UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2001, or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from
No. 0-23863
(Commission File Number)
PEOPLES FINANCIAL SERVICES CORP.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2931852
(State of Incorporation) (IRS Employer ID Number)
50 Main Street
Hallstead, PA 18822
(Address of Principal Executive Offices) (Zip Code)
(570) 879-2175
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of deliquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, tot he best
of registrant's knowledge, in definitive proxy or information statements
incorporated bt reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No____
Number of shares outstanding as of December 31, 2001
COMMON STOCK ($2 Par Value) 2,105,836
--------------------------- --------------------------
(Title of Class) (Outstanding Shares)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2001 Proxy Statement for the Registrant are incorporated by
reference into Part III of this report.
TABLE OF CONTENTS
Part I
Item 1 Business..................................................... 1-12
Item 2 Properties................................................... 13
Item 3 Legal Proceedings............................................ 13
Item 4 Submission of Matters to a Vote of Security Holders......... 14
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 14
Item 6 Selected Financial Data...................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operation.....................................16-39
Item 7A Quantitative and Qualitative Disclosure About Market Risk..... 39
Item 8 Financial Statements and Supplementary Data.................. 39
Independent Auditor's Report................................. 40
Consolidated Balance Sheets.................................. 41
Consolidated Statements of Income............................ 42
Consolidated Statements of Comprehensive Income.............. 43
Consolidated Statements of Stockholders' Equity.............. 43
Consolidated Statements of Cash Flows........................44-45
Notes to Consolidated Financ ial Statements...................46-69
Item 9 Changes and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 70
Part III
Item 10 Directors and Executive Officers of the Registrant.... 70
Item 11 Executive Compensation................................ 70
Item 12 Security Ownership of Certain Beneficial Owners
and Management........................................ 70
Item 13 Certain Relationships and Related Transactions........ 70
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................... 71
PART I
ITEM 1 BUSINESS
BRIEF HISTORY
Peoples Financial Services Corp. was incorporated under the laws of the
Commonwealth of Pennsylvania on February 6, 1986, and is a one-bank holding
company headquartered in Hallstead, Pennsylvania.
The Company is engaged primarily in commercial and retail banking services and
in businesses related to banking services through its sole subsidiary, Peoples
National Bank ("PNB" or the "Bank"). PNB was chartered in Hallstead,
Pennsylvania in 1905 under the name of The First National Bank of Hallstead. In
1965, the Hop Bottom National Bank (chartered in 1910) merged with and into the
First National Bank of Hallstead to form Peoples National Bank of Susquehanna
County. In 2001, the Bank changed its name to Peoples National Bank. PNB is
currently in its 96th year of operation.
SUPERVISION AND REGULATION
The Company and PNB are extensively regulated under federal and state law.
Generally, these laws and regulations are intended to protect depositors, not
shareholders. The following is a summary description of certain provisions of
certain laws that affect the regulation of bank holding companies and banks.
This discussion is qualified in its entirety by reference to applicable laws and
regulations. Changes in such laws and regulations may have a material effect on
the business and prospects of the Company and PNB.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and is subject to regulation, supervision, and
examination by the Federal Reserve Bank ("FRB"). The Company is required to file
annual and quarterly reports with the FRB and to provide the FRB with such
additional information as the FRB may require. The FRB also conducts
examinations of the Company.
With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person or
entity proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of the Company is required to give 60 days
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
The Company's banking subsidiary is a federally chartered national banking
association regulated by the Office of the Comptroller of the Currency ("OCC").
The OCC may prohibit the institution over which it has supervisory authority
from engaging in activities or investments that the agency believes constitute
unsafe or unsound banking practices. Federal banking regulators have extensive
enforcement authority over the institutions they regulate to prohibit or correct
activities that violate law; regulation or a regulatory agreement or which are
deemed to constitute unsafe or unsound practices.
Enforcement actions may include:
the appointment of a conservator or receiver,
the issuance of a cease and desist order,
the termination of deposit insurance,
the imposition of civil money penalties on the institution, its
directors, officers, employees and institution affiliated parties, the
issuance of directives to increase capital, the issuance of formal and
informal agreements, the removal of or restrictions on directors,
officers, employees and institution-affiliated parties, and the
enforcement of any such mechanisms through restraining orders or any
other court actions.
PNB is subject to certain restrictions on extensions of credit to executive
officers, directors, principal shareholders or any related interests of such
persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with PNB
and not involving more than the normal risk of repayment. Other laws tie the
maximum amount that may be loaned to any one customer and its related interests
to capital levels of the bank.
Limitations on Dividends and Other Payments
The Company's current ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiary, PNB. Both federal and state
laws impose restrictions on the ability of the Company to pay dividends. The FRB
has issued a policy statement that provides that, as a general matter, insured
banks and bank holding companies may pay dividends only out of prior operating
earnings. Under the National Bank Act, a national bank such as PNB, may pay
dividends only out of the current year's net profits and the net profits of the
last two years. In addition to these specific restrictions, bank regulatory
agencies in general, also have the ability to prohibit proposed dividends by a
financial institution that would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
Permitted Non-Banking Activities
Generally, a bank holding company may not engage in any activities other than
banking, managing, or controlling its bank and other authorized subsidiaries,
and providing service to those subsidiaries. With prior approval of the FRB, the
Company may acquire more than 5% of the assets or outstanding shares of a
company engaging in non-bank activities determined by the FRB to be closely
related to the business of banking or of managing or controlling banks. The FRB
provides expedited procedures for expansion into approved categories of non-bank
activities.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions: on extensions of credit to the bank holding
company or its subsidiaries, on investments in their securities, and on the use
of their securities as collateral for loans to any borrower.
These regulations and restrictions may limit the Company's ability to obtain
funds from PNB for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, PNB may not generally require a
customer to obtain other services from itself or the Company, and may not
require that a customer promise not to obtain other services from a competitor
as a condition to an extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guarantee liabilities generally
are superior in priority to the obligation of the depository institutions to its
stockholders due solely to their status as stockholders and obligations to other
affiliates.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act has made major changes in the way that the financial
services industry has been organized. By eliminating distinctions between
different types of financial institutions and allowing them to merge, the bill
enables one company to meet all of its consumers' financial needs. It allows
banks and securities firms to own the other. Over the past two decades, the
products offered by banks and securities firms have gradually come to resemble
each other. Both types of firms offer checking accounts in which idle balances
are invested in stocks or bonds, and credit cards. The new Act repeals portions
of the 1933 Glass-Steagall that prohibit banks and securities firms from owning
each other. This Act also protects consumer privacy by allowing customers to
know how confidential information will be treated. Instead of hoping a financial
services company will treat their personal data as confidential, consumers will
receive an explicit disclosure of how such information will be used by the firm.
The stated policy must specify how and under what circumstances confidential
information, that is not available from other public sources, would be disclosed
among the firm's affiliates and other firms. Customers who object to any portion
of this policy would be able to take their business to another firm. This Act
also allows consumers to control how their personal information is shared.
Customers have the right to prohibit financial services companies from sharing
their personal confidential information with other non-affiliated firms. Once a
consumer makes that decision, financial companies are prohibited from violating
their instructions
The goal of this Act is to ensure that the interest of consumers are protected,
both by assuring that their personal information is safeguarded and by giving
financial institutions the flexibility to serve their needs.
Pennsylvania Law
As a Pennsylvania bank holding company, the Company is subject to various
restrictions on its activities as set forth in Pennsylvania law. This is in
addition to those restrictions set forth in federal law. Under Pennsylvania law,
a bank holding company that desires to acquire a bank or bank holding company
that has its principal place of business in Pennsylvania must obtain permission
from the Pennsylvania Department of Banking.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies were eliminated effective September 29,
1995. The law also permits interstate branching by banks effective as of June 1,
1997, subject to the ability of states to opt-out completely or to set an
earlier effective date.
FIRREA (Financial Institution Reform, Recovery, and Enforcement Act) FIRREA was
enacted into law in order to address the financial condition of the Federal
Savings and Loan Insurance Corporation, to restructure the regulation of the
thrift industry, and to enhance the supervisory and enforcement powers of the
Federal bank and thrift regulatory agencies. As the primary federal regulator of
the bank, the OCC is responsible for the supervision of the bank. When dealing
with capital requirements, the OCC and FDIC have the flexibility to impose
supervisory agreements on institutions that fail to comply with regulatory
requirements. The imposition of a capital plan, termination of deposit
insurance, and removal or temporary suspension of an officer, director or other
institution-affiliated person may cause enforcement actions. There are three
levels of civil penalties under FIRREA.
The first tier provides for civil penalties of up to $5,000 per day for any
violation of law or regulation. The second tier provides for civil penalties of
up to $25,000 per day if more than a minimal loss or a pattern is involved.
Finally, civil penalties of up to $1 million per day may be assessed for
knowingly or recklessly causing a substantial loss to an institution or taking
action that results in a substantial pecuniary gain or other benefit.
Criminal penalties are increased to $1 million per violation and may be up to $5
million for continuing violations or for the actual amount of gain or loss.
These penalties may be combined with prison sentences of up to five years.
FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991) In
December 1991, Congress enacted FDICIA which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things,publicly available annual financial condition and
management reports for financial institutions, including audits by independent
accountants, the establishment of uniform accounting standards by federal
banking agencies, the establishment of a "prompt corrective action" system of
regulatory supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with lower
levels of capital, additional grounds for the appointment of a conservator or
receiver, and restrictions or prohibitions on accepting brokered deposits,
except for institutions which significantly exceed minimum capital requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories:
"well capitalized,"
"adequately capitalized,"
"under capitalized,"
"significantly undercapitalized," and
"critically undercapitalized."
PNB is currently classified as "well capitalized." An institution may be deemed
by the regulators to be in a capitalization category that is lower than is
indicated by its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically under capitalized.
FDICIA provides the federal banking agencies with significantly expanded powers
to take enforcement action against institutions that fail to comply with capital
or other standards. Such actions may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Under FDICIA each federal banking agency is required to prescribe, by
regulation, non-capital safety and soundness standards for institutions under
its authority. The federal banking agencies, including the OCC, have adopted
standards covering:
internal controls,
information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and
compensation fees and benefits.
Any institution that fails to meet these standards may be required by the agency
to develop a plan acceptable to the agency, specifying the steps that the
institutions will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company, on
behalf of PNB, believes that it meets substantially all the standards that have
been adopted. FDICIA also imposed new capital standards on insured depository
institutions. Before establishing new branch offices, PNB must meet certain
minimum capital stock and surplus requirements and must obtain OCC approval.
Risk-Based Capital Requirements
The federal banking regulators have adopted certain risk-based capital
guidelines to assist in the assessment of the capital adequacy of a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit, and recourse agreements,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain US Treasury securities,
to 100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital.
"Tier 1", or core capital, includes common equity, perpetual preferred stock
(excluding auction rate issues) and minority interest in equity accounts of
consolidated subsidiaries, less goodwill and other intangibles, subject to
certain exceptions. "Tier 2", or supplementary capital, includes, among other
things, limited life preferred stock, hybrid capital instruments, mandatory
convertible securities, qualifying subordinated debt, and the allowance for loan
and lease losses, subject to certain limitations and less restricted deductions.
The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant. As of December 31, 2001, PFSC's ratio of Tier
1 capital to risk-weighted assets stood at 14.51% and its ratio of total capital
to risk- weighted assets stood at 15.37%. In addition to risk-based capital,
banks and bank holding companies are required to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage capital ratio, of at
least 4%. As of December 31, 2001, the Company's leverage capital ratio was
9.89%.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions including: limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital, and in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under FDICIA as applicable to under capitalized
institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of PNB to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
Interest Rate Risk
In August 1995 and May 1996, the federal banking agencies adopted final
regulations specifying that the agencies will include, in their evaluations of a
bank's capital adequacy, an assessment of the bank's interest rate risk ("IRR")
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization's IRR management includes a measurement of Board of
Directors and senior management oversight, and a determination of whether a
banking organization's procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking organization. PNB has
internal IRR models that are used to measure and monitor IRR. In addition, an
outside source also assesses IRR using its model on a quarterly basis.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, the Company does not expect the IRR
evaluation in the agencies' capital guidelines to result in significant changes
in capital requirements for PNB.
FDIC Insurance Assessments
As a FDIC member institution, PNB's deposits are insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF") that is
administered by the FDIC and each institution is required to pay semi-annual
deposit insurance premium assessments to the FDIC. The PNB assessment for 2001
was $42,947. These figures can be compared to FDIC assessments in 2000 of
$44,063 and in 1999 of $24,307.
Prior to 1997, only thrift institutions were subject to assessments to raise
funds to pay the Financing Corporate bonds. On September 30, 1996, as part of
the Omnibus Budget Act, Congress enacted the Deposit Insurance Funds Act of
1996, which recapitalized the Savings Association Insurance Fund ("SAIF") and
provided that BIF deposits would be subject to 1/5 of the assessment to which
SAIF deposits are subject for FICO bond payments through 1999. Beginning in
2000, BIF deposits and SAIF deposits were subject to the same assessment for
FICO bonds. The FICO assessment for PNB for 2001 was $.0190 for each $100 of BIF
deposits.
Community Reinvestment Act
The Community Reinvestment Act of 1977, (the CRA) is designed to create a system
for bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. Until May 1995, a depository
institution was evaluated for CRA compliance based on twelve assessment factors.
The CRA regulations were completely revised as of July 1, 1995, (the revised CRA
regulation) to establish new performance-based standards for use in examining
for compliance. This revised CRA regulation established new tests for evaluating
both small and large depository institutions. A small bank is defined as one
that has total assets of less than $250 million and is independent or is an
affiliate of a holding company with less than $1 billion in assets.
The Bank had its last CRA compliance examination in 1998 and received a
"satisfactory" rating.
Concentration
Payment risk is a function of the economic climate in which the Bank's lending
activities are conducted. Economic downturns in the economy generally or in a
particular sector could cause cash flow problems for customers and make loan
payments more difficult. The Bank attempts to minimize this risk by avoiding
loan concentrations to a single customer or to a small group of customers whose
loss would have a materially adverse effect on the financial condition of the
Bank.
Monetary Policy
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are open
market operations in United States Government securities, changes in the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits.
These methods are used in varying combinations to influence overall growth and
distribution of bank loans, investments, and deposits, and their use may also
affect interest rates charged on loans or paid on deposits. The monetary
policies of the FRB have had a significant effect on the operating results of
commercial banks in the past and are expected to do so in the future.
Legislation and Regulatory Changes
From time to time, legislation is enacted that effects the cost of doing
business or limits the activities of a financial institution. No prediction can
be made as to the likelihood of any major changes or the impact of those changes
might have on the Company.
MARKET AREAS
The PNB market areas are in the northeastern part of Pennsylvania with the
primary focus being Susquehanna and Wyoming Counties. Since Susquehanna County
borders the State of New York, the southern portion of Broome County, New York
is also considered part of the market area of PNB. In addition, parts of
Lackawanna, Wayne, and Bradford Counties in Pennsylvania that border Susquehanna
and Wyoming Counties are also considered part of the PNB market area.
The PNB market area is situated between:
the city of Binghamton, Broome County, New York, located to the north
the city of Scranton, Lackawanna County, Pennsylvania, to the south,
and Wilkes Barre, Luzerne County, Pennsylvania, to the southwest.
Susquehanna County could best be described as a bedroom county with a high
percentage of its residents commuting to work in Broome County, New York, or to
the Scranton, Pennsylvania, area. The southern part of Susquehanna County tends
to gravitate south for both employment and shopping while the northern part of
the county goes north to Broome County, New York. The western part of
Susquehanna County gravitates south and west to and through Wyoming County.
Wyoming County is home to a Proctor & Gamble manufacturing facility. This is an
economic stimulus to Wyoming County and the surrounding areas.
Our offices are located in counties that would be considered sparsely populated
as they are made up of many small towns and villages. The latest population
figures show Susquehanna County at approximately 42,000 and Wyoming County at
approximately 30,000 residents. Both counties are experiencing growth, but not
robust growth. Interstate 81 runs north and south through the eastern half of
Susquehanna County and has brought an influx of people from New Jersey and the
Philadelphia area. These people have purchased homes and land to build homes
that are used as vacation/recreation retreats and, quite often, become
retirement homes.
BUSINESS
Lending Activities
PNB provides a full range of retail and commercial banking services designed to
meet the borrowing and depository needs of small and medium sized businesses and
consumers in its market areas. Substantially all of PNB's loans are to customers
located within its service areas. PNB has no foreign loans or highly leveraged
transaction loans, as defined by the FRB. Substantially all of the loans in
PNB's portfolio have been originated by PNB. Policies adopted by the Board of
Directors are the basis by which PNB conducts its lending activities. These loan
policies grant individual lending officers authority to make secured and
unsecured loans in specific dollar amounts. Larger loans must be approved by
senior officers or by the Board of Directors. PNB's management information
systems and loan review policies are designed to monitor lending sufficiently to
ensure adherence to PNB's loan policies.
The commercial loans offered by PNB include commercial real estate loans,
working capital, equipment and other commercial loans, construction loans, SBA
guaranteed loans, and agricultural loans.
PNB's commercial real estate loans are used to provide financing for retail
operations, manufacturing operations, farming operations, multi-family housing
units, and churches. Commercial real estate secured loans are generally written
for a term of 15 years or less or amortized over a longer period with balloon
payments at shorter intervals. Personal guarantees are obtained on nearly all
commercial loans. Credit analysis, loan review, and an effective collections
process are also used to minimize any potential losses. PNB employs two
full-time commercial lending officers. These two people are augmented by branch
managers who are authorized to make smaller, less complex, commercial loans.
Risk with respect to PNB's commercial lending activities involves payment risk,
interest rate risk, or collateral risk.
Payment risk is a function of the economic climate in which PNB's lending
activities are conducted; economic downturns in the economy generally or in a
particular sector could cause cash flow problems for customers and make loan
payments more difficult. PNB attempts to minimize this risk by avoiding
concentrations of credit to single borrowers or borrowers in a particular
industry. Interest rate risk would occur if PNB were to make loans at fixed
rates in an environment in which rates were rising thereby preventing PNB from
making loans at the higher prevailing rates. PNB attempts to mitigate this risk
by making adjustable rate commercial loans and, when extending fixed rate
commercial loans, fixing loan maturities at five years or less. Finally,
collateral risk can occur if PNB's position in collateral taken as security for
loan repayment is not adequately secured. PNB attempts to minimize collateral
risk by avoiding loan concentrations to particular borrowers, by perfecting
liens on collateral and by obtaining appraisals on property prior to extending
loans.
Consumer loans offered by PNB include:
residential real estate loans,
automobile loans,
manufactured housing loans,
personal installment loans secured and unsecured for almost any
purpose, student loans, and home equity loans (fixed-rate term and open
ended revolving lines of credit).
PNB offers credit cards as an agent bank through another correspondent bank.
Risks applicable to consumer lending are similar to those applicable to
commercial lending. PNB attempts to mitigate payment risk in consumer lending by
limiting consumer lending products to a term of five years or less. To the
extent that PNB extends unsecured consumer loans, there is greater collateral
risk; however, credit checks and borrower history are obtained in all consumer
loan transactions.
Residential mortgage products include adjustable-rate as well as conventional
fixed-rate loans. Terms vary from 1, 5, 7 and 10-year adjustable rate loans to
5, 10, 15, 20, and 30-year fully amortized fixed rate loans. Bi-weekly payment
plans are also available. The longer term fixed rate loans have been
underwritten as conforming and may be sold to the secondary market to reduce
interest rate risk. Personal secured and unsecured revolving lines of credit
with variable interest rates and principal amounts ranging from $1,000 to
$10,000 are offered to credit-worthy customers. The largest segment of PNB's
installment loan portfolio is fixed-rate loans. Most are secured either by
automobiles, motorcycles, snowmobiles, boats, other personal property, or by
liens filed against real estate. These loans are generally available in terms of
up to 15 years with automobile loans having maturities of up to 60 months and
real estate loans having maturities up to 15 years. Loans secured by other
collateral usually require a maturity of less than 60 months. Home equity
products include both fixed-rate term products and also an open-end revolving
line of credit with a maximum loan-to-value ratio of 80% of current appraisal. A
special MGIC program now offered through the Bank, allows for loans of up to
100% of the appreciated value for qualified applicants. Credit checks, credit
scoring, and debt-to-income ratios within preset parameters are used to qualify
borrowers.
Mortgage loans have historically had a longer average life than commercial or
consumer loans. Accordingly, payment and interest rate risks are greater in some
respects with mortgage loans than with commercial or consumer lending. Deposits,
which are used as the primary source to fund mortgage lending, tend to be of
shorter duration than the average maturities on residential mortgage loans and
are more susceptible to interest rate changes. As a result of the relatively
long life of mortgage products, mortgages are written as either conforming or
nonconforming. In an effort to minimize interest rate and payment risk, only
conforming mortgage loans, which can be sold in the secondary mortgage market,
are written for periods of 30 years. Nonconforming mortgages are made with
adjustable rates or fixed rates with maturities shorter than 30 years.
Nonconforming mortgages also historically have higher interest rates. Mortgage
lending is also subject to economic downturns, in that increases in unemployment
could adversely affect the ability of borrowers to repay mortgage loans and
decreases in property values could affect the value of the real estate serving
as collateral for the loan.
The general good economy allowed good growth in loans that ended 2001 up 12.72%
from year-end 2000. Industry standard debt-to-income ratios and credit checks
are used to qualify borrowers on all consumer loans. Managers, assistant
managers, and customer service officers have retail lending authorities at each
of the full-service branch office locations. PNB has centralized loan
administration at its operations/administrative offices where mortgage
underwriting and loan review and analysis take place.
Loan Approval
Individual loan authorities are established by PNB's Board of Directors upon
recommendation by the senior credit officer. In establishing an individual's
loan authority, the experience of the lender is taken into consideration, as
well as the type of lending in which the individual is involved. The President
of PNB has the authority to approve loans up to $500,000 following an analysis
and review by loan administration and a written recommendation by the Chief
Credit Officer. The full Board of Directors reviews on a monthly basis, all
loans approved by individual lenders and the officers loan committee. All loan
requests which are either complex in nature or exceed $500,000 must be analyzed
and reviewed by loan administration and presented with a recommendation to the
full Board of Directors for approval or denial.
PNB generally requires that loans secured by first mortgages or real estate
have loan-to-value ratios within specified limits, ranging from 50% for loans
secured by raw land to 80% for improved property, with the exception of
secondary market programs which allow loan-to-value ratios as high as 95%. In
addition, in some instances for qualified borrowers, private mortgage insurance
is available for purchase that allows loan-to-value ratios to go as high as 95%.
PNB also participates in a guaranteed mortgage insurance program. This allows
PNB to make loans secured by second mortgages on real estate up to 100% of the
value of the property. Adjustable rate mortgage products, as well as
conventional fixed-rate products, are also available at PNB.
Deposit Activities
PNB also offers a full range of deposit and personal banking services insured
by the FDIC, including commercial checking and small business checking products,
cash management services, retirement accounts such as Individual Retirement
Accounts ("IRA"), retail deposit services such as certificates of deposit, money
market accounts, saving accounts, a variety of checking account products,
automated teller machines ("ATM's"), point of sale and other electronic services
such as automated clearing house ("ACH") originations, and other personal
miscellaneous services. These miscellaneous services would include
safe deposit boxes,
night depository services,
traveler's checks,
merchant credit cards,
direct deposit of payroll and other checks,
U.S. Savings Bonds,
official bank checks, and
money orders.
The principal sources of funds for PNB are core deposits that include demand
deposits, interest bearing transaction accounts, money market accounts, savings
deposits, and certificates of deposit. These deposits are solicited from
individuals, businesses, non-profit entities, and government authorities.
Substantially all of PNB's deposits are from the local market areas surrounding
each of its offices.
Investment Products
In 1999, PNB entered into an agreement with T.H.E. Financial Services to hire a
joint employee to sell investment products. An agent was hired and has an office
located in the Bank's Hallstead Plaza building.
Investment Portfolio and Activities PNB's investment portfolio has several
objectives.
A key objective is to provide a balance in PNB's asset mix of loans and
investments consistent with its liability structure, and to assist in management
of interest rate risk. The investments augment PNB's capital position in the
risk-based capital formula, providing the necessary liquidity to meet
fluctuations in credit demands of the community and also fluctuations in deposit
levels.
In addition, the portfolio provides collateral for pledging against public
funds, and a reasonable allowance for control of tax liabilities. Finally, the
investment portfolio is designed to provide income for PNB.
In view of the above objectives, the portfolio is treated conservatively by
management and only securities that pass those criteria are purchased.
Competition
PNB operates in a fairly competitive environment, competing for deposits and
loans with commercial banks, thrifts, credit unions, and finance and mortgage
companies. Some of these competitors possess substantially greater financial
resources than those available to PNB. Also, certain of these institutions have
significantly higher lending limits then PNB and may provide various services
for their customers, such as trust services, that are not presently available at
PNB.
Financial institutions generally compete on the basis of rates and service. PNB
is subject to increasing competition from credit unions, finance companies, and
mortgage companies that may not be subject to the same regulatory restrictions
and taxations as commercial banks.
PNB will seek to remain competitive with interest rates that it charges on its
loans and offers on deposits. It also believes that its success has been, and
will continue to be, due to its emphasis on community involvement, customer
services, and relationships. With consolidation continuing in the financial
industry, and particularly in PNB's markets, smaller profitable banks are
gaining opportunities where larger institutions exit markets that are only
marginally profitable for them.
SEASONALITY
Management does not feel that the deposits or the business of PNB in general are
seasonal in nature. The deposits may, however, vary with local and national
economic conditions but should not have a material effect on planning and policy
making.
ITEM 2 PROPERTIES
PNB has four full-service banking offices in Susquehanna County that are located
in:
Borough of Susquehanna Depot,
Hallstead Plaza, Great Bend Township, Borough of Hop Bottom, Montrose
office in Bridgewater Township.
PNB's presence in Wyoming County, Pennsylvania had been limited to a de novo
branch in Nicholson, which reopened in 1992 until the purchase of the two Mellon
offices in 1997. The Wyoming County locations are:
Borough of Nicholson,
Meshoppen Township,
Tunkhannock Borough
The administrative/operations office of the Company and PNB is located at 50
Main Street, Hallstead, Pennsylvania. The following departments are located at
that office:
commercial, mortgage and consumer lending operations, executive
offices, marketing department, human resources office, deposit account
support services, data processing services
All offices are owned in fee title by PNB with the exception of the Hallstead
Plaza office and the Meshoppen office. The Hallstead Plaza and Meshoppen offices
are subject to ground leases. Each lease is either long-term expiring in
September 2028 or includes renewal options. Current lease payments range from
$2,535 to $17,760 annually. The leases provide that the Bank pay property taxes,
insurance, and maintenance costs. Six of the seven offices provide drive-up
banking services and five offices have 24-hour ATM services.
ITEM 3 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 4 Submissions of Matters to a Vote of Security Holders
NONE
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is not listed on an exchange or quoted on the
National Association of Securities Dealers, Inc. Automated Quotation system
(NASDAQ). The Company's Common Stock is traded sporadically in the
over-the-counter market and, accordingly, there is no established public trading
market at this time. The Company's stock is listed on the OTC Bulletin Board
under the symbol PFIS. The cusip number is 711040-10-5. The investment firms of
Tucker Anthony Company, Incorporated from Lancaster, Pennsylvania, and Ferris,
Baker Watts, Incorporated from Baltimore, Maryland, make a limited market in the
Company's Common Stock. The Company and previously the Bank has continuously
paid dividends for more than 90 years and it is the intention to pay dividends
in the future. However, future dividends must necessarily depend upon earnings,
financial condition, appropriate legal restrictions, and other factors at the
time that the Board of Directors considers dividend payments. As of December 31,
2001, there were 43,634 outstanding options to purchase the Company's common
stock. See Note 9 of the Consolidated Financial Statements for more information.
Book value of common stock at December 31, 2001, was $16.03 and on December 31,
2000, it was $14.31. As of December 31, 2001, the Company had approximately 801
shareholders of record. At such date, 2,105,836 shares of Common Stock were
outstanding.
The following table reflects high bid and low asked prices for shares of the
Company's Common Stock to the extent such information is available, and the
dividends declared with respect thereto during the preceding two years.
COMPANY STOCK
2001 2000
Price Range Dividends Price Range Dividends
Low High Declared Low High Declared
First Quarter ........ $ 24.00 $ 24.00 $ 0.17 $ 27.00 $ 27.00 $ 0.15
Second Quarter ....... $ 24.00 $ 24.25 $ 0.19 $ 26.50 $ 27.50 $ 0.15
Third Quarter ........ $ 24.25 $ 25.38 $ 0.19 $ 25.50 $ 26.25 $ 0.16
Fourth Quarter ....... $ 25.38 $ 26.00 $ 0.21 $ 23.50 $ 24.00 $ 0.16
ITEM 6 SELECTED FINANCIAL DATA
Amounts are in thousands except for per share data.
Consolidated Financial Highlights DEC DEC DEC DEC DEC
Unaudited 2001 2000 1999 1998 1997
Performance
Net Income .................................. $ 4,836 $ 3,905 $ 3,787 $ 3,405 $ 3,011
Return of Average Assets .................... 1.62% 1.42% 1.49% 1.45% 1.38%
Return on Average Equity .................... 15.15% 14.28% 14.27% 13.23% 12.20%
Shareholders' Value
Earnings per Share, Basic and Diluted ....... $ 2.28 $ 1.80 $ 1.74 $ 1.56 $ 1.38
Dividends ................................... $ 0.72 $ 0.62 $ 0.52 $ 0.46 $ 0.34
Book Value .................................. $ 16.03 $ 14.31 $ 12.36 $ 12.42 $ 11.28
Market Value ................................ $ 26.00 $ 24.00 $ 27.00 $ 25.50 $ 17.60
Market Value/Book Value Ratio ............... 162.20% 167.71% 218.44% 205.31% 156.08%
Price Earnings Multiple ..................... 11.40x 13.33x 15.52x 16.35x 12.75x
Dividend Payout Ratio ....................... 31.62% 35.15% 29.82% 29.23% 24.42%
Dividend Yield .............................. 2.77% 2.58% 1.93% 1.80% 2.18%
Safety and Soundness
Stockholders' Equity/Asset Ratio ............ 10.70% 10.71% 10.26% 10.94% 10.77%
Allowance for Loan Loss as a Percent of Loans 0.94% 1.11% 1.15% 1.21% 1.32%
Net Charge Offs/Total Loans ................. 0.063% 0.045% 0.129% 0.110% 0.090%
Allowance for Loan Loss/Nonaccrual Loans .... 383.67% 464.44% 985.61% 331.88% 163.24%
Allowance for Loan Loss/Non-performing Loans 306.28% 381.43% 655.22% 324.43% 139.43%
Balance Sheet Highlights at December 31, 2001
Total Assets ................................ $315,347 $287,625 $261,319 $247,202 $228,720
Total Investments ........................... 100,783 99,678 92,066 93,175 88,149
Net Loans ................................... 191,913 170,262 150,630 139,536 125,110
Allowance for Loan Losses ................... 1,816 1,918 1,756 1,713 1,676
Total Deposits .............................. 238,891 230,739 215,424 209,881 193,592
Stockholders' Equity ........................ $ 33,754 $ 30,852 $ 26,810 $ 27,046 $ 24,644
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation
This consolidated review and analysis of Peoples Financial Services Corp. (the
Company) is intended to assist the reader in evaluating the Company's
performance for the years ending December 2001 and 2000. The information should
be read in conjunction with the consolidated financial statements and the
accompanying notes to those statements.
Peoples Financial Services Corp. is the one-bank holding company of Peoples
National Bank (the Bank), which is wholly owned by the Company. The Company and
the Bank derive their primary income from the operation of a commercial bank,
including earning interest on loans and investment securities. The Bank incurs
interest expense in relation to deposits and other borrowings. The Bank operates
seven full-service branches in the Hallstead Shopping Plaza, Hop Bottom,
Montrose, Susquehanna, Nicholson, Tunkhannock, and Meshoppen, PA. The Bank has
on-site automated teller machines at all offices except Hop Bottom and
Meshoppen. The administrative offices and operations offices are located in
Hallstead, PA. Principal market areas are Susquehanna and Wyoming Counties in PA
and the bordering areas of those counties. As of December 31, 2001, the Bank
employed 80 full-time employees and 17 part-time employees.
Forward Looking Statements
When used in this discussion, the words "believes", "anticipates",
"contemplated", "expects", or similar expressions are intended to identify
forward looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Those risks and uncertainties include changes in interest rates, the
ability to control costs and expenses, and general economic conditions. The
Company undertakes no obligation to publicly release the results of any
revisions to those forward looking statements that may be made to reflect events
or circumstances after this date or to reflect the occurrence of unanticipated
events.
Critical Accounting Policies
Note 1 to the Company's consolidated financial statements lists significant
accounting policies used in the development and presentation of its financial
statements. This discussion and analysis, the significant accounting policies,
and other financial statement disclosures identify and address key variables and
other qualitative and quantitative factors that are necessary for an
understanding and evaluation of the Company and its results of operations.
Results of Operations
Net Interest Income
Net interest income is the main source of the Company's income. It is the
difference between interest earned on assets and interest paid on liabilities.
The discussion of net interest income should be read in conjunction with Table
2: "Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential", and Table 3: "Rate/Volume Analysis of Changes in Net
Interest Income."
The following table shows the net interest income on a fully tax equivalent
basis for each of the three years ending December 2001, 2000, and 1999.
TABLE 1
Net Interest Income
(In thousands)
2001 2000 1999
Total Interest Income .......................... $20,902 $19,990 $17,623
Tax Equivalent Adjustment ...................... 991 991 937
21,893 20,981 18,560
Total Interest Expense ......................... 10,022 10,469 8,480
Net Interest Income (Fully Tax Equivalent Basis) $11,871 $10,512 $10,080
Table 2 includes the average balances, interest income and expense, and the
average rates earned and paid for assets and liabilities. Yields on tax-exempt
assets have not been calculated on a fully tax equivalent basis. For yield
calculation purposes, nonaccruing loans are included in average loan balances.
Table 3 analyzes the components contributing to the changes in net interest
income in 2001 and indicates the impact in either changes in rate or changes in
volume
TABLE 2
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential
2001 2000 1999
ASSETS Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Loans
Real Estate ................ $ 98,238 $ 7,995 8.14% $ 90,002 $ 7,349 8.17% $ 82,534 $ 6,680 8.09%
Installment ................ 18,945 1,715 9.05% 18,629 1,769 9.50% 17,739 1,616 9.11%
Commercial ................. 54,761 4,696 8.58% 47,474 4,323 9.11% 37,283 3,366 9.03%
Tax Exempt ................. 8,428 401 4.76% 6,398 326 5.10% 7,801 354 4.54%
Other Loans ................ 461 49 10.63% 424 53 12.50% 367 41 11.17%
Total Loans ................... 180,833 14,856 8.22% 162,927 13,820 8.48% 145,724 12,057 8.27%
Investment Securities (AFS)
Taxable .................... 70,636 4,339 6.14% 64,205 4,397 6.85% 63,737 3,947 6.19%
Non-Taxable ................ 28,745 1,522 5.29% 31,139 1,598 5.13% 28,667 1,464 5.11%
Total Securities .............. 99,381 5,861 5.90% 95,344 5,995 6.29% 92,404 5,411 5.86%
Time Deposits with Other Banks 2,526 149 5.90% 1,536 112 7.29% 589 39 6.62%
Fed Funds Sold ................ 806 36 4.47% 976 63 6.45% 2,353 116 4.93%
Total Earning Assets .......... 283,546 20,902 7.37% 260,783 19,990 7.67% 241,070 17,623 7.31%
Less: Allowance for Loan Losses (1,905) (1,820) (1,716)
Cash and Due from Banks ....... 5,160 5,102 4,948
Premises and Equipment, Net ... 3,393 3,451 3,521
Other Assets .................. 7,939 7,438 6,580
Total Assets ................. $ 298,133 $ 274,954 $ 254,403
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 2001 2000 1999
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Loans
Interest Bearing Demand ............... $ 21,402 402 1.88% $ 18,232 397 2.17% $ 16,066 225 1.40%
Regular Savings ....................... 51,405 1,497 2.91% 44,247 1,600 3.62% 33,416 887 2.65%
Money Market Savings ................. 31,494 991 3.15% 34,022 1,611 4.74% 38,900 1,511 3.88%
Time .................................. 105,598 5,762 5.46% 101,706 5,660 5.57% 102,011 5,364 5.26%
Total Interest Bearing Deposits .......... 209,899 8,652 4.12% 198,207 9,268 4.68% 190,393 7,987 4.20%
Other Borrowings ......................... 25,751 1,370 5.32% 20,682 1,201 5.81% 10,135 493 4.86%
Total Interest Bearing ................... 235,650 10,022 4.25% 218,889 10,469 4.78% 200,528 8,480 4.23%
Net Interest Income ...................... $ 10,880 3.12% $ 9,143 2.88% $ 9,521 3.08%
Non-Interest Bearing
Demand Deposits ..................... 28,546 26,680 25,527
Accrued Expenses and Other Liabilities ... 2,013 2,034 1,806
Stockholders' Equity ..................... 31,924 27,351 26,542
Total Liabilities and Stockholders' Equity $ 98,133 $274,954 $254,403
Interest Income/Earning Assets ........... 7.37% 7.67% 7.31%
Interest Expense/Earning Assets .......... 3.53% 4.01% 3.52%
Net Interest Margin ...................... 3.84% 3.66% 3.79%
========
TABLE 3
Rate/Volume Analysis of Changes in Net Interest Income
2001 to 2000 2000 to 1999
(in thousands) Increase Change Due to Increase Change Due to
Decrease Rate Volume Decrease Rate Volume
INTEREST INCOME
Real Estate Loans .............. $ 646 $ (27) $ 673 $ 669 $ 65 $ 604
Installment Loans .............. (54) (84) 30 153 72 81
Commercial Loans ............... 373 (291) 664 957 37 920
Tax Exempt Loans ............... 75 (28) 103 (28) 36 (64)
Other Loans .................... (4) (9) 5 12 6 6
Total Loans .................... 1,036 (439) 1,475 1,763 216 1,547
Investment Securities (AFS)
Taxable ........................ (58) (498) 440 450 421 29
Non-Taxable .................... (76) 47 (123) 134 8 126
Total Securities (AFS) ........ (134) (451) 317 584 429 155
Time Deposits with Other Banks . 37 (41) 78 73 10 63
Fed Funds Sold ................. (27) (16) (11) (53) 15 (68)
Total Interest Income .......... 912 (947) 1,859 2,367 670 1,697
INTEREST EXPENSE
Interest Bearing Demand Deposits 5 (64) 69 171 141 30
Regular Savings Deposits ....... (103) (362) 259 713 426 287
Money Market Savings Deposits . (620) (500) (120) 100 289 (189)
Time Deposits .................. 102 (115) 217 296 312 (16)
Total Interest Bearing Deposits (616) (1,041) 425 1,280 1,168 112
Other Borrowings ............... 169 (125) 294 708 195 513
Total Interest Expense ......... (447) (1,166) 719 1,988 1,363 625
Net Interest Spread ............ $ 1,359 $ 219 $ 1,140 $ 379 $ (693) $ 1,072
Net interest income on loans increased $1,036,000 from 2000 to 2001. This
increase of 7.5% is attributable to growth in the loan portfolio during the Year
2001. Net loans increased 12.72%. Prime rate went from 9.5% to 4.75% during the
year.
Interest income on taxable investments decreased $58,000 from 2000 due to lower
interest rates during the year. Beginning in January and ending in December, the
Federal Reserve Bank decreased interest rates 11 times. Interest income from
Federal Funds sold decreased $27,000 from 2000 to 2001 because of lesser volume
and lower rates. In addition, the growth in the loan portfolio did not provide
for excess funds.
For comparison, interest income on loans increased $1,763,000 in 2000 from 1999.
This increase of 14.6% was attributable to growth in the loan portfolio during
the Year 2000. Net loans increased 13%. Although interest rates were higher at
the end of the year than the beginning, competitive pricing pressures kept
income lower. Prime rate increased from 8.5% to 9.5% during 2000.
Interest income on taxable investments increased $449,000 from 1999 to 2000 due
to a combination of higher balances and investing at higher interest rates
during the 2000. Beginning in June 1999 and ending in May of 2000, the Federal
Reserve Bank increased interest rates 1 3/4%. During most of the Year 2000,
interest rates were inverted, meaning that short-term rates were higher than
long-term rates. Because of this situation and management's desire to shorten
maturities on taxable investments, purchase of taxable securities were limited
to those with maturities of 5 years or less.
As previously stated, short-term interest rates decreased during the Year 2001.
Since deposit accounts are priced off the short end of the treasury curve, the
Bank experienced an abnormal decrease in interest expense of $447,000 or 4.3% in
2001. Not only did deposits cost less, but borrowings also were less expensive.
Funding loan growth through borrowing was deemed more economically sensible than
through aggressive certificate of deposit rates. Interest on deposits decreased
$616,000 in 2001.
Short-term interest rates increased during the Year 2000. Since deposit accounts
are priced off the short end of the treasury curve, the Bank experienced an
abnormal increase in interest expense during 2000 over 1999 of 23.4% or
$1,988,000. Not only did deposits cost more, term borrowings also were more
expensive as that line item went from $493,000 in 1999 to $1,201,000 in 2000.
Funding loan growth through term borrowing was deemed more economically sensible
than through aggressive certificate of deposit rates. Interest on deposits
increased $1,280,000 in 2000 over 1999 due to the increase in short-term rates.
PROVISION FOR LOAN LOSS
The provision and allowance for loan losses are based on management's ongoing
assessment of the Corporation's credit exposure and consideration of other
relevant factors. The allowance for loan losses is a valuation reserve that is
available to absorb future loan charge offs. The provision for loan losses is
the amount charged to earnings on an annual basis. The factors considered in
management's assessment of the reasonableness of the allowance for loan losses
include prevailing and anticipated economic conditions, assigned risk ratings on
loan exposures, the results of examinations and appraisals of the loan portfolio
conducted by federal regulatory authorities and an independent loan review firm,
the diversification and size of the loan portfolio, the level of and inherent
risk in non-performing assets, and any other factors deemed relevant by
management.
The provision for loan losses was $20,000, $240,000 and $240,000 for the years
2001, 2000, and 1999. Net charge-offs for 2001 were $122,000 compared to $78,000
in 2000. As of December 31, 2001, the allowance for loan loss was 0.94% of loans
and at December 31, 2000, the ratio was 1.11% of loans. After allocation of
reserves to all non-accrual and especially mentioned loans as well as applying a
percentage of outstanding loans based on the loss history of such loans in each
category, the opinion of management was that the provision for loan loss was
proper and sufficient. The ratio of allowance for loan loss to non-performing
loans was 306.28% at year end 2001.
Net charge-offs for 2000 were $78,000 compared to $198,000 in 1999, so the
balance in allowance for loan loss increased 9.23%. The ratio of allowance for
loan loss to non-performing loans was 381.43% at year-end 2000 as compared to
655.22% at year-end 1999. As of December 31, 2000, the allowance for loan loss
was 1.11% of loans and at December 31, 1999, the ratio was 1.15% of loans.
OTHER INCOME
Non-Interest Income
Non-interest income includes items that are not related to interest rates, but
rather, to services rendered and activities conducted in conjunction with the
operation of a commercial bank. Service charges earned on deposit accounts is
the largest single item in this category and represents fees related to deposit
accounts including overdraft fees, minimum balance fees, and transaction fees.
Several components of this category contributed strongly to the increase of
$253,000 from $1,452,000 in 2000 to $1,705,000 in 2001, an increase of 17.4%.
Bank-owned life insurance in the amount of $4 million was added to assets at
midyear and contributed $124,000. The commissions from the sales of investment
products from our third party provider increased $38,000 ending the year at
$140,000 compared to $102,000 in 2000. Overdraft fees increased $104,000 in 2001
which was 16.6%.
Non-interest income in 2000 increased $146,000 or 11.2% from 1999. Increased
volume and adjustments in fee schedules account for customer service fees
increasing $78,000.
The following table analyzes the increase in total other income by comparing the
years ending 2001 and 2000:
TABLE 4
INCOME
(In thousands) Variance 2001 Variance 2000
December 31 Amount Percent Amount Percent
2001 2000 1999 Of Change Of Change Of Change Of Change
Service Charges and Fees $1,125 $ 978 $ 900 147 15.03% 78 8.67%
Other Operating Income . 548 453 321 95 20.97% 132 41.12%
Gains on Security Sales 32 21 85 11 52.38% (64) (75.29)%
TOTAL Other Income ..... $1,705 $1,452 $1,306 253 17.42% 146 11.18%
OTHER EXPENSE
Non-Interest Expense
Non-interest expense includes all other expenses associated with the Company.
Salaries and related benefits is the largest expense in this category and it
increased $207,000 or 7.3% over year end 2000. Annual salary increases, along
with an increase for health insurance, were the reasons for this change. In
comparison, the increase in this category from 1999 to 2000 was 11.2% or
$285,000. New employees and annual salary increases along with an increase for
health insurance were the reason.
Occupancy expense decreased 6.8% or $23,000 in 2001 as compared to 2000, when
occupancy expense increased 4.6% or $15,000. This was considered a normal
fluctuation for taxes, utilities, repairs and maintenance, and depreciation.
Furniture and equipment expense decreased a negligible amount with 2001 at
$385,000 compared to 2000 at $388,000 which was consistent with 1999 expenses of
$383.000.
Professional fees, which includes outside service, continues to increase as
management and the Company find it efficient and cost effective to utilize
outside services and consultants to facilitate management and operations.
Professional fees and outside services were $231,000 in 2001 which compares to
$216,000 in 2000 and $197,000 in 1999.
Computer services and supplies is another component of other expenses and it is
as its name implies. This category covers the expense of data processing for the
Company. Each year dependence grows as does the resultant expense. In 2001 the
expense was $394,000 compared to $361,000 in 2000 and $306,000 in 1999.
Technology has proven to be expensive, but necessary to provide excellent
customer service and maintain efficiencies.
Taxes, other than payroll and income, are another component and in 2001, this
expense was $290,000 compared to $255,000 in 2000, an increase considered to be
normal. In 1999 taxes were $247,000.
Every other non-interest expense is in the category of other. In 2001 this
expense increased $223,000 and the total for this year was $1,461,000. The
biggest components in this figure were the amortization of premiums on the
purchase of the Tunkhannock and Meshoppen branch offices at $258,000; operating
costs other than salaries for our operation center, $151,000; directors' and
associate directors' fees, employee education costs of $66,000; stationery
printing and supplies, $120,000; and postage at $143,000. All were deemed to be
in line with budget expectations. Also included in non-interest expense for 2001
was a $139,000 estimated loss on the alleged fraud in the sale of securities by
Bentley Financial Services, Inc. for funds the Company had invested with them.
Please refer to Note 12 to the Consolidated Financial Statements for a further
discussion on this matter.
All other non-interest expense only increased $12,000 in 2000 compared to 1999.
The Bently investment loss accounts for the largest share of the variance
between the three years. Other variances are postage was up from $112,000 in
2000 to $143,000 in 2001. Automated teller machine costs were $131,000 in 2000
and $192,000 in 2001.
TABLE 5
EXPENSE
Variance Variance
(In thousands) 2001 2000
31-Dec 31-Dec 31-Dec Amount Percent Amount Percent
2001 2000 1999 Of Change Of Change Of Change Of Change
Salaries and Benefits ................. $3,026 $2,819 $2,534 $ 207 7.34% $ 285 11.25%
Occupancy Expenses .................... 315 338 323 (23) (6.80)% 15 4.64%
Furniture and Equipment Expense ....... 385 388 383 (3) (0.77)% 5 1.31%
FDIC Insurance and Assessments ........ 119 116 92 3 2.59% 24 26.09%
Professional Fees and Outside Services 231 216 197 15 6.94% 19 9.64%
Computer Services and Supplies ........ 394 361 306 33 9.14% 55 17.97%
Taxes, Other Than Payroll and Income .. 290 255 247 35 13.73% 8 3.24%
Other Operating Expenses .............. 1,461 1,238 1,226 223 18.01% 12 0.98%
Total Non-Interest Expense ............ 6,221 5,731 5,308 $ 490 8.55% $ 423 7.97%
Income Before Income Taxes ............ 6,344 5,002 4,901
Provision for Income Taxes ............ 1,508 1,097 1,115
Net Income ............................ $4,836 $3,905 $3,786
Net Income Per Share, Basic and Diluted 2.28 1.80 1.74
Federal Income Taxes
The provision for income taxes was $1,508,000 in 2001 compared to $1,097,000 in
2000 and $1,114,000 in 1999. The effective tax rate, which is the ratio of
income tax expense to income before taxes, was 24% in 2001, up from 22% in 2000
and 23% in 1999. The tax rate for all periods was substantially less than the
federal statutory rate of 34% primarily due to tax-exempt securities and
tax-exempt loan income. Please refer to Note 10 of the Notes to Consolidated
Financial Statements included as part of this report for further analysis of
federal income tax expense for 2001.
Quarterly Results
The decline in interest rates in the first quarter and slower loan growth caused
a loss in interest income in the first quarter. Interest income increased during
the second and third quarters of 2001 as the loan portfolio grew. The rate
declines caused a downturn again by the fourth quarter. Compare this to the
scenario in 2000 when net income improved each of the first three quarters due
to rising rates with a slight dip in the last quarter due to the larger gain in
other income peaking during the third quarter of 2000.
Interest expense decreased each quarter of 2001 as interest rates dropped eleven
times throughout the year. In 2000 interest rates were going up and interest
expense reached a high in the fourth quarter at $2,844,000.
The combination of loan growth and falling rates made each quarter show improved
net interest income numbers in 2001.
The provision for loan loss of $20,000 was made in the first quarter of 2001.
Because of good credit quality and low past due ratios, the remaining quarters
were at zero. The provision for the prior year was $240,000.
The changes in securities gains and losses were not significant during 2001.
Some gains were taken in the first quarter as interest rates started to decline.
As the rate declines continued, the portfolio's performance precluded any
restructuring changes, and liquidity needs were met with short-term borrowings.
Net Income was highest during the third quarter due to lower Other Expenses in
the third quarter and good interest income. The fourth quarter showed a small
decrease with net interest income improving significantly in that quarter but
Other Expenses coming in higher to diminish the effect. In 2000 net income grew
each quarter as rates continued to rise.
Earnings per share increased $0.05 in the first quarter with the second quarter
the same. The third quarter increased $0.08 with the fourth quarter the same. In
2000 there was a $0.03 increase in the second quarter, another $0.03 in the
third quarter, and a $0.01 increase in the last quarter.
TABLE 6
Quarterly Results of Operations
Quarter Ended 2001
Mar 31 Jun 30 Sep 30 Dec 31
Interest Income ................. $ 5,178 $ 5,210 $ 5,287 $ 5,227
Interest Expense ................ 2,674 2,532 2,503 2,313
Net Interest Income ............. 2,504 2,678 2,784 2,914
Provision for Loan Loss ......... 20 0 0 0
Securities Gains/Losses ......... 29 0 16 (13)
Other Income .................... 328 444 456 445
Other Expense ................... 1,330 1,642 1,520 1,729
Income Before taxes ............. 1,511 1,480 1,736 1,617
Income Taxes .................... 370 362 446 330
Net Income ...................... 1,141 1,118 1,290 1,287
Primary Earnings per common share 0.53 0.53 0.61 0.61
Quarter Ended 2000
Mar 31 Jun 30 Sep 30 Dec 31
Interest Income ................. $ 4,659 $ 4,891 $ 5,140 $ 5,300
Interest Expense ................ 2,334 2,537 2,754 2,844
Net Interest Income ............. 2,325 2,354 2,386 2,456
Provision for Loan Loss ......... (60) (60) (60) (60)
Securities Gains/Losses ......... 2 (2) 12 9
Other Income .................... 330 344 362 395
Other Expense ................... (1,428) (1,401) (1,355) (1,547)
Income Before taxes ............. 1,169 1,235 1,345 1,253
Income Taxes .................... 273 290 308 226
Net Income ...................... 896 945 1,037 1,027
Primary Earnings per common share 0.41 0.44 0.48 0.48
FINANCIAL CONDITION
The Corporation's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The following table illustrates how the Corporation
has managed its sources and uses of funds that are directly affected by outside
economic factors, such as interest rate fluctuations:
TBALE 7
Sources, Uses of Funds
2001 2000 1999
Average Increase (Decrease) Average Increase (Decrease) Average
Funding Uses Balance Amount Percent Balance Amount Percent Balance
Real Estate Loans .......... 98,238 $ 8,236 9.15% 90,002 $ 7,468 9.05% 82,534
Consumer Loans ............. 18,945 316 1.70% 18,629 890 5.02% 17,739
Commercial Loans ........... 54,761 7,287 15.35% 47,474 10,191 27.33% 37,283
Tax Exempt Loans ........... 8,428 2,030 31.73% 6,398 (1,403) (17.98)% 7,801
Other Loans ................ 461 37 8.73% 424 57 15.53% 367
Total Loans ................ 180,833 162,927 145,724
Less Allowance for Loan Loss (1,905) (1,820) (1,716)
Total Loans with Loan Loss . 178,928 17,821 11.06% 161,107 17,099 11.87% 144,008
Taxable Securities ......... 70,636 6,431 10.02% 64,205 (121) (0.19)% 63,737
Non-Taxable Securities ..... 28,745 (2,394) (7.69)% 31,139 2,472 8.62% 28,667
Total Securities ........... 99,381 4,037 4.23% 95,344 2,351 2.53% 92,993
Fed Funds Sold ............. 806 (170) (17.42)% 976 (1,377) (58.52)% 2,353
Total Uses ................. $279,115 $21,688 8.42% $257,427 $18,073 7.55% $239,354
2001 2000 1999
Average Increase (Decrease) Average Increase (Decrease) Average
Funding Sources Balance Amount Percent Balance Amount Percent Balance
Interest Bearing Demand Deposits .. 21,402 $ 3,170 17.39% 18,232 $ 2,166 13.48% 16,066
Regular Savings Deposits .......... 51,405 7,158 16.18% 44,247 10,831 32.41% 33,416
Money Market Savings Deposits ..... 31,494 (2,528) (7.43)% 34,022 (4,878) (12.54)% 38,900
Time Deposits ..................... 105,598 3,892 3.83% 101,706 (305) (0.30)% 102,011
Total Interest Bearing Deposits ... 209,899 11,692 5.90% 198,207 7,814 4.10% 190,393
Other Borrowing ................... 25,751 5,069 24.51% 20,682 10,547 104.07% 10,135
Short Term Funds Borrowed ......... 7,648 5,100 4,694
Long Term Funds Borrowed .......... 18,103 15,582 5,441
Total Funds Borrowed .............. 25,751 20,682 10,135
Total Interest Bearing Deposits and 235,650 218,889 200,528
Funds Borrowed
Other Sources, net ................ 45,991 43,842 38,826
Total Sources ..................... $281,641 $262,731 $ 239,354
Total assets increased 9.64%, to $315,347,000 in the year ending December 31,
2001. There were increases in both borrowed funds and deposits on the liability
side, which fueled this growth of assets. Loan and investment portfolios on the
asset side reflected growth also. In 2000, total assets increased 10.07% to
$287,625,000.
Investments at year-end 2001 totaled $100,783,000 compared to $99,678,000 on
December 31, 2000.
Loans continued to increase in 2001, ending the year with $191,913,000 in net
loans compared to $170,262,000 at year-end 2000, an increase of 12.72%.
Commercial loans and individual mortgages were the biggest gainers. Commercial
loans were up over 26% to close the year at $73,422,000 compared to $58,204,000
at year-end 2000. In 2000 loans grew 13.03%
Mortgages were up 7.9% to $101,934,000 compared to $94,429,000 on December 31,
2000, an increase of $7,505,000. Mortgage growth was higher in 2000 at 10.41%,
an increase of $8,901,000.
With interest rates down during 2001, there was a stronger demand for mortgages.
The growth in commercial lending is due, in part, to a concerted effort on our
part to increase our exposure to this segment.
To fund loan growth, short and long-term borrowings increased $16,593,000.
Short-term borrowings stood at $21,338,000 at year-end 2001 compared to
$7,245,000 the previous year. However, the average short term borrowing for 2001
was $7,648,000 compared to $5,100,000 for 2000. As the Year 2001 progressed and
especially after September 11, 2001, it became evident that interest rates would
remain low and the short term borrowing position could be liquidated with
maturing and called investments in the future. Long-term borrowings increased
$2,500,000 during 2001.
Loan Portfolio Types
All categories of loans except consumer loans showed growth in 2001. Consumer
loans include personal lines of credit, installment loans, and home equity loans
to individuals. These loans can be secured or unsecured and are generally used
for purposes such as automobile financing, home improvement, recreational loans,
and for educational purposes.
TABLE 8
Loan Portfolio
(In thousands) Dec 2001 Dec 2000 Dec 1999 Dec 1998 Dec 1997
Commercial ............ $ 73,422 $ 58,204 $ 47,771 $ 44,349 $ 14,796
Real Estate Mortgage .. 101,934 94,429 85,528 79,369 96,201
Consumer .............. 18,414 19,681 19,281 17,756 16,035
Total Loans ................ 193,770 172,314 152,580 141,474 127,032
Deferred Loans ............. (41) (134) (194) (225) (246)
Total Loans, net of Deferred 193,729 172,180 152,386 141,249 126,786
Allowance for Loan Loss .... (1,816) (1,918) (1,756) (1,713) (1,676)
Net Loans .................. $ 191,913 $ 170,262 $ 150,630 $ 139,536 $ 125,110
Loan Maturities
The Bank has 19.27% of its loans maturing within the next year. Of those
maturing within one year, most are commercial loans with the remainder split
between mortgages and consumer loans. In the one to five year maturity range,
the Bank has 25.2% of its portfolio. The over 5 year maturity group makes up
55.5% of the portfolio which reflects the Bank's significant investment in
mortgages. Mortgages are 52.6% of the total loan portfolio.
TABLE 9
Loan Maturity by Type One Year Over One Year Over Total
Or Less Within Five Years Five Years Loans
Commercial ......................... $ 24,488 $ 19,262 $ 29,663 $ 73,413
Real-Estate Mortgage ............... 7,518 21,045 73,357 101,920
Installment ........................ 5,330 8,556 4,510 18,396
Total .............................. $ 37,336 $ 48,863 $107,530 $193,729
Total Loans with Predetermined Rates 19,984 32,751 40,651 93,386
Total Loans with Variable Rates .... 17,352 16,112 66,879 100,343
Total .............................. $ 37,336 $ 48,863 $107,530 $193,729
Table 10 reflects the Corporation's non-accrual and past due loans for each of
the past five years. A commercial loan is generally placed on non-accrual when
the contractual payment of principal or interest has become 90 days past due or
when management has serious doubts about further collectibility of principal or
interest even though the loan is currently performing. Consumer loans, including
mortgages, are generally placed on non-accrual at 120 days. A loan may remain on
accrual status if it is in the process of collection and is either guaranteed or
well secured.
TABLE 10
Non-performing Loans
(In thousands) December 31,
2001 2000 1999 1998 1997
Nonaccrual and Restructured .................................. $ 473 $ 413 $ 178 $ 516 $1,027
Loans Past Due 90 or More Days, Accruing Interest ............ 120 90 90 12 175
Total Nonperforming Loans .................................... 593 503 268 528 1,202
Foreclosed Assets ............................................ 79 50 250 351 0
Total Nonperforming Assets ................................... $ 672 $ 553 $ 518 $ 879 $1,202
Nonperforming Loans to Total Loans at Period-end ............. 0.31% 0.29% 0.18% 0.37% 0.95%
Nonperforming Assets to Period-end Loans and Foreclosed Assets 0.35% 0.32% 0.34% 0.62% 0.95%
TABLE 11
(In thousands) Year Ended December 31,
Non-accrued Loans: 2001 2000 1999 1998 1997
Interest Income That Would Have Been ..... $70 $52 $28 $63 $96
Recorded Under Original Items
Interest Income Recorded During the Period 6 18 14 7 24
Commitments To Lend Additional Funds ..... 0 0 0 94 0
Allowance for Loan Losses
The balance in the allowance for loan losses is based on management's assessment
of the risk in the loan portfolio. Allocations to specific commercial loans are
made in adherence to SFAS 114, Accounting by Creditors for Impairments of a
Loan. These allocations are based upon the present value of expected future cash
flows or the fair value of the underlying collateral. In addition, management
reviews the other components of the loan portfolio through the loan review
function and assigns internal grades to loans based upon the perceived risks
inherent in each loan. In that determination, management reviews a number of
factors including historical analysis of similar credits, delinquency reports,
ratio analysis as compared to peers, concentration of credit risks, local
economic conditions, and regulatory evaluation of the allowance for loan losses.
Although the Bank has sold some mortgages on the secondary market in the past,
the Bank did not sell any in 2001. Management expects this trend to continue.
Therefore, allocation methods are the same for all mortgages. This evaluation is
reviewed monthly by management and by the Board of Directors. Management
believes that on December 31, 2001, the allowance for loan losses was adequate
to absorb potential losses in the loan portfolio. However, this judgement is
subjective and a significant degradation in loan quality could require a change
in the estimates and therefore, a change in net income.
This is the only year of the last five years where the allowance for loan loss
decreased. During 2001, asset quality improved and past dues remained low.
Therefore, management lowered the provision for loan losses made to $20,000 from
$240,000 in 2001, despite the higher number of net charge-offs in 2001 compared
to 2000. In 1998 and 1999, the net charge-offs were more than in 2001 and the
Bank had a much smaller portfolio during those years.
The following is a summary of loans charged off, recoveries and provisions to
the allowance for loan losses for the periods presented.
TABLE 12
Summary of Loan Loss Experience
(In thousands) Years Ended
Dec 2001 Dec 2000 Dec 1999 Dec 1998 Dec 1997
Average Total Loans ................................. $180,833 $162,927 $145,724 $134,692 $114,119
Balance at Beginning of Period ...................... 1,918 1,756 1,713 1,676 1,664
Charge Offs
Commercial ..................................... 25 0 46 94 38
Residential Real Estate ........................ 35 4 87 31 50
Installment .................................... 125 115 108 70 61
Total charge Offs ................................... 185 119 241 195 149
Recoveries
Commercial ..................................... 14 0 3 14 4
Real Estate .................................... 14 11 4 4 17
Installment .................................... 35 30 37 24 10
Total Recoveries .................................... 63 41 44 42 31
Net Charge-Offs ..................................... 122 78 197 153 118
Provision for Loan Losses ........................... 20 240 240 190 130
Balance at End of Period ............................ $ 1,816 $ 1,918 $ 1,756 $ 1,713 $ 1,676
Allowance for Credit Losses to Period-end Total Loans 0.94% 1.11% 1.15% 1.21% 1.32%
Allowance for Credit Losses to Non-accrual Loans .... 383.67 464.44 985.61 331.88 163.24
Net Charge-Offs to Average Loans .................... 0.07 0.05 0.14 0.11 0.10
The following table details the allocation of the allowance for loan losses to
various categories:
TABLE 13
Allocation of Allowances % of Loan % of Loan % of Loan % of Loan % of Loan
(In thousands) Type to Type to Type to Type to Type to
Dec Total Dec Total Dec Total Dec Total Dec Total
2001 Loans 2000 Loans 1999 Loans 1998 Loans 1997 Loans
Commercial ............... $ 339 37.9% $ 359 33.8% $ 328 31.3% $ 320 31.3% $ 321 11.6%
Real Estate Mortgage ..... 364 52.6 385 54.8 352 56.1 343 56.1 344 75.8
Consumer ................. 138 9.5 144 11.4 133 12.6 130 12.6 129 12.6
Unallocated .............. 975 N/A 1,030 N/A 943 N/A 920 N/A 882 N/A
Total Allowance for Loan Losses $1,816 100.0% $1,918 100.0% $1,756 100.0% $1,713 100.0% $1,676 100.0%
The unallocated portion of the allowance is intended to provide for possible
losses that are not otherwise accounted for and to compensate for the imprecise
nature of estimating future loan losses. Management believes the allowance is
adequate to cover the inherent risks associated with the loan portfolio. While
allocations have been established for particular loan categories, management
considers the entire allowance to be available to absorb losses in any category.
Highly leveraged transactions (HLT's) that result in the borrower's
debt-to-total assets ratio exceeding the 75%, generally include loans and
commitments made in connection with recapitalization, acquisitions, and
leveraged buyouts The Corporation had no loans at December 31, 2001 that
qualified as HLT's.
Securities
The Corporation's securities portfolio is classified, in its entirety, as
"available for sale" as shown in Table 14. Management believes that a portfolio
classification of all available for sale allows complete flexibility in the
investment portfolio. Using this classification, the Corporation intends to hold
these securities for an indefinite amount of time but not necessarily to
maturity. Such securities are carried at fair value with the unrealized holding
gains or losses, net of taxes, reported as a component of the Corporation's
stockholders' equity on the balance sheet. The portfolio is structured to
provide maximum return on investments while providing a consistent source of
liquidity and meeting strict risk standards.
Table 14 shows the amortized cost and average yield of securities by maturity or
call date at December 31, 2001.
TABLE 14
Securities by Maturities (Amortized Cost)
(In thousands) 1 Year 1-5 5-10 Over 10
or Less Average Years Average Years Average Years Average TOTAL Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Available for Sale
US Government Treasury .......... $ 499 6.85% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 499 6.85%
US Government Agency ............ 2,176 5.97% 5,641 4.90% 4,223 6.42% 0 0.00% $12,040 5.61%
State/County/Municipal Obligation 933 5.24% 2,271 4.95% 5,631 5.20% 19,827 5.21% $28,662 5.19%
Mortgage-Baked Securities ....... 6,218 5.45% 11,468 5.61% 7,888 5.68% 1,666 5.96% $27,240 5.61%
Corporate/Other Securities ...... 3,144 7.32% 21,782 6.56% 4,103 6.73% 582 5.09% $29,611 6.63%
Equity Securities ............... 0 0.00% 0 0.00% 0 0.00% 1,919 5.76% $ 1,919 5.76%
TOTAL Available for Sale ........ $12,970 6.03% $41,162 5.98% $21,845 5.90% $23,994 5.30% $99,971 5.80%
Table 15 shows the balance of securities for the past three years on December
31. More details on Securities can be found in Note 3 of the Consolidated
Financial Statement.
TABLE 15
Securities (Fair Value)
(In thousands)
2001 2000 1999
Treasury/Agency Obligations ... $ 12,661 $ 24,401 $ 26,911
State/Municipal Obligations ... 28,777 31,945 29,097
Mortgage backed Securities .... 27,220 25,649 27,378
Other Securities .............. 32,125 17,683 8,680
Total Investment Securities ... $100,783 $ 99,678 $ 92,066
Available for Sale (Fair Value) $100,783 $ 99,678 $ 92,066
Held to Maturity (Amortized) .. 0 0 0
Total Investment Securities ... $100,783 $ 99,678 $ 92,066
Deposits
Deposits were harder to obtain during 2001 as a result of declining interest
rates. The Bank was able to obtain funds at low cost from the Federal Home Loan
Bank. As a result, there was little growth in certificates of deposits in the
year 2001. For the same reason, there was less than 1% growth in IRA's.
The growth that did occur in deposits was in the savings and demand accounts.
These core deposits were specifically the areas where growth was encouraged.
Demand deposits increased $3,690,000 or 4.6% while savings increased 6.1% and
$3,040,000.
TABLE 16
Average Deposits and Other Borrowings
(In thousands)
2001 2000 1999
Amount Rate Diff $ Amount Rate Diff $ Amount Rate
Interest Bearing Demand Deposits ... $ 21,402 1.88% $ 3,170 $ 18,232 2.17% $ 2,166 $ 16,066 1.40%
Savings Deposits ................... 51,405 2.91% $ 7,158 44,247 3.62% $ 10,831 33,416 2.65%
Money Market Savings ............... 31,494 3.15% $ (2,528) 34,022 4.74% $ (4,878) 38,900 3.88%
Time Deposits ...................... 105,598 5.46% $ 3,892 101,706 5.57% $ (305) 102,011 5.26%
Total Interest Bearing Deposits .... 209,899 4.12% $ 11,692 198,207 4.68% $ 7,814 190,393 4.19%
Other Borrowings ................... 25,751 5.32% $ 5,069 20,682 5.81% $ 10,547 10,135 4.86%
Total Interest Bearing Liabilities . 235,650 4.24% $ 16,761 218,889 4.78% $ 18,361 200,528 4.23%
Non-Interest Bearing Demand Deposits 28,546 $ 1,866 26,680 $ 1,153 25,527
Total .............................. $264,196 3.79% $ 18,627 $245,569 4.27% $ 19,514 $226,055 3.75%
MATURITIES OF TIME DEPOSITS
The maturities on the time deposits over $100,000 are spread fairly evenly
throughout the four categories. The largest percentage 34.48%, is in the first
category of three months or less.
TABLE 17
Maturities
(In thousands)
Amount Percent
Three Months or Less ................ $ 6,296 34.48%
Over Three Months through Six Months 2,995 16.40%
Over Six Months through Twelve Months 4,624 25.32%
Over Twelve Months .................. 4,346 23.80%
Total ............................... $18,261 100.00%
SHORT AND LONG TERM BORROWINGS
Short-term borrowings which are overnight or less than 30-day borrowings consist
of federal funds purchased, securities sold under agreements to repurchase,
Federal Home Loan Bank advances, and U.S. Treasury tax and loan notes. Long-term
borrowings consist of notes from the Federal Home Loan Bank. These notes are
secured under terms of a blanket collateral agreement by a pledge of qualifying
investment and mortgage backed securities, certain mortgage loans and a lien on
FHLB stock. For more detail on short and long-term borrowings see Note 7 and 8
of the Notes to Consolidated Financial Statements.
TABLE 18
BORROWED FUNDS
(In thousands)
2001 2000
Other Short Term Borrowings 21,338 7,245
FHLB Term Borrowings ...... 20,000 17,500
Total ..................... $41,338 $24,745
Capital Accounts
Total stockholders' equity increased 9.41% or $2,902,000 over year-end 2000.
This growth is primarily attributable to retained earnings. A common ratio used
to determine effective use of capital is the return on average equity. For the
year ending December 31, 2001, this ratio was 15.15% compared to 14.28% at
December 31, 2000. A strong capital position has always been a goal of the
Company, but we also recognize that investors want to see judicious use of
capital. At year-end 2001, the equity-to-assets ratio was 10.70% compared to
10.71% at year-end 2000. It is the goal of management to implement ways to
better leverage our capital. A capital-to-assets ratio closer to 8% is a target
number.
Net Income increased capital by $4,836,000 in 2001 and dividends reduced that
number by $1,529,000. The investment portfolio appreciated in value by $666,000
in 2001. Since all of our investments are available for sale, changes in market
values adjusted for taxes are reflected in the equity portion of the balance
sheet. A total of $1,071,000 in treasury stock purchases reduced the capital
account to equal the total net change.
From time to time the Company has purchased PFIS stock in the open market or
from individuals to leverage the capital account and to provide stock for our
dividend reinvestment plan. During the year 2001, 43,999 shares were purchased
in this manner. There were no stock purchases from the treasury stock account by
individuals exercising options or for our dividend reinvestment plan during
2001. The investment banking firms of Tucker Anthony, Inc. and Ferris, Baker
Watts, Incorporated have been known to make markets in PFIS common stock.
The following table represents the Company's capital position as it compares to
the regulatory guidelines at December 31, 2001.
TABLE 19
Capital Ratios
(In thousands) December 31 December 31 Regulatory
2001 2000 Requirement
Tier 1 Capital to Risk Weighted ........ 14.51% 15.90% 4.00%
TOTAL Capital to Risk Weighted ......... 15.37% 16.99% 8.00%
Capital Leverage Ratio to Average Assets 9.89% 10.04% 4.00%
Interest Rate Sensitivity
The operations of the Company do not subject it to foreign currency risk or
commodity price risk. The Company does not utilize interest rate swaps, caps, or
hedging transactions. In addition, the Company has no market risk sensitive
instruments entered into for trading purposes. However, the Company is subject
to interest rate risk and employs several different methods to manage and
monitor the risk.
Interest rate sensitivity refers to the relationship between market interest
rates and the earnings volatility of the Company due to the repricing
characteristics of assets and liabilities. The responsibility for monitoring
interest rate sensitivity and policy decisions has been given to the
Asset/Liability Committee (ALCO) of the Bank. 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. Because of the risks caused
by embedded options in both assets and liabilities, the services of a consultant
was utilized in 2001 to test the accuracy of the software model being used. The
final analysis was positive and some policy changes were enacted to reflect the
increased regulatory emphasis on the economic value of equity (EVE).
The following sets forth the Company's interest sensitivity analysis as of
December 31, 2001:
TABLE 20
Statement of Interest Sensitivity Gap
(In thousands) Maturity or Repricing In:
3 to 6 6 to 12 1 to 5 Over 5
3 Months Months Months Years Years
RATE SENSITIVE ASSETS
Loans .......................................... $ 18,769 $ 19,180 $ 24,315 $ 78,971 $ 50,678
Securities ..................................... 8,523 4,769 6,033 49,612 32,099
Federal Funds Sold ............................. 0 0 0 0 0
Total Rate Sensitive Assets .................... 27,292 23,949 30,348 128,583 82,777
Cummulative Rate Sensitive Assets .............. 27,292 51,241 81,589 210,172 292,949
RATE SENSITIVE LIABILITIES
Interest Bearing Checking ...................... 619 619 1,238 9,907 8,256
Money Market Deposits .......................... 968 967 1,935 15,480 12,900
Regular Savings ................................ 1,617 1,573 3,371 25,143 20,951
CDs and IRAs ................................... 25,264 23,357 23,309 28,403 2,350
Other Borrowings ............................... 21,217 0 0 7,621 13,863
Total Rate Sensitive Liabilities ............... 49,685 26,516 29,853 86,554 58,320
Cummulative Rate Sensitive Liabilities ......... 49,685 76,201 106,054 192,608 250,928
Period Gap ..................................... $ (22,393) $ (2,567) $ 495 $ 42,029 $ 24,457
Cummulative Gap ................................ (22,393) (24,960) (24,465) 17,564 42,021
Cummulative Rate Sensitive Assets to Liabilities 54.93% 67.24% 76.93% 109.12% 116.75%
Cummulative Gap to Total Assets ................ (7.10)% (7.92)% (7.76)% 5.57% 13.33%
The drop in the Federal Reserve Bank's discount and federal funds rate by 475
basis points during 2001 actually put to test the Company's ability to
effectively manage its interest rate sensitivity. Throughout the year, the
Company was able to effectively manage its net interest margin. As a result, the
net interest margin remained fairly stable starting at 3.66% for the month of
December 2000, compared to 3.84% for the year 2001 and ending at 3.93% for the
month of December 2001.
Liquidity
The liquidity of the Company is reflected in its capacity to have sufficient
amounts of cash available to fund the needs of customer withdrawal requests,
accommodate loan demand, and maintain regulatory reserve requirements; that is
to conduct banking business. Additional liquidity is obtained by either
increasing liabilities or by decreasing assets. The primary source for
increasing liabilities is the generation of additional deposit accounts which
are managed through our system of branches. In addition, loan payments on
existing loans, sales of loans held for sale, or investments available for sale
can generate additional liquidity. Other sources include income from operations,
decreases in federal funds sold or interest-bearing deposits in other banks,
securities sold under agreements to repurchase, and borrowings from the Federal
Home Loan Bank. On December 31, 2001, the Bank had a borrowing capacity from the
Federal Home Loan Bank of approximately $107,034,000. During the Year 2001,
maturities and sales of investments, increases in deposits, and short term
borrowings provided the majority of additional cash with operating activities
also contributing to liquidity. The funds were used primarily to grant loans to
customers, purchase additional investment securities, and to pay dividends to
our shareholders.
The 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 mainly of unfunded loans and letters of credit made under
the same standards as on-balance sheet instruments. Unused commitments, at
December 31, 2001 totaled $16,417,000. Because these instruments have fixed
maturity dates, and because many of them will expire without being drawn upon,
they do not generally present any significant liquidity risk.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations.
The Company has no investment in or financial relationship with any
unconsolidated entities that are reasonably likely to have a material effect on
liquidity or the availability of capital resources.
The following table represents the aggregate on and off balance sheet
contractual obligations to make future payments.
Contractual Obligations
In Thousands
December 31, 2001
Less than Over
1 Year 1-3 Years 4-5 Years 5 Years Total
Time Deposits .. $ 71,884 $ 19,961 $ 8,442 $ 2,396 $102,683
Long-term Debt . 0 0 7,500 12,500 20,000
Operating Leases 17,760 40,320 41,400 39,600 139,080
Total .......... $ 89,644 $ 60,281 $ 57,342 $ 54,496 $261,763
The Company is not aware of any known trends or any known demands, commitments,
events or uncertainties, which would result in any material increase or decrease
in liquidity.
SUBSEQUENT EVENT
On November 19, 2001, the Bank entered into an agreement with another bank to
purchase certain assets, including furniture and equipment and assume certain
liabilities, including approximately $6,000,000 of deposits and a premises
lease, of a branch located in Norwich, New York. The purchase price equals
$50,000 for a deposit premium plus the book value cost of the personal property.
Subsequently, the Company formed an interim national bank which was assigned the
Bank's interest in the agreement. On March 6, 2002, the branch purchased was
consummated and the interim national bank was merged with and into the Bank. The
transaction closed on March 6, 2002.
EFFECTS OF INFLATION
The majority of assets and liabilities of a financial institution are monetary
in nature and, therefore, differ greatly from commercial and industrial
companies that have significant investments in fixed assets or inventories. The
precise impact of inflation upon the Corporation is difficult to measure.
Inflation may affect the borrowing needs of consumers, thereby impacting the
growth rate of the Corporation's assets. Inflation may also affect the general
level of interest rates, which can have a direct bearing on the Corporation.
Management believes that the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain a position that is within
conservative parameters for interest sensitive assets and liabilities in order
to be protected against wide interest rate fluctuation.
NEW ACCOUNTING STANDARDS
The following can be found under Note 1 of the Notes to Consolidated Financial
Statements:
SFAS No. 141, "Business Combinations"
SFAS No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS No. 144, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of "
ITEM 7A Quantitative and Qualitative Disclosure About Market Risk
The Company is not a party to any forward contract, interest rate swap, option
interest, or similar derivation instrument. The Company does not deal in foreign
currency. The following table presents average interest rates that relate to
assets and liabilities that are sensitive to changes in interest rates.
ITEM 8 Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Peoples Financial Services Corp.
Hallstead, Pennsylvania
We have audited the accompanying consolidated balance sheet of Peoples
Financial Services Corp. and its subsidiary as of December 31, 2001, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Peoples Financial Services Corp. and its subsidiary for the years ended
December 31, 2000 and 1999 were audited by other auditors whose report, dated
February 15, 2001, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2001 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Financial Services Corp. and its subsidiary as of December 31, 2001, and
the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/BEARD MILLER COMPANY LLP
Allentown, Pennsylvania
January 4, 2002
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2001 2000
(In Thousands, except Per Share Data)
Cash and due from banks ....................................... $ 7,172 $ 5,507
Interest bearing deposits in other banks ...................... 107 2,090
-------- --------
Cash and Cash Equivalents ................................. 7,279 7,597
Securities available for sale ................................. 100,783 99,678
Loans receivable, net of allowance for loan losses 2001 $1,816;
2000 $1,918 ............................................... 191,913 170,262
Premises and equipment, net ................................... 3,371 3,411
Accrued interest receivable ................................... 2,282 2,362
Other assets .................................................. 9,719 4,315
-------- --------
Total Assets .............................................. $315,347 $287,625
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
December 31,
2001 2000
(In Thousands, except Per Share Data)Deposits:
Non-interest bearing $ 30,664 $ 27,290
Interest-bearing ... 208,227 203,449
-------- --------
Total Deposits ..... 238,891 230,739
Short-term borrowings .. 21,338 7,245
Long-term borrowings ... 20,000 17,500
Accrued interest payable 703 854
Other liabilities ...... 661 435
-------- --------
Total Liabilities .. 281,593 256,773
-------- --------
STOCKHOLDERS' EQUITY
December 31,
2001 2000
(In Thousands, except Per Share Data)
Common stock, par value $2 per share; authorized 12,500,000 shares; 4,455 4,455
issued 2,227,500 shares; outstanding 2001 2,105,836 shares;
2000 2,149,835 shares
Surplus ........................................................... 4,611 4,611
Retained earnings ................................................. 26,851 23,544
Accumulated other comprehensive income (loss) ..................... 536 (130)
Treasury stock, at cost, 2001 121,664 shares; 2000 77,665 shares .. (2,699) (1,628)
--------- ---------
Total Stockholders' Equity .................................... 33,754 30,852
--------- ---------
Total Liabilities and Stockholders' Equity .................... $ 315,347 $ 287,625
========= =========
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------------------
2001 2000 1999
(In Thousands, except Per Share Data)
INTEREST INCOME
Loans receivable, including fees ........................... $14,856 $13,820 $12,057
Securities:
Taxable ................................................ 4,340 4,397 3,948
Tax-exempt ............................................. 1,522 1,598 1,464
Other ...................................................... 184 175 155
------- ------- -------
Total Interest Income .................................. 20,902 19,990 17,624
------- ------- -------
INTEREST EXPENSE
Deposits ................................................... 8,652 9,268 7,988
Short-term borrowings ...................................... 232 280 214
Long-term borrowings ....................................... 1,138 921 279
------- ------- -------
Total Interest Expense ................................. 10,022 10,469 8,481
------- ------- -------
Net Interest Income .................................... 10,880 9,521 9,143
PROVISION FOR LOAN LOSSES ....................................... 20 240 240
------- ------- -------
Net Interest Income after Provision for Loan Losses .... 10,860 9,281 8,903
------- ------- -------
OTHER INCOME
Customer service fees ...................................... 1,125 978 900
Other income ............................................... 548 453 321
Net realized gains on sales of securities available for sale 32 21 85
------- ------- -------
Total Other Income ..................................... 1,705 1,452 1,306
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits ............................. 3,026 2,819 2,534
Occupancy .................................................. 315 338 323
Equipment .................................................. 385 388 383
FDIC insurance and assessments ............................. 119 116 92
Professional fees and outside services ..................... 231 216 197
Computer service and supplies .............................. 394 361 306
Taxes, other than payroll and income ....................... 290 255 247
Other ...................................................... 1,461 1,238 1,226
------- ------- -------
Total Other Expenses ................................... 6,221 5,731 5,308
------- ------- -------
Income before Income Taxes ............................. 6,344 5,002 4,901
FEDERAL INCOME TAXES ............................................ 1,508 1,097 1,114
------- ------- -------
Net Income ............................................. $ 4,836 $ 3,905 $ 3,787
======= ======= =======
EARNINGS PER SHARE
Basic ...................................................... $ 2.28 $ 1.80 $ 1.74
======= ======= =======
Diluted .................................................... $ 2.28 $ 1.80 $ 1.74
======= ======= =======
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
(In Thousands)
BALANCE - DECEMBER 31, 1998 ........................ $ 4,455 $ 4,455 $ 18,322 $ 561 ($ 748) $ 27,045
--------
Comprehensive income:
Net income ..................................... - - 3,787 - - 3,787
Net change in unrealized gains (losses)on securities
available for sale, net of taxes... - - - (2,648) - (2,648)
--------
Total Comprehensive Income ..................... 1,139
--------
Cash dividends declared, $.52 per share - - (1,129) - - (1,129)
Shares issued from treasury related to dividend
reinvestment plan and stock option plan ........ - 57 - - 52 109
Purchase of treasury stock ..................... - - - - (354) (354)
-------- -------- -------- -------- -------- --------
BALANCE - DECEMBER 31, 1999 ........................ 4,455 4,512 20,980 (2,087) (1,050) 26,810
--------
Comprehensive income:
Net income ..................................... - - 3,905 - - 3,905
Net change in unrealized gains (losses)on securities
available for sale, net of taxes ............ - - - 1,957 - 1,957
--------
Total Comprehensive Income ..................... 5,862
--------
Cash dividends declared, $.62 per share - - (1,341) - - (1,341)
Shares issued from treasury related to dividend
reinvestment plan and stock option plan ..... - 99 - - 80 179
Purchase of treasury stock ..................... - - - - (658) (658)
-------- -------- -------- -------- -------- --------
BALANCE - DECEMBER 31, 2000 ........................ 4,455 4,611 23,544 (130) (1,628) 30,852
--------
Comprehensive income:
Net income ..................................... - - 4,836 - - 4,836
Net change in unrealized gains (losses)on securities
available for sale, net of taxes ... - - - 666 - 666
--------
Total Comprehensive Income ..................... 5,502
--------
Cash dividends declared, $.72 per share ........ - - (1,529) - - (1,529)
Purchase of treasury stock ..................... - - - - (1,071) (1,071)
-------- -------- -------- -------- -------- --------
BALANCE - DECEMBER 31, 2001 ........................ $ 4,455 $ 4,611 $ 26,851 $ 536 ($ 2,699) $ 33,754
======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2001 2000 1999
(In Thousands)
----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 4,836 $ 3,905 $ 3,787
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................... 644 641 642
Provision for loan losses ........................... 20 240 240
Gain on sale of equipment ........................... - (4) -
(Gain) loss on sale of other real estate ............ 16 (5) 6
Net amortization of securities premiums and discounts 93 79 225
Net realized gains on sales of securities ........... (32) (21) (85)
Deferred income taxes (benefit) ..................... (47) (70) (32)
Net increase in cash surrender value of life
insurance .............................................. (124) - -
(Increase) decrease in assets:
Accrued interest receivable ...................... 80 (366) (214)
Other assets ..................................... (1,805) (18) (234)
Increase (decrease) in liabilities:
Interest payable ................................. (151) 135 15
Other liabilities ................................ 226 (81) (24)
------- ------- -------
Net Cash Provided by Operating Activities ......... 3,756 4,435 4,326
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Years Ended December 31,
2001 2000 1999
(In Thousands)
----------------
Proceeds from sale of available for sale securities 12,703 10,879 12,072
Proceeds from maturities of and principal repayments on
available for sale securities ..................... 24,570 7,230 18,292
Purchase of available for sale securities ............. (37,430) (22,813) (33,408)
Net increase in loans ................................. (21,914) (19,857) (11,451)
Purchase of investment in life insurance .............. (4,000) - -
Proceeds from sale of premises and equipment .......... - 4 -
Purchase of premises and equipment .................... (346) (339) (316)
Proceeds from sale of other real estate ............... 198 200 157
------- ------- -------
Net Cash Used in Investing Activities ........ (26,219) (24,696) (14,654)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Years Ended December 31,
2001 2000 1999
(In Thousands)
----------------
Increase in deposits 8,152 15,315 5,543
Proceeds from long-term borrowings .......................... 2,500 5,500 7,000
Net increase in short-term borrowings ....................... 14,093 1,395 1,819
Proceeds from sale of treasury stock ........................ - 179 109
Purchase of treasury stock .................................. (1,071) (658) (354)
Cash dividends paid ......................................... (1,529) (1,341) (1,129)
-------- -------- --------
Net Cash Provided by Financing Activities .......... 22,145 20,390 12,988
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents.... (318) 129 2,660
CASH AND CASH EQUIVALENTS - BEGINNING ............................ 7,597 7,468 4,808
-------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING ............................... $ 7,279 $ 7,597 $ 7,468
======== ======== ========
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31,
2001 2000 1999
(In Thousands)
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid ........................................................... $ 10,173 $10,333 $ 8,466
============ ======= =======
Income taxes paid ....................................................... $ 1,586 $ 1,075 $ 1,216
============ ======= =======
SUPPLEMENTARY DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans .................. $ 243 $ 53 $ 233
============ ======= =======
Proceeds from sales of foreclosed real estate financed through loans..... $ - $ 77 $ 117
============ ======= =======
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Peoples
Financial Services Corp. and its wholly-owned subsidiary, Peoples National
Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Nature of Operations
The Company provides a variety of financial services, through the bank, to
individuals, small businesses and municipalities through its seven
Pennsylvania offices located in Hallstead, Hop Bottom, Susquehanna,
Montrose, Nicholson, Meshoppen and Tunkhannock, which are small communities
in a rural setting. The Bank's primary deposits are checking accounts,
savings accounts and certificates of deposit. Its primary lending products
are single-family residential loans and loans to small businesses. As a
national bank, the Bank is subject to regulation of the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation.
The Company is subject to regulation of the Federal Reserve Bank.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans.
Presentation of Cash Flows
For purposes of cash flows, cash and cash equivalents include cash and due
from banks, interest-bearing deposits in other banks and federal funds
sold.
Securities
Securities classified as available for sale are those securities that the
Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are carried at
fair value. Unrealized gains or losses are reported as increases or
decreases in other comprehensive income, net of the related deferred tax
effect. Realized gains or losses, determined on the basis of the cost of
the specific securities sold, are included in earnings. Premiums and
discounts are recognized in interest income using the interest method over
the period to maturity. Common equity securities include restricted
investments, primarily Federal Home Loan Bank and Federal Reserve Bank
stock which is carried at cost. Federal law requires a member institution
of the Federal Home Loan Bank and the Federal Reserve Bank to hold stock
according to a predetermined formula.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their
outstanding unpaid principal balances, net of an allowance for loan losses
and any deferred fees or costs. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized over the contractual life of the related
loan as an adjustment to the yield.
The accrual of interest is generally discontinued when the contractual
payment of principal or interest has become 90 days past due or management
has serious doubts about further collectibility of principal or interest,
even though the loan is currently performing. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or
well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's
judgment as to the collectibility of principal. Generally, loans are
restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectibility of the total contractual principal
and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known or inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change, including the amounts and timing
of future cash flows expected to be received on impaired loans.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price or the
fair value of the collateral if the loan is collateral dependent.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses (Continued)
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line and various accelerated
methods based on estimated useful lives. Maintenance, repairs and minor
replacements are expensed when incurred. Gains and losses on routine
dispositions are reflected in current operations.
Intangible Assets
The Bank has core deposit acquisition premiums which are being amortized
over an estimated life of fifteen years using the straight-line method.
These intangible assets of $2,627,000 and $2,885,000, net of accumulated
amortization of $1,210,000 and $952,000, are included in other assets at
December 31, 2001 and 2000, respectively. Amortization was $258,000 for
each of the years ended December 31, 2001, 2000 and 1999.
Foreclosed Assets
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans
classified as in-substance foreclosure. The Company includes such
properties in other assets. A loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings take place. Foreclosed
assets initially are recorded at fair value, net of estimated selling
costs, at the date of foreclosure establishing a new cost basis. Subsequent
declines in the recorded value of the property prior to its disposal and
costs to maintain the assets are included in other expense. In addition,
any gain or loss realized upon disposal is included in other income or
expense.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred
tax assets are recognized for deductible temporary differences and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment. Peoples Financial Services
Corp. and its subsidiary file a consolidated federal income tax return.
Advertising
The Company follows the policy of charging marketing and advertising costs
to expense as incurred.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Common Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the Company
relate solely to outstanding stock options, and are determined using the
treasury stock method.
The following table shows the amounts used in computing earnings per share
for the years ended December 31, 2001, 2000 and 1999:
Common
Income Shares
Numerator Denominator EPS
--------- ----------- -----
(In Thousands, Except Share and Per Share Data)
2001:
Basic EPS ................................ $4,836 2,121 $2.28
Dilutive effect of potential common stock,
stock options ........................ - 1 -
------ ------ -----
Diluted EPS .............................. $4,836 2,122 $2.28
====== ====== =====
2000:
Basic EPS ................................ $3,905 2,161 $1.80
Dilutive effect of potential common stock,
stock options ........................ - 3 -
------ ------ -----
Diluted EPS .............................. $3,905 2,164 $1.80
====== ====== =====
1999:
Basic EPS ................................ $3,787 2,171 $1.74
Dilutive effect of potential common stock,
stock options ........................ - 3 -
------ ------ -----
Diluted EPS .............................. $3,787 2,174 $1.74
====== ====== =====
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on available
for sale securities, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income, are
components of comprehensive income.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income (Continued)
The components of other comprehensive income (loss) and related tax effects
for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
(In Thousands)
----------------
Unrealized holding gains (losses) on available for sale securities..... $ 1,041 $ 2,986 ($3,927)
Reclassification adjustment for gains realized in net income .......... (32) (21) (85)
------- ------- -------
Net Unrealized Gains (Losses) .................................. 1,009 2,965 (4,012)
Tax effect ............................................................ 343 1,008 (1,364)
------- ------- -------
Net of Tax Amount .............................................. $ 666 $ 1,957 ($2,648)
======= ======= =======
Segment Reporting
The Bank acts as an independent community financial services provider and
offers traditional banking and related financial services to individual,
business and government customers. Through its branch and automated teller
machine network, the Bank offers a full array of commercial and retail
financial services, including the taking of time, savings and demand
deposits; the making of commercial, consumer and mortgage loans; and the
providing of other financial services.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail and trust operations of
the Bank. As such, discrete information is not available and segment
reporting would not be meaningful.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded.
New Accounting Standards
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.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards (Continued)
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 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.
At December 31, 2001, 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.
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 Company on January 1, 2002, but are not expected to
have a significant impact on the financial condition or results of
operations.
Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform with the 2001 presentation format. Such
reclassifications had no impact on the Company's net income.
NOTE 2 - BRANCH ACQUISITION
On November 19, 2001, the Bank entered into an agreement with another bank to
purchase certain assets, including furniture and equipment and assume certain
liabilities, including approximately $6,000,000 of deposits and a premises
lease, of a branch located in Norwich, New York. The purchase price equals
$50,000 for a deposit premium plus the book value cost of the personal property.
The acquisition is subject to obtaining regulatory approvals and is not expected
to be completed until the first quarter of 2002.
NOTE 3 - SECURITIES
At December 31, 2001 and 2000, the amortized cost and fair values of securities
available for sale are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------
(In Thousands)
DECEMBER 31, 2001:
U.S. Treasury securities ........................... $ 499 $ 5 $ - $ 504
U.S. Government agencies and corporations .......... 8,996 134 10 9,120
Obligations of state and political subdivisions..... 28,662 402 287 28,777
Corporate debt securities .......................... 29,611 736 141 30,206
Mortgage-backed securities ......................... 27,240 182 202 27,220
Preferred equity securities ........................ 3,044 27 34 3,037
Common equity securities ........................... 1,919 - - 1,919
-------- -------- -------- --------
Total .......................................... $ 99,971 $ 1,486 $ 674 $100,783
======== ======== ======== ========
DECEMBER 31, 2000:
U.S. Treasury securities ........................... $ 497 $ 7 $ - $ 504
U.S. Government agencies and corporations .......... 23,048 - 160 22,888
Obligations of state and political subdivisions..... 31,446 499 - 31,945
Corporate debt securities .......................... 16,399 136 126 16,409
Mortgage-backed securities ......................... 26,202 2 555 25,649
Preferred equity securities ........................ 1,009 - - 1,009
Common equity securities ........................... 1,274 - - 1,274
-------- -------- -------- --------
Total .......................................... $ 99,875 $ 644 $ 841 $ 99,678
======== ======== ======== ========
NOTE 3 - SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of December 31, 2001, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without any penalties.
Amortized Fair
Cost Value
-------- --------
(In Thousands)
Due in one year or less ..................... $ 4,105 $ 4,202
Due after one year through five years ....... 26,175 26,777
Due after five years through ten years....... 9,615 9,776
Due after ten years ......................... 27,873 27,852
-------- --------
67,768 68,607
Mortgage-backed securities .................. 27,240 27,220
Equity securities ........................... 4,963 4,956
-------- --------
$ 99,971 $100,783
======== ========
Proceeds from sale of available for sale securities during 2001, 2000 and 1999
were $12,703,000, $10,879,000 and $12,072,000, respectively. Gross gains
realized on these sales were $100,000, $35,000 and $113,000, respectively. Gross
losses on these sales were $68,000, $14,000 and $28,000, respectively.
Securities with a carrying value of $36,747,000 and $31,261,000 at December 31,
2001 and 2000, respectively, were pledged to secure public deposits and
repurchase agreements as required or permitted by law.
NOTE 4 - LOANS RECEIVABLE
The composition of loans receivable at December 31, 2001 and 2000 is as follows:
December 31,
-----------------------------
2001 2000
------ ------
(In Thousands)
Commercial ..................................... $ 34,333 $ 24,707
Real estate:
Commercial ................................ 39,089 33,497
Residential ............................... 101,934 94,429
Consumer ....................................... 18,414 19,681
--------- ---------
193,770 172,314
Unearned net loan origination fees and costs.... (41) (134)
Allowance for loan losses ...................... (1,816) (1,918)
--------- ---------
$ 191,913 $ 170,262
========= =========
A summary of the transactions in the allowance for loan losses is as follows:
Years Ended December 31,
------------------------------------------
2001 2000 1999
------- ------- -------
(In Thousands)
Balance, beginning ................ $ 1,918 $ 1,756 $ 1,713
Provision for loan losses..... 20 240 240
Recoveries ................... 63 41 44
Loans charged off ............ (185) (119) (241)
------- ------- -------
Balance, ending ................... $ 1,816 $ 1,918 $ 1,756
======= ======= =======
Impaired loans, not requiring an allowance for loan losses, were $-0- at
December 31, 2001 and 2000. Impaired loans requiring an allowance for loan
losses were $125,000 and $253,000 at December 31, 2001 and 2000, respectively.
At December 31, 2001 and 2000, the related allowance for loan losses associated
with these loans was $23,000 and $74,000, respectively. For the years ended
December 31, 2001, 2000 and 1999, average impaired loans were $125,000, $256,000
and $263,000, respectively. Interest income recognized on these impaired loans
was $6,000, $18,000 and $14,000 in 2001, 2000 and 1999, respectively.
NOTE 4 - LOANS RECEIVABLE (CONTINUED)
Loans outstanding to directors, executive officers, principal stockholders or to
their affiliates totaled $617,000 and $615,000 at December 31, 2001 and 2000,
respectively. Advances and repayments during 2001 totaled $129,000 and $127,000,
respectively. These loans are made during the ordinary course of business at the
Company's normal credit terms. There were no related party loans that were
classified as non-accrual, past due, restructured or considered a potential
credit risk at December 31, 2001 and 2000.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2001 and 2000 are comprised of the
following:
2001 2000
---- ----
(In Thousands)
Land ................................ $ 348 $ 348
Building and improvements ........... 3,850 3,581
Furniture, fixtures and equipment.... 3,438 3,368
------- -------
7,636 7,297
Accumulated depreciation ............ (4,265) (3,886)
------- -------
$ 3,371 $ 3,411
======= =======
NOTE 6 - DEPOSITS
The composition of deposits at December 31, 2001 and 2000 were as follows:
2001 2000
---- ----
(In Thousands)
Demand:
Non-interest bearing......... $ 30,664 $ 27,290
Interest bearing ............ 52,889 52,573
Savings .......................... 52,655 49,615
Time:
$100,000 and over ........... 18,261 16,855
Less than $100,000 .......... 84,422 84,406
-------- --------
$238,891 $230,739
======== ========
NOTE 6 - DEPOSITS (CONTINUED)
At December 31, 2001, the scheduled maturities of time deposits are as follows
(in thousands):
2002 $71,884
2003 10,441
2004 9,520
2005 3,494
2006 4,948
Thereafter 2,396
-------
$102,683
========
NOTE 7 - SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and
Federal Home Loan Bank advances generally represent overnight or less than
30-day borrowings. U.S. Treasury tax and loan notes for collections made by the
Bank are payable on demand. Short-term borrowings consisted of the following at
December 31, 2001 and 2000:
December 31, 2001
Maximum
Ending Average Month-End Average
Balance Balance Balance Rate
----------- ----------- ----------- -----------
(In Thousands)
Federal funds purchased and securities sold under
agreements to repurchase ................... $ 4,817 $ 4,005 $ 4,841 2.81 %
Federal Home Loan Bank .......................... 16,400 3,099 16,400 3.27
U.S. Treasury tax and loan notes ................ 121 544 1,022 3.31
------- ------- ------- ------
$21,338 $ 7,648 $22,263 3.03 %
======= ======= ======= ======
December 31, 2000
Maximum
Ending Average Month-End Average
Balance Balance Balance Rate
--------- --------- --------- ---------
(In Thousands)
Federal funds purchased and securities sold under
agreements to repurchase $3,899 $4,170 $ 3,946 5.32 %
Federal Home Loan Bank 2,865 472 5,570 6.21
U.S. Treasury tax and loan notes 481 457 1,011 6.26
------- ------ -------- ------
$7,245 $5,099 $10,527 5.49 %
======= ====== ======== ======
NOTE 7 - SHORT-TERM BORROWINGS (CONTINUED)
The Bank has an agreement with the Federal Home Loan Bank (FHLB) which allows
for borrowings up to a percentage of qualifying assets. At December 31, 2001 and
2000, the Bank had a maximum borrowing capacity of approximately $107,034,000
and $109,345,000, respectively. All advances from FHLB are secured by qualifying
assets of the Bank.
Securities sold under repurchase agreements are retained under the Bank's
control at its safekeeping agent. The Bank may be required to provide additional
collateral based on the fair value of the underlying securities.
The Bank has a $7,000,000 line of credit for the sale of federal funds with
Atlantic Central Bankers Bank of which $-0- was outstanding at December 31, 2001
and 2000. These borrowings are unsecured.
NOTE 8 - LONG-TERM BORROWINGS
Long-term debt consisted of advances from the Federal Home Loan Bank under
various notes.
Detail of long-term debt at December 31, 2001 and 2000 is as follows:
Current
Strike Interest
Due Convertible Rate Rate 2001 2000
----- ------------- -------- --------- ----- -----
(In Thousands)
May 2005 May 2001 8.5 7.03% $ 2,500,000 $ 2,500,000
November 2005 May 2001 N/A 5.93 5,000,000 5,000,000
May 2010 May 2001 7.5 6.37 5,000,000 5,000,000
September 2010 September 2003 N/A 6.10 5,000,000 5,000,000
October 2011 October 2003 8.0 4.47 2,500,000 -
---------------- ---------------
$20,000,000 $17,500,000
================ ===============
On convertible rate notes, the Federal Home Loan Bank has the option to convert
the notes at rates ranging from the three-month LIBOR (1.88% at December 31,
2001) plus .10% to plus .20% on a quarterly basis commencing on the conversion
date. If converted, the Bank has the option to repay these advances at each of
the option dates without penalty. Accordingly, contractual maturities above may
differ from expected maturities.
NOTE 8 - LONG-TERM BORROWINGS (CONTINUED)
Maturities of long-term debt in years subsequent to December 31, 2001 are as
follows (in thousands):
2002 $ -
2003 -
2004 -
2005 7,500
2006 -
Thereafter 12,500
-------
$20,000
=======
The notes are secured under terms of a blanket collateral agreement by a pledge
of qualifying investment and mortgage-backed securities, certain mortgage loans
and a lien on FHLB stock.
NOTE 9 - STOCK PURCHASE PLANS
The Company has a stock option plan covering non-employee directors and a stock
incentive plan for all officers and key employees. The Plan is administered by a
committee of the Board of Directors. Under the Plan, 125,000 shares of common
stock are reserved for possible issuance, subject to future adjustment in the
event of specified changes in the Company's capital structure. Under the Plan,
the exercise price cannot be less than 100% of the fair market value on the date
of grant. The vesting period of options granted is at the discretion of the
Board of Directors. Options granted during 2001, 2000 and 1999 expire in ten
years.
A summary of transactions under this Plan were as follows:
2001 2000 1999
----------- ------------ -----------
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
------- -------- -------- -------- ------- --------
Outstanding, beginning of year... 32,893 $ 24.38 27,913 $ 23.24 21,060 $ 22.20
Granted .................... 12,250 24.75 8,750 27.50 9,050 25.50
Exercised .................. (280) 22.20 (2,495) 22.86 (1,750) 22.67
Forfeited .................. (1,065) 23.75 (1,275) 23.48 (447) 22.20
------- ------ ------- ------ ------ -------
Outstanding, end of year........ 43,798 $ 24.52 32,893 $ 24.38 27,913 $ 23.24
======= ====== ======= ====== ====== =======
Exercisable, end of year........ 43,634 $ 24.53 32,447 $ 24.45 27,198 $ 23.29
======= ====== ======= ====== ====== =======
The weighted-average remaining contractual life of the above options is
approximately 7.7 years. Stock options outstanding at December 31, 2001 are
exercisable at prices ranging from $22.20 to $27.50 a share.
NOTE 9 - STOCK PURCHASE PLANS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation costs have been recognized for options granted in
2001, 2000 and 1999. Had compensation costs for stock options granted in 2001,
2000 and 1999 been determined based on the fair value at the grant dates for
awards under the plan consistent with the provisions of SFAS No. 123, the
Company's net income and earnings per share for the years ended December 31,
2001, 2000 and 1999 would have been reduced to the proforma amounts indicated
below:
2001 2000 1999
(In Thousands, except Per Share Amounts)
----------------------------------------
Net income:
As reported .......... $ 4,836 $ 3,905 $ 3,787
Pro forma ............ $ 4,794 $ 3,861 $ 3,739
Basic earnings per share:
As reported .......... $ 2.28 $ 1.80 $ 1.74
Pro forma ............ $ 2.26 $ 1.78 $ 1.72
Diluted earnings per share:
As reported .......... $ 2.28 $ 1.80 $ 1.74
Pro forma ............ $ 2.26 $ 1.78 $ 1.72
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999, respectively: risk-free interest rate of
5.17%, 6.51% and 5.69%, volatility of 0.20, 0.24 and 0.17, dividend yield of
$2.92%, 2.49% and 1.93%, and an expected life of 6 years. The weighted-average
fair value of options granted was $5.18 per share in 2001, $7.77 per share in
2000 and $7.98 per share in 1999.
During 1999, the Company implemented a Dividend Reinvestment and Stock Purchase
Plan. Under the Plan, the Company registered with the Securities and Exchange
Commission 100,000 shares of the common stock to be sold pursuant to the Plan.
Participation is available to all common stockholders. The Plan provides each
participant with a simple and convenient method of purchasing additional common
shares without payment of any brokerage commission or other service fees. A
participant in the Plan may elect to reinvest dividends on all or part of their
shares to acquire additional common stock. A participant may withdraw from the
Plan at any time. Stockholders purchased 14,078, 11,880 and 2,527 shares in
2001, 2000 and 1999, respectively, through the Plan. Effective in 2002, the Plan
was amended to permit stockholders participating in the Plan to purchase
additional shares of common stock with voluntary cash payments of a minimum of
$100 and a maximum of $2,500 each calendar quarter.
NOTE 10 - INCOME TAXES
The provision for federal income taxes consists of the following:
Years Ended December 31,
---------------------------
2001 2000 1999
----- ----- -----
(In Thousands)
Current............ $ 1,555 $ 1,167 $ 1,146
Deferred........... (47) (70) (32)
------- ------- -------
$ 1,508 $ 1,097 $ 1,114
======= ======= =======
The components of the net deferred tax asset at December 31, 2001 and 2000 are
as follows:
2001 2000
------ ------
(In Thousands)
Deferred tax asset:
Allowance for loan losses ............................................... $ 489 $ 524
Deferred loan fees ...................................................... 23 25
Deferred compensation ................................................... 111 77
Unrealized loss on available for sale securities ........................ - 67
Other ................................................................... 78 28
----- -----
701 721
Deferred tax liabilities, unrealized gain on available for sale securities.... (276) -
----- -----
Net Deferred Tax Asset ................................................ $ 425 $ 721
===== =====
A reconciliation of the provision for income taxes and the amount that would
have been provided at statutory rates for the years ended December 31 is as
follows:
2001 2000 1999
------------------ ------------------- --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------- ------ ------ ------ -------
(In Thousands)
Federal income tax at statutory rate... $ 2,157 34% $ 1,701 34% $ 1,666 34%
Tax exempt interest ................... (673) (11) (654) (13) (618) (12)
Non-deductible interest ............... 85 1 97 2 83 1
Officers' life insurance income ....... (40) - - - - -
Other, net ............................ (21) - (47) (1) (17) -
------- ------- ------- ------- ------- -------
$ 1,508 24% $ 1,097 22% $ 1,114 23%
======= ======= ======= ======= ======= =======
NOTE 10 - INCOME TAXES (CONTINUED)
The income tax provision includes $11,000, $7,000 and $29,000 in 2001, 2000 and
1999, respectively, of income tax expense to net realized securities gains.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership and profit-sharing plan with 401(k)
provisions. The Plan is for the benefit of all employees who meet the
eligibility requirements set forth in the Plan. The amount of employer
contributions to the plan, including 401(k) matching contributions, is at the
discretion of the Board of Directors. Employer ESOP contributions are allocated
to participant accounts based on their percentage of total compensation for the
Plan year. Shares of Bank stock owned by the Plan are included in the earnings
per share calculation and dividends on these shares are deducted from undivided
profits. During 2001, 2000 and 1999, ESOP contributions to the Plan charged to
operations were $101,000, $77,000 and $72,000, respectively. During 2001, 2000
and 1999, employer 401(k) matching contributions to the Plan charged to
operations were $53,000, $44,000 and $39,000, respectively. At December 31,
2001, 88,276 shares of the Company's common stock were held in the Plan. In the
event a terminated Plan participant desires to sell his or her shares of the
Company's stock, or for certain employees who elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at their fair market value.
The Bank has an agreement with its chief executive officer to establish an
excess benefit retirement plan. The Plan is a non-qualified Deferred
Compensation Plan in which the Bank is not required to establish a reserve. The
Bank has obtained life insurance (designating the Bank as the beneficiary) on
the life of the chief executive officer in an amount which is intended to cover
the Bank's obligations under the Deferred Compensation Plan, based upon certain
actuarial assumptions upon the death of the officer. The cost charged to
operations was $100,000, $-0- and $23,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
In June 2000, the Bank terminated a noncontributory pension plan covering
eligible employees. The plan assets in excess of the projected benefit
obligation were allocated to the Plan's eligible participants and the prepaid
pension cost of $37,000 was charged to expense.
NOTE 12 - CONTINGENCIES
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 Commission alleged that the defendants have violated the
broker-dealer registration and the 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/illgotten gains plus prejudgment interest, and civil penalties
against each defendant. Additionally, the Commission's action sought 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, 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.
NOTE 12 - CONTINGENCIES (CONTINUED)
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
estimates the loss to be approximately $139,000, which has been charged against
operations for the year ended December 31, 2001 and the asset has been written
down to $1,841,000. 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. The $1,841,000 net claim with the receiver is included
in other assets on the consolidated balance sheet of the Company as of December
31, 2001.
The Company is a defendant in various lawsuits wherein various amounts are
claimed. In the opinion of the Company's management, these suits are without
merit and should not result in judgments which, in the aggregate, would have a
material adverse effect on the Company's consolidated financial statements.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF
CREDIT RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments. Standby letters of credit commit the Bank to make payments on
behalf of customers when certain specified future events occur. Commitments to
extend credit are agreements to lend to the customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses. Since many of the
commitments are expected to expire in one year or less without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
The Bank's exposure to credit loss is essentially the same for these items as
that involved in extending loans to customers. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. Collateral is obtained based on management's
credit assessment of the particular customer.
The contract or notional amounts at December 31, 2001 and 2000 were as follows:
2001 2000
---- ----
(In Thousands)
Commitments to extend credit...... $15,160 $12,099
Standby letters of credit ........ 1,257 540
------- -------
$16,417 $12,639
======= =======
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF
CREDIT RISK (CONTINUED)
The Bank grants commercial, consumer and residential loans to customers
primarily in the Susquehanna/Wyoming County, Pennsylvania and Broome County, New
York areas. The concentrations of credit by type of loan are set forth in Note
4. The Bank does not have any significant concentrations to any one industry or
customer. Although the Bank has a diversified loan portfolio, its debtors'
ability to honor their contracts is influenced by the region's economy.
NOTE 14 - REGULATORY MATTERS
The Bank is required to maintain average cash reserve balances in vault cash and
with the Federal Reserve Bank based on a percentage of deposits. The required
reserve balance at December 31, 2001 and 2000 was $2,225,000 and $1,534,000,
respectively.
Dividends are paid by the Company from its assets, which are mainly provided by
dividends from the Bank. However, certain restrictions exist regarding the
ability of the Bank to transfer funds to the Company in the form of cash
dividends, loans or advances. Under such restrictions, the Bank may not, without
the prior approval of the Comptroller of the Currency, declare dividends in
excess of the sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years. Under this restriction, the
Bank, without prior regulatory approval, can declare dividends to the Company
totaling $4,385,000, plus an additional amount equal to the net profit for 2002,
up to the date any such dividend is declared.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of its
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 2001, that the Company and
Bank meet all capital adequacy requirements to which they are subject.
NOTE 14 - REGULATORY MATTERS (CONTINUED)
As of December 31, 2001, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Company and Bank's actual capital ratios as of December 31, 2001 and 2000,
and the minimum ratios required for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions are as follows:
To be Well
Capitalized under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
As of December 31, 2001:
Total capital (to risk-weighted assets):
Consolidated ........................ $32,400 15.37% $=>16,861 =>8.00% $=>21,076 =>10.00%
Peoples National Bank ............... 31,883 15.16 =>16,821 =>8.00 =>21,026 =>10.00
Tier 1 capital (to risk-weighted assets):
Consolidated ........................ 30,584 14.51 => 8,430 =>4.00 =>12,646 => 6.00
Peoples National Bank ............... 30,067 14.30 => 8,410 =>4.00 =>12,616 => 6.00
Tier 1 capital (to average assets):
Consolidated ........................ 30,584 9.89 =>12,371 =>4.00 =>15,463 => 5.00
Peoples National Bank ............... 30,067 9.74 =>12,351 =>4.00 =>15,438 => 5.00
As of December 31, 2000:
Total capital (to risk-weighted
assets)
Consolidated ........................ $30,015 16.99% $=>14,133 =>8.00% $=>17,666 =>10.00%
Peoples National Bank ............... 29,567 16.75 =>14,123 =>8.00 =>17,654 =>10.00
Tier 1 capital (to risk-weighted
assets)
Consolidated ........................ 28,097 15.90 => 7,067 =>4.00 =>10,600 => 6.00
Peoples National Bank ............... 27,649 15.66 => 7,062 =>4.00 =>10,593 => 6.00
Tier 1 capital (to average assets)
Consolidated ........................ 28,097 10.04 =>11,193 =>4.00 =>13,991 => 5.00
Peoples National Bank ............... 27,649 9.88 =>11,193 =>4.00 =>13,991 => 5.00
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Company's
financial instruments, however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been reevaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets. Due to a wide range of valuation
techniques and the degree of subjectivity used in making the estimates,
comparisons between the Company's disclosures and those of other companies may
not be meaningful. The following methods and assumptions were used to estimate
the fair values of the Company's financial instruments at December 31, 2001 and
2000:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate their fair
value.
Securities
Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans Receivable
For variable-rate loans that reprice frequently and which entail no
significant changes in credit risk, fair values are based on carrying
amounts. The fair values of fixed rate loans are estimated using discounted
cash flow analyses, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair
value.
Deposits
The fair values for demand deposits, savings accounts and certain money
market accounts are, by definition, equal to the amount payable on demand
at the reporting date (that is, their carrying amounts). The fair values
for certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such
time deposits.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates fair value.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Short-Term Borrowings
The carrying amounts of short-term borrowings approximate their fair
values.
Long-Term Borrowings
The fair values of the Bank's long-term debt are estimated using discounted
cash flow analyses based on the Bank's current incremental borrowing rates
for similar types of borrowing arrangements.
Commitments to Extend Credit and Standby Letters of Credit
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment or letter of credit and the fair value, determined by
discounting the remaining contractual fee over the term of the commitment
using fees currently charged to enter into similar agreements with similar
risk, are not considered material for disclosure. The contractual amounts
of unfunded commitments and letters of credit are presented in Note 13.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 2001 December 31, 2000
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In Thousands)
Financial assets:
Cash and cash equivalents .................. $ 7,279 $ 7,279 $ 7,597 $ 7,597
Securities available for sale............... 100,783 100,783 99,678 99,678
Loans receivable, net of allowance ......... 191,913 194,376 170,262 170,372
Accrued interest receivable ................ 2,282 2,282 2,362 2,362
Financial liabilities:
Deposits ................................... 238,891 240,176 230,739 230,348
Short-term borrowings ...................... 21,338 21,338 7,245 7,245
Long-term borrowings ....................... 20,000 23,499 17,500 17,559
Accrued interest payable ................... 703 703 854 854
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
2001 2000
----- -----
(In Thousands)
ASSETS
Cash .................................................. $ 82 $ 27
Investment in bank subsidiary ......................... 33,237 30,404
Investment securities available for sale .............. 500 500
Accrued interest receivable ........................... 23 23
Other assets .......................................... 25 -
-------- --------
Total Assets ................................... $ 33,867 $ 30,954
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to subsidiary ................................ $ 111 $ 101
Other liabilities ................................ 2 1
-------- --------
Total Liabilities .............................. 113 102
-------- --------
Stockholders' equity:
Common stock ..................................... 4,455 4,455
Surplus .......................................... 4,611 4,611
Retained earnings ................................ 26,851 23,544
Accumulated other comprehensive income (loss)..... 536 (130)
-------- --------
36,453 32,480
Treasury stock ................................... (2,699) (1,628)
------- --------
Total Stockholders' Equity ..................... 33,754 30,852
-------- --------
Total Liabilities and Stockholders' Equity..... $ 33,867 $ 30,954
======== ========
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------ ------
(In Thousands)
Dividends from bank subsidiary ................................................................$ 2,679 $ 1,741 $ 1,479
Other income .................................................................................. 46 47 45
Other expenses ................................................................................ 61 37 46
------- ------- -------
Income before Income Taxes and Equity in Undistributed Net Income of Subsidiary......... 2,664 1,751 1,478
Income taxes (benefits) ....................................................................... (5) 4 -
------- ------- -------
Income before Equity in Undistributed Net Income of .................................... 2,669 1,747 1,478
Subsidiary
Equity in undistributed net income of subsidiary .............................................. 2,167 2,158 2,309
------- ------- -------
Net Income .............................................................................$ 4,836 $ 3,905 $ 3,787
======= ======= =======
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------
2001 2000 1999
----- ----- -----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 4,836 $ 3,905 $ 3,787
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed net income of subsidiary ............... (2,167) (2,158) (2,309)
Increase (decrease) in due to subsidiary ............. 10 (5) (1)
Increase in accrued interest receivable .............. - (2) -
Increase in other liabilities ........................ 1 - 2
Increase in other assets ............................. (25) - -
------- ------- -------
Net cash provided by operating activities ....... 2,655 1,740 1,479
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid ...................................... (1,529) (1,341) (1,129)
Proceeds from sale of treasury stock ..................... - 179 109
Purchase of treasury stock ............................... (1,071) (658) (354)
------- ------- -------
Net cash used in financing activities ........... (2,600) (1,820) (1,374)
------- ------- -------
Increase (decrease) in cash and cash equivalents: 55 (80) 105
Cash and cash equivalents:
Beginning ................................................ 27 107 2
------- ------- -------
Ending ................................................... $ 82 $ 27 $ 107
======= ======= =======
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 28, 2001, the Board of Directors of the Company
approved the engagement of the accounting firm of Beard Miller
Company LLP as their independent accountants to replace Prociak
& Associates, LLC. Information pertaining to this change can be
found in the previously submitted 8-K dated March 7, 2001, and
the 8-K/A dated March 12, 2001 and March 16, 2001.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 8,
2002.
ITEM 11 EXECUTIVE COMPENSATION
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 8,
2002.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference under the
previously submitted document DEF 14A filed with the SEC on
March 8, 2002.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 8,
2002.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statement Schedules can be found under Item 8 of this report.
(b) Other events and reports on Form 8-K that have been previously filed
are as follows:
Press Release of Peoples Financial Services Corp. dated November 19,
2001, Purchase of Subsidiary, previously submitted as Exhibit 99.1
Press Release of Peoples Financial Services Corp. dated October 23,
2001, Third Quarter Results, previously submitted as Exhibit 99.012
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.
(21) Subsidiaries of Peoples Financial Services Corp. *
(23.1) Consent of Independent Auditors - Beard Miller Company, LLP,
filed herewith
(23.2) Consent of Independent Auditors - Prociak & Associates, LLC,
filed herewith
(99) Report of Independent Auditors - Prociak & Associates, LLC,
filed herewith
* 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
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/John W. Ord
John W. Ord, President and Chief Executive Officer
/s/Debra E. Dissinger
Debra E. Dissinger, Executive Vice President
/s/Frederick J. Malloy
Frederick J. Malloy, Principal Accounting Officer
/s/Jack M. Norris
Jack M. Norris, Member, Board of Directors
/s/Gerald R. Pennay
Gerald R. Pennay, Member, Board of Directors
/s/George H. Stover, Jr.
George H. Stover, Jr., Member, Board of Directors
/s/Thomas F. Chamberlain
Thomas F. Chamberlain, Member, Board of Directors
/s/Russell Shurtleff
Russell Shurtleff, Member, Board of Directors
EXHIBIT 23.1
CONSENT OF BEARD MILLER COMPANY LLP INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Peoples Financial Services Corp. of our report dated January 4,
2002 included in the 2001 Annual Report to Stockholders of Peoples Financial
Services Corp.
We consent to the incorporation by reference in the Registration
Statement, No. 333-84169, of our report dated January 4, 2002, with respect to
the consolidated financial statements of Peoples Financial Services Corp.
included in this Annual Report (Form 10-K) for the year ended December 31, 2001.
/s/ BEARD MILLER COMPANY LLP
Allentown, Pennsylvania
March 27, 2002
EXHIBIT 23.2
CONSENT OF PROCIAK & ASSOCIATES, L.L.C. INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Peoples Financial Services Corp. of our report dated February 15,
2001 included in the 2001 Annual Report to Stockholders of Peoples Financial
Services Corp.
We consent to the incorporation by reference in Registration
Statement No. 333-84169 of Peoples Financial Services Corp. and in the related
Prospectus of our report dated February 15, 2001 with respect to the
consolidated financial statements of Peoples Financial Services Corp.
incorporated by reference in this Annual Report (Form 10-K) for the year ended
December 31, 2001.
/s/PROCIAK & ASSOCIATES, L.L.C.
Wilkes-Barre, Pennsylvania
March 27, 2002
EXHIBIT 99
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Peoples Financial Services Corp.
Hallstead, Pennsylvania
We have audited the accompanying consolidated balance sheet of
Peoples Financial Services Corp. and its subsidiary as of December 31, 2000, and
the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 2000 and 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Financial Services Corp. and its subsidiary as of December 31, 2000, and
the results of their operations and their cash flows for the years ended
December 31, 2000 and 1999 in conformity with accounting principles generally
accepted in the United States of America.
/s/PROCIAK & ASSOCIATES, L.L.C.
Wilkes-Barre, Pennsylvania
February 15, 2001