UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 000-23863
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 Identification Number)
Incorporation or Organization)
50 Main Street, Hallstead, PA 18822
(Address of Principal Executive Officer) (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, 2.00 par value
(Title of Class)
2,177,576
(Number of Shares Outstanding as of December 31, 1998)
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TABLE OF CONTENTS
Part I
Item 1 Business............................................................ 1-8
Item 2 Properties............................................................ 9
Item 3 Legal Proceedings..................................................... 9
Item 4 Submission of Matters to a Vote of Security Holders................... 9
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.10
Item 6 Selected Financial Data.............................................. 11
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................ 12-29
Item 7A Quantitative and Qualitative Disclosure About Market Risk........... 30
Item 8 Financial Statements and Supplementary Data
Independent Auditor's Report........................................... 31
Consolidated Balance Sheets............................................ 32
Consolidated Statements of Income...................................... 33
Consolidated Statements of Comprehensive Income........................ 34
Consolidated Statements of Stockholders' Equity........................ 35
Consolidated Statements of Cash Flows............................... 36-37
Notes to Consolidated Financial Statements.......................... 38-56
Item 9 Changes and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 57
Part III
Item 10 Directors and Executive Officers................................. 57-58
Item 11 Executive Compensation........................................... 58-63
Item 12 Share Ownership of Management and Directors......................... 64
Item 13 Certain Relationships and Related Transactions...................... 64
Part IV
Item 14 Exhibits and Reports on Form 8-K.................................... 64
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PART 1
ITEM 1 BUSINESS
BRIEF HISTORY
Peoples Financial Services Corp. (the "Company") was incorporated under the laws
of the Commonwealth of Pennsylvania on February 6, 1986 and is a one-bank
holding company headquartered in Hallstead, Pennsylvania.
The Company is engaged primarily in commercial and retail banking services and
in businesses related to banking services through its sole subsidiary, Peoples
National Bank of Susquehanna County ("PNB" or the "Bank"). PNB was chartered in
Hallstead, Pennsylvania in 1905 under the name of The First National Bank of
Hallstead. In 1965, the Hop Bottom National Bank (chartered in 1910) merged with
and into the First National Bank of Hallstead to form PNB. PNB is currently in
its 93rd year of operation.
SUPERVISION AND REGULATION
The Company and PNB are extensively regulated under federal and state law.
Generally, these laws and regulations are intended to protect depositors, not
shareholders. The following is a summary description of certain provisions of
certain laws which affect the regulation of bank holding companies and banks.
This discussion is qualified in its entirety by reference to applicable laws and
regulations. Changes in such laws and regulations may have a material effect on
the business and prospects of the Company and PNB.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and as such, it is subject to regulation,
supervision, and examination by the Federal Reserve Bank ("FRB"). The Company is
required to file annual and quarterly reports with the FRB and to provide the
FRB with such additional information as the FRB may require. The FRB also
conducts examinations of the Company.
With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person or
entity proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of the Company is required to give 60 days
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
The Company's banking subsidiary is a federally-chartered national banking
association regulated by the Office of the Comptroller of the Currency ("OCC").
The OCC may prohibit the institution over which it has supervisory authority
from engaging in activities or investments that the agency believes constitute
unsafe or unsound banking practices. Federal banking regulators have extensive
enforcement authority over the institutions they regulate to prohibit or correct
activities that violate law; regulation or a regulatory agreement or which are
deemed to constitute unsafe or unsound practices.
Enforcement actions may include:
the appointment of a conservator or receiver,
the issuance of a cease and desist order,
the termination of deposit insurance,
the imposition of civil money penalties on the institution, its
directors, officers, employees and institution affiliated parties, the
issuance of directives to increase capital, the issuance of formal and
informal agreements, the removal of or restrictions on directors,
officers, employees and institution-affiliated parties, and the
enforcement of any such mechanisms through restraining orders or any
other court actions.
PNB is subject to certain restrictions on extensions of credit to executive
officers, directors, principal shareholders or any related interests of such
persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with PNB
and not involving more than the normal risk of repayment. Other laws tie the
maximum amount that may be loaned to any one customer and its related interests
to capital levels of the bank.
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Limitations on Dividends and Other Payments
The Company's current ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiary, PNB. Both federal and state
laws impose restrictions on the ability of the Company to pay dividends. The FRB
has issued a policy statement that provides that, as a general matter, insured
banks and bank holding companies may pay dividends only out of prior operating
earnings. Under the National Bank Act, a national bank such as PNB, may pay
dividends only out of the current year's net profits and the net profits of the
last two years. In addition to these specific restrictions, bank regulatory
agencies in general, also have the ability to prohibit proposed dividends by a
financial institution that would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
Permitted Non-Banking Activities
Generally, a bank holding company may not engage in any activities other than
banking, managing or controlling its bank and other authorized subsidiaries, and
providing service to those subsidiaries. With prior approval of the FRB, the
Company may acquire more than 5% of the assets or outstanding shares of a
company engaging in non-bank activities determined by the FRB to be closely
related to the business of banking or of managing or controlling banks. The FRB
provides expedited procedures for expansion into approved categories of non-bank
activities.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions on extensions of credit to the bank holding company
or its subsidiaries, on investments in their securities and on the use of their
securities as collateral for loans to any borrower. These regulations and
restrictions may limit the Company's ability to obtain funds from PNB for its
cash needs, including funds for the payment of dividends, interest and operating
expenses. Further, subject to certain exceptions, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, PNB may not generally require a customer to obtain
other services from itself or the Company, and may not require that a customer
promise not to obtain other services from a competitor as a condition to an
extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of or assistance provided to, a commonly controlled
FDIC insured depository institution. Accordingly, in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guarantee liabilities generally
are superior in priority to the obligation of the depository institutions to its
stockholders due solely to their status as stockholders and obligations to other
affiliates.
Pennsylvania Law
As a Pennsylvania bank holding company, the Company is subject to various
restrictions on its activities as set forth in Pennsylvania law, in addition to
those restrictions set forth in federal law. Under Pennsylvania law, a bank
holding company that desires to acquire a bank or bank holding company that has
its principal place of business in Pennsylvania must obtain permission from the
Pennsylvania Department of Banking.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies were eliminated effective September 29,
1995. The law also permits interstate branching by banks effective as of June 1,
1997, subject to the ability of states to opt-out completely or to set an
earlier effective date.
Legislation and Regulatory Changes
From time to time, legislation is enacted that effects the cost of doing
business or limits the activities of a financial institution. No prediction can
be made as to the likelihood of any major changes or the impact of those changes
might have on the Company. Some changes made by Congress and regulatory agencies
are discussed below.
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FIRREA (Financial Institution Reform, Recovery, and Enforcement Act)
FIRREA was enacted into law in order to address the financial condition of the
Federal Savings and Loan Insurance Corporation, to restructure the regulation of
the thrift industry, and to enhance the supervisory and enforcement powers of
the Federal bank and thrift regulatory agencies. As the primary federal
regulator of the bank, the OCC is responsible for the supervision of the bank.
When dealing with capital requirements, the OCC and FDIC have the flexibility to
impose supervisory agreements on institutions that fail to comply with
regulatory requirements. The imposition of a capital plan, termination of
deposit insurance, and removal or temporary suspension of an officer, director
or other institution-affiliated person may cause enforcement actions.
There are three levels of civil penalties under FIRREA. The first tier provides
for civil penalties of up to $5,000 per day for any violation of law or
regulation. The second tier provides for civil penalties of up to $25,000 per
day if more than a minimal loss or a pattern is involved. Finally, civil
penalties of up to $1 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1 million per violation and may be up to $5 million for continuing
violations or for the actual amount of gain or loss. These penalties may be
combined with prison sentences of up to five years.
FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991)
In December 1991, Congress enacted FDICIA, which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things,
publicly available annual financial condition and management reports
for financial institutions, including audits by independent
accountants, the establishment of uniform accounting standards by
federal banking agencies, the establishment of a "prompt corrective
action" system of regulatory supervision and intervention, based on
capitalization levels, with more scrutiny and restrictions placed on
depository institutions with lower levels of capital, additional
grounds for the appointment of a conservator or receiver, and
restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories:
"well capitalized,"
"adequately capitalized,"
"under capitalized,"
"significantly undercapitalized," and
"critically undercapitalized."
PNB is currently classified as "well capitalized." An institution may be deemed
by the regulators to be in a capitalization category that is lower than is
indicated by its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically under capitalized.
FDICIA provides the federal banking agencies with significantly expanded powers
to take enforcement action against institutions that fail to comply with capital
or other standards. Such actions may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
<PAGE>
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 that fails to meet these standards may be required by the agency
to develop a plan acceptable to the agency, specifying the steps that the
institutions will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company, on
behalf of PNB, believes that it meets substantially all the standards that have
been adopted. FDICIA also imposed new capital standards on insured depository
institutions. Before establishing new branch offices, PNB must meet certain
minimum capital stock and surplus requirements and must obtain OCC approval.
Capital Requirements
The federal banking regulators have adopted certain risk-based capital
guidelines to assist in the assessment of the capital adequacy of a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit, and recourse agreements,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain US Treasury securities,
to 100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1", or core capital, includes common equity,
perpetual preferred stock (excluding auction rate issues) and minority interest
in equity accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions. "Tier 2", or supplementary capital,
includes, among other things, limited life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations and less
restricted deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant. As of December 31, 1998, PNB's ratio of Tier 1
capital to risk-weighted assets stood at 16.67% and its ratio of total capital
to risk- weighted assets stood at 17.92%. 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, 1998, PNB's leverage capital ratio was 9.43%.
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" 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.
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Interest Rate Risk
In August 1995 and May 1996, the federal banking agencies adopted final
regulations specifying that the agencies will include, in their evaluations of a
bank's capital adequacy, an assessment of the bank's interest rate risk ("IRR")
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization's IRR management includes a measurement of Board of
Directors and senior management oversight, and a determination of whether a
banking organization's procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking organization. PNB has
internal IRR models that are used to measure and monitor IRR. In addition, an
outside source also assesses IRR using its model on a quarterly basis.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, the Company does not expect the
addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for PNB.
FDIC Insurance Assessments
As a FDIC member institution, PNB's deposits are insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF"), administered by
the FDIC, and each institution is required to pay semi-annual deposit insurance
premium assessments to the FDIC. The 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 to pay a portion of the FICO assessments. The PNB assessment
for 1998 was $23,500. These figures can be compared to FDIC assessments in 1997
of $22,120 and 1996 of $1,000.
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.
The FICO assessment for PNB for 1998 was $.0126 for each $100 of BIF deposits.
Community Reinvestment Act
The Community reinvestment Act of 1977, (the CRA) is designed to create a system
for bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. Until May 1995, a depository
institution was evaluated for CRA compliance based on twelve assessment factors.
The CRA regulations were completely revised as of May 4, 1985, (the revised CRA
regulation) to establish new performance-based standards for use in examining
for compliance. This revised CRA regulation established new tests for evaluating
both small and large depository institutions. A small bank is defined as one
that has total assets of less than $250 million and is independent or is an
affiliate of a holding company with less than $1 billion in assets. Pursuant to
the revised CRA regulations, a small bank will be examined under a streamlined
procedure that emphasizes lending activities. The streamlined procedures for
small banks became effective on January 1, 1996.
Based on financial information as of December 31, 1998, the Bank is deemed to be
a small depository institution. The Bank had a CRA compliance examination in
1998 and received a "satisfactory" rating.
Concentration
Payment risk is a function of the economic climate in which the Bank's lending
activities are conducted. Economic downturns in the economy generally or in a
particular sector could cause cash flow problems for customers and make loan
payments more difficult. The Bank attempts to minimize this risk by avoiding
loan concentrations to a single customer or to a small group of customers whose
loss would have a materially adverse effect on the financial condition of the
Bank.
Monetary Policy
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are open
market operations in United States Government securities, changes in the
discount rate on member bank borrowings and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments, and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The monetary policies of the FRB have had a significant effect on
the operating results of commercial banks in the past and are expected to do so
in the future.
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MARKET AREAS
The PNB market areas are in the northeastern part of Pennsylvania with the
primary focus being Susquehanna and Wyoming Counties. Since Susquehanna County
borders the State of New York, the southern portion of Broome County, New York
is also considered part of the market area of PNB. In addition, parts of
Lackawanna, Wayne, and Bradford Counties in Pennsylvania that border Susquehanna
and Wyoming Counties are also considered part of the PNB market area: . The PNB
market area is situated between:
the city of Binghamton, Broome County, New York, located to the north
the city of Scranton, Lackawanna County, Pennsylvania, to the south,
and Wilkes Barre, Luzerne County, Pennsylvania to the southwest.
Susquehanna County could best be described as a bedroom county with a high
percentage of its residents commuting to work in Broome County, New York, or to
the Scranton, Pennsylvania area. The southern part of Susquehanna County tends
to gravitate south for both employment and shopping while the northern part of
the county goes north to Broome County, New York. The western part of
Susquehanna County gravitates south and west to and through Wyoming County.
Wyoming County is home to a Proctor & Gamble manufacturing facility which
employs approximately 3,000 people. This is an economic stimulus to Wyoming
County and the surrounding areas.
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 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
that 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. Based on the latest available published
information of personal income for the region, the breakdown by percentage is as
follows:
forestry and forestry-related industries, including the Proctor and
Gamble paper products facility located in Wyoming County, accounted for
approximately 12.5%,
farming and quarrying accounted for approximately 1.5%,
service industries accounted for approximately 9%, and
government jobs accounted for an additional 7%.
BUSINESS
Lending Activities
PNB provides a full range of retail and commercial banking services designed to
meet the borrowing and depository needs of small and medium sized businesses and
consumers in its market areas. Substantially all of PNB's loans are to customers
located within its service areas. PNB has no foreign loans or highly leveraged
transaction loans, as defined by the 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 commercial real estate loans,
working capital, equipment, and other commercial loans, construction loans, SBA
guaranteed loans, and agricultural loans. PNB's commercial real estate loans are
used to provide financing for retail operations, manufacturing operations,
farming operations, multi-family housing units, and churches. Commercial real
estate secured loans are generally written for a term of 15 years or less or
amortized over a longer period with balloon payments at shorter intervals.
Personal guarantees are obtained on nearly all commercial loans. Credit
analysis, loan review, and an effective collections process are also used to
minimize any potential losses. PNB employs two full-time commercial lending
officers. These two people are augmented by branch managers who are authorized
to make smaller, less complex, commercial loans.
<PAGE>
Risk with respect to PNB's commercial lending activities involves payment risk,
interest rate risk, or collateral risk. Payment risk is a function of the
economic climate in which PNB's lending activities are conducted; economic
downturns in the economy generally or in a particular sector could cause cash
flow problems for customers and make loan payments more difficult. PNB attempts
to minimize this risk by avoiding concentrations of credit to single borrowers
or borrowers in a particular industry. Interest rate risk would occur if PNB
were to make loans at fixed rates in an environment in which rates were rising
thereby preventing PNB from making loans at the higher prevailing rates. PNB
attempts to mitigate this risk by making adjustable rate commercial loans and,
when extending fixed rate commercial loans, fixing loan maturities at five years
or less. Finally, collateral risk can occur if PNB's position in collateral
taken as security for loan repayment is not adequately secured. PNB attempts to
minimize collateral risk by avoiding loan concentrations to particular
borrowers, by perfecting liens on collateral and by obtaining appraisals on
property prior to extending loans.
Consumer loans offered by PNB include:
residential real estate loans,
automobile loans,
manufactured housing loans,
personal installment loans secured and unsecured for almost any purpose,
student loans,
and home equity loans (fixed-rate term and open ended revolving lines of credit)
Risks applicable to consumer lending are similar to those applicable to
commercial lending. PNB attempts to mitigate payment risk in consumer lending by
limiting consumer lending products to a term of five years or less. To the
extent that PNB extends unsecured consumer loans, there is greater collateral
risk; however, credit checks and borrower history are obtained in all consumer
loan transactions.
Residential mortgage products include adjustable-rate as well as conventional
fixed-rate loans. Terms vary from 1, 5, 7 and 10-year adjustable rate loans to
5, 10, 15, 20, and 30-year fully amortized fixed rate loans. Bi-weekly payment
plans are also available. The longer term fixed rate loans have been
underwritten as conforming and may be sold to the secondary market to reduce
interest rate risk. Personal secured and unsecured revolving lines of credit
with variable interest rates and principal amounts ranging from $1,000 to
$10,000 are offered to credit-worthy customers. The largest segment of PNB's
installment loan portfolio is fixed-rate loans. Most are secured either by
automobiles, motorcycles, snowmobiles, boats, other personal property, or by
liens filed against real estate. These loans are generally available in terms of
up to 15 years with automobile loans having maturities of up to 60 months and
real estate loans having maturities up to 15 years. Loans secured by other
collateral usually require a maturity of less than 60 months. Home equity
products include both fixed-rate term products and also an open-end revolving
line of credit with a maximum loan-to-value ratio of 80% of current appraisal.
Credit checks, credit scoring, and debt-to-income ratios within preset
parameters are used to qualify borrowers.
Mortgage loans have historically had a longer average life than commercial or
consumer loans. Accordingly, payment and interest rate risks are greater in some
respects with mortgage loans than with commercial or consumer lending. Deposits,
which are used as the primary source to fund mortgage lending, tend to be of
shorter duration than the average maturities on residential mortgage loans and
are more susceptible to interest rate changes. As a result of the relatively
long life of mortgage products, mortgages are written as either conforming or
nonconforming. In an effort to minimize interest rate and payment risk, only
conforming mortgage loans, which can be sold in the secondary mortgage market,
are written for periods of 30 years. Nonconforming mortgages are made with
adjustable rates or fixed rates with maturities shorter than 30 years.
Nonconforming mortgages also historically have higher interest rates. Mortgage
lending is also subject to economic downturns, in that increases in unemployment
could adversely affect the ability of borrowers to repay mortgage loans and
decreases in property values could affect the value of the real estate serving
as collateral for the loan.
<PAGE>
Lending volume increased substantially in 1998 as our presence in Wyoming
County was expanded by the purchase of branch offices in Tunkhannock and
Meshoppen, Pennsylvania in 1997. 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 that ended 1998 up
over 11.42% from year-end 1997. 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 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 50% for loans
secured by raw land to 80% for improved property, with the exception of
secondary market programs which allow loan-to-value ratios as high as 95%. In
addition, in some instances for qualified borrowers, private mortgage insurance
is available for purchase that allows loan-to-value ratios to go as high as 95%.
PNB also participates in a guaranteed mortgage insurance program. This allows
PNB to make loans secured by second mortgages on real estate up to 100% of the
value of the property. Adjustable rate mortgage products, as well as
conventional fixed-rate products, are also available at PNB.
Deposit Activities
PNB also offers a full range of deposit and personal banking services insured
by the Federal Deposit Insurance Corporation ("FDIC"), including commercial
checking and small business checking products, cash management services,
retirement accounts such as Individual Retirement Accounts ("IRA"), retail
deposit services such as certificates of deposit, money market accounts, saving
accounts, a variety of checking account products, automatic teller machines
("ATM's"), point of sale and other electronic services such as automated
clearing house ("ACH") originations, and other personal miscellaneous services.
These miscellaneous services would include safe deposit boxes, night depository
services, traveler's checks, merchant credit cards, direct deposit of payroll
and other checks, U.S. Savings Bonds, official bank checks, and money orders.
PNB offers credit cards as an agent bank through another correspondent bank. The
principal sources of funds for PNB are core deposits that include demand
deposits, interest bearing transaction accounts, money market accounts, savings
deposits, and certificates of deposit. These deposits are solicited from
individuals, businesses, non-profit entities, and government authorities.
Substantially all of PNB's deposits are from the local market areas surrounding
each of its offices.
Investment Portfolio and Activities
PNB's investment portfolio has several objectives. A key objective is to provide
a balance in PNB's asset mix of loans and investments consistent with its
liability structure, and to assist in management of interest rate risk. The
investments augment PNB's capital position in the risk-based capital formula,
providing the necessary liquidity to meet fluctuations in credit demands of the
community and also fluctuations in deposit levels. In addition, the portfolio
provides collateral for pledging against public funds, and a reasonable
allowance for control of tax liabilities. Finally, the investment portfolio is
designed to provide income for PNB. In view of the above objectives, the
portfolio is treated conservatively by management and only securities that pass
those criteria are purchased.
<PAGE>
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.
Financial institutions generally compete on the basis of rates and service. PNB
is subject to increasing competition from credit unions, finance companies, and
mortgage companies that may not be subject to the same regulatory restrictions
and taxations as commercial banks.
PNB will seek to remain competitive with interest rates that it charges on its
loans and offers on deposits. It also believes that its success has been, and
will continue to be, due to its emphasis on community involvement, customer
services, and relationships. With consolidation continuing in the financial
industry, and particularly in PNB's markets, smaller profitable banks are
gaining opportunities where larger institutions exit markets that are only
marginally profitable for them
SEASONALITY
Management does not feel that the deposits or the business of PNB in general
are seasonal in nature. The deposits may, however, vary with local and national
economic conditions but should not have a material effect on planning and policy
making.
<PAGE>
ITEM 2 PROPERTIES
PNB has four full-service banking offices in Susquehanna County along with a
limited service office located in Springville, Pennsylvania that 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,
the Borough of Hop Bottom, and
the Montrose office in Bridgewater Township.
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 six years, and the recent (1997)
purchase of branches located in Tunkhannock and Meshoppen, Pennsylvania, which
are west of Nicholson. 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.
The administrative/operations office of the Company and PNB is located at 50
Main Street, Hallstead, Pennsylvania. The following are located at that office:
PNB's commercial, mortgage and consumer lending operations, its executive
offices, marketing department, human resources office, deposit account support
services, and data processing department. 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 6 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 $18,000 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. See Note 12 of
Notes to Consolidated Financial Statements for further information on this
subject.
ITEM 3 LEGAL PROCEEDINGS
The nature of the Company's business generates a certain amount of litigation
involving matters arising out of the ordinary course of business. At this time,
it is managements' opinion that there are no pending legal proceedings that
would be of material affect to the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS 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. The
information in the following table has been adjusted to reflect the 5 for 2
stock split of September 1998.
<TABLE>
<CAPTION>
1998 1997
Price Range Dividends Price Range Dividends
Low High Declared Low High Declared
<S> <C> <C> <C> <C> <C> <C>
First Quarter .........$17.60 $19.20 $0.10 $12.80 $13.60 $0.08
Second Quarter ........$19.20 $25.20 $0.12 $13.60 $14.40 $0.08
Third Quarter .........$25.20 $25.50 $0.12 $14.40 $16.40 $0.08
Fourth Quarter ........$25.50 $25.50 $0.12 $16.40 $17.60 $0.10
</TABLE>
As of December 31, 1998, the approximate number of holders of record of the
Company's Common Stock was 658. At such date, 2,177,576 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 21,060 outstanding options or warrants to
purchase. See Note 9 of the Consolidate Financial Statements for more
information.
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
The following table shows the Consolidated Financial Highlights as seen in the
Quarterly Report for the Fourth Quarter 1998. Amounts are in thousands except
for per share data.
Consolidated Financial Highlights
<TABLE>
<CAPTION>
December 31 December 31
1998 1997 % Inc
---- ---- -----
<S> <C> <C> <C>
Performance
Net Income .................................. 3,405 3,011 13.08%
Return of Average Assets .................... 1.45 1.38 5.07%
Return on Equity ............................ 13.23 12.20 8.44%
Shareholders' Value Net Income per Share .... 1.56 1.38 13.04%
Dividends ................................... 0.46 0.34 35.29%
Book Value .................................. 12.42 11.28 10.11%
Market Value ................................ 25.50 17.60 44.89%
Market Value/Book Value Ratio ............... 205.31 156.08 31.54%
Price Earnings Multiple ..................... 16.35 12.79 27.83%
Dividend Payout Ratio ....................... 29.23 24.42 19.70%
Dividend Yield .............................. 1.80 2.18 (17.43)%
Safety and Soundness
Shareholders' Equity/Asset Ratio ............ 10.94 10.77 1.58%
Allowance for Loan Loss as a Percent of Loans 1.21 1.34 (9.70)%
Net Charge Offs/Total Loans ................. 0.11 0.09 22.22%
Allowance for Loan Loss/Nonaccrual Loans .... 331.88 163.24 103.31%
Allowance for Loan Loss/Non-performing Loans 231.61 94.89 144.08%
Balance Sheet Highlights at December 31, 1998
Total Assets ................................ 247,202 228,720 8.08%
Total Investments ........................... 93,175 88,149 5.70%
Net Loans ................................... 139,536 125,110 11.53%
Allowance for Loan Losses ................... 1,713 1,676 2.21%
Total Deposits .............................. 209,881 193,592 8.41%
Stockholders' Equity ........................ 27,046 24,644 9.75%
</TABLE>
<PAGE>
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation
The following discussion of the Company's consolidated financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and Related Notes included in Item 8 of this report.
Statements regarding the Company's expectations as to financial results and
other aspects of its business may constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Although
the Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business operations, there can be no
assurance that its results will not differ materially from its expectations.
Factors that might cause or contribute to such differences may include
uncertainty of future profitability, changing economic conditions and monetary
policies, uncertainty of interest rates, risks inherent in banking transactions,
competition, extent of government regulations, and delay in or failure in
obtaining regulatory approvals.
GENERAL DISCUSSION
Peoples Financial Services Corp (Corporation) recorded net income of $3,405,000
($1.56 per share) for 1998 compared to $3,011,000 ($1.38 per share) in 1997, and
$2,716,000 ($1.24 per share) in 1996. Return on average assets (ROAA) was 1.45%,
1.38% and 1.52% respectively. The purchase of two branch offices in Wyoming
County from Mellon Bank was completed in March of 1997. Deposits of $37.3
million were included in the purchase. This significant increase in both assets
and liabilities was the reason for the decline in ROAA for 1997 and also 1998. A
more detailed explanation for each contribution to the increase in income is
included in the remainder of the analysis.
RESULTS OF OPERATION
Net Interest Income
Net interest income is the primary source of operating income for the
Corporation. Net interest income is the difference between interest earned on
loans and securities and interest paid on deposits and other funding sources.
The factors that influence net interest income include changes in interest
rates, changes in the volume, and mix of asset and liability balances.
For analytical purposes, net interest income is reported on a tax-equivalent
basis that recognizes the income tax savings on tax-exempt items such as
interest on state and municipal securities and tax-exempt loans. Net interest
income on a fully tax-equivalent basis increased $686,000 or 8.1% in 1998
compared to 1997. Table 1 presents the net interest income on a fully
tax-equivalent basis for each of the three years ending December 31, 1998, 1997,
and 1996.
<TABLE>
<CAPTION>
NET INTEREST INCOME
(In thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total Interest Income .......................... $16,584 $15,725 $13,446
Tax Equivalent Adjustment ...................... 766 662 425
17,350 16,387 13,870
Total Interest Expense ......................... 8,191 7,914 6,879
Net Interest Income (Fully Tax Equivalent Basis) $ 9,159 $ 8,473 $ 6,990
------- ------- -------
</TABLE>
Table 2 analyzes the components contributing to the changes in net interest
income in 1998 and indicates the impact in either changes in rate or changes in
volume. Table 3 includes the average balances, interest income and expense, and
the average rates earned and paid for assets and liabilities.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
VOLUME/RATE ANALYSIS
YEARS-ENDED DECEMBER 31,
1998 to 1997 1997 to 1996
Increase Change Due to Increase Change Due to
(Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Real Estate Loans ................... (289) (365) 76 642 (39) 681
Installment Loans ................... (481) (74) (407) 457 (13) 470
Commercial Loans ................... 1,782 225 1,557 (104) (90) (14)
Tax Exempt Loans .................... 98 (35) 133 (220) (153) (67)
Other Loans ......................... 341 (134) 475 11 14 (3)
Total Loans ........................ 1,451 (384) 1,835 786 (281) 1,067
----- ---- ------ ------ ---- -----
Investment Securities (Available for Sale)
Taxable ............................. (768) (243) (525) 770 (76) 846
Non-Taxable ......................... (202) (15) 217 35 (568) 603
Total Securities(Available for Sale). (566) (259) (307) 805 (643) 1,449
------ ---- ------ ----- ---- -----
Time Deposits with Other Banks ...... 3 (13) 16 34 16 18
Federal Funds Sold .................. (51) 1 (52) 57 0 57
Total Interest Income ............... 837 (654) 1,491 1,682 (909) 2,591
---- ---- ------ ------ ---- -----
INTEREST EXPENSE
Interest Bearing Demand Deposits ..... 20 (9) 29 95 (3) 98
Regular Savings Deposits ............. 76 (7) 83 180 20 160
Money Market Savings Deposits ........(195) (103) (92) 371 (180) 551
Time Deposits ........................ 267 (9) 276 293 (161) 454
Total Interest Bearing Deposits ...... 168 (166) 334 939 (548) 1,487
---- ---- ------ ------ ---- -----
Other Borrowings .................... 109 (62) 171 95 30 65
Total Interest Expense .............. 277 (193) 470 1,034 (518) 1,552
----- ---- ------ ------ ---- -----
Net Interest Spread ................. 560 (461) 1,021 1,457 (391) 1,039
---- ---- ------ ------ ---- -----
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
AVERAGE BALANCES AND INTEREST RATES
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans
Real Estate 76,516 6,306 8.24% 75,642 6,595 8.72% 67,877 5,953 8.77%
Installment 14,039 1,265 9.01% 18,303 1,746 9.54% 13,416 1,289 9.61%
Commercial 30,162 3,097 10.27% 13,809 1,315 9.52% 13,943 1,419 10.18%
Tax Exempt 8,666 402 4.64% 6,028 304 7.61% 6,911 524 7.58%
Other Loans 5,309 377 7.10% 337 36 10.68% 378 25 6.61%
Total Loans 134,692 11,447 8.50% 114,119 9,996 8.90% 102,525 9,210 8.98%
------- ------- ------ ------- ----- ------ ------ ------ -----
Investment Securities (AFS)
Taxable 59,520 3,548 5.96% 64,978 4,316 6.64% 52,464 3,546 6.76%
Non-Taxable 28,937 1,487 5.14% 24,753 1,285 7.87% 16,702 1,250 7.48%
Total
Securities 88,457 5,035 5.69% 89,731 6,263 6.98% 69,166 4,796 6.93%
Time Deposits with
Other Banks 616 38 6.17% 423 35 6.38% 22 1 4.55%
Fed Funds Sold 760 42 5.53% 1,721 93 5.40% 668 36 5.39%
Total Earning
Assets 224,525 16,562 7.38% 205,994 15,725 8.03% 172,381 14,043 8.15%
------- ------ ----- ------- ------ ----- ------- ------ -----
Less: Allowance for
Loan Losses (1,710) (1,694) (1,575)
Cash and Due
from Banks 1,742 4,089 2,915
Premises and Equipment,
net 3,688 3,459 2,617
Other Assets 5,990 5,320 1,574
Total Assets 234,235 217,168 177,912
-------- ------- --------
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------ ------- ----- ------- -------- ---- ------- -------- ----
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Interest Bearing
Demand 15,058 250 1.66% 13,379 230 1.72% 7,748 135 1.74%
Regular Savings 31,752 904 2.85% 28,870 828 2.87% 23,154 648 2.80%
Money Market Savings 38,401 1,565 4.08% 40,529 1,760 4.34% 29,015 1,389 4.79%
Time 93,890 5,187 5.52% 88,908 4,920 5.53% 80,965 4,627 5.71%
Total
Interest Bearing
Deposits 179,101 7,906 4.41% 171,686 7,738 4.51% 140,882 6,799 4.83%
------- ----- ----- ------- ----- ----- ------- ----- -----
Other Borrowings 6,029 285 4.73% 3,057 176 5.76% 1,701 81 4.76%
Total Liabilities 185,130 8,191 4.42% 174,743 7,914 4.53% 142,583 6,880 4.83%
------- ----- ----- ------- ----- ----- ------- ----- ------
Net Interest Spread 8,371 7,811 7,163
Non-Interest Bearing
Demand Deposits 22,247 18,735 13,822
Accrued Expenses and
other Liabilities 1,320 974 994
Stockholder's Equity 25,538 22,716 20,513
Total Liabilities and
Stockholder's Equity 234,235 217,168 177,912
------- ------- -------
Interest Income/Earning Assets 7.38% 8.03% 8.15%
Interest Expense/Earning Assets 3.65% 3.84% 3.99%
Net Interest Margin 3.74% 4.19% 4.16%
</TABLE>
<PAGE>
PROVISION FOR LOAN LOSS
The provision and allowance for loan losses are based on management's ongoing
assessment of the Corporation's credit exposure and consideration of other
relevant factors. The allowance for loan losses is a valuation reserve that is
available to absorb future loan charge offs. The provision for loan losses is
the amount charged to earnings on an annual basis. The factors considered in
management's assessment of the reasonableness of the allowance for loan losses
include prevailing and anticipated economic conditions, assigned risk ratings on
loan exposures, the results of examinations and appraisals of the loan portfolio
conducted by federal regulatory authorities and an independent loan review firm,
the diversification and size of the loan portfolio, the level of and inherent
risk in non-performing assets, and any other factors deemed relevant by
management.
At December 31, 1998, the allowance for loan losses represents 1.22% of
outstanding loans, compared to 1.34% at December 31, 1997. Non-performing loans,
which include loans past due greater than 90 days, decreased from $1,202,000 in
1997 to $ 578,000 in 1998. The allowance for loan losses to non-performing loans
in 1998 and 1997 was 231.61% and 94.89%, respectively. Because of an increase in
charge offs in 1998 compared to 1997 and an 11.50% increase in loans
outstanding, the provision for loan loss was increased from $130,000 to
$190,000. Management believes the current level of the allowance is adequate.
OTHER INCOME
Other income consists of service charges, other income, and securities gains
(losses). Table 4 analyzes the increase in other income of $59,000 or 5.2% in
1998 compared to 1997.
<TABLE>
<CAPTION>
(In thousands)
OTHER INCOME
Variance
1998 1997
Dec 31 Amount Percent Amount Percent
1998 1997 1996 Of Change Of Change
---- ---- ---- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service Charges and Fees $1,108 $ 891 $ 682 $ 217 24.35% $ 209 30.65%
Other Operating Income . 41 29 22 12 41.38% 7 31.82%
Gains on Security Sales 47 217 120 (170)(78.34)% 97 80.83%
TOTAL Other Income ..... $1,196 $1,137 $ 824 $ 509 5.19% $ 313 37.99%
</TABLE>
Service charges for 1998 were $1,108,000, an increase of $217,000 or 24.3%,
compared to $891,000 in 1997. This increase is a result of growth in demand
deposits and an effort to cut down the number of waived service charges at the
branches. Other operating income is not a significant income number. It consists
mainly of safe deposit box rentals, interest forfeited, fees charged on bank
checks, commissions on life and disability insurance sold with installment and
mortgage loans, fees received from the food stamp program, and fees received for
processing U.S. Series EE Bonds. However, an increase of $12,000 from 1997 to
1998 was 41.4%. Increased volume is the reason for the bigger amount. Securities
gains were down significantly in 1998 from 1997 with $47,000 and $217,000 being
the respective amounts. In comparison, 1998 gains were 78.34% lower than 1997.
Decreased sales activity caused by a very stable interest rate environment in
1998 was the reason for the decline in income.
OTHER EXPENSE
Other expenses increased 1.9% or $96,000 in 1998 to $5,090,000 when compared to
the 1997 figure of $4,994,000. The 1997 figure was up substantially because of
the purchase of two offices in Wyoming County that resulted in increases in
every category of the other expenses. Other expenses were $3,603,000 in 1996
and, for the reason listed above, increased to $4,994,000 in 1997. Table 5 is a
summary of the other expenses by category for 1998, 1997 and 1996
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
OTHER EXPENSES
Variance
1998 1997
Dec 31 Amount Percent Amount Percent
1998 1997 1996 Of Change Of Change
---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $2,395 $2,282 $1,790 $113 4.95% $492 27.49%
Occupancy Expenses 319 324 225 (5) (1.54)% 99 44.00%
Furniture and Equipment Expense 436 389 252 47 12.08% 137 54.37%
FDIC Insurance and Assessments 88 81 56 7 8.64% 25 44.64%
Professional Fees and
Outside Services 191 193 183 (2) (1.04)% 10 5.46%
Computer Services and Supplies 268 359 224 (91)(25.35)% 135 60.27%
Taxes, Other Than Payroll and
Income 222 204 183 18 8.82% 21 11.48%
Other Operating Expenses 1,171 1,162 690 9 0.77% 472 68.41%
Total Non-Interest Expense $5,090 $4,994 $3,603 $96 1.92% $1,391 38.61%
</TABLE>
Salaries and benefits totaled $2,395,000 in 1998, an increase of $113,000 or
4.9% from 1997. This increase was normal when growth and annual salary increases
are considered. The increase of $492,000 or 27.5% from 1996 to 1997 was the
result of adding new employees through the purchase of branch offices.
Occupancy expense decreased $5,000 or 1.6% from 1997 to 1998 while increasing
$99,000 or 44.0% from 1996 to 1997. Again, adding two branch offices and the
related expenses to the existing branch network caused the increase in 1997.
Equipment expense was $436,000 in 1998 compared to $389,000 in 1997 and $252,000
in 1996. The addition of two branch offices caused additional equipment,
compatible to the existing system to be purchased. In addition, in 1997, a new
computer system and related software was purchased and installed. The first full
year of depreciation on the new equipment computer, and software was in 1998.
This was a major reason for the 1998 increase in expenses. The 1998 increase was
$47,000 or 12.1% over 1997 and 1997 was $137,000 or 54.3% over 1996.
FDIC insurance and regulatory assessments continued to increase as a result of
growth in deposits. The large increase in 1997 over 1996 was also related to the
branch purchases and the approximate $38 million in deposits purchased with the
branches. This expense category was over $88,000 in 1998 compared to $81,000 in
1997, an increase of $7,000 or 8.6%. In 1997 compared to 1996, the increase was
$25,000 from $56,000 to $81,000 or 44.6%.
Professional fees and outside services declined in 1998 to $191,000 from
$193,000 in 1997 or 1.0% while the difference between 1996 and 1997 was $10,000
with 1996 expense at $183,000 and 1997 at $193,000 or a 5.5% increase. The trend
in this expense category is considered to be normal.
Computer services and supplies decreased substantially in 1998 to $268,000 when
compared to 1997 at $359,000 or 25.3% less. This extra expense in 1997 is
directly related to installation charges, including out of pocket expense and
travel from the software company in conjunction with a new computer system. This
extraordinary expense in 1997 from $224,000 in 1996 caused this expense line
item to increase 60.3% to the $359,000 record figure in 1997
Taxes, other than payroll, increased in a normal pattern attributed to growth in
the years 1997 and 1998. The 1998 figure was $222,000 compared to $204,000 in
1997 and $183,000 in 1996. This was a difference of $18,000 or 8.8% comparing
1998 to 1997 and a difference of $21,000 or 11.5% when comparing 1997 to 1996.
Other operating expenses covers everything not covered in the specific areas
previously listed. The major items in this category are postage, stationary,
printing and supplies, advertising and promotion, directors' fees, and employee
education. This category increased greatly in 1997 to $1,162,000 compared to
$690,000 in 1996. The major reasons for the increase was the addition of the two
purchased branches and the increase in related expenses and the new computer and
software which was purchased in 1997 and the related expenses to that. In 1998
expenses leveled off to $1,171,000 or $9,000 and 0.8% over 1997.
<PAGE>
FEDERAL INCOME TAXES
The provision for income taxes in 1998 was $903,804 compared to $813,619 in
1997. The effective tax rate, which is the ratio of income tax expense to income
before taxes, was 21% in 1998, down from 21.3% in 1997. The tax rate for both
periods was substantially less than the federal statutory rate of 34% primarily
due to tax-exempt securities and tax-exempt loan income. Please refer to Note 10
of the Notes to Consolidated Finance Statements included as part of this report
for further analysis of federal income tax expense for 1998.
<TABLE>
<CAPTION>
(in thousands, except per share data)
QUARTERLY RESULTS OF OPERATIONS
Quarter Ended 1998
31-Mar 30-Jun 30-Sep 31-Dec
<S> <C> <C> <C> <C>
Interest Income ................. 4,042 4,085 4,146 4,338
Interest Expense ................ 2,017 2,005 2,096 2,073
Net Interest Income ............. 2,025 2,080 2,050 2,265
Provision for Loan Loss ......... (38) (38) (55) (60)
Securities Gains/Losses ......... 27 0 21 (1)
Other Income .................... 270 279 290 337
Other Expense ................... (1,286) (1,198) (1,294) (1,312)
Income Before taxes ............. 998 1,070 1,012 1,229
Income Taxes .................... (205) (228) (202) (269)
Net Income ...................... 793 842 810 960
Primary Earnings per common share 0.36 0.39 0.37 0.44
Quarter Ended 1997
31-Mar 30-Jun 30-Sep 31-Dec
Interest Income ...................... 3,586 3,924 4,064 4,151
Interest Expense ..................... 1,813 1,978 2,049 2,074
Net Interest Income .................. 1,773 1,946 2,015 2,077
Provision for Loan Loss .............. (10) (50) (30) (40)
Securities Gains/Losses .............. 20 108 23 66
Other Income ......................... 177 221 245 278
Other Expense ........................ (1,091) (1,259) (1,375) (1,269)
Income Before taxes .................. 868 966 879 1,112
Income Taxes ......................... (182) (185) (208) (238)
Net Income ........................... 686 781 671 874
Primary Earnings per common share 0.31 0.36 0.31 0.40
<FN>
Note: All per share data has been adjusted to reflect the 5 for 2 stock split
which was effective September 1998.
</FN>
</TABLE>
<PAGE>
FINANCIAL CONDITION
The Corporation's financial condition can be evaluated in terms of trends in its
sources and uses of funds. Table 7 illustrates how the Corporation has managed
its sources and uses of funds that are directly affected by outside economic
factors, such as interest rate fluctuations
<TABLE>
<CAPTION>
(In thousands)
SOURCES AND USES OF FUNDS
1998 1997 1996
Average Increase(Decrease) Average Increase(Decrease) Average
Balance Amount Percent Balance Amount Percent Balance
------- ------ ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Funding Uses
Real Estate Loans $76,516 $874 1.16% $75,642 $7,765 11.44% $67,877
Consumer Loans 14,039 (4,264) (23.30)% 18,303 4,887 36.43% 13,416
Commercial Loans 30,162 16,353 118.42% 13,809 (134) (0.96)% 13,943
Tax Exempt Loans 8,666 2,638 43.76% 6,028 (883) (12.78)% 6,911
Other Loans 5,309 4,972 1475.37% 337 (41) (10.85)% 378
Total Loans 134,692 114,119 102,525
Less Allowance
for Loan Loss (1,710) (1,694) (1,575)
Total Loans
with Loan Loss 132,982 20,557 18.29% 112,425 11,475 11.48% 100,950
Taxable Securities 60,136 (5,265) (8.05)% 65,401 12,915 24.61% 52,486
Nontaxable Securities 28,937 4,184 16.90% 24,753 8,051 48.20% 16,702
Total Securities 89,073 (1,081) (1.20)% 90,154 20,966 30.30% 69,188
Fed Funds Sold 760 (961) (55.84)% 1,721 1,053 157.63% 668
Total Uses $222,815 $18,515 9.06% $204,300 $33,494 19.61% $170,806
(In thousands)
1998 1997 1996
Average Increase(Decrease) Average Increase(Decrease) Average
Balance Amount Percent Balance Amount Percent Balance
------- ------ ------- ------- ------ ------- -------
Funding Sources
Interest Bearing
Demand Deposits $15,058 $1,679 12.55% $13,379 $5,631 72.68% $7,748
Regular Savings Deposits 31,752 2,882 9.98% 28,870 5,716 24.69% 23,154
Money Market
Savings Deposits 38,401 (2,128) (5.25)% 40,529 11,514 39.68% 29,015
Time Deposits 93,890 4,982 5.60% 88,908 7,943 9.81% 80,965
Total Interest Bearing
Deposits 179,101 7,415 4.32% 171,686 30,804 21.87% 140,882
Other Borrowing 6,029 2,972 97.22% 3,057 1,356 79.72% 1,701
Short Term
Federal Funds Borrowed 5,399 3,057 1,701
Long Term
Federal Funds Borrowed 630 0 0
Total Funds Borrowed 6,029 3,057 1,701
Total Deposits and
Funds Borrowed 185,130 174,743 142,583
Other Sources, net 37,685 29,557 28,223
Total Sources $222,815 $204,300 $170,806
</TABLE>
Loans Receivable
Average loans receivable, net of loan reserves, increased $20,557 or 18.29% in
1998 compared to an increase of $11,475 or 11.48% in 1997. The increase in loans
was directly attributable to increased marketing efforts, favorable economic
conditions in our market area, and competitive pricing. Management expects this
trend to continue into 1999 due to an interest rate environment that appears to
be relatively stable. The Company has no foreign loans outstanding.
Consumer loans include personal lines of credit, installment loans, and home
equity loans to individuals. These loans can be secured or unsecured and are
generally used for purposes such as automobile financing, home improvement,
recreational loans, and for educational purposes.
The apparent increase in commercial loans in 1998 was due to a reclassification
of loan group codes in the general ledger. This also affected real estate
mortgages and installment loans as can be seen in Tables 8 and 9.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
LOAN PORTFOLIO BALANCE BY TYPE
Dec 1998 Dec 1997 Dec 1996 Dec 1995 Dec 1994
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial ............. $ 44,359 $ 14,796 $ 9,787 $ 10,920 $ 9,795
Real Estate Mortgage ... 79,369 96,192 83,484 73,699 70,959
Real Estate Construction 0 9 0 0 0
Installment ............ 17,756 16,035 14,169 13,643 12,113
Total Loans ............ 141,474 127,032 107,440 98,262 92,867
-------- ------- ------- ------- ------
Deferred Loan Fees ..... (225) (246) (290) (311) (324)
Total Loans,
net of Deferred ........ 141,249 126,786 107,150 97,951 92,543
------- ------- ------- ------ -------
Allowance for Loan Loss (1,713) (1,676) (1,665) (1,488) (1,484)
Net Loans .............. $139,536 $125,110 $ 105,485 $ 96,463 $ 91,059
-------- ------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
LOAN MATURITIES BY TYPE
One Year Over One Year Over Total
Or Less Within Five Years Five Years Loans
<S> <C> <C> <C> <C>
Commercial $12,733 $13,601 $17,516 $43,850
Real-Estate Construction 0 0 0 0
Real-Estate Mortgage 5,387 18,152 56,104 79,643
Installment 6,162 8,318 3,276 17,756
Total $24,282 $40,071 $76,896 $141,249
------ ------ ------ -------
Total Loans with Predetermined Rates 19,845 27,652 29,538 77,035
Total Loans with Variable Rates 4,437 12,419 47,358 64,214
Total $24,282 $40,071 $76,896 $141,249
------ ------ ------ -------
</TABLE>
Non-performing Loans
Table 10 reflects the Corporation's non-accrual and past due loans for each of
the past five years. A commercial loan is generally placed on non-accrual when
the contractual payment of principal or interest has become 90 days past due or
when management has serious doubts about further collectibility of principal or
interest even though the loan is currently performing. Consumer loans, including
mortgages, are generally placed on non-accrual at 120 days. A loan may remain on
non-accrual status if it is in the process of collection and is either
guaranteed or well secured.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
NONPERFORMING LOANS
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual and Restructured $516 $1,027 $1,544 $1,349 $1,257
Loans Past Due 90 or More Days,
Accruing Interest 12 175 137 44 60
Total Nonperforming Loans 528 1,202 1,681 1,393 1,317
Foreclosed Assets 351 0 99 430 100
Total Nonperforming Assets $879 $1,202 $1,780 $1,823 $1,417
---- ------ ------ ------ ------
Nonperforming Loans to Total Loans
at Period-end 0.38% 0.95% 1.56% 1.44% 1.45%
Nonperforming Assets to Period-end
Loans and Forclosed Assets 0.62% 0.95% 1.56% 1.85% 1.56%
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
NONACCURUAL AND RESTRUCTURED LOANS - RELATED INFORMATION
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income That Would Have Been
Recorded Under Original Items ............ $ 63 $ 96 $163 $143 $ 0
Interest Income Recorded During the Period 7 24 31 26 0
Commitments To Lend Additional Funds ..... 94 0 0 0 0
</TABLE>
The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluation of the portfolio by management.
This evaluation considers several factors including, but not limited to current
economic conditions, loan portfolio's composition, prior loan loss experience,
trends in portfolio's volume, and management's estimation of future potential
losses. Management believes that the allowance for loan losses is adequate.
Table 12 is an analysis of the allowance for loan losses for the past 5 years.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
SUMMARY OF LOAN LOSS EXPERIENCE
Dec 1998 Dec 1997 Dec 1996 Dec 1995 Dec 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average Total Loans ............ $114,119 $102,525 $ 95,379 $ 87,148 $79,320
Balance at Beginning of Period . 1,676 1,664 1,488 1,484 1,248
Charge Offs Commercial ......... 94 38 20 301 21
Residential Real Estate ........ 31 50 26 122 8
Installment .................... 70 61 31 39 53
Total charge Offs .............. 195 149 77 462 82
Recoveries
Commercial ..................... 14 4 26 1 37
Real Estate .................... 4 17 1 0 8
Installment .................... 24 10 6 15 8
Total Recoveries ............... 42 31 33 16 53
Net Charge-Offs ................ 153 118 44 446 29
Provision for Loan Losses ...... 190 130 220 450 265
Balance at End of Period ....... $ 1,713 1,676 $ 1,644 $ 1,488 $ 1,484
Allowance for Credit Losses
to Period-end Total Loans ...... 1.22% 1.32% 1.55% 1.54% 1.60%
Allowance for Credit Losses
to Nonaccrual Loans ............ 331.88% 163.24% 107.80% 110.29% 118.05%
Net Charge-Offs to Average Loans 0.11% 0.09% 0.04% 0.47% 0.03%
</TABLE>
The increase in charge offs of $46,000 in 1998 was primarily due to charging off
$90,786 on two commercial loans that were on nonaccrual from early 1998. As of
year-end 1998, management believes that there may be a significant charge off on
three individual loans that account for $81,000 in the first quarter. Management
has allotted the proper funds to allowance for loan loss to cover such charge
offs
<TABLE>
<CAPTION>
(In thousands)
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
Dec 1998 Dec 1997 Dec 1996 Dec 1995 Dec 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial .................... $ 320 $ 321 $ 687 $ 734 $ 496
Real Estate Mortgage .......... 342 343 197 165 55
Real Estate Construction ...... 1 1 1 0 0
Installment ................... 130 129 118 184 18
Unallocated ................... 920 882 661 405 915
Total Allowance for Loan Losses $1,713 $1,676 $1,664 $1,488 $1,484
------ ------ ------ ------ ------
</TABLE>
Highly leveraged transactions (HLT's) that result in the borrower's
debt-to-total assets ratio exceeding the 75%, generally include loans and
commitments made in connection with recapitalization, acquisitions, and
leveraged buyouts The Corporation had no loans at December 31, 1998 that
qualified as HLT's.
<PAGE>
Securities
The Corporation's securities portfolio is classified, in its entirety, as
"available for sale" as shown in Table 14. Management believes that a portfolio
classification of all available for sale allows complete flexibility in the
investment portfolio. Using this classification, the Corporation intends to hold
these securities for an indefinite amount of time but not necessarily to
maturity. Such securities are carried at fair value with the unrealized holding
gains or losses, net of taxes, reported as a component of the Corporation's
stockholders' equity on the balance sheet. The portfolio is structured to
provide maximum return on investments while providing a consistent source of
liquidity and meeting strict risk standards.
Table 14 shows the book value and average yield of securities by maturity or
call date at December 31, 1998.
<TABLE>
<CAPTION>
(In thousands)
SECURITIES BY CONTRACTURAL MATURITIES
1 Year or Less 1-5 Years 5-10 Years Over 10 Years TOTAL
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>
Available for Sale
US Government Treasury
...... $4,007 6.275% $6,470 6.377% $0 0.000% $0 0.000% $10,477 6.336%
US Government Agency
........... 0 0.000% 5,995 6.747% 4,261 6.307% 0 0.000% 10,256 6.571%
State/County/Municipal Obligation
....... 1,735 5.832% 6,231 5.097% 5,247 5.570% 16,278 5.108% 29,491 5.235%
Mortgage-Baked Securities
......... 150 3.915% 2,289 5.716% 7,482 5.570% 22,619 6.100% 32,540 5.960%
Corporate/Other Securities
......... 150 6.682% 2,744 6.111% 250 9.000% 6,517 6.348% 9,661 6.153%
TOTAL Available for Sale
....... 6,042 6.127% $23,729 6.047% $17,240 5.084% $45,414 5.793% $92,425 5.860%
</TABLE>
Table 15 shows the balance of securities for the past three years on December
31.
<TABLE>
<CAPTION>
(In thousands)
INVESTMENTS BY MARKET VALUE, THREE YEAR BALANCE COMPARISON
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Treasury/Agency Obligation .... $23,008 $32,513 $22,192
State/Municipal Obligation .... 30,230 29,474 20,167
Mortgage Backed Securities .... 30,283 19,215 23,184
Other Securities .............. 9,754 7,936 6,588
Total Investment Securities ... $93,275 $89,138 $72,131
------- ------- -------
Available for Sale (Fair Value) $93,275 $89,138 $72,131
Held to Maturity (Amortized) .. 0 0 0
Total Investment Securities ... $93,275 $89,138 $72,131
------- ------- -------
</TABLE>
Deposits
Table 16 shows the average deposits and average rates for 1998, 1997 and 1998.
The bank was able to reduce its average interest cost on liabilities to 4.42%
in 1998 from 4.53% in 1997.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
AVERAGE DEPOSITS, THREE YEAR COMPARISON
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Bearing
Demand ...... 15,058 250 1.66% 13,379 230 1.72% 7,748 135 1.74%
Regular
Savings ..... 31,752 904 2.85% 28,870 828 2.87% 23,154 648 2.80%
Money Market
Savings ..... 38,401 1,565 4.08% 40,529 1,760 4.34% 29,015 1,389 4.79%
Time .........93,890 5,187 5.52% 88,908 4,920 5.53% 80,965 4,627 5.71%
Total Interest Bearing
Deposits ....179,101 7,906 4.41% 171,686 7,738 4.51% 140,882 6,799 4.83%
Other
Borrowings .. 6,029 285 4.73% 3,057 176 5.76% 1,701 81 4.76%
Total Interest Bearing
Liabilities .185,130 8,191 4.42% 174,743 7,914 4.53% 142,583 6,880 4.83%
Non-Interest Bearing Demand
Deposit... 22,247 18,735 13,822
</TABLE>
The Corporation's primary source of funds continues to be core deposit accounts
that include interest bearing demand, non-interest bearing demand, savings, and
time deposits under $100,000. Core deposits increased an average of $10,927,000
or 5.73% in 1998 compared to an increase of $ 35,717,000 or 23.08% in 1997. The
reason for the large increase in 1997 over 1996 was the purchase of two Wyoming
County branch offices. The purchase included deposits of over $38 million. The
largest category of core deposits and the primary source of funds continues to
be time deposits under $100,000. This category includes certificates of deposits
that allow customers to invest their funds at selected maturity ranges from 3
months to 5 years and individual retirement accounts. The average balance of
funds increased $4,982,000 or 5.60% in 1998 and $7,943,000 or 9.81% in 1997. The
Company has no foreign deposits in domestic offices.
Average Interest Bearing Demand Deposits accounts and Savings deposits totaled
$46,810,000 in 1998 and $42,249,000 in 1997 showing a growth of $4,561,000 this
year. These deposits are lower cost sources of funds for the bank and help the
bank to achieve more net interest income than higher paying Money Market and
Time Deposit accounts. The bank had an increase of $11,347,000 in this same
category on 1997 due to the purchase of the Mellon branches.
Non-interest checking accounts have also grown substantially over the last two
years. In the 1997 acquisition year, the average Demand Deposits grew from
$13,822,000 to $18,735,000, an increase of $4,913,000 or 35.54%. This year they
grew another 18.75% from $18,735,000 to $22,247,000. Management considers this a
positive trend.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
1998 1997
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Three Months or Less ................ $ 3,242 22.30 $2,356 18.83
Over Three Months through Six Months 3,793 26.09 3,631 29.03
Over Six Months through Twelve Months 3,764 25.89 1,788 14.29
Over Twelve Months .................. 3,736 25.72 4,735 37.85
Total ............................... $14,535 100.00 12,570 100.00
------ ------ ------ ------
</TABLE>
Short Term and Term Borrowings
Borrowed funds are utilized when timing differences occur between the purchase
of new assets and the maturity of existing assets. Management also uses
borrowings as an asset/liability tool to match the repricing characteristics of
certain earning assets, allowing for core funds to be used for additional loan
volume or security purchases
<TABLE>
<CAPTION>
(In thousands)
BORROWED FUNDS
1998 1997
---- ----
<S> <C> <C>
Other Short Term Borrowings $4,032 $9,275
FHLB Term Borrowings ...... 5,000 0
Total ..................... $9,032 $9,275
------ ------
</TABLE>
The Corporation has an arrangement with the Federal Home Loan Bank (FHLB) that
allows for borrowings up to a percentage of qualifying assets. As of December
31, 1998 and 1997, the Corporation had a maximum borrowing capacity of
$87,046,000 and $67,815,000 respectively.
Borrowings from the FHLB include repurchase agreements and term borrowings. In
addition, the Corporation has an agreement to borrow up to $6,000,000 from
Atlantic Central Bankers Bank (ACBB) in federal funds for periods of up to 14
days at a time.
Summary of Securities Sold Under Repurchase Agreements
Information concerning securities sold under agreements to repurchase is
summarized as of December 31, 1998. Securities sold under agreement to
repurchase generally mature within 14 days from the transaction date. The
securities underlying the agreement were under the control of the Corporation.
Advances on the FHLB flexible line of credit at December 31, 1998 and 1997 were
$2,190,000 and $3,775,000 respectively. The interest rate paid on these funds on
December 31, 1998 was 5.49% and 6.32% on December 31, 1997.
No Federal Funds purchased under the agreement with ACBB were outstanding at
December 31, 1998 or 1997.
Term borrowings are term funds from the FHLB under various notes. There is a
note in the amount of $5,000,000 with a fixed interest rate of 4.64%. The note
has the final maturity of 2003. This note has a convertible option that allows
the FHLB, after two years to change the note to an adjustable rate advance at 3
months LIBOR plus 10 basis points. The option also allows the Corporation to put
the funds back to the FHLB at no charge should the FHLB choose to exercise the
option.
Capital Requirement Ratios
The Corporation places a significant emphasis on maintaining a very strong
capital base. The capital resources of the Corporation consist of two major
components of regulatory capital; stockholders' equity and the allowance for
loan losses. The Corporation's capital maintained steady growth during 1998.
Current capital guidelines, issued by federal regulatory authorities, require
both banks and bank holding companies to meet minimum risk-based capital ratios
in an effort to make regulatory capital more responsive to the risk exposures
related to a bank's on and off balance sheet items.
Risk based capital guidelines redefine the components of capital, categorize
assets into risk classes, and include certain off-balance sheet items in the
calculation of capital requirements. The components of risk-based capital are
suggested as Tier I and Tier II capital. Tier I capital is composed of total
stockholders' equity reduced by goodwill and other intangible assets. Tier II
capital is comprised of the allowance for loan losses and any qualifying debt
obligations. Regulators also have adopted minimum requirements of 4% Tier I
capital and 8% of risk-adjusted assets in total capital.
<PAGE>
The Corporation is also subject to leverage capital requirements. This
requirement compares capital (using the definition of Tier I capital) to total
balance sheet assets and is intended to supplement the risk-based capital ratios
in measuring capital adequacy. The guidelines set a minimum leverage ratio of 3%
for institutions that are highly rated in terms of safety and soundness, and
that are not experiencing or anticipating any significant growth. Other
institutions are expected to maintain capital levels of at least 1% or 2% above
the minimum. As of December 31, 1998 the Corporation had a leverage capital
ratio of 9.60%.
<TABLE>
<CAPTION>
CAPITAL RATIO
December 31 Regulatory
1998 1997 Requirement
---- ---- -----------
<S> <C> <C> <C>
Tier 1 Capital to risk (Weighted) 16.90% 16.59% 4.00%
TOTAL Capital to Risk (Weighted) 18.15% 17.82% 8.00%
Capital Leverage Ratio .......... 9.60% 9.22% 3.00%
</TABLE>
Capital Analysis
On September 15, 1998, the Corporation issued a 5 for 2 stock split.
Accordingly, issued shares of common stock increased 1,310,138 shares. On the
same date and in conjunction with the 5 for 2 stock split, the par value per
share was reduced from $5 to $2. Also, in the same proportion, authorized but
unissued stock increased from 5 million to 12.5 million shares.
During 1998 the Corporation paid cash dividends to its shareholders amounting to
$995,407 compared to $735,292 in 1997. On a per share basis, dividends for 1998
increased 35.3% to $0.46 compared to $ 0.34 in 1997. Dividends have been
adjusted to reflect the 5 for 2 split of September 1998. The indicated rate for
1999 is $ 0.48 per share representing a 4.3% increase over 1998 dividends.
The Corporation has continued to purchase common stock of the Corporation in the
open market. These purchases are carried as treasury stock in the equity section
of the Corporation balance sheet. On December 31, 1998 treasury stock totaled
$747,871 representing 49,924 shares purchased. During 1998, 8,249 shares were
purchased at an average price per share of $24.14. During 1997, 39,375 shares
were purchased at an average price per share of $15.76. Per share prices are
adjusted to recognize the 5 for 2 stock split paid in September 1998. Treasury
stock purchases have the effect of reducing the equity of the Corporation while
increasing the earnings per share of the receiving shareholder. For a detailed
comparison of shareholder equity for 1998 and 1997, refer to Note 17 of the
Consolidated Financial Statements.
Stockholders' equity is adjusted for the effect of unrealized appreciation or
depreciation, net of taxes, on securities classified available for sale. As of
December 31, 1998 and 1997, stockholders' equity included 561,470 and 370,569
respectively in unrealized appreciation.
As shown in Table 20, the return on average equity increased to 13.23% in 1998
from 12.20% in 1997. The change in average assets ratio from 22.06% in 1997 to
7.86% in 1998 reflects the impact of the purchase of the branches in Wyoming
County in 1997.
<PAGE>
<TABLE>
<CAPTION>
CAPITAL ANALYSIS
Relationship Between Significant Financial Ratios
1998 1997 1996
<S> <C> <C> <C>
Return on Average Equity 13.23% 12.20% 12.51%
Earnings Retained ...... 70.77% 75.58% 77.77%
Internal Capital Growth 9.36% 10.01% 10.30%
Change in Average Assets 7.86% 22.06% 8.32%
Equity to Average Assets 11.10% 11.34% 12.20%
Dividend Payout Ratio .. 29.23% 24.42% 22.23%
Growth in Average Equity 17.54% 10.74% 9.33%
<FN>
*Internal capital growth is equal to return on average equity multiplied by
earnings retained
</FN>
</TABLE>
Interest Rate Sensitivity
Interest rate sensitivity is a function of the repricing characteristics of the
Corporation's asset and liabilities. Each asset and liability reprices either at
maturity or during the life of the instrument. Interest rate sensitivity is
measured as the difference between the volume of assets and liabilities that are
subject to repricing at a future period of time. These differences are known as
interest sensitivity gaps.
The principle objectives of asset/liability management are to manage the
sensitivity of the net interest margin to potential movements in interest rates
and to enhance profitability through returns from managed levels of interest
rate risk. The Corporation actively manages the interest rate sensitivity of its
assets and liabilities. Several techniques are used for measuring interest rate
sensitivity. The traditional maturity "gap" analysis, which reflects the volume
difference between interest rate sensitive assets and liabilities during a given
time period, is reviewed regularly by management. A positive gap occurs when the
amount of interest sensitive assets exceeds interest sensitive liabilities. The
position would contribute positively to net income in a rising rate environment.
Conversely, if the balance sheet has more liabilities repricing than assets, the
balance sheet is liability sensitive or negatively gapped. Management contrives
to monitor sensitivity in order to avoid overexposure to changing interest
rates.
Another way management reviews its sensitivity position is through "simulation".
In simulation, the Corporation projects future net interest streams in light of
the current gap position. Various interest rate scenarios are used to measure
levels of interest income associated with potential changes in our operating
environment. Management can not predict the direction of interest rates or how
the mix of assets and liabilities will change. The use of this information will
help formulate strategies to minimize the unfavorable effect on net income
caused by interest rate changes.
Limitations of gap analysis in the following gap schedule include assets and
liabilities which contractually reprice within the same period may not reprice
at the same time or to the same extent, changes in market interest rates do no
affect all assets and liabilities to the same extent or at the same time, and
interest rate gaps reflect the Corporation's position on a single day (December
31, 1998 in the case of Table 21) while the Corporation continually adjusts its
interest sensitivity throughout the year.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
GAP ANALYSIS
Maturity or Repricing In: 3 3 to 6 6 to 12 1 to 5 Over 5
Months Months Months Years Years
-------- --------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Loans $16,998 $17,930 $20,134 $46,121 $40,065
Securities 25,751 6,470 9,839 41,528 11,812
Federal Funds Sold 0 0 0 0 0
Total Rate Sensitive Assets 42,749 24,400 29,973 87,649 51,877
Cummulative Rate
Sensitive Assets $42,749 $67,149 $97,122 $184,771 $236,648
------- ------- ------- -------- --------
RATE SENSITIVE LIABILITIES
Interest Bearing Checking $ 1,503 $ 0 $ 0 $ 0 $ 13,527
Money Market Deposits ..... 30,245 1,639 0 0 8,194
Regular Savings ........... 3,089 26 298 0 27,501
CDs and IRAs ............... 21,410 22,536 22,445 31,488 1,718
Short-term Borrowings ...... 4,032 0 0 5,000 0
Total Rate Sensitive
Liabilities ................ 60,279 24,201 22,743 36,488 50,940
Cummulative Rate
Sensitive Liabilities ......$ 60,279 $84,480 $107,223 $143,711 $194,651
-------- ------- ------- ------ ------
Period Gap ................($ 17,530) $ 199 $ 7,230 $ 51,161 $ 937
Cummulative Gap ........... (17,530) (17,331) (10,101) 41,060 41,997
Cummulative Rate Sensitive
Assets to Liabilities ..... 70.92% 79.49% 90.58% 128.57% 121.58%
Cummulative Gap to
Total Assets .............. (7.09)% (7.01)% (4.09)% 16.61% 16.99%
</TABLE>
The Corporation's asset/liability reporting format incorporates interest bearing
demand deposits and savings deposits as rate sensitive in various time frames.
This accounts for the fact that a change in interest rates will not affect the
rates paid on these products as it would to products more closely tied to a
market index.
As of December 31,1998, the gap analysis would indicate that net income would
not be significantly influenced by small fluctuations in interest rates either
up or down. However, market rates on interest bearing demand deposits and
savings deposits are currently very low and management feels that it would be
unlikely that these rates could be reduced significantly. Conversely, the rate
sensitivity of these liabilities will increase in a rising rate environment due
to market competition until rates return to pre-1992 levels (approximately 5%
for savings and demand deposits). In 1998 management maintained a level of
interest rate risk that was consistent with internally established acceptable
level of risk.
Liquidity
Liquidity management involves meeting the funds flow requirements of customers
who may either be depositors wanting to withdraw funds or borrowers needing
assurance that sufficient funds will be available to meet their credit needs.
Liquid assets consist of vault cash, securities available for sale, and
maturities of earning assets of one year or less.
The Corporation's principal source of liquidity is the securities portfolio. As
disclosed in Note 3 of the Consolidated Financial Statements, as of December
1998, the value of securities maturing in less than 1 year equals $5,810,235. In
addition to those maturities, the Corporation receives monthly principal
repayments on agencies and mortgage-backed securities. In 1998 the total was
$6,255,232.
Other sources of funds are principal paydowns and maturities in the loan
portfolio. The loan maturity schedule (Table 9) illustrates the maturities of
loans. Liquidity can also be managed by maintaining a capability to borrow
funds. The Corporation has arranged for short-term borrowings through the FHLB
and ACBB as discussed in the Short-Term Borrowing section of this report.
<PAGE>
Loan Concentration and Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of its
customers. These financial instruments may include and involve commitments to
extend credit, standby letters of credit, elements of credit, and interest rate
risk in excess of the amount recognized in the consolidated balance sheets. The
amounts of these instruments reflect the extent of involvement the Company has
in particular classes of financial instruments. Standby letters of credit commit
the Company to make payments on behalf of customers when certain specified
future events occur. Commitments to extend credit are agreements to lend to the
customer as long as there is no violation of any condition established in the
contract. These commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire in one
year or less without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company's exposure to credit loss is essentially the same for these items as
that involved in extending loans to customers. The Company 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.
Please refer to Note 13 in the Notes to Consolidated Financial Statements for a
more detailed account.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary
in nature and, therefore, differ greatly from commercial and industrial
companies that have significant investments in fixed assets or inventories. The
precise impact of inflation upon the Corporation is difficult to measure.
Inflation may affect the borrowing needs of consumers, thereby impacting the
growth rate of the Corporation's assets. Inflation may also affect the general
level of interest rates, which can have a direct bearing on the Corporation.
Management believes that the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain a position that is within
conservative parameters for interest sensitive assets and liabilities in order
to be protected against wide interest rate fluctuation.
FASB and Other Disclosures
The following can be found under Note 1 of the Notes to Consolidated Financial
Statements:
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 131 Segment Reporting
SFAS No. 133 Accounting Principles Issued and Not Yet Adopted
SFAS No. 134 Accounting for Mortgage-backed Securities retained after the
Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Activities
YEAR 2000 COMPLIANCE
The company has adopted a Year 2000 policy to address the "Year 2000" issue
concerning the inability of certain information systems and automated equipment
to properly recognize and process dates containing the Year 2000 and beyond. If
not corrected, these systems and equipment could produce inaccurate or
unpredictable results. The Company, similar to most financial service providers,
is particularly vulnerable to the potential impact of the Year 2000 issue due to
the nature of financial information. Potential impacts to the Company may arise
from software, computer hardware, and other equipment both within the company's
direct control and outside of the company's ownership, yet with which the
company electronically or operationally interfaces.
In order to address the Year 2000 issue, the company has developed and
implemented a five-phase compliance plan divided into the following major
components:
Awareness
Assessment
Renovation
Validation & Testing
Implementation
<PAGE>
We have finished the first three phases and are working on the last two phases.
We are in the final stages of those phases of the Y2K project. We have been
actively conducting internal testing of equipment and programs in conjunction
with Year 2000 procedures to insure that all of our systems are able to function
accurately and completely at the turn of the century. We did this testing by
simulating future dates. Similar tests have been done by other banks that are
using the same software. We also ran an off premise test in Birmingham, Alabama.
We are substantially finished with our business resumption and contingency plan
which details solutions to potential problems we defined through
"what-if-scenarios". We have initiated communications with all of our
significant suppliers to determine the extent of our vulnerability to those
third parties should they fail to remediate their own Year 2000 issues. To the
extent that we do not receive adequate assurances, we are prepared through our
contingency plan to seek alternate vendors. We do not internally generate
programmed software coding as all of our software is purchased or licensed from
external providers. At this time, we cannot estimate the cost, if any, that
might be required to implement such a contingency plan.
We anticipate that the testing phase of the Year 2000 project will cost $15,000.
The aforementioned cost estimate may change as we obtain additional information
associated with and conduct further testing concerning third parties.
Financial institution regulators have intensively focused upon Year 2000
exposure, issuing guidance concerning the responsibilities of senior management
and directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with regulatory exams. The FFIEC has
highly prioritized Year 2000 compliance in order to avoid major disruptions to
the operations of financial institutions and the country's financial systems
when the new century begins. The Bank is subject to supervision by the
Comptroller of the Currency, which regularly conducts reviews of the safety and
soundness of the Banks operations, including Year 2000 compliance
In spite of all the company's activities and efforts, there can be no assurance
that partial or total systems interruptions or the costs necessary to update
hardware and software would not have a material adverse effect upon the
company's business, financial condition, results of operations, and business
prospects.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Except for historical data, this report may be deemed to contain forward-looking
information. Examples of this information may include projections or statements
regarding future earnings or losses, projections or statements regarding
interest income and other income, projections or statements regarding growth
prospects and other financial terms, statements of plans and objectives of the
Board of Directors, statements of future economic performance, and statements of
assumptions such as economic conditions in the market areas served by the
Corporation and the Bank, underlying other statements and statements about the
Corporation and the Bank and their respective businesses. Such forward looking
information can be identified by the use of forward looking terminology such as
"believes", "expects", "may", "intends", "will", "should", "anticipates", or the
negative or variation of such terminology. No assurance can be given that the
future results covered by the forward looking information will be achieved. Such
statements are subject to risks, uncertainties, and other factors that could
cause actual results to differ materially from future results expressed or
implied by such forward looking information. Important factors that could impact
operating results may include the effects of changing economic conditions in the
market areas of the Corporation, the Bank, and nationally, credit risks of
lending activities, significant changes in interest rates, changes in federal
and state banking laws and regulations, funding costs, and other external
developments which could materially affect business and operations.
<PAGE>
ITEM 7A Quantitative and Qualitative Disclosure
About Market Risk
The Company is not a party to any forward contract, interest rate swap, option
interest, or similar derivation instrument. The Company does not deal in foreign
currency. The following tables present average interest rates that relate to
assets and liabilities that are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Investment Securities $26,895,686 $14,418,951 $14,114,555 $10,569,371 $7,363,627
Average Interest Rate 6.21% 6.12% 6.00% 5.91% 5.91%
Loans $24,281,661 $11,722,833 $10,554,703 $9,339,129 $8,454,714
Average Interest Rate 7.37% 7.82% 8.00% 8.06% 8.09%
Liabilities:
Deposits $103,344,623 $17,281,921 $7,323,071 $3,974,653 $2,907,874
Average Interest Rate 4.72% 4.81% 4.88% 4.91% 4.93%
</TABLE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES
5 Years Total Fair Value
-------- ------- --------
<S> <C> <C> <C>
Assets:
Investment Securities $19,812,879 $93,175,069 $93,175,068
Average Interest Rate 5.67% 5.67%
Loans $75,182,599 $139,535,639 $140,648,995
Average Interest Rate 8.08% 8.08%
Liabilities:
Deposits $75,048,910 $209,881,052 $210,619,877
Average Interest Rate 3.81% 3.81%
</TABLE>
ITEM 8 Financial Statements and Supplementary Data
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
TABLE OF CONTENTS
DECEMBER 31, 1998, 1997 AND 1996
Page
Independent Auditor's report ............................. 31
Financial statements:
Consolidated balance sheets .............................. 32
Consolidated statements of income ........................ 33
Consolidated statements of comprehensive income .......... 34
Consolidated statements of stockholders' equity .......... 35
Consolidated statements of cash flows .................... 36 - 37
Notes to consolidated financial statements ............... 38 - 56
<PAGE>
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, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
February 17, 1999
PROCIAK & ASSOCIATES, L.L.C.
Wilkes-Barre, Pennsylvania
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
December 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks .................... $ 2,083,913 $ 2,401,332
Interest-bearing deposits in other banks ... 2,724,780 3,147,371
Investment securities available for sale ... 93,175,068 88,149,054
Loans ...................................... 141,282,569 126,852,708
Less: Unearned income ...................... (34,272) (67,188)
Allowance for loan losses .................. (1,712,657) (1,675,887)
------------- -------------
Net loans .................................. 139,535,640 125,109,633
Premises and equipment ..................... 3,523,053 3,756,300
Accrued interest receivable ................ 1,781,561 1,776,908
Other assets ............................... 4,378,362 4,379,317
------------- -------------
Total assets ............................... $ 247,202,377 $ 228,719,915
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ................... $ 24,262,777 $ 20,104,376
Interest bearing ....................... 185,618,275 173,487,641
------------ ------------
Total deposits ......................... 209,881,052 193,592,017
Short-term borrowings .................. 4,031,975 9,274,834
Long-term borrowings ................... 5,000,000 -0-
Accrued interest payable ............... 702,889 662,696
Other liabilities ...................... 540,767 546,445
------------ ------------
Total liabilities ...................... 220,156,683 204,075,992
------------ ------------
Stockholders' equity:
Common stock, par value $2 per share, 12,500,000 shares
authorized; 2,177,576 and 2,185,825 shares issued and outstanding
at December 31, 1998 and 1997, respectively .. 4,455,000 4,455,000
Surplus ...................................... 4,455,000 4,455,000
Retained earnings ............................ 18,322,095 15,912,129
Accumulated other comprehensive income ....... 561,470 370,569
Less: treasury stock, at cost
(49,924 and 41,675 in 1998 and 1997,
respectively) ................................ (747,871) (548,775)
------------- -------------
Total stockholders' equity ................... 27,045,694 24,643,923
------------- -------------
Total liabilities and stockholders' equity ... $ 247,202,377 $ 228,719,915
============= =============
</TABLE>
See notes to financial statements
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .................$11,447,692 $ 9,995,843 $ 9,031,697
Interest and dividends on investments:
Taxable .................................... 3,472,481 4,255,842 3,491,090
Tax exempt ................................. 1,486,960 1,285,145 824,995
Dividends .................................. 89,737 60,533 55,257
Interest on deposits in other banks ........ 45,153 34,684 7,333
Interest on federal funds sold ............. 41,529 92,678 35,367
----------- ----------- -----------
Total interest income ...................... 16,583,552 15,724,725 13,445,739
----------- ----------- -----------
Interest expense:
Interest on deposits ....................... 7,906,294 7,737,668 6,798,796
Interest on short-term borrowings .......... 275,041 176,390 69,958
Interest on long-term borrowings ........... 9,667 -0- 10,810
----------- ----------- -----------
Total interest expense ..................... 8,191,002 7,914,058 6,879,564
----------- ----------- -----------
Net interest income ........................ 8,392,550 7,810,667 6,566,175
Provision for loan losses .................. 190,000 130,000 220,000
----------- ----------- -----------
Net interest after provision for loan losses 8,202,550 7,680,667 6,346,175
----------- ----------- -----------
Other income:
Service charges and customer service fees .. 1,108,023 891,489 682,003
Other income ............................... 40,700 29,278 21,900
Investment securities gains, net ........... 47,494 217,104 119,913
--------- ----------- -----------
Total other income ......................... 1,196,217 1,137,871 823,816
----------- ----------- -----------
Other expenses:
Salaries and employee benefits ............. 2,395,055 2,282,412 1,790,480
Occupancy expense, net ..................... 319,234 323,532 225,251
Equipment expense .......................... 435,631 388,857 251,732
FDIC insurance and assessments ............. 87,683 81,410 55,730
Professional fees and outside services ..... 190,676 192,530 182,974
Computer service and supplies .............. 268,294 359,024 223,917
Taxes, other than payroll and income ....... 222,267 203,719 183,332
Other operating expenses ................... 1,170,750 1,162,176 689,710
----------- ----------- -----------
Total other expense ........................ 5,089,590 4,993,660 3,603,126
----------- ----------- -----------
Income before taxes ........................ 4,309,177 3,824,878 3,566,865
Provision for income tax ................... 903,804 813,619 850,828
----------- ----------- -----------
Net income .................................$ 3,405,373 $ 3,011,259 $ 2,716,037
=========== =========== ===========
Earnings per share - basic .................$ 1.56 $ 1.38 $ 1.22
=========== =========== ===========
Earnings per share - diluted ...............$ 1.56 $ 1.38 $ 1.22
=========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income .................................$ 3,405,373 $ 3,011,259 $ 2,716,037
----------- ----------- -----------
Other comprehensive income (loss) before tax:
Unrealized holding gains (losses) on securities
available for sale arising during the period .. 336,738 1,217,825 (344,107)
Less: reclassification adjustment ............. (47,494) (132,343) 54,315
----------- ----------- ----------
Other comprehensive income (loss) before tax .. 289,244 1,085,482 (398,422)
Federal income tax expense (benefit) .......... 98,343 369,064 (135,463)
----------- ----------- -----------
Other comprehensive income (loss),
net of tax (benefit) .......................... 190,901 716,418 (262,959)
---------- ----------- -----------
Total comprehensive income ................. $3,596,274 $3,727,677 $ 2,453,078
=========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $4,455,000 $4,455,000 $11,524,013 $(82,890) $ -0- $20,351,123
Net income, 1996 2,716,037 2,716,037
Cash dividends paid, 1996
($.27 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 (benefit)
of $135,463 -------- -------- -------- (262,959) -------- (262,959)
Balance,
December 31, 1996 4,455,000 4,455,000 13,636,162 (345,849) (486,735) 21,713,578
Net income, 1997 3,011,259 3,011,259
Cash dividends paid, 1997
($.34 per share) (735,292) (735,292)
Treasury stock purchase (62,040) (62,040)
Change in unrealized gain
(loss) on securities available for sale,
net of deferred income taxes
of $369,064 -------- -------- -------- 716,418 -------- 716,418
Balance,
December 31, 1997 4,455,000 4,455,000 15,912,129 370,569 (548,775) 24,643,923
Net income, 1998 3,405,373 3,405,373
Cash dividend paid, 1998
(.46 per share) (995,407) (995,407)
Treasury stock purchase (199,096) (199,096)
Change in unrealized gain
(loss) on securities available for sale,
net of deferred income taxes
of $98,343 -------- -------- -------- 190,901 -------- 190,901
$4,455,000 $4,455,000 $18,322,095 $561,470 $(747,871)$27,045,64
========== ========== =========== ======== ========= =========
</TABLE>
See notes to financial statements
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................... $ 3,405,373 $ 3,011,259 $ 2,716,037
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ............... 709,422 639,526 262,387
Provision for loan losses ................... 190,000 130,000 220,000
(Gain) loss on sale of equipment ............ 2,520 4,229 (1,283)
(Gain) loss on sale of other real estate .... (20,489) 5,485 42,467
Amortization of securities' premiums and
accretion of discounts ...................... 134,580 (58,454) (4,270)
Gains on sale of investment securities, net . (47,494) (217,104) (119,913)
Deferred income taxes (benefit) ............. (36,757) 21,630 (72,682)
Increase in accrued interest receivable ..... (4,653) (346,951) (183,700)
(Increase) decrease in other assets ......... (11,249) (113,755) 12,507
Increase (decrease) in accrued
interest payable 40,193 63,451 (11,998)
Increase (decrease) in other liabilities .... (5,678) 343,439 (128,431)
------------ ---------- -----------
Net cash provided by operating activities ... 4,355,768 3,482,755 2,731,121
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of
available for sale securities ............... 8,110,848 16,552,440 21,945,795
Proceeds from maturities of
available for sale securities ................15,044,682 40,404,500 3,705,000
Purchase of available for sale securities (34,234,619)(73,639,832)(34,223,967)
Principal payments on
mortgage-backed securities ................. 6,255,232 2,026,089 2,551,169
Net increase in loans ......................(14,961,260)(19,753,478) (9,201,875)
Proceeds from sale of premises and equipment . 2,026 2,500 2,554
Purchase of premises and equipment ........... (222,360) (1,215,313) (1,237,641)
Proceeds from sale of other real estate ...... 58,000 69,251 213,052
Purchase of intangible assets ................ -0- (3,875,031) -0-
------------ ----------- -----------
Net cash used in investing activities ......(19,947,451)(39,428,874)(16,245,913)
------------ -----------------------
Cash flows from financing activities:
Cash dividends paid ......................... (995,407) (735,292) (603,888)
Increase in deposits ........................ 16,289,035 36,661,664 9,762,071
Net increase (decrease) in
long-term borrowings ........................ 5,000,000 -0- (1,025,000)
Net increase (decrease)
in short-term borrowings ....................(5,242,859) 2,561,916 6,018,858
Purchase of treasury stock .................. (199,096) (62,040) (486,735)
------------ ----------- ----------
Net cash provided by financing activities ... 14,851,673 38,426,248 13,665,306
------------ ---------- ----------
Net increase (decrease) in cash and
cash equivalents ............................ (740,010) 2,480,129 150,514
Cash and cash equivalents, beginning of year 5,548,703 3,068,574 2,918,060
------------ ---------- ----------
Cash and cash equivalents, end of year .....$ 4,808,693 $ 5,548,703 $ 3,068,574
============ =========== ===========
</TABLE>
See notes to financial statements
<PAGE>
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash paid:
Interest paid ....................... $ 8,150,809 $ 7,850,607 $ 6,867,566
=========== =========== ===========
Income taxes paid ................... $ 864,000 $ 838,000 $ 1,048,966
=========== =========== ===========
Non-cash investing and financing activities:
Transfers from loans to real estate
acquired through foreclosure ........ $ 545,253 $ 163,854 $ -0-
=========== =========== ===========
Proceeds from sales of foreclosed
real estate financed through loans .. $ 200,000 $ 108,500 $ 41,000
=========== =========== ===========
Total increase (decrease) in unrealized gain (loss)
on securities available for sale .... $ 289,244 $(1,085,481) $ 398,422
=========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 Pennsylvania 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 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.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 1: (Cont'd)
Investment Securities (Cont'd)
Securities classified as available for sale are those debt securities
that the Company intends to hold for an indefinite period of time, but
not necessarily to maturity. Any decision to sell a security classified
as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of
the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities available
for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities
sold, are included in earnings. Management determines the appropriate
classification of securities at the time of purchase and re-evaluates
the designations as of each balance sheet date. Equity securities
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.
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>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 1: (Cont'd)
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight line and
various accelerated methods based on estimated useful lives.
Maintenance, repairs and minor replacements are expensed when incurred.
Gains and losses on routine dispositions are reflected in current
operations.
Intangible Assets
Intangible assets are included in other assets and are being amortized
over a period of fifteen years using the straight-line method.
Amortization for 1998 and 1997 was $258,360 and $214,931, respectively.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale is comprised of property acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure and loans classified as in-substance foreclosure. The
Company includes such properties in other assets. A loan is classified
as in-substance foreclosure when the Company has taken possession of
the collateral regardless of whether formal foreclosure proceedings
take place. Any excess of the loan balance over the recorded value is
charged to the allowance for loan losses. Subsequent declines in the
recorded value of the property prior to its disposal and costs to
maintain the assets are included in other expense. In addition, any
gain or loss realized upon disposal is included in other income or
expense.
Income Taxes
The provision for income taxes is based on the current and deferred tax
consequences of all transactions that have been recognized in the
financial statements using the provisions of the enacted tax laws.
Deferred income taxes are provided using the liability method whereby
deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amount of assets and liabilities and their tax bases.
Advertising Costs
The Company follows the policy of charging marketing and advertising
costs to expense as incurred.
Common Stock
Holders of Company Common Stock are entitled to one vote for each share
on all matters voted on by shareholders. Holders of Company Common
Stock do not have cumulative voting rights in the election of
directors.
Holders of Company Common Stock do not have preemptive rights, or any
subscription, redemption or conversion privileges. Holders of Company
Common Stock are entitled to participate ratably in dividends on the
Company Common Stock as declared by the Board of Directors, and are
entitled to share ratably in all assets available for distribution to
shareholders in the event of liquidation or dissolution of the Company.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 1: (Cont'd)
Earnings per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS
128)." SFAS 128 eliminates primary and fully diluted earnings per share
and requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share exclude dilution and
is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods' earnings per
share calculations have been restated to reflect the adoption of SFAS
No. 128.
On September 15, 1998, the Company effected a 5-for-2 stock split to
shareholders of record on August 15, 1998. In connection with the stock
split, the Corporation amended it's articles of incorporation to
authorize 12,500,000 shares of $2 par value common stock. Earnings per
share amounts and weighted average shares outstanding have been
restated to give effect to the stock split.
The following data shows the amounts used in computing earnings per
share for 1998:
<TABLE>
Common
Income Shares
Numerator Denominator EPS
<S> <C> <C> <C>
Income available to common stockholders - basic
earnings per share .................... $3,405,373 2,182,804 $ 1.56
========= ========= =========
Dilutive effect of potential common stock:
Stock options ....................... _________ 1,797
Income available to common stockholders - diluted
earnings per share .................... $3,405,373 2,184,601 $ 1.56
========== ========== =========
</TABLE>
During 1997 and 1996, there were no potential common stock equivalents.
The weighted average number of shares outstanding after the effect of
the 5-for-2 stock split was 2,188,281 and 2,220,087 for 1997 and 1996,
respectively.
Accounting for Stock Options
The Company accounts for stock-based compensation in accordance with
the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." This method calculates compensation expense
using the intrinsic value method which recognizes as expense the
difference between the market value of the stock and the exercise price
at grant date. The Company has not recognized any compensation expense
under this method. The Company adopted the reporting disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires the Company to disclose the pro forma
effects of accounting for stock-based compensation using the fair value
method as described in the accounting requirements of SFAS No. 123. As
permitted by SFAS No. 123, the Company continues to account for
stock-based compensation under APB opinion No. 25.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 1: (Cont'd)
Accounting for Transfers and Servicing of Financial Assets
The Company accounts for transfers and servicing of financial assets in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The statement
requires an entity to recognize the financial and servicing assets it
controls and the liabilities it has incurred, derecognize financial
assets when control has been surrendered, and derecognize liabilities
when extinguished. It requires that servicing assets and other retained
interests in the transferred assets be measured by allocating the
previous carrying amount between the asset sold, if any, and retained
interest, if any, based on their relative fair values at the date of
transfer. It also provides implementation guidance for servicing of
financial assets, securitizations, loan syndications and participations
and transfers of loan receivables with recourse.
Reporting Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires entities
presenting a complete set of financial statements to include details of
comprehensive income. Comprehensive income consists of net income or
loss for the current period and income, expenses, gains and losses that
bypass the income statement and are reported directly in a separate
component of equity. The effect of adopting SFAS No. 130 was not
material to the Company's financial position or results of operations.
Segment Reporting
During 1998, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for the way public companies report information
about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures
regarding products and services, geographic areas and major customers.
The adoption of this Statement had no impact on the Company's financial
position or results of operations.
Disclosures about Pension and Other Post-retirement Benefits
During 1998, the Company adopted SFAS No. 132. This Statement: (1)
revises employers' disclosures about pension and other post-retirement
benefit plans; (2) standardizes the disclosure requirements for
benefits of such plans; (3) requires additional information on changes
in the benefit obligations and fair value of plan assets that will
facilitate financial analysis; and (4) eliminates certain disclosures
that are no longer useful. Most of the changes in the disclosure
provisions of this Statement address defined benefit plans. The
Company's adoption of SFAS No. 132 had no effect on the Company's
financial position or results of operations.
Accounting Principles Issued and Not Yet Adopted
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, and will not be applied
retroactively to financial statements of prior periods.
Management of the Bank is in the process of
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 1: (Cont'd)
evaluating the impact, if any, this Statement will have on the Bank's
consolidated results of operations or financial position when adopted.
In November 1998, SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" was issued. The Statement amends
SFAS 65, "Accounting for Certain Mortgage Banking Activities."
Statement 65, as amended, requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a trading
security. This Statement further amends SFAS 65 to
require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those investments.
This Statement conforms the subsequent accounting for securities
retained after securitization of mortgage loans by a mortgage banking
entity with the subsequent accounting for securities retained after the
securitization of other types of assets by nonmortgage banking
enterprises. This means that such securities can be classified as
held-to-maturity if they conform to the requirements of SFAS 115. The
Statement is effective for the first fiscal quarter beginning after
December 15, 1998. Management of the Bank is in process of evaluating
the impact, if any, this Statement will have on the Bank's consolidated
results of operations or financial position when adopted.
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, 1998 and 1997 was $1,017,000 and
$1,005,000, respectively.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 3: Investment Securities
At December 31, 1998 and 1997, the amortized cost and fair values of
securities available for sale are as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury securities ......... $10,476,447 $248,399 $ -0- $10,724,846
U.S. Government corporate and
agency obligations ............... 12,244,318 55,144 1,708 12,297,754
Obligations of state and political
subdivisions ..................... 29,490,805 739,104 -0- 30,229,909
Corporate debt securities ........ 6,238,663 98,621 -0- 6,337,284
Mortgage backed securities ....... 32,470,422 41,392 330,239 32,181,575
Equity securities ................ 1,403,700 -0- -0- 1,403,700
----------- --------- ------- -----------
$92,324,355 $1,182,660 $331,947 $93,175,068
=========== ========== ======== ===========
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
=========== ========== ======== ===========
</TABLE>
The amortized cost and fair value of securities as of December 31, 1998
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.
<TABLE>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less .............. $ 5,756,917 $ 5,810,235
Due after one year through five years 1,239,055 21,667,209
Due after five years through ten years 7,161,964 7,388,358
Due after ten years .................. 24,292,297 24,723,991
Mortgage-backed securities ........... 32,470,422 32,181,575
Equity securities .................... 1,403,700 1,403,700
----------- -----------
$92,324,355 $93,175,068
</TABLE>
Proceeds from sale of available for sale securities during 1998, 1997
and 1996 were $8,110,848, $16,552,440 and $21,945,795, respectively.
Gross gains realized on these sales were $63,459, $238,070 and
$251,687, respectively. Gross losses on these sales were $15,965,
$20,966, and $131,774, respectively. Net unrealized gains (losses) on
securities available for sale included in accumulated other
comprehensive income net of tax was $561,470 and $370,569 in 1998 and
1997, respectively.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 3: (Cont'd)
Securities with a carrying value of $24,652,037 and $22,635,952 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and repurchase agreements as required or permitted by law.
Note 4: Loans
Loans are summarized as follows:
<TABLE>
1998 1997
<S> <C> <C>
Commercial $ 16,525,040 $ 14,796,511
Real estate 106,916,488 95,953,797
Consumer .. 17,841,041 16,102,400
------------ ------------
Total loans $141,282,569 $126,852,708
============ ============
</TABLE>
A summary of the transactions in the allowance for loan losses is as
follows:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year .......... $ 1,675,887 $ 1,663,806 $ 1,487,757
Provision charged to operating expenses 190,000 130,000 220,000
Recoveries ............................ 41,868 31,253 33,146
Loan charge-offs (195,098) (149,172) (77,097)
--------- --------- ----------
Balance at end of year ................ $ 1,712,657 $ 1,675,887 $ 1,663,806
=========== =========== ===========
</TABLE>
Information with respect to impaired loans as of and for the years ended
December 31, 1998 and 1997 are as follows:
<TABLE>
1998 1997
<S> <C> <C>
Loans receivable for which there is a related
allowance for loan losses ...................... $572,000 $432,000
Loans receivable for which there is no related
allowance for loan losses ...................... -0- -0-
-------- --------
Total impaired loans ........................... $572,000 $432,000
======== ========
Related allowance for loan losses .............. $142,000 $ 89,000
======== ========
Average recorded balance on these impaired loans $504,000 $486,000
======== ========
Interest income on these impaired loans ........ $ 33,100 $ 7,100
======== ========
</TABLE>
In addition, the Bank had other non-accrual loans of approximately
$112,000 and $595,000 at December 31, 1998 and 1997, respectively, for
which impairment had not been recognized. Interest income on these
loans, which is recorded when received, amounted to $7,200 and $24,900
for the years ended December 31, 1998 and 1997, respectively.
Interest income that would have been recorded under the original terms
of the loan agreements amounted to $63,000 and $96,000 for the years
ended December 31, 1998 and 1997, respectively.
The Bank has no commitments to loan additional funds to borrowers with
impaired or non-accrual loans.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 5: Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 are comprised of:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Land ............................ $ 348,280 $ 348,280
Building and improvements ....... 3,486,097 3,408,074
Furniture, fixtures and equipment 2,833,692 2,713,521
----------- -----------
Total ........................... 6,668,069 6,469,875
Accumulated depreciation ........ (3,145,016) (2,713,575)
----------- -----------
Net ............................. $ 3,523,053 $ 3,756,300
=========== ===========
</TABLE>
Note 6: Deposits
The carrying amounts of deposits at December 31, 1998 and 1997
consisted of the following:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Demand - non-interest bearing $ 24,263,832 $ 20,104,376
Demand - interest bearing ... 55,107,402 52,945,190
Savings ..................... 30,563,596 29,034,158
Time - $100,000 and over .... 14,535,000 12,510,000
Time - less than $100,000 ... 85,411,222 78,998,293
------------ ------------
$209,881,052 $193,592,017
============ ============
</TABLE>
At December 31, 1998 the time remaining to maturity of time
certificates of deposit of $100,000 or more was as follows:
<TABLE>
1998
<S> <C>
Within 3 months .. $ 3,242,000
3 to 12 months ... 7,557,000
One to three years 3,295,000
Over three years . 441,000
-----------
Total ............ $14,535,000
===========
</TABLE>
Interest expense related to time deposits of $100,000 or more was
$659,044 in 1998, $611,961 in 1997 and $653,410 in 1996.
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, 1998 and 1997:
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 7: (Cont'd)
<TABLE>
1998
Maximum
Ending Average Month End Average
Balance Balance Balance Rate
------- ------- ------- ----
<S> <C> <C> <C> <C>
Federal funds
purchased and
securities sold
under agreements to
repurchase ........... $1,742,886 $4,368,045 $ 7,410,570 5.16%
Federal Home Loan Bank 2,190,000 543,101 3,000,000 5.49%
U.S. Treasury tax and
loan notes ........... 99,089 488,050 1,061,765 4.90%
---------- ---------- ----------- ----
Total ................ $4,031,975 $5,399,196 $11,472,335 5.27%
========== ========== =========== ====
1997
Maximum
Ending Average Month End Average
Balance Balance Balance Rate
------- ------- ------- ----
Federal funds
purchased and
securities sold
under agreements to
repurchase $2,596,742 $1,271,083 $ 4,900,000 5.65%
Federal Home Loan Bank 5,675,000 1,251,027 6,000,000 6.32%
U.S. Treasury tax and
loan notes 1,003,092 535,242 1,107,099 4.74%
--------- ---------- ----------- -----
Total $9,274,834 $3,057,352 $12,007,099 5.77%
========== ========== =========== =====
</TABLE>
The Bank has an agreement with Federal Home Loan Bank (FHLB) which
allows for borrowings up to a percentage of qualifying assets. At
December 31, 1998 and 1997, the Bank had a maximum borrowing capacity
of $87,046,000 and $67,815,000, respectively. Advances on the flexible
line of credit from the FHLB at December 31, 1998 and 1997 were
$2,190,000 and $3,775,000, 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, 1998 and 1997, respectively. These borrowings are
unsecured.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 8: Long-term Borrowing
Long-term borrowings of $5,000,000 at December 31, 1998 consists of a
term fund from the Federal Home Loan Bank. The note has a fixed rate of
interest of 4.64% and matures in 2003. This note has a convertible
option which allows FHLB, after two years, to change the note to an
adjustable-rate advance at 3 month LIBOR plus 10 basis points. In that
event, the Bank has the option to prepay the loan without penalty. If
the Bank prepays the loan within the two year period, the prepayment
fee applicable to the advance is equal to the present value of the
difference between cash flows generated at the advance rate from the
date of the prepayment until the original maturity date, and the cash
flows that would result from the interest rate posted by the FHLB on
the date of prepayment for an advance of comparable maturity. The note
is secured under terms of a blanket collateral agreement by a pledge of
qualifying investment and mortgage backed securities, certain mortgage
loans and a lien on FHLB stock.
Note 9: Stock Option Plan
A stock option plan covering non-employee directors and a stock
incentive plan for all officers and key employees was approved by the
shareholders at the annual meeting held on April 25, 1998. The plan
will be administered by a committee of the Board of Directors. Under
the plan, 125,000 shares of common stock (adjusted for the 5-for-2
stock split on September 15, 1998) are reserved for possible issuance,
subject to future adjustment in the event of specified changes in the
Company's capital structure. Under the plan, the exercise price cannot
be less than 100% of the fair market value on the date of grant.
Options granted during 1998 expire in ten years.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 9: (Cont'd)
A summary of transactions under this plan were as follows:
<TABLE>
1998
Weighted
average
Options price
<S> <C> <C>
Granted .......................... 8,934 $ 55.50
Stock split ...................... 13,401 22.20
Canceled ......................... (1,275) 22.20
------- ------
Outstanding, end of year ......... 21,060 $ 22.20
======= ======
Options exercisable at end of year -0- $ 22.20
======= ======
</TABLE>
The following summarizes information about all stock options
outstanding at December 31, 1998:
<TABLE>
Weighted-Average
Remaining Options
Exercise Price Number Contractual Life Exercisable
<S> <C> <C> <C>
$22.20 21,060 9.4 years -0-
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for the Option Plan. Accordingly,
no compensation expense has been recognized for the Option Plan. Had
compensation cost for the Option Plan been determined based on the fair
values at the grant dates for awards consistent with the method of SFAS
No. 123, the Company's net income and earnings per share would have
been adjusted to the pro forma amounts indicated below for the year
ended December 31, 1998:
<TABLE>
As Reported Pro Forma
<S> <C> <C>
Net income: ....... $ 3,405,373 $ 3,318,995
=========== =============
Earnings per share:
Basic ............. $ 1.56 $ 1.52
=========== =============
Fully diluted ..... $ 1.56 $ 1.52
=========== =============
</TABLE>
For the purposes of the pro forma calculations, the fair value of each
option grant is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for grants issued in
1998:
<TABLE>
<S> <C>
Dividend yield ........ 1.80%
Expected volatility ... 20.00%
Risk-free interest rate 5.90%
Expected lives ........ 10 years
</TABLE>
Note 10: Income Taxes
The components of the provision for income tax are as follows:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal
Currently payable ............ $ 940,561 $ 791,989 $ 923,510
Deferred tax (benefit) ....... (36,757) 21,630 (72,682)
--------- --------- ---------
Total provision for income tax $ 903,804 $ 813,619 $ 850,828
========= ========= =========
</TABLE>
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 11: (Cont'd)
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, 1998 and
1997 are as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses ...................... $ 454,100 $ 441,599
Deferred loan fees ............................. 50,670 83,680
Deferred compensation .......................... 69,797 61,873
--------- ---------
574,567 587,152
--------- ---------
Deferred tax liability:
Unrealized gain on available for sale securities (289,242) (190,899)
Accretion ...................................... -0- (51,746)
Other, net ..................................... (22,533) (20,129)
--------- ---------
Total .......................................... (311,775) (262,774)
--------- ---------
Net deferred tax asset ......................... $ 262,792 $ 324,378
========= =========
</TABLE>
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:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision at statutory rate .. $ 1,465,120 $ 1,300,459 $ 1,212,734
Tax exempt interest .......... (642,312) (561,156) (425,385)
Non-deductible interest ...... 88,540 86,990 73,121
Other, net ................... (7,544) (12,674) (9,642)
----------- ----------- -----------
Net provision for income taxes $ 903,804 $ 813,619 $ 850,828
=========== =========== ===========
</TABLE>
Note 11: Pension Plan and Other Employee Benefit Plans
The Bank has a noncontributory pension plan covering eligible
employees. Benefits are based on the employee's compensation and years
of service. The Bank's funding policy is to contribute annually amounts
not to exceed the maximum amount deductible for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned
in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Bank's statement of financial position at December
31, 1998 and 1997.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 11: (Cont'd)
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ...... $ 705,991 $ 458,277
Service cost ................................. 43,380 21,665
Interest cost ................................ 51,980 37,841
Actuarial gain ............................... -0- 208,729
Benefits paid ................................ (21,920) (20,521)
----------- -----------
Benefit obligation at end of year ............ 779,431 705,991
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 915,027 868,910
Actual return on plan assets ................. 151,836 66,638
Benefits paid ................................ (21,920) (20,521)
----------- -----------
Fair value of plan assets at end of year ..... 1,044,943 915,027
----------- -----------
Funded status ................................ 265,512 209,036
Unrecognized net actuarial loss .............. (19,666) 49,409
Unrecognized prior service cost .............. (204,906) (214,025)
----------- -----------
Prepaid (accrued) benefit cost ............... $ 40,940 $ 44,420
=========== ===========
Weighted-average assumptions:
Discount rate ................................ 7.5% 8.5%
Expected return on plan assets ............... 8.5% 8.5%
Rate of compensation increase ................ 4.0% 4.0%
</TABLE>
Net pension cost for the years ended December 31, 1998, 1997 and 1996
included the following components:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost ...................... $ 43,380 $ 21,665 $ 19,155
Interest cost ..................... 51,98 37,841 33,098
Expected return on plan assets .... (151,837) (66,638) (96,036)
Net amortization and deferral ..... (6,082) (6,082) (6,082)
Prior service cost ................ (9,119) (9,119) (9,119)
Deferred gain (loss) .............. 75,157 (6,106) 29,324
--------- --------- ---------
Net periodic pension cost (benefit) $ 3,480 $ (28,439) $ (29,660)
========= ========= =========
</TABLE>
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 1998, 1997 and 1996,
contributions to the plan charged to operations were $67,931, $65,416,
and $67,713, 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 1998, 1997
and 1996, employer contributions to the plan charged to operations were
$37,499, $34,831, and $21,252, respectively.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 11: (Cont'd)
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
$23,304, $15,832, and $21,185 for the years ended December 31, 1998,
1997 and 1996, respectively.
Note 12: Commitments and Contingencies
The Bank is obligated under non-cancelable lease agreements for certain
bank premises expiring in September 2028. The leases contain a renewal
option and provide that the Bank pay property taxes, insurance and
maintenance costs.
The following is a schedule by years of future
minimum lease payments required under this
non-cancelable lease:
<TABLE>
Years ended December 31
<S> <C> <C>
1998 $ 17,760
1999 17,760
2000 17,760
2001 17,760
2002 18,720
2003 through 2008 102,600
--------
$192,360
</TABLE>
Total rent expense was $13,440, $12,000 and $12,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Note 13: Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the consolidated balance sheets.
The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. Standby letters of credit commit the Bank to make
payments on behalf of customers when certain specified future events
occur. Commitments to extend credit are agreements to lend to the
customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or
other termination clauses. Since many of the commitments are expected
to expire in one year or less without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
The Bank's exposure to credit loss is essentially the same for these
items as that involved in extending loans to customers. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments. Collateral is
obtained based on management's credit assessment of the particular
customer.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 13: (Cont'd)
The contract or notional amounts at December 31, 1998 and 1997 were as
follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $7,946,887 $6,450,413
Standby letters of credit .. 480,105 250,500
---------- ----------
$8,426,992 $6,700,913
========== ==========
</TABLE>
The Bank grants commercial, consumer and residential loans to
customers primarily in the Susque- hanna/Wyoming County, PA and Broome
County, NY areas. Of the total loan portfolio, 76% is for real estate
loans, principally residential. It is the opinion of management that
this high concentration does not pose any adverse credit risk.
Further, it is management's opinion that the remainder of the loan
portfolio is balanced and diversified to the extent necessary to avoid
any significant concentration of credit.
Note14: Regulatory Matters
The Company is subject to the dividend restrictions set forth by the
Comptroller of the Currency. Under such restrictions, the Company may
not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings
(as defined) plus the retained earnings (as defined) from the prior
two years. Under this restriction, the Bank, without prior regulatory
approval, can declare dividends to the Company totaling $4,755,000,
plus an additional amount equal to the net profit for 1999, 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, 1998, 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, 1998, that the Company and Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, 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.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 14: (Cont'd)
The Company and Bank's actual capital ratios as of December 31, 1998
and 1997, and the minimum ratios required for capital adequacy
purposes and to be well capitalized under the prompt corrective action
provisions are as follows:
<TABLE>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted assets):
Consolidated $24,790,000 18.15% $10,927,000 8.00% $13,658,000 10.00%
Peoples National Bank $24,367,000 17.92% $10,879,000 8.00% $13,599,000 10.00%
Tier 1 capital (to risk weighted assets):
Consolidated $23,083,000 16.90% $ 5,463,000 4.00% $ 8,195,000 6.00%
Peoples National Bank $22,667,000 16.67% $ 5,440,000 4.00% $ 8,160,000 6.00%
Tier 1 capital (to average assets):
Consolidated $23,083,000 9.60% $ 9,613,000 4.00% $12,017,000 5.00%
Peoples National Bank $22,667,000 9.43% $ 9,613,000 4.00% $12,017,000 5.00%
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%
</TABLE>
Note 15: 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,
1998 and 1997 was $752,961 and $758,083, respectively. During 1998,
$177,498 of new loans and advances on lines of credit were made, and
repayments totaled $182,620.
Note 16: 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.
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 16: (Cont'd)
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 carrying amount of accrued interest payable approximates fair
value.
Short-term borrowings: The carrying amounts of short-term borrowings
approximate their fair values.
Long-term borrowings: The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing
arrangements.
Commitments to extend credit and standby letters of credit: These
financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented
by the net deferred fee arising from the unrecognized commitment or
letter of credit, and the fair value, determined by discounting the
remaining contractual fee over the term of the commitment using fees
currently charged to enter into similar agreements with similar risk,
are not considered material for disclosure. The contractual amounts of
unfunded commitments and letters of credit are presented in Note 13.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .... $2,083,913 $2,083,913 $2,401,332 $2,401,332
Interest-bearing deposits in
other banks ................ 2,724,780 2,724,780 3,147,371 3,147,371
Investment securities ...... 93,175,068 93,175,068 88,149,054 88,149,054
Loans, net ................. 139,535,640 140,648,995 125,109,633 128,853,451
Accrued interest receivable 1,781,561 1,781,561 1,776,908 1,776,908
</TABLE>
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 16: (Cont'd)
<TABLE>
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits $209,881,052 $210,619,877 $193,592,017 $193,621,446
Short-term borrowings 4,031,975 4,031,975 9,274,834 9,274,834
Accrued interest payable 702,889 702,889 662,696 662,696
Long-term borrowings 5,000,000 4,738,833 -0- -0-
</TABLE>
The carrying amounts in the preceding table are included in the
balance sheet under the applicable captions.
Note 17: Parent Company
The following is financial information for Peoples Financial Services Corp.
(Parent Company only):
<TABLE>
<CAPTION>
Balance Sheets
December 31, December 31,
1998 1997
<S> <C> <C>
Assets:
Cash ..................................... $ 2,129 $ 101,225
Investment in bank subsidiary ............ 26,629,087 24,608,305
Investment securities available for sale . 500,000 -0-
Accrued interest receivable .............. 21,000 -0-
------------ ------------
Total assets ............................. $ 27,152,216 $ 24,709,530
============ ============
Liabilities:
Due to subsidiary ........................ 106,522 65,607
------------ ------------
Total liabilities ........................ 106,522 65,607
------------ ------------
Stockholders' equity:
Common stock ............................. 4,455,000 4,455,000
Surplus .................................. 4,455,000 4,455,000
Retained earnings ........................ 18,322,095 15,912,129
Accumulated other comprehensive income ... 561,470 370,569
Less: Treasury stock ..................... (747,871) (548,775)
------------ ------------
Total stockholders' equity ............... 27,045,694 24,643,923
------------ ------------
Total liabilities and stockholders' equity $ 27,152,216 $ 24,709,530
============ ============
</TABLE>
<PAGE>
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 1998, 1997 AND 1996
Note 17: (Cont'd)
<TABLE>
<CAPTION>
Statements of Income
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividends from bank subsidiary ...... $ 1,595,407 $ 885,292 $ 1,103,888
Other income ........................ 21,000 -0- -0-
Other expenses ...................... 51,174 34,296 1,823
----------- ----------- -----------
Income before taxes and equity in
undistributed income of subsidiary .. 1,565,233 850,996 1,102,065
Provision for income tax (benefit) .. (10,259) (11,661) (620)
----------- ----------- -----------
Income before equity in undistributed
income of subsidiary ................ 1,575,492 862,657 1,102,685
Equity in undistributed income of
subsidiary .......................... 1,829,881 2,148,602 1,613,352
----------- ----------- -----------
Net income .......................... $ 3,405,373 $ 3,011,259 $ 2,716,037
=========== =========== ===========
Statements of Cash Flows
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income .............................$3,405,373 $3,011,259 $2,716,037
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of subsidiary ..(1,829,881) (2,148,602) (1,613,352)
Increase in due to subsidiary .......... 40,915 22,635 1,203
Increase in accrued
interest
receivable ............................. (21,000) -0- -0-
---------- --------- -----------
Net cash provided by operating
activities ............................. 1,595,407 885,292 1,103,888
---------- --------- -----------
Cash flows from investing activities:
Purchase of available for sale
securities ............................. (500,000) -0- -0-
---------- --------- -----------
Cash flows from financing activities:
Cash dividends paid .................... (995,407) (735,292) (603,888)
Purchase of treasury stock ............. (199,096) (62,040) (486,735)
---------- --------- -----------
Net cash used by financing activities ..(1,194,503) (797,332) (1,090,623)
---------- --------- -----------
Net increase (decrease) in cash and cash
equivalents ............................ (99,096) 87,960 13,265
Cash and cash equivalents, beginning
of year ................................ 101,225 13,265 -0-
---------- --------- -----------
Cash and cash equivalents, end of year . $ 2,129 $ 101,225 $ 13,265
========== ========== ===========
</TABLE>
<PAGE>
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None
PART III
ITEM 10 Directors and Executive Officers
The Company's Board of Directors presently consists of 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 information is set forth in the table entitled "Company's Board
of Directors": name, age, term of office, 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>
Year Year Term
Name Age Position on Board Elected Expires Occupation
<S> <C> <C> <C> <C> <C>
Carl F Pease 67 Chairman 1985 2000 Retired, Susquehanna
County Planning
Commission
Gerald R Pennay 62 Vice Chairman 1985 2001 Owner, Gerald R.
Pennay & Sons
Auctioneers
John W. Ord 58 President & CEO 1969 2000 President of Peoples
National Bank
Virginia M. Turner 63 Corporate Secretary 1981 2001 Investor
Thomas F. Chamberlain 50 Director 1994 2001 Nationwide
Insurance Agent
Judith Ely Kelly 50 Director 1988 1999 State Farm
Insurance Agent
Jack B. Norris 65 Director 1985 1999 Retired Owner,
B.K. Norris
Distributors(Beverage)
George H. Stover, Jr. 52 Director 1992 1999 Real Estate Appraiser
William S. Crock 52 Director 1992 2000 President, W.S. Crock
& Sons, Inc.
(Retail Store)
Michael S. Karhnak 46 Vice President/ 1986 N/A Executive Vice
Treasurer President, Peoples
National Bank
Debra E. Dissinger 44 Vice President/ 1985 N/A Executive Vice
Assistant Secretary President, Peoples
National Bank
</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
The Company's Board of Directors met five times during 1998 and the Bank's Board
of Directors met 12 times during 1998.
<PAGE>
The Company's Board of Directors is authorized, under the Company's By-Laws, to
create an Executive Committee and other Board committees. At present, no such
committees have been established, and all committee functions are performed by
committees of the Bank's Board. The Bank's Board has seven standing committees:
Executive, Compensation, Audit, Asset/Liability, Human Resources and Marketing,
Loan Administration, and Branch. There is no Nominating Committee.
The Executive Committee of the Bank met one time during 1998. It is a fixed
committee comprised of the Chairman, the Vice-Chairman, the President, and one
other director appointed on a yearly basis. This committee may exercise the
authority of the Bank's Board to the extent permitted by law during intervals
between meetings of the Board. The Executive Committee of the Bank may also be
assigned other duties by the Bank's Board.
The Compensation Committee of the Bank met one time during 1998. This committee
reviews and recommends compensation policies and plans. Carl F. Pease was the
Chairman of the Committee. The other Committee members were Jack M. Norris,
Gerald Pennay, and Jack Ord. Mr. Ord is the current CEO and President of
Peoples National Bank. While Mr. Ord was specifically excluded from any
Committee
discussion concerning his own compensation, he does participate in the
Committee's discussion concerning other key executive's compensation.
The Audit Committee of the Bank met four times during 1998. It supervises the
compliance and internal audit program of the Bank and recommends the appointment
of, and serves as the principal liaison between, the Board and the Company's
independent accountants. The Audit Committee also reports to the Board on the
general financial condition of the Bank.
The Asset/Liability Committee of the Bank met 12 times during 1998. It monitors
and helps control the Bank's risk position by recommending the allocation of
funds within guidelines for rate sensitivity, time deposits, liquidity, Federal
Funds borrowing, loans, investments, dividends, and tax position. The
Asset/Liability Committee is responsible for developing such guidelines, guiding
the Bank's investments, and coordinating the Bank's budget process.
The Human Resources and Marketing Committee of the Bank met four times during
1998. It is responsible for sound human resources management. This Committee is
also responsible for evaluation, planning and supervision of the marketing of
the Bank's products and services and also oversees community relations and other
public relations activities.
The Loan Administration Committee of the Bank met four times during 1998. It
assists the Bank's Board of Directors in discharging its responsibility for the
lending activities of the Bank by reviewing loans, lines of credit, floor plans,
and compliance. The Loan Administration Committee recommends lending
authorizations and is responsible for assuring that the Bank's loan activities
are carried out in accordance with loan policies. The Loan Administration
Committee is also responsible for ensuring the adequacy of the Bank's loan loss
reserve.
The Branch Committees of the Bank each met 10 times during 1998. There is a
committee assigned to each branch of the Bank. These Committees are responsible
for monitoring the operations, goals, and profitability of the branches.
ITEM 11 EXECUTIVE COMPENSATION
The aggregate cash compensation paid to all three executive officers of the
Company and the Bank for services performed during 1998 was $254,235.
The Bank has in effect a directors' and officers' liability insurance policy
from the Fidelity and Deposit Company of Maryland to cover certain liabilities,
losses, damages, and expenses that the Bank's Directors and Officers may incur
in such capacities. Annual premiums for this policy are $5,267.
The Bank provides an automobile for its executive officers in connection with
the Bank's business. The value of any resulting personal benefit is not directly
related to job performance.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This Report of the Compensation Committee covers the role of the Corporate
Governance and Compensation Committee relative to the compensation program,
Executive Compensation Guiding Principles, Components of the Compensation
Program, and Compensation of the Chief Executive Officer
<PAGE>
ROLE OF THE CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE
The Committee is made up of four members of the Board of Directors. Three of
them are not current or former employees of the Company. The Committee sets the
overall compensation principles of the Company and reviews the entire program at
least annually. This includes each element described below, the measurement used
to make payments of awards under the Company's incentive plans, and the overall
effectiveness of the program. The committee specifically reviews and establishes
the individual compensation levels for the top three members of the senior
leadership team, including the Chief Executive Officer. The committee has
considered the advice of an independent outside consultant in determining the
appropriateness and the level of compensation.
EXECUTIVE COMPENSATION GUIDING PRINCIPLES
Peoples National Bank has developed a compensation program that is intended to
motivate and retain the key talent it needs to be a market leader in a highly
competitive industry. The Committee and the Company's leadership team developed
this program to support the Company's business strategy. The following
principles guided the development of the program:
Compensation opportunity should be related to performance. That is, if
Peoples National Bank's and the individual's performance are at the
median of those companies with whom we compete for talent, then pay
should also be at the median. Opportunity should increase
proportionately if Peoples National Bank's or the individual's
performance is above the median. On the other hand, if performance is
at less than the median, any award payment will be at the Committee's
discretion.
Ownership of the Company's shares should be pervasive throughout the
Company with each individual having a number of opportunities to own
Peoples National Bank's stock. To that end, we have made a stock option
grant to all employee population in May 1998. The overall intent is to
encourage each employee to be, and to behave like, an owner of the
business.
As described later in this report, our compensation programs are
designed to balance short- and long-term financial objectives, build
shareholder value and reward for individual, team and corporate
performance.
The proportion of total pay that is at risk against individual and
Company performance objectives increases with the more senior
positions. For example, in 1998, approximately 16% of the President's
total target pay opportunity was at risk against short- and long-term
performance goals.
Survey data is compiled by an independent outside consultant to ensure that our
total program is competitive. Compensation data includes 148 institutions which
includes 111 commercial banks or bank holding companies, 35 savings
institutions, and 2 credit unions.
COMPONENTS OF THE COMPENSATION PROGRAM
The three components of the total compensation program are base salary,
short-term incentives, and long-term incentives.
Base Salary
Base salaries for all officers have been set at levels that are comparable to
similar positions at other companies with whom we compare for compensation
purposes.
Short-Term Incentives
The annual bonus component of incentive compensation is designed to align
executive pay with short-term (annual) performance of the Company. In 1998, the
annual bonus opportunity was based on an increased corporate net income
objective of 10%. Other factors may be used or added in subsequent years.
Distribution of bonuses was based on years of service, salary, part-time or
full-time status, and management level classification.
<PAGE>
Long-Term Incentives
The Bank has an employee stock ownership plan covering substantially all
employees. Contributions to the plan are at the discretion of the Board of
Directors. Employer contributions are allocated to participant accounts based on
their percentage of total base and short-term incentive compensation for the
plan year. The Bank also maintains a profit sharing plan under the provisions of
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees who have completed one year of service. Contributions to the plan by
the Bank equal 50% of the employee contribution up to a maximum of 6% of annual
salary.
The Company made a grant of stock options to substantially all employees. Grants
for 1998 were made May 1, 1998. These options have an exercise price of $22.20
(price adjusted to reflect the Company's 5 for 2 stock split in September 1998).
The option vests after five years of service and will expire ten years from the
date of the grant.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In fiscal 1998, the Company's most highly compensated officer was John W. Ord,
CEO and President. Based on the sample of peers provided through the consultant,
approximately 75% of CEO's total annual compensation is in base salary, 20% in
short-term incentive compensation, and 5% in long-term compensation. In 1998,
Mr. Ord's total compensation included 68.44% in base salary, 11.92% in
short-term incentive, and 19.64% in long-term compensation.
The guidelines and factors considered by the Committee in determining
compensation include corporate profitability measured by return on assets, stock
prices, asset quality, loan loss reserve levels, market share, regulatory
capital strength, cost control, and regulatory examination. The Committee based
compensation and benefit levels on the contribution to the Company in meeting
the goals and objectives as set forth in the strategic plan of the Company and
the Bank.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Other
Name Principal Position Year Salary Bonus Compensation
- ---- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
John W. Ord President & CEO 1998 $114,800(1) $20,000 $32,951(2)
1997 $103,500(3) $11,117 $24,825(4)
1996 $98,000(5) $32,250 $31,879(6)
<FN>
(1)Includes Director's fees of $4,800.
(2) Includes Peoples National Bank's contribution to 401 (k) plan of $3,299,
ESOP Contribution of $4,844, Split Dollar Life Insurance premium payment of
$1,504 and Supplemental Employee Retirement Plan contribution of $23,304.
(3) Includes Director's fees of $3,500.
(4) 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.
(5) Includes Director's fees of $4,000
(6) 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.
</FN>
</TABLE>
Base Salary
The Committee increased Mr. Ord's base salary from $103,500 in 1997 to $114,800
in 1998. This increase includes an increase in Director's fees, which were
$3,500 in 1997 and $4,800 in 1998.
Short-Term Incentives
The Committee assessed Mr. Ord's performance in determining his short-term
incentive awards. The goals and objectives set forth in the strategic plan were
met and additional stretch goals were achieved through the leadership efforts
of Mr. Ord. In 1998 Mr. Ord was paid a bonus of $20,000.
<PAGE>
Long-Term Incentives
The Bank has an employee stock ownership plan covering substantially all
employees. Contributions to the plan are at the discretion of the Board of
Directors. Employer contributions are allocated to participant accounts based on
their percentage of total base and short-term incentive compensation for the
plan year. In 1998, Mr. Ord's was $4,844.
The Bank also maintains a profit sharing plan under the provisions of Section
401(k) of the Internal Revenue Code. The plan covers substantially all employees
who have completed one year of service. Contributions to the plan by the Bank
equal 50% of the employee contribution up to a maximum of 6% of annual salary.
Effective August 1, 1994, the Bank maintains a profit sharing plan under the
provisions of Section 401 (K) of the Internal Revenue Code. The plan covers
substantially all employees who have completed one year of service.
Contributions to the plan by the Bank equal 50% of the employee contribution up
to a maximum of 6% of annual salary. During 1998, employer contributions to the
plan charged to operations were $37,498. In 1998 Mr. Ord's was $3,299.
The Company made a grant of stock options to substantially all employees. Grants
for 1998 were made May 1, 1998. These options have an exercise price of $22.20.
The option vests after five years of serve and will expire ten years from the
date of the grant. A total of 1,250 shares were granted to Mr. Ord under the
1998 Stock Option.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants (1)
Number of Shares Total Options Exercise
Underlying Granted to Price Expiration Grant Date
Name Options Granted Employees Per Share Date Present Value
<S> <C> <C> <C> <C> <C>
John W. Ord 1,250 8.60% $22.20 5/1/08 $6,344
<FN>
(1) All Share and per Share amounts have been adjusted to reflect the Company's
September 1998 5-for-2 stock split.
</FN>
</TABLE>
Peoples National Bank maintains an excess benefit plan for Mr. Ord. Under this
plan, which is a non-qualified plan, Mr. Ord will receive a supplemental payment
in order to provide him with an annual retirement benefit.
COMPENSATION OF DIRECTORS
Each member of the Board of Directors receives $350 for each Bank Board meeting
and all committee members, except Mr. Ord who receives $150 for each committee
meeting they attend. The Chairman of the Board of Directors receives an
additional $200 per month.
Stock Options
On May 1, 1998, each non-employee Director received an option to purchase 625
shares of Common Stock. These options have an exercise price of $22.20. The
option vests after five years of service and will expire ten years from the date
of the grant. (shares have been adjusted to reflect the Company's September 1998
5 for 2 stock split)
Life Insurance
Each Director has $50,000 of split dollar life insurance with premiums paid by
the Bank. The total of premiums paid in 1998 was $27,485. Under this split
dollar life insurance agreement, the Company will receive an amount from the
cash value or death proceeds of the policy equal to its premium advances.
Health Insurance
Health insurance is provided to Directors under the same terms and conditions as
the Employees of the Bank. The total of premiums paid in 1998 was $30,986.
Compensation Committee Interlocks And Insider Participation
John W. Ord is the only employee serving on the Compensation Committee of the
Board of Directors. Mr. Ord is excluded from any discussion concerning his own
compensation. Section 16 (a) Beneficial Ownership Reporting Compliance Section
16 (a) of the Securities Exchange Act of 1934 requires the Company's Directors
and executive officers to file reports of holdings and transactions in Shares
with the SEC. Based on Company records and other information, the Company
believes that all SEC filing requirements applicable to its Directors and
executive officers with respect to the Company's 1998 fiscal year were met.
<PAGE>
PENSION PLANS
The Bank's Pension Plan is available to Bank employees who have attained age 21,
and have completed one year of service. Employees do not contribute to the plan.
Each year, the bank contributes under the plan an actuarially determined amount
for distribution to eligible employees at their retirement. Benefits are payable
at normal retirement (age 65) and early retirement (age 55). Disability benefits
are payable at age 55 with vesting at five years. The following table shows the
annual retirement benefits payable at normal retirement (age 65) under the
Bank's plan for a range of compensation levels and years of service. The amounts
are based on an employee who became a participant in 1998 and will have the
service and salary at normal retirement.
<TABLE>
<CAPTION>
YEARS OF SERVICE
Salary 15 20 25 30 35
- ------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>
Performance Graph
The following graph and table compare the cumulative total shareholder return on
the Corporation's Common Stock during the period of December 31, 1993, through
and including December 31, 1998, with the S&P 500 Index and the NASDAQ Bank
Index. The comparison assumes $100 was invested on December 31, 1993, in the
Corporation's Common Stock and in each of the indices below and assumes further
the reinvestment of dividends into the applicable securities. The shareholder
return shown on the graph and table below is not necessarily indicative of
future performance.
[OBJECT OMITTED]
<TABLE>
Period Ending
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C> <C>
Peoples Financial
Services Corp. 100.00 112.00 139.00 159.00 223.00 329.00
NASDAQ - Bank Index 100.00 100.00 148.00 196.00 328.00 325.00
S&P 500 Index 100.00 101.00 139.00 171.00 229.00 294.00
</TABLE>
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
In February 1997, the Company entered into an employment agreement with John W.
Ord, President and Chief Executive Officer of the Company. The agreement is for
an initial three-year term and is renewed annually for a three-year term unless
notice of 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 minimum base salary of $100,000 per year and for
such incentive bonuses as may be awarded to the executive under any incentive
compensation plan which may be in effect or otherwise in the discretion of the
Board of Directors. If the executive's employment is terminated without "cause"
(as defined in the agreement) or the executive terminates his employment for
"good reason" (as defined in the agreement) following a "change in control" of
the Company, the executive becomes entitled to severance benefits under the
agreement. "Good reason" includes a reduction in title, a reduction in
responsibilities, a reduction in authority, a reassignment which requires the
executive to move his principal residence, a reduction in salary, or a failure
to provide the executive with comparable benefits following a "change in
control." If any such termination occurs following a "change in control," the
executive will be entitled generally to a lump-sum payment equal to 2.99 times
his average annual compensation for the five years preceding the year of
termination. In the event that the executive's employment is terminated by the
Company without "cause" in the absence of a "change in control," the executive
will be entitled generally to a lump-sum payment equal to 2.0 times the sum of
his highest annual compensation in the prior three years plus certain pension
and welfare benefits received in the relevant year. Mr. Ord's agreement contains
provisions restricting his ability to compete with the Company under certain
circumstance following termination of his employment.
In February 1997, the Company also entered into severance agreements with two
other executive officers of the Company, which provided for certain severance
benefits in the event the executive's employment is terminated or the executive
resigns for specified reasons following a "change in control" of the Company.
Under these agreements, the executive would be entitled generally to a severance
benefit equal to 2.0 times the executive's average annual compensation for the
five years preceding the year of termination. No benefits are payable under
these agreements in the event the executive's employment is terminated for
"cause" or in the event the executive's employment is terminated for any reason
prior to a "change in control." The specified reasons for termination under
these agreements are substantially similar to the events of "good reason"
contained in Mr. Ord's agreement.
Some of the Directors and Officers of the Company, and the companies with which
they are associated, are customers of, and during 1998 had banking transactions
with, the Bank in the ordinary course of the Bank's business, and intend to do
so in the future. All loans and commitments to loan included in such
transactions were made under substantially the same terms, including interest
rates, collateral, and repayment terms, as those prevailing at the time for
comparable transactions with other persons and, in the opinion of the Bank's
management, do not involve more than the normal risk of collection or present
other unfavorable features.
<PAGE>
ITEM 12 SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth information concerning the beneficial ownership
of the Company's Common Shares as of 12/31/98, for each incumbent Director and
each of the nominees for Director; the two most highly compensated executive
officers who are not also Directors; and the Directors and executive officers as
a group. Except as otherwise noted, the named individuals or family members had
sole voting and investment power with respect to such securities.
<TABLE>
Number of Percentage of
Name Shares Owned Shares Owned
- ---- ------------ ------------
<S> <C> <C>
Carl F Pease 30,000 1.38% (1)
Gerald R Pennay 20,499 0.94% (2)
John W. Ord 46,666 2.14% (3)
Virginia M. Turner 98,887 4.54%
Thomas F. Chamberlain 4,230 0.19% (4)
Judith Ely Kelly 9,450 0.43% (5)
Jack B. Norris 8,303 0.38% (6)
George H. Stover, Jr. 49,072 2.25% (7)
William S. Crock 2,950 0.14% (8)
Michael S. Karhnak 6,699 0.31% (9)
Debra E. Dissinger 6,952 0.32% (10)
<FN>
(1) All shares are held jointly with spouse.
(2) Includes 10,137 shares held jointly with spouse.
(3) Includes shares owned by the trustee of the Company's Employee Stock
Ownership Plan ("ESOP") which have been allocated to Mr. Ord's account.
All other Shares are held jointly with spouse.
(4) Includes 675 shares held jointly with spouse.
(5) Includes 4,500 shares held jointly with husband and 75 shares held in
custodial account for each of her 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) Includes shares owned by the trustee of the Company's ESOP which have been
allocated to Mr. Karhnak's account. All other shares are held jointly with
spouse.
(10) Includes shares owned by the trustee of the Company's ESOP which have been
allocated to Ms. Dissinger's account. All other shares are held jointly with
spouse.
</FN>
</TABLE>
ITEM 13 Certain Relationships and Related Transactions
Certain directors and officers of the Company or PNB, and their respective
associates, were customers of and had transactions with PNB in the ordinary
course of business during the Company's fiscal year ended December 31, 1998.
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.
PART IV
ITEM 14 EXHIBITS AND REPORTS ON FORM 8-K
Financial Statement Schedules can be found under Item 8 of this report.
The Corporation filed a Form 8-K on August 28, 1998. A press release dated July
30, 1998 concerning information about earnings, cash dividends and a stock split
was incorporated as Exhibit 99.1.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEOPLES FINANCIAL SERVICES CORP
By/s/ John W. Ord
John W. Ord, President and Chief Executive Officer
Debra E. Dissinger
Debra E. Dissinger, Executive Vice President
Frederick J. Malloy
Frederick J. Malloy, Accounting Officer
Carl F. Pease
Carl F. Pease Chairman, Board of Directors
George H. Stover, Jr.
George H. Stover, Jr., Member, Board of Directors
Jack Norris
Jack Norris, Member, Board of Directors
Gerald Pennay
Gerald Pennay, Member, Board of Directors
Judith Kelly
Judith Kelly, Member, Board of Directors
William S. Crock
William S. Crock, Member, Board of Directors
Thomas F. Chamberlain
Thomas F. Chamberlain, Member, Board of Directors
Virginia M. Turner
Virginia M. Turner, Member, Board of Directors
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001056943
<NAME> 2r$ixyyp
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,084
<INT-BEARING-DEPOSITS> 2,725
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 93,175
<INVESTMENTS-MARKET> 93,736
<LOANS> 141,248
<ALLOWANCE> 1,713
<TOTAL-ASSETS> 247,202
<DEPOSITS> 209,881
<SHORT-TERM> 4,032
<LIABILITIES-OTHER> 1,243
<LONG-TERM> 5,000
0
0
<COMMON> 4,455
<OTHER-SE> 22,591
<TOTAL-LIABILITIES-AND-EQUITY> 247,202
<INTEREST-LOAN> 11,448
<INTEREST-INVEST> 4,959
<INTEREST-OTHER> 177
<INTEREST-TOTAL> 16,584
<INTEREST-DEPOSIT> 7,906
<INTEREST-EXPENSE> 285
<INTEREST-INCOME-NET> 8,393
<LOAN-LOSSES> 190
<SECURITIES-GAINS> 47
<EXPENSE-OTHER> 5,090
<INCOME-PRETAX> 4,309
<INCOME-PRE-EXTRAORDINARY> 4,309
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,405
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 1.80
<LOANS-NON> 516
<LOANS-PAST> 2,507
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 351
<ALLOWANCE-OPEN> 1,676
<CHARGE-OFFS> 195
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 1,713
<ALLOWANCE-DOMESTIC> 1,713
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
