UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549
FORM 10-Q
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2003, or( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ______ to ______
Commission file number 0-23863
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____
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ____ No X
PEOPLES FINANCIAL SERVICES CORP.
For the Quarter Ended March 31, 2003
TABLE OF CONTENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Peoples Financial Services Corp. (the “Corporation” or the “Company”) and its wholly owned subsidiary, Peoples National Bank (the “Bank”). All material intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share, as adjusted for the stock split declared April 1, 2003:
3. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects for the three months and six months ended June 30, 2003 and 2002 are as follows:
4. STOCK OPTION PLAN
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” Accordingly, no compensation costs have been recognized for options granted in 2003 and 2002. Had compensation costs for stock options granted been determined based on the fair value at the grant dates for awards under the plan consistent with the provisions of SFAS No. 123, the Company’s net income and earnings per share for the six months and three months ended June 30, 2003 and 2002, would have been reduced to the proforma amounts indicated below:
5. NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This Interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under certain specified guarantees. FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies.” In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability or equity security of the guaranteed party, which would include standby letters of credit. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this Interpretation, including, among others, guarantees related to commercial letters of credit and loan commitments. The disclosure requirements of FIN 45 require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The accounting recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did not have a significant impact on the Company’s financial condition or results of operations.
Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company had $860,000 of standby letters of credit as of June 30, 2003. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.
The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral supporting these letters of credit as deemed necessary. The maximum undiscounted exposure related to these commitments at June 30, 2003 was $860,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $248,000. The current amount of the liability as of June 30, 2003 for guarantees under standby letters of credit issued after December 31, 2002 is not material.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". This interpretation provides new guidance for the consolidation of variable interest entities (VIEs) and requires such entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved. The interpretation also adds disclosure requirements for investors that are involved with unconsolidated VIEs. The disclosure requirements apply to all financial statements issued after January 31, 2003. The consolidation requirements apply immediately to VIEs created after January 31, 2003 and are effective for the first fiscal year or interim period beginning after June 15, 2003 for VIEs acquired before February 1, 2003. The adoption of this interpretation did not have a significant impact on the Company’s financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of these instruments were previously classified as equity. This Statement was effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective beginning July 1, 2003. The adoption of this standard did not have a significant impact on the Company’s financial condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 provides financial services to individuals and businesses within the Bank’s primary market area made up of Susquehanna, Wyoming and northern Lackawanna counties in Pennsylvania, and southern Broome County in New York. The Bank also operates a branch in Conklin, 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.
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.
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by Management. Additional information is contained on page 16 of this report for the provision and allowance for loan losses.
OVERVIEW
Net income for the quarter increased 32.9% to $ 2.572 million as compared to $ 1.936 million for the second quarter of 2002. Diluted earnings per share increased 32.8% to $ .81 per share for the second quarter of 2003 from $ .61 per share in the second quarter of 2002, as adjusted for the stock split declared April 1, 2003. At June 30, 2003 the Company had total assets of $363.631 million, total loans of $227.875 million, and total deposits of $271.183 million.
FINANCIAL CONDITION
Cash and Cash Equivalents:
At June 30, 2003 cash, federal funds sold, and deposits with other banks totaled $16.491 million as compared to $6.340 million on December 31, 2002. The increase over the six months of 2003, has been due to the increase in Federal Funds Sold which had a balance of $ 0 at the end of 2002 and now has a balance of $ 7.150 million.
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. The continuous decline in interest rates continues to increase liquidity. The current sources of funds will enable the Corporation to meet all its cash obligations as they come due.
Investments:
Investments totaled $106.599 million on June 30, 2003, increasing by $627 thousand over the December 31, 2002 total of $105.972 million. As loan demand has slowed in the second quarter of 2003, the investment portfolio and Fed Funds have utilized the increase in deposits in that same time period.
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.
Investments available for sale are accounted for at fair value with unrealized gains or losses, net of deferred income taxes, reported as a separate component of stockholders’ equity. The carrying value of investments as of June 30, 2003 included an unrealized gain of $3.929 million reflected as accumulated other comprehensive income of $2.593 million in shareholders’ equity, net of deferred income taxes of $1.336 million. This compares to an unrealized gain of $3.176 million at December 31, 2002 reflected as accumulated other comprehensive income of $2.096 million, net of deferred income taxes of $1.080 million.
Management monitors the earnings performance and effectiveness of liquidity of the investment portfolio on a monthly basis through the Asset/Liability Committee (“ALCO”). 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.
Loans:
Net loans increased $6.589 million or 3.01% to $225.847 million as of June 30, 2003 from $219.258 million as of December 31, 2002. Of the loan growth experienced in the first half of 2003, the most significant growth occurred in commercial loans. Commercial loans increased $8.354 million or 8.80% to $103.288 million as of June 30, 2003 compared to $94.934 million as of December 31, 2002.
Increasing the loan to deposit ratio is a goal of the Bank, but loan quality is always considered in this effort. Management has continued its efforts to create good underwriting standards for both commercial and consumer credit. The Bank’s lending continues to consist primarily of retail lending which includes single family residential mortgages and other consumer lending. Most commercial lending is done primarily with locally owned small businesses.
Other Assets:
Other Assets decreased $990 thousand or 10.67% to $8.286 million as of June 30, 2003 from $9.276 million as of December 31, 2002. The largest portion of the decrease in other assets was due to the receipt of $1.187 million due to the bank in partial settlement of the fraud case against Robert E. Bentley, his d/b/a Entrust Group and Bentley Financial Services, Inc. This settlement directly reduced other assets.
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 IRA’s. During the six-month period ended June 30, 2003, total deposits increased by $11.996 million or 4.63% to $271.183 million.
Borrowings:
The Bank utilizes borrowings 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 the FHLB.
Total short-term borrowings at June 30, 2003 were $7.981 million as compared to $13.113 million as of December 31, 2002 a decrease of $5.132 million or 39.14%. Long-term borrowings were $42.398 million as of June 30, 2003 compared to $34.744 million as of December 31, 2002 an increase of $7.654 million or 22.03%. The decrease in short-term borrowings was directly related to the increase in long-term borrowings as the bank moved to lock in at historically low long-term borrowing rates.
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, 2003 regulatory capital to total assets was 9.79 % as compared to the same, 9.91% on December 31, 2002. The Company repurchases its stock in the open market or from individuals as warranted to leverage the capital account and to provide stock for a dividend reinvestment and stock purchase plan. In the six months ended June 30, 2003 the Company purchased 1,586 shares for the treasury at a total cost of $34,000.
The Corporation has complied with the standards of capital adequacy mandated by the banking regulators. 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 the 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 risk weighted asset ratio was 14.28 % and the total capital ratio to risk weighted assets ratio was 15.11 % at June 30, 2003. 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 10Q 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 Company’s Asset/Liability Committee (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 Company’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans and unfunded commitments of existing loans and letters of credit made under the same standards as on-balance sheet instruments. Unused commitments on June 30, 2003 totaled $26.873 million, which consisted of $15.716 million in unfunded commitments of existing loans, $10.297 million to grant new loans and $860 thousand in letters of credit. Due to fixed maturity dates and specified conditions within these instruments, many will expire without being drawn upon. Management believes that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to the Company.
The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates.
The Company’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company’s asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Company’s Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The guidelines established by ALCO are reviewed by the Company’s Board of Directors.
The tools used to monitor sensitivity are the Statement of Interest Sensitivity Gap and the interest rate shock analysis. The Bank uses a software model to measure and to keep track. In addition, an outside source does a quarterly analysis to make sure our internal analysis is current and correct. The statement of Interest Sensitivity Gap is a good assessment of current position and is a very useful tool for the ALCO in performing its job. This report is monitored in an effort to “match” maturities or repricing opportunities of assets and liabilities in order to attain the maximum interest within risk tolerance policy guidelines. The statement does, although, have inherent limitations in that certain assets and liabilities may react to changes in interest rates in different ways with some categories reacting in advance of changes and some lagging behind the changes. In addition, there are estimates used in determining the actual propensity to change of certain items such as deposits without maturities.
The following table sets forth the Company’s interest sensitivity analysis as of June 30, 2003:
RESULTS OF OPERATIONS
Net Interest Income:
For the three months ended June 30, 2003 total interest income decreased by $208 thousand, or 4.07%, to $4.906 million as compared to $5.114 million for the three months ended June 30, 2002. This decrease was primarily due to the continued decrease in yield on earnings assets, which decreased to 5.81% as compared to 6.66% for the second quarter of 2002. Average earning assets increased to $338.958 million for the three months ended June 30, 2003 as compared to $307.965 million for the three months ended June 30, 2002.
For the six months ended June 30, 2003 total interest income decreased by $264 thousand, or 2.60% to $9.883 million as compared to $10.147 million for the six months ended June 30, 2002. This was also due to the decrease in yield on earning assets, which decreased to 5.97% for the first half of 2003 as compared to 6.79% for the first half of 2002. Average earning assets increased to $333.894 million for the six months ended June 30, 2003 as compared to $301.170 million for the six months ended June 30, 2002.
Total interest expense decreased by $213 thousand, or 9.88 % to $1.943 million for the three months ended June 30, 2003 from $2.156 million for the three months ended June 30, 2002. This decrease was attributable to the decrease in the cost of funds, which decreased to 2.76 % as compared to 3.35 % for the second quarter of 2002. Average interest-bearing liabilities increased to $282.752 million for the three months ended June 30, 2003 as compared to $257.788 million for the three months ended June 30, 2002.
For the six months ended June 30, 2003 total interest expense decreased by $413 thousand, or 9.62% to $3.882 million as compared to $4.295 million for the six months ended June 30, 2002. Again, the decrease in the cost of funds to 2.80% for the first half of 2003 as compared to 3.43% for the first half of 2002 caused this decrease. Average interest bearing liabilities increased to $279.293 million for the first half of 2003 compared to $252.221 million for the first half of 2002.
Net interest income decreased by $5 thousand, or .17 %, to $2.963 million for the three months ended June 30, 2003 from $2.958 million for the three months ended June 30, 2002. The Bank’s net interest spread decreased to 3.05% for the second quarter of 2003 from 3.31 % for the second quarter of 2002. The net interest margin decreased to 3.51 % from 3.85 % for the three-month periods ended June 30, 2003 and 2002 respectively.
For the six months ended June 30, 2003 net interest income increased $149 thousand, or 2.55% to $6.001 million as compared to $5.852 million for the six months ended June 30, 2002. This increase is due to an increase in the volume of average earning assets with which offset a decrease in the net interest spread to 3.17% for the six months ended June 30, 2003 compared to 3.36% for the six months ended June 30, 2002. The net interest margin decreased to 3.62% from 3.92% for the six month periods ended June 30, 2003 and 2002, respectively.
Below are the tables which set forth Average balances and corresponding yields for both the three month and six month periods ended June 30, 2003.
Provision for Loan Loss:
For the three month period ended June 30, 2003 the provision for Loan Loss increased by $15,000 or 33.33% to $60,000 as compared to $45,000 for the three months ended June 30, 2002.
The provision for loan loss for the six months ended June 30, 2003 was $120,000 an increase of $60,000, or 100.0% from $60,000 for the same period in 2002. Loan growth, particularly growth in commercial loans, required the increased provisions. 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 strong 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.
In the three-month period ended June 30, 2003, charge-offs totaled $23,000 while net charge-offs totaled $16,000 as compared to $25,000 and $20,000 respectively for the same three-month period in 2002.
Charge-offs totaled $42,000 for the six month period ended June 30, 2003 while net charge-offs totaled $27,000 as compared to charge-offs of $43,000 and net charge-offs of $26,000 for the comparable period in 2002.
Monthly, senior management uses a detailed analysis of the loan portfolio 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 on a monthly basis by the board of directors. The Bank has not had nor presently has any foreign loans. Based upon this analysis, senior management has concluded that the allowance of loan loss is adequate.
Other Income:
Other income was $627 thousand for the three-months ended June 30, 2003, an increase of $920 thousand, or 313.99% over the comparable period in 2002. This is due to the inclusion of the impairment charge of $850,000 on a Worldcom bond in the 2002 figures.
Other income was $1.160 million for the six month period ended June 30, 2003, an increase of $1.039 million, or 858.68% as compared to $121 thousand for the same six month period in 2002. Again, this difference between the two periods is primarily due to the security impairment previously discussed.
Service charges and fees increased 13.59%, or $39 thousand, to $326 thousand for the three month period ended June 30, 2003, from $287 thousand in the same period in 2002.
Service charges and fees increased 13.82%, or $77 thousand to $634 thousand for the six month period ended June 30, 2003 from $557 thousand for the six month period ended June 30, 2002.
Gains on security sales were $139 thousand for the quarter ended June 30, 2003 compared $97 thousand for the comparable period in 2002, an increase of $42 thousand, or 43.30%.
Gains on security sales increased 139.02%, or $114 thousand to $196 thousand for the six month period ended June 30, 2003 as compared to $82 thousand for the same period in 2002. Increases in security gains in 2003 have been the result of the bank selling securities which would be called in the near term at par while those securities still had gains in them.
Other Operating Expenses:
Total other expenses increased 3.47%, or $61thousand, to $1.819 million during the three month period ended June 30, 2003 compared to $1.758 million for the comparable period in 2002.
Total other expenses increased 3.77%, or $130 thousand to $3.582 million for the six month period ended June 30, 2003 as compared to total other expenses of $3.452 million for the six month period ended June 30, 2002.
Salaries and benefits increased 10.18%, or $87 thousand to $942 thousand for the three month period ended June 30, 2003 compared to $855 thousand for the same period in 2002 due to normal pay increases and increased staff.
Salaries and benefits increased 16.09%, or $256 thousand to $1.847 million for the six month period ended June 30, 2003 as compared to $1.591 million for the comparable period in 2002. The full-time equivalent number of employees was 98 as of June 30, 2003 compared to 96 as of June 30, 2002 due to the addition of branch staff for the first half of 2003, when compared to the same period in 2002.
Occupancy expenses increased 5.94%, or $6 thousand, to $107 thousand for the three month period ended June 30, 2003 compared to $101 thousand for the same period in 2002. Occupancy expenses increased 13.85%, or $27 thousand to $222 thousand for the six month period ended June 30, 2003 as compared to $195 thousand for the same period in 2002. Furniture and fixtures expense decreased 7.29%, or $7 thousand to $89 thousand for the second quarter of 2003 compared to $96 thousand for the second quarter of 2002. Furniture and fixtures expense decreased 17.13%, or $31 thousand to $150 thousand for the six month period ended June 30, 2003 as compared to $181 thousand for the six month period ended June 30, 2002. This decrease was due to the decrease of depreciation expense during the first half of 2003 compared to the same period in 2002.
All other operating expenses decreased $25 thousand, or 3.54%, to $681 thousand for the three months ended June 30, 2003 compared to $706 thousand for the same period in 2002. All other operating expense categories decreased $122 thousand, or 8.22% to $1.363 million for the six months ended June 30, 2003. This compares to $1.485 million for the comparable period in 2002. The decrease was aided by the $158 thousand provision for possible losses on the alleged fraud on the sale of securities by Bentley Financial Services, Inc., recorded in the first half of 2002. This charge against income was a non-recurring event.
Income Tax Provision:
The Corporation recorded an income tax provision of $433 thousand, or 25.3% of income, and $133 thousand, or 15.4% of income, for the quarters ended June 30, 2003 and 2002 respectively.
The income tax provision recorded was $887 thousand, or 25.6% of income, and $525 thousand, or 21.3% of income, for the six month periods ended June 30, 2003 and 2002 respectively.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Fed Funds rate was lowered by 25 basis points on June 25, 2003. It remains to be seen how this will effect the net interest income and net income position of the bank. As of June 30, 2003, the Bank is currently showing sensitivity to downward rate shift scenarios. While this remains in question, the results of the latest financial simulation follow. The simulation shows a possible increase in net interest income of 2.04% or $247,000, in a +200 basis point rate shock scenario over a one-year period. A decrease of 2.93 % or $355,000 is shown in the model at a –200 basis point rate shock. The net interest income risk position of the Bank remains within the guidelines established by the Bank’s asset/liability policy. The Bank continuously monitors its rate sensitivity.
Equity value at risk is monitored regularly and is also within established policy limits. Please refer to the Annual Report on Form 10-K filed with the Securities and Exchange Commission for December 31, 2002, for further discussion of this matter.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of June 30, 2003, the chief executive and chief financial officers of the company concluded that the company’s disclosure controls and procedures were adequate.
(b) Changes in internal controls.
The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the evaluation of the controls for the quarter ended June 30, 2003 by the chief executive and chief financial officers.
PART II
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
ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDER VOTE
At the Annual Meeting of Stockholders held on April 26, 2003, Chairman Shurtleff reported that the Judge of Election and Proxy had completed the voting tabulations. On the basis of that report, Chairman Shurtleff declared that John W. Ord and Russell D. Shurtleff were elected for a three-year term and Beard Miller Company, LLP, had been ratified as the independent auditors for the year-ending December 31, 2003.
The following outlines the items voted on at the meeting as well as the votes cast for, against, and non-vote:
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
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
EXHIBIT INDEX
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OR PRINCIPAL FINANCIAL OFFICER PURSUANT TO 81 U.S.C. SECTION 1350
I, John W. Ord, certify that:
Date: August 13, 2003
Exhibit 31.2
I, Debra E. Dissinger, certify that:
Exhibit 32.1
In connection with the Quarterly Report on Form 10-Q of Peoples Financial Services Corp. (the “Company”) for the period ended June 30, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, John W. Ord, Chief Executive Officer and President, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
Exhibit 32.2
In connection with the Quarterly Report on Form 10-Q of Peoples Financial Services Corp. (the “Company”) for the period ended June 30, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, Debra E. Dissinger, Executive Vice President, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that: