UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2000 or ( ) Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from No. 0-23863 (Commission File Number) PEOPLES FINANCIAL SERVICES CORP. (Exact Name of Registrant as Specified in its Charter) Pennsylvania 23-2931852 (State of Incorporation) (IRS Employer ID Number) 50 Main Street Hallstead, PA 18822 (Address of Principal Executive Offices) (Zip Code) (570) 879-2175 (Registrant's Telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes X NO____ Number of shares outstanding as of June 30, 2000 COMMON STOCK ($2 Par Value) 2,156,808 - --------------------------- -------------------------- (Title of Class) (Outstanding Shares)
PEOPLES FINANCIAL SERVICES CORP. FORM 10-Q For the Quarter Ended June 30, 2000 Contents PART I. FINANCIAL INFORMATION. Page No. -------- Item 1. Financial Statements. Consolidated Statement of Financial Condition as of June 30, 2000 (Unaudited) and December 30, 1999. 3 Consolidated Statement of Income (Unaudited) for the Six Month Period Ended June 30, 2000 and 1999. 4 Consolidated Statement of Comprehensive Income (Unaudited) for the Six Month Period Ended June 30, 2000 and 1999. 5 Consolidated Statement of Shareholders' Equity (Unaudited) for the Six Month Period Ended June 30, 2000 and 1999. 6 Consolidated Statement of Cash Flows (Unaudited) for the Six Month Period Ended June 30, 2000 and 1999. 7 Notes to Consolidated Statements. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9 Item 3. Quantitative and Qualitative Disclosure About Market Risks. 17 PART II. OTHER INFORMATION 18 Item 6. Exhibits and Reports on Form 8-K. 18
PART I Item 1 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION June 30, 2000 and December 31, 1999 (UNAUDITED) (in thousands) <TABLE> <CAPTION> ASSETS: June 1999 June 2000 Dec 1999 <S> <C> <C> <C> Cash Due from Banks ........................... 2,531 2,654 3,373 Interest Bearing Deposits with Other Banks .... 4,721 4,293 4,096 Federal Funds Sold ............................ 0 1,070 0 Securities Available for Sale ................. 92,642 97,569 92,066 Loans ......................................... 142,503 162,463 152,396 Less: Unearned Income ........................ -20 -7 -11 Allowance for Loan Loss ....................... -1,707 -1,824 -1,755 Loans, Net .................................... 140,776 160,632 150,630 Bank Premises and Equipment, Net .............. 3,502 3,399 3,455 Accrued Interest Receivable ................... 1,826 2,110 1,996 Other Assets .................................. 5,165 5,954 5,703 TOTAL Assets .................................. 251,163 277,681 261,319 LIABILITIES Deposits, Non-Interest Bearing ................ 25,317 32,269 25,419 Deposits, Interest Bearing .................... 189,764 194,347 190,005 Total Deposits ................................ 215,081 226,616 215,424 Accrued Interest Payable ...................... 657 658 718 Borrowed Funds ................................ 8,286 22,005 17,850 Other Liabilities ............................. 504 735 517 TOTAL Liabilities ............................. 224,528 250,014 234,509 SHAREHOLDERS' EQUITY Common Stock * ................................ 4,455 4,455 4,455 Surplus ....................................... 4,465 4,570 4,512 Treasury Stock at Cost ........................ -905 -1,496 -1,050 Undivided Profit .............................. 19,523 22,170 20,980 Accumulated Other Comprehensive Income ........ -903 -2,032 -2,087 TOTAL Shareholders' Equity .................... 26,635 27,667 26,810 TOTAL LIABILITIES CAPITAL ..................... 251,163 277,681 261,319 <FN> Common Stock, par value $2 per share, 12,500,000 shares authorized; 2,156,808 and 2,171,966 shares issued and outstanding at June 30, 2000 and 1999 respectively. </FN> </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (in thousands) <TABLE> <CAPTION> 6 Months Ended 3 Months Ended 30-Jun 30-Jun 30-Jun 30-Jun INTEREST INCOME: 2000 1999 2000 1999 <S> <C> <C> <C> <C> Interest and Fees on Loans ..................... 6,562 5,861 3,361 2,948 Interest Investments, Taxable .................. 2,096 1,794 1,063 902 Tax Exempt .......................... 789 733 411 359 Dividends ........................... 43 39 22 19 Interest on Federal Funds Sold ................. 20 56 18 46 Interest on Deposits of Other Banks ............ 40 0 17 1 TOTAL Interest Income .......................... 9,550 8,483 4,892 4,275 Interest on Deposits ........................... 4,341 3,916 2,238 1,964 Interest on Borrowed Funds ..................... 530 197 299 81 Interest Expense ............................... 4,871 4,113 2,537 2,045 Net Interest Income ............................ 4,679 4,370 2,355 2,230 Provision for Loan Losses ...................... 120 120 60 60 Net Interest Income, after Loan Loss Provision . 4,559 4,250 2,295 2,170 OTHER INCOME: Service Charges and Fees ....................... 588 489 328 245 Gains on Security Sales ........................ 0 63 -2 57 Other Operating Income ......................... 85 73 15 42 TOTAL Other Income ............................. 673 625 341 344 OTHER EXPENSES: Salaries and Benefits .......................... 1,408 1,295 684 652 Occupancy Expenses ............................. 167 159 80 76 Furniture and Equipment Expense ................ 180 182 88 91 FDIC Insurance and Assessments ................. 57 46 28 23 Professional Fees and Outside Services ......... 96 91 55 51 Computer Services and Supplies ................. 164 161 82 82 Taxes, Other Than Payroll and Income ........... 129 120 64 62 Other Operating Expenses ....................... 627 595 320 314 Total Non-Interest Expense ..................... 2,828 2,649 1,401 1,351 Income Before Income Taxes ..................... 2,404 2,226 1,235 1,163 Provision for Income Taxes ..................... 563 478 290 266 Net Income ..................................... 1,841 1,748 945 897 Net Income Per Share, Basic .................... 0.848 0.803 0 0 Net Income Per Share, Diluted .................. 0.848 0.803 0 0 </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Six Months Ended Three Months Ended June June June June 2000 1999 2000 1999 <S> <C> <C> <C> <C> Net Income ..................................... 1,841 1,748 945 897 Other Comp Income (loss) before tax Unrealized Holding Gains/Losses on Securities .. 83 -2,282 -32 -1,780 Less: Reclassification Adjustment .............. 0 -63 2 -69 Other Comp Income (loss) before tax ............ 83 -2,219 -30 -1,711 Federal Income Tax Expense (benefit) ........... 28 754 -10 927 Other Comp Income (loss) before tax ............ 55 -1,465 -40 -784 TOTAL Comp Income .............................. 1,896 283 905 113 </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHE ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) (in thousands) <TABLE> <CAPTION> Accumulated Other Common Surplus Undivided Comprehensive Treasury Total Stock Profit Income Stock <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1998 .................................. 4,455 4,455 18,322 562 -748 27,046 Net Income 1999 for the six months ended June 30, 1999 ........ 0 0 1,748 0 0 1,748 Cash Dividends Paid, 1999 ..................................... 0 0 -547 0 0 -547 Treasury Stock Purchase ....................................... 0 10 0 0 -157 -147 Change in unrealized gain/loss on securities available for sale net of deferred income taxes ................................. 0 0 0 -1,465 0 -1,465 Balance, June 30, 1999 ....................................... 4,455 4,465 19,523 -903 -905 26,635 Balance, December 31, 1999 ................................... 4,455 4,512 20,980 -2,087 -1,050 26,810 Net Income 2000 ............................................... 0 0 1,841 0 0 1,841 Cash Dividends Paid, 2000 ..................................... 0 0 -651 0 0 -651 Treasury Stock Purchase ....................................... 0 0 0 0 -494 -494 Shares issued from treasury related to DRIP and Stock Option Plan .................................................. 0 58 0 0 48 106 Change in unrealized gain/loss on securities available for sale, net of deferred income taxes .................................. 0 0 0 55 55 Balance, June 30, 2000 ....................................... 4,455 4,570 22,170 -2,032 -1,496 27,667 </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (UNAUDITED) (in thousands) <TABLE> <CAPTION> June June 2000 1999 <S> <C> <C> Cash Flows from Operating Activities Net Income ................................................................. 1,841 1,748 Adjustments:Depreciation and amortization .................................. 301 310 Provision for Loan Losses ................................................ 120 120 Gain/Loss on sale of equipment ........................................... -4 0 Gain/loss on sale of other real estate ................................... 0 27 Amortization of securities' premiums and accretion of discounts ............ 51 132 Gains on sales of investment securities, NET ............................... 0 -63 Deferred Income Tax (benefit) .............................................. 0 0 Increase in accrued interest receivable .................................... -114 -44 Increase/Decrease in other assets .......................................... -455 -165 Increase/Decrease in accrued interest payable .............................. -60 -46 Increase/Decrease in other liabilities ..................................... 218 -37 Net cash provided by operating activities .................................. 1,898 1,982 Cash Flows from investing activities Proceeds from sale of available for sale securities ........................ 1,945 4,514 Proceeds from maturities of available for sale securities .................. 1,883 6,257 Purchase of available for sale securities .................................. -11,004 -19,074 Principal payments on mortgage-backed securities ........................... 1,702 6,548 Net increase in loans ...................................................... -9,998 -1,597 Proceeds from sale of premises and equipment ............................... 4 0 Purchase of premises and equipment ......................................... -111 -160 Proceeds from sale of other real estate .................................... 0 213 Purchase of intangible assets .............................................. 0 0 Net cash used in investing activities ...................................... -15,579 -3,299 Cash flows from financing activities Cash dividends paid ........................................................ -651 -547 Increase in deposits ....................................................... 11,192 5,200 Net Increase/Decrease in long-term borrowing ............................... 5,500 0 Net Increase/Decrease in short-term borrowing .............................. -1,345 -746 Purchase of treasury stock ................................................. -467 -147 Net cash provided by financing activities .................................. 14,229 3,760 Net Increase/Decrease in cash/cash equivalents ............................. 548 2,443 Cash and cash equivalents, beginning of year ............................... 7,469 4,809 Cash and cash equivalents,end of year ...................................... 8,017 7,252 Supplemental disclosures of cash paid Interest Paid .............................................................. 4,871 4,159 Income Taxes Paid .......................................................... 563 478 Non-cash investing and financing activities Transfers from loans to real estate through foreclosure .................... 0 237 Proceeds from sales of foreclosed real estate .............................. 0 0 TOTAL Increase/Decrease in unrealized gain/loss on securities avail for sale 83 2,219 </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The registrant believes that the disclosures made are adequate to make the information presented a fair representation of the Corporation's financial status. In the opinion of management, the accompanying consolidated financial statements for the six-month period ended June 30, 2000 and 1999 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the six-month period ended June 30, 2000, is not necessarily the result to be expected for the full year. 2. RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise SFAS No. 134 During 1999, the Company adopted SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". The Statement amends SFAS 65, "Accounting for Certain Mortgage Banking Activities." Statement 65, as amended, requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. This Statement further amends SFAS 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interest based on its ability and intent to sell or hold those investments. This Statement conforms the subsequent accounting for securities retained after securitization of mortgage loans by a mortgage banking entity with the subsequent accounting for securities retained after the securitization of other types of assets by nonmortgage banking enterprises. This means that such securities can be classified as held-to-maturity if they conform to the requirements of SFAS 115. The adoption of this statement had no impact on the Company's financial position or results of operations.
Accounting Principles Issued and Not Yet Adopted In June 1999 SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of SFAS No. 133" was issued. This statement defers the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Management is in the process of evaluating the impact, if any, this statement will have on the Company's financial position or results of operations. 3. COMMON STOCK On September 15, 1998, the Corporation effected a 5-for-2 stock split to shareholders of record on August 15, 1998. Earnings per share amounts and weighted average shares outstanding have been restated to give effect to the stock split. In connection with the stock split, the Corporation amended its Articles of Incorporation to authorize 12,500,000 shares of $2 par value common stock. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's only subsidiary, Peoples National Bank of Susquehanna County (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of Susquehanna, Wyoming and northern Lackawanna counties in Pennsylvania, and southern Broome County in New York. The Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency.
FINANCIAL CONDITION Cash and Cash Equivalents: At June 30, 2000, cash, federal funds sold, and deposits with other banks totaled $8.017 million; an increase of $548 thousand compared to $57.469 million at June 30, 1999. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that matures within one year. These sources of funds will enable the Corporation to meet cash obligations as they come due. Investments: Investments totaled $97.569 million on June 30, 2000; increasing $5.503 million as compared to June 30, 1999, total of $92.066 million. This is an increase of 6% The total investment portfolio is held as available for sale. This strategy was implemented in 1995 to provide more flexibility in using the investment portfolio for liquidity purposes as well as providing more flexibility in selling when market opportunities occur. Management monitors the earnings performance and effectiveness of the liquidity of the investment portfolio on a monthly basis through the Asset/Liability Committee ("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the investment securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. Borrowings: The Bank utilizes borrowing as a source of funds for its asset/liability management. Advances are available from the FHLB provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from FHLB. Total borrowings at June 30, 2000, were $22.005 million as compared to $17.850 million on June 30, 1999, showing an increase of $4.155 million. Term borrowings are term funds from the FHLB under various notes. The following notes are still outstanding: Issue Date Maturity Interest Rate Amount 11/16/98 11/17/03 4.64% $5,000,000 03/17/00 09/18/00 6.40% $5,000,000 05/02-00 05/03/10 6.37% $5,000,000 05/18/00 05/18/05 7.03% $2,500,000
Loans: The Bank's loan volume has continued to be steady through the second quarter of 2000. Increasing the loan to deposit ratio is a goal of the Bank, but loan quality is a requisite in this effort. Management has continued its efforts to create tighter underwriting standards for both commercial and consumer credit. The Bank's lending consists primarily of retail lending which includes single family residential mortgage and other consumer lending, and also commercial lending primarily to locally owned small businesses. On June 30, 2000, net loans totaled $162.463 million as compared to $152.396 million on June 30, 1999 showing an increase of $10.067 million in the past year. The loan to deposit ratio was 70.8% on June 30, 2000, as compared to 65.4% on June 30, 1999. During the second quarter of 2000 net loans grew $6.606 million as compared to $5.225 million in the first quarter of 2000.. Deposits: Deposits are attracted from within the Bank's primary market area through the offering of various deposit instruments including NOW accounts, money market accounts, savings accounts, certificates of deposit and IRAs. Total deposits at June 30, 2000, were $226.616 million as compared to $215.081 million at June 30, 1999. This is an increase in deposits of $811.535 million or 5.36%. Although we are not the highest payer for deposits in our market area, our deposit growth has remained steady. Deposits for the first quarter 2000 increased $4.572 million or 21.2% and the second quarter increased another $6.63 million, making the cummulative growth over the last six months $11.192 million or 5.19% in the year. Capital: The adequacy of the Corporation's capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Corporation's resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings. As of June 30, 2000, regulatory capital to total assets was 9.77% as compared to 9.51% on June 30, 1999. The Corporation has complied with the standards of capital adequacy mandated by the banking regulator. The bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk asset), 20%, 50% or 100% (highest risk assets) is assigned to each asset on the balance sheet. Capital is being maintained in compliance with risk-based capital guidelines. The Company's Tier 1 capital to total risk weighted assets ratio is 15.87% and the total capital ratio to total risk weighted assets ratio is 16.97%. The Corporation is deemed to be well-capitalized under regulatory standards.
Liquidity and Interest Rate Sensitivity: Liquidity measures an organization's ability to meet cash obligations as they come due. The consolidated statement of cash flows presented in the accompanying financial statements included in Part I of this Form 10-Q provide analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The ALCO addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook. The following table sets forth the Bank's interest rate sensitivity as of June 30, 2000. <TABLE> <CAPTION> INTEREST RATE SENSITIVITY ANALYSIS June 30, 2000 (in thousands) Maturity or Repricing In: RATE SENSITIVE ASSETS 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years <S> <C> <C> <C> <C> <C> Loans ................................ 19,299 10,537 22,593 63,091 46,934 Securities ........................... 26,681 5,176 9,074 38,657 22,274 Federal Funds Sold ................... 1,070 0 0 0 0 Total Rate Sensitive Assets .......... 47,050 15,713 31,667 101,748 69,208 Cummulative Rate Sensitive Assets .... 47,050 62,763 94,430 196,178 265,386 RATE SENSITIVE LIABILITIES Interest Bearing Checking ............ 6,264 0 0 0 12,294 Money Market Deposits ................ 25,153 1,473 0 0 7,363 Regular Savings ...................... 17,982 566 20 1 26,301 CDs and IRAs ......................... 21,845 15,400 24,772 37,878 1,933 Short-term Borrowings ................ 4,505 0 0 0 1,211 Long-term Borrowings ................. 5,000 0 7,500 5,000 0 Total Rate Sensitive Liabilities ..... 80,749 17,439 32,292 42,879 49,102 Cummulative Rate Sensitive Liabilities 80,749 98,188 130,480 173,359 222,461 Period Gap ........................... -33,699 -1,726 -625 58,869 20,106 Cummulative Gap ...................... -33,699 -35,425 -36,050 22,819 42,925 Cummulative RSA to RSL ............... 58.26% 63.92% 72.37% 113.16% 119.29% Cummulative Gap to Total Assets ...... -12.16% -12.78% -13.01% 8.23% 15.49% </TABLE>
The following assumptions have been made in the foregoing model. Non-interest bearing categories are shown to reprice 10% of balances in the "within 3 months" period (all repricing within the first month) and the remaining balances in the last period. NOW accounts and regular Savings accounts also reprice 10% of balances in the "within 3 months" and the remaining balances in the last period. Management can change these rates, but such changes are infrequent and incrementally small. History has shown a strong core deposit relationship in these accounts and little or no run-off if rates change in these products. Repayment for principal on mortgage backed securities are projected by expected cash flows as evidenced by recent history. Repayment of principal for loan categories is projected at expected maturity (amortization) for fixed rate products and the next repricing date for variable rate products. RESULTS OF OPERATIONS Net Interest Income: Net interest income after loan loss provision increased by $309 thousand or 7.27% for the six months ended June 30, 2000, as compared to the same period in 1999. Earning assets increased $16.772 million or 6.80% for June 30, 2000, as compared to December 31, 1999 and $25.425 million from June 1999 to June 2000, a 10.68% increase. Rising interest rates caused deposit costs and borrowing costs to increase and loan investment income has not increased as quickly. The result is a smaller margin. Interest Income: Interest and fees on loans for the six-months and quarter ended June 31, 2000 totaled $6.562 million, reflecting increases of $701 thousand or 11.96% over the comparable periods in 1999. The loan portfolio grew $19.856 million from a total of $140.776 million in June 1999 to $160.632 million in June 2000 which is an increase of 14.10%. Interest on investments for the six-months and the quarter ended June 30, 2000, totaled $2.988 million which reflects increases of $366 thousand or 13.96% over the comparable period in 1999. The investment portfolio has increased by $4.927 million over the June 1999 total of $92.642 million which is an increase of 5.32%. The higher income percentage growth over the portfolio growth is a by-product of a higher interest rate environment.
Interest Expense: Interest expense for the six-months and the quarter ended June 30, 2000, totaled $4.871 million compared to $4.113 million in 1999, reflecting an increase of $758 thousand or 18.43% over the comparable period in 1999. Provision for Loan Loss: The provision for loan loss for the Second quarter ending June 30, 2000 showed no increase from the corresponding period in 1999. Second quarter 2000 charge-offs totaled $77,337 while net charge-offs totaled $51,753 as compared to $145,272 and $125,868 respectively for the same six months period in 1999. Senior management utilizes detailed analysis of the loan portfolio monthly to determine loan loss reserve adequacy. The process considers all "problem loans" including classified, criticized and monitored loans. Prior loan loss history and current market trends, both nationally and locally, are taken into consideration. A watch list of potential problem loans is maintained and monitored monthly. This list is reviewed on a monthly basis by the Board of Directors. The Bank has not had nor presently has any foreign loans. In addition, the Bank does not have any concentrations of credit. Based upon this analysis, senior management has concluded that the allowance of loan loss is adequate. The Bank's loan volume continues to be strong. One of the Bank's main goals is to increase the loan to deposit ratio without jeopardizing loan quality. To reach its goal, management has continued its efforts to create tighter underwriting standards for both commercial and consumer credit. The Bank's lending consists primarily of retail lending which includes single family residential mortgages and other consumer lending and commercial lending primarily to locally owned small businesses.
Other Income: Other income increased $48 thousand when comparing the first six months of 2000 to the first six months of 1999. Service Charge Fee Income is up $99 thousand for the six months. Gains and losses on security sales are $63 thousand less this year when comparing 1999 to 2000. Other operating income is up $12 thousand over the first six months of 1999. T.H.E. commissions on investment and Private Business products are contributing to other income. Other Operating Expenses: Non-Interest expense went up by $179 thousand during the first six months of 2000 as compared to the first six months of 1999. Postage costs have gone up by $9.348 thousand for the first two quarters of 2000 compared to the first two quarters of 1999. Forms supplies have gone up $9.850 thousand over last year. ATM expenses have gone up $13.667 thousand. FDIC insurance costs have gone up $11.497 thousand. Losses on bad checks have increased by $4.671 thousand. Taxes have increased $4.468 thousand over the Second quarter of 1999. Employee salaries, the largest component of non-interest, increased $112.708 thousand for the second quarter of 2000 compared to the second quarter of 1999. The increase is due to the addition of several new positions as well as pay increases in salaries and benefits for employees. Income Tax Provision: The income tax provision was $563 thousand and $748 thousand for the six-month periods ended June 30, 2000 and June 30, 1999 respectively.
Year 2000 Compliance: The Company adopted a Year 2000 policy to address the "Year 2000" issue concerning the inability of certain information systems and automated equipment to properly recognize and process dates containing the Year 2000 and beyond. If not corrected, these systems and equipment could have produced inaccurate or unpredictable results. The Company, similar to most financial service providers, was particularly vulnerable to the potential impact of the Year 2000 issue due to the nature of financial information. In order to address the Year 2000 issue, the company developed and implemented a five-phase compliance plan divided into the following major components: Awareness Assessment Renovation Validation & Testing Implementation Financial institution regulators intensively focused upon Year 2000 exposure, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification was addressed as a key safety and soundness issue in conjunction with regulatory exams. The FFIEC highly prioritized Year 2000 compliance in order to avoid major disruptions to the operations of financial institutions and the country's financial systems when the new century begins. The Bank is subject to supervision by the Comptroller of the Currency, which regularly conducted reviews of the safety and soundness of the Banks operations, including Year 2000. There was no interruption of the company's business due to Year 2000. ANNUAL MEETING The Corporation held its Annual Shareholders' Meeting on April 29, 2000, at 10:30 a.m. at the Montrose Bible Conference. John Hovan, Associate Board Member, was the moderator. John W. Ord spoke about the overall performance of the Bank during the past year. Wayne Whipple spoke on the new sales efforts. He was followed by Debbie Dissinger who told about the operational side of the Bank and Joe Ferretti from Loan Administration. Carl Pease, Jon Ord, and Russell Shurtleff were elected to the Board.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION Except for historical information, this Report may be deemed to contain "forward looking" information. Examples of forward looking information may include, but are not limited to (a) projections of or statements regarding future earnings, interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure and other financial terms, (b) statements of plans and objectives of management or the Board of Directors, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions in the market areas served by the Corporation and the Bank, underlying other statements and statements about the Corporation and the Bank or their respective businesses. Such forward looking information can be identified by the use of forward looking terminology such as "believes," "expects," "may," "intends," "will," "should," "anticipates," or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. No assurance can be given that the future results covered by the forward looking information will be achieved. Such statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward looking information. Important factors that could impact operating results include, but are not limited to, (i) the effects of changing economic conditions in both the market areas served by the Corporation and the Bank and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could affect operations, (v) funding costs, and (vi) other external developments which could materially affect business and operations. Item 3. Quantitative and Qualitative Disclosure About Market Risks The information set forth under the caption "Liquidity and Interest Sensitivity" under Item 2, Part I is incorporated herein by reference.
PART II PEOPLES FINANCIAL SERVICES CORP ITEM 1. LEGAL PROCEEDINGS The nature of the Company's business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS IN SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDER VOTE None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8K July 18, 2000 May 5, 2000 January 27, 2000
(c) Other Events Press Release of Peoples Financial Services Corp. dated July 18, 2000, previously submitted as Exhibit 99.003 Press Release of Peoples Financial Services Corp. dated May 5, 2000, previously submitted as Exhibit 99.002 Press Release of Peoples Financial Services Corp. dated January 27, 2000, previously submitted as Exhibit 99.001 Exhibits required by Item 601 of Regulation S-K that have previously been filed are as follows: (3.1) Articles of Incorporation of Peoples Financial Services Corp. (3.2) By laws of Peoples Financial Service Corp. as amended in the 10-Q filed August 16, 1999 (10.1) Agreement dated January 14, 1997, between John W. Ord and Peoples Financial Services Corp. (10.2) Excess Benefit Plan dated January 14, 1992, for John W. Ord. (10.4) Termination Agreement dated January 1, 1997, between Debra E.Dissinger and Peoples Financial Services Corp. (21) Subsidiaries of Peoples Financial Services Corp. (23) Consent of Independent Auditors 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/ Debra E. Dissinger Debra E. Dissinger Vice President Operations