1
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 June 30, 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 July 31, 2002
COMMON STOCK ($2 Par Value) 2,099,550
- --------------------------- --------------------------
(Title of Class) (Outstanding Shares)
PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q
For the Quarter Ended June 30, 2002
Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets 3
as of June 30, 2002 (Unaudited)
and December 31, 2001 (Audited)
Consolidated Statements of Income 4
(Unaudited) for the Three Months and the Six Months
Ended June 30, 2002 and 2001
Consolidated Statements of Stockholders' 5
Equity (Unaudited) for the Six Months
Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows 6
(Unaudited) for the Six Months
Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 16
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults in Senior Securities 17
Item 4. Submission of Matters for Security Holder Vote 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED BALANCE SHEET
June 30, 2002 (UNAUDITED) and December 31, 2001
(In thousands, except per share data) June 30 December 31
2002 2001
--------- ---------
ASSETS
Cash and Due from Banks ..................... $ 6,331 $ 7,172
Interest Bearing Deposits with Other Banks .. 110 107
Federal Funds Sold .......................... 1,100 0
--------- ---------
Cash and Cash Equivalents ................... 7,541 7,279
Securities Available for Sale ............... 96,727 100,783
Loans ....................................... 210,471 193,729
Less: Allowance for.......................... (1,850) (1,816)
--------- ---------
Loans, Net .................................. 208,621 191,913
Bank Premises and Equipment, Net ............ 3,549 3,371
Accrued Interest Receivable ................. 2,150 2,282
Other Assets ................................ 9,754 9,719
--------- ---------
TOTAL Assets ................................ $ 328,342 $ 315,347
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Deposits, Non-Interest Bearing .............. $ 34,150 $ 30,664
Deposits, Interest Bearing .................. 222,693 208,227
--------- ---------
Total Deposits .............................. 256,843 238,891
Accrued Interest Payable .................... 680 703
Short-term Borrowings ....................... 5,446 21,338
Long-term Borrowings ........................ 29,899 20,000
Other Liabilities ........................... 185 661
--------- ---------
TOTAL Liabilities ........................... 293,053 281,593
--------- ---------
STOCKHOLDERS' EQUITY
Common Stock * .............................. 4,455 4,455
Surplus ..................................... 4,611 4,611
Retained Earnings ........................... 27,882 26,851
Accumulated Other Comprehensive Income ...... 1,207 536
Treasury Stock at Cost ...................... (2,866) (2,699)
--------- ---------
TOTAL Stockholders' Equity .................. 35,289 33,754
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .. $ 328,342 $ 315,347
========= =========
<FN>
*Common Stock, par value $2 per share,12,500,000 shares authorized; 2,227,500
shares issued; 2,099,550 and 2,105,836 shares outstanding at June 30, 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 Six Months Ended
June 30 June 30 June 30 June 30
2002 2001 2002 2001
------- -------- ------- -------
INTEREST INCOME:
Loans Receivable, Including Fees ................ $ 3,806 $ 3,683 $ 7,515 $ 7,333
Securities, Taxable ............................. 953 1,041 1,911 2,104
Tax Exempt ........................... 328 386 662 777
Dividends ............................ 17 19 41 42
Interest of Fed Funds Sold ...................... 10 81 18 132
------- -------- ------- -------
TOTAL Interest Income ........................... 5,114 5,210 10,147 10,388
INTEREST EXPENSE:
Deposits ........................................ 1,720 2,221 3,450 4,541
Borrowed Funds .................................. 436 311 845 665
------- -------- ------- -------
TOTAL Interest Expense .......................... 2,156 2,532 4,295 5,206
------- -------- ------- -------
Net Interest Income ............................. 2,958 2,678 5,852 5,182
Provision for Loan Losses ....................... 45 0 60 20
------- -------- ------- -------
Net Interest Income, after Loan Loss Provision .. 2,913 2,678 5,792 5,162
OTHER INCOME (LOSSES):
Customer Service Fees ........................... 287 298 557 547
Gains (Losses) on Security Sales ................ 97 0 82 29
Impairment of Security .......................... (850) 0 (850) 0
Other ........................................... 173 146 332 225
------- -------- ------- -------
TOTAL Other Income (Losses) ..................... (293) 444 121 801
OTHER EXPENSES:
Salaries and Benefits ........................... 855 878 1,591 1,488
Occupancy ....................................... 101 68 195 142
Furniture and Equipment ......................... 96 98 181 197
FDIC Insurance and Assessments .................. 32 29 64 59
Professional Fees and Outside Services .......... 63 60 115 109
Computer Services and Supplies .................. 124 109 224 183
Taxes, Other Than Payroll and Income ............ 81 74 157 141
Other ........................................... 406 326 925 653
------- -------- ------- -------
Total Other Expenses ............................ 1,758 1,642 3,452 2,972
------- -------- ------- -------
Income Before Income Taxes ...................... 862 1,480 2,461 2,991
Federal Income Taxes ............................ 133 362 525 732
------- -------- ------- -------
Net Income ...................................... $ 729 $ 1,118 $ 1,936 $ 2,259
======= ======== ======= ========
Earnings Per Share, Basic ....................... $ 0.35 $ 0.53 $ 0.92 $ 1.06
Earnings Per Share, Diluted ..................... $ 0.35 $ 0.53 $ 0.92 $ 1.06
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In thousands, except per share data)
Accumulated
Other
Common Undivided Comprehensive Treasury
Stock Surplus Profits Income Stock Total
------- ------- --------- ---------- --------- --------
Balance, December 31, 2001 ................................. $ 4,455 $ 4,611 $ 26,851 $ 536 $ (2,699) $ 33,754
--------
Comprehensive Income
Net Income ........................................ 0 0 1,936 0 0 1,936
Net change in Unrealized gains (losses) on
securities available for sale, net of taxes... 0 0 0 671 0 671
Total Comprehensive Income .................................. 2,607
--------
Cash Dividends Paid ($0.43 per share) ....................... 0 0 (905) 0 0 (905)
Treasury Stock Purchase ..................................... 0 0 0 0 (167) (167)
--------
Balance, June 30, 2002 ..................................... $ 4,455 $ 4,611 $ 27,882 $ 1,207 $ (2,866) $ 35,289
======== ======== ======== ======== ======== ========
Balance, December 31, 2000 ................................. $ 4,455 $ 4,611 $ 23,544 $ (130) $ (1,628) $ 30,852
--------
Comprehensive Income
Net Income ........................................ 0 0 2,259 0 0 2,259
Net change in Unrealized gains (losses) on
securities available for sale, net of taxes .. 0 0 0 902 0 902
--------
Total Comprehensive Income .................................. 3,161
--------
Cash Dividends Paid ($0.34 per share) ....................... 0 0 (729) 0 0 (729)
Treasury Stock Purchase ..................................... 0 0 0 0 (736) (736)
--------
Balance, June 30, 2001 ..................................... $ 4,455 $ 4,611 $ 25,074 $ 772 $ (2,364) $ 32,548
======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) Six Months Ended
June 30, June 30,
2002 2001
-------- --------
Cash Flows from Operating Activities
Net Income ........................................................ $ 1,936 $ 2,259
Adjustments:
Depreciation and amortization ..................................... 186 191
Provision for Loan Losses ......................................... 60 20
Gain/loss on sale of other real estate ............................ 22 16
Amortization of securities' premiums and accretion of discounts.... 98 21
(Gains) Losses on sales of investment securities, net ............. (82) (29)
Impairment of Security ............................................ 850 0
Increase/Decrease in accrued interest receivable .................. 132 (79)
Increase/Decrease in other assets ................................. (385) 18
Increase/Decrease in accrued interest payable ..................... (23) (77)
Increase/Decrease in other liabilities ............................ (476) 0
-------- --------
Net cash provided by operating activities ......................... 2,318 2,340
-------- --------
Cash Flows from investing activities
Proceeds from sale of available for sale securities ............... 11,609 4,001
Proceeds from maturities of available for sale securities ......... 11,436 4,393
Purchase of available for sale securities ......................... (23,862) (7,111)
Principal payments on mortgage-backed securities .................. 5,024 2,119
Net increase in loans ............................................. (16,808) (5,991)
Purchase of premises and equipment ................................ (364) (179)
Proceeds from sale of other real estate ........................... 22 54
Purchase of investment in life insurance .......................... 0 (4,000)
-------- --------
Net cash used in investing activities ............................. (12,943) (6,714)
-------- --------
Cash flows from financing activities
Cash dividends paid ............................................... (905) (729)
Increase in deposits .............................................. 17,952 7,935
Net Increase/Decrease in long-term borrowing ...................... 9,899 0
Net Increase/Decrease in short-term borrowing ..................... (15,892) (1,090)
Purchase of treasury stock ........................................ (167) (736)
-------- --------
Net cash provided by financing activities ......................... 10,887 5,380
-------- --------
Net Increase/Decrease in cash/cash equivalents .................... 262 1,006
Cash and cash equivalents, beginning of year ...................... 7,279 7,597
-------- --------
Cash and cash equivalents, end of year ............................ $ 7,541 $ 8,603
======== ========
Supplemental disclosures of cash paid
Interest Paid ..................................................... $ 4,318 $ 5,283
======== ========
Income Taxes Paid ................................................. $ 812 $ 744
======== ========
Non-cash investing and financing activities
Transfers from loans to real estate through foreclosure ........... $ 40 $ 169
======== ========
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 six month period ended June 30,
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 Six Months Ended
June 30 June 30 June 30 June 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income applicable to common stock ....................................... $ 729,000 $1,118,000 1,936,000 2,259,000
Weighted average common shares outstanding .................................. 2,101,104 2,120,550 2,103,374 2,130,640
Effect of dilutive securities, stock options ................................ 4,067 0 3,684 0
---------- ---------- ---------- ---------
Weighted average common shares outstanding used to calculate diluted
earnings per share .................................................. 2,105,171 2,120,550 2,107,058 2,130,640
Basic earnings per share .................................................... $ 0.35 $ 0.53 $ 0.92 $ 1.06
Diluted earnings per share .................................................. $ 0.35 $ 0.53 $ 0.92 $ 1.06
3. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects for the six
months ended June 30, 2002 and 2001 are as follows:
(In thousands)
Six Months Ended
June 30, June 30,
2002 2001
------- -------
Unrealized Holding Gains (Losses) on Available for Sale Securities ............ $ 249 $ 1,396
Less: Reclassification Adjustment for Gains (Losses) Realized in Net Income.... (768) 29
------- -------
1,017 1,367
Tax Effect .................................................................... (346) (465)
------- -------
Other Comprehensive Income .................................................... 671 902
======= =======
4. IMPAIRMENT OF SECURITY
Peoples Financial Services Corp., through its subsidiary, Peoples National Bank
holds approximately $1 million (face value) WorldCom Group corporate bond in its
investment security portfolio. Peoples Financial Services Corp. recorded a
$850,000 impairment loss on this security (after tax loss of $562,000) in the
second quarter ended June 30, 2002 related to the decline in market value of its
WorldCom security. The market value of the bond as of June 30, 2002 was
$150,000.
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. Current performance does not
guarantee and may not be indicative of similar performance in the future.
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.
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 decreased 14.30% to $1.936 million as compared to
$2.259 million for the second quarter of 2001. Diluted earnings per share
decreased 13.21% to $0.92 per share from $1.06 per share in the second quarter
of 2002. At June 30, 2002, the Company had total assets of $328.3 million, total
loans of $208.6 million, and total deposits of $256.8 million.
FINANCIAL CONDITION
Cash and Cash Equivalents:
At June 30, 2002, cash, federal funds sold, and deposits with other banks
totaled
$7.541 million as compared to $7.279 million on December 31, 2001. The slight
increase over the six months of 2002 has been due to an increase in the Federal
Funds Sold position, which had a balance of $0 at the end of 2001 and now has a
balance of $1.1 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 $96.727 million on June 30, 2002, decreasing by $4.056
million from the December 31, 2001 total of $100.783 million. This correlates
strongly to the large increase in loans over the same period.
In the three months ended June 30, 2002, the Company recognized an $850,000
impairment loss on its $1 million investment in a WorldCom Group bond. The
carrying value and fair value of this bond was $150,000 at June 30, 2002.
WorldCom subsequently declared bankruptcy therefore, the ultimate collectibility
of the $150,000 carrying value is presently unknown.
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 June 30, 2002
included an unrealized gain of $1,829,000 reflected as accumulated other
comprehensive income of $1,207,000 in shareholders' equity, net of deferred
income taxes of $622,000. 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 June 30, 2002 were $5.446 million as compared to
$21.338 million on December 31, 2001, showing a decrease of $15.892 million.
This was due in large part to an increase in long-term borrowings at Federal
Home Loan Bank which were $29.899 million on June 30, 2002 as compared to
$20.000 million at December 31, 2001. The Bank has taken an additional $10.000
million in long term borrowings in the six months ended June 30, 2002.
Loans:
The Bank's loan volume has continued to grow during the first six months of
2002. The June 30, 2002 total was $208.621 million compared to the December 31,
2001 total of $191.913 million. This shows a growth of $16.708 million in the
last six-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.
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
six-month period ended June 30, 2002, total deposits increased by $17.592
million to $256.843 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 June 30, 2002, regulatory capital to total assets was 9.55% 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 six months ended June 30, 2002,
the Company purchased 6,286 shares for the treasury at a total cost of $167,000.
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 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 weighted asset ratio was 13.98% and
the total capital ratio to total risk weighted assets ratio was 14.81% at June
30, 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 June 30, 2002
totaled $24.148 million, which consisted of $14.957 million in unfunded
commitments of existing loans, $7.863 million to grant new loans and $1.328
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 periodic
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
June 30, 2002:
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30
(In thousands)
Maturity or Repricing In:
3 3-6 6-12 1-5 Over 5
Months Months Months Years Years
------- ------- ------- ------- -------
RATE SENSITIVE ASSETS
Loans ................................... 29,913 11,561 25,887 92,227 49,034
Securities .............................. 10,399 3,442 6,416 52,985 27,492
Federal Funds Sold ...................... 1,100 0 0 0 0
------- ------- ------- ------- -------
Total Rate Sensitive Assets ............. 41,412 15,003 32,303 145,212 76,526
------- ------- ------- ------- -------
Cumulative Rate Sensitive Assets ........ 41,412 56,415 88,718 233,930 310,456
------- ------- ------- ------- -------
RATE SENSITIVE LIABILITIES
Interest Bearing Checking ............... 682 682 1,364 10,931 9,094
Money Market Deposits ................... 1,075 1,075 2,149 17,194 14,329
Regular Savings ......................... 1,779 2,368 3,437 27,842 22,902
CDs and IRAs ............................ 22,963 14,301 28,139 39,448 1,316
Short-term Borrowings ................... 5,446 0 0 0 0
Long-term Borrowings .................... 0 0 0 15,000 14,899
------- ------- ------- ------- -------
Total Rate Sensitive Liabilities ........ 31,945 18,426 35,089 110,415 62,540
------- ------- ------- ------- -------
Cumulative Rate Sensitive Liabilities ... 31,945 50,371 85,460 195,875 258,415
------- ------- ------- ------- -------
Period Gap .............................. 9,467 (3,423) (2,786) 34,797 13,986
Cumulative Gap .......................... 9,467 6,044 3,258 38,055 52,041
Cumulative RSA to RSL ................... 129.64% 112.00% 103.81% 119.43% 120.14%
Cumulative Gap to Total Assets .......... 2.96% 1.89% 1.02% 11.88% 16.25%
RESULTS OF OPERATIONS
Net Interest Income:
For the six months ended June 30, 2002, total interest income decreased by
$241,000 or 2.3%, to $10.147 million as compared to $10.388 million for the six
months ended June 30, 2001. This decrease was primarily due to the decrease in
yield on earning assets, which decreased to 6.79% as compared to 7.59% for the
first six months of 2001 offset by an increase in average earning assets.
Average earning assets increased to $301.170 million as of June 30, 2002 as
compared to $275.910 million as of June 30, 2001
Total interest income was $5.114 million for the three-month period ended June
30, 2002, compared to $ 5.210 million for the comparable period in 2001.
Total interest expense decreased by $911,000 or 17.5% to $4.295 million for the
six months ended June 30, 2002 from $5.206 million for the six months ended June
30, 2001. This decrease was attributable to the decrease in the cost of funds,
which decreased to 3.43% as compared to 4.59% for the first six months of 2001
offset by an increase in interest-bearing liabilities. Average interest-bearing
liabilities increased to $252.221 million as of June 30, 2002 as compared to
$228.904 million as of June 30, 2001.
Total interest expense was $2.156 million for the three month period ended June
30, 2002, compared to $2.532 million for the comparable three month period in
2001, a reduction of $376 thousand between the compared quarters.
The increase in the net interest income for the three and six month periods
ended June 30, 2002, when compared to the same periods in 2001, can be primarily
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 six months of 2002 was $5.852 million compared to $5.182 million
for the first six months of 2001. This was an increase of $670 thousand.
The Bank's net interest spread increased to 3.36% for the first six months of
2002 from 3.01% for the first six months of 2001. The net interest margin
increased to 3.92% from 3.79% for the six-month period ended June 30, 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 six
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 six-month period ending June 30, 2002,
showed an increase of $40 thousand from the comparable period in 2001. During
2002, the provision total was $60 thousand as compared to $20 thousand in 2001.
The provision for loan losses was $45,000 for the three months ended June 30,
2002 compared to no provision for the three months ended June 30, 2001.
The Bank's loan growth 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 six-month period of 2002 charge-offs totaled $43,000, while net
charge-offs totaled $26,000 as compared to $35,000 and $9,000 respectively for
the same six-month period in 2001.
In the three-month period ended June 30, 2002, charge offs totaled $25,000
compared to $37,000 for the same period in 2001. Net charge offs were $20,000
and $14,000 respectively.
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 decreased $680 thousand when comparing the first six months
of 2002 to the first six months of 2001.
For the three months ended June 30, 2002, Other Income decreased $737 thousand
when compared to the same period in 2001.
The decreases are due to the $850 thousand charge for the impairment of a
security within the Bank's investment portfolio as described in Footnote 4 to
the June 30, 2002 interim financial statements. Service Charge Fee income
increased $10 thousand when comparing the six months ended June 30, 2002 to
2001. Gains on sales on securities were up $53 thousand over last year. Gains on
sales on securities increased $97 thousand in the second quarter of 2002
compared to the same period in 2001. The largest increase has been in Other
Operating Income, an increase of $107 thousand comparing the first six months of
2002 to the first six 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 $480 thousand dollars when comparing the first
six months of 2002 with the first six months of 2001.
Non-interest expense went up by $116 thousand for the three-month period ended
June 30, 2002 when compared to the same period in 2001.
The largest share of the year to date increase, $103 thousand, was in the
Salaries and Benefits category. Computer Services and supplies were also up $41
thousand as of June 2002 compared to the same period in 2001. Taxes increased
$16 thousand and Furniture and Equipment expenses decreased $16 thousand.
Income Tax Provision
The income tax provision was $525 thousand for the first six months of 2002 as
compared to $732 thousand in the same period for 2001.
The income tax provision was $133 thousand for the three-month period ended June
30, 2002 compared to $362 thousand for the comparable period in 2001.
The decrease for both periods is due to lower pre-tax income.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Fed Funds rate has remained the same for the second quarter of 2002. As of
June 30, 2002, the Bank is currently showing sensitivity to downward rate shift
scenarios. Based on discussions, this scenario seemed unlikely. However, recent
instability in the markets has increased the likelihood of this happening, maybe
as early as fall 2002. The model simulation used by the Bank's ALCO shows a
possible increase in net interest income of 0.941% or $117,000 in a +200 basis
point rate shock over a one-year period. A decrease of 1.456% or $181,000 is
shown in the model at a -200 basis point rate shock when interest rate
sensitivity is performed through December 2002. When testing is extended through
December 2003, an upward shock of 200 basis points results in an increase in net
interest income of 8.107% or $1,056,000 while a downward shock of 200 basis
points results in a decrease in net interest income of 12.672% or $1,650,000.
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
At the Annual Meeting of Stockholders held on April 27, 2002, Chairman Shurtleff
reported that the Judge of Election and Proxy had completed the voting
tabulations. On the basis of that report, Chairman Shurtleff declared that Jack
Norris and George Stover 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, 2002.
The following outlines the items voted on at the meeting as well as the votes
cast for, against, and non-vote:
I. Election of Class I Directors
Name For Withhold Authority
-------------------- -------------------- --------------------
Jack M. Norris 1,327,166 44,062
George H. Stover, Jr. 1,325,117 46,111
Class II Directors whose terms will expire in 2003
John W. Ord
Russell D. Shurtleff
Class III Directors whose terms shall expire in 2004
Gerald R. Pennay
Thomas F. Chamberlain
II. Ratification of selection of Beard Miller Company, LLC as independent
auditors of the Bank for 2002.
For Against Abstain
------------ ------------ ------------
1,365,600 3,477 2,153
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits required by Item 601 of Regulation S-K:
(3.1) Articles of Incorporation of Peoples Financial Services Corp.*
(3.2) By laws of Peoples Financial Service Corp. as amended **
(10.1) Agreement dated January 14, 1997, between John W. Ord and
Peoples Financial Services Corp. *
(10.2) Excess Benefit Plan dated January 14, 1992, for John W. Ord *
(10.4) Termination Agreement dated January 1, 1997, between Debra E.
Dissinger and Peoples Financial Services Corp. *
(11) The statement regarding computation of per share earnings
required by this exhibit is contained in Note 1 to the
consolidated financial statements captioned "Earnings Per
Common Share" filed as part of Item 8 of this report.
(99) Certification of Principal Executive Officer or Principal
Financial Officer
* Incorporated by reference to the Corporation's
Registration Statement on Form 10 as filed with the
U.S. Securities and Exchange Commission on March 4,
1998
** Incorporated by reference to Exhibit 99.6 on Form
8K as filed with the U.S. Securities and Exchange
Commission on April 20, 2001
(b) Other events and reports on Form 8-K that have been previously filed
are as follows:
Press Release of Peoples Financial Services Corp. to the Registrant's
Current Report on Form 8-K as filed on April 10, 2002, submitted as
Exhibit 99.4, regarding First Quarter Results and Dividend
Announcement.
Press Release of Peoples Financial Services Corp. to the Registrant's
Current Report on Form 8-K as filed on May 9, 2002, submitted
as Exhibit 99, regarding First Quarter Results.
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
EXHIBIT 99
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OR
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 81 U.S.C. SECTION 1350
In connection with the Quarterly Report of Peoples Financial Services, Corp. on
Form 10-Q for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission, we the undersigned, certify, pursuant to 18 C.S.U. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly represents, in all
material respects, the financial condition and results of operations
of the Company as of the date and for the periods expresses in the
Report.
By/s/ John W. Ord
Chief Executive Officer
By/s/ Debra E. Dissinger
Executive Vice President
Date: August 14, 2002