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 September 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 September 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 September 30, 2000 Contents PART I. FINANCIAL INFORMATION. Page No. -------- Item 1. Financial Statements. Consolidated Statement of Financial Condition as of September 30, 2000 (Unaudited) and December 31, 1999. 4 Consolidated Statement of Income (Unaudited) for the Nine Month Period Ended September 30, 2000 and 1999. 5 Consolidated Statement of Comprehensive Income (Unaudited) for the Nine Month Period Ended September 30, 2000 and 1999. 6 Consolidated Statement of Shareholders' Equity (Unaudited) for the Nine Month Period Ended September 30, 2000 and 1999. 7 Consolidated Statement of Cash Flows (Unaudited) for the Nine Month Period Ended September 30, 2000 and 1999. 8 Notes to Consolidated Statements. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 Item 3. Quantitative and Qualitative Disclosure About Market Risks. 14 PART II. OTHER INFORMATION 15 Item 6. Exhibits and Reports on Form 8-K. 15
PART I Item 1 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION September 30, 2000 and December 31, 1999 (UNAUDITED) (in thousands) <TABLE> <CAPTION> ASSETS: Sep 1999 Sep 2000 Dec 1999 <S> <C> <C> <C> Cash Due from Banks ........................... 2,958 4,869 3,373 Interest Bearing Deposits with Other Banks .... 5,196 2,100 4,096 Federal Funds Sold ............................ 120 945 0 Securities Available for Sale ................. 94,609 96,834 92,066 Loans ......................................... 147,428 167,989 152,396 Less: Unearned Income ........................ -13 -6 -11 Allowance for Loan Loss ....................... -1,750 -1,871 -1,755 Loans, Net .................................... 145,665 166,112 150,630 Bank Premises and Equipment, Net .............. 3,483 3,421 3,455 Accrued Interest Receivable ................... 1,788 2,158 1,996 Other Assets .................................. 5,744 5,373 5,703 TOTAL Assets .................................. 259,563 281,812 261,319 LIABILITIES Deposits, Non-Interest Bearing ................ 26,775 26,837 25,419 Deposits, Interest Bearing .................... 195,296 202,565 190,005 Total Deposits ................................ 222,071 229,402 215,424 Accrued Interest Payable ...................... 672 757 718 Borrowed Funds ................................ 9,620 22,130 17,850 Other Liabilities ............................. 525 563 517 TOTAL Liabilities ............................. 232,888 252,852 234,509 SHAREHOLDERS' EQUITY Common Stock * ................................ 4,455 4,455 4,455 Surplus ....................................... 4,471 4,570 4,512 Treasury Stock at Cost ........................ -1,084 -1,496 -1,050 Undivided Profit .............................. 20,305 22,861 20,980 Accumulated Other Comprehensive Income ........ -1,472 -1,430 -2,087 TOTAL Shareholders' Equity .................... 26,675 28,960 26,810 TOTAL LIABILITIES CAPITAL ..................... 259,563 281,812 261,319 </TABLE> [FN] Common Stock, par value $2 per share, 12,500,000 shares authorized; 2,156,808 and 2,165,441 shares issued and outstanding at September 30, 2000 and 1999 respectively. </FN> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (in thousands) <TABLE> <CAPTION> 9 Months Ended 3 Months Ended 30-Sep 30-Sep INTEREST INCOME: 2000 1999 2000 1999 <S> <C> <C> <C> <C> Interest and Fees on Loans ................... 10,105 8,864 3,543 2,948 Interest Investments, Taxable ................ 3,295 2,810 1,199 902 Tax Exempt ........................ 1,107 1,090 318 359 Dividends ......................... 66 59 23 19 Interest on Federal Funds Sold ............... 44 112 24 46 Interest on Deposits of Other Banks .......... 73 9 33 1 TOTAL Interest Income ........................ 14,690 12,944 5,140 4,275 Interest on Deposits ......................... 6,903 5,936 2,562 1,964 Interest on Borrowed Funds ................... 722 299 192 81 Interest Expense ............................. 7,625 6,235 2,754 2,045 Net Interest Income .......................... 7,065 6,709 2,386 2,230 Provision for Loan Losses .................... 180 180 60 60 Net Interest Income, after Loan Loss Provision 6,885 6,529 2,326 2,170 OTHER INCOME: Service Charges and Fees ..................... 883 751 295 245 Gains on Security Sales ...................... 12 104 12 57 Other Operating Income ....................... 152 150 67 42 TOTAL Other Income ........................... 1,047 1,005 374 344 OTHER EXPENSES: Salaries and Benefits ........................ 2,049 1,841 641 652 Occupancy Expenses ........................... 251 232 84 76 Furniture and Equipment Expense .............. 273 271 93 91 FDIC Insurance and Assessments ............... 86 69 29 23 Professional Fees and Outside Services ....... 150 141 54 51 Computer Services and Supplies ............... 264 235 100 82 Taxes, Other Than Payroll and Income ......... 192 182 63 62 Other Operating Expenses ..................... 918 896 291 314 Total Non-Interest Expense ................... 4,183 3,867 1,355 1,351 Income Before Income Taxes ................... 3,749 3,667 1,345 1,163 Provision for Income Taxes ................... 871 855 308 266 Net Income ................................... 2,878 2,812 1,037 897 Net Income Per Share, Basic .................. 1.320 1.300 Net Income Per Share, Diluted ................ 1.320 1.300 </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> 9 Months 3 Months Ended Ended Sept Sept 2000 1999 2000 1999 <S> <C> <C> <C> <C> Net Income .................................. 2,878 2,812 1,037 1,064 Other Comp Income (loss) before tax Unrealized Holding Gains/Losses on Securities 1,007 -3,082 924 -800 Less: Reclassification Adjustment ........... 12 104 12 167 Other Comp Income (loss) before tax ......... 995 -2,978 912 -759 Federal Income Tax Expense (benefit) ........ -338 1,013 -310 259 Other Comp Income (loss) before tax ......... 657 -1,965 602 -500 TOTAL Comp Income ........................... 3,535 847 1,639 564 </TABLE> See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHE ENDED SEPTEMBER 30, 2000 AND 1999 (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 nine months ended September 30, 1999 .. 0 0 2,812 0 0 2,812 Cash Dividends Paid, 1999 ..................................... 0 0 -829 0 0 -829 Treasury Stock Purchase ....................................... 0 16 0 0 -336 -320 Change in unrealized gain/loss on securities available for sale net of deferred income taxes ................................. 0 0 0 -2,034 0 -2,034 Balance, September 30, 1999 .................................. 4,455 4,471 20,305 -1,472 -1,084 26,675 Balance, December 31, 1999 ................................... 4,455 4,512 20,980 -2,087 -1,050 26,810 Net Income 2000 ............................................... 0 0 2,878 0 0 2,878 Cash Dividends Paid, 2000 ..................................... 0 0 -997 0 0 -997 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 0 657 657 Balance, Spetember 30, 2000 .................................. 4,455 4,570 22,861 -1,430 -1,496 28,960 </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> Sept Sept 2000 1999 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income ..................................................................... 2,878 2,812 Adjustments:Depreciation and amortization ...................................... 454 466 Provision for Loan Losses ................................................. 180 180 Gain/Loss on sale of equipment ............................................ -4 0 Gain/loss on sale of other real estate .................................... 0 24 Amortization of securities' premiums and accretion of discounts ................ 66 180 Gains on sales of investment securities, NET ................................... -12 -104 Deferred Income Tax (benefit) .................................................. 0 0 Increase in accrued interest receivable ........................................ -162 -7 Increase/Decrease in other assets .............................................. -714 -547 Increase/Decrease in accrued interest payable .................................. 39 -31 Increase/Decrease in other liabilities ......................................... 8 -16 Net cash provided by operating activities ...................................... 2,733 2,957 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available for sale securities ............................ 7,845 9,909 Proceeds from maturities of available for sale securities ...................... 2,988 8,942 Purchase of available for sale securities ...................................... -18,197 -31,573 Principal payments on mortgage-backed securities ............................... 2,522 8,130 Purchase of Fed Funds Sold ..................................................... 945 -120 Net increase in loans .......................................................... -15,482 -6,546 Proceeds from sale of premises and equipment ................................... 4 0 Purchase of premises and equipment ............................................. -161 -232 Proceeds from sale of other real estate ........................................ 8 249 Purchase of intangible assets .................................................. 0 0 Net cash used in investing activities .......................................... -19,528 -11,241 CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid ............................................................ -996 -829 Increase in deposits ........................................................... 13,978 12,190 Net Increase/Decrease in long-term borrowing ................................... 5,000 0 Net Increase/Decrease in short-term borrowing .................................. -1,220 588 Purchase of treasury stock ..................................................... -467 -320 Net cash provided by financing activities ...................................... 16,295 11,629 Net Increase/Decrease in cash/cash equivalents ................................. -500 3,345 Cash and cash equivalents, beginning of year ................................... 7,469 4,809 Cash and cash equivalents,end of year .......................................... 6,969 8,154 SUPPLEMENTAL DISCLOSURES OF CASH PAID Interest Paid .................................................................. 7,625 6,266 Income Taxes Paid .............................................................. 874 858 NON-CASH INVESTING AND FINANCING ACTIVITIES Transfers from loans to real estate through foreclosure ........................ 44 237 Proceeds from sales of foreclosed real estate .................................. 8 0 Total Increase/Decrease in unrealized gain/loss on securities available for sale 995 -3,082 </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 nine-month period ended September 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 nine-month period ended September 30, 2000, is not necessarily the result to be expected for the full year. 2. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 137 During 2000, the Company adopted "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of SFAS No. 133". 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. The adoption of this statement had no impact on the Company's financial position or results of operations. SFAS No. 140 In September of 2000, SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" - a replacement of FASB Statement No. 125, was issued. This Statement replaces FASB No. 125, " Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishements of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitization and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. 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 September 30, 2000, cash, federal funds sold, and deposits with other banks totaled $7.914 million; a decrease of $360 thousand compared to $8.274 million at September 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 $96.834 million on September 30, 2000;increasing $2.225 million as compared to September 30, 1999, total of $94.609 million. This is an increase of 2.35% 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 September 30, 2000, were $22.130 million as compared to $9.620 million on September 30, 1999, showing an increase of $12.510 million. The large increase over last year is due to the Management's decision to use borrowed funds as opposed to customer deposits. This is due to the current rising rate environment and the competitive pricing strategies for customer deposits in the marketplace. Borrowed funds totaled $17.850 million as of December 31, 1999, and $22.005 million as of June 30, 2000. Term borrowings are term funds from the FHLB under various notes. The following notes are still outstanding as of September 30, 2000: <TABLE> <CAPTION> Issue Date Maturity Interest Rate Amount <S> <C> <C> <C> 11/16/98 11/17/03 4.64% $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 09/22/00 09/22/00 6.10% $5,000,000 </TABLE>
Loans: The Bank's loan volume has continued to be steady through the third 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 September 30, 2000, net loans totaled $166.112 million as compared to $145.665 million on September 30, 1999 showing an increase of $20.447 million in the past year. The loan to deposit ratio was 73.22% on September 30, 2000, as compared to 66.37% on September 30, 1999. During the third quarter of 2000 net loans grew $5.480 million as compared to $4.775 million in growth during the third 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 September 30, 2000, were $229.402 million as compared to $222.071 million at September 30, 1999. This is an increase in deposits of $7.331 million or 3.3%. Although our strategy has not been keyed on the highest payer for deposits in our market area, our deposit growth has remained steady. Deposits for the second quarter 2000 increased $6.630 million or 3.0% and the third quarter increased another $2.786 million. 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 September 30, 2000, regulatory capital to total assets was 9.75% as compared to 9.64% on September 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 15.67% and the total capital ratio to total risk weighted assets ratio is 16.75%. 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 September 30, 2000. INTEREST RATE SENSITIVITY ANALYSIS September 30, 2000 (in thousands) <TABLE> <CAPTION> Maturity or Repricing In: 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years <S> <C> <C> <C> <C> <C> RATE SENSITIVE ASSETS Loans ................................ 18,262 8,402 27,069 65,804 48,446 Securities ........................... 20,451 9,787 10,537 36,349 21,810 Federal Funds Sold ................... 945 0 0 0 0 Total Rate Sensitive Assets .......... 39,658 18,189 37,606 102,153 70,256 Cummulative Rate Sensitive Assets .... 39,658 57,847 95,453 197,606 267,862 RATE SENSITIVE LIABILITIES Interest Bearing Checking ............ 8,821 0 0 0 12,352 Money Market Deposits ................ 24,848 1,377 0 0 6,884 Regular Savings ...................... 21,424 21 26 1 25,325 CDs and IRAs ......................... 18,735 14,054 29,628 37,191 1,879 Short-term Borrowings ................ 4,630 0 0 0 0 Long-term Borrowings ................. 5,000 0 7,500 5,000 0 Total Rate Sensitive Liabilities ..... 83,458 15,452 37,154 42,192 46,440 Cummulative Rate Sensitive Liabilities 83,458 98,910 136,064 178,256 224,696 Period Gap ........................... -43,800 2,737 452 59,961 23,816 Cummulative Gap ...................... -43,800 -41,063 -40,611 19,350 43,166 Cummulative RSA to RSL ............... 47.52% 58.48% 70.15% 110.86% 119.21% Cummulative Gap to Total Assets ...... -15.54% -14.57% -14.41% 6.87% 15.32% </TABLE> The following assumptions are used for our 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 $356 thousand or 5.3% for the nine months ended September 30, 2000, as compared to the same period in 1999. Earning assets increased $19.199 million or 7.78% for September 30, 2000, as compared to December 31, 1999, and $20.401 million from September 1999 to September 2000, an 8.31% increase. Interest earning liabilities increased $19.779 million or 9.6% in the first nine months of 2000 as compared to the first nine months of 1999. 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 nine-months and quarter ended September 30, 2000 totaled $10.105 million, reflecting increases of $1.241 thousand or 14.0% over the comparable periods in 1999. The loan portfolio grew $20.561 million from a total of $147.428 million in September 1999 to $167.989 million in September 2000 which is an increase of 13.95%. Interest on investments for the nine-months and the quarter ended September 30, 2000, totaled $4.585 million which reflects increases of $505 thousand or 12.38% over the comparable period in 1999. The investment portfolio has increased by $2.225 million over the September 1999 total of $94.609 million which is an increase of 2.35%. 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 nine-months and the quarter ended September 30, 2000, totaled $7.625 million compared to $6.235 million in 1999, reflecting an increase of $1.390 million or 22.29% over the comparable period in 1999. Provision for Loan Loss: The provision for loan loss for the third quarter ending September 30, 2000 showed no increase from the corresponding period in 1999. Third quarter 2000 charge-offs totaled $98,999 while net charge-offs totaled $64,932 as compared to $179,799 and $142,631 respectively for the same nine 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 $42 thousand when comparing the first nine months of 2000 to the first nine months of 1999. Service Charges and Fee Income is up $132 thousand for the nine months. Gains and losses on security sales are $92 thousand less this year when comparing 1999 to 2000. Other operating income is up $2 thousand over the first nine months of 1999.
Other Operating Expenses: Non-Interest expense went up by $316 thousand during the first nine months of 2000 as compared to the first nine months of 1999. Legal and Professional Fees have gone up by $9 thousand for the first three quarters of 2000 as compared to the first three quarters of 1999. Forms and supplies have gone up $5 thousand over last year. ATM expenses have gone up $24 thousand. FDIC insurance costs have gone up $18 thousand. Losses on bad checks have increased by $6 thousand. Taxes have increased $5 thousand over the third quarter of 1999. Employee salaries, the largest component of non-interest, increased $204 thousand for the third quarter of 2000 compared to the third quarter of 1999. The increase is due to additions in staff, pay increases, and increases in health care benefits. Income Tax Provision: The income tax provision was $871 thousand and $855 thousand for the nine-month periods ended September 30, 2000 and September 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 Office of the Comptroller of the Currency, which regularly conducted reviews of the safety and soundness of the Banks operations, including Year 2000. There was no interruption of the company's business due to Year 2000. CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION Except for historical 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