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, 2002 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, 2002
COMMON STOCK ($2 Par Value) 2,105,530
- --------------------------- --------------------------
(Title of Class) (Outstanding Shares)
PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q
For the Quarter Ended March 31, 2002
Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets
as of March 31, 2002 (Unaudited)
and December 31, 2001 (Audited) 3
Consolidated Statements of Income
(Unaudited) for the Three Months
Ended March 31, 2002 and 2001 4
Consolidated Statements of Stockholders'
Equity (Unaudited) for the Three Months
Ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows
(Unaudited) for the Three Months
Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 19
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults in Senior Securities 20
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 BALANCE SHEET
March 31, 2002 (UNAUDITED) and December 31, 2001
(In thousands, except per share data) March 31 December 31
2002 2001
ASSETS: --------- ----------
Cash and Due from Banks .......................... $ 4,550 $ 7,172
Interest Bearing Deposits with Other Banks 156 107
--------- ---------
Cash and Cash Equivalents ........................ $ 4,706 $ 7,279
Securities Available for Sale .................... 94,288 100,783
Loans ............................................ 207,590 193,729
Allowance for Loan Loss .......................... (1,824) (1,816)
Loans, Net ................... ................... 205,766 191,913
Bank Premises and Equipment, Net ................. 3,501 3,371
Accrued Interest Receivable ...................... 2,101 2,282
Other Assets ..................................... 9,956 9,719
--------- ---------
TOTAL Assets ..................................... $ 320,318 $ 315,347
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Deposits, Non-Interest Bearing ................... $ 31,982 $ 30,664
Deposits, Interest Bearing ....................... 216,972 208,227
--------- ---------
Total Deposits ................................... 248,954 238,891
Accrued Interest Payable ......................... 724 703
Short-term Borrowings ............................ 5,441 21,338
Long-term Borrowings ............................. 29,975 20,000
Other Liabilities ................................ 887 661
--------- ---------
TOTAL Liabilities ................................ 285,981 281,593
--------- ---------
STOCKHOLDERS' EQUITY
Common Stock * ................................... 4,455 4,455
Surplus .......................................... 4,611 4,611
Retained Earnings ................................ 27,616 26,851
Accumulated Other Comprehensive Income ........... 362 536
Treasury Stock at Cost ........................... (2,707) (2,699)
--------- ---------
TOTAL Shareholders' Equity ....................... 34,337 33,754
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 320,318 $ 315,347
========= =========
<FN>
*Common Stock, par value $2 per share,12,500,000 shares authorized; 2,227,500
shares issued; 2,105,530 and 2,105,836 shares outstanding at March 31, 2002 and
December 31, 2001, respectively
</FN>
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended
March 31 March 31
2002 2001
-------- --------
INTEREST INCOME:
Loans Receivable, Including Fees ...................... $ 3,709 $ 3,650
Securities, Taxable ................................... 958 1,063
Tax Exempt ................................. 334 391
Dividends .................................. 24 23
Other ................................................. 8 51
------- -------
TOTAL Interest Income ................................. 5,033 5,178
------- -------
INTEREST EXPENSE:
Deposits .............................................. 1,730 2,320
Borrowed Funds ........................................ 409 354
------- -------
TOTAL Interest Expense ................................ 2,139 2,674
------- -------
Net Interest Income ................................... 2,894 2,504
Provision for Loan Losses ............................. 15 20
------- -------
Net Interest Income, after Loan Loss Provision ........ 2,879 2,484
------- -------
OTHER INCOME:
Customer Service Fees ................................. 270 249
Gains (Losses) on Security Sales ...................... (15) 29
Other ................................................. 159 79
------- -------
TOTAL Other Income .................................... 414 357
------- -------
OTHER EXPENSES:
Salaries and Benefits ................................. 736 610
Occupancy ............................................. 94 74
Furniture and Equipment ............................... 85 99
FDIC Insurance and Assessments ........................ 32 30
Professional Fees and Outside Services ................ 52 49
Computer Services and Supplies ........................ 100 74
Taxes, Other Than Payroll and Income .................. 76 67
Other ................................................. 519 327
------- -------
Total Other Expenses .................................. 1,694 1,330
------- -------
Income Before Income Taxes ............................ 1,599 1,511
Federal Income Taxes .................................. 392 370
------- -------
Net Income ............................................ $ 1,207 $ 1,141
======= =======
Earnings Per Share, Basic ............................. $ 0.57 $ 0.53
======= =======
Earnings Per Share, Diluted ........................... $ 0.57 $ 0.53
======= =======
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(In thousands, except per share data)
Accumulated
Other
Common Surplus Undivided Comprehensive Treasury Total
Stock Profit Income Stock
------- ------- --------- ------------ -------- ---------
Balance, December 31, 2001 ............................... $ 4,455 $ 4,611 $ 26,851 $ 536 $ (2,699) $ 33,754
--------
Comprehensive Income
Net Income .......................................... 0 0 1,207 0 0 1,207
Net change in Unrealized gains (losses) on
securities available for sale, net of taxes .... 0 0 0 (174) 0 (174)
--------
Total Comprehensive Income ..................... 0 0 0 0 0 1,033
--------
Cash Dividends ($0.21 per share) ........................ 0 0 (442) 0 0 (442)
Treasury Stock Purchase .................................. 0 0 0 0 (8) (8)
------- -------- --------- -------- ---------- --------
Balance, March 31, 2002 ................................. $ 4,455 $ 4,611 $ 27,616 $ 362 $ (2,707) $ 34,337
--------
Balance, December 31, 2000 .............................. $ 4,455 $ 4,611 $ 23,544 $ (130) $ (1,628) $ 30,852
--------
Comprehensive Income
Net Income .......................................... 0 0 1,141 0 0 1,141
Net change in Unrealized gains (losses) on
securities available for sale, net of taxes .... 0 0 0 902 0 902
--------
Total Comprehensive Income ..................... 0 0 0 0 0 2,043
--------
Cash Dividends ($0.17 per share) ......................... 0 0 (366) 0 0 (366)
Treasury Stock Purchase .................................. 0 0 0 0 0 0
Treasury Stock Issued for DRIP and Stock Option Plan ..... 0 0 0 0 (402) (402)
------- -------- --------- -------- --------- --------
Balance, March 31, 2001 ................................. $ 4,455 $ 4,611 $ 24,319 $ 772 $ (2,030) $ 32,127
========
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) Three Months Ended
March 31, March 31,
2002 2001
--------- ---------
Cash Flows from Operating Activities
Net Income ............................................................... $ 1,207 $ 1,141
Adjustments:Depreciation and amortization ................................ 88 96
Provision for Loan Losses ....................................... 15 20
Gain/Loss on sale of equipment ................................... 0 0
Gain/loss on sale of other real estate ........................... 17 0
Amortization of securities' premiums and accretion of discounts .......... 41 16
(Gains) Losses on sales of investment securities, net .................... 15 (29)
Increase/Decrease in accrued interest receivable ......................... 181 157
Increase/Decrease in other assets ........................................ (165) (287)
Increase/Decrease in accrued interest payable ............................ 21 (35)
Increase/Decrease in other liabilities ................................... 226 243
-------- --------
Net cash provided by operating activities ................................ 1,646 1,322
-------- --------
Cash Flows from investing activities
Proceeds from sale of available for sale securities ...................... 6,917 4,001
Proceeds from maturities of available for sale securities ................ 6,195 4,461
Purchase of available for sale securities ................................ (10,066) (3,022)
Principal payments on mortgage-backed securities ......................... 3,130 760
Net increase in loans .................................................... (13,868) (1,198)
Proceeds from sale of premises and equipment ............................. 0 0
Purchase of premises and equipment ....................................... (218) (28)
Proceeds from sale of other real estate .................................. 0 24
-------- --------
Net cash used in investing activities .................................... (7,910) 4,998
-------- --------
Cash flows from financing activities
Cash dividends paid ...................................................... (442) (366)
Increase in deposits ..................................................... 10,063 840
Net Increase/Decrease in long-term borrowing ............................. 9,975 (3,446)
Net Increase/Decrease in short-term borrowing ............................ (15,897) 0
Purchase of treasury stock ............................................... (8) (402)
-------- --------
Net cash provided by financing activities ................................ 3,691 (3,374)
-------- --------
Net Increase/Decrease in cash/cash equivalents ........................... (2,573) 2,946
Cash and cash equivalents, beginning of year ............................. 7,279 7,597
-------- --------
Cash and cash equivalents, end of year ................................... 4,706 10,543
======== ========
Supplemental disclosures of cash paid
Interest Paid ............................................................ 2,139 (2,709)
======== ========
Income Taxes Paid ........................................................ 454 377
======== ========
Non-cash investing and financing activities
Transfers from loans to real estate through foreclosure .................. 0 54
======== ========
Increase/Decrease in unrealized gain/loss on securities avail for sale .... $ 263) $ 1,367
======== ========
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Peoples Financial
Services Corp. (the "Corporation" or the "Company") and its wholly owned
subsidiary, Peoples National Bank (the "Bank"). All material intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the three month period ended March 31,
2002, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002. For further information, refer to the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
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
2002 2001
---------- ----------
Net income applicable to common stock ..................................................... $1,207,000 $1,141,000
Weighted average common shares outstanding ................................................ 2,105,670 2,137,640
Effect of dilutive securities, stock options .............................................. 3,300 0
Weighted average common shares outstanding used to calculate diluted earnings per share ... 2,108,970 2,137,640
Basic earnings per share .................................................................. $ 0.57 $ 0.53
Diluted earnings per share ................................................................ $ 0.57 $ 0.53
3. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects for the
three months ended March 31, 2002 and 2001 are as follows:
(In thousands)
Three Months Ended
March 31, March 31,
2002 2001
--------- ----------
Unrealized Holding Gains (Losses) on Available for Sale Securities ................ $ (278) $ 1,396
Less: Reclassification Adjustment for Gains (Losses) Realized in Net Income ....... (15) 29
------- -------
(263) 1,367
Tax Effect ........................................................................ 89 (465)
------- -------
Other Comprehensive Income ........................................................ (174) 902
======= =======
4. INVESTMENTS HELD BY A RECEIVER AND CONTINGENCY
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.
Specifically, the Commission alleged that the defendants were representing to
investors that they were selling bank-issued, federally insured certificates of
deposit when they were actually selling uninsured securities issued by the
defendants. The Court on November 7, 2001 appointed a receiver for Robert L.
Bentley, Entrust Group and Bentley Financial Services, Inc. (collectively the
Bentley Receivership Entities). The receiver was required to take control of all
investments and assets of the Bentley Receivership Entities.
The Bank regularly invested through Entrust Group and Bentley Financial
Services, Inc. for certificates of deposit that the Bank had understood were
bank issued, federally insured and the Entrust Group was holding in safekeeping
for them. As of December 31, 2001, the Bank had $1,980,000 of these investments
outstanding with Entrust Group. Based on preliminary information, management
estimated the loss to be approximately $139,000, which was charged against
operations for the year ended December 31, 2001 and the asset had been written
down to $1,841,000.
Based upon additional information, the Bank recorded an additional allowance for
possible losses of $158,000 on the alleged securities fraud based on the
estimated net realizable value of the investments. This provision for possible
losses of $158,000 is recorded in other expense for the three months ended March
31, 2002. The $1,683,000 net claim with the receiver is included in other assets
on the consolidated balance sheet of the Company as of March 31, 2002.
Since the ultimate resolution of this matter is presently unknown, it is
reasonably possible that the loss estimate could change and the change could be
material.
5. BRANCH ACQUISITION
On March 6, 2002, the Bank acquired certain assets, including furniture and
equipment and assumed certain liabilities, including deposits and a premises
lease, of a branch located in Norwich, New York. The purchase price equaled
$50,000 for a deposit premium plus the book value cost of the personal property.
Deposits assumed equaled $4,264,000.
6. NEW ACCOUNTING STANDARDS
In June of 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets."
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 the determinable useful life. The
provisions of this Statement became 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 are accounted for in
accordance with the provisions of this Statement.
At January 1, 2002, the Company had core deposit acquisition premiums with a net
book value of $2,627,000, which will continue to be amortized under the new
rules.
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 Company on January 1, 2003 but is
not expected to have a significant impact on the financial condition or results
of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
provides financial services to individuals and businesses within the Bank's
primary market area made up of Susquehanna, Wyoming and northern Lackawanna
counties in Pennsylvania, and southern Broome County in New York. The Bank also
operates a branch in Norwich, 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.
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies is included in Note
1 to the consolidated financial statements of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. Some of these policies are
particularly sensitive requiring significant judgements, estimates and
assumptions to be made by Management. Additional information is contained on
page 16 of this report for the provision and allowance for loan losses.
OVERVIEW
Net income for the quarter increased 5.78% to $1.207 million as compared to
$1.141 million for the first quarter of 2001. Diluted earnings per share
increased 7.55% to $0.57 per share from $0.53 per share in the first quarter of
2002. At March 31, 2002, the Company had total assets of $320.3 million, total
loans of $205.8 million, and total deposits of $249.0 million.
FINANCIAL CONDITION
Cash and Cash Equivalents:
At March 31, 2002, cash, federal funds sold, and deposits with other banks
totaled
$4.706 million as compared to $7.279 million on December 31, 2001. The decrease
over the three months of 2002 has been due to a decrease in balances held at the
Federal Reserve, which had a balance of $5.247 million at the end of 2001 and
now has a balance of $2.86 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 in interest
rates continues to increase liquidity. The current sources of funds will enable
the Corporation to meet all its cash obligations as they come due.
Investments:
Investments totaled $94.288 million on March 31, 2002, decreasing by $6.495
million over the December 31, 2001, total of $100.783 million. This correlates
strongly to the large increase in loans over the same period.
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
stockholders' equity. The carrying value of investments as of March 31, 2002
included an unrealized gain of $549,000 reflected as accumulated other
comprehensive income of $362,000 in shareholders' equity, net of deferred income
taxes of $187,000. This compares to an unrealized gain of $812,000 at December
31, 2001, reflected as accumulated other comprehensive loss of income of
$536,000, net of deferred income taxes of $276,000.
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 March 31, 2002, were $5.441 million as compared
to $21.338 million on December 31, 2001, showing a decrease of $15.897 million.
Long term borrowings on March 31, 2002, and December 31, 2001, were at $29.975
million and $20.000 million respectively. The Bank has taken an additional
$10.000 million in long term borrowings in the three months ended March 31,
2002.
Loans:
The Bank's loan volume has continued to grow during the first three months of
2002. The March 31, 2002, total was $205.766 million compared to the December
31, 2001, total of $191.913 million. This shows a growth of $13.853 million in
the last three-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 $9.719 million on December 31, 2001 to $9.956
million on March 31, 2002. The slight increase is due to the prepayment of
Pennsylvania shares tax for 2002.
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
three-month period ended March 31, 2002, total deposits increased by $10.063
million to $248.954 million. On March 6, 2002, the Bank assumed deposits
totaling $4.3 million through the acquisition of a branch in Norwich, New York.
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, 2002, regulatory capital to total assets was 9.95% as compared
to 9.89% on December 31, 2001. The Company repurchases its stock in the open
market or from individuals as warranted to leverage the capital account and to
provide stock for a dividend reinvestment plan. In the three months ended March
31, 2002, the Company purchased 306 shares for the treasury at a total cost of
$8,036.
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 risk weighted asset ratio was 13.94% and the
total capital ratio to risk weighted assets ratio was 14.76% at March 31, 2002.
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 Company's Asset/Liability Committee (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 Company's financial statements do not reflect various commitments that are
made in the normal course of business, which may involve some liquidity risk.
These commitments consist primarily of commitments to grant new loans and
unfunded commitments of existing loans and letters of credit made under the same
standards as on-balance sheet instruments. Unused commitments on March 31, 2002
totaled $20.618 million, which consisted of $14.973 million in unfunded
commitments of existing loans, $4.340 million to grant new loans and $1.305
million in letters of credit. Due to fixed maturity dates and specified
conditions within these instruments, many will expire without being drawn upon.
Management believes that amounts actually drawn upon can be funded in the normal
course of operations and therefore, do not represent a significant liquidity
risk to the Company.
The management of interest rate sensitivity seeks to avoid fluctuating net
interest margins and to provide consistent net interest income through periods
of changing interest rates.
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
The tools used to monitor sensitivity are the Statement of Interest Sensitivity
Gap and the interest rate shock analysis. The Bank uses a software model to
measure and to keep track. In addition, an outside source does a quarterly
analysis to make sure our internal analysis is current and correct. The
Statement of Interest Sensitivity Gap is a good assessment of current position
and is a very useful tool for the ALCO in performing its job. This report is
monitored in an effort to "match" maturities or repricing opportunities of
assets and liabilities in order to attain the maximum interest within risk
tolerance policy guidelines. The statement does, although, have inherent
limitations in that certain assets and liabilities may react to changes in
interest rates in different ways with some categories reacting in advance of
changes and some lagging behind the changes. In addition, there are estimates
used in determining the actual propensity to change of certain items such as
deposits without maturities.
The following table sets forth the Company's interest sensitivity analysis as of
March 31, 2002:
INTEREST RATE SENSITIVITY ANALYSIS
MARCH 31
Maturity or Repricing In:
3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years
(In thousands) ---------- ------------ ------------ --------- ------------
RATE SENSITIVE ASSETS
Loans .................................... 38,771 12,247 22,555 83,513 48,680
Securities ............................... 7,306 2,838 5,801 50,714 31,806
Federal Funds Sold ....................... 0 0 0 0 0
------- ------- ------- -------- --------
Total Rate Sensitive Assets .............. 46,077 15,085 28,356 134,227 80,486
------- ------- ------- -------- --------
Cumulative Rate Sensitive Assets ......... 46,077 61,162 89,518 223,745 304,231
------- ------- ------- -------- --------
RATE SENSITIVE LIABILITIES
Interest Bearing Checking ................ 638 638 1,276 10,208 8,507
Money Market Deposits .................... 960 960 1,919 15,356 12,797
Regular Savings .......................... 1,702 1,648 3,734 26,333 21,943
CDs and IRAs ............................. 31,207 20,282 17,116 37,993 1,755
Short-term Borrowings .................... 5,441 0 0 0 0
Long-term Borrowings ..................... 0 0 0 15,000 14,975
------- ------- ------- -------- --------
Total Rate Sensitive Liabilities ......... 39,948 23,528 24,045 104,890 59,977
------- ------- ------- -------- --------
Cumulative Rate Sensitive Liabilities .... 39,948 63,476 87,521 192,411 252,388
------- ------- ------- -------- --------
Period Gap ............................... 6,129 (8,443) 4,311 29,337 20,509
Cumulative Gap ........................... 6,129 (2,314) 1,997 31,334 51,843
Cumulative RSA to RSL .................... 115.34% 96.35% 102.28% 116.28% 120.54%
Cumulative Gap to Total Assets ........... 1.91% (0.72)% 0.62% 9.78% 16.18%
RESULTS OF OPERATIONS
Net Interest Income:
For the three months ended March 31, 2002, total interest income decreased by
$145,000 or 2.8%, to $5.033 million as compared to $5.178 million for the three
months ended March 31, 2001. This decrease was primarily due to the decrease in
yield on earning assets, which decreased to 6.94% as compared to 7.71% for the
first three months of 2001. Average earning assets increased to $294.3 million
as of March 31, 2002 as compared to $272.1 million as of March 31, 2001.
Total interest expense decreased by $535,000 or 20.0% to $2.139 million for the
three months ended March 31, 2002 from $2.674 million for the three months ended
March 31, 2001. This decrease was attributable to the decrease in the cost of
funds, which decreased to 3.52% as compared to 4.78% for the first three months
of 2001. Average interest-bearing liabilities increased to $246.6 million as of
March 31, 2002 as compared to $227.0 million as of March 31, 2001.
Net interest income increased by $390,000 or 15.6%, to $2.894 million for the
three months ended March 31, 2002, from $2.504 million for the three months
ended March 31, 2001. The Bank's net interest spread increased to 3.42% for the
first three months of 2002 from 2.94% for the first three months of 2001. The
net interest margin increased to 3.99% from 3.72% for the three-month period
ended March 31, 2002, and 2001, respectively. Although there was an increase in
the volume of interest-earning assets and interest-bearing liabilities, the
increases in net interest spread and the net interest margin, respectively, for
the first three months of 2002 were the result of a decline in interest rates,
which impacted interest expense at a greater amount than interest income.
Provision for Loan Loss:
The provision for loan loss for the three months ended March 31, 2002, was
$15,000, a decrease of $5,000 from the comparable period in 2001. 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 three-month period of 2002, charge-offs totaled $19,000 while net
charge-offs totaled $7,000 as compared to $15,000 and $9,000 respectively for
the same three-month period in 2001.
Monthly, senior management uses 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 $57,000 when comparing the first three months of
2002 to the first three months of 2001. Customer Service Fee income has gone up
$21,000 when comparing 2002 to 2001. Gains (Losses) on sales of securities were
down $44,000 over last year. The largest increase has been in Other Operating
Income, an increase of $80,000 comparing the first three months of 2002 to the
first three months of 2001. 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 $364,000 when comparing the first three months
of 2002 with the first three months of 2001. The largest share of this increase,
$192,000, was in the Other Operating Expenses category. The majority of this
increase relates to a $158,000 provision for possible losses on the alleged
fraud on the sale of securities by Bentley Financial Services, Inc. recorded in
the first quarter of 2002 as explained in Footnote 4 to the Consolidated
Financial Statements for March 31, 2002. Other operating expenses also includes
various administrative expenses. Among these expenses are postage, insurance,
phone, etc. Computer Services and supplies were also up $26,000 for the quarter
ended March 2002 compared to the same period in 2001. Taxes increased $9,000 and
Furniture and Equipment expenses decreased $14,000.
Income Tax Provision
The income tax provision was $ 392,000 for the first three months of 2002 as
compared to $370,000 in the same period for 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 Risk
The Fed Funds rate has remained the same for the first quarter of 2002. The next
change in overnight rates by the Fed is expected to be an upward move. As of
March 31, 2002, the Bank is currently showing sensitivity to downward rate shift
scenarios. While this remains unlikely, the results of the latest financial
simulation follow. The simulation shows a possible increase in net interest
income of 2.675% or $315,000, in a +200 basis point rate shock over a one-year
period. A decrease of 3.094% or $364,000 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
continuously monitors its rate sensitivity.
Equity value at risk is monitored regularly and is also within established
policy limits. Please refer to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission for December 31, 2001 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
Press Release of Peoples Financial Services Corp. to the Registrant's
Current Report on Form 8-k as filed on January 10, 2002, submitted as
Exhibit 99.2.
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
By/s/ Frederick J. Malloy
Frederick J. Malloy, AVP/Controller