SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
PEOPLES FINANCIAL SERVICES CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2391852
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
50 Main Street, Hallstead, Pennsylvania 18822
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (717)879-2175
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 par value
(Title of Class)
PAGE 1
<PAGE>
Item 1. Business
General
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 93rd year
of operation.
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 and the
cities 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.
Both Susquehanna and Wyoming Counties would be
considered sparsely populated with many small towns and villages
in their makeup. The latest population figures show Susquehanna
<PAGE 2> County at approximately 41,000 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
which are used as vacation/recreation retreats and, quite often,
become retirement homes.
The regional economy in which PNB's market area is
located is comprised primarily of forestry and forestry-related
industries, farming, quarrying, service industries and
government. Forestry and forestry-related industries, including
the Proctor and Gamble paper products facility located in Wyoming
County, accounted for approximately 12.5% of personal income for
the region based on the latest available published information,
with farming and quarrying accounting for approximately 1.5% of
the total. Service industries accounted for approximately 9% and
government jobs accounted for an additional 7%.
PNB has four full-service banking offices in
Susquehanna County along with a limited services office located
in Springville, Pennsylvania which is operated as an adjunct to
PNB's office located in Montrose, Pennsylvania. Other offices
are located in the borough of Susquehanna Depot, the Hallstead
Plaza, Great Bend Township; and the Borough of Hop Bottom; the
Montrose office is located in Bridgewater Township, just outside
the borough of Montrose boundary. Montrose is the county seat of
Susquehanna County. The Administrative/Operations office for the
Company and PNB is located in the Borough of Hallstead.
PNB's presence in Wyoming County, Pennsylvania has
been limited to a de novo branch in Nicholson which has been open
for five years, and the recent (1997) purchase of branches
located in Tunkhannock and Meshoppen, Pennsylvania which are west
of Nicholson and closer to the Proctor and Gamble plant.
The Nicholson office in Wyoming County is located in
the Borough of Nicholson. The Meshoppen Office is located in
Meshoppen Township, just east of the Meshoppen Borough.
Tunkhannock Borough is the county seat of Wyoming County and also
is home to PNB's Tunkhannock office.
<PAGE 3>
Lending and Deposit Activities
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 Federal
Reserve Board ("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 various loan committees 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
(i) commercial real estate loans, (ii) working capital,
equipment, and other commercial loans, (iii) construction loans,
(iv) SBA guaranteed loans, and (v) agricultural loans. PNB's
commercial real estate loans are used to provide permanent
financing for retail, manufacturing and farming operations. They
are also used for 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 analyses, 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 involve either 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
<PAGE 4> 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 (i) residential
real estate loans, (ii) automobile loans, (iii) manufactured
housing loans, (iv) personal installment loans secured and
unsecured for almost any purpose, (v) student loans, and
(vi) home equity loans (fixed-rate term and open ended revolving
lines of credit).
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 or 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. Up to this point all real estate loans have been
held in PNB's loan portfolio, but 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 or 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. Credit
checks, credit scoring, and debt-to-income ratios within preset
parameters are used to qualify borrowers.
<PAGE 5>
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.
Lending volume increased substantially in 1997 as
our presence in Wyoming County was expanded by the purchase of
branch offices in Tunkhannock and Meshoppen, Pennsylvania. Loans
were not included in the assets purchased in these transactions.
A great number of loan customers at the Tunkhannock and Meshoppen
branch offices desired to continue making payments at the same
offices so throughout the year loans were transferred via new
applications for credit at PNB. At the same time, a general push
to increase the loan-to-deposit ratio of PNB as a whole was
initiated. The general good economy and stable-to-lower interest
rate scenario allowed good growth in total loans which ended 1997
up over 18% from year-end 1996. The highest percentage of growth
was in personal installment loans and in mortgages. Personal
installment loans grew by 13% while mortgages rose 15% in 1997
over 1996. 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 takes place.
Loan Approval.
Individual loan authorities are established by PNB's
Board of Directors upon recommendation by the senior lending
officer. In establishing individual's loan authority the
<PAGE 6> experience of the lender is taken into consideration, as
well as the type of lending in which the individual is involved.
The officers loan committee consists of the President of PNB and
the senior lending officer. This committee has the authority to
approve loans up to $500,000. 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
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 75% 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 which allows loan-
to-value ratios to go as high as 95%. PNB also makes loans
secured by second mortgages on real estate. Adjustable rate
mortgage products, as well as conventional fixed-rate products,
are also available at PNB.
PNB participates in various community development
programs and is an active lender in the Pennsylvania Housing
Finance Authority program in effort to meet its responsibilities
under the Community Reinvestment Act ("CRA"). PNB has
consistently been rated "outstanding" in meeting its obligations
under the CRA.
Deposit Activities.
PNB also offers a full range of deposit and personal
banking services insured by the Federal Deposit Insurance
Corporation ("FDIC"), including (i) commercial checking and small
business checking products, (ii) cash management services,
(iii) 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 (iv) other personal miscellaneous
services such as 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. PNB offers credit cards as an agent
bank through another correspondent bank.
<PAGE 7>
The principal sources of funds for PNB are core
deposits (demand deposits, interest bearing transaction accounts,
money market accounts, savings deposits and certificate 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 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 that 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, mutual funds and annuities, which are not
presently available at PNB.
PNB does not maintain data concerning its competitive
position within its market area and relies instead on data
produced by third parties such as the FDIC. According to the
latest statistics available, June 30, 1996, PNB had a 34.3%
market share of deposits held by the Susquehanna County branches
of financial institutions. On June 30, 1996, the Tunkhannock and
Meshoppen offices of PNB were branches of Mellon Bank. Adding
those deposits to the deposits of the Nicholson office of PNB,
the total market share of deposits held in Wyoming County was
21.1%. The relative position in Susquehanna County was number 2
of 6 commercial banks and in Wyoming County, the position was
number 3 of 5 commercial banks and other financial institutions.
<PAGE 8>
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,
which may not be subject to the same regulatory restrictions and
taxations as commercial banks. It is anticipated that recent
legislation such as the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 may increase those competitive
pressures by permitting additional entries into the existing
market.
While 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. It is the belief of the management of PNB that it can
profitably utilize such opportunities to establish a local
community bank presence in those areas.
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.
Supervision and Regulation
General. 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.
<PAGE 9>
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.
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 injunction 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
<PAGE 10> 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.
As a Pennsylvania bank holding company, the Company is
subject to various restrictions on its activities as set forth in
Pennsylvania law, in addition to those restrictions set forth in
federal law. See "Supervision and Regulation - Federal Bank
Holding Company Regulation and Structure." 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.
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
which 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 which may be loaned to any one customer and
its related interests to capital levels of the bank. <PAGE 11>
Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, ("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 which 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 which have been adopted. FDICIA also imposed
new capital standards on insured depository institutions. See
"Supervision and Regulation - Capital Requirements."
Before establishing new branch offices, PNB must meet
certain minimum capital stock and surplus requirements and must
obtain OCC approval.
Deposit Insurance. 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 BIF assessment
rates have a range of zero cents to 27 cents for every $100 in
assessable deposits. PNB is categorized as "well capitalized"
and therefore in 1996 was subject only to the minimum FDIC
assessment of $1,000. In 1997, under the BIF/SAIF compromise
agreement, BIF institutions were required to pay a portion of the
FICO assessments. The PNB assessment for 1997 was $22,120.
These figures can be compared to FDIC assessments in 1995 of
$158,142 and 1994 of $281,603.
While PNB presently pays no premiums for deposit
insurance, it is subject to assessments to pay the interest on
Financing Corporation ("FICO") bonds. FICO was created by
Congress to issue bonds to finance the resolution of failed
thrift institutions. Prior to 1997, only thrift institutions
were subject to assessments to raise funds to pay the FICO 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.
<PAGE 12> The FICO assessment for PNB for 1998 is $.0126 for each
$100 of BIF deposits.
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 which 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 which would otherwise be
permitted under applicable regulations if the regulatory body
determines that such distribution would constitute an unsafe or
unsound practice.
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.
<PAGE 13> 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, 1997, PNB's ratio of Tier 1 capital to risk-weighted
assets stood at 16.57% and its ratio of total capital to risk-
weighted assets stood at 17.82%. 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, 1997, PNB's leverage capital ratio was 9.20%.
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.
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 "Federal Deposit
Insurance Corporation Improvement Act of 1991" below, 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.
Federal Deposit Insurance Corporation Improvement Act
of 1991. In December 1991, Congress enacted FDICIA, which
substantially revised the bank regulatory and funding provisions
<PAGE 14> of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes.
FDICIA provides for, among other things, (i) publicly available
annual financial condition and management reports for financial
institutions, including audits by independent accountants,
(ii) the establishment of uniform accounting standards by federal
banking agencies, (iii) 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,
(iv) additional grounds for the appointment of a conservator or
receiver, and (v) 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
<PAGE 15> 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 which 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.
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.
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.
Employees
As of December 31, 1997, PNB had the equivalent of 76
full-time employees. None of its employees are represented by a
collective bargaining unit. PNB considers relations with its
employees to be good.
Year 2000 Compliance
Like any other company, advances and changes in available
technology can significantly impact the business and operations
of PNB. For example, a challenging problem exists as many
computer systems worldwide do not have the capability of
<PAGE 16> recognizing the year 2000 or years thereafter. PNB has
conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000"
issue. PNB is utilizing both internal and external resources to
identify, correct, and reprogram all systems for year 2000
compliance. It is anticipated that all critical applications
will be tested by December 31, 1998. To date, confirmations have
been received from all of PNB's primary vendors and management
presently does not foresee any problems meeting the December 31
testing deadline. Management has assessed and budgeted the 1998
costs for year 2000 compliance to be $2,000.00.
PAGE 17
<PAGE>
Item 2. Financial Information
The following selected data are derived from should be
read in conjunction with the Company's consolidated financial
statements, related notes and other financial information
included herein and Management's Discussion and Analysis of
Financial Condition and Results of Operations included herein.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(In thousands of dollars, except per-share data)
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
RESULTS FROM OPERATIONS
Interest Income $15,725 $13,446 $12,730 $11,271 $10,442
Interest expense 7,914 6,880 6,373 5,090 4,900
Net Interest Income 7,811 6,566 6,357 6,181 5,542
Provision for Loan Loss 130 220 450 265 270
Net Interest Income after Provision for Loan Loss 7,681 6,346 5,907 5,916 5,272
Non-Interest Income 1,138 824 712 590 665
Non-Interest Expense 4,994 3,603 3,293 3,415 3,249
Income Before Income Taxes 3,825 3,567 3,326 3,091 2,688
Applicable Income Taxes 814 851 838 764 613
Net Income before effect of accounting change 3,011 2,716 2,487 2,328 2,075
Effect of accounting change 0 0 0 0 0
Net Income $3,011 $2,716 $2,487 $2,328 $2,075
======= ======= ======= ====== ======
FINANCIAL CONDITION
Total Assets $228,720 $186,159 $170,181 $157,573 $144,044
Investment securities 88,149 72,131 66,383 58,227 51,531
Available for Sale 88,149 72,131 66,383 37,320 51,531
Held to Maturity 0 0 0 20,631 0
Trading Securities 0 0 0 276 0
Loans, net of unearned income 126,786 107,150 97,951 92,543 83,859
Allowance for loan losses 1,676 1,664 1,488 1,484 1,248
Deposits 193,592 156,930 147,168 135,897 124,354
Stockholders' Equity 24,642 21,714 20,351 16,899 16,543
PER SHARE DATA
Net Income $3.44 $3.06 $2.79* $2.61* $2.33*
Dividends .84 .68 .50 .48 .43
Stockholder's Equity 28.16 24.46 22.84 18.97 18.57
PERFORMANCE RATIOS
Return on average assets 1.39% 1.53% 1.51% 1.54% 1.51%
Return on average equity 13.25 13.24 13.25 14.47 14.11
Net interest margin on average earning assets 4.19 4.16 4.26 4.30 4.23
Efficiency (non-interest expense/(net
interest income + non-interest income)) 55.81 48.76 46.58 50.44 52.34
<PAGE 18>
LIQUIDITY AND CAPITAL RATIOS
Stockholder 10.77% 11.66% 11.96% 10.72% 11.48%
Risk based:
Tier 1 Capital 16.57 20.82 21.44 20.40 19.23
Total Capital 17.82 22.07 22.69 21.65 20.48
Dividends (% net income) 24.42 22.23 19.94 18.35 18.60
Loans to deposits 64.63 67.22 67.28 67.01 66.43
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.32% 1.55% 1.54% 1.60% 1.48%
Allowance for loan loses to non-performing loans 158.49 98.97 106.79 110.19 66.29
Net loan charge-offs to average loans .09 .04 .46 .03 .22
____________
</TABLE>
* Restated to reflect the 3-for-2-stock split effected on
May 31, 1995.
PAGE 19
<PAGE>
Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
The following discussion is should be read in
conjunction with the consolidated financial statements and notes
included herein.
Overview
In the past six years, the Company has grown steadily
in total assets from $133,933,047 in 1992 to $228,719,915 at
year-end 1997, an increase of almost 71%. In December 1992, a
branch office was established in Nicholson, Wyoming County which
was the first office of PNB to be located outside of Susquehanna
County. In March 1997, PNB purchased the real estate, furniture
and equipment and most of the deposits of the Tunkhannock and
Meshoppen offices of Mellon Bank. These offices are also located
in Wyoming County. The premium of 10.125% of the deposits
purchased in this transaction amounted to nearly $4 million and
will be written off as an expense over 180 months.
The Bank experienced some deposit run-off during
1997 as the strong equity markets caused the disintermediation of
deposit funds to other sources, including mutual fund purchases.
Because of the level of deposits acquired in connection with the
1997 Mellon Branch purchases, management decided not to be
aggressive in pricing certiticates of deposit in an effort to
retain deposits. Assets nonetheless increased almost 23% to end
1997 at $228,720,000. The growth from 1995 to 1996 was
$15,978,000, or 9.4%. Asset growth has been steady and generally
above that of peers. The growth has been attained even though
the market area has not grown at the same pace. Growth was
attained, in part, because of merger activity which created
changes in the local market.
Loan growth accelerated in 1997 as market coverage
area increased and was up almost 19% over year-end 1996. The
loan growth in 1996 was 10.8% over 1995. Net income rose 10.9%
in 1997 to $3,011,259 from $2,716,037 in 1996. This increase is
in addition to an increase of 9.2% from 1995 to 1996. Year-end
1995 net was $$2,487,220 compared to the December 31, 1996 net
income figure of $2,716,037. Return on average assets was down
in 1997 to 1.38%. This was due to the branch purchases which
raised average assets significantly. Return on average assets
was 1.52% for 1996 and 1995. Return on equity remained
relatively constant during the period at 13.25%, 13.24% and
13.25% for 1997, 1996, and 1995, respectively.
<PAGE 20>
Dividends on common stock rose to $.84 in 1997 from
$.68 in 1996, an increase of 23.5%. The increase of dividends
from 1995 to 1996 was 36.0% over the 1995 dividend rate of $.50
per share. As a percent of income, dividends rose from 19.9% in
1995, to 22.2% in 1996, to 24.4% in 1997. As of December 31,
1993, PNB adopted a change in accounting method, "Accounting for
Investment Securities" whereby certain security investments may
be designated "available for sale." Any gain or loss in fair
market value must be shown as an adjustment to equity, net of
taxes. Because of general market conditions at year-end in each
of the past three years, this accounting method caused the equity
to adjust to those conditions. In 1995, the effect was negative
$82,890, in 1996 it was again negative $345,849, but at year-end
1997, there was a positive adjustment in the amount of $370,569.
Except for this equity adjustment, retained earnings continue to
be the major source of increases in stockholders' equity.
Net Interest Income
Net interest income is the chief component of the
Company's earnings, and it consists of the excess of interest
income from earning assets less the expense of interest bearing
liabilities. Earning assets consist primarily of loans and
investments, while deposits and short-term borrowings represent
the major portion of interest bearing liabilities. Changes in
the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid are determinants of
the changes in net interest income. The net interest margin is
calculated as tax-equivalent net interest income (income plus the
tax savings from tax-exempt loans and investments) divided by
average earning assets and represents the Company's net yield on
its earning assets.
Net interest income was $7,810,667 in 1997, $6,566,175
in 1996, and $6,356,861 in 1995. These levels represent
increases of $1,244,492 over 1996, or 19%, and $209,314, or 3.3%,
over 1995. On tax equivalent basis, the respective net interest
incomes for 1997, 1996 and 1995 were respectively $8,620,000,
$7,163,000 and $6,801,000.
In 1997, the growth in net interest income accelerated
because of the growth in loans outstanding and in investments.
With good economic conditions and the increase in market area
this trend is expected to continue. Net interest margin,
however, has come under pressure because of a sustained flat
treasury yield curve and increased competition for loans. Net
interest margin on a tax equivalent basis increased slightly to
4.19% in 1997 from 4.16% in 1996. In 1995, the net interest
margin was 4.26%.
<PAGE 21>
Average earning assets were $205,994,000 in 1997, up
19.5% from $172,381,000 in 1996 which were up 8% from
$159,518,000 in 1995. Earning assets made up 94.9% of average
assets in 1997 compared to 96.7% in 1996 and 97.1% in 1995.
Total interest income on a tax equivalent basis, was $16,534,000
in 1997, up $2,491,000 or 17.7% from $14,043,000 in 1996 which
was up $869,000 or 6.67% over 1995. Tax equivalent yields have
declined over the past two years from 8.26% in 1995, 8.15% in
1996, to 8.03% in 1997.
Average interest bearing liabilities were $174,743,000
in 1997, up 22.6% from $142,583 in 1996 which were up 7.7% from
$132,390,000 in 1995. These funds made up 80.0% of average
assets in 1997 compared to 80.1% in 1996 and 80.6% in 1995.
Total interest expense was $7,914,000 in 1997 up $1,034,000 or
15% from $6,880,000 in 1996 which was 8% higher than the 1995
level.
During 1995, 1996, and 1997, certificates of deposit
were the major source of funds for the company, with money market
deposit accounts the next biggest source, followed by savings
accounts, non-interest bearing demand deposits and interest
bearing demand deposits. Interest rates tend to determine the
structure as customers seeking higher returns deposit their
discretionary funds in those investments which pay the highest
rates. Yields on interest bearing accounts have trended lower
the past three years with 1995 at 4.81%, 1996 at 4.83% and 1997
at 4.53%. This pattern closely resembles US Treasury yields on
maturities of up to five years because that is generally the
manner in which deposit liabilities are priced. The past three
years in particular have seen a tremendous amount of interest,
followed by investment in, the equity markets via mutual funds.
Mutual funds have become significant competition for bank
deposits.
Tax equivalent interest income on loans increased by
941,000 in 1997 over 1996 or 10.2%, while average loans increased
$11,594,000 or 11.3%. This reflects a slight decline in interest
rates which were economic and competitive in nature. In
comparing 1996 to 1995 tax equivalent loan interest increased
$575,000 or 6.7%, while average loans increased $7,146,000 or
7.5% suggesting the trend mentioned earlier. Tax equivalent
yields on loans mirror this trend. In 1995, this yield was 9.05%
while it was 8.98% in 1996 and 8.90% in 1997.
The following table illustrates average balances of
assets, liabilities and stockholder equity as well as the related
income and expense for each item and the average yields and cost
for the years 1995 through 1997.
<PAGE 22>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND YIELD ANALYSIS
(In thousands)
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Real Estate $75,642 $6,595 8.72% $67,887 $5,953 8.77% $63,824 $5,593 8.76%
Mortgage
Construction
Installment 18,303 1,746 9.54% 13,416 1,289 9.61% 12,146 1,116 9.19%
Commercial 13,809 1,315 9.52% 13,943 1,419 10.18% 14,328 1,513 10.56%
Tax Exempt 6,028 459 7.61% 6,911 524 7.58% 4,744 391 8.24%
Other Loans 337 36 10.68% 378 25 6.61% 337 22 6.53%
Total Loans 114,119 10,151 8.90% 102,525 9,210 8.98% 95,379 8,635 9.05%
Investment securities
available for sale:
Taxable 64,978 4,316 6.64% 52,464 3,546 6.76% 51,073 3,547 6.94%
Non-taxable 24,753 1,947 7.87% 16,702 1,250 7.48% 12,025 932 7.75%
Total securities
available for sale 89,731 6,263 6.98% 69,166 4,796 6.93% 63,098 4,479 7.10%
Investment securities
held to maturity:
Taxable
Non-Taxable
Total securities
held to maturity:
Time deposits with
other banks 423 27 6.38% 22 1 4.55% 99 6 6.06%
Federal funds sold 1,721 93 5.40% 668 36 5.39% 942 54 5.73%
Total Earning Assets 205,994 16,534 8.03% 172,381 14,043 8.15% 159,518 13,174 8.26%
Less: Allowance for
loan losses (1,694) (1,575) (1,418)
Cash and due from banks 4,089 2,915 2,969
Premises and Equipment,
net 3,459 2,617 1,813
Other Assets 5,320 1,574 1,360
Total Assets $217,168 $177,912 $164,242
======== ======== ========
LIABILITIES AND
STOCKHOLDERS EQUITY
Interest-bearing
demand deposits $13,379 230 1.72% $7,748 135 1.74% $7,834 153 1.95%
Regular savings
deposits 28,870 828 2.87% 23,154 648 2.80% 23,806 662 2.78%
Money Market savings
deposits 40,529 1,760 4.34% 29,015 1,389 4.79% 23,611 1,215 5.15%
Time deposits 88,908 4,920 5.53% 80,965 4,627 5.71% 74,840 4,210 5.63%
Total Interest-Bearing 171,686 7,738 4.51% 140,882 6,799 4.83% 130,091 6,240 4.80%
Deposits
Other borrowings 3,057 176 5.76% 1,701 81 4.76% 2,299 133 5.79%
<PAGE 23>
Total Interest-Bearing 174,743 7,914 4.53% 142,583 6,880 4.83% 132,390 6,373 4.81%
Liabilities
Net Interest Spread 8,620 3.50% 7,163 3.32% 6,801 3.45%
===== ==== ===== ==== ===== ====
Non-interest bearing
demand deposits 18,735 13,822 12,176
Accrued expenses and
other liabilities 974 994 913
Stockholders' Equity 22,716 20,513 18,763
Total Liabilities and
Stockholders' Equity $217,168 $177,912 $164,242
======== ======== ========
Net interest income/
earning assets 8.03% 8.15% 8.26%
Net interest expense/
earning assets 3.84% 3.99% 4.00%
assets
Net interest margin 4.19% 4.16% 4.26%
===== ===== =====
</TABLE>
1. Loan fee income is included in interest income for each loan
category and yields are stated to include all income earned.
2. Balances of non-accrual loans and related income have been
included for computational purposes.
3. Tax-exempt income has been converted to a tax equivalent
basis by using an incremental rate of 34%.
PAGE 24
<PAGE>
The following table describes the impact comparison on net
interest income resulting from changes in average balances and
rates.
<TABLE>
<CAPTION>
RATE AND VOLUME ANALYSIS
(In thousands)
Years-ended December 31,
1997 to 1996 1996 to 1995
Increase Change Due to Increase Change Due to
(Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans:
Real Estate $642 $(39) $681 $360 $5 $355
Consumer 457 (13) 470 173 56 117
Commercial (104) (90) (14) (94) (53) (41)
Tax-exempt (65) 2 (67) 133 (46) 179
Other Loans 11 14 (3) 3 0 3
Total Loans 941 (126) 1,067 (38) 613
Investment securities available
for sale:
Taxable 770 (76) 846 (1) (98) 97
Non-taxable 697 94 603 318 (44) 362
Total securities available for sale 1,467 18 1,449 317 (142) 459
Total securities held to maturity 0 0 0 0 0 0
Time deposits with other banks 26 8 18 (5) (0) (5)
Federal Funds sold 57 0 57 (18) (2) (16)
Total Interest Income 2,491 (100) 2,591 869 (182) 1,051
INTEREST EXPENSE:
Interest-bearing demand deposits 95 (3) 98 (18) (16) (2)
Regular savings deposits 180 20 160 (14) 4 (18)
Money Market Savings deposits 371 (180) 551 174 (104) 278
Time deposits 293 (161) 454 417 72 345
Total Interest-Bearing Deposits 939 (324) 1,263 559 (44) 603
Other borrowings 95 30 65 (52) (17) (35)
Total Interest Expense 1,034 (294) 1,328 507 (61) 568
Net Interest Income $1,457 $194 $1,263 $362 $(121) $483
</TABLE>
(1) For the purpose of this report, the analyses includes
non-accruing loans of average balances of $964,315 in 1997
and $1,423,875 in 1996 in the Real Estate portfolio.
(2) Loan fees are included in the above numbers. In 1997, the
loan fees collected totaled $196,992. In 1996, the loan
fees collected totaled $195,769.26.
<PAGE 25>
(3) Tax-exempt income has been converted to a tax-equivalent
basis using an incremental rate of 34%.
Non-Interest Income
Total non-interest income was $1,137,871 in 1997, which
was up 38.1% over the 1996 figure of $823,816. Continuing the
trend from 1996 being up 15.7% or $111,617 from year-end 1995.
Service charges and other customer service fees were the
significant contributors to growth in non-interest income the
past two years. At $891,489 at year-end 1997, this number was up
$209,486 over the previous year or 30.0%. Fees were increased in
1997 and volume was also increased because of the deposits
purchased in the Wyoming County acquisitions. The trend was also
up in 1996 over 1995 with service charges on deposit accounts and
customer fees at $682,003 at year-end 1996 up $66,674, or 10.8%
over year-end 1995. Another significant component to non-
interest income is gains on investment securities sold. In 1997,
this figure was $217,104 compared to a gain of $119,913 in 1996
and a gain of $60,194 in 1995.
Non-Interest Expense
Non-interest expense took a significant jump in 1997 as
expenses involved in branch purchases and expenses involved in
new computer software and hardware hit the income statement.
Total non-interest expense in 1997 was $4,993,660 compared to
$3,603,126. The increase of $1,390,534 was 38.6% higher than
year-end 1996. In comparison year-end 1996 at $3,603,126 was
9.4% or $309,642 over 1995.
The largest component by far in non-interest expense
is salaries and benefits. At year-end 1997, this figure was
$2,282,412 which was up $491,932 or 27.5% over 1996. This
increase is reflective of the increases in staff which came about
with the purchase of the two Wyoming County offices. Another,
although less significant factor, was the increase in minimum
wage legislation. Although the bank's entry levels were always
above the prevailing minimum wage, it was felt that increases
were necessary to keep those levels at approximately the same
percentage in excess of minimum as they were previously. The
increase in salaries and benefits in 1996 over 1995 was 11.3% or
$491,932. Growth in all areas of the bank and the commitment of
the bank to recognize employees for their efforts contributes to
the increases in salaries and benefits.
Occupancy and equipment expenses also showed sharp
increases in 1997 over 1996 because of the purchases of the
Wyoming County offices, the computer and equipment purchases and
<PAGE 26> upgrades and the costs associated with the first full
year of operation in the expanded Administrative/Operations
building. This figure was up almost 50% at $712,389 compared to
year-end 1996 at $476,983. Year-end 1995 was $394,660 so 1996
was 20.9% over 1995. Other operating expenses were $1,998,859 in
1997 compared to year-end 1996 at $1,335,663. This is an
increase of $663,196 or 49.7%. Professional fees, computer
services and supplies, advertising and promotional fees were up
significantly and the increases can generally be traced to the
branch acquisitions and to computer purchases and upgrades and
the costs associated with these changes. In comparison, the
difference between 1995 and 1996 on other operating expenses was
3.5% or only an increase of $45,217. Although depreciation will
remain high because of the purchase of fixed assets it is
expected that non-interest expense should level off in the future
because a significant volume of expense in 1997 was one-time
only.
Income Taxes
Income tax expense was $813,619 in 1997, $850,828 in
1996 and $838,356 in 1995. The 1997 expense was $37,209 lower
than 1996 or 4.4% because of the significant increase in tax-free
income received in 1997. The increase of $12,472 in income taxes
from 1995 to 1996 was less than 1.5%. In the period 1995 through
1997, net income increased over $524,000 or 21%, while tax
expense actually decreased $24,737. This is directly
attributable to the increased investment in tax-free securities.
Securities Portfolio
The following table presents the composition of the
securities portfolio for the periods indicated:
<PAGE 27>
<TABLE>
<CAPTION>
Investment Securities Portfolio Composition
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
US Government Treasury and Agency Obligations $32,513 $22,192 $ 18,567
State and Municipal Obligations 29,474 20,167 16,622
Mortgage-Backed Securities 19,215 23,184 26,318
Other Securities 7,936* 6,588 4,778
Total Investment Securities $89,138 $72,131 $66,285
======= ======= =======
Available For Sale (Fair Value) $89,138 $72,131 $66,285
Held to Maturity (Amortized Cost) 0 0 0
Total Investment Securities $89,138 $72,131 $66,285
======= ======= =======
<FN>
*Includes CD's with other banks
</TABLE>
Total balances in the investment portfolio at year-end
were $88,149,000 in 1997, $72,131,000 in 1996, and $66,285,000 in
1995. The portfolio expanded by 22.2% in 1997 generally because
of the purchase of the deposit liabilities of the two new Wyoming
County branches. while growing the loan portfolio was the
desired approach to utilize the new deposits, it was understood
that doing so would take some time. In the meantime, use of
investments was the approach taken to provide maximum interest
rate spread opportunities. Maturities were chosen to best fit
the anticipated growth in the loan portfolio. Investments
purchased in the three years reflect the Company's strategic goal
of quality, liquidity, and income production. Emphasizing this
strategy, the investment portfolio components showing growth are
US Government Treasury and agency obligations and State and
Municipal obligations. US Treasuries and Agencies generally
supply the liquidity needs and states and municipal obligations
provide more of the tax equivalent income needs. Rates have been
stable and the treasury yield curve flatter than normal in the
past three years as inflation fears have not been prevalent.
During such times it is difficult to attain interest rate
spreads. Yield gains by maturity extensions are not available as
well as ill advised given relatively short deposit maturities
which make up a significant part of liabilities. Tax-free
investments have shown a greater tax-equivalent rate spread than
most other investments during this three-year period and because
of that, more of these investments have been purchased for the
portfolio. Increased tax-free investment income has resulted in
less federal income taxes being paid in 1997 than in 1995. There
has been a general decline in interest rates in 1997 which has a
positive effect on the market value of the investment portfolio
<PAGE 28> and at year-end, the portfolio showed an appreciation
of $561,468. The total portfolio had an average maturity of
7.57 years on December 31, 1997 compared with 9.76 years on
December 31, 1996 and 8.93 years on December 31, 1995.
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standard no. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS
115") in 1993, requiring securities to be classified according to
a bank's ability and intent to hold securities until maturity.
Any instruments for which a company wishes to reserve the right
to sell prior to maturity must be classified as available for
sale, and their carrying values must be regularly adjusted to
fair value with an offsetting adjustment, net of taxes, to
stockholders' equity. This change was implemented on
December 31, 1993. In order to provide the maximum portfolio
flexibility, 100% of the portfolio has been designated as
available for sale for the years 1997, 1996, and 1995. Many
factors influence interest rates and, in turn, the fair value or
market value of the portfolio. These changes were reflected in
net of taxes adjustments to stockholders' equity on a quarterly
basis. At year-end 1997, there was a positive adjustment of
$370,669 while year-end 1996 saw a negative adjustment of
$345,849 and there also was a negative adjustment of $82,890 at
year-end 1995.
For the types of investment purchases at PNB, interest
rate risk is considered to be moderate and price fluctuations can
be compared to US Treasury securities with similar weighted
average maturities. There is an active and well-established
secondary market for all portfolio investments.
The following table sets forth the maturity
distribution and weighted average yields of the investment
portfolio as of December 31, 1997. The weighted average yields
are calculated on the basis of carrying value of the securities
and their related interest income adjusted for the amortization
of premium and accretion of discount. Yields on tax-exempt
securities have been computed on a tax equivalent basis assuming
a federal tax rate of 34%.
<TABLE>
<CAPTION>
MATURITY OF THE INVESTMENT SECURITIES PORTFOLIO
1 Year or Less 1-5 Years 5-10 Years Over 10 Years Totals
(In thousands)
Book Average Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
US Government Treasury $1,000 5.93% $5,471 6.39% $1,000 6.25% $0 0% $11,471 16.34%
<PAGE 29>
US Government Agency 0 0% 8,395 6.58% 9,670 7.36% 2,812 7.27% 20,877 7.03%
State, County & Municipal
Obligations 1,370 7.21% 6,976 7.93% 3,953 7.32% 16,592 7.92% 28,891 7.81%
Mortgage-backed
Securities 0 0% 1,624 6.87% 550 6.23% 17,136 6.60% 19,310 6.61%
Equity Securities 1,853 6.22% 500 6.50% 1,998 6.39% 3.679 6.50% 8,030 6.41%
Total Available for Sale $4,223 6.47% $26,966 6.88% $17,171 7.14% $40,219 7.18% $88,579 7.05%
</TABLE>
Loan Portfolio
Total loans outstanding on December 31, 1997 were
$126,786,000 compared with $107,150,000 on the same date in 1996
and $97,951,000 in 1995. The loan portfolio represented 55.4% of
the total assets on December 31, 1997 compared with 57.6% on both
December 31, 1996 and December 31, 1995.
PNB's loan portfolio is composed of commercial loans,
residential loans, and consumer loans. The commercial portfolio
represents 11.7% of the total portfolio and is comprised of lines
of credit, local municipal loans, equipment loans, and notes for
various purposes, including working capital. A significant
portion of commercial loans are secured by real estate and are
carried in the real estate mortgage component of the portfolio.
This combined component represents 75.9% of the total portfolio.
Only a minimal number of mortgages have a loan to value ratio
greater than 80%. Private mortgage insurance is required for
those loans with higher loan to value ratios. At year-end 1997,
all mortgages were kept "in house" although a percentage of those
portfolio loans have been underwritten in anticipation of future
sale. The consumer portfolio makes up the remaining 12.6% of the
portfolio. Included in the consumer portfolio are direct
installment loans for purposes such as vehicle purchases, debt
consolidations, home improvements, and other personal needs.
Home equity loans are also a part of the consumer portfolio. PNB
does not engage in foreign lending nor does it engage in
speculative real estate and land development lending. The
primary areas of lending are Susquehanna and Wyoming Counties,
Pennsylvania and these areas which border those counties yet
gravitate by trade to Susquehanna and Wyoming Counties.
Some risk is involved in all types of lending. PNB,
however, attempts to manage that risk to minimize potential
losses on its portfolio. Concentration is considered minimal
with the exception of real estate mortgages which include
commercial real estate. Although property values have declined
slightly, risk is not considered to be substantial unless there
were to be major economic crisis in the future. Financial
analysis is used as a tool to identify potential risk in
commercial loans. Residential loans are generally well secured.
<PAGE 30> Standard debt to income ratios are adhered to, and loan
to value ratios greater than 80% require Private Mortgage
Insurance again reducing risk. A large segment of the consumer
portfolio is secured by motor vehicles. The use of debt to
income ratios and credit bureau reports assist in the approval
process. Delinquent accounts are worked quickly to minimize
losses in all components in the loan portfolio.
The following table summarizes the composition of the
loan portfolio at the periods indicated:
<TABLE>
<CAPTION>
LOAN PORTFOLIO
December 31,
(In thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial $14,796 $9,787 $10,920 $9,795 $8,897
Real Estate-Construction 9 0 0 0 0
Real Estate-Mortgage 96,192 83,484 73,699 70,959 65,268
Installment 16,035 14,169 13,643 12,113 9,990
Total Loans 127,032 107,440 98,262 92,867 84,155
Deferred Loans (246) (290) (311) (324) (296)
Total Loans (Net of deferred loans) 126,786 107,150 97,951 92,543 83,859
Allowance for Loan Loss (1,676) (1,664) (1,488) (1,484) (1,248)
Net Loans $125,110 $105,486 $96,463 $91,059 $82,611
======== ======== ======= ======= =======
</TABLE>
The table below details the maturity distribution as
well as the fixed and variable rate distribution of the loan
portfolio as of December 31, 1997:
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF LOANS
One Year Over One, within Over Five Total
or Less Five Years Years Loans
<S> <C> <C> <C> <C>
Commercial $16,374 $4,823 $741 $21,938
Real Estate-Construction 9 0 0 9
Real Estate-Mortgage 8,452 35,231 37,473 81,156
Installment 11,023 10,194 2,712 23,929
Total $35,858 $50,248 $40,926 $127,032
======= ======= ======= ========
Total Loans w/Predetermined Rates $26,248 $28,908 $ 7,937 $ 63,093
Total Loans w/Variable Rates 9,610 21,340 32,989 63,939
Total $35,858 $50,248 $40,926 $127,032
======= ======= ======= ========
</TABLE>
ALLOWANCE FOR CREDIT LOSSES AND MANAGEMENT OF CREDIT RISK
<PAGE 31>
A comparative analysis of the allowance for credit
losses, including charge-off activity, is presented below:
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Average Total Loans $114,119,000 $102,525,000 $95,379,000 $87,148,000 $79,320,000
============ ============ =========== =========== ===========
Balance, beginning of period 1,663,806 1,487,756 1,483,882 1,248,052 1,161,689
Less Charge-offs:
Commercial 37,791 20,031 301,000 21,522 193,389
Installment 50,197 26,030 122,857 7,835 0
Residential real Estate 61,184 31,035 38,634 52,683 16,995
Total Charge-offs 149,172 77,096 462,491 82,040 210,384
Plus Recoveries:
Commercial 3,900 26,369 1,000 36,565 16,034
Installment 16,655 442 0 8,336 0
Residential Real Estate 10,698 6,335 15,365 7,969 10,713
Total Recoveries 31,253 33,146 16,365 52,870 26,747
Net Charge-offs 117,919 43,950 446,126 29,170 183,637
Provision for Loan Losses 130,000 220,000 450,000 265,000 270,000
Balance, End of Period $ 1,675,867 $ 1,663,806 $ 1,487,756 $ 1,483,882 $ 1,248,052
Allowance for credit losses to 1.32% 1.55% 1.54% 1.60% 1.49%
period-end total loans
Allowance for credit losses to 163.19 107.80 110.29 118.05 72.85
non-accrual loans
Net charge-offs to average loans 0.09 0.04 0.47 0.03 0.23
(annualized)
</TABLE>
The following table reflects the allocation of the
allowance for credit losses by loan type. The allowance has been
allocated to the various categories of loans. The process
considers all "problem loans" including classified, criticized,
and monitored loans, and allocates a portion of the reserve to
each of these categories. The excess allowances is then
considered the unallocated portion. This allocation method is
not intended to limit the amount of the allowance available to
absorb losses from any specific type of loan and should not be
viewed as an indicator of the specific amount or specific
categories in which future charge-offs may ultimately occur.
<PAGE 32>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES IN DOLLARS
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial $ 321,064 $ 687,640 $ 733,507 $ 495,889 $ 368,391
Real Estate construction 139 119 0 0 0
Real Estate mortgage 342,980 197,032 165,479 55,227 5,242
Installment 129,383 117,876 183,721 17,783 19,248
Unallocated portion 882,321 661,139 405,049 914,983 855,171
Total allowance for credit losses $1,675,887 $1,664,806 $1,487,756 $1,483,882 $1,248,052
========== ========== ========== ========== ==========
</TABLE>
The following table breaks down the loan portfolio by
category as a percentage of the whole:
<TABLE>
<CAPTION>
LOAN CATEGORIES BY PERCENTAGES
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial 11% 9% 11% 11% 11%
Real Estate-Construction 1% 0% 0% 0% 0%
Real Estate-Mortgage 76% 78% 75% 76% 77%
Installment 12% 13% 14% 13% 12%
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
Any increase in the level of the allowance is warranted
because of the increase in the size of the loan portfolio and the
risk factors of the loans. Management uses detailed analyses of
the portfolio to determine the adequacy of the allowance for
credit losses. Prior loss history along with current trends,
both nationally and locally, are taken into consideration:
(i) specific reserves are established on all classified loans
where a loss seems imminent; (ii) a general reserve is
established on identified problem loans where specific potential
losses are not yet determined, but likely; (iii) smaller reserves
are also established on criticized loans that have identifiable
weaknesses but are not yet classified; and (iv) a general overall
reserve is calculated on the entire remainder of the portfolio by
loan type and included as an unallocated reserve allowance. In
addition, it is the practice of the bank to manage the risk
elements of lending through rigorous credit evaluation of
prospective borrowers, continuous review of the portfolio,
diversification of the types of borrowers, and by maintaining a
well collateralized portfolio.
The following table details information concerning non-
accrual and past-due loans, as well as foreclosed assets (other
<PAGE 33> Real Estate owned). It is the policy of the bank to
consider a loan not in the process of collection when there is
doubt to the full repayment of the principal and interest or when
the loan is 90 days past due. When a loan is reclassified non-
accrual any previously accrued income is charged against income,
and no future income is accrued until performance is restored.
More consistent and aggressive collection procedures as well as
consistent, yet fair, underwriting has resulted in a decline in
non-performing assets from 1993 and especially when comparing
1997 to 1996. The economy in the market area also has a
significant effect on non-performing assets. Management believes
that the current levels of reserve is sufficient to cover non-
performing loans.
Consumer loans are not generally reclassified as non-
accrual at this stage but collection procedures are continued.
These loans are generally charged off at 120 days past due.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,026,625 $1,543,397 $1,348,877 $1,257,034 $1,713,796
Restructured loans 0 0 0 0 0
Loans past due 90 or more
days accruing interest 30,765 137,286 44,202 59,619 168,892
Total Non-performing loans 1,057,390 1,681,183 1,393,079 1,346,653 1,882,688
Foreclosed Assets 0 99,000 429,680 100,244 168,740
Total Non-performing assets $1,057,390 $1,775,183 $1,822,759 $1,446,897 $2,051,428
========== ========== ========== ========== ==========
Non-performing loans to
total loans at period end .83% 1.56% 1.44% 1.46% 2.24%
Non-performing assets to
period end total loans plus
foreclosed assets .83% 1.65% 1.85% 1.56% 2.44%
</TABLE>
The loans listed above as non-accruing are
significantly past due and are not considered to be in the
process of collection. Income was recorded on these loans in
1997 in the amount of $24,900 compared to income anticipated
under the original loan agreements of $96,000. In 1996, those
amounts were $30,700 and $163,000, respectively. Once the
collection is deemed to be unlikely over the foreseeable future,
a loan is charged off. Even though a loan is charged off, PNB
continues to work with a borrower to collect that loan wherever
possible. While management does not anticipate any loss not
previously provided for these loans, economic conditions may be
<PAGE 34> such as to necessitate future modifications in the
repayment terms.
Deposits
PNB uses deposits as the primary source of funding of
its assets and has experienced continuous growth in all measured
components. A variety of accounts are offered to individuals,
businesses, and non-profit organizations. These accounts,
including checking, savings, money market, and certificates of
deposit, are obtained primarily from the communities and
surrounding areas which are serviced by PNB.
The following table details the average amount, the
average rate paid on, and the percent of the total of, the
following primary deposit categories for the past three years.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT COMPOSITION AND COST
(In thousands of dollars)
1997 1996 1995
Average % of Average % of Average % of
Balance Rate Total Balance Rate Total Balance Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $18,735 9.84% $13,822 8.93% $12,176 8.56%
Interest-bearing demand
deposits 13,379 1.72% 7.03% 7,748 1.71% 5.01% 7,834 1.95% 5.51%
Regular savings deposits 28,870 2.87% 15.16% 23,154 2.80% 14.97% 23,806 2.70% 16.73%
Money market savings
deposits 40,529 4.34% 21.28% 29,015 4.79% 18.76% 23,611 5.15% 16.60%
Time deposits 89,908 5.53% 46.69% 80,965 5.73% 52.33% 74,840 5.63% 52.60%
Total Interest-
Bearing Deposits 171,686 4.51% 90.16% 140,882 4.83% 91.07% 130,091 4.80% 91.44%
Total Deposits $190,421 4.16% 100.00% $154,704 4.45% 100.00% $142,267 4.48% 100.00%
======== ===== ====== ======== ==== ====== ======== ==== ======
</TABLE>
Total deposits were $193,592,017 on December 31, 1997
as compared to $156,930,353 on December 31, 1996 and $147,168,282
on December 31, 1995. A significant reason for growth in all
deposit components in 1997 was the purchase of the two branch
offices in Wyoming County. At year-end 1997, non-interest
bearing deposits totaled $20,104,376 and interest bearing
deposits totaled $173,487,641. The greatest portion of interest
bearing deposits was certificates of deposits with an average
balance for 1997 of $88,908,000 which was 51.8% of the average
total deposits for the year.
<PAGE 35>
The following is a summary of the maturity distribution
of certificates of deposit in the amounts of $100,000 or more on
December 31, 1997:
<TABLE>
<CAPTION>
MATURITIES OR REPRICING OF CD'S OF $100,000 OR MORE ON DECEMBER 31, 1997
(In thousands of dollars)
Amount Percent
<S> <C> <C>
Three months or less $2,356 18.83%
Over three months through six months 3,631 29.03%
Over six months through twelve months 1,788 14.29%
Over twelve months 4,735 37.85%
$12,510 100.00%
======= ======
</TABLE>
Short-Term Borrowings
Short-term borrowings consist of federal funds
purchased, repurchase agreements, and borrowings from the Federal
Home Loan Bank and the Federal Reserve Bank. Because deposit and
loan growth occur at different times throughout the year, it is
necessary to have the flexibility to fund loan growth and
securities purchases by drawing on credit lines at the Federal
Home Loan Bank and by purchasing overnight federal funds from a
correspondent bank.
Cash management became an important product for some
bank customers in 1997 and as a result, repurchase agreements
were introduced as a vehicle to sweep excess funds into each day.
Repurchase agreements averaged $2,495,494 in 1997. Federal funds
purchased was also used extensively and the average outstanding
in 1997 was $1,254,192 while in 1996 the average was $714,123 and
in 1995 it was $355,973. An additional source of funds for
liquidity purposes was the Federal Home Loan Bank. During 1997,
the average outstanding borrowings was $1,251,027 compared to
$555,724 in 1996 and $1,419,452 in 1995. At year-end 1997,
repurchase agreements were $2,596,742. There were no repurchase
agreements outstanding at year-end 1996 or 1995. Borrowings from
the Federal Home Loan Bank at year-end 1997 were $5,675,000. At
year-end 1996, the total was $6,175,000 compared to $1,000,000 at
year-end 1995.
<PAGE 36>
Liquidity
Assuring adequate liquidity involves meeting future
cash flow needs. This liquidity can be provided by reducing
asset balances and increasing deposits and short-term borrowing,
or a combination of both may be employed. Traditionally, PNB has
maintained a strong liquidity position because of a concentration
of core deposits such as regular savings and checking accounts.
A high percentage of money market accounts and certificates of
deposit can also be considered core deposits. Federal funds sold
is the bank's most liquid earning asset. Other sources include
money market instruments and securities classified as available
for sale. In addition to these sources, the bank has credit
lines of $67.8 million available from correspondent and Federal
Home Loan Bank of Pittsburgh.
On December 31, 1997, securities available for sale and
federal funds sold totaled $88,149,000 compared to $72,131,000 in
1996 and $66,285,000 in 1995. These funds averaged $91,002,000
in 1997, $68,677,000 in 1996 and $62,898,000 in 1995. In each
year, all investment securities were classified as available for
sale. Asset liquidity is also provided by managing the
maturities of loans, securities, and certificates of deposits.
Cash flows from operating activities remained relatively
constant at $3,391,000, $2,731,000, and $3,483,000 for 1995,
1996, and 1997, respectively. Depreciation and amortization
expense for 1997 increased significantly over prior years as a
result of the March 1997 branch purchases, as PNB began to
amortize the deposit premium paid in connection with these
acquisitions.
Cash used in investing activities similarly increased to
$39,428,874 in 1997 from $16,245,913 in 1996 as a result of the
purchase of investment securities with the cash related to the
deposit liabilities assumed in connection with the 1997 branch
purchases. Loans have also increased steadily over the period,
rising approximately $20,000,000 from 1997 over 1996, as the
Company attempts to capitalize on the higher margins resulting
from commercial lending activities.
Cash provided by financing activities has increased to
$38,426,000 in 1997 from $13,665.000 and $8,475,000 in 1996 and
1995, respectively. Substantially all of this increase relates
to deposit increases, with the increase in the amounts for 1997
resulting from the 1997 branch purchases.
<PAGE 37>
Interest Rate Sensitivity Analysis
An important element of both earnings performance and
the maintenance of sufficient liquidity is maintaining an
appropriate balance between rate-sensitive assets and rate-
sensitive liabilities. Interest rate sensitivity analysis is the
measure of the vulnerability of net interest income to changes in
the level of rates. An interest rate sensitivity gap results
when assets and liabilities reprice at different intervals. If
the gap is negative or liability sensitive, the impact on
earnings is negative if rates rise. A positive or asset
sensitive gap implies the risk of lower earnings if rates
decline. To attempt to offset this risk, PNB regularly forecasts
its exposure to rate changes and monitors its performance. In
addition, the net interest margin is calculated monthly so that
interest rate changes and asset restructuring may be made as
needed.
PNB's rate-sensitive position reflects a liability
sensitive or negative gap position on a cumulative basis through
one year, then shifts to a cumulative asset sensitive or positive
gap position beyond one year. This analysis makes several
assumptions. First that 10% of interest bearing demand deposit
accounts and 10% of regular savings accounts are rate sensitive.
Also, it is assumed that the entire third tier (balances of
$50,000 or more) of money market deposits are rate sensitive. In
addition, principal payments on mortgage backed securities are
projected at the average levels experienced over the past 12
months.
The following table illustrates the interest rate
sensitivity gap of PNB as of December 31, 1997. This table
presents a position that existed at a particular point in time.
Although that position can change continually, this position is
also similar to other times as well.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS(1)
Within 3 >3 mos >6 mos >1 year 5 years
months to 6 mos to 1 year to 5 years and over
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Loans 18,414 11,441 10,319 46,672 39,182
Securities 24,595 4,469 4,725 41,556 11,411
Federal funds sold 0 0 0 0 0
Total rate sensitive assets 43,009 15,910 15,044 88,228 50,593
Cumulative rate sensitive assets 43,009 58,919 73,963 162,191 212,784
RATE SENSITIVE LIABILITIES <PAGE 38>
Interest bearing checking 1,358 0 0 0 12,226
Money market deposits 23,716 2,608 0 0 13,037
Regular savings 2,932 44 258 0 26,131
Certificates of deposits/IRA 17,803 18,470 23,739 29,102 2,064
Short-term borrowings 9,275 0 0 0 0
Total rate sensitive liabilities 55,081 21,122 23,997 29,102 53,458
Cumulative rate sensitive liabilities $55,081 $76,203 $100,200 $129,302 $182,760
Period gap (12,072) (5,212) (8,953) 59,126 (2,865)
Cumulative gap (12,072) (17,284) (26,237) 32,889 30,024
Cumulative rate sensitive assets to 78.08% 77.32% 73.82% 125.44% 116.43%
rate sensitive liabilities
Cumulative gap to total interest-
earning assets 5.67% 8.12% 12.33% 15.46% 14.11%
</TABLE>
(1) The following are assumptions that have been made in the
foregoing model. Non-interest bearing categories are shown
to reprice 10% of balances in the "within 3 months" period
(all repricing within the first month) and the remaining
balances in the last period. NOW accounts and regular
Savings accounts also reprice 10% of balances in the "within
3 months" period and the remaining balances in the last
period. Management can change these rates, but such changes
are infrequent and incrementally small. History has shown a
strong core deposit relationship in these accounts and
little or no run-off if rates change in these products.
Repayment of principal for mortgage backed securities are
projected by expected cash flows as evidenced by recent
history. Repayment of principal for loan categories are
projected at expected maturity (amortization) for fixed rate
products and the next repricing date for variable rate
products.
Gap guidelines for PNB are that for the one year
interval, the cumulative rate sensitive assets to rate sensitive
liabilities ratio will be between 75% and 125%. The Asset
Liability Committee (ALCO) and the Board of Directors reviews
this guideline monthly to insure compliance. ALCO reviews their
assumptions monthly and determines if the GAP is correctly
predicting the net interest margin. In determining risk exposure
limits, ALCO considers the nature of PNB's strategies and
activities, its past performance, the level of earnings and
capital available to absorb potential losses. Historically,
PNB's performance has been within the guidelines set for GAP. If
it appears that the guidelines may be breached, ALCO would
implement actions to be taken to prevent this breach. Some of
the strategies used by banks to assure compliance with GAP
guidelines are controlling its interest rates, increasing or
decreasing the duration of the portfolio, raising additional
<PAGE 39> capital, selling assets to enhance liquidity, and/or
implementing hedging and interest rate swaps.
Market Rate Risk
The following table presents certain additional
information, as of December 31, 1997, relating to assets and
liabilities of PNB consisting of financial instruments that are
sensitive to changes in interest rates. The table presents
average interest rates for such assets and liabilities. PNB is
not a party to any forward contract, interest rate swap, option
interest or similar derivation instrument. PNB also does not
deal in foreign currency.
<TABLE>
<CAPTION>
Expected Maturity Dates
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 >5 Yrs. Total Fair Value
-------- -------- -------- -------- -------- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments $23,856,429 $13,336,999 $ 9,091,250 $ 8,608,004 $ 9,474,542 $23,209,360 $ 88,576,584 $ 89,138,052
Average Interest Rate 6.15% 6.27% 6.24% 6.16% 6.07% 6.09% 6.15%
Loans $35,857,331 $18,351,882 $11,385,354 $10,775,854 $ 9,735,139 39,004,073 $125,109,633 $128,853,451
Average Interest Rate 8.51% 8.58% 8.64% 8.69% 8.70% 8.72% 8.62%
Liabilities:
Deposits $92,913,994 $14,543,916 $ 5,457,667 $ 5,781,024 $ 3,319,046 $71,576,370 $193,592,017 $193,621,446
Average Interest Rate 4.74% 4.75% 4.78% 4.87% 4.90% 4.03% 4.48%
____________
</TABLE>
Off-Balance Sheet Risk
In the normal course of business, the company enters
into financial commitments with off-balance sheet risk. The
company's maximum exposure to accounting loss, based upon the
credit risk associated with unfunded loan commitments and letter
of credit outstanding is represented by the contract amount of
these items as of the dates indicated in the following table:
<TABLE>
<CAPTION>
OFF-BALANCE SHEET RISK
December 31,
(In thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Commitments to extend credit $1,530,600 $1,304,700 $762,150
Standby letters of credit $ 249,915 $ 272,515 $250,915
<PAGE 40>
</TABLE>
Many of such commitments to extend credit may expire
without being drawn upon and, therefore, the total commitment
amounts do not necessarily represent future cash flow
requirements. In making the commitments, the company applies
the same credit standards used in the lending process, and it
periodically reassesses the customer's credit worthiness through
ongoing credit reviews. The risks associated with making these
commitments are also included in the overall credit risk in
determining the allowance for possible loan losses.
Capital Management
Banking regulatory authorities have implemented strict
capital guidelines directly related to the credit risk associated
with an institutions assets. Banks and bank holding companies
are required to maintain capital levels based on their "risk-
adjusted" assets so that categories of assets with higher defined
credit risks will require more capital support than assets with
lower risk. Additionally, capital must be maintained to support
certain off-balance sheet instruments.
Capital is classified Tier I capital (common
stockholders' equity less certain intangible assets) and total
capital (Tier I plus the allowance for credit losses). Minimum
required levels must at least equal 4% for Tier I capital and 8 %
for total capital. In addition, institutions must maintain a
minimum of a 3% leverage capital ratio (Tier I capital to average
total assets).
PNB's and Company's capital position is presented in
the following table:
<TABLE>
<CAPTION>
December 31, Regulatory
1997 1996 Requirement
<S> <C> <C> <C>
Tier 1 capital to risk weighted assets 16.57% 20.82% 4.00%
Total capital to risk weighted assets 17.82% 22.07% 8.00%
Capital leverage ratio 9.20% 11.99% 3.00%
</TABLE>
<PAGE 41>
Fair Market Value
The Financial Accounting Standards Board, through its
statement No. 107 ("FASB 107"), and the FDIC Improvement Act of
1991, require banks to disclose the fair value of all financial
instruments. Approximately 90% of the total assets, 95% of total
liabilities, and almost all off-balance sheet financial contracts
in a depository institution come under the definition. This
disclosure is required for banks with assets in excess of
$150 million beginning with the 1992 annual report.
The fair market values of all financial instruments
held by PNB are disclosed in the footnotes to the financial
statements appearing elsewhere herein. For those financial
instruments which are traded in active financial markets, the
fair value is the market price. For loans and deposits with no
quoted prices, FASB 107 provides that the value be determined by
means of discounted present value models or option pricing
models. The valuing technique employed for each group of
instruments is based upon the characteristics of each instrument.
PAGE 42
<PAGE>
Item 3. Properties
The administrative/operations office of the Company and
PNB is located at 50 Main Street, Hallstead, Pennsylvania. PNB's
commercial, mortgage and consumer lending operations, as well as
its executive offices, marketing department, human resources
office, deposit account support services, and data processing
department are located in the administrative/operations office.
There are eight branch locations, five in Susquehanna County and
three in Wyoming County. All offices are owned in fee title by
PNB with the exception of the Springville Office, the Hallstead
Plaza office and the Meshoppen office. The Springville office,
which is located in a convenience store, is leased with
approximately 18 months remaining on a lease with renewal
options. 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 $2,000 to
$12,000 annually. Six of the eight 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.
The following is a schedule by years of future
minimum lease payments required under this non-cancelable
lease:
Years ended December 31 Amount
1998 $ 13,440
1999 17,760
2000 17,760
2001 17,760
2002 17,760
2003 through 2008 121,320
$205,800
Total rent expense was $12,000 for the years ended
December 31, 1997, 1996 and 1995.
PAGE 43
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and
Management
The following table reflects the beneficial ownership
of the Company's Common Stock as of January 28, 1998 by
directors, executive officers, each person known to management to
own beneficially, directly or indirectly, more than 5% of the
Company's Common Stock, and all directors and executive officers
as a group. Except as otherwise indicated, the persons or
entities listed below have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
5% Beneficial Owners
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Beneficial Owners and Management Ownership Percent of Class
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Carl F. Pease 12,000 1.37% (1)
Gerald R. Pennay 8,200 * (2)
John W. Ord 18,502 2.12% (3)
Virginia M. Turner 39,555 4.52%
Thomas F. Chamberlain 1,652 * (4)
Judith Ely Kelly 3,780 * (5)
Jack M. Norris 2,835 * (6)
George H. Stover, Jr. 19,575 2.24% (7)
William S. Crock 1,100 * (8)
Michael S. Karhnak** 2,580 * (9)
Debra E. Dissinger** 2,696 * (10)
All directors and executive officers
as a group (11 persons) 101,407 11.60%
_______________
<FN>
* Less than 1%
** Executive officers only.
</TABLE>
(1) All shares are held jointly with spouse.
(2) Includes 4,055 shares held jointly with spouse.
(3) All shares are held jointly with spouse. Includes shares
owned by the trustee of the Company's Employee Stock
Ownership Plan ("ESOP") which have been allocated to
Mr. Ord's account.
(4) Includes 270 shares held jointly with spouse.
<PAGE 44>
(5) Includes 1,800 shares held jointly with husband and 30
shares held in custodial account for each of three children.
(6) All shares are held jointly with spouse.
(7) All shares are held jointly with spouse.
(8) All shares are held jointly with spouse.
(9) All shares are held jointly with spouse. Includes shares
owned by the trustee of the Company's ESOP which have been
allocated to Mr. Karhnak's account.
(10) All shares are held jointly with spouse. Includes shares
owned by the trustee of the Company's ESOP which have been
allocated to Ms. Dissinger's account.
PAGE 45
<PAGE>
Item 5. Directors and Executive Officers
The Company's Board of Directors presently consists of
9 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 table sets forth the name, age and term
of office of each executive officer and director of the Company
and 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.
<TABLE>
<CAPTION>
Year Term
Name, Age and Principal Occupations Director or as Director
Position with Company During Past Five Years Officer Since Expires
<S> <C> <C> <C>
Carl F, Pease, 66 Retired Director of the 1985 2000
Director, Chairman of Susquehanna County Planning
the Board Commission
Gerald R. Pennay, 62 Owner, Gerald R. Pennay & 1985 1998
Director, Vice Chairman Son Auctioneers
of the Board
John W. Ord, 57 President & CEO of Peoples 1969 2000
Director, President & National Bank
CEO
Virginia M. Turner, 62 Investor 1981 1998
Director, Corporate
Secretary
Thomas F. Chamberlain, 49 Nationwide Insurance Agent 1994 1998
Director
Judith Ely Kelly, 49 State Farm Insurance Agent 1988 1999
Director
<PAGE 46>
Jack M. Norris, 64 Retired Owner, B.K. Norris 1985 1999
Director Distributor (Beverage
Distributorship)
George H. Stover, Jr., 51 Real Estate Appraiser 1992 1999
Director
William S. Crock, 51 President, W. S. Crock & 1992 2000
Director Sons, Inc. (Retail Store)
Michael S. Karhnak, 45 Executive Vice President of 1986 N/A
Vice Pres. & Treasurer Peoples National Bank
Debra E. Dissinger, 43 Executive Vice President of 1985 N/A
Vice Pres. & Asst. Peoples National Bank
Secretary (1997-Present), Senior Vice
President of Peoples National
Bank (1992-1996)
</TABLE>
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
At present, the directors of the Company also serve as
directors of PNB. There are presently no Board committees of the
Company's Board of Directors and committee functions are
performed by committees of PNB's Board of Directors.
PNB has an Executive Committee, an Audit Committee, an
Asset/Liability Committee, a Human Resources and Marketing
Committee, and a Loan Administration Committee.
The Executive Committee consists of John Ord, Carl
Pease, Gerald Pennay, and Jack Norris. This committee may
exercise the authority of PNB's Board of Directors to the extent
permitted by law during intervals between meetings of the Board.
This committee may also be assigned other duties by PNB's Board
of Directors.
The Audit Committee consists of George Stover, Gerald
Pennay, Jack Norris and Judith Kelly. This Committee supervises
the compliance and internal audit program of PNB and recommends
the appointment of, and serves as the principal liaison between,
the Board of Directors and the independent auditors. This
committee also reports to the Board of Directors on the general
financial condition of PNB.
<PAGE 47>
The Asset/Liability Committee consists of William
Crock, Carl Pease, Virginia Turner, and Thomas Chamberlain. This
committee helps control PNB'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. This committee is also responsible
for developing such guidelines, guiding PNB's investments, and
coordinating PNB's budget process.
The Human Resources Committee consists of Gerald
Pennay, Jack Norris, George Stover, and Judith Kelly. This
committee is responsible for sound human resources management
(e.g., in employment, compensation, and performance appraisals).
This committee is also responsible for evaluation, planning and
supervision of the marketing of PNB's products and services and
also oversees community relations and other public relations
activities.
The Loan Administration Committee consists of Jack
Norris, Gerald Pennay, George Stover, and Judith Kelly. This
committee assists PNB's Board of Directors in discharging its
responsibility for the lending activities of PNB by reviewing
loans, lines of credit, and floor plans; and monitoring loan
review and compliance. This committee recommends lending
authorizations and is responsible for assuring that PNB's loan
activities are carried out in accordance with loan policies.
This committee is also responsible for ensuring the adequacy of
PNB's loan loss reserve.
PAGE 48
<PAGE>
Item 6. Executive Compensation
The following table sets forth information concerning
the annual and long-term compensation for services in all
capacities to the Company and PNB for the fiscal years ended
December 31, 1997, 1996, and 1995 of the Chief Executive Officer
of the Company and PNB. There were no other officers of the
Company or PNB who received compensation in excess of $100,000
during any fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Other Annual All Other
Name Year Salary Bonus Compensation Compensation
<S> <C> <C> <C> <C> <C>
John W. Ord 1997 $103,500 (1) $11,117 -- $24,825 (2)
President,
Chief Executive
Officer
1996 $ 89,000 (3) $32,250 -- $31,879 (4)
1995 $ 89,000 (5) $21,801 -- $28,293 (6)
</TABLE>
_______________
(1) Includes Director's fees of $3,500.
(2) Includes Peoples National Bank's contribution to 401 (k)
plan of $2,999, ESOP contribution of $4,490, Split Dollar
Life Insurance premium payment of $1,504 and Supplemental
Employee Retirement Plan contribution of $15,832.
(3) Includes Director's fees of $4,000.
(4) Includes Peoples National Bank's contribution to 401 (k)
plan of $1,634, ESOP contribution of $7,555, Split Dollar
Life Insurance premium payment of $1,504, and Supplemental
Employee Retirement Plan contribution of $21,185.
(5) Includes Director's Fees of $4,000.
(6) Includes Peoples National Bank's contribution to 401 (k)
plan of $1,536, ESOP contribution of $6,010, Split Dollar
Life Insurance premium payment of $1,504 and Supplemental
Employee Retirement Plan contribution of $19,242.
<PAGE 49>
Compensation of Directors
Directors of the Company do not receive compensation in
such capacity. Directors of PNB, however, receive compensation
for serving on the Board of Directors in the following amounts:
(i) $200 per month for the Chairman of the Board, (ii) $250 per
Board meeting for all directors with a maximum of two meetings
missed and paid for between annual meetings, and (iii) $150 for
each director for each committee meeting and branch board meeting
that they attend.
Compensation Committee Interlocks and Insider Participation
The Executive Committee of the Board of Directors of
PNB serves as the compensation committee of PNB. The members of
this committee are John Ord, Carl Pease, Gerald Pennay, and Jack
Norris. 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.
Management Committee Compensation Report
The compensation of the CEO and other officers of PNB
is determined by the Executive Committee of the Board of
Directors of PNB. This committee sets compensation guidelines
intended to provide suitable rewards for individual performance
and to tie such performance to increased stockholder value. The
compensation paid is designed to attract, retain and reward
executive officers who are capable of leading the Company and PNB
in achieving its business objectives in an industry characterized
by complexity, competitiveness and constant change. The
compensation of PNB's key executives is reviewed and approved by
the Board of Directors upon recommendation of PNB's Executive
Committee.
Total compensation for PNB's Chief Executive Officer
and other key executive officers consists of base salary, short
and long-term incentives and perquisites.
The guidelines and factors considered by the Committee
in determining compensation include corporate profitability
measured by return on assets, stock price, asset quality, loan
loss reserve levels, market-share, regulatory capital strength,
cost control, and regulatory examination.
Annually, at year end, the Committee reviews the base
compensation and benefit levels of the CEO and other executive
officers. Each officer's compensation is based on their
<PAGE 50> individual contribution to the Company and PNB, and
their meeting of the goals and objectives as set forth in the
strategic plan of the Company and PNB. To ensure that the
compensation and benefits are reasonable and competitive, the
Committee compares the compensation awarded to executive officers
of the Company and PNB with those of executive officers of
similarly sized and situated banks and thrift institutions in the
Mid-Atlantic region.
Executive Committee
John W. Ord, Carl F. Pease,
Gerald R. Pennay, Jack M. Norris
Employment and Other Contracts
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 nonrenewal is given by either party in
which case the agreement will expire at the end of the existing
term.
The agreement provides for a 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, responsibilities, or
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 2.0 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 circumstances
following termination of his employment.
In February 1997, the Company also entered in severance
agreements with two other executive officers of the Company,
Michael S. Karnhak, Vice President and Treasurer, and Debra E.
<PAGE 51> Dissinger, Vice President, 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 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.
PNB also maintains an excess benefit plan for Mr. Ord.
Under this plan, which is a nonqualified plan, Mr. Ord will
receive a supplemental payment necessary to provide him with an
annual retirement benefit, together with payments received under
PNB's pension plan, employee stock ownership plan, and 401)k)
plan, equivalent to 90% of his average salary for the three years
prior to his retirement, subject to certain adjustments. PNB has
obtained a life insurance policy (designating PNB as beneficiary)
on the life of Mr. Ord in an amount intended to cover PNB's
obligations under the plan, based on certain actuarial
assumptions relating to life expectancy. The amount charged to
PNB's operations with respect to this plan for the years ended
December 31, 1997, 1996 and 1995 was $15,832, $21,185, and
$19,242, respectively.
Pension Plan
PNB's Pension Plan is available to PNB employees who have
attained age 21, and have completed one year of service.
Employees do not contribute to the plan. Each year, PNB
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 PNB's plan
for a range of compensation levels and years of service. The
amounts are based on an employee who became a participant in 1997
and will have the service and salary at normal retirement.
YEARS OF SERVICE(1)
<TABLE>
<CAPTION>
Salary 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
<PAGE 52>
$ 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
<FN>
(1) The current compensation covered by the pension plan does not differ by
more than 10% from the amount included in the annual compensation column
in the Summary Compensation Table. John W. Ord, President, Chief
Executive Officer has 37 years of service with the company. The plan
formula provides for a monthly amount at age 65 of .80% of a
participant's average monthly compensation for the five highest
consecutive years of compensation times years of participation to a
maximum of 30 years. This plan is not integrated with Social Security.
</TABLE>
PAGE 53
<PAGE>
Item 7. 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, 1997. 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
collectability or present other unfavorable features.
PAGE 54
<PAGE>
Item 8. Legal Proceedings
None.
PAGE 55
<PAGE>
Item 9. Market Price of and Dividends on the 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 Hopper Soliday and 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.
<TABLE>
<CAPTION>
1997 1996
Price Range Dividends Price Range Dividends
Low High Declared Low High Declared
<S> <C> <C> <C> <C> <C> <C>
1st Qtr. $32.00 $34.00 $.20 $28.50 $30.00 $.16
2nd Qtr. 34.00 36.00 .20 30.00 31.00 .16
3rd Qtr. 36.00 41.00 .20 31.00 32.00 .16
4th Qtr. 41.00 44.00 .24 32.00 32.00 .20
</TABLE>
As of December 31, 1997, the approximate number of
holders of record of the Company's Common Stock was 570. At such
date, 874,330 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, 1997, there were no outstanding
options or warrants to purchase, or securities that were
convertible into, the Company's Common Stock, no shares of the
Company's Common Stock constituting "restricted securities" which
could be sold pursuant to SEC Rule 144 or that the Company has
agreed to register, and no public offerings proposed by the
Company. <PAGE 56>
PAGE 57
<PAGE>
Item 10. Recent Sales of Unregistered Securities
None.
PAGE 58
<PAGE>
Item 11. Description of Registrant's Securities to be Registered
The holders of the Company's Common Stock are entitled
to share ratably in dividends when and if declared by the
Company's Board of Directors from funds legally available
therefor.
Each holder of the Company's Common Stock has one vote
for each share held of record on each matter presented for
consideration by Company's shareholders. The Company's
shareholders are not entitled to cumulate votes in the election
of directors.
The holders of the Company's Common Stock have no
preemptive rights to acquire any additional shares of the
Company.
In the event of liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, holders of the
Company's Common Stock will be entitled to share ratably in any
of its assets or funds that are available for distribution to its
shareholders after the satisfaction of its liabilities (or after
adequate provision is made therefor) and after payment of any
liquidation preferences of any outstanding preferred stock.
The Bylaws of the Company provide for a "classified"
Board of Directors of between nine (9) and twenty-five (25)
members, which number is fixed by the Board of Directors, divided
into three classes, serving for terms of three years each. In
the event of a Board vacancy, the Bylaws provide that the sole
power to fill such vacancy is vested in the Company's Board of
Directors, and any such new director shall serve out the full
term of the former director. The election of directors for
staggered terms significantly extends the time required to make
any change in control of the Company's Board of Directors and may
tend to discourage any surprise and hostile takeover bid for
control of the Company. The staggered terms also have the effect
of increasing the number of votes required to elect a director.
Under the Company's Bylaws, it will take at least two annual
meetings for holders of a majority of the Company's voting
securities to make a change in control of the Company's Board
because only a minority (approximately one-third) of the
directors will be elected at such meeting. In addition, because
certain actions require more than majority approval of the Board,
as described herein, it may take as many as three annual meetings
for a controlling block of the Company's shareholders to obtain
complete control of the Board, and thereby of the Company's
management.
<PAGE 59>
The Company's Articles of Incorporation provide that
any merger, consolidation, sale of assets or similar transaction
involving the Company and any other entity or person, and any
liquidation or dissolution of the Company, will require the
affirmative vote of holders of at least 75% of the Company's
outstanding voting stock. The Company's Articles provide,
however, that any such transaction will require approval by the
affirmative vote of holders of a majority of the outstanding
voting stock of the Company if such transaction is approved in
advance by 66-2/3% of the Board of Directors of the Company.
Thus, if a transaction is approved by 66-2/3% of the Board, a
majority vote of the shareholders is necessary to approve the
transaction, but if the Board does not approve the transaction, a
75% shareholder approval requirement will apply.
The Company's Bylaws vest the authority to make, alter,
amend, or repeal the Bylaws of the Company in the holders of 75%
of the Company's Common Stock or in the Board of Directors,
acting by a majority vote except with respect to alteration,
amendment or repeal of the By-law provision providing for a
"classified" Board of Directors which would require the vote of
at least 75% of the members of the Board of Directors. The right
of the Board to make, alter, repeal or amend the Bylaws is always
subject to the right of holders of at least 75% of the Company's
voting stock to change such action.
The Pennsylvania Business Corporation Law provides that
the Articles of Incorporation of a Pennsylvania corporation (such
as the Company) may be amended by the affirmative vote of a
majority of the votes cast at a meeting at which a quorum of
shareholders is present, except as otherwise provided by such
corporation's articles of incorporation. The Company's Articles
of Incorporation, however, provide that the provisions requiring
a supermajority vote in the event of a proposed merger, sale of
assets, liquidation or other similar transaction and the
provision permitting the Board to consider noneconomic factors in
a tender or other acquisition offer for the Company's securities
can only be amended by an affirmative vote of holders of at least
75% of the outstanding voting stock of the Company unless
approved by the affirmative vote of 66-2/3% or more of the
members of the Board of Directors in which case only majority
shareholder approval is required.
PAGE 60
<PAGE>
Item 12. Indemnification of Directors and Officers
The Bylaws of the Company provide for
(1) indemnification of directors, officers, employees and agents
of the Company and its subsidiaries and (2) the elimination of a
director's liability for monetary damages, each to the fullest
extent permitted by Pennsylvania law. Pennsylvania law provides
that a Pennsylvania corporation may indemnify directors,
officers, employees and agents of the corporation against
liabilities they may incur in such capacities for any action
taken or any failure to act, whether or not the corporation would
have the power to indemnify the person under any provision of
law, unless such action or failure to act is determined by a
court to have constituted recklessness or willful misconduct.
Pennsylvania law also permits the adoption of a Bylaw amendment,
approved by shareholders, providing for the elimination of a
director's liability for monetary damages for any action taken or
any failure to take any action unless (1) the director has
breached or failed to perform the duties of his office and
(2) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness. The Company's shareholders
approved Bylaw amendments adopting these provisions at the 1987
Annual Meeting of Shareholders.
PAGE 61
<PAGE>
Item 13. Financial Statements and Supplementary Data
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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
February 11, 1998
/s/ Prociak and Associates
PROCIAK AND ASSOCIATES, L.L.C.
Wilkes-Barre, Pennsylvania
PAGE 62
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,401,332 $ 1,672,682
Interest-bearing deposits in other banks 3,147,371 1,395,892
Investment securities available for sale 88,149,054 72,131,211
Loans 126,852,708 107,265,269
Less: Unearned income (67,188) (115,308)
Allowance for loan losses (1,675,887) (1,663,806)
Net loans 125,109,633 105,486,155
Premises and equipment 3,756,300 2,972,312
Accrued interest receivable 1,776,908 1,429,957
Other assets 4,379,317 1,070,891
Total assets $228,719,915 $186,159,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 20,104,376 $ 13,780,637
Interest bearing 173,487,641 143,149,716
Total deposits 193,592,017 156,930,353
Short-term borrowings 9,274,834 6,712,918
Accrued interest payable 662,696 599,245
Other liabilities 546,445 203,006
Total liabilities 204,075,992 164,445,522
Stockholders' equity:
Common stock, par value $5 per share,
5,000,000 shares authorized; 874,330
and 875,905 shares issued and
outstanding at December 31,
1997 and 1996, respectively 4,455,000 4,455,000
Surplus 4,455,000 4,455,000
Undivided profits 15,912,129 13,636,162
Unrealized gain (loss) on securities
available for sale, net of applicable
deferred income taxes 370,569 (345,849)
Less: treasury stock, at cost (16,670 in
1997 and 15,095 in 1996) (548,775) (486,735)
Total stockholders' equity 24,643,923 21,713,578
Total liabilities and stockholders'
equity $228,719,915 $186,159,100
</TABLE>
See notes to financial statements
PAGE 63
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,995,843 $ 9,031,697 $ 8,501,984
Interest and dividends on investments:
Taxable 4,255,842 3,491,090 3,432,158
Tax exempt 1,285,145 824,995 614,807
Dividends 60,533 55,257 44,622
Interest on deposits in other banks 34,684 7,333 13,326
Interest on trading account securities -0- -0- 68,625
Interest on federal funds sold 92,678 35,367 54,554
Total interest income 15,724,725 13,445,739 12,730,076
Interest expense:
Interest on deposits 7,737,668 6,798,796 6,240,687
Interest on short-term borrowings 176,390 69,958 84,328
Interest on long-term borrowings -0- 10,810 48,200
Total interest expense 7,914,058 6,879,564 6,373,215
Net interest income 7,810,667 6,566,175 6,356,861
Provision for loan losses 130,000 220,000 450,000
Net interest after provision
for loan losses 7,680,667 6,346,175 5,906,861
Other income:
Service charges and customer
service fees 891,489 682,003 615,329
Other income 29,278 21,900 36,676
Investment securities gains, net 217,104 119,913 60,194
Total other income 1,137,871 823,816 712,199
Other expenses:
Salaries and employee benefits 2,282,412 1,790,480 1,608,378
Occupancy expense, net 323,532 225,251 199,102
Equipment expense 388,857 251,732 195,558
FDIC insurance and assessments 81,410 55,730 211,144
Professional fees and outside services 192,530 182,974 80,515
Computer service and supplies 359,024 223,917 205,066
Taxes, other than payroll and income 203,719 183,332 167,786
Other operating expenses 1,162,176 689,710 625,935
Total other expense 4,993,660 3,603,126 3,293,484
Income before taxes 3,824,878 3,566,865 3,325,576
Provision for income tax 813,619 850,828 838,356
Net income $3,011,259 $2,716,037 $2,487,220
Net income per share $ 3.44 $ 3.06 $ 2.79
</TABLE>
See notes to financial statements
PAGE 64
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Available for Sale
Net of Applicable
Common Undivided Deferred Income Treasury
Stock Surplus Profits Taxes Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,970,000 $2,970,000 $12,502,783 $(1,543,693) $ -0- $16,899,090
Net income, 1995 2,487,220 2,487,220
Cash dividends paid, 1995 ($.56 per share) (495,990) (495,990)
Stock dividend 1,485,000 1,485,000 (2,970,000) -0-
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $752,535 1,460,803 1,460,803
Balance, December 31, 1995 4,455,000 4,455,000 11,524,013 (82,890) -0- 20,351,123
Net income, 1996 2,716,037 2,716,037
Cash dividends paid, 1996 ($.68 per share) (603,888) (603,888)
Treasury stock purchase (486,735) (486,735)
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $135,463 (262,959) (262,959)
Balance, December 31, 1996 4,455,000 4,455,000 13,636,162 (345,849) (486,735) 21,713,578
Net income, 1997 3,011,259 3,011,259
Cash dividends paid, 1997 ($.84 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 $369,063 716,418 716,418
Balance, December 31, 1997 $4,455,000 $4,455,000 $15,912,129 $ (370,569) $(548,775) $24,643,923
========== ========== =========== =========== ========= ===========
</TABLE>
PAGE 65
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,011,259 $ 2,716,037 $ 2,487,220
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 639,526 262,387 211,614
Provision for loan losses 130,000 220,000 450,000
(Gain) loss on sale of equipment 4,229 (1,283) -0-
(Gain) loss on sale of other real
estate 5,485 42,467 -0-
Amortization of securities' premiums
and accretion of Discounts (58,454) (4,270) 52,021
Losses (gains) on sale of investment
securities, net (217,104) (119,913) (106,619)
Decrease in trading account
securities -0- -0- 275,594
Deferred income taxes (benefit) 21,630 (72,682) 16,973
(Increase) in accrued interest
receivable (346,951) (183,700) (81,073)
(Increase) decrease in other assets (113,755) 12,507 (99,919)
Increase (decrease) in accrued
interest payable 63,451 (11,998) 76,358
Increase (decrease) in other
liabilities 343,439 (128,431) 109,231
Net cash provided by (used by)
operating activities 3,482,755 2,731,121 3,391,400
Cash flows from investing activities:
Proceeds from sale of available for
sale securities 16,552,440 21,945,795 33,795,336
Proceeds from maturities of available
for sale securities 40,404,500 3,705,000 -0-
Purchase of available for sale
securities (73,639,832) (34,223,967) (46,943,586)
Proceeds from maturities of held
to maturity securities -0- -0- 6,189,000
Purchase of held to maturity
securities 2,026,089 2,551,169 2,220,615
Net increase in loans (19,753,478) (9,201,875) (5,854,428)
Proceeds from sale of premises
and equipment 2,500 2,554 -0-
Purchase of premises and equipment (1,215,313) (1,237,641) (58,171)
Additions to construction
in progress -0- -0- (330,617)
Proceeds from sale of other real
estate 69,251 213,052 -0-
Purchase of intangible assets (3,875,031) -0- -0-
<PAGE 66>
Net cash used in investing
activities (39,428,874) (16,245,913) (12,407,116)
Cash flows from financing activities:
Cash dividends paid (735,292) (603,888) (495,990)
Increase in deposits 36,661,664 9,762,071 11,270,988
Net decrease in long-term borrowing -0- (1,025,000) (25,000)
Net increase (decrease) in short-
term borrowing 2,561,916 6,018,858 (2,275,036)
Purchase of treasury stock (62,040) (486,735) -0-
Net cash provided by financing
activities 38,426,248 13,665,306 8,474,962
Net increase (decrease) in cash
and cash equivalents 2,480,129 150,514 (540,754)
Cash and cash equivalents, beginning
of year 3,068,574 2,918,060 3,458,814
Cash and cash equivalents, end of
year $ 5,548,703 $ 3,068,574 $ 2,918,060
Supplemental disclosures of cash paid:
Interest paid $ 7,850,607 $ 6,867,566 $ 6,296,857
Income taxes paid $ 838,000 $ 1,048,966 $ 544,000
Non-cash investing and financing
activities:
Transfers from loans to real
estate acquired through
foreclosure $ 164,854 $ -0- $ 438,207
Proceeds from sales of foreclosed
real estate financed through
loans $ 108,500 $ 41,000 $ -0-
Total increase (decrease) in
unrealized gain (loss) on
securities available for sale $ (1,085,481) $ 398,422 $ (2,213,338)
Stock dividend $ -0- $ -0- $ 2,970,000
</TABLE>
See notes to financial statements
PAGE 67
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 eight offices located in Hallstead,
Hop Bottom, Susquehanna, Montrose, Nicholson, Meshoppen,
Tunkhannock and Springville, 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
<PAGE 68> 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 Corporation intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Corporation'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 consist primarily of
Federal Home Loan Bank and Federal Reserve Bank stock.
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.
<PAGE 69>
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.
<PAGE 70>
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 1997 was $214,931.
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
<PAGE 71>
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.
Earnings per Common Share
During 1997, the Company adopted the provisions of
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.
SFAS No. 128 requires that, unless there are no
potential common shares outstanding, both basic and diluted EPS
must be presented including a reconciliation of the numerator and
denominator in the computation of basic EPS to the numerator and
denominator used for diluted EPS. Since there are no potential
common shares outstanding at December 31, 1997, these disclosures
were not required.
Earnings per common share are based on the weighted
average number of shares outstanding for the period after giving
retroactive effect to stock dividends. The weighted average
number of shares outstanding was 875,312, 888,034 and 891,000 for
1997, 1996 and 1995, respectively.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 provides accounting and reporting
<PAGE 72> standards for transfers and servicing of financial
assets and extinguishments of liabilities. Implementation
guidance is provided in SFAS No. 125 for assessing isolation of
transferred assets and for accounting for transfers of partial
interests, servicing of financial assets, securitizations,
transfers of sales-type and direct financing lease receivables,
securities lending transactions, repurchase and reverse-
repurchase agreements, dollar-roll transactions, wash sales, loan
syndications and participations, risk participations in banker's
acceptances, factoring arrangements, transfers of receivables
with recourse, and extinguishments of liabilities. The
accounting and reporting standards of SFAS No. 125 are based on
consistent application of financial-components approach that
focuses on control.
Under such approach, after a transfer of financial
assets, an enterprise recognizes the financial and servicing
assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, except as amended in SFAS No.
127, "Deferral of the Effective Date of certain Provisions of
FASB Statement No. 125." SFAS No. 125 is to be applied
prospectively with earlier or retroactive application prohibited.
Specifically, the provisions identified as being deferred under
SFAS No. 127 include secured borrowings, collateralizations and
transfers of financial assets that are part of repurchase
agreements, dollar-rolls, securities lending and similar
transactions. The adoption of SFAS No. 125 standards did not
have a material effect on operating results. The standards
deferred by SFAS No. 127 until 1998 are not expected to have a
material effect on operating results or financial position.
Accounting Principles Issued and Not Yet Adopted
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", which is effective for
years beginning after December 15, 1997. SFAS No. 130 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 is not expected to be material to
the Company's financial position or results of operations.
<PAGE 73>
In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which is effective for all periods beginning after
December 15, 1997. SFAS No. 131 requires that public business
enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises
report certain information about their products and services, the
geographic areas in which they operate, and their major
customers. Management is currently evaluating the disclosure
impact of SFAS No. 131 on its financial statements.
Cash Flows
For the purpose of cash flow, 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, 1997 and
1996 was $1,005,000 and $588,000, respectively.
Note 3:
Investment Securities
At December 31, 1997 and 1996, the amortized cost and
fair values of securities available for sale are as follows:
<PAGE 74>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury securities $11,470,890 $ 166,301 $ -0- $11,637,191
U.S. Government corporate
and agency obligations 20,876,825 120,812 121,375 20,876,262
Obligations of state and
political subdivisions 28,891,549 586,237 3,743 29,474,043
Corporate debt securities 6,177,235 66,907 129,603 6,114,539
Mortgage backed securities 19,339,387 81,942 206,010 19,215,319
Equity securities 831,700 -0- -0- 831,700
$87,587,586 $1,022,199 $460,731 $88,149,054
December 31, 1996
U.S. Treasury securities $ 2,899,624 $ 22,553 $ 113 $ 2,922,064
U.S. Government corporate
and energy obligations 19,553,795 29,033 312,713 19,270,115
Obligations of state and
political subdivisions 20,004,026 240,588 77,785 20,166,829
Corporate debt securities 5,817,041 26,089 186,222 5,656,908
Mortgage backed securities 23,449,838 116,618 382,061 23,184,395
Equity securities 930,900 -0- -0- 930,900
$72,655,224 $ 434,881 $958,894 $72,131,211
</TABLE>
The amortized cost and fair value of securities as of
December 31, 1997 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,
or elect not to prepay the obligation at call date.
Amortized Fair
Cost Value
Due in one year or less $ 3,915,569 $ 3,921,743
Due after one year through five years 28,878,865 29,217,894
Due after five years through ten years 16,029,816 16,122,793
Due after ten years 18,592,249 18,839,605
67,416,499 68,102,035
Mortgage-backed securities 19,339,387 19,215,319
Equity securities 831,700 831,700
$87,587,586 $88,149,054
Proceeds from sale of available for sale securities
during 1997, 1996 and 1995 were $16,552,440, $21,945,795, and
<PAGE 75> $33,795,336, respectively. Gross gains realized on
these sales were $238,070, $251,687, and $191,722, respectively.
Gross losses on these sales were $20,966, $131,774, and $85,103,
respectively. Realized losses on trading securities amounting to
$46,425 were recognized in net income in 1995. Net unrealized
gains (losses) on securities available for sale included as a
separate component of consolidated stockholders' equity net of
tax was $370,569 and $(345,849) in 1997 and 1996, respectively.
On November 15, 1995 the Financial Accounting Standards
Board (FASB) published a special report, "A Guide to
Implementation of Statement No. 115 on Accounting for Certain
Investments in Debt and Equity Securities" (the "Report"). The
report included a provision that allowed banks a one-time
opportunity to reclassify (at fair value) held-to-maturity
securities without calling into question their intent to hold
other debt securities to maturity in the future. The
reclassification had to be made in conjunction with
implementation of the supplemental guidance by December 31, 1995.
The bank transferred debt securities with an amortized cost of
$18,349,070 from held-to-maturity to available for sale due to
management's reassessment of the classification of securities.
The securities had an unrealized gain of approximately $229,400.
Held-to-maturity securities were also sold for total proceeds of
$399,920 resulting in a realized gain of $4,080.
Securities with a carrying value of $22,635,952 and
$21,744,599 at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and repurchase agreements as
required or permitted by law.
Note 4: Loans
Loans are summarized as follows:
1997 1996
Commercial $ 14,796,511 $ 9,787,504
Real estate 95,953,797 83,193,457
Consumer 16,102,400 14,284,308
Total loans $126,852,708 $107,265,269
A summary of the transactions in the allowance for loan
losses is as follows:
<PAGE 76>
1997 1996 1995
Balance at beginning of
year $1,663,806 $1,487,757 $1,483,883
Provision charged to
operating expenses 130,000 220,000 450,000
Recoveries 31,253 33,146 16,365
Loan charge-offs (149,172) (77,097) (462,491)
Balance at end of year $1,675,887 $1,663,806 $1,487,757
Information with respect to impaired loans as of and
for the years ended December 31, 1997 and 1996 are as follows:
1997 1996
Loans receivable for which there is a
related allowance for loan losses $432,000 $ 963,000
Loans receivable for which there is no
related allowance for loan losses -0- 82,000
Total impaired loans $432,000 $1,045,000
Related allowance for loan losses $ 89,000 $ 386,000
Average recorded balance on these
impaired loans $486,000 $1,100,000
Interest income on these impaired loans $ 7,100 $ 118,000
In addition, the Bank had other non-accrual loans of
approximately $595,000 and $647,000 at December 31, 1997 and
1996, respectively, for which impairment had not been recognized.
Interest income on these loans, which is recorded when received,
amounted to $24,900 and $30,700 for the years ended December 31,
1997 and 1996, respectively.
Interest income that would have been recorded under the
original terms of the loan agreements amounted to $96,000 and
$163,000 for the years ended December 31, 1997 and 1996,
respectively.
The Bank has no commitments to loan additional funds to
borrowers with impaired or non-accrual loans.
Note 5: Premises and Equipment
Premises and equipment at December 31, 1997 and 1996
are comprised of:
1997 1996
Land $ 348,280 $ 298,280
<PAGE 77>
Building and improvements 3,408,074 3,027,282
Furniture, fixtures and equipment 2,713,521 2,107,570
Total 6,469,875 5,433,132
Accumulated depreciation (2,713,575) (2,460,820)
Net $ 3,756,300 $ 2,972,312
Note 6: Deposits
The carrying amounts of deposits at December 31,
consisted of the following:
1997 1996
Demand - non-interest bearing $ 20,104,376 $ 13,780,637
Demand - interest bearing 52,945,190 40,896,069
Savings 29,034,158 21,776,181
Time - $100,000 and over 12,510,000 11,964,463
Time - less than $100,000 78,998,293 68,513,003
$193,592,017 $156,930,353
At December 31, 1997 and 1996 the time remaining to
maturity of time certificates of deposit of $100,000 or more was
as follows:
1997
Three months or less $ 2,356,000
Over three months through six months 3,631,000
Over six months through twelve months 1,788,000
Over twelve months 4,735,000
Total $12,510,000
Interest expense related to time deposits of $100,000
or more was $611,961 in 1997, $653,410 in 1996 and $605,910 in
1995.
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, 1997 and 1996:
<PAGE 78>
<TABLE>
<CAPTION>
1997 1996
Maximum Maximum
Ending Average Month End Average Ending Average Month End Average
Balance Balance Balance Rate Balance Balance Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds
purchased and
securities sold
under agreements
to repurchase $2,596,742 $1,271,083 $ 4,900,000 5.65% $ -0- $ 714,123 $1,800,000 5.51%
Federal Home Loan
Bank 5,675,000 1,251,027 6,000,000 6.32% 6,175,000 555,724 6,175,000 3.20%
U.S. Treasury tax
and loan notes 1,003,092 535,242 1,107,099 4.74% 537,918 424,301 1,116,693 4.05%
Total $9,274,834 $3,057,352 $12,007,099 5.77% $6,712,918 $1,694,148 $9,091,693 4.49%
</TABLE>
Advances on the flexible line of credit from the FHLB
at December 31, 1997 and 1996 were $3,775,000 and $6,175,000,
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, 1997 and 1996, respectively. These
borrowings are unsecured.
Note 8: Income Taxes
The components of the provision for income tax are as
follows:
1997 1996 1995
Federal
Currently payable $791,989 $923,510 $821,383
Deferred 21,630 (72,682) 16,973
Total provision for income
tax $813,619 $850,828 $838,356
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, 1997, 1996, and 1995 are as follows:
<PAGE 79>
1997 1996
Deferred tax asset:
Unrealized loss on available for sale
securities $ -0- $178,164
Allowance for loan losses 441,599 437,491
Deferred loan fees 83,680 98,565
Deferred compensation 61,873 56,490
587,152 770,710
Deferred tax liability:
Unrealized gain on available for sale
securities (190,899) -0-
Accretion (51,746) (44,190)
Other (20,129) (11,449)
Total (262,774) (55,639)
Net deferred tax asset $ 324,378 $715,071
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:
1997 1996 1995
Provision at statutory
rate $1,300,459 $1,212,734 $1,130,695
Tax exempt interest (561,156) (425,385) (351,586)
Non-deductible expenses 86,990 73,121 67,250
Other, net (12,674) (9,642) (8,003)
Net provision for
income taxes $ 813,619 $ 850,828 $ 838,356
Note 9: 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, 1997 and 1996.
<PAGE 80>
1997 1996
Actuarial present value of benefit
obligation:
Accumulated benefit obligation
(including vested benefits of
$435,663 and $408,491 in 1997
and 1996, respectively) $ 435,663 $ 413,812
Plan assets at fair value 915,027 868,910
Projected benefit obligation for
services rendered to date (Including
vested benefits of $435,663 and
$408,491 in 1997 and 1996,
respectively) (499,036) (458,277)
Plan assets in excess of projected
benefit obligations 415,991 410,633
Net (gain) loss from past experience
different from that assumed and effects
of changes in assumptions (76,836) (84,716)
Prior service cost not yet recognized in
net periodic pension cost (214,025) (223,144)
Net obligation (asset) being recognized
over 20.89 years (80,710) (86,792)
Prepaid pension cost included in other
assets $ 44,420 $ 15,981
Net pension cost for the years ended December 31, 1997,
1996 and 1995 included the following components:
1997 1996 1995
Service cost-benefits earned
during the year $ 21,665 $ 19,155 $ 19,933
Interest cost on projected
benefit 37,841 33,098 31,276
Actual return on plan assets (66,638) (96,036) (142,693)
Net amortization and deferral (6,082) (6,082) (6,082)
Prior service cost (9,119) (9,119) (9,119)
Deferred gain (loss) (6,106) 29,324 86,925
Net periodic pension cost $(28,439) $(29,660) $ (19,760)
The weighted average discount rate and rate on increase
in future compensation levels used in determining the actuarial
present value of the projected benefit obligation was 8.5% at
<PAGE 81> December 31, 1997 and 1996. The expected long-rate of
return on plan assets was 8.5% in 1997, 1996 and 1995.
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 1997, 1996 and 1995, contributions to
the plan charged to operations were $65,416, $67,713 and $71,777,
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 1997, 1996 and 1995, employer contributions to
the plan charged to operations were $34,831, $21,252 and $21,139,
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
$15,832, $21,185 and $19,242 for the years ended December 31,
1997, 1996 and 1995, respectively.
Note 10: Commitments and Contingencies
The Bank is obligated under non-cancelable lease
agreements for certain bank premises expiring in September 2028.
The leases contains a renewal option and provides 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
1998 $ 13,440
1999 17,760
2000 17,760
2001 17,760
<PAGE 82>
2002 17,760
2003 through 2008 121,320
$205,800
Total rent expense was $12,000 for the years ended
December 31, 1997, 1996 and 1995.
Note 11: 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 Company 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, 1997
and 1996 were as follows:
1997 1996
Commitments to extend credit $6,450,413 $3,544,638
Standby letters of credit 250,500 272,515
$6,700,913 $3,817,153
The Bank grants commercial, consumer and residential
loans to customers in the Susquehanna/Wyoming County, PA and
Broome County, NY areas. Of the total loan portfolio, 76% is for
<PAGE 83> 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.
Note 12: Regulatory Matters
The Bank is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such
restrictions, the Bank may not, without the prior approval of the
Comptroller of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years. Under this
restriction, the Bank, without prior regulatory approval, can
declare dividends to the Company totaling $4,575,000, plus an
additional amount equal to the net profit for 1998, 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, 1997, 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 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, 1997, that the
Company and Bank meet all capital adequacy requirements to which
they are subject. <PAGE 84>
As of December 31, 1997, 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, and the minimum ratios required for capital adequacy
purposes and to be well capitalized under the prompt corrective
action provisions are as follows:
<TABLE>
<CAPTION>
To Be Well Capital-
ized Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk
weighted assets):
Consolidated $22,167,000 17.84% $9,938,000 8.00% $12,422,000 10.00%
Peoples National Bank $22,132,000 17.82% $9,933,000 8.00% $12,417,000 10.00%
Tier 1 capital (to risk
weighted assets):
Consolidated $20,613,000 16.59% $4,969,000 4.00% $ 7,453,000 6.00%
Peoples National Bank $20,578,000 16.57% $4,967,000 4.00% $ 7,450,000 6.00%
Tier 1 capital (to average
assets):
Consolidated $20,613,000 9.22% $8,947,000 4.00% $11,184,000 5.00%
Peoples National Bank $20,578,000 9.20% $8,947,000 4.00% $11,184,000 5.00%
As of December 31, 1996:
Total capital (to risk
weighted assets):
Consolidated $23,389,000 22.07% $8,476,000 8.00% $10,596,000 10.00%
Peoples National Bank $23,419,000 22.07% $8,488,000 8.00% $10,610,000 10.00%
Tier 1 capital (to risk
weighted assets):
Consolidated $22,060,000 20.82% $4,238,000 4.00% $ 6,357,000 6.00%
Peoples National Bank $22,089,000 20.82% $4,244,000 4.00% $ 6,366,000 6.00%
Tier 1 capital (to average
assets):
Consolidated $22,060,000 10.76% $8,201,000 4.00% $10,252,000 5.00%
Peoples National Bank $22,089,000 11.99% $7,368,000 4.00% $ 9,209,000 5.00%
</TABLE>
<PAGE 85>
Note 13: Related Parties
The Bank has entered into transactions with its
directors, significant shareholders and their affiliates (related
parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at
the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than
normal credit risk or present other unfavorable features. The
aggregate amount of loans to such related parties at December 31,
1997 and 1996 was $758,083 and $712,083, respectively. During
1997, $262,106 of new loans and advances on lines of credit were
made, and repayments totaled $213,509.
Note 14: 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.
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
<PAGE 86> 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 11.
The estimated fair values of the Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due
from banks $ 2,401,332 $ 2,401,332 $ 1,672,682 $ 1,672,682
Interest-bearing
deposits in
other banks 3,147,371 3,147,371 1,395,892 1,395,892
Investment
securities 88,149,054 88,149,054 72,131,211 72,131,211
Loans, net 125,109,633 128,853,451 105,486,155 106,330,931
Accrued interest
receivable 1,776,908 1,776,908 1,429,957 1,429,957
Financial liabilities:
Deposits $193,592,017 $193,621,446 $156,930,353 $156,962,830
Short-term borrowings 9,274,834 9,274,834 6,712,918 6,712,918
Accrued interest
payable 662,696 662,696 599,245 599,245
</TABLE>
The carrying amounts in the preceding table are
included in the balance sheet under the applicable captions.
<PAGE 87>
Note 15: Parent Company
The following is financial information for Peoples
Financial Services Corp. (Parent Company only):
Balance Sheets
December 31, December 31,
1997 1996
Assets:
Cash $ 101,225 $ 13,265
Investment in bank subsidiary 24,608,305 21,743,285
Total assets 24,709,530 21,756,550
Liabilities:
Due to subsidiary 65,607 42,972
Total liabilities 65,607 42,972
Stockholders' equity:
Common stock 4,455,000 4,455,000
Surplus 4,455,000 4,455,000
Undivided profits 15,912,129 13,636,162
Unrealized gain (loss) on
securities available for sale,
net of applicable income taxes 370,569 (345,849)
Less: Treasury stock (548,775) (486,735)
Total stockholders' equity 24,643,923 21,713,578
Total liabilities and
stockholders' equity $24,709,530 $21,756,550
Statements of Income
1997 1996 1995
Dividends from bank
subsidiary $ 885,292 $1,103,888 $ 495,990
Other expenses 34,296 1,823 102
Income before taxes
and equity in
undistributed
income of
subsidiary 850,996 1,102,065 495,888
Provision for income tax
(benefit) (11,661) (620) (102)
Income before equity
in undistributed
income of <PAGE 88>
subsidiary 862,657 1,102,685 495,990
Equity in undistributed
income of subsidiary 2,148,602 1,613,352 1,991,230
Net income $3,011,259 $2,716,037 $2,487,220
Statement of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 3,011,259 $ 2,716,037 $ 2,487,220
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed earnings of
subsidiary (2,148,602) (1,613,352) (1,991,230)
Increase (decrease) in due
to subsidiary 22,635 1,203 0
Net cash provided by
operating activities 885,292 1,103,888 495,990
Cash flows from financing
activities:
Cash dividends paid (735,292) (603,888) (495,990)
Purchase of treasury stock (62,040) (486,735) 0
Net cash used by financing
activities (797,332) (1,090,623) (495,990)
Net increase in cash and cash
equivalents 87,960 13,265 0
Cash and cash equivalents,
beginning of year 13,265 0 0
Cash and cash equivalents, end
of year $ 101,225 $ 13,265 $ 0
Non-cash investing and financing
activities:
Stock dividend $ 0 $ 0 $ 2,970,000
</TABLE>
PAGE 89
<PAGE>
Item 14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PAGE 90
<PAGE>
Item 15. Financial Statements and Exhibits
(a) The following financial statements are being filed
as a part of this Registration Statement:
(i) Independent auditor's report;
(ii) Consolidated balance sheets as of
December 31, 1997 and 1996;
(iii) Consolidated statements of income for the
three years ended December 31, 1997, 1996 and 1995; and
(iv) Consolidated statements of cash flows for
the three years ended December 31, 1997, 1996 nd 1995.
(b) The following exhibits are being filed as a part
of this Registration Statement:
(3.1) Articles of Incorporation of Peoples
Financial Services Corp.*
(3.2) Bylaws of Peoples Financial Services
Corp.*
(10.1) Agreement dated January 1, 1997 between
John W. Ord and Peoples Financial Services Corp.*
(10.2) Excess Benefit Plan, dated January 14,
1992, for John W. Ord.*
(10.3) Termination Agreement dated January 1,
1997 between Michael S. Karhnak and Peoples Financial
Services Corp.*
(10.4) Termination Agreement dated January 1,
1997 between Debra E. Dissinger and Peoples Financial
Services Corp.*
(21) Subsidiaries of Peoples Financial
Services Corp.*
(23) Consent of Independent Auditors.*
(27) Financial Data Schedule.*
____________
* Previously filed.
PAGE 91
<PAGE>
Signatures
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
PEOPLES FINANCIAL SERVICES
CORPORATION
By /s/ John W. Ord
John W. Ord, President and Chief
Executive Officer
Date: June 2, 1998
<PAGE 92>
