UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from .
No. 0-23863
(Commission File Number)
PEOPLES FINANCIAL SERVICES CORP.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2931852
(State of Incorporation) (IRS Employer ID Number)
50 Main Street
Hallstead, PA 18822
(Address of principal executive offices) (Zip Code)
(717) 879-2175
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Number of shares outstanding as of September 30, 1998
COMMON STOCK ($2.00 Par Value) 2,180,436
(Title of Class) (Outstanding Shares)
PAGE 1
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q/A
For the Quarter Ended September 30, 1998
Contents
Page No.
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Statement of Financial
Condition as of September 30, 1998
(Unaudited) and December 31, 1997. 3
Consolidated Statement of Income
(Unaudited) for the Nine and Three
Month Periods Ended September 30, 1998
and 1997. 4
Consolidated Statement of Comprehensive
Income (Unaudited) for the Nine and
Three Month Periods Ended September 30,
1998 and 1997. 5
Consolidated Statement of Shareholders'
Equity (Unaudited) for the Nine Month
Periods Ended September 30, 1998 and 1997. 6
Consolidated Statement of Cash Flows
(Unaudited) for the Nine Month Periods
Ended September 30, 1998 and 1997. 7
Notes to Consolidated Financial Statements. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 11
Item 3. Quantitative and Qualitative Disclosure 18
About Market Risks
PART II OTHER INFORMATION 19
Item 6. Exhibits and Reports on Form 8-K. 19
PAGE 2
<PAGE>
PART I
Item 1
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,279 $ 2,402
Interest-bearing deposits in other banks 1,853 3,147
Federal Funds Sold 0 0
Investment securities available for sale 88,770 88,149
Loans 138,118 126,853
Less: Unearned income (43) (67)
Allowance for loan losses (1,711) (1,676)
Net loans 136,364 125,110
Premises and equipment 3,558 3,756
Accrued interest receivable 1,665 1,777
Other assets 4,440 4,379
Total assets $238,929 $228,720
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 22,366 $ 20,104
Interest bearing 182,336 173,488
Total deposits 204,702 193,592
Short-term borrowings 6,331 9,275
Accrued interest payable 663 663
Other liabilities 540 546
Total liabilities 212,236 204,076
Stockholders' equity:
Common stock, par value $2 per share,
12,500,000 shares authorized; 2,180,436
and 2,185,825 shares issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 4,455 4,455
Surplus 4,455 4,455
Undivided profits 17,623 15,912
Unrealized gain (loss) on securities
available for sale, net of applicable
deferred income taxes 834 371
Less: treasury stock, at cost (47,064 in
1998 and 41,675 in 1997) (674) (549)
Total stockholders' equity 26,693 24,644
Total liabilities and stockholders'
equity $238,929 $228,720
</TABLE>
See notes to financial statements
PAGE 3
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1998 1997 1998 1997
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $8,464 $7,279 $2,897 $2,556
Interest on investments:
Taxable 2,553 3,222 840 1,119
Tax exempt 1,109 918 373 354
Dividends 39 46 16 14
Interest on deposits in other banks 40 92 14 7
Interest on federal funds sold 41 17 7 13
Total interest income 12,246 11,574 4,147 4,063
Interest expense:
Interest on deposits 5,916 5,723 2,036 2,026
Interest on borrowed funds 202 117 60 22
Total interest expense 6,118 5,840 2,096 2,048
Net interest income 6,128 5,734 2,051 2,015
Provision for loan losses 130 90 55 30
Net interest after provision
for loan losses 5,998 5,644 1,996 1,985
Other income:
Service charges and customer
service fees 759 628 270 239
Investment securities gains, net 48 151 21 24
Other income 53 15 20 6
Total other income 860 794 311 269
Other expenses:
Salaries and employee benefits 1,759 1,730 602 610
Occupancy expense, net 232 227 75 97
Equipment expense 320 238 110 82
FDIC insurance and assessments 66 60 22 22
Professional fees and outside services 168 126 52 47
Computer service and supplies 196 299 72 151
Taxes, other than payroll and income 166 151 56 50
Other operating expenses 871 894 306 315
Total other expense 3,778 3,725 1,295 1,374
Income before taxes 3,080 2,713 1,012 880
Provision for income tax 635 576 202 209
Net income $2,445 $2,137 $ 810 $ 671
Net income per share (Basic & Diluted) $ 1.12 $ 0.98 $ 0.37 $ 0.31
</TABLE>
See notes to financial statements
PAGE 4
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Income $2,445 $2,137 $ 810 $ 671
Other Comprehensive Income:
Unrealized gains/loss on available for sale securities 750 878 518 560
Less: reclassification adjustment for <gain> loss
included in net income <48> <66> <21> 61
Other Comprehensive Income/Loss Before Tax 702 812 497 621
Applicable Income Tax Expense 239 276 169 211
Other Comprehensive Income/Loss, Net of Taxes 463 536 328 410
------ ------ ------ ------
TOTAL Comprehensive Income 2,908 2,673 1,138 1,081
====== ====== ====== ======
</TABLE>
See notes to financial statements
PAGE 5
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION> Unrealized Loss
on Investment and
Mortgage-backed
Securities
Common Undivided Available-for-sale Treasury
Stock Surplus Profits Net of Taxes Stock Total
------------- ----------- ---------- ------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 4,455 $ 4,455 $13,636 $ (346) $ (487) $21,713
Net Income for the nine months ended
June 30, 1997 2,137 2,137
Cash dividends paid (525) (525)
Treasury stock purchase (30) (30)
Change in unrealized gain (loss)
on securities available for sale,
net of taxes _______ _______ _______ 536 ________ 536
Balance, September 30, 1997 (unaudited) $ 4,455 $ 4,455 $15,248 $ 190 $ (517) $23,831
======= ======= ======= ======== ======== =======
BALANCE, December 31, 1997 $ 4,455 $ 4,455 $15,912 $ 371 $ (549) $24,644
Net Income for the nine months ended
September 30, 1998 2,445 2,445
Cash dividends paid (734) (734)
Treasury stock purchase (125) (125)
Change in unrealized gain (loss)
on securities available for sale,
net of taxes _______ _______ _______ 463 ________ 463
Balance, September 30, 1998 (unaudited) $ 4,455 $ 4,455 $17,623 $ 834 $ (674) $26,693
======= ======= ======= ======== ======== =======
See notes to financial statements
</TABLE>
PAGE 6
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 2,445 $ 2,137
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 527 417
Provision for loan losses 130 90
(Gain) loss on sale of equipment 2 6
(Gain) loss on sale of other real
estate 2 6
Amortization of securities' premium
and accretion of Discounts 87 (58)
Losses (gains) on sale of investment
securities, net (48) (66)
(Increase) in accrued interest
receivable 112 (415)
(Increase) decrease in other assets (126) (64)
Increase (decrease) in accrued
interest payable -0- 98
Increase (decrease) in other
liabilities (6) 70
Total Adjustments
Net cash provided by
operating activities 3,125 2,221
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for
sale securities 7,111 9,781
Proceeds from maturities of available
for sale securities 11,978 32,171
Purchase of available for sale
securities (22,420) (68,811)
Principal payment on mortgage-backed
securities 3,374 1,430
Net increase in loans (11,785) (11,904)
Proceeds from sale of premises
and equipment 1 5
Purchase of premises and equipment (137) (898)
Proceeds from sale of other real
estate 30 80
Purchase of intangible assets 0 (3,875)
<PAGE 7>
Net cash used in investing
activities (11,848) (42,021)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (734) (525)
Increase in deposits 11,110 41,592
Net decrease in long-term borrowing 0 0
Net increase (decrease) in short-
term borrowing (2,945) 1,019
Purchase of treasury stock (125) (30)
Net cash provided by financing
activities 7,306 42,056
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,417) 2,256
Cash and cash equivalents, beginning
of period 5,549 3,069
CASH AND CASH EQUIVALENTS, END OF
PERIOD 4,132 5,325
SUPPLEMENTAL DISCLOSURES OF CASH PAID:
Interest paid 6,119 5,741
Income taxes paid 579 783
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Transfers from loans to real
estate acquired through
foreclosure $601 $163
==== ====
Proceeds from sales of foreclosed
real estate financed through
loans $200 $0
==== ====
Total increase (decrease) in
unrealized gain (loss) on
securities available for sale $702 $812
==== ====
</TABLE>
See notes to financial statements
PAGE 8
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared pursuant to rules and regulations of the Securities and
Exchange Commission (SEC) and in compliance with generally
accepted accounting principles. Because this report is based on
an interim period, certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted. The registrant believes that the disclosures made
are adequate to make the information presented a fair
representation of the Corporation's financial status.
In the opinion of management, the accompanying consolidated
financial statements for the nine-month periods ended
September 30, 1998 and 1997 include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair
presentation of the financial condition and the results of
operations for the period. The financial performance reported
for the Corporation for the nine-month period ended September 30,
1998, is not necessarily the result to be expected for the full
year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME
SFAS No. 130
The Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income" effective January 1, 1998. This statement
establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income
includes net income and all other changes in shareholder's equity
except those resulting from investments and distributions to
owners. The adoption of SFAS No. 130 had no impact on the
Corporation's net income or shareholder's equity. Prior year
financial statements have been restated to conform to the
requirements of Statement 130. The statement requires that the
accumulated other comprehensive income be descriptively labeled
in the shareholder's equity (loss) on available for sale
securities that were previously reported. The Corporation has
included this new reporting information in Part I of this
Form 10-Q/A.
<PAGE 9>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
SFAS No. 131
The Company adopted SFAS No. 131 on January 1, 1998. This
Statement establishes standards for the way public companies
report information about operating segments in interim financial
reports issued to stockholders. It also establishes standards
for related disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 need not be
applied to interim financial statements in the initial year of
its application, therefore adoption of this Statement had no
impact on the accompanying consolidated financial statements.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS
SFAS No. 132
The Company adopted SFAS No. 132 on January 1, 1998. This
Statement: (1) revises employers' disclosures about pension and
other post-retirement benefit plans; (2) standardizes the
disclosure requirements for benefits of such plans; (3) requires
additional information on changes in the benefit obligations and
fair value of plan assets that will facilitate financial
analysis; and (4) eliminates certain disclosures that are no
longer useful. Most of the changes in the disclosure provisions
of this Statement address defined benefit plans. The Company's
adoption of SFAS No. 132 had no effect on disclosure requirements
nor did it have any effect on operating results or financial
position.
3. COMMON STOCK
On September 15, 1998, the Corporation effected a 5-for-2
stock split to shareholders of record on August 15, 1998.
Earnings per share amounts and weighted average shares
outstanding have been restated to give effect to the stock split.
In connection with the stock split, the Corporation amended it's
Articles of Incorporation to authorize 12,500,000 shares of $2
par value common stock. The following schedule shows the
resultant weighted average shares outstanding for the period.
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
Basic 2,184,011 2,188,963 2,183,382 2,188,569
Diluted 2,185,345 2,188,963 2,186,049 2,188,569
PAGE 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
The following discussion and analysis of the consolidated
financial statements of the Corporation is presented to provide
insight into management's assessment of financial results. The
Corporation's only subsidiary, Peoples National Bank of
Susquehanna County (the "Bank") provides financial services to
individuals and businesses within the Bank's market area made up
of Susquehanna, Wyoming and northern Lackawanna counties in
Pennsylvania, and southern Broome County in New York. The Bank
is a member of the Federal Reserve System and subject to
regulation, supervision and examination by the Office of the
Comptroller of the Currency.
FINANCIAL CONDITION
Cash and Cash Equivalents:
At September 30, 1998, cash, federal funds sold and deposits
with other banks totaled $4.132 million; a decrease of $1.193
million compared to $5.325 million at September 30, 1997.
Management believes the liquidity needs of the Corporation
are satisfied by the current balance of cash and cash
equivalents, readily available access to traditional funding
sources, and the portion of the investment and loan portfolios
that matures within one year. These sources of funds will enable
the Corporation to meet cash obligations as they come due.
Investments:
Investments totaled $88.770 million on September 30, 1998;
decreasing $9.726 million compared to September 30, 1997,
totaling $98.496 million. The decrease in the investment
portfolio is directly attributable to the increase in loan
demand.
The total investment portfolio is held as available for
sale. This strategy was implemented in 1995 to provide more
flexibility in using the investment portfolio for liquidity
purposes as well as providing more flexibility in selling when
market opportunities occur.
Management monitors the earnings performance and
effectiveness of the liquidity of the investment portfolio on a
monthly basis through the Asset/Liability Committee ("ALCO")
meetings. The ALCO also reviews and manages interest rate risk
for the Corporation. Through active balance sheet management and
analysis of the investment securities portfolio, the Corporation
maintains sufficient liquidity to satisfy depositor requirements
and various credit needs of its customers.
PAGE 11
<PAGE>
Loans:
The Bank's loan volume has continued to be strong through
the first three quarters of 1998. Increasing the loan to deposit
ratio is a goal of the Bank, but loan quality is a requisite in
this effort. Management has continued its efforts to create
tighter underwriting standards for both commercial and consumer
credit. The Bank's lending consists primarily of retail lending
which includes single family residential mortgage and other
consumer lending, and also commercial lending primarily to
locally owned small businesses.
On September 30, 1998, net loans totaled $136.364 million as
compared to $117.138 million on September 30, 1997; an increase
of $19.226 million in the past year. The loan to deposit ratio
was 67.45% on September 30, 1998; compared to 59.87% on September
30, 1997. During the third quarter of 1998 net loans grew from
$132.009 million to $136.364 million. On June 30, 1998, the loan
deposit ratio was 67.23% as compared to 67.45% on September 30,
1998.
Deposits:
Deposits are attracted from within the Bank's primary market
area through the offering of various deposit instruments
including NOW accounts, money market accounts, savings accounts,
certificates of deposit and IRAs. Total deposits at
September 30, 1998, were $204.702 million; compared to $198.521
million at September 30, 1997. This is an increase in deposits
of $6.181 million or 3%. Comparing the third quarter ending
balance to the second quarter ending balance, the deposit balance
at September 30, 1998, was $204.702 million and the June 30, 1998
deposit balance was $198.582 million, an increase of $6.12
million.
Borrowings:
The Bank utilizes borrowing as a source of funds for its
asset/liability management. Advances are available from the FHLB
provided certain standards related to credit worthiness have been
met. Repurchase and term agreements are also available from
FHLB.
Total borrowings at September 30, 1998, were $6.330 million
as compared to $7.732 million on September 30, 1997 a decrease of
$1.402 million. Comparing the second and third quarters of 1998,
borrowings were $4.925 million on June 30, 1998, showing an
increase of $1.405 million during the third quarter.
Capital:
The adequacy of the Corporation's capital is reviewed on an
ongoing basis with reference to the size, composition and quality
of the Corporation's resources and regulatory guidelines.
<PAGE 12> Management seeks to maintain a level of capital
sufficient to support existing assets and anticipated asset
growth, maintain favorable access to capital markets and preserve
high quality credit ratings. As of September 30, 1998,
regulatory capital to total assets was 9.44% as compared to 8.99%
on September 30, 1997.
The Corporation has complied with the standards of capital
adequacy mandated by the banking regulator. The bank regulators
have established "risk-based" capital requirements designed to
measure capital adequacy. Risk-based capital ratios reflect the
relative risks of various assets banks hold in their portfolios.
A weight category of either 0% (lowest risk asset), 20%, 50% or
100% (highest risk assets) is assigned to each asset on the
balance sheet. Capital is being maintained in compliance with
risk-based capital guidelines. The Company's Tier 1 capital to
total risk weighted assets ratio is 16.53% and the total capital
ratio to total risk weighted assets ratio is 17.77%. The
Corporation is deemed to be well capitalized under regulatory
standards.
On September 15, 1998, the Corporation effected a 5-for-2
stock split to shareholders of record on August 15, 1998.
PAGE 13
<PAGE>
Liquidity and Interest Rate Sensitivity:
Liquidity measures an organization's ability to meet cash
obligations as they come due. The consolidated statement of cash
flows presented in the accompanying financial statements included
in Part I of this Form 10-Q provide analysis of the Corporation's
cash and cash equivalents. Additionally, management considers
that portion of the loan and investment portfolio that matures
within one year as part of the Corporation's liquid assets.
The ALCO addresses the liquidity needs of the Bank to see
that sufficient funds are available to meet credit demands and
deposit withdrawals as well as to the placement of available
funds in the investment portfolio. In assessing liquidity
requirements, equal consideration is given to the current
position as well as the future outlook.
The following table sets forth the Bank's interest rate
sensitivity as of September 30, 1998.
INTEREST RATE SENSITIVITY ANALYSIS
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Maturity or Repricing In:
Rate Sensitive Assets 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years
<S> <C> <C> <C> <C> <C>
Loans 18,350 9,511 28,184 44,178 36,141
Securities 21,192 5,449 11,635 36,122 16,226
Federal Funds Sold 0 0 0 0 0
Total Rate Sensitive Assets 39,542 14,960 39,819 80,300 52,367
Cumulative Rate Sensitive Assets 39,542 54,502 94,321 174,621 226,988
<CAPTION>
Rate Sensitive Liabilities 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years
<S> <C> <C> <C> <C> <C>
Interest Bearing Checking 1,528 0 0 0 13,756
Money Market Deposits 25,021 2,489 0 0 12,444
Regular Savings 3,085 0 0 0 27,761
CDs and IRAs 15,978 17,777 27,824 31,305 2,089
Short-term Borrowings 6,330 0 0 0 1,127
Total Rate Sensitive Liabilities 51,942 20,266 27,824 31,305 57,177
Cumulative Rate Sensitive
Liabilities 51,942 72,208 100,032 131,337 188,514
Period Gap -12,400 -5,306 11,995 48,995 -4,810
Cumulative Gap -12,400 -17,706 -5,711 43,284 38,474
Cumulative RSA to RSL 76.13% 75.48% 94.29% 132.96% 120.41%
Cumulative Gap to Total Assets -5.20% -7.43% -2.40% 18.15% 16.14%
</TABLE>
The following assumptions 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" and the remaining balances in
<PAGE 14> 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 for 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.
RESULTS OF OPERATIONS
Net Interest Income:
Net interest income increased by $394 thousand and $36
thousand, or 6.87% and 1.79%, respectively for the nine months
and quarter ended September 30, 1998, as compared to the same
periods in 1997. Earning assets increased $8.175 million or 3.7%
for September 30, 1998, as compared to September 30, 1997.
Interest bearing liabilities have increased less than 1% or 1.4
million over September 1997 totals. The net interest margin was
3.663% for September 1998 and 3.735% for the period ended
September 30, 1997.
Interest Income:
Interest and fees on loans for the nine months and quarter
ended September 30, 1998, totaled $8.4 million and $2.9 million,
reflecting increases of $1.185 million or 16.3% and $341 thousand
or 13.3% respectively, over the comparable periods in 1997. The
loan portfolio grew $19.1 million from a total of $118.9 million
in September 1997 to $138.1 million in September 1998.
Interest on investments for the nine months and the quarter
ended September 30, 1998, totaled $3.8 million, year to date, and
$1.2 million for the quarter which reflects decreases of $513
thousand or 11.9% and $257 thousand or 17% respectively, over the
comparable period in 1997. Reinvestments of maturing investments
in loans increased because of loan demand which shows in these
numbers.
Interest Expense:
Interest expense for the nine months and the quarter ended
September 30, 1998, totaled $6.118 million and $2.096 million,
compared to $5.840 million and $2.048 million in 1997, reflecting
an increase of $278 thousand or 4.76%, year to date, and $48
thousand or 2.34% for quarter end, respectively, over the
comparable periods in 1997. The larger difference in the nine
months comparison reflects the effect of the extra deposits costs
in January and February of 1998 for the acquired deposits from
the branch purchases in Wyoming County in March of 1997.
Although deposit rates were dropped on statement savings on
September 1st, our interest expense for the quarter does not show
significant reduction in cost of funds for deposits. This is
<PAGE 15> because of the added volume of $6.2 million, year to
date, and $1.8 million in additional deposits for the quarter.
Provision for Loan Loss:
The provision for loan loss for the third quarter ending
September 30, 1998 increased by $3 thousand from the
corresponding period in 1997.
As of the end of the third quarter 1998, charge-offs totaled
$125 thousand, net charge-offs totaled $95 thousand as compared
to $64 thousand and $46 thousand respectively for the same nine
months period in 1997.
Senior management utilizes detailed analysis of the loan
portfolio monthly to determine loan loss reserve adequacy. The
process considers all "problem loans" including classified,
criticized and monitored loans. Prior loan loss history and
current market trends, both nationally and locally, are taken
into consideration. A watch list of potential problem loans is
maintained and monitored monthly. This list is reviewed by the
Board of Directors on a monthly basis. The Bank has not had nor
presently has any foreign loans. In addition, the Bank does not
have any concentrations of credit. Based upon this analysis,
senior management has concluded that the allowance of loan loss
is adequate.
Other Operating Income:
Other operating income increased $42 thousand when comparing
the same three month period, third quarter 1998 to third quarter
1997, and increased $66 thousand over the nine months period
comparison of September 1998 to September 1997. Service Charge
Fee Income is up $131 thousand for the entire nine months, with
the third quarter contributing $31 thousand. Gains and losses on
security sales were $3 thousand less this year when comparing
third quarter 1997 to 1998. The total gains and losses year to
date in 1998 is $103 thousand less than the year to date total in
1997.
Other Operating Expenses:
Non-Interest expense went down by $79 thousand during the
third quarter of 1998 as compared to the third quarter of 1997.
For the nine months ended September 30, 1998, total non-interest
expenses increased by $53 thousand over the same nine months
period in 1997. The decrease in the third quarter comparison is
due to the one-time charges that were incurred when the new
software was installed in 1997. The higher nine-month year to
date numbers reflects the additional costs for staff and
occupancy of the new buildings. Also furniture and equipment
costs are $28 thousand higher for the third quarter and $82
thousand higher for the nine month year to date period reflecting
the cost of the new equipment and software purchased in 1997.
Professional fees and outside services are higher by $5 thousand
<PAGE 16> for the quarter and $42 thousand higher for the first
three quarters of 1998 over 1997. This increase is due to
additional costs involved in legal fees for recovery on problem
loans.
Employee salaries, the largest component of non-interest,
decreased $8 thousand for the third quarter of 1998 and increased
only $29 thousand, as compared to the same year to date period of
1997. It is the goal of the Bank to be fair and competitive in
remuneration to employees and wages and salaries are adjusted at
least annually. Attrition and the use of more part time
employees have been a factor in the slower growth in this non-
interest expense for the periods being compared. In January
1998, management implemented an employee task force to work on
staffing efficiencies. Some impact can be seen in the quarter
and year to date numbers due to these efforts. In the first
quarter of 1998, employee expenses increased significantly from
the additional salaries in the Tunkhannock and Meshoppen offices
that were applicable in 1997 which has carried forward in the
year to date totals.
Income Tax Provision:
The income tax provision was $202 thousand and $635 thousand
for the three-month and nine-month periods ended September 30,
1998 compared to $209 thousand and $576 thousand for the same
periods in 1997.
Year 2000 Compliance:
The Bank utilizes software and related computer technologies
essential to its operations that can be affected by the Year 2000
issues.
In 1997, the Bank assigned a senior officer and the
compliance committee the responsibility to address the risks of
the critical internal bank systems as well as external and
environmental systems.
A comprehensive plan was developed for assessment, review,
remediation, testing, and contingency planning.
The assessment, review and remediation stages involved
creating inventory listings of internal and external sources of
hardware, software, and environmental systems, and then
installing all the necessary updates to put all systems at the
required Year 2000 level or version. The loan portfolio was also
inventoried. Selected borrowers were contacted to assess their
Year 2000 readiness to determine the adequacy of our allowances
for loan losses.
In the third quarter, the Bank participated in a public
awareness campaign through mailings, lobby materials, survey
cards, and calling officer visits.
<PAGE 17>
The project is now at the testing and contingency planning
phase.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Except for historical information, this Report may be deemed
to contain "forward looking" information. Examples of forward
looking information may include, but are not limited to
(a) projections of or statements regarding future earnings,
interest income, other income, earnings or loss per share, asset
mix and quality, growth prospects, capital structure and other
financial terms, (b) statements of plans and objectives of
management or the Board of Directors, (c) statements of future
economic performance, and (d) statements of assumptions, such as
economic conditions in the market areas served by the Corporation
and the Bank, underlying other statements and statements about
the Corporation and the Bank or their respective businesses.
Such forward looking information can be identified by the use of
forward looking terminology such as "believes," "expects," "may,"
"intends," "will," "should," "anticipates," or the negative of
any of the foregoing or other variations thereon or comparable
terminology, or by discussion of strategy. No assurance can be
given that the future results covered by the forward looking
information will be achieved. Such statements are subject to
risks, uncertainties, and other factors which could cause actual
results to differ materially from future results expressed or
implied by such forward looking information. Important factors
that could impact operating results include, but are not limited
to, (i) the effects of changing economic conditions in both the
market areas served by the Corporation and the Bank and
nationally, (ii) credit risks of commercial, real estate,
consumer and other lending activities, (iii) significant changes
in interest rates, (iv) changes in federal and state banking laws
and regulations which could affect operations, (v) funding costs,
and (vi) other external developments which could materially
affect business and operations.
Item 3. Quantitative and Qualitative Disclosure About Market
Risks
The information set forth under the caption "Liquidity and
Interest Sensitivity" under Item 2, Part I is incorporated herein
by reference.
PAGE 18
<PAGE>
PART II
PEOPLES FINANCIAL SERVICES CORP.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDER VOTE
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
27 Financial Data Schedule*
(b) Reports on Form 8-K
(c) The Corporation filed a Current Report on Form 8-K,
dated August 14, 1998, to report earnings for the second quarter
of 1998, announce the declaration of a cash dividend of $.29 per
share and announce the 5-for-2 stock split effected on
September 15, 1998.
____________________
* Previously filed.
PAGE 19
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: December 1, 1998 PEOPLES FINANCIAL SERVICES CORP.
(Registrant)
By/s/ Debra Dissinger
Debra Dissinger
Chief Accounting Officer
<PAGE 20>
