-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ULPsEhmdDdyznKo7gtn7Ha3v5OGfZXZQiscAZydN6g+WfXp3zVYZ4rhI00BHf5qx Eq/4oHBu/4mVeIUL2yilTw== 0000891554-00-000757.txt : 20000324 0000891554-00-000757.hdr.sgml : 20000324 ACCESSION NUMBER: 0000891554-00-000757 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES FINANCIAL SERVICES CORP/ CENTRAL INDEX KEY: 0001056943 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 232391852 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23863 FILM NUMBER: 576308 BUSINESS ADDRESS: STREET 1: 50 MAIN STREET CITY: HALSTEAD STATE: PA ZIP: 18822 BUSINESS PHONE: 5708792175 MAIL ADDRESS: STREET 1: 50 MAIN STREET CITY: HALSTEAD STATE: PA ZIP: 18822 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 000-23863 Peoples Financial Services, Corp. (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 23-2391852 (IRS Employer Identification Number) 50 Main Street, Hallstead, PA (Address of principal executive officer) 18822 (Zip Code) Securities registered pursuant to Section 12(b) of the Act: None (Title of each class) None (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $2.00 (Type of class) 2,168,218 (Number of shares outstanding as of December 31, 1999) TABLE OF CONTENTS Part I Item 1 Business...............................................2-11 Item 2 Properties...............................................11 Item 3 Legal Proceedings........................................11 Item 4 Submission of Matters to a Vote of Security Holders.... 11 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................................12 Item 6 Selected Financial Data..................................13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation....................14-30 Item 7A Quantitative and Qualitative Disclosure About Market Risk.....................................................30 Item 8 Financial Statements and Supplementary Data..............31 Independent Auditor's Report.............................31 Consolidated Balance Sheets..............................32 Consolidated Statements of Income........................33 Consolidated Statements of Comprehensive Income..........34 Consolidated Statements of Stockholders' Equity..........35 Consolidated Statements of Cash Flows.................36-37 Notes to Consolidated Financial Statements............38-56 Item 9 Changes and Disagreements with Accountants on Accounting and Financial Disclosure......................57 Part III Item 10 Directors and Executive Officers.........................57 Item 11 Executive Compensation................................58-63 Item 12 Share Ownership of Management and Directors..............63 Item 13 Certain Relationships and Related Transactions...........64 Part IV Item 14 Exhibits and Reports on Form 8-K.........................64 PART 1 ITEM 1 BUSINESS BRIEF HISTORY Peoples Financial Services Corp. (the "Company") 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 of Susquehanna County ("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 PNB. PNB is currently in its 94th 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 which 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 as such, it 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. 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. 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. 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. GRAMM-LEACH-BLILEY ACT The Gramm-Leach-Bliley Act makes major changes in the way that the financial services industry has been organized. By eliminating obsolete 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 Act (P.L. 48-162) 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 explicit 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 would be prohibited from violating their instructions. Anyone attempting to obtain this information fraudulently by pretending to be the consumer or any similar action could be sent to a federal prison for up to five years. The goal of this Act is to ensure that the final rules protect the interest of consumers, both by assuring that their personal information is safeguarded and by giving financial institutions the flexibility to serve the needs of their customers. The OCC, PNB's primary regulator, is seeking comments on the proposed rules to implement the privacy provisions of the Gramm-Leach-Bliley Act. The comment period is open until March 31, 2000. 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, 1999, PNB's ratio of Tier 1 capital to risk-weighted assets stood at 16.99% and its ratio of total capital to risk- weighted assets stood at 18.15%. 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 3%. As of December 31, 1999, PNB's leverage capital ratio was 10.02%. 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 addition of IRR evaluation to 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"), administered by the FDIC, and each institution is required to pay semi-annual deposit insurance premium assessments to the FDIC. The PNB assessment for 1999 was $24,307. These figures can be compared to FDIC assessments in 1998 of $23,500 and in 1997 of $22,120. 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 will be subject to the same assessment for FICO bonds. The FICO assessment for PNB for 1999 was $.0141 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 May 4, 1985, (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. 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 which employs approximately 3,000 people. 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 total loans that ended 1999 up 7.95% from year-end 1998. 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, automatic 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 has been open for seven years, 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: PNB's 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 or includes renewal options. Current lease payments range from $2,585 to $18,000 annually. Six of the seven offices provide drive-up banking services and five offices have 24-hour ATM services. PNB is obligated under non-cancelable lease agreements for certain bank premises expiring in September 2028. The leases contain a renewal option and provide that the Bank pay property taxes, insurance, and maintenance costs. See Note 12 of Notes to Consolidated Financial Statements for further information on this subject. 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 11 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 investment firm of Tucker Anthony Co., Inc., Lancaster, Pennsylvania, makes a limited market in the Company's Common Stock. 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. The information in the following table has been adjusted to reflect the 5 for 2 stock split of September 1998.
1999 1998 Price Range Dividends Price Range Dividends LOW HIGH DECLARED LOW HIGH DECLARED --- ---- -------- --- ---- -------- First Quarter ........ $ 25.50 $ 25.50 $ 0.12 $ 17.60 $ 19.20 $ 0.10 Second Quarter ....... $ 25.50 $ 25.50 $ 0.13 $ 19.20 $ 25.20 $ 0.12 Third Quarter ........ $ 25.50 $ 26.00 $ 0.13 $ 25.20 $ 25.50 $ 0.12 Fourth Quarter ....... $ 26.00 $ 27.00 $ 0.14 $ 25.50 $ 25.50 $ 0.12
As of December 31, 1999, the approximate number of holders of record of the Company's Common Stock was 736. At such date, 2,168,218 shares of Common Stock were outstanding. The Company's Board of Directors of Directors reviews its dividend policy at least annually. The amount of dividends, while in the sole discretion of the Board of Directors, depends, in part, on earnings, capital requirements, federal and state laws, regulations and policies, and other factors, including the performance of PNB. The Company's ability to pay dividends is also subject to the restrictions imposed by Pennsylvania law. Generally, under Pennsylvania law, a business corporation, such as the Company, may pay dividends to the extent that the value of its assets (determined by the Board of Directors) exceeds the value of its liabilities. As of December 31, 1999, there were 19,112 outstanding options or warrants to purchase. See Note 9 of the Consolidate Financial Statements for more information. ITEM 6 SELECTED FINANCIAL DATA The following table shows the Consolidated Financial Highlights as seen in the Quarterly Report for the Fourth Quarter 1999. Amounts are in thousands except for per share data.
CONSOLIDATED FINANCIAL HIGHLIGHTS DEC 31 DEC 31 DIFF 1999 1998 % INC ---- ---- ----- PERFORMANCE Net Income ................................... 3,787 3,405 11.22% Return of Average Assets ..................... 1.49 1.45 2.76% Return on Equity ............................. 14.08 13.23 6.42% SHAREHOLDERS' VALUE Net Income per Share ......................... 1.750 1.560 12.18% Dividends .................................... 0.520 0.460 13.04% Book Value ................................... 12.360 12.420 (0.48)% Market Value ................................. 27.00 25.50 5.88% Market Value/Book Value Ratio ................ 219.33% 205.31% 6.83% Price Earnings Multiple ...................... 15.46 16.35 (5.44)% Dividend Payout Ratio ........................ 29.82% 29.23% 2.02% Dividend Yield ............................... 1.93% 1.80% 7.22% SAFETY AND SOUNDNESS Shareholders' Equity/Asset Ratio ............. 10.26% 10.94% (6.22)% Allowance for Loan Loss as a Percent of Loans 1.15% 1.21% (4.96)% Net Charge Offs/Total Loans .................. 0.129 0.110 17.27% Allowance for Loan Loss/Nonaccrual Loans ..... 985.61% 331.88% 196.98% Allowance for Loan Loss/Non-performing Loans . 654.68% 231.61% 182.66% BALANCE SHEET HIGHLIGHTS AT SEPTEMBER 30, 1999 Total Assets ................................. $261,319 $247,202 5.71% Total Investments ............................ 92,066 93,175 (1.19)% Net Loans .................................... 150,630 139,536 7.95% Allowance for Loan Losses .................... 1,756 1,713 2.51% Total Deposits ............................... 215,424 209,881 2.64% Stockholders' Equity ......................... $ 26,810 $ 27,046 (0.87)%
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion of the Company's consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Related Notes included in Item 8 of this report. Statements regarding the Company's expectations as to financial results and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business operations, there can be no assurance that its results will not differ materially from its expectations. Factors that might cause or contribute to such differences may include uncertainty of future profitability, changing economic conditions and monetary policies, uncertainty of interest rates, risks inherent in banking transactions, competition, extent of government regulations, and delay in or failure in obtaining regulatory approvals. GENERAL DISCUSSION Peoples Financial Services Corp (Corporation) recorded net income of $3,787,000 ($1.75 per share) for 1999 compared to $3,405,000 ($1.56 per share) in 1998, and $3,011,000 ($1.38 per share) in 1997. Return on average assets (ROAA) was 1.49%, 1.45% and 1.38% for 1999, 1998, and 1997 respectively. A more detailed explanation for each contribution to the increase in income is included in the remainder of the analysis. RESULTS OF OPERATION NET INTEREST INCOME Net interest income is the primary source of operating income for the Corporation. Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other funding sources. The factors that influence net interest income include changes in interest rates, changes in the volume, and mix of asset and liability balances. For analytical purposes, net interest income is reported on a tax-equivalent basis that recognizes the income tax savings on tax-exempt items such as interest on state and municipal securities and tax-exempt loans. Net interest income on a fully tax-equivalent basis increased $921,000 or 10.1% in 1999 compared to 1998. Table 1 presents the net interest income on a fully tax-equivalent basis for each of the three years ending December 31, 1999, 1998, and 1997.
(In thousands) 1999 1998 1997 ---- ---- ---- Total Interest Income .......................... $17,623 $16,584 $15,725 Tax Equivalent Adjustment ...................... 937 766 662 18,560 17,350 16,387 Total Interest Expense ......................... 8,480 8,191 7,914 Net Interest Income (Fully Tax Equivalent Basis) $10,080 $9,159 $8,473
Table 2 analyzes the components contributing to the changes in net interest income in 1999 and indicates the impact in either changes in rate or changes in volume. Table 3 includes the average balances, interest income and expense, and the average rates earned and paid for assets and liabilities.
YEARS ENDED DECEMBER 31, 1999 to 1998 1998 to 1997 Increase Change Due to Increase Change Due to (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME INTEREST INCOME Real Estate Loans ............................ 374 (122) 496 (289) (365) 76 Installment Loans ............................ 351 18 333 (481) (74) (407) Commercial Loans ............................. 269 (462) 731 1,782 225 1,557 Tax Exempt Loans ............................. (48) (8) (40) 98 (35) 133 Other Loans .................................. (336) 15 (351) 341 (190) 531 Total Loans .................................. 610 (559) 1,169 1,451 (440) 1,891 Investment Securities (Available for Sale) Taxable ...................................... 399 148 251 (768) (405) (363) Non-Taxable .................................. (23) (9) (14) 202 (15) 217 Total Securities (Available for Sale) ........ 376 138 238 (566) (421) (145) Time Deposits with Other Banks ............... 1 3 (2) 3 (13) 16 Federal Funds Sold ........................... 74 (14) 88 (51) 1 (52) Total Interest Income ........................1,061 (432) 1,493 837 (873) 1,710
1999 to 1998 1998 to 1997 Increase Change Due to Increase Change Due to (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME INTEREST EXPENSE Interest Bearing Demand Deposits ...............(25) (42) 17 20 (9) 29 Regular Savings Deposits .......................(17) (64) 47 76 (7) 83 Money Market Savings Deposits .................(54) (74) 20 (195) (103) (92) Time Deposits ..................................177 (272) 449 267 (9) 276 Total Interest Bearing Deposits ................ 81 (417) 498 168 (166) 334 Other Borrowings ...............................208 14 194 109 (62) 171 Total Interest Expense .........................289 (392) 681 277 (193) 470 Net Interest Spread ............................772 (40) 812 560 (679) 1,239
1999 1998 1997 AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS Loans Real Estate ................... 82,534 6,680 8.09% 76,516 6,306 8.24% 75,642 6,595 8.72% Installment ................... 17,739 1,616 9.11% 14,039 1,265 9.01% 18,303 1,746 9.54% Commercial .................... 37,283 3,366 9.03% 30,162 3,097 10.27% 13,809 1,315 9.52% Tax Exempt .................... 7,801 354 4.54% 8,666 402 4.64% 6,028 304 5.04% Other Loans ................... 367 41 11.17% 5,309 377 7.10% 337 36 10.68% Total Loans ................... 145,724 12,057 8.27% 134,692 11,447 8.50% 114,119 9,996 8.76% Investment Securities (AFS) Taxable ....................... 63,737 3,947 6.19% 59,520 3,548 5.96% 64,978 4,316 6.64% Non-Taxable ................... 28,667 1,464 5.11% 28,937 1,487 5.14% 24,753 1,285 5.19% Total Securities .............. 92,404 5,411 5.86% 88,457 5,035 5.69% 89,731 5,601 6.24% Time Deposits with Other Banks 589 39 6.62% 616 38 6.17% 423 35 8.27% Fed Funds Sold ................ 2,353 116 4.93% 760 42 5.53% 1,721 93 5.40% Total Earning Assets .......... 241,070 17,623 7.31% 224,525 16,562 7.38% 205,994 15,725 7.63% Less: Allowance for Loan Losses (1,716) (1,710) (1,694) Cash and Due from Banks ....... 4,948 1,742 4,089 Premises and Equipment, net ... 3,521 3,688 3,459 Other Assets .................. 6,580 5,990 5,320 Total Assets .................. 254,403 234,235 217,168
1999 1998 1997 AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Interest Bearing Demand ................ 16,066 225 1.40% 15,058 250 1.66% 13,379 230 1.72% Regular Savings ........................ 33,416 887 2.65% 31,752 904 2.85% 28,870 828 2.87% Money Market Savings .................. 38,900 1,511 3.88% 38,401 1,565 4.08% 40,529 1,760 4.34% Time ...................................102,011 5,364 5.26% 93,890 5,187 5.52% 88,908 4,920 5.53% Total Interest Bearing Deposits ........190,393 7,987 4.20% 179,101 7,906 4.41% 171,686 7,738 4.51% Other Borrowings ....................... 10,135 493 4.86% 6,029 285 4.73% 3,057 176 5.76% Total Interest Bearing .................200,528 8,480 4.23% 185,130 8,191 4.42% 174,743 7,914 4.53% Liabilities Net Interest Spread .................... 9,143 3.08% 8,371 2.95% 7,811 3.10% Non-Interest Bearing Demand Deposits ... 25,527 22,247 18,735 Accrued Expenses and other Liabilities . 1,806 1,320 974 Stockholder's Equity ................... 26,542 25,538 22,716 Total Liabilities and Stockholder's Equity ...................254,403 234,235 217,168 Interest Income/Earning Assets ......... 7.31% 7.38% 7.63% Interest Expense/Earning Assets ........ 3.52% 3.65% 3.84% Net Interest Margin .................... 3.80% 3.74% 3.80%
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. At December 31, 1999, the allowance for loan losses represents 1.15% of outstanding loans compared to 1.21% at December 31, 1998. Non-performing loans, which include loans past due greater than 90 days, decreased from $739,456 in 1998 to $268,166 in 1999. The allowance for loan losses to non-performing loans in 1999 and 1998 were 654.68% and 231.61% respectively. Due to an increase in charge offs in 1999 compared to 1998, the provision for loan loss was increased from $190,000 in 1998 to $220,000 in 1999. Based on the percentage of allowance to non-performing loans, management believes the current level of allowance is adequate. OTHER INCOME Total Other Income consists of service charges, miscellaneous operating income, and securities gains (losses). Table 4 analyzes the increase in total other income of $111,000 or 9.3% in 1999 compared to 1998.
(In thousands) Variance December 31 1999 1998 1999 1998 1997 Amount Percent Amount Percent OF CHANGE OF CHANGE OF CHANGE OF CHANGE Service Charges and Fees ..... $1,187 $1,108 $891 $79 4.60% $217 24.35% Misc. Operating Income ....... 35 41 29 $(6) 53.66% 12 41.38% Gains on Security Sales ...... 85 47 217 $38 80.85% (170) (78.34)% TOTAL Other Income ........... $1,307 $1,196 $1,137 $111 9.28% 59 5.19%
Service charges in 1999 totaled $1,187,000, an increase of $79,000 or 7.13% over 1998 service charges of $1,108,000. Miscellaneous operating income is not a significant income number. It consists mainly of safe deposit box rentals and other miscellaneous one-time entries that included a disbursement of $17,786 due to dissolving the local credit bureau of which PNB was a member. Securities gains were up slightly in 1999 from 1998 with $85,000 and $47,000 being the respective amounts. The interest rate environment in 1999 was not conducive to taking gains on sales and the Bank was able to adequately meet all its liquidity needs without taking losses. OTHER EXPENSE Total non-interest expenses increased 4.28% or $218,000 in 1999 to $5,308,000 when compared to the 1998 figure of $5,090,000. Table 5 is a summary of the other expenses by category for 1999, 1998 and 1997
Variance (In thousands) 1999 1998 1999 1998 1997 OF CHANGE OF CHANGE OF CHANGE OF CHANGE ---- ---- ---- --------- --------- --------- --------- Salaries and Benefits ........................ 2,534 $2,395 $2,282 $139 5.80% $113 4.95% Occupancy Expenses ........................... 323 319 324 4 1.25% (5) (1.54)% Furniture and Equipment Expense .............. 383 436 389 (53) (12.16)% 47 12.08% FDIC Insurance and Assessments ............... 92 88 81 4 4.55% 7 8.64% Professional Fees and Outside Services ....... 197 191 193 6 3.14% (2) (1.04)% Computer Services and Supplies ............... 306 268 359 38 14.18% (91) (25.35)% Taxes, Other Than Payroll and Income ......... 247 222 204 25 11.26% 18 8.82% Other Operating Expenses ..................... 1,226 1,171 1,162 55 4.70% 9 0.77% Total Non-Interest Expense ...................$5,308 $5,090 $4,994 $218 4.28% $ 96 1.92% Income Before Income Taxes ................... 4,901 4,309 3,824 Provision for Income Taxes ................... 1,115 904 813 Net Income ...................................$3,786 $3,405 $3,011 Net Income Per Share, Basic and Diluted ...... 1.74 1.56 1.38
Salaries and benefits totaled $2,534,000 in 1999, an increase of $139,000 or 5.8% from 1998. This increase was normal when growth and annual salary increases are considered. Occupancy expense increased $4,000 or 1.25% from 1998 to 1999. Equipment expense was $383,000 in 1999 compared to $436,000 in 1998 and $389,000 in 1997 when a new computer system and related software was purchased and installed. The first full year of depreciation on the new equipment and software was in 1998. This was a major reason for the 1998 increase in expenses. A new Voice Response Unit was the only large equipment purchase in 1999. The decrease in 1999 was $53,000 or 12.2% over 1998. The decrease in 1999 was due to less equipment expenditures than prior years and the resulting decrease in depreciation expenses. FDIC insurance and regulatory assessments continued to increase as a result of growth in deposits. This expense category was over $92,000 in 1999 compared to $88,000 in 1998, an increase of $4,000 or 4.6%. In 1998 compared to 1997, the increase was $7,000 from $81,000 to $88,000 or 8.6%. Professional fees and outside services increased in 1999 to $197,000 from $191,000 in 1998 or 3.1%. In management's view, the trend in this expense category is considered to be normal as our volume of business increases. Computer services and supplies increased substantially in 1999 to $306,000 when compared to 1998 at $268,000 or 14.2% more. As our services have expanded and our business has become more technology based, our costs to maintain our systems have increased. A one-time expense for Y2K testing in 1999 added $12,675 to service costs. Taxes, other than payroll, increased in a normal pattern attributed to growth in the years 1998 and 1999. The 1999 figure was $247,000 compared to $222,000 in 1998 and $204,000 in 1997. This was a difference of $25,000 or 11.3% comparing 1999 to 1998 and a difference of $18,000 or 8.8% when comparing 1998 to 1997. Other operating expenses covers everything not covered in the specific areas previously listed. The major items in this category are postage, stationary, printing and supplies, advertising and promotion, directors' fees, and employee education. This category increased in 1999 to $1,226,000 compared to $1,171,000 in 1998. There are several reasons for the increase: ostage increased in January 1999, Employee education programs were highly promoted, and Advertising was increased to promote the new services available through the Bank's affiliation with T.H.E. for investment services. FEDERAL INCOME TAXES The provision for income taxes in 1999 was $1,114,538 compared to $903,804 in 1998. The effective tax rate, which is the ratio of income tax expense to income before taxes, was 22.7% in 1999, up from 21% in 1998. The tax rate for both 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 Finance Statements included as part of this report for further analysis of federal income tax expense for 1999. QUARTERLY RESULTS Net income improved each quarter of 1999 as the portfolio of loans and investments grew and interest rates were rising. Other income also increased, peaking in the third quarter with $339,000 earned from July 1 to September 30. Lower expenses in the third quarter at $1,218,000 made that quarter the highest earning quarter of 1999 with $1,441,000 before taxes.
Quarter Ended 1999 Quarter Ended 1998 31-MAR 30-JUN 30-SEP 31-DEC 31-MAR 30-JUN 30-SEP 31-DEC ------ ------ ------ ------ ------ ------ ------ ------ Interest Income ......................$4,208 $4,275 $4,461 $4,679 $4,042 $4,085 $4,146 $4,338 Interest Expense ..................... 2,068 2,045 2,122 2,246 2,017 2,005 2,096 2,073 Net Interest Income .................. 2,140 2,230 2,339 2,434 2,025 2,080 2,050 2,265 Provision for Loan Loss .............. (60) (60) (60) (60) (38) (38) (55) (60) Securities Gains/Losses .............. 6 57 41 (19) 27 0 21 (1) Other Income ......................... 275 287 339 321 270 279 290 337 Other Expense ........................(1,298) (1,351) (1,218) (1,441) (1,286) (1,198) (1,294) (1,312) Income Before taxes .................. 1,063 1,163 1,441 1,234 998 1,070 1,012 1,229 Income Taxes ......................... (212) (266) (377) (260) (205) (228) (202) (269) Net Income ........................... 851 897 1,064 975 793 842 810 960 Primary Earnings per common share .... 0.39 0.42 0.49 0.45 0.36 0.39 0.37 0.44 Note: All per share data has been adjusted to reflect the 5 for 2 stock split which was effective September 1998.
FINANCIAL CONDITION The Corporation's financial condition can be evaluated in terms of trends in its sources and uses of funds. Table 7 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
1999 1998 1997 Average Increase (Decrease) Average Increase (Decrease) Average Funding Uses BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT BALANCE ------- ------ ------- ------- ------ ------- ------- Real Estate Loans .................... 82,534 $6,018 7.87% $76,516 $874 1.16% $75,642 Consumer Loans ....................... 17,739 3,700 26.36% 14,039 (4,264) (23.30)% 18,303 Commercial Loans ..................... 37,283 7,121 23.61% 30,162 16,353 118.42% 13,809 Tax Exempt Loans ..................... 7,801 (865) (9.98)% 8,666 2,638 43.76% 6,028 Other Loans .......................... 367 (4,942) (93.09)% 5,309 4,972 1475.37% 337 Total Loans .......................... 145,724 134,692 114,119 Less Allowance for Loan Loss ......... (1,716) (1,710) (1,694) Total Loans with Loan Loss ........... 144,008 11,026 8.29% 132,982 20,557 18.29% 112,425 Taxable Securities ................... 64,326 4,190 6.97% 60,136 (5,265) (8.05)% 65,401 Non-Taxable Securities ............... 28,667 (270) (0.93)% 28,937 4,184 16.90% 24,753 Total Securities ..................... 92,993 3,920 4.40% 89,073 (1,081) (1.20)% 90,154 Fed Funds Sold ....................... 2,353 1,593 209.61% 760 (961) (55.84)% 1,721 Total Uses ........................... $239,354 $16,539 7.42% $222,815 $18,515 9.06% $204,300
1999 1998 1997 Average Increase (Decrease) Average Increase (Decrease) Average Funding Sources BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT BALANCE ------- ------ ------- ------- ------ ------- ------- Interest Bearing Demand Deposits ......... 16,066 $1,008 6.69% $15,058 $1,679 12.55% $13,379 Regular Savings Deposits ................. 33,416 1,664 5.24% 31,752 2,882 9.98% 28,870 Money Market Savings Deposits ............ 38,900 499 1.30% 38,401 (2,128) (5.25)% 40,529 Time Deposits ............................ 102,011 8,121 8.65% 93,890 4,982 5.60% 88,908 Total Interest Bearing Deposits .......... 190,393 11,292 6.30% 179,101 7,415 4.32% 171,686 Other Borrowing .......................... 10,135 4,106 68.10% 6,029 2,972 97.22% 3,057 Short Term Federal Funds Borrowed......... 4,694 5,399 3,057 Long Term Federal Funds Borrowed.......... 5,441 630 0 Total Funds Borrowed ..................... 10,135 6,029 3,057 Total Deposits and Funds Borrowed......... 200,528 185,130 174,743 Other Sources, net ....................... 38,826 37,685 29,557 Total Sources ............................$239,354 $222,815 $204,300
LOANS RECEIVABLE Average loans receivable, net of loan reserves, increased $11,026 or 8.29% in 1999 compared to an increase of $20,557 or 18.29% in 1998. This year we experienced less of an increase due to the competition for quality loans in our market area in the commercial and real estate categories. LOAN PORTFOLIO TYPES All categories of loans showed growth in 1999. The 1997 to 1998 numbers show a variance between commercial and mortgages caused by a reclassification of commercial mortgages from the mortgage group to the commercial group. 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
(In thousands) DEC 1999 DEC 1998 DEC 1997 DEC 1996 DEC 1995 -------- -------- -------- -------- -------- Commercial .................... 47,771 $44,349 $14,796 $9,787 $10,920 Real Estate Mortgage .......... 85,528 79,369 96,192 83,484 73,699 Real Estate Construction ...... 0 0 9 0 0 Installment ................... 19,281 17,756 16,035 14,169 13,643 Total Loans ........................ 152,580 141,474 127,032 107,440 98,262 Deferred Loans ..................... (194) (225) (246) (290) (311) Total Loans, net of Deferred ....... 152,386 141,249 126,786 107,150 97,951 Allowance for Loan Loss ............ (1,756) (1,713) (1,676) (1,665) (1,488) Net Loans .......................... $150,630 $139,536 $125,110 $105,485 $96,463
LOAN MATURITIES The Bank has 13.32% of its loans maturing within the next year. Of that 13.31%, almost half of the maturing loans are commercial loans with the remainder almost split equally between mortgages and installment loans. In the one to five year maturity range, the Bank has 30.40% of its portfolio. The over 5 year maturity group makes up 56.1% of the portfolio which reflects the Bank's significant investment in mortgages. Mortgages are 55.99% of the total loan portfolio.
One Year Over One Year Over Total OR LESS WITHIN FIVE YEARS FIVE YEARS LOANS Commercial ................................. $9,058 $17,802 $20,911 $47,771 Real-Estate Construction ................... 0 0 0 0 Real-Estate Mortgage ....................... 5,450 19,669 60,215 85,334 Installment ................................ 5,799 8,988 4,494 19,281 Total ......................................$20,307 $46,459 $85,620 $152,386 Total Loans with Predetermined Rates ....... 12,663 28,168 26,315 67,146 Total Loans with Variable Rates ............ 7,644 18,291 59,305 85,240 Total ......................................$20,307 $46,459 $85,620 $152,386
NON-PERFORMING LOANS 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 non-accrual status if it is in the process of collection and is either guaranteed or well secured.
(In thousands) December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Nonaccrual and Restructured ....................................... $178 $516 $1,027 $1,544 $1,349 Loans Past Due 90 or More Days, Accruing Interest ................. 90 12 175 137 44 Total Nonperforming Loans ......................................... 268 528 1,202 1,681 1,393 Foreclosed Assets ................................................. 250 351 0 99 430 Total Nonperforming Assets ........................................ $518 $879 $1,202 $1,780 $1,823 Nonperforming Loans to Total Loans at Period-end .................. 0.18% 0.38% 0.95% 1.56% 1.44% Nonperforming Assets to Period-end Loans and Forclosed Assets ..... 0.34% 0.62% 0.95% 1.56% 1.85%
(In thousands) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Interest Income That Would Have Been Recorded Under Original Items ........ $28 $63 $96 $163 $143 Interest Income Recorded During the Period ................................ 3 7 24 31 26 Commitments To Lend Additional Funds ...................................... 0 94 0 0 0
The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluation of the portfolio by management. This evaluation considers several factors including, but not limited to current economic conditions, loan portfolio's composition, prior loan loss experience, trends in portfolio's volume, and management's estimation of future potential losses. Management believes that the allowance for loan losses is adequate. Table 12 is an analysis of the allowance for loan losses for the past 5 years.
(In thousands) DEC 1999 DEC 1998 DEC 1997 DEC 1996 DEC 1995 -------- -------- -------- -------- -------- Average Total Loans .....................................145,724 $134,692 $114,119 $102,525 $95,379 Balance at Beginning of Period .......................... 1,713 1,676 1,664 1,488 1,484 Charge Offs Commercial ......................................... 46 94 38 20 301 Residential Real Estate ............................ 87 31 50 26 122 Installment ........................................ 108 70 61 31 39 Total charge Offs ....................................... 241 195 149 77 462 Recoveries Commercial ......................................... 2 14 4 26 1 Real Estate ........................................ 4 4 17 1 0 Installment ........................................ 37 24 10 6 15 Total Recoveries ........................................ 43 42 31 33 16 Net Charge-Offs ......................................... 198 153 118 44 446 Provision for Loan Losses ............................... 220 190 130 220 450 Balance at End of Period ................................ $1,756 $1,713 $1,676 $1,644 $1,488 Allowance for Credit Losses to Period-end Total Loans ... 1.15% 1.22% 1.32% 1.55% 1.54% Allowance for Credit Losses to Nonaccrual Loans ......... 985.61 331.88 163.24 107.80 110.29 Net Charge-Offs to Average Loans ........................ 0.14 0.11 0.09 0.04 0.47
Commercial charge offs were down $48,000 in 1999 compared to 1998. The charge offs in 1998 were higher due to charging off $90,786 on two commercial loans. Real estate charge offs were up $56,000 and installment charge offs were up $38,000 in 1999. These increases were not caused by significant losses in any one loan, but more to increased frequency of bankruptcies and repayment problems. As of year end 1999, management believes that the allowance for loan loss is adequate.
(In thousands) DEC 1999 DEC 1998 DEC 1997 DEC 1996 DEC 1995 -------- -------- -------- -------- -------- Commercial ....................... $328 $320 $321 $687 $734 Real Estate Mortgage ............. 351 342 343 197 165 Real Estate Construction ......... 1 1 1 1 0 Installment ...................... 133 130 129 118 184 Unallocated ...................... 943 920 882 661 405 Total Allowance for Loan Losses ....... $1,756 $1,713 $1,676 $1,664 $1,488
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, 1999 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. The interest rate environment in 1999 caused capital adjustments for unrealized losses, due to lower market values as interest rates increased. Table 14 shows the book value and average yield of securities by maturity or call date at December 31, 1999.
(In thousands) 1 Year 1-5 5-10 Over 10 or Less Years Years Years TOTAL Book Average Book Average Book Average Book Average Book Average VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Available for Sale US Government Treasury .............$1,999 6.37% $2,490 6.54% $0 0.00% $0 0.00% $4,489 6.46% US Government Agency ............... 11 8.96% 7,819 6.52% 15,034 6.44% 377 6.91% 23,241 6.48% State/County/Municipal Obligation .. 1,320 6.27% 3,708 4.02% 6,138 5.26% 18,933 5.02% 30,099 5.00% Mortgage-Baked Securities .......... 0 0.00% 2,468 6.10% 6,899 6.10% 17,378 6.45% 26,745 6.33% Corporate/Other Securities ......... 1,468 6.20% 3,527 6.18% 3,783 6.62% 3,360 6.70% 12,138 6.46% TOTAL Available for Sale ...........$4,798 6.30% $20,012 5.95% $31,854 6.16% $40,048 5.80% $96,712 5.97%
Table 15 shows the balance of securities for the past three years on December 31. More details on Investments by Market Value can be found in Note 15 of the Consolidated Financial Statement.
(In thousands) 1999 1998 1997 ---- ---- ---- Treasury/Agency Obligation .......... $26,911 $23,008 $32,513 State/Municipal Obligation .......... 29,097 30,230 29,474 Mortgage backed Securities .......... 25,698 30,283 19,215 Other Securities .................... 11,845 9,754 7,936 Total Investment Securities ......... $93,551 $93,275 $89,138 Available for Sale (Fair Value) ..... $93,551 $93,275 $89,138 Held to Maturity (Amortized) ........ 0 0 0 Total Investment Securities ......... $93,551 $93,275 $89,138
DEPOSITS Table 16 shows the average deposits and average rates for 1999, 1998, and 1997. The bank was able to control its average interest cost on liabilities to 4.23% in 1999 from 4.42% in 1998 and 4.83% in 1997.
1999 1998 1997 Average Yield/ Average Yield/ Average Yield/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE Deposits Interest Bearing Demand ............ 16,066 225 1.40% 15,058 250 1.66% 13,379 230 1.72% Regular Savings .................... 33,416 887 2.65% 31,752 904 2.85% 28,872 828 2.87% Money Market Savings .............. 38,900 1,511 3.88% 38,401 1,565 4.08% 40,529 1,760 4.34% Time ............................... 102,011 5,364 5.26% 93,890 5,187 5.52% 88,908 4,920 5.53% Total Interest Bearing Deposits .... 190,393 7,987 4.20% 179,101 7,906 4.41% 171,686 7,738 4.51% Other Borrowings ................... 10,135 493 4.86% 6,029 285 4.73% 3,057 176 5.76% Total Interest Bearing Liabilities . 200,528 8,480 4.23% 185,130 8,191 4.42% 174,743 7,914 4.53% Non-Interest Bearing Demand Deposits 25,527 22,247 18,735
The Corporation's primary source of funds continues to be core deposit accounts that include interest bearing demand, non-interest bearing demand, savings, and time deposits under $100,000. Core deposits increased an average of $14,736,000 or 7.83% in 1999 compared to an increase of $ 10,927,000 or 5.73% in 1998. The large increase in 1997 over 1996 was due to the purchase of two Wyoming County branch offices. The largest category of core deposits and the primary source of funds continues to be time deposits under $100,000. This category includes certificates of deposits and individual retirement accounts that allow customers to invest their funds at selected maturity ranges from 3 months to 5 years. The average balance of funds increased $8,121,000 or 11.56% in 1999 and $4,982,000 or 5.60% in 1998. The Company has no foreign deposits in domestic offices. Average Interest Bearing Demand Deposits accounts and Savings deposits totaled $49,482,000 in 1999 and $46,810,000 in 1998 showing a growth of $2,672,000 this year. These deposits are lower cost sources of funds for the bank and help the bank to achieve more net interest income than higher paying Money Market and Time Deposit accounts. Non-interest checking accounts have also grown substantially over the last two years. In the 1997 acquisition year, the average Demand Deposits grew from $13,822,000 to $18,735,000, an increase of $4,913,000 or 35.54%. In 1998 , they grew another 18.75% from $18,735,000 to $22,247,000. In 1999, this category of deposits again grew by $3,280,000 or 14.78%. Management considers these accounts a very important part of our balance sheet and will continue to seek ways to encourage growth in non-interest checking accounts. MATURITIES OF TIME DEPOSITS The maturities on the time deposits over $100,000 are spread fairly evenly throughout the four categories. The largest percentage, 30.71%, is in the first category of three months or less.
(In thousands) 1999 1998 AMOUNT PERCENT AMOUNT PERCENT Three Months or Less ................... $4,348 30.71 $3,242 22.30 Over Three Months through Six Months ... 3,083 21.78 3,793 26.09 Over Six Months through Twelve Months .. 3,491 24.65 3,764 25.89 Over Twelve Months ..................... 3,237 22.86 3,736 25.72 Total .................................. $14,159 100.00 $14,535 100.00
SHORT TERM AND TERM BORROWINGS Borrowed funds are utilized when timing differences occur between the purchase of new assets and the maturity of existing assets. Management also uses borrowings as an asset/liability tool to match the repricing characteristics of certain earning assets, allowing for core funds to be used for additional loan volume or security purchases.
(In thousands) 1999 1998 ---- ---- Other Short Term Borrowings ...... $5,851 $4,032 FHLB Term Borrowings ............ 12,000 5,000 Total ........................... $17,851 $9,032
The Corporation has an arrangement with the Federal Home Loan Bank (FHLB) that allows for borrowings up to a percentage of qualifying assets. As of December 31, 1999 and 1998, the Corporation had a maximum borrowing capacity of $97,471,000 and $87,046,000 respectively. Borrowings from the FHLB include repurchase agreements and term borrowings. In addition, the Corporation has an agreement to borrow up to $7,000,000 from Atlantic Central Bankers Bank (ACBB) in federal funds for periods of up to 14 days at a time. SUMMARY OF SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Information concerning securities sold under agreements to repurchase is summarized as of December 31, 1999. Securities sold under agreement to repurchase generally mature within 14 days from the transaction date. The securities underlying the agreement were under the control of the Corporation. Short term advances at FHLB on December 31, 1999 and 1998 were $700,000 and $2,190,000 respectively. The interest rate paid on these funds on December 31, 1999 was 5.00% and 5.49% on December 31, 1998. No Federal Funds purchased under the agreement with ACBB were outstanding at December 31, 1999 or 1998. Term borrowings are term funds from the FHLB under various notes. There was a note taken November 16, 1998, in the amount of $5,000,000 with a fixed interest rate of 4.64%. The note has a final maturity date of November 17, 2003. This note has a convertible option that, after two years, allows the FHLB to change the note to an adjustable rate advance at 3 months LIBOR plus 10 basis points. The option also allows the Corporation to put the funds back to the FHLB at no charge should the FHLB choose to exercise the option. There was a note taken on November 19, 1999, in the amount of $2,000,00 with a fixed interest rate of 5.29%. This note has a final maturity date of November 19, 2009. It also has a conversion option that allows the FHLB to change the rate after six months and then every three months thereafter. There was a note taken on December 17, 1999, in the amount of $5,000,000 with a fixed interest rate of 5.60%. The note has a final maturity date of December 17, 2004. It has a conversion option that allows the FHLB to change the rate after the first three months and then every three months thereafter. CAPITAL REQUIREMENT RATIOS The Corporation places a significant emphasis on maintaining a very strong capital base. The capital resources of the Corporation consist of two major components of regulatory capital; stockholders' equity and the allowance for loan losses. Current capital guidelines, issued by federal regulatory authorities, require both banks and bank holding companies to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposures related to a bank's on and off balance sheet items. Risk based capital guidelines redefine the components of capital, categorize assets into risk classes, and include certain off-balance sheet items in the calculation of capital requirements. The components of risk-based capital are suggested as Tier I and Tier II capital. Tier I capital is composed of total stockholders' equity reduced by goodwill and other intangible assets. Tier II capital is comprised of the allowance for loan losses and any qualifying debt obligations. Regulators also have adopted minimum requirements of 4% Tier I capital and 8% of risk-adjusted assets in total capital. The Corporation is also subject to leverage capital requirements. This requirement compares capital (using the definition of Tier I capital) to total balance sheet assets and is intended to supplement the risk-based capital ratios in measuring capital adequacy. The guidelines set a minimum leverage ratio of 3% for institutions that are highly rated in terms of safety and soundness, and that are not experiencing or anticipating any significant growth. Other institutions are expected to maintain capital levels of at least 1% or 2% above the minimum. As of December 31, 1999 the Corporation had a leverage capital ratio of 10.02%.
(In thousands) December 31 Regulatory 1999 1998 REQUIREMENT ---- ---- ----------- Tier 1 Capital to risk (Weighted) ...........16.99% 16.90% 4.00% TOTAL Capital to Risk (Weighted) ............18.15% 18.15% 8.00% Capital Leverage Ratio ......................10.02% 9.60% 3.00%
CAPITAL ANALYSIS On September 15, 1998, the Corporation issued a 5 for 2 stock split. Accordingly, issued shares of common stock increased 1,310,138 shares. On the same date and in conjunction with the 5 for 2 stock split, the par value per share was reduced from $5 to $2. Also, in the same proportion, authorized but unissued stock increased from 5 million to 12.5 million shares. During 1999 the Corporation paid cash dividends to its shareholders amounting to $1,129,062 compared to $995,407 in 1998. On a per share basis, dividends for 1999 increased 13.04% to $0.52 compared to $ 0.46 in 1998. The indicated rate for 2000 is $ 0.56 per share representing a 7.6% increase over 1999 dividends. The Corporation has continued to purchase common stock of the Corporation in the open market. These purchases are carried as treasury stock in the equity section of the Corporation balance sheet. On December 31, 1999, treasury stock totaled $1,050,391 representing 63,559 shares purchased and 4,277 shares reissued through exercised options and the dividend reinvestment plan. During 1999, 13,635 shares were purchased at an average price per share of $25.77. During 1998, 8,249 shares were purchased at an average price per share of $24.14. Per share prices are adjusted to recognize the 5 for 2 stock split paid in September 1998. Treasury stock purchases have the effect of reducing the equity of the Corporation while increasing the earnings per share of the receiving shareholder. During 1999, options were exercised by three parties. The total number of shares exercised equaled 1,750. The parties paid $39,675 to exercise those options, making the average option price $22.67. For a detailed comparison of shareholder equity for 1999 and 1998, refer to Note 17 of the Consolidated Financial Statements. Stockholders' equity is adjusted for the effect of unrealized appreciation or depreciation, net of taxes, on securities classified available for sale. As of December 31, 1998 and 1997, stockholders' equity included $561,470 and $370,569 respectively in unrealized appreciation. In 1999, the total unrealized depreciation net of taxes is $2,086,929. This depreciation is due to the rise in interest rates in 1999 and the effect that rise had on the market value of our security portfolio. As shown in Table 20, the return on average equity increased to 14.08% in 1999 from 13.23% in 1998. The change in average assets ratio from 22.06% in 1997 to 7.86% in 1998 reflects the impact of the purchase of the branches in Wyoming County in 1997.
Relationship Between Significant Financial Ratios 1999 1998 1997 ---- ---- ---- Return on Average Equity ............ 14.08% 13.23% 12.20% Earnings Retained ................... 70.18% 70.77% 75.58% Internal Capital Growth ............. (0.87)% 9.36% 10.01% Change in Average Assets ............ 8.61% 7.86% 22.06% Equity to Average Assets ............ 10.54% 11.10% 11.34% Growth in Average Equity ............ 3.93% 17.54% 10.74% *Internal capital growth is equal to return on average equity multiplied by earnings retained
INTEREST RATE SENSITIVITY Interest rate sensitivity is a function of the repricing characteristics of the Corporation's asset and liabilities. Each asset and liability reprices either at maturity or during the life of the instrument. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing at a future period of time. These differences are known as interest sensitivity gaps. The principle objectives of asset/liability management are to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Corporation actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. The traditional maturity "gap" analysis, which reflects the volume difference between interest rate sensitive assets and liabilities during a given time period, is reviewed regularly by management. A positive gap occurs when the amount of interest sensitive assets exceeds interest sensitive liabilities. The position would contribute positively to net income in a rising rate environment. Conversely, if the balance sheet has more liabilities repricing than assets, the balance sheet is liability sensitive or negatively gapped. Management contrives to monitor sensitivity in order to avoid overexposure to changing interest rates. Another way management reviews its sensitivity position is through "simulation". In simulation, the Corporation projects future net interest streams in light of the current gap position. Various interest rate scenarios are used to measure levels of interest income associated with potential changes in our operating environment. Management can not predict the direction of interest rates or how the mix of assets and liabilities will change. The use of this information will help formulate strategies to minimize the unfavorable effect on net income caused by interest rate changes. Limitations of gap analysis in the following gap schedule include assets and liabilities which contractually reprice within the same period may not reprice at the same time or to the same extent, changes in market interest rates do no affect all assets and liabilities to the same extent or at the same time, and interest rate gaps reflect the Corporation's position on a single day (December 31, 1999 in the case of Table 21) while the Corporation continually adjusts its interest sensitivity throughout the year.
(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 ............................................. 14,056 12,060 20,375 60,802 43,337 Securities ........................................ 22,397 2,873 9,485 42,498 18,409 Federal Funds Sold ................................ 0 0 0 0 0 Total Rate Sensitive Assets ....................... 36,453 14,933 29,860 103,300 61,746 Cummulative Rate Sensitive Assets ................. 36,453 51,386 81,246 184,546 246,292 RATE SENSITIVE LIABILITIES Interest Bearing Checking ......................... 1,473 0 0 0 13,258 Money Market Deposits ............................. 27,579 1,600 0 0 8,000 Regular Savings ................................... 9,629 33 218 2 26,431 CDs and IRAs ...................................... 21,976 17,562 25,599 35,045 1,601 Short-term Borrowings ............................. 10,851 2,000 0 5,000 1,174 Total Rate Sensitive Liabilities .................. 71,508 21,195 25,817 40,047 50,464 Cummulative Rate Sensitive ........................ $71,508 92,703 118,520 158,567 209,031 Liabilities Period Gap ........................................ ($35,055) ($6,262) $4,043 $63,253 $11,282 Cummulative Gap ................................... (35,055) (41,317) (37,274) 25,979 37,261 Cummulative Rate Sensitive Assets to Liabilities.. 50.98% 55.43% 68.55% 116.38% 117.83% Cummulative Gap to Total Assets ................... (13.14)% (15.81)% (14.26)% 9.94% 14.26%
The Corporation's asset/liability reporting format incorporates interest bearing demand deposits and savings deposits as rate sensitive in various time frames. This accounts for the fact that a change in interest rates will not affect the rates paid on these products as it would to products more closely tied to a market index. As of December 31,1999, the gap analysis would indicate that net income would not be significantly influenced by small fluctuations in interest rates either up or down. However, market rates on interest bearing demand deposits and savings deposits are currently very low and management feels that it would be unlikely that these rates could be reduced significantly. Conversely, the rate sensitivity of these liabilities will increase in a rising rate environment due to market competition until rates return to pre-1992 levels (approximately 5% for savings and demand deposits). In 1999 management maintained a level of interest rate risk that was consistent with internally established acceptable level of risk. LIQUIDITY Liquidity management involves meeting the funds flow requirements of customers who may either be depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Liquid assets consist of vault cash, securities available for sale, and maturities of earning assets of one year or less. The Corporation's principal source of liquidity is the securities portfolio. As disclosed in Note 3 of the Consolidated Financial Statements, as of December 1999, the value of securities maturing in less than 1 year equals $3,324,502. In addition to those maturities, the Corporation receives monthly principal repayments on agencies and mortgage-backed securities. In 1999 the total was $9,274,789. Other sources of funds are principal paydowns and maturities in the loan portfolio. The loan maturity schedule (Table 9) illustrates the maturities of loans. Liquidity can also be managed by maintaining a capability to borrow funds. The Corporation has arranged for short-term borrowings through the FHLB and ACBB as discussed in the Short-Term Borrowing section of this report. LOAN CONCENTRATION AND OFF BALANCE SHEET RISK Our Bank is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments may include and involve commitments to extend credit, standby letters of credit, elements of credit, and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Standby letters of credit commit the Company 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. These 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. Our exposure to credit loss is essentially the same for these items as that involved in extending loans to customers. We use the same credit policies in making commitments and conditional obligations as we do for on balance sheet instruments. Collateral is obtained based on management's credit assessment of the particular customer. Please refer to Note 13 in the Notes to Consolidated Financial Statements for a more detailed account. 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. FASB AND OTHER DISCLOSURES The following can be found under Note 1 of the Notes to Consolidated Financial Statements: SFAS No. 130 Reporting Comprehensive Income SFAS No. 131 Segment Reporting SFAS No. 133 Accounting Principles Issued and Not Yet Adopted SFAS No. 134 Accounting for Mortgage-backed Securities retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Activities SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of SFAS No. 133 YEAR 2000 COMPLIANCE The company adopted a Year 2000 policy to address the "Year 2000" issue concerning the inability of certain information systems and automated equipment to properly recognize and process dates containing the Year 2000 and beyond. If not corrected, these systems and equipment could have produced inaccurate or unpredictable results. The Company, similar to most financial service providers, was particularly vulnerable to the potential impact of the Year 2000 issue due to the nature of financial information. In order to address the Year 2000 issue, the company developed and implemented a five-phase compliance plan divided into the following major components: Awareness Assessment Renovation Validation & Testing Implementation Financial institution regulators intensively focused upon Year 2000 exposure, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification was addressed as a key safety and soundness issue in conjunction with regulatory exams. The FFIEC highly prioritized Year 2000 compliance in order to avoid major disruptions to the operations of financial institutions and the country's financial systems when the new century begins. The Bank is subject to supervision by the Comptroller of the Currency, which regularly conducted reviews of the safety and soundness of the Banks operations, including Year 2000. There was no interruption of the company's business due to Year 2000. CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION Except for historical data, this report may be deemed to contain forward-looking information. Examples of this information may include projections or statements regarding future earnings or losses, projections or statements regarding interest income and other income, projections or statements regarding growth prospects and other financial terms, statements of plans and objectives of the Board of Directors, statements of future economic performance, and statements of assumptions such as economic conditions in the market areas served by the Corporation and the Bank, underlying other statements and statements about the Corporation and the Bank and their respective businesses. Such forward looking information can be identified by the use of forward looking terminology such as "believes", "expects", "may", "intends", "will", "should", "anticipates", or the negative or variation of such terminology. No assurance can be given that the future results covered by the forward looking information will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward looking information. Important factors that could impact operating results may include the effects of changing economic conditions in the market areas of the Corporation, the Bank, and nationally, credit risks of lending activities, significant changes in interest rates, changes in federal and state banking laws and regulations, funding costs, and other external developments which could materially affect business and operations. 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.
12/31/00 12/31/01 12/31/02 12/31/03 -------- -------- -------- -------- Investments .........................$18,969,571 $16,165,488 $13,197,707 $8,351,927 Average Interest Rate ............... 6.11% 6.11% 6.00% 6.02% Loans ...............................$20,306,772 $15,182,179 $11,808,565 $10,095,114 Average Interest Rate ............... 8.33% 8.44% 8.42% 8.38% Liabilities: Deposits ............................$99,085,382 $21,869,582 $7,262,932 $3,448,473 Average Interest Rate ............... 4.68% 4.84% 4.90% 4.92%
Greater than 12/31/04 5 YEARS TOTAL FAIR VALUE -------- ------- ----- ---------- Assets: Investments ......................... $6,584,189 $28,797,505 $92,066,387 $92,066,387 Average Interest Rate ............... 5.97% 6.19% 6.19% Loans ............................... $9,373,321 $83,864,064 $150,630,015 $150,068,867 Average Interest Rate ............... 8.34% 8.23% 8.23% Liabilities: Deposits ............................ $2,465,291 $81,292,631 $215,424,291 $215,392,253 Average Interest Rate ............... 4.93% 3.82% 3.82%
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY TABLE OF CONTENTS DECEMBER 31, 1999, 1998 AND 1997 PAGE Independent Auditor's report 31 Financial statements: Consolidated balance sheets 32 Consolidated statements of income 33 Consolidated statements of comprehensive income 34 Consolidated statements of stockholders' equity 35 Consolidated statements of cash flows 36-37 Notes to consolidated financial statements 38-56 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Peoples Financial Services Corp. and Subsidiary We have audited the accompanying consolidated balance sheets of Peoples Financial Services Corp. and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 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 generally accepted auditing standards. 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 Subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. February 10, 2000 PROCIAK & ASSOCIATES, L.L.C. Wilkes-Barre, Pennsylvania PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
December 31, December 31, 1999 1998 ---- ---- ASSETS Cash and due from banks ......................................................... $ 3,372,554 $ 2,083,913 Interest-bearing deposits in other banks ........................................ 4,095,992 2,724,780 Investment securities available for sale ........................................ 92,066,386 93,175,068 Loans ........................................................................... 152,396,398 141,282,569 Less: Unearned income ....................................................... (10,756) (34,272) Allowance for loan losses ............................................. (1,755,629) (1,712,657) ------------- ------------- Net loans .................................................................... 150,630,013 139,535,640 Premises and equipment .......................................................... 3,455,270 3,523,053 Accrued interest receivable ..................................................... 1,995,981 1,781,561 Other assets .................................................................... 5,703,004 4,378,362 ------------- ------------- Total assets ............................................................. $ 261,319,200 $ 247,202,377 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ....................................................... $ 25,419,318 $ 24,262,777 Interest bearing ........................................................... 190,004,973 185,618,275 ------------- ------------- Total deposits ........................................................... 215,424,291 209,881,052 Short-term borrowings ........................................................ 5,850,521 4,031,975 Long-term borrowings ......................................................... 12,000,000 5,000,000 Accrued interest payable ..................................................... 717,941 702,889 Other liabilities ............................................................ 516,573 540,767 ------------- ------------- Total liabilities ........................................................ 234,509,326 220,156,683 ------------- ------------- Stockholders' equity: Common stock, par value $2 per share, 12,500,000 shares authorized; 2,168,218 and 2,177,576 shares issued and outstanding at December 31, 1999 and 1998, respectively ........................................... 4,455,000 4,455,000 Surplus ...................................................................... 4,512,333 4,455,000 Retained earnings ............................................................ 20,979,861 18,322,095 Accumulated other comprehensive income (loss) ................................ (2,086,929) 561,470 Less: treasury stock, at cost (59,282 and 49,924 in 1999 and 1998, respectively) ......................................................... (1,050,391) (747,871) ------------- ------------- Total stockholders' equity .............................................. 26,809,874 27,045,694 ------------- ------------- Total liabilities and stockholders' equity .............................. $ 261,319,200 $ 247,202,377 ============= =============
See notes to financial statements PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Interest income: Interest and fees on loans ................................. $12,056,931 $11,447,692 $ 9,995,843 Interest and dividends on investments: Taxable 3,821,456 3,472,481 4,255,842 Tax exempt 1,464,074 1,486,960 1,285,145 Dividends ................................................ 126,384 89,737 60,533 Interest on deposits in other banks ........................ 39,012 45,153 34,684 Interest on federal funds sold 115,740 41,529 92,678 Total interest income .................................. 17,623,597 16,583,552 15,724,725 ----------- ----------- ----------- Interest expense: Interest on deposits ....................................... 7,987,930 7,906,294 7,737,668 Interest on short-term borrowings .......................... 213,595 275,041 176,390 Interest on long-term borrowings ........................... 279,516 9,667 -0- ----------- ----------- ----------- Total interest expense ................................. 8,481,041 8,191,002 7,914,058 ----------- ----------- ----------- Net interest income .................................... 9,142,556 8,392,550 7,810,667 Provision for loan losses ..................................... 240,000 190,000 130,000 ----------- ----------- ----------- Net interest income after provision for loan losses ........................................ 8,902,566 8,202,550 7,680,667 ----------- ----------- ----------- Other income: Service charges and customer service fees .................. 1,187,064 1,108,023 891,489 Other income ............................................... 34,448 40,700 29,278 Investment securities gains, net ........................... 85,071 47,494 217,104 ----------- ----------- ----------- Total other income ..................................... 1,306,583 1,196,217 1,137,871 ----------- ----------- ----------- Other expenses: Salaries and employee benefits ............................. 2,534,316 2,395,055 2,282,412 Occupancy expense, net ..................................... 323,250 319,234 323,532 Equipment expense .......................................... 382,862 435,631 388,857 FDIC insurance and assessments ............................. 91,789 87,683 81,410 Professional fees and outside services ..................... 196,714 190,676 192,530 Computer service and supplies .............................. 306,090 268,294 359,024 Taxes, other than payroll and income ....................... 247,238 222,267 203,719 Other operating expenses ................................... 1,225,514 1,170,750 1,162,176 ----------- ----------- ----------- Total other expense .................................... 5,307,773 5,089,590 4,993,660 ----------- ----------- ----------- Income before taxes ........................................... 4,901,366 4,309,177 3,824,878 Provision for income tax ...................................... 1,114,538 903,804 813,619 ----------- ----------- ----------- Net income .................................................... $ 3,786,828 $ 3,405,373 $ 3,011,259 =========== =========== =========== Earnings per share - basic .................................... $ 1.74 $ 1.56 $ 1.38 =========== =========== =========== Earnings per share - diluted .................................. $ 1.74 $ 1.56 $ 1.38
See notes to financial statements PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Net income ..................................................... $ 3,786,828 $ 3,405,373 $ 3,011,259 ----------- ----------- ----------- Other comprehensive income (loss) before tax: Unrealized holding gains (losses) on securities available for sale arising during the period ........... 336,738 1,217,825 (3,927,655) Reclassification adjustment ............................... (47,494) (132,343) ----------- ----------- ----------- (85,071) Other comprehensive income (loss) before tax ................... (4,012,726) 289,244 1,085,482 Federal income tax expense (benefit) ...................... (1,364,327) 98,343 369,064 ----------- ----------- ----------- Other comprehensive income (loss), net of tax (benefit) ........ (2,648,399) 190,901 716,418 ----------- ----------- ----------- Total comprehensive income ..................................... $ 1,138,429 $ 3,596,274 $ 3,727,677 =========== =========== ===========
See notes to financial statements PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED OTHER COMMON RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL ----- ------- -------- ----- ----- ----- Balance, December 31, 1996 ........................ $4,455,000 $4,455,000 $13,636,162 $(345,849) $(486,735) $21,713,578 Net income, 1997 .................................. 3,011,259 3,011,259 Cash dividends paid, 1997 ($.34 per share) ........ (735,292) (735,292) Treasury stock purchase ........................... (62,040) (62,040) Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $369,064 ................................. 716,418 716,418 ------------ ----------- ----------- ----------- ----------- ------------ Balance, December 31, 1997 ........................ 4,455,000 4,455,000 15,912,129 370,569 (548,775) 24,643,923 Net income, 1998 .................................. 3,405,373 3,405,373 Cash dividend paid, 1998 ($.46 per share) ......... (995,407) (995,407) Treasury stock purchase ........................... (199,096) (199,096) Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $98,343 .................................. 190,901 190,901 ------------ ----------- ----------- ----------- ----------- ------------ Balance, December 31, 1998 ........................ 4,455,000 4,455,000 18,322,095 561,470 (747,871) 27,045,694 Net income, 1999 .................................. 3,786,828 3,786,828 Cash dividend paid, 1999 ($.52 per share) ......... (1,129,062) (1,129,062) Shares issued from treasury related to dividend reinvestment plan and stock option plan ........... 57,333 51,835 109,168 Treasury stock purchase ........................... (354,355) (354,355) Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $1,364,327 ............................... (2,648,399) (2,648,399) ------------ ----------- ----------- ----------- ----------- ------------ $4,455,000 $4,512,333 $20,979,861 $(2,086,929) $(1,050,391) $26,809,874 ============ =========== =========== =========== =========== ============
See notes to financial statements PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income .................................................................... $3,786,828 $3,405,373 $3,011,259 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................ 642,477 709,422 639,526 Provision for loan losses .................................................... 240,000 190,000 130,000 (Gain) loss on sale of equipment ............................................. -0- 2,520 4,229 (Gain) loss on sale of other real estate ..................................... 6,005 (20,489) 5,485 Amortization of securities' premiums and accretion of discounts .............. 224,731 134,580 (58,454) Gains on sale of investment securities, net .................................. (85,071) (47,494) (217,104) Deferred income taxes (benefit) .............................................. (31,870) (36,757) 21,630 Increase in accrued interest receivable ...................................... (214,420) (4,653) (346,951) Increase in other assets ..................................................... (233,656) (11,249) (113,755) Increase in accrued interest payable ......................................... 15,052 40,193 63,451 Increase (decrease) in other liabilities ..................................... (24,194) (5,678) 343,439 ----------- ------------ ------------ Net cash provided by operating activities ................................. 4,325,882 4,355,768 3,482,755 ----------- ------------ ------------ Cash flows from investing activities: Proceeds from sale of available for sale securities ......................... 12,072,318 8,110,848 16,552,440 Proceeds from maturities of available for sale securities ................... 9,016,962 15,044,682 40,404,500 Purchase of available for sale securities ................................... (33,407,774) (34,234,619) (73,639,832) Principal payments on mortgage-backed securities ............................ 9,274,789 6,255,232 2,026,089 Net increase in loans ....................................................... (11,450,925) (14,961,260) (19,753,478) Proceeds from sale of premises and equipment ................................ -0- 2,026 2,500 Purchase of premises and equipment .......................................... (316,334) (222,360) (1,215,313) Proceeds from sale of other real estate ..................................... 157,400 58,000 69,251 Purchase of intangible assets ............................................... -0- -0- (3,875,031) ----------- ------------ ------------ Net cash used in investing activities ............................... (14,653,564) (19,947,451) (39,428,874) ----------- ------------ ------------ Cash flows from financing activities: Increase in deposits ........................................................ 5,543,239 16,289,035 36,661,664 Net increase in long-term borrowings ........................................ 7,000,000 5,000,000 -0- Net increase (decrease) in short-term borrowings ............................ 1,818,545 (5,242,859) 2,561,916 Proceeds from sale of treasury stock ........................................ 109,168 -0- -0- Purchase of treasury stock................................................... (354,355) (199,096) (62,040) Cash dividends paid ......................................................... (1,129,062) (995,407) (735,292) ------------ ------------ ------------ Net cash provided by financing activities ........................... 12,987,535 14,851,673 38,426,248 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ........................... 2,659,853 (740,010) 2,480,129 Cash and cash equivalents, beginning of year ................................... 4,808,693 5,548,703 3,068,574 ------------ ------------ ------------ Cash and cash equivalents, end of year ......................................... $7,468,546 $4,808,693 $5,548,703 ============ ============ ============
See notes to financial statements PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Supplemental disclosures of cash paid: Interest paid .......................................................... $ 8,465,989 $ 8,150,809 $ 7,850,607 =========== =========== =========== Income taxes paid ...................................................... $ 1,216,000 $ 864,000 $ 838,000 =========== =========== =========== Non-cash investing and financing activities: Transfers from loans to real estate acquired through foreclosure ....... $ 233,152 $ 545,253 $ 163,854 =========== =========== =========== Proceeds from sales of foreclosed real estate financed through loans ... $ 116,600 $ 200,000 $ 108,500 =========== =========== =========== Total increase (decrease) in unrealized gain (loss) on securities available for sale ........................................ $(4,012,726) $ 289,244 $(1,085,481) =========== =========== ===========
See notes to financial statements PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Peoples Financial Services Corp. and Subsidiary, (the "Company") follow generally accepted accounting principles and have been applied on a consistent basis. The more significant accounting policies are summarized below: BASIS OF PRESENTATION The consolidated financial statements include the accounts of Peoples Financial Services Corp. and its wholly owned subsidiary, Peoples National Bank of Susquehanna County. All 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 deposit products are checking accounts, savings accounts, and certificates of deposit. Its primary lending products are single-family residential loans and loans to small businesses. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. INVESTMENT SECURITIES Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires investments to be classified and accounted for as either held to maturity, available for sale, or trading account securities based on management's intent at the time of acquisition. Management is required to reassess the appropriateness of such classifications at each reporting date. The Company classifies debt securities as held to maturity when management has the positive intent and ability to hold such securities to maturity. Held to maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount. Securities classified as available for sale are those debt 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 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 1: (Cont'd) INVESTMENT SECURITIES (Cont'd) 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 stockholders' equity, net of the related tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Management determines the appropriate classification of securities at the time of purchase and re-evaluates the designations as of each balance sheet date. Equity securities include restricted investments, primarily Federal Home Loan Bank stock which is carried at cost and evaluated for impairment. LOANS Loans 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. A loan is generally considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. The accrual of interest is discontinued when the contractual payment of principal and 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 non-accrual 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. Certain non-accrual loans may continue to perform, that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny and if performance continues, interest income may be recorded on a cash basis based on management's judgment as to collectibility of principal. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses which is charged to operations. Loans, determined to be uncollectible are charged against the allowance account and subsequent recoveries, if any, are credited to the account. The allowance for loan losses related to impaired loans, that are identified for evaluation, is based on discounted cash flows using the loans' initial effective interest rate or the fair value, less selling costs, of the collateral for certain collateral dependent loans. By the time a loan becomes probable of foreclosure, it has been charged down to fair value, less estimated costs to sell. The allowance is maintained at a level believed by management to be sufficient to absorb estimated potential credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of expected future cash flows on impaired loans, which may be susceptible to significant change in the near term. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 1: (Cont'd) 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 Intangible assets are included in other assets and are being amortized over a period of fifteen years using the straight-line method. Amortization for 1999 and 1998 was $258,360. FORECLOSED ASSETS HELD FOR SALE Foreclosed assets held for sale is 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. Any excess of the loan balance over the recorded value is charged to the allowance for loan losses. 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 The provision for income taxes is based on the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred income taxes are provided using 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 amount of assets and liabilities and their tax bases. ADVERTISING COSTS The Company follows the policy of charging marketing and advertising costs to expense as incurred. COMMON STOCK Holders of Company Common Stock are entitled to one vote for each share on all matters voted on by shareholders. Holders of Company Common Stock do not have cumulative voting rights in the election of directors. Holders of Company Common Stock do not have preemptive rights, or any subscription, redemption or conversion privileges. Holders of Company Common Stock are entitled to participate ratably in dividends on the Company Common Stock as declared by the Board of Directors, and are entitled to share ratably in all assets available for distribution to shareholders in the event of liquidation or dissolution of the Company. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 1: (Cont'd) EARNINGS PER COMMON SHARE The Company computes earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)." SFAS 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share exclude dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods' earnings per share calculations have been restated to reflect the adoption of SFAS No. 128. On September 15, 1998, the Company effected a 5-for-2 stock split to shareholders of record on August 15, 1998. In connection with the stock split, the Corporation amended it's articles of incorporation to authorize 12,500,000 shares of $2 par value common stock. Earnings per share amounts and weighted average shares outstanding have been restated to give effect to the stock split. The following data shows the amounts used in computing earnings per share for 1999 and 1998:
INCOME COMMON SHARES NUMERATOR DENOMINATOR EPS ----------- ----------- ----------- 1999 Basic EPS .....................................$3,786,828 2,170,849 $ 1.74 ========= Dilutive effect of potential common stock: Stock options ................................. 2,981 --------- Diluted EPS ...................................$3,786,828 2,173,830 $ 1.74 ========== ========== ======== 1998 Basic EPS .....................................$3,405,373 2,182,804 $ 1.56 ======== Dilutive effect of potential common stock: Stock options ................................. 1,797 --------- Diluted EPS ...................................$3,405,373 2,184,601 $ 1.56 ========== ========== ========
During 1997, there were no potential common stock equivalents. The weighted average number of shares outstanding after the effect of the 5-for-2 stock split was 2,188,281. ACCOUNTING FOR STOCK OPTIONS The Company accounts for stock-based compensation in accordance with the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." This method calculates compensation expense using the intrinsic value method which recognizes as expense the difference between the market value of the stock and the exercise price at grant date. The Company has not recognized any compensation PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 1: (Cont'd) ACCOUNTING FOR STOCK OPTIONS (Cont'd) expense under this method. The Company adopted the reporting disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," which requires the Company to disclose the pro forma effects of accounting for stock-based compensation using the fair value method as described in the accounting requirements of SFAS No. 123. As permitted by SFAS No. 123, the Company continues to account for stock-based compensation under APB opinion No. 25. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS The Company accounts for transfers and servicing of financial assets in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred, derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. It requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the asset sold, if any, and retained interest, if any, based on their relative fair values at the date of transfer. It also provides implementation guidance for servicing of financial assets, securitizations, loan syndications and participations and transfers of loan receivables with recourse. REPORTING COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. The effect of adopting SFAS No. 130 was not material to the Company's financial position or results of operations. SEGMENT REPORTING During 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". This Statement establishes standards for the way public companies report information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures regarding products and services, geographic areas and major customers. The adoption of this Statement had no impact on the Company's financial position or results of operations. DISCLOSURES ABOUT PENSION AND OTHER POST-RETIREMENT BENEFITS During 1998, the Company adopted SFAS No. 132. This Statement: (1) revises employers' disclosures about pension and other post-retirement benefit plans; (2) standardizes the disclosure requirements for benefits of such plans; (3) requires additional information on changes in the benefit obligations and fair value of plan assets that will facilitate financial analysis; and (4) eliminates certain disclosures that are no longer useful. Most of the changes in the disclosure provisions of this Statement address defined benefit plans. The Company's adoption of SFAS No. 132 had no effect on the Company's financial position or results of operations. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 1: (Cont'd) ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE During 1999, the Company adopted SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". The Statement amends SFAS 65, "Accounting for Certain Mortgage Banking Activities." Statement 65, as amended, requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. This Statement further amends SFAS 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interest based on its ability and intent to sell or hold those investments. This Statement conforms the subsequent accounting for securities retained after securitization of mortgage loans by a mortgage banking entity with the subsequent accounting for securities retained after the securitization of other types of assets by nonmortgage banking enterprises. This means that such securities can be classified as held-to-maturity if they conform to the requirements of SFAS 115. The adoption of this statement had no impact on the Company's financial position or results of operations. ACCOUNTING PRINCIPLES ISSUED AND NOT YET ADOPTED In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of SFAS No. 133" was issued. This statement defers the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Management is in the process of evaluating the impact, if any, this statement will have on the Company's financial position or results of operations. CASH FLOWS For the purpose of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks and federal funds sold. 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 become payable. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year's classifications. Note 2: RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The required reserve balance at December 31, 1999 and 1998 was $1,095,000 and $1,017,000, respectively. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 3: INVESTMENT SECURITIES At December 31, 1999 and 1998, the amortized cost and fair values of securities available for sale are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ---- ---- ---- ----- December 31, 1999 U.S. Treasury securities ...................... $ 4,488,848 $ 14,590 $ -0- $ 4,503,438 U.S. Government corporate and agency obligations .......................... 23,241,125 -0- 833,264 22,407,861 Obligations of state and political subdivisions ................................ 30,099,492 -0- 1,002,061 29,097,431 Corporate debt securities ..................... 7,221,929 -0- 306,826 6,915,103 Mortgage backed securities .................... 28,412,905 1,369 1,035,821 27,378,453 Equity securities ............................. 1,764,100 -0- -0- 1,764,100 ----------- ----------- ----------- ----------- ----------- $95,228,399 $ 15,959 $ 3,177,972 $92,066,386 =========== =========== =========== =========== December 31, 1998 U.S. Treasury securities ...................... $10,476,447 $ 248,399 $ -0- $10,724,846 U.S. Government corporate and agency obligations .......................... 12,244,318 55,144 1,708 12,297,754 Obligations of state and political subdivisions ................................ 29,490,805 739,104 -0- 30,229,909 Corporate debt securities ..................... 6,238,663 98,621 -0- 6,337,284 Mortgage backed securities .................... 32,470,422 41,392 330,239 32,181,575 Equity securities ............................. 1,403,700 -0- -0- 1,403,700 ----------- ----------- ----------- ----------- $92,324,355 $ 1,182,660 $ 331,947 $93,175,068 =========== =========== =========== ===========
The amortized cost and fair value of securities as of December 31, 1999 by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities or call dates because borrowers may have the right to prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed securities have been estimated based on the contractual maturity.
AMORTIZED FAIR COST VALUE Due in one year or less ...................... $ 3,315,668 $ 3,324,502 Due after one year through five years ........ 20,011,528 19,782,738 Due after five years through ten years ....... 18,892,513 18,058,244 Due after ten years .......................... 51,244,590 49,136,802 Equity securities ............................ 1,764,100 1,764,100 ----------- ----------- $95,228,399 $92,066,386
Proceeds from sale of available for sale securities during 1999, 1998 and 1997 were $12,072,318, $8,110,848 and $16,552,440, respectively. Gross gains realized on these sales were $112,657, $63,459, and $238,070, respectively. Gross losses on these sales were $27,586, $15,965 and $20,966, respectively. Net unrealized gains (losses) on securities available for sale included in accumulated other comprehensive income net of tax was $(2,086,929) and $561,470 in 1999 and 1998, respectively. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 3: (Cont'd) Securities with a carrying value of $26,823,000 and $24,652,000 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits and repurchase agreements as required or permitted by law. Note 4: LOANS Loans are summarized as follows:
1999 1998 ---- ---- Commercial ..................... $ 16,604,167 $ 16,525,040 Real estate .................... 116,363,918 106,916,488 Consumer ....................... 19,428,313 17,841,041 ------------ ------------ Total loans ......... $152,396,398 $141,282,569 ============ ============
A summary of the transactions in the allowance for loan losses is as follows:
1999 1998 1997 Balance at beginning of year .................. $ 1,712,657 $ 1,675,887 $ 1,663,806 Provision charged to operating expenses ....... 240,000 190,000 130,000 Recoveries .................................... 44,139 41,868 31,253 Loan charge-offs .............................. (241,167) (195,098) (149,172) ----------- ----------- ----------- Balance at end of year ........................ $ 1,755,629 $ 1,712,657 $ 1,675,887 =========== =========== ===========
Information with respect to impaired loans as of and for the years ended December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Loans receivable for which there is a related allowance for loan losses ........................... $260,700 $572,000 ======== ======== Related allowance for loan losses ..................... $ 62,000 $142,000 ======== ======== Average recorded balance on these impaired loans ...... $263,000 $504,000 ======== ======== Interest income on these impaired loans ............... $ 14,300 $ 33,100 ======== ========
In addition, the Bank had other non-accrual loans of approximately $83,000 and $112,000 at December 31, 1999 and 1998, respectively, for which impairment had not been recognized. Interest income on these loans, which is recorded when received, amounted to $2,800 and $7,200 for the years ended December 31, 1999 and 1998, respectively. Interest income that would have been recorded under the original terms of the loan agreements amounted to $27,500 and $63,000 for the years ended December 31, 1999 and 1998, respectively. The Bank has no commitments to loan additional funds to borrowers with impaired or non-accrual loans. Loans outstanding to directors, executive officers, principal stockholders or to their affiliates totaled $437,455 at December 31, 1999 and $491,502 at December 31, 1998. Advances and repayments during 1999 totaled $130,231 and $184,278, 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, 1999 and 1998. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 5: PREMISES AND EQUIPMENT Premises and equipment at December 31, 1999 and 1998 are comprised of:
1999 1998 ---- ---- Land ...................................... $ 348,280 $ 348,280 Building and improvements ................. 3,551,492 3,486,097 Furniture, fixtures and equipment ......... 3,084,455 2,833,692 ----------- ----------- Total .............................. 6,984,227 6,668,069 Accumulated depreciation ........... (3,528,957) (3,145,016) ----------- ----------- Net ................................ $ 3,455,270 $ 3,523,053 =========== ===========
Note 6: DEPOSITS The carrying amounts of deposits at December 31, 1999 and 1998 consisted of the following:
1999 1998 ---- ---- Demand - non-interest bearing ..........$ 25,418,319 $ 24,263,832 Demand - interest bearing .............. 51,909,234 55,107,402 Savings ................................ 36,018,082 30,563,596 Time - $100,000 and over ............... 14,159,389 14,535,000 Time - less than $100,000 .............. 87,919,267 85,411,222 ------------ ------------ $215,424,291 $209,881,052 ============ ============
At December 31, 1999 the time remaining to maturity of time certificates of deposit of $100,000 or more was as follows:
1999 Within 3 months ................... $ 4,348,000 3 to 12 months .................... 6,574,000 One to three years ................ 2,902,000 Over three years .................. 335,389 ----------- Total ........................ $14,159,389 ===========
Interest expense related to time deposits of $100,000 or more was $697,248 in 1999, $659,044 in 1998 and $611,961 in 1997. Note 7: SHORT-TERM BORROWINGS Federal funds purchased, securities sold under agreements to repurchase and Federal Home Loan Bank advances generally represent overnight or less than 30-day borrowings. U.S. Treasury tax and loan notes for collections made by the Bank are payable on demand. Short-term borrowings consisted of the following at December 31, 1999 and 1998: PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 7: (Cont'd)
1999 1998 MAXIMUM MAXIMUM ENDING AVERAGE MONTH END AVERAGE ENDING AVERAGE MONTH END AVERAGE BALANCE BALANCE BALANCE RATE BALANCE BALANCE BALANCE RATE ------- ------- ------- ---- ------- ------- ------- ---- Federal funds purchased and securities sold under agreements to repurchase ............$ 4,403,328 $ 3,639,276 $ 6,319,172 4.45% $ 1,742,886 $ 4,368,045 $ 7,410,570 5.16% Federal Home Loan Bank .. 700,000 587,363 5,000,000 5.25% 2,190,000 543,101 3,000,000 5.49% U.S. Treasury tax and loan notes ............ 747,193 464,921 1,070,527 4.48% 99,089 488,050 1,061,765 4.90% --------- ----------- ----------- ---- ----------- ----------- ----------- ---- Total ...................$ 5,850,521 $ 4,691,560 $12,389,699 4.55% $ 4,031,975 $ 5,399,196 $11,472,335 5.27% =========== =========== =========== ==== =========== =========== =========== ====
The Bank has an agreement with Federal Home Loan Bank (FHLB) which allows for borrowings up to a percentage of qualifying assets. At December 31, 1999 and 1998, the Bank had a maximum borrowing capacity of $97,471,000 and $87,046,000, respectively. Advances on the flexible line of credit from the FHLB at December 31, 1999 and 1998 were $700,000 and $2,190,000, respectively. All advances from FHLB are secured by qualifying assets of the Bank. Securities sold under repurchase agreements were under the Bank's control. The Bank has a line of credit for the sale of federal funds with Atlantic Central Bankers Bank of which $-0- were outstanding at December 31, 1999 and 1998, respectively. These borrowings are unsecured. Note 8: LONG-TERM BORROWINGS Long-term borrowings were comprised of three long-term borrowings from Federal Home Loan Bank (FHLB) as follows: o A $5,000,000 term fund with a fixed rate of interest at 4.64% which matures in 2003. This note has a convertible option which allows FHLB, after two years, to change the note to an adjustable-rate advance at 3 month LIBOR plus 10 points. In that event, the Bank has the option to prepay the loan without penalty. Interest is payable monthly. o A $2,000,000 term fund with a fixed rate of interest at 5.295% which matures in 2009. This note has a convertible option which allows FHLB, after 6 months, to change the note to an adjustable- rate advance at 3 month LIBOR plus 11 points. In that event, the Bank has the option to prepay the loan without penalty. Interest only is payable monthly. o A $5,000,000 term fund with a fixed rate of interest at 5.6% which matures 2004. This note has a convertible option which allows FHLB, after 3 months, to change the note to an adjustable-rate advance at 3 month LIBOR plus 11 points. In that event, the Bank has the option to prepay the loan without penalty. Interest only is payable monthly. If the Bank prepays any of the above term funds, the prepayment fee applicable to the advance is equal to the present value of the difference between cash flows generated at the advance rate from the date of the prepayment until the original maturity date, and the cash flows that would have resulted from the interest rate posted by the FHLB on the date of prepayment for an advance of comparable maturity. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 8: (Cont'd) 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 A stock option plan covering non-employee directors and a stock incentive plan for all officers and key employees was approved by the shareholders at the annual meeting held on April 25, 1998. The plan will be administered by a committee of the Board of Directors. Under the plan, 125,000 shares of common stock (adjusted for the 5-for-2 stock split on September 15, 1998) 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. Options granted during 1999 and 1998 expire in ten years. A summary of transactions under this plan were as follows:
1999 1998 WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS PRICE OPTIONS PRICE Outstanding, beginning of year ......... 21,060 $ 22.20 -0- $ -0- Granted ................................ 9,050 25.50 8,934 55.50 Stock split ............................ -0- -0- 13,401 22.20 Exercised .............................. (1,750) 22.67 -0- -0- Forfeited .............................. (447) 22.20 (1,275) 22.20 ------ ------- --------- ----- Outstanding, end of year ............... 27,913 $ 23.24 21,060 $ 22.20 ====== ======= ========= =====
The following summarizes information about all stock options outstanding at December 31, 1999: WEIGHTED-AVERAGE REMAINING OPTIONS EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISABLE $22.20 19,113 8.4 years 17,324 $25.50 8,800 9.4 years 8,800 The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Option Plan. Accordingly, no compensation expense has been recognized for the Option Plan. Had compensation cost for the Option Plan been determined based on the fair values at the grant dates for awards consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below for the year ended December 31, 1999:
AS REPORTED PRO FORMA Net income: ................. $ 3,786,828 $ 3,739,163 =========== ============= Earnings per share: Basic .................. $ 1.74 $ 1.72 =========== ============= Fully diluted .......... $ 1.74 $ 1.72 =========== =============
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 9: (Cont'd) For the purposes of the pro forma calculations, the fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants issued in 1999: Dividend yield ................ 1.93% Expected volatility ........... 17% Risk-free interest rate ....... 5.69% Expected lives ................ 6 years
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 2,527 shares in 1999 through the Plan. Note 10: INCOME TAXES The components of the provision for income tax are as follows:
1999 1998 1997 ---- ---- ---- Federal Currently payable ..................... $ 1,146,408 $ 940,561 $ 791,989 Deferred tax (benefit) ................ (31,870) (36,757) 21,630 ----------- ----------- ----------- Total provision for income tax..... $ 1,114,538 $ 903,804 $ 813,619 =========== =========== ===========
The deferred tax assets and liabilities resulting from temporary timing differences have been netted to reflect a net deferred tax asset included in other assets in these consolidated financial statements. The components of the net deferred tax assets at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Deferred tax asset: Allowance for loan losses ............................. $ 468,711 $ 454,100 Deferred loan fees .................................... 38,601 50,670 Deferred compensation ................................. 77,474 69,797 Unrealized loss on available for sale securities ...... 1,075,085 -0- ----------- ----------- 1,659,871 574,567 ----------- ----------- Deferred tax liability: Unrealized gain on available for sale securities ...... -0- (289,242) Other, net (882) (22,533) ----------- Total ............................................. (882) (311,775) ----------- ----------- Net deferred tax asset ................................... $ 1,658,989 $ 262,792 =========== ===========
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 10: (Cont'd) 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, are as follows:
1999 1998 1997 ---- ---- ---- Provision at statutory rate .............. $ 1,666,464 $ 1,465,120 $ 1,300,459 Tax exempt interest ...................... (618,210) (642,312) (561,156) Non-deductible interest .................. 82,639 88,540 86,990 Other, net ............................... (16,355) (7,544) (12,674) ----------- ----------- ----------- Net provision for income taxes ...... $ 1,114,538 $ 903,804 $ 813,619 =========== =========== ===========
Note 11: PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS The Bank has a noncontributory pension plan covering eligible employees. Benefits are based on the employee's compensation and years of service. The Bank's funding policy is to contribute annually amounts not to exceed the maximum amount deductible for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The following table sets forth the plan's funded status and amounts recognized in the Bank's statement of financial position at December 31, 1999 and 1998.
1999 1998 ---- ---- Change in benefit obligation: Benefit obligation at beginning of year .............. $ 779,431 $ 705,991 Service cost ......................................... 48,869 43,380 Interest cost ........................................ 57,369 51,980 Actuarial gain ....................................... (6,692) -0- Benefits paid ........................................ (16,288) (21,920) ----------- ----------- Benefit obligation at end of year .................... 862,689 779,431 ----------- ----------- Change in plan assets: Fair value of plan assets at beginning of year ....... 1,044,943 915,027 Actual return on plan assets ......................... 71,558 151,836 Benefits paid ........................................ (16,288) (21,920) ----------- ----------- Fair value of plan assets at end of year ............. 1,100,213 1,044,943 ----------- ----------- Funded status ........................................ 237,524 265,512 Unrecognized net actuarial loss ...................... (4,247) (19,666) Unrecognized prior service cost ...................... (195,787) (204,906) ----------- ----------- Prepaid (accrued) benefit cost ....................... $ 37,490 $ 40,940 =========== =========== Weighted-average assumptions: Discount rate ........................................ 7.5% 7.5% Expected return on plan assets ....................... 8.5% 8.5% Rate of compensation increase ........................ 4.0% 4.0%
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 11: (Cont'd) Net pension cost for the years ended December 31, 1999, 1998 and 1997 included the following components:
1999 1998 1997 ---- ---- ---- Service cost ............................... $ 48,869 $ 43,380 $ 21,665 Interest cost .............................. 57,369 51,981 37,841 Expected return on plan assets ............. (87,587) (151,837) (66,638) Net amortization and deferral .............. (6,082) (6,082) (6,082) Prior service cost ......................... (9,119) (9,119) (9,119) Deferred gain (loss) ....................... -0- 75,157 (6,106) --------- --------- --------- Net periodic pension cost (benefit) ........ $ 3,450 $ 3,480 $ (28,439) ========= ========= =========
The Bank has an employee stock ownership plan covering substantially all employees. Contributions to the plan are at the discretion of the Board of Directors. Employer 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 1999, 1998 and 1997, contributions to the plan charged to operations were $72,442, $67,931 and $65,416, respectively. The Bank also maintains a profit sharing plan under the provisions of Section 401 (k) of the Internal Revenue Code. The plan covers substantially all employees who have completed one year of service. Contributions to the plan by the Bank equal 50% of the employee contribution up to a maximum of 6% of annual salary. During 1999, 1998 and 1997, employer contributions to the plan charged to operations were $39,071, $37,499 and $34,831, respectively. 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 $22,581, $23,304 and $15,832, for the years ended December 31, 1999, 1998 and 1997, respectively. Note 12: COMMITMENTS AND CONTINGENCIES The Bank is obligated under non-cancelable lease agreements for certain bank premises expiring in September 2028. The leases contain a renewal option and provide that the Bank pay property taxes, insurance and maintenance costs. The following is a schedule by years of future minimum lease payments required under this non-cancelable lease:
YEARS ENDED DECEMBER 31 2000 $ 17,760 2001 17,760 2002 17,760 2003 18,720 2004 21,600 2004 through 2008 81,000
Total rent expense was $17,760, $13,440, and $12,000 for the years ended December 31, 1999, 1998 and 1997, respectively. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 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 standby 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, 1999 and 1998 were as follows:
1999 1998 ---- ---- Commitments to extend credit ............ $ 9,878,407 $ 7,946,887 Standby letters of credit ............... 446,910 480,105 ----------- ----------- $10,325,317 $ 8,426,992 =========== ===========
The Bank grants commercial, consumer and residential loans to customers primarily in the Susque- hanna/Wyoming County, PA and Broome County, NY areas. Of the total loan portfolio, 76% is for real estate loans, principally residential. It is the opinion of management that this high concentration does not pose any adverse credit risk. Further, it is management's opinion that the remainder of the loan portfolio is balanced and diversified to the extent necessary to avoid any significant concentration of credit. Note14: REGULATORY MATTERS The Company is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Company 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 $5,165,000, plus an additional amount equal to the net profit for 2000, up to the date any such dividend is declared. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend to its affiliates, including the Company, unless such loans are collateralized by specified obligations. At December 31, 1999, the maximum amount available for transfer from the Bank to the Company in the form of loans approximated 20% of capital stock and surplus. 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 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 14: (Cont'd) 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, 1999, that the Company and Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, 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, 1999 and 1998, 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 FOR CAPITAL CAPITALIZED UNDER PROMPT ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- As of December 31, 1999: Total capital (to risk weighted assets): Consolidated .............................$27,509,000 18.15% $12,127,000 8.00% $15,159,000 10.00% Peoples National Bank ....................$26,989,000 17.62% $12,252,000 8.00% $15,315,000 10.00% Tier 1 capital (to risk weighted assets): Consolidated .............................$25,753,000 16.99% $ 6,064,000 4.00% $ 9,095,000 6.00% Peoples National Bank ....................$25,233,000 16.48% $ 6,126,000 4.00% $ 9,189,000 6.00% Tier 1 capital (to average assets): Consolidated .............................$25,753,000 10.02% $10,280,000 4.00% $12,849,000 5.00% Peoples National Bank ....................$25,233,000 9.82% $10,280,000 4.00% $12,849,000 5.00% As of December 31, 1998: Total capital (to risk weighted assets): Consolidated .............................$24,790,000 18.15% $10,927,000 8.00% $13,658,000 10.00% Peoples National Bank ....................$24,367,000 17.92% $10,879,000 8.00% $13,599,000 10.00% Tier 1 capital (to risk weighted assets): Consolidated .............................$23,083,000 16.90% $ 5,463,000 4.00% $ 8,195,000 6.00% Peoples National Bank ....................$22,667,000 16.67% $ 5,440,000 4.00% $ 8,160,000 6.00% Tier 1 capital (to average assets): Consolidated .............................$23,083,000 9.60% $ 9,613,000 4.00% $12,017,000 5.00% Peoples National Bank ....................$22,667,000 9.43% $ 9,613,000 4.00% $12,017,000 5.00%
Note 15: FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the statement of financial condition for cash and cash equivalents approximate those assets fair values. Investment securities (including trading account securities and mortgage-backed securities): Fair values for investment 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. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 15: (Cont'd) Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amount of accrued interest receivable approximates its fair value. Deposits: The fair values disclosed for demand deposits 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. The carrying amount of accrued interest payable approximates fair value. 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, 1999 DECEMBER 31, 1998 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and due from banks ......................$ 3,372,554 $ 3,372,554 $ 2,083,913 $ 2,083,913 Interest-bearing deposits in other banks ................................ 4,095,992 4,095,992 2,724,780 2,724,780 Investment securities ........................ 92,066,386 92,066,386 93,175,068 93,175,068 Loans, net ................................... 150,630,013 150,068,867 139,535,640 140,648,995 Accrued interest receivable .................. 1,995,981 1,995,981 1,781,561 1,781,561 DECEMBER 31, 1999 DECEMBER 31, 1998 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial liabilities Deposits ...................................$215,424,291 $215,392,353 $209,881,052 $210,619,877 Short-term borrowings ...................... 5,850,521 5,850,521 4,031,975 4,031,975 Accrued interest payable ................... 717,941 702,889 702,889 717,941 Long-term borrowings ....................... 12,000,000 11,949,679 5,000,000 4,738,833
The carrying amounts in the preceding table are included in the balance sheet under the applicable captions. PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 16: PARENT COMPANY The following is financial information for Peoples Financial Services Corp. (Parent Company only):
BALANCE SHEETS December 31, December 31, 1999 1998 ---- ---- Assets: Cash ............................................... $ 106,941 $ 2,129 Investment in bank subsidiary ..................... 26,289,255 26,629,087 Investment securities available for sale .......... 500,000 500,000 Accrued interest receivable ....................... 21,000 21,000 ------------ ------------ Total assets ................................. $ 26,917,196 $ 27,152,216 ============ ============ Liabilities: Due to subsidiary ................................. 105,722 106,522 Other liabilities ................................. -0- ------------ ------------ 1,600 -0- ------------ ------------ Total liabilities ............................ 107,322 106,522 ------------ ------------ Stockholders' equity: Common stock ...................................... 4,455,000 4,455,000 Surplus ........................................... 4,512,333 4,455,000 Retained earnings ................................. 20,979,861 18,322,095 Accumulated other comprehensive income (loss) ..... (2,086,929) 561,470 Less: Treasury stock ............................. (1,050,391) (747,871) ------------ ------------ Total stockholders' equity ................... 26,809,874 27,045,694 ------------ ------------ Total liabilities and stockholders' equity ... $ 26,917,196 $ 27,152,216 ============ ============
STATEMENTS OF INCOME 1999 1998 1997 ---- ---- ---- Dividends from bank subsidiary .......................$ 1,479,062 $ 1,595,407 $ 885,292 Other income ......................................... 45,000 21,000 -0- Other expenses ....................................... 46,213 51,174 34,296 ----------- ----------- ----------- Income before taxes and equity in undistributed income of subsidiary ......... 1,477,849 1,565,233 850,996 Provision for income tax (benefit) ................... (10,259) (11,661) (412) ----------- ----------- ----------- Income before equity in undistributed income of subsidiary ....................... 1,478,261 1,575,492 862,657 Equity in undistributed income of subsidiary ........................................ 2,308,567 1,829,881 2,148,602 ----------- ----------- ----------- Net income ...............................$ 3,786,828 $ 3,405,373 $ 3,011,259 =========== =========== ===========
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd) DECEMBER 31, 1999, 1998 AND 1997 Note 16: (Cont'd)
STATEMENTS OF CASH FLOWS 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income ........................................... $ 3,786,828 $ 3,405,373 $ 3,011,259 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiary ............ (2,308,567) (1,829,881) (2,148,602) Increase (decrease) in due to subsidiary ........ (800) 40,915 22,635 Increase in accrued interest receivable ......... -0- (21,000) -0- Increase in other liabilities ................... 1,600 -0- -0- ----------- ----------- ----------- Net cash provided by operating activities .......... 1,479,061 1,595,407 885,292 ----------- ----------- ----------- Cash flows from investing activities: Purchase of available for sale securities ............ -0- (500,000) -0- ----------- ----------- ----------- Cash flows from financing activities: Cash dividends paid .................................. (1,129,062) (995,407) (735,292) Proceeds from sale of treasury stock ................. 109,168 -0- -0- Purchase of treasury stock ........................... (354,355) (199,096) (62,040) ----------- ----------- ----------- Net cash used by financing activities .............. (1,374,249) (1,194,503) (797,332) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ...... 104,812 (99,096) 87,960 Cash and cash equivalents, beginning of year .............. 2,129 101,225 13,265 ----------- ----------- ----------- Cash and cash equivalents, end of year .................... $ 106,941 $ 2,129 $ 101,225 =========== =========== ===========
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS The Company's Board of Directors presently consists of 7 members. The Company's Board of Directors is divided into three classes, one-third (as nearly equal in number as possible) of whom are elected annually to serve for a term of three years. The following information is set forth in the table entitled "Company's Board of Directors": name, age, term of office, the principal occupations of such individuals during the past five years. The executive officers are appointed to their respective offices annually. All directors of the Company also serve as directors of PNB. Unless otherwise indicated, the principal occupation listed for a person has been the person's occupation for at least the past five years. Because a majority of persons listed served as officers or directors of PNB prior to the formation of the Company in 1986, the table indicates the earliest year a person became an officer or director for PNB or the Company.
YEAR YEAR TERM NAME AGE POSITION ON BOARD ELECTED EXPIRES OCCUPATION - ---- -- ----------------- ------- ------ ---------- Carl F Pease ..............68 Chairman 1985 2000 Retired, Susquehanna County Planning Commission Gerald R Pennay ...........64 Vice Chairman 1985 2001 Owner, Gerald R. Pennay & Sons Auctioneers John W. Ord ...............59 President & CEO 1969 2000 President of Peoples National Bank Thomas F. Chamberlain .....51 Director 1994 2001 Nationwide Insurance Agent Jack B. Norris ............66 Director 1985 2002 Retired Owner, B.K. Norris Distributors (Beverage) George H. Stover, Jr ......53 Director 1992 2002 Real Estate Appraiser William S. Crock ..........53 Director 1992 2000 President, W.S. Crock & Sons, Inc. (Retail Store) Debra E. Dissinger ........45 Vice President/Secretary N/A N/A Executive Vice President, Peoples National Bank
There are no family relationships among any of the executive officers or directors of the Company. Executive officers of PNB are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors met four times during 1999 and the Bank's Board of Directors met 12 times during 1999. The Company's Board of Directors is authorized, under the Company's By-Laws, to create an Executive Committee and other Board committees. At present, no such committees have been established, and all committee functions are performed by committees of the Bank's Board. The Bank's Board has seven standing committees: Executive, Compensation, Audit, Asset/Liability, Human Resources and Marketing, Loan Administration, and Branch. There is no Nominating Committee. The Executive Committee of the Bank met twice during 1999. It is a fixed committee comprised of the Chairman, the Vice-Chairman, the President, and one other director appointed on a yearly basis. This committee may exercise the authority of the Bank's Board to the extent permitted by law during intervals between meetings of the Board. The Executive Committee of the Bank may also be assigned other duties by the Bank's Board. The Compensation Committee of the Bank met one time during 1999. This committee reviews and recommends compensation policies and plans. Carl F. Pease was the Chairman of the Committee. The other Committee members were Jack M. Norris, Gerald Pennay, and Jack Ord. Mr. Ord is the current CEO and President of Peoples National Bank. While Mr. Ord was specifically excluded from any Committee discussion concerning his own compensation, he does participate in the Committee's discussion concerning other key executive's compensation. The Audit Committee of the Bank met four times during 1999. It supervises the compliance and internal audit program of the Bank and recommends the appointment of, and serves as the principal liaison between, the Board and the Company's independent accountants. The Audit Committee also reports to the Board on the general financial condition of the Bank. The Asset/Liability Committee of the Bank met 12 times during 1999. It monitors and helps control the Bank's risk position by recommending the allocation of funds within guidelines for rate sensitivity, time deposits, liquidity, Federal Funds borrowing, loans, investments, dividends, and tax position. The Asset/Liability Committee is responsible for developing such guidelines, guiding the Bank's investments, and coordinating the Bank's budget process. The Human Resources and Marketing Committee of the Bank met four times during 1999. It is responsible for sound human resources management. This Committee is also responsible for evaluation, planning and supervision of the marketing of the Bank's products and services and also oversees community relations and other public relations activities. The Loan Administration Committee of the Bank met four times during 1999. It assists the Bank's Board of Directors in discharging it responsibility for the lending activities of the Bank by reviewing loans, lines of credit, floor plans, and compliance. The Loan Administration Committee recommends lending authorizations and is responsible for assuring that the Bank's loan activities are carried out in accordance with loan policies. The Loan Administration Committee is also responsible for ensuring the adequacy of the Bank's loan loss reserve. The Branch Committees of the Bank each met 10 times during 1999. There is a committee assigned to each branch of the Bank. These Committees are responsible for monitoring the operations, goals, and profitability of the branches. ITEM 11 EXECUTIVE COMPENSATION The aggregate cash compensation paid to both executive officers of the Company and the Bank for services performed during 1999 was $213,010. The Bank has in effect a directors' and officers' liability insurance policy from the Fidelity and Deposit Company of Maryland to cover certain liabilities, losses, damages, and expenses that the Bank's Directors and Officers may incur in such capacities. Annual premiums for this policy are $5,327. The Bank provides an automobile for its executive officers in connection with the Bank's business. The value of any resulting personal benefit is not directly related to job performance. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION This Report of the Compensation Committee covers the role of the Corporate Governance and Compensation Committee relative to the compensation program, Executive Compensation Guiding Principles, Components of the Compensation Program, and Compensation of the Chief Executive Officer ROLE OF THE CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE The Committee is made up of four members of the Board of Directors. Three of them are not current or former employees of the Company. The Committee sets the overall compensation principles of the Company and reviews the entire program at least annually. This includes each element described below, the measurement used to make payments of awards under the Company's incentive plans, and the overall effectiveness of the program. The committee specifically reviews and establishes the individual compensation levels for the top four members of the senior leadership team, including the Chief Executive Officer. The committee has considered the advice of an independent outside consultant in determining the appropriateness and the level of compensation. EXECUTIVE COMPENSATION GUIDING PRINCIPLES Peoples National Bank has developed a compensation program that is intended to motivate and retain the key talent it needs to be a market leader in a highly competitive industry. The Committee and the Company's leadership team developed this program to support the Company's business strategy. The following principles guided the development of the program: Compensation opportunity should be related to performance. That is, if Peoples National Bank's and the individual's performance are at the median of those companies with whom we compete for talent, then pay should also be at the median. Opportunity should increase proportionately if Peoples National Bank's or the individual's performance is above the median. On the other hand, if performance is at less than the median, any award payment will be at the Committee's discretion. Ownership of the Company's shares should be pervasive throughout the Company with each individual having a number of opportunities to own Peoples National Bank's stock. The overall intent is to encourage each employee to be, and to behave like, an owner of the business. As described later in this report, our compensation programs are designed to balance short- and long-term financial objectives, build shareholder value and reward for individual, team and corporate performance. The proportion of total pay that is at risk against individual and Company performance objectives increases with the more senior positions. For example, in 1999, approximately 18% of the President's total target pay opportunity was at risk against short- and long-term performance goals. Survey data is compiled by an independent outside consultant to ensure that our total program is competitive. Compensation data includes 126 institutions: 88 commercial banks or bank holding companies, 34 savings institutions, 4 credit unions. COMPONENTS OF THE COMPENSATION PROGRAM The three components of the total compensation program are: base salary, short-term incentives, long-term incentives. BASE SALARY Base salaries for all officers have been set at levels that are comparable to similar positions at other companies with whom we compare for compensation purposes. SHORT-TERM INCENTIVES The annual bonus component of incentive compensation is designed to align executive pay with short-term (annual) performance of the Company. In 1999, the annual bonus opportunity was based on an increased corporate net income objective of 11%. Other factors may be used or added in subsequent years. LONG-TERM INCENTIVES The Bank has an employee stock ownership plan covering substantially all employees. Contributions to the plan are at the discretion of the Board of Directors. Employer contributions are allocated to participant accounts based on their percentage of total base and short-term incentive compensation for the plan year. The Bank also maintains a profit sharing plan under the provisions of Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who have completed one year of service. Contributions to the plan by the Bank equal 50% of the employee contribution up to a maximum of 6% of annual salary. In 1998, the Company made a grant of stock options to substantially all employees. Grants for 1998 were made May 1, 1998. These options have an exercise price of $22.20 (price adjusted to reflect the Company's 5 for 2 stock split in September 1998). The option vests after five years of service and will expire ten years from the date of the grant. In 1999, the Company made a grant of stock options to key managers and department heads. Grants for 1999 were made on May 1, 1999. These options have an exercise price of $25.50. The options granted in 1999 will expire in ten years from the date of the grant. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER In fiscal 1999, the Company's most highly compensated officer was John W. Ord, CEO and President. Mr. Ord's total compensation included 72.31% in base salary, 14.44% in short-term incentive, and 13.20% in long-term compensation. The guidelines and factors considered by the Committee in determining compensation include corporate profitability measured by return on assets, stock prices, asset quality, loan loss reserve levels, market share, regulatory capital strength, cost control, and regulatory examination. The Committee based compensation and benefit levels on the contribution to the Company in meeting the goals and objectives as set forth in the strategic plan of the Company and the Bank. BASE SALARY The Committee increased Mr. Ord's base salary from $114,800 in 1998 to $125,000 in 1999. This increase includes an increase in Director's fees, which were $4,800 in 1998 and $5,200 in 1999. SHORT-TERM INCENTIVES The Committee assessed Mr. Ord's performance in determining his short-term incentive awards. The goals and objectives set forth in the strategic plan were met and additional stretch goals were achieved through the leadership efforts of Mr. Ord. The 1999 bonus paid to Mr. Ord was $25,000. LONG-TERM INCENTIVES The Bank has an employee stock ownership plan covering substantially all employees. Contributions to the plan are at the discretion of the Board of Directors. Employer contributions are allocated to participant accounts based on their percentage of total base and short-term incentive compensation for the plan year. In 1999, Mr. Ord's was $5,600. The Bank also maintains a profit sharing plan under the provisions of Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who have completed one year of service. Contributions to the plan by the Bank equal 50% of the employee contribution up to a maximum of 6% of annual salary. Effective August 1, 1994, the Bank maintains a profit sharing plan under the provisions of Section 401 (K) of the Internal Revenue Code. The plan covers substantially all employees who have completed one year of service. Contributions to the plan by the Bank equal 50% of the employee contribution up to a maximum of 6% of annual salary. During 1999, employer contributions to the plan charged to operations were $39,071. In 1999, Mr. Ord's was $3,600. The Company made a grant of stock options to certain management. Grants for 1999 were made May 1, 1999. These options have an exercise price of $25.50. The option vests after five years of serve and will expire ten years from the date of the grant. A total of 500 shares were granted to Mr. Ord under the 1999 Stock Option.
Individual Grants (1) Number of Shares Total Options Exercise Underlying Granted to Price Expiration Grant Date NAME OPTIONS GRANTED EMPLOYEES PER SHARE DATE PRESENT VALUE - ---- --------------- --------- --------- ---- ------------- John W. Ord ............ 500 15% $ 25.50 5/1/09 $2,006
Peoples National Bank maintains an excess benefit plan for Mr. Ord. Under this plan, which is a non-qualified plan, Mr. Ord will receive a supplemental payment in order to provide him with an annual retirement benefit. COMPENSATION OF DIRECTORS Each member of the Board of Directors receives $350 for each Bank Board meeting. All committee members receive $150 for each committee meeting they attend except for Mr. Ord who is not paid for any committee meetings. The Chairman of the Board of Directors receives an additional $200 per month. STOCK OPTIONS On May 1, 1999, each non-employee Director received an option to purchase 500 shares of Common Stock. These options have an exercise price of $25.50. The option will expire ten years from the date of the grant. LIFE INSURANCE Each Director has $50,000 of split dollar life insurance with premiums paid by the Bank. The total of premiums paid in 1999 was $27,980. Under this split dollar life insurance agreement, the Company will receive an amount from the cash value or death proceeds of the policy equal to its premium advances. HEALTH INSURANCE Health insurance is provided to Directors under the same terms and conditions as the Employees of the Bank. The total of premiums paid in 1999 was $26,568. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION John W. Ord is the only employee serving on the Compensation Committee of the Board of Directors. Mr. Ord is excluded from any discussion concerning his own compensation. SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 (a) of the Securities Exchange Act of 1934 requires the Company's Directors and executive officers to file reports of holdings and transactions in Shares with the SEC. Based on Company records and other information, the Company believes that all SEC filing requirements applicable to its Directors and executive officers with respect to the Company's 1999 fiscal year were met. PENSION PLANS The Bank's Pension Plan is available to Bank employees who have attained age 21, and have completed one year of service. Employees do not contribute to the plan. Each year, the bank contributes under the plan an actuarially determined amount for distribution to eligible employees at their retirement. Benefits are payable at normal retirement (age 65) and early retirement (age 55). Disability benefits are payable at age 55 with vesting at five years. The following table shows the annual retirement benefits payable at normal retirement (age 65) under the Bank's plan for a range of compensation levels and years of service. The amounts are based on an employee who became a participant in 1999 and will have the service and salary at normal retirement.
SALARY 15 20 25 30 35 ------ -- -- -- -- -- $25,000 $3,000 $4,000 $5,000 $6,000 $7,000 $50,000 $6,000 $8,000 $10,000 $12,000 $14,000 $75,000 $9,000 $12,000 $15,000 $18,000 $21,000 $100,000 $12,000 $16,000 $20,000 $24,000 $28,000 $125,000 $15,000 $20,000 $25,000 $30,000 $35,000 $150,000 $18,000 $24,000 $30,000 $36,000 $42,000
After a study and evaluation in 1999, a decision was made by the Board of Directors to terminate the defined benefit plan described above. It is expected that the termination will be completed in 2000. At that time, all the plan's assets will be allocated to eligible individuals. PERFORMANCE GRAPH The following graph and table compare the cumulative total shareholder return on the Corporation's Common Stock during the period of December 31, 1994, through and including December 31, 1999, with the S&P 500 Index and the NASDAQ Bank Index. The comparison assumes $100 was invested on December 31, 1994, in the Corporation's Common Stock and in each of the indices below and assumes further the reinvestment of dividends into the applicable securities. The shareholder return shown on the graph and table below is not necessarily indicative of future performance.
Period Ending 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 -------- -------- -------- -------- -------- -------- Peoples Financial Services Corp. .....100.00 125.00 143.00 201.00 297.00 321.00 NASDAQ - Bank Index ..................100.00 149.00 197.00 329.00 327.00 314.00 S&P 500 Index ........................100.00 138.00 169.00 226.00 290.00 351.00
EXECUTIVE EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS In February 1997, the Company entered into an employment agreement with John W. Ord, President and Chief Executive Officer of the Company. The agreement is for an initial three-year term and is renewed annually for a three-year term unless notice of non-renewal is given by either party in which case the agreement will expire at the end of the existing term. The agreement provides for a minimum base salary of $100,000 per year and for such incentive bonuses as may be awarded to the executive under any incentive compensation plan which may be in effect or otherwise in the discretion of the Board of Directors. If the executive's employment is terminated without "cause" (as defined in the agreement) or the executive terminates his employment for "good reason" (as defined in the agreement) following a "change in control" of the Company, the executive becomes entitled to severance benefits under the agreement. "Good reason" includes a reduction in title, a reduction in responsibilities, a reduction in authority, a reassignment which requires the executive to move his principal residence, a reduction in salary, or a failure to provide the executive with comparable benefits following a "change in control." If any such termination occurs following a "change in control," the executive will be entitled generally to a lump-sum payment equal to 2.99 times his average annual compensation for the five years preceding the year of termination. In the event that the executive's employment is terminated by the Company without "cause" in the absence of a "change in control," the executive will be entitled generally to a lump-sum payment equal to 2.0 times the sum of his highest annual compensation in the prior three years plus certain pension and welfare benefits received in the relevant year. Mr. Ord's agreement contains provisions restricting his ability to compete with the Company under certain circumstance following termination of his employment. In February 1997, the Company also entered into severance agreements with two other executive officers of the Company, which provided for certain severance benefits in the event the executive's employment is terminated or the executive resigns for specified reasons following a "change in control" of the Company. Under these agreements, the executive would be entitled generally to a severance benefit equal to 2.0 times the executive's average annual compensation for the five years preceding the year of termination. No benefits are payable under these agreements in the event the executive's employment is terminated for "cause" or in the event the executive's employment is terminated for any reason prior to a "change in control." The specified reasons for termination under these agreements are substantially similar to the events of "good reason" contained in Mr. Ord's agreement. In June 1999, one of the two executive officers resigned his position with the Bank. Some of the Directors and Officers of the Company, and the companies with which they are associated, are customers of, and during 1999 had banking transactions with, the Bank in the ordinary course of the Bank's business, and intend to do so in the future. All loans and commitments to loan included in such transactions were made under substantially the same terms, including interest rates, collateral, and repayment terms, as those prevailing at the time for comparable transactions with other persons and, in the opinion of the Bank's management, do not involve more than the normal risk of collection or present other unfavorable features. ITEM 12 SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS The following table sets forth information concerning the beneficial ownership of the Company's Common Shares as of 12/31/99, for each incumbent Director and each of the nominees for Director; the two most highly compensated executive officers who are not also Directors; and the Directors and executive officers as a group. Except as otherwise noted, the named individuals or family members had sole voting and investment power with respect to such securities.
Number of percentage of NAME SHARES OWNED SHARES OWNED ---- ------------ ------------ Carl F Pease ....................... 31,277 1.44% (1) Gerald R Pennay .................... 21,624 1.00% (2) John W. Ord ........................ 48,778 2.25% (3) Thomas F. Chamberlain .............. 5,627 0.26% (4) Jack B. Norris ..................... 9,445 0.43% (5) George H. Stover, Jr ............... 50,297 2.32% (6) William S. Crock ................... 4,175 0.19% (7) Debra E. Dissinger ................. 8,188 0.38% (8) Russell Shurtleff .................. 6,581 0.30% (9) TOTAL ..............................185,992 8.58% (1) Includes stock option grants of 1,125 shares. All other shares are held jointly with spouse. (2) Includes stock option grants of 1,125 shares. Includes 10,137 shares held jointly with spouse. (3) Includes stock option grants of 1,750 shares. Includes shares owned by the trustee of the Company's Employee Stock Ownership Plan ("ESOP") which have been allocated to Mr. Ord's account.All other shares are held jointly with spouse. (4) Includes stock option grants of 1,125 shares. Includes 678 shares held jointly with spouse. (5) Includes stock option grants of 1,125 shares. All other shares are held jointly with spouse. (6) Includes stock option grants of 1,125 shares. Includes 24,586 shares owned by spouse. (7) Includes stock option grants of 1,125 shares All other shares are held jointly with spouse. (8) Includes stock option grants of 1,125 shares. Includes shares owned by the trustee of the Company's ESOP which have been allocated to Ms. Dissinger's account. All other shares are held jointly with spouse. (9) Includes stock option grants of 300 shares. Includes 251 shares held jointly with spouse.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain directors and officers of the Company or PNB, and their respective associates, were customers of and had transactions with PNB in the ordinary course of business during the Company's fiscal year ended December 31, 1999. Similar transactions may be expected to take place in the future. Such transactions included deposit products and extensions of credit in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risks of collectibility or present other unfavorable features. PART 1V ITEM 14 EXHIBITS AND REPORTS ON FORM 8-K Financial Statement Schedules can be found under Item 8 of this report. The Corporation filed a Form 8-K on February 9, 1999. A press release dated February 9, 1999 concerning information about earnings and cash dividends was incorporated as Exhibit 99.1. The Corporation filed a Form 8-K on April 15, 1999. A press release dated April 16, 1999 concerning information about first quarter results was incorporated as Exhibit 99.1. The Corporation filed a Form 8-K on May 5, 1999. A press release dated May 5, 1999 concerning information about a dividend increase was incorporated as Exhibit 99.2. The Corporation filed a Form 8-K on July 22, 1999. A press release dated July 22, 1999 concerning information about financial figures for the first half was incorporated as Exhibit 99.3. The Corporation filed a Form 8-K on October 27, 1999. A press release dated October 27, 1999 concerning information about the third quarter financial results was incorporated as Exhibit 99.4. The Corporation filed a Form S-3 on July 30, 1999. 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 Debra E. Dissinger Debra E. Dissinger, Executive Vice President Frederick J. Malloy Frederick J. Malloy, Accounting Officer Carl F. Pease Carl F. Pease Chairman, Board of Directors Jack M. Norris Jack M. Norris, Member, Board of Directors Gerald R. Pennay Gerald R. Pennay, Member, Board of Directors George H. Stover, Jr. George H. Stover, Jr., Member, Board of Directors EX-27 2 FDS --
9 0001056943 2r$ixyyp 12-MOS DEC-31-1999 DEC-31-1999 3,373 4,096 0 0 0 95,228 92,066 152,386 1,756 261,319 215,424 5,851 1,235 12,000 0 0 4,455 22,355 261,319 12,057 5,286 281 17,624 7,988 493 9,143 240 85 5,308 4,901 4,901 0 0 3,787 1.74 1.74 1.93 178 2,139 0 250 1,713 241 43 1,756 1,756 0 0
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