-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HZzoaQI7LHG225UWhcilUXJBUFnujsPn0lz/lh1TQpcoLUY/Yx1RUS0epAR878ts AWzo8ICvaQd13GoYPM/FXg== 0000903594-98-000174.txt : 19981203 0000903594-98-000174.hdr.sgml : 19981203 ACCESSION NUMBER: 0000903594-98-000174 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES FINANCIAL SERVICES CORP/ CENTRAL INDEX KEY: 0001056943 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 232391852 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-23863 FILM NUMBER: 98762581 BUSINESS ADDRESS: STREET 1: 0 STREET 2: 50 MAIN STREET CITY: HALSTEAD STATE: PA ZIP: 18822 BUSINESS PHONE: 7178752175 MAIL ADDRESS: STREET 1: 50 MAIN STREET STREET 2: 50 MAIN STREET CITY: HALSTEAD STATE: PA ZIP: 18822 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A (x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from . No. 0-23863 (Commission File Number) PEOPLES FINANCIAL SERVICES CORP. (Exact Name of Registrant as Specified in its Charter) Pennsylvania 23-2931852 (State of Incorporation) (IRS Employer ID Number) 50 Main Street Hallstead, PA 18822 (Address of principal executive offices) (Zip Code) (717) 879-2175 (Registrant's Telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Number of shares outstanding as of September 30, 1998 COMMON STOCK ($2.00 Par Value) 2,180,436 (Title of Class) (Outstanding Shares) PAGE 1 PEOPLES FINANCIAL SERVICES CORP. FORM 10-Q/A For the Quarter Ended September 30, 1998 Contents Page No. PART I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Statement of Financial Condition as of September 30, 1998 (Unaudited) and December 31, 1997. 3 Consolidated Statement of Income (Unaudited) for the Nine and Three Month Periods Ended September 30, 1998 and 1997. 4 Consolidated Statement of Comprehensive Income (Unaudited) for the Nine and Three Month Periods Ended September 30, 1998 and 1997. 5 Consolidated Statement of Shareholders' Equity (Unaudited) for the Nine Month Periods Ended September 30, 1998 and 1997. 6 Consolidated Statement of Cash Flows (Unaudited) for the Nine Month Periods Ended September 30, 1998 and 1997. 7 Notes to Consolidated Financial Statements. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 Item 3. Quantitative and Qualitative Disclosure 18 About Market Risks PART II OTHER INFORMATION 19 Item 6. Exhibits and Reports on Form 8-K. 19 PAGE 2 PART I Item 1 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION September 30, 1998 and December 31, 1997 (in thousands)
September 30, December 31, 1998 1997 (unaudited) ASSETS Cash and due from banks $ 2,279 $ 2,402 Interest-bearing deposits in other banks 1,853 3,147 Federal Funds Sold 0 0 Investment securities available for sale 88,770 88,149 Loans 138,118 126,853 Less: Unearned income (43) (67) Allowance for loan losses (1,711) (1,676) Net loans 136,364 125,110 Premises and equipment 3,558 3,756 Accrued interest receivable 1,665 1,777 Other assets 4,440 4,379 Total assets $238,929 $228,720 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 22,366 $ 20,104 Interest bearing 182,336 173,488 Total deposits 204,702 193,592 Short-term borrowings 6,331 9,275 Accrued interest payable 663 663 Other liabilities 540 546 Total liabilities 212,236 204,076 Stockholders' equity: Common stock, par value $2 per share, 12,500,000 shares authorized; 2,180,436 and 2,185,825 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively 4,455 4,455 Surplus 4,455 4,455 Undivided profits 17,623 15,912 Unrealized gain (loss) on securities available for sale, net of applicable deferred income taxes 834 371 Less: treasury stock, at cost (47,064 in 1998 and 41,675 in 1997) (674) (549) Total stockholders' equity 26,693 24,644 Total liabilities and stockholders' equity $238,929 $228,720
See notes to financial statements PAGE 3 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (in thousands)
Nine Months Ended Three Months Ended September 30 September 30 1998 1997 1998 1997 (unaudited) (unaudited) Interest income: Interest and fees on loans $8,464 $7,279 $2,897 $2,556 Interest on investments: Taxable 2,553 3,222 840 1,119 Tax exempt 1,109 918 373 354 Dividends 39 46 16 14 Interest on deposits in other banks 40 92 14 7 Interest on federal funds sold 41 17 7 13 Total interest income 12,246 11,574 4,147 4,063 Interest expense: Interest on deposits 5,916 5,723 2,036 2,026 Interest on borrowed funds 202 117 60 22 Total interest expense 6,118 5,840 2,096 2,048 Net interest income 6,128 5,734 2,051 2,015 Provision for loan losses 130 90 55 30 Net interest after provision for loan losses 5,998 5,644 1,996 1,985 Other income: Service charges and customer service fees 759 628 270 239 Investment securities gains, net 48 151 21 24 Other income 53 15 20 6 Total other income 860 794 311 269 Other expenses: Salaries and employee benefits 1,759 1,730 602 610 Occupancy expense, net 232 227 75 97 Equipment expense 320 238 110 82 FDIC insurance and assessments 66 60 22 22 Professional fees and outside services 168 126 52 47 Computer service and supplies 196 299 72 151 Taxes, other than payroll and income 166 151 56 50 Other operating expenses 871 894 306 315 Total other expense 3,778 3,725 1,295 1,374 Income before taxes 3,080 2,713 1,012 880 Provision for income tax 635 576 202 209 Net income $2,445 $2,137 $ 810 $ 671 Net income per share (Basic & Diluted) $ 1.12 $ 0.98 $ 0.37 $ 0.31
See notes to financial statements PAGE 4 PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands)
Nine Months Ended Three Months Ended September 30, September 30, ---------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ----------- (unaudited) (unaudited) Net Income $2,445 $2,137 $ 810 $ 671 Other Comprehensive Income: Unrealized gains/loss on available for sale securities 750 878 518 560 Less: reclassification adjustment for loss included in net income <48> <66> <21> 61 Other Comprehensive Income/Loss Before Tax 702 812 497 621 Applicable Income Tax Expense 239 276 169 211 Other Comprehensive Income/Loss, Net of Taxes 463 536 328 410 ------ ------ ------ ------ TOTAL Comprehensive Income 2,908 2,673 1,138 1,081 ====== ====== ====== ======
See notes to financial statements PAGE 5 PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) (in thousands)
Unrealized Loss on Investment and Mortgage-backed Securities Common Undivided Available-for-sale Treasury Stock Surplus Profits Net of Taxes Stock Total ------------- ----------- ---------- ------------------- ---------- ---------- BALANCE, December 31, 1996 $ 4,455 $ 4,455 $13,636 $ (346) $ (487) $21,713 Net Income for the nine months ended June 30, 1997 2,137 2,137 Cash dividends paid (525) (525) Treasury stock purchase (30) (30) Change in unrealized gain (loss) on securities available for sale, net of taxes _______ _______ _______ 536 ________ 536 Balance, September 30, 1997 (unaudited) $ 4,455 $ 4,455 $15,248 $ 190 $ (517) $23,831 ======= ======= ======= ======== ======== ======= BALANCE, December 31, 1997 $ 4,455 $ 4,455 $15,912 $ 371 $ (549) $24,644 Net Income for the nine months ended September 30, 1998 2,445 2,445 Cash dividends paid (734) (734) Treasury stock purchase (125) (125) Change in unrealized gain (loss) on securities available for sale, net of taxes _______ _______ _______ 463 ________ 463 Balance, September 30, 1998 (unaudited) $ 4,455 $ 4,455 $17,623 $ 834 $ (674) $26,693 ======= ======= ======= ======== ======== ======= See notes to financial statements
PAGE 6 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands)
Nine Months Ended September 30 1998 1997 (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 2,445 $ 2,137 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 527 417 Provision for loan losses 130 90 (Gain) loss on sale of equipment 2 6 (Gain) loss on sale of other real estate 2 6 Amortization of securities' premium and accretion of Discounts 87 (58) Losses (gains) on sale of investment securities, net (48) (66) (Increase) in accrued interest receivable 112 (415) (Increase) decrease in other assets (126) (64) Increase (decrease) in accrued interest payable -0- 98 Increase (decrease) in other liabilities (6) 70 Total Adjustments Net cash provided by operating activities 3,125 2,221 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of available for sale securities 7,111 9,781 Proceeds from maturities of available for sale securities 11,978 32,171 Purchase of available for sale securities (22,420) (68,811) Principal payment on mortgage-backed securities 3,374 1,430 Net increase in loans (11,785) (11,904) Proceeds from sale of premises and equipment 1 5 Purchase of premises and equipment (137) (898) Proceeds from sale of other real estate 30 80 Purchase of intangible assets 0 (3,875) Net cash used in investing activities (11,848) (42,021) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (734) (525) Increase in deposits 11,110 41,592 Net decrease in long-term borrowing 0 0 Net increase (decrease) in short- term borrowing (2,945) 1,019 Purchase of treasury stock (125) (30) Net cash provided by financing activities 7,306 42,056 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,417) 2,256 Cash and cash equivalents, beginning of period 5,549 3,069 CASH AND CASH EQUIVALENTS, END OF PERIOD 4,132 5,325 SUPPLEMENTAL DISCLOSURES OF CASH PAID: Interest paid 6,119 5,741 Income taxes paid 579 783 NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfers from loans to real estate acquired through foreclosure $601 $163 ==== ==== Proceeds from sales of foreclosed real estate financed through loans $200 $0 ==== ==== Total increase (decrease) in unrealized gain (loss) on securities available for sale $702 $812 ==== ====
See notes to financial statements PAGE 8 PEOPLES FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The registrant believes that the disclosures made are adequate to make the information presented a fair representation of the Corporation's financial status. In the opinion of management, the accompanying consolidated financial statements for the nine-month periods ended September 30, 1998 and 1997 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the nine-month period ended September 30, 1998, is not necessarily the result to be expected for the full year. 2. RECENT ACCOUNTING PRONOUNCEMENTS REPORTING COMPREHENSIVE INCOME SFAS No. 130 The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income" effective January 1, 1998. This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income includes net income and all other changes in shareholder's equity except those resulting from investments and distributions to owners. The adoption of SFAS No. 130 had no impact on the Corporation's net income or shareholder's equity. Prior year financial statements have been restated to conform to the requirements of Statement 130. The statement requires that the accumulated other comprehensive income be descriptively labeled in the shareholder's equity (loss) on available for sale securities that were previously reported. The Corporation has included this new reporting information in Part I of this Form 10-Q/A. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION SFAS No. 131 The Company adopted SFAS No. 131 on January 1, 1998. This Statement establishes standards for the way public companies report information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application, therefore adoption of this Statement had no impact on the accompanying consolidated financial statements. EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS SFAS No. 132 The Company adopted SFAS No. 132 on January 1, 1998. This Statement: (1) revises employers' disclosures about pension and other post-retirement benefit plans; (2) standardizes the disclosure requirements for benefits of such plans; (3) requires additional information on changes in the benefit obligations and fair value of plan assets that will facilitate financial analysis; and (4) eliminates certain disclosures that are no longer useful. Most of the changes in the disclosure provisions of this Statement address defined benefit plans. The Company's adoption of SFAS No. 132 had no effect on disclosure requirements nor did it have any effect on operating results or financial position. 3. COMMON STOCK On September 15, 1998, the Corporation effected a 5-for-2 stock split to shareholders of record on August 15, 1998. Earnings per share amounts and weighted average shares outstanding have been restated to give effect to the stock split. In connection with the stock split, the Corporation amended it's Articles of Incorporation to authorize 12,500,000 shares of $2 par value common stock. The following schedule shows the resultant weighted average shares outstanding for the period. Nine Months Ended Three Months Ended September 30, September 30, 1998 1997 1998 1997 Basic 2,184,011 2,188,963 2,183,382 2,188,569 Diluted 2,185,345 2,188,963 2,186,049 2,188,569 PAGE 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's only subsidiary, Peoples National Bank of Susquehanna County (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of Susquehanna, Wyoming and northern Lackawanna counties in Pennsylvania, and southern Broome County in New York. The Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. FINANCIAL CONDITION Cash and Cash Equivalents: At September 30, 1998, cash, federal funds sold and deposits with other banks totaled $4.132 million; a decrease of $1.193 million compared to $5.325 million at September 30, 1997. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that matures within one year. These sources of funds will enable the Corporation to meet cash obligations as they come due. Investments: Investments totaled $88.770 million on September 30, 1998; decreasing $9.726 million compared to September 30, 1997, totaling $98.496 million. The decrease in the investment portfolio is directly attributable to the increase in loan demand. The total investment portfolio is held as available for sale. This strategy was implemented in 1995 to provide more flexibility in using the investment portfolio for liquidity purposes as well as providing more flexibility in selling when market opportunities occur. Management monitors the earnings performance and effectiveness of the liquidity of the investment portfolio on a monthly basis through the Asset/Liability Committee ("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the investment securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. PAGE 11 Loans: The Bank's loan volume has continued to be strong through the first three quarters of 1998. Increasing the loan to deposit ratio is a goal of the Bank, but loan quality is a requisite in this effort. Management has continued its efforts to create tighter underwriting standards for both commercial and consumer credit. The Bank's lending consists primarily of retail lending which includes single family residential mortgage and other consumer lending, and also commercial lending primarily to locally owned small businesses. On September 30, 1998, net loans totaled $136.364 million as compared to $117.138 million on September 30, 1997; an increase of $19.226 million in the past year. The loan to deposit ratio was 67.45% on September 30, 1998; compared to 59.87% on September 30, 1997. During the third quarter of 1998 net loans grew from $132.009 million to $136.364 million. On June 30, 1998, the loan deposit ratio was 67.23% as compared to 67.45% on September 30, 1998. Deposits: Deposits are attracted from within the Bank's primary market area through the offering of various deposit instruments including NOW accounts, money market accounts, savings accounts, certificates of deposit and IRAs. Total deposits at September 30, 1998, were $204.702 million; compared to $198.521 million at September 30, 1997. This is an increase in deposits of $6.181 million or 3%. Comparing the third quarter ending balance to the second quarter ending balance, the deposit balance at September 30, 1998, was $204.702 million and the June 30, 1998 deposit balance was $198.582 million, an increase of $6.12 million. Borrowings: The Bank utilizes borrowing as a source of funds for its asset/liability management. Advances are available from the FHLB provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from FHLB. Total borrowings at September 30, 1998, were $6.330 million as compared to $7.732 million on September 30, 1997 a decrease of $1.402 million. Comparing the second and third quarters of 1998, borrowings were $4.925 million on June 30, 1998, showing an increase of $1.405 million during the third quarter. Capital: The adequacy of the Corporation's capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Corporation's resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings. As of September 30, 1998, regulatory capital to total assets was 9.44% as compared to 8.99% on September 30, 1997. The Corporation has complied with the standards of capital adequacy mandated by the banking regulator. The bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk asset), 20%, 50% or 100% (highest risk assets) is assigned to each asset on the balance sheet. Capital is being maintained in compliance with risk-based capital guidelines. The Company's Tier 1 capital to total risk weighted assets ratio is 16.53% and the total capital ratio to total risk weighted assets ratio is 17.77%. The Corporation is deemed to be well capitalized under regulatory standards. On September 15, 1998, the Corporation effected a 5-for-2 stock split to shareholders of record on August 15, 1998. PAGE 13 Liquidity and Interest Rate Sensitivity: Liquidity measures an organization's ability to meet cash obligations as they come due. The consolidated statement of cash flows presented in the accompanying financial statements included in Part I of this Form 10-Q provide analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The ALCO addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook. The following table sets forth the Bank's interest rate sensitivity as of September 30, 1998. INTEREST RATE SENSITIVITY ANALYSIS September 30, 1998 (in thousands)
Maturity or Repricing In: Rate Sensitive Assets 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years Loans 18,350 9,511 28,184 44,178 36,141 Securities 21,192 5,449 11,635 36,122 16,226 Federal Funds Sold 0 0 0 0 0 Total Rate Sensitive Assets 39,542 14,960 39,819 80,300 52,367 Cumulative Rate Sensitive Assets 39,542 54,502 94,321 174,621 226,988 Rate Sensitive Liabilities 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years Interest Bearing Checking 1,528 0 0 0 13,756 Money Market Deposits 25,021 2,489 0 0 12,444 Regular Savings 3,085 0 0 0 27,761 CDs and IRAs 15,978 17,777 27,824 31,305 2,089 Short-term Borrowings 6,330 0 0 0 1,127 Total Rate Sensitive Liabilities 51,942 20,266 27,824 31,305 57,177 Cumulative Rate Sensitive Liabilities 51,942 72,208 100,032 131,337 188,514 Period Gap -12,400 -5,306 11,995 48,995 -4,810 Cumulative Gap -12,400 -17,706 -5,711 43,284 38,474 Cumulative RSA to RSL 76.13% 75.48% 94.29% 132.96% 120.41% Cumulative Gap to Total Assets -5.20% -7.43% -2.40% 18.15% 16.14%
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 for mortgage backed securities are projected by expected cash flows as evidenced by recent history. Repayment of principal for loan categories are projected at expected maturity (amortization) for fixed rate products and the next repricing date for variable rate products. RESULTS OF OPERATIONS Net Interest Income: Net interest income increased by $394 thousand and $36 thousand, or 6.87% and 1.79%, respectively for the nine months and quarter ended September 30, 1998, as compared to the same periods in 1997. Earning assets increased $8.175 million or 3.7% for September 30, 1998, as compared to September 30, 1997. Interest bearing liabilities have increased less than 1% or 1.4 million over September 1997 totals. The net interest margin was 3.663% for September 1998 and 3.735% for the period ended September 30, 1997. Interest Income: Interest and fees on loans for the nine months and quarter ended September 30, 1998, totaled $8.4 million and $2.9 million, reflecting increases of $1.185 million or 16.3% and $341 thousand or 13.3% respectively, over the comparable periods in 1997. The loan portfolio grew $19.1 million from a total of $118.9 million in September 1997 to $138.1 million in September 1998. Interest on investments for the nine months and the quarter ended September 30, 1998, totaled $3.8 million, year to date, and $1.2 million for the quarter which reflects decreases of $513 thousand or 11.9% and $257 thousand or 17% respectively, over the comparable period in 1997. Reinvestments of maturing investments in loans increased because of loan demand which shows in these numbers. Interest Expense: Interest expense for the nine months and the quarter ended September 30, 1998, totaled $6.118 million and $2.096 million, compared to $5.840 million and $2.048 million in 1997, reflecting an increase of $278 thousand or 4.76%, year to date, and $48 thousand or 2.34% for quarter end, respectively, over the comparable periods in 1997. The larger difference in the nine months comparison reflects the effect of the extra deposits costs in January and February of 1998 for the acquired deposits from the branch purchases in Wyoming County in March of 1997. Although deposit rates were dropped on statement savings on September 1st, our interest expense for the quarter does not show significant reduction in cost of funds for deposits. This is because of the added volume of $6.2 million, year to date, and $1.8 million in additional deposits for the quarter. Provision for Loan Loss: The provision for loan loss for the third quarter ending September 30, 1998 increased by $3 thousand from the corresponding period in 1997. As of the end of the third quarter 1998, charge-offs totaled $125 thousand, net charge-offs totaled $95 thousand as compared to $64 thousand and $46 thousand respectively for the same nine months period in 1997. Senior management utilizes detailed analysis of the loan portfolio monthly to determine loan loss reserve adequacy. The process considers all "problem loans" including classified, criticized and monitored loans. Prior loan loss history and current market trends, both nationally and locally, are taken into consideration. A watch list of potential problem loans is maintained and monitored monthly. This list is reviewed by the Board of Directors on a monthly basis. The Bank has not had nor presently has any foreign loans. In addition, the Bank does not have any concentrations of credit. Based upon this analysis, senior management has concluded that the allowance of loan loss is adequate. Other Operating Income: Other operating income increased $42 thousand when comparing the same three month period, third quarter 1998 to third quarter 1997, and increased $66 thousand over the nine months period comparison of September 1998 to September 1997. Service Charge Fee Income is up $131 thousand for the entire nine months, with the third quarter contributing $31 thousand. Gains and losses on security sales were $3 thousand less this year when comparing third quarter 1997 to 1998. The total gains and losses year to date in 1998 is $103 thousand less than the year to date total in 1997. Other Operating Expenses: Non-Interest expense went down by $79 thousand during the third quarter of 1998 as compared to the third quarter of 1997. For the nine months ended September 30, 1998, total non-interest expenses increased by $53 thousand over the same nine months period in 1997. The decrease in the third quarter comparison is due to the one-time charges that were incurred when the new software was installed in 1997. The higher nine-month year to date numbers reflects the additional costs for staff and occupancy of the new buildings. Also furniture and equipment costs are $28 thousand higher for the third quarter and $82 thousand higher for the nine month year to date period reflecting the cost of the new equipment and software purchased in 1997. Professional fees and outside services are higher by $5 thousand for the quarter and $42 thousand higher for the first three quarters of 1998 over 1997. This increase is due to additional costs involved in legal fees for recovery on problem loans. Employee salaries, the largest component of non-interest, decreased $8 thousand for the third quarter of 1998 and increased only $29 thousand, as compared to the same year to date period of 1997. It is the goal of the Bank to be fair and competitive in remuneration to employees and wages and salaries are adjusted at least annually. Attrition and the use of more part time employees have been a factor in the slower growth in this non- interest expense for the periods being compared. In January 1998, management implemented an employee task force to work on staffing efficiencies. Some impact can be seen in the quarter and year to date numbers due to these efforts. In the first quarter of 1998, employee expenses increased significantly from the additional salaries in the Tunkhannock and Meshoppen offices that were applicable in 1997 which has carried forward in the year to date totals. Income Tax Provision: The income tax provision was $202 thousand and $635 thousand for the three-month and nine-month periods ended September 30, 1998 compared to $209 thousand and $576 thousand for the same periods in 1997. Year 2000 Compliance: The Bank utilizes software and related computer technologies essential to its operations that can be affected by the Year 2000 issues. In 1997, the Bank assigned a senior officer and the compliance committee the responsibility to address the risks of the critical internal bank systems as well as external and environmental systems. A comprehensive plan was developed for assessment, review, remediation, testing, and contingency planning. The assessment, review and remediation stages involved creating inventory listings of internal and external sources of hardware, software, and environmental systems, and then installing all the necessary updates to put all systems at the required Year 2000 level or version. The loan portfolio was also inventoried. Selected borrowers were contacted to assess their Year 2000 readiness to determine the adequacy of our allowances for loan losses. In the third quarter, the Bank participated in a public awareness campaign through mailings, lobby materials, survey cards, and calling officer visits. The project is now at the testing and contingency planning phase. CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION Except for historical information, this Report may be deemed to contain "forward looking" information. Examples of forward looking information may include, but are not limited to (a) projections of or statements regarding future earnings, interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure and other financial terms, (b) statements of plans and objectives of management or the Board of Directors, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions in the market areas served by the Corporation and the Bank, underlying other statements and statements about the Corporation and the Bank or their respective businesses. Such forward looking information can be identified by the use of forward looking terminology such as "believes," "expects," "may," "intends," "will," "should," "anticipates," or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. No assurance can be given that the future results covered by the forward looking information will be achieved. Such statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward looking information. Important factors that could impact operating results include, but are not limited to, (i) the effects of changing economic conditions in both the market areas served by the Corporation and the Bank and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could affect operations, (v) funding costs, and (vi) other external developments which could materially affect business and operations. Item 3. Quantitative and Qualitative Disclosure About Market Risks The information set forth under the caption "Liquidity and Interest Sensitivity" under Item 2, Part I is incorporated herein by reference. PAGE 18 PART II PEOPLES FINANCIAL SERVICES CORP. ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS IN SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDER VOTE None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits 27 Financial Data Schedule* (b) Reports on Form 8-K (c) The Corporation filed a Current Report on Form 8-K, dated August 14, 1998, to report earnings for the second quarter of 1998, announce the declaration of a cash dividend of $.29 per share and announce the 5-for-2 stock split effected on September 15, 1998. ____________________ * Previously filed. PAGE 19 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 1, 1998 PEOPLES FINANCIAL SERVICES CORP. (Registrant) By/s/ Debra Dissinger Debra Dissinger Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----