PEOPLES FINANCIAL SERVICES CORP. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-K
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(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2009,
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or
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( )
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ______ to ______
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Commission
file number 0-23863
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PEOPLES
FINANCIAL SERVICES CORP.
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(Exact
name of registrant as specified in its charter)
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PENNSYLVANIA
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23-2391852
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(State
of incorporation)
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(IRS
Employer Identification No.)
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82
FRANKLIN AVENUE, HALLSTEAD, PA
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18822
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(Address
of principal executive offices)
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(Zip
code)
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(570)
879-2175
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(Registrant’s
telephone number including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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COMMON
STOCK ($2 Par Value)
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes __ No X
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes___ No
X
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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__
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
(as defined in Rule 12b-2 of the Exchange Act).
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Large
accelerated filer ____
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Accelerated
filer X
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Non-accelerated
filer _____
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Smaller
reporting company _____
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(Do
not check if smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes __ No X
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The
aggregate market value of voting stock held by non-affiliates of the
registrant is $51,233,335
as of June 30, 2009.
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The
aggregate dollar amount of the voting stock set forth equals the number of
shares of the registrant’s Common Stock outstanding, reduced by the amount
of Common stock held by executive officers, directors, and shareholders
owning in excess of 10% of the registrant’s Common Stock, multiplied by
the last sale price for the registrant’s Common Stock at June 30, 2009.
The information provided shall in no way be construed as an admission that
the officer, director, or 10% shareholder in the registrant may be deemed
an affiliate of the registrant or that such person is the beneficial owner
of the shares reported as being held by him and any such inference is
hereby disclaimed. The information provided herein is included solely for
the record keeping purpose of the Securities and Exchange
Commission.
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Number
of shares outstanding as of February 26, 2010
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COMMON
STOCK ($2 Par Value)
(Title
of Class)
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3,136,156
(Outstanding
Shares)
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DOCUMENTS
INCORPORATED BY REFERENCE
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Portions
of the 2009 Proxy Statement for the Registrant are incorporated by
reference into Part III of this
report.
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1
TABLE OF
CONTENTS
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Page
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Part
I
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Number
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Item
1
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Business
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3
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Item
1A
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Risk
Factors
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15
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Item
1B
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Unresolved
Staff Comments
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17
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Item
2
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Properties
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17
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Item
3
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Legal
Proceedings
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18
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Item
4
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Submission
of Matters to a Vote of Security Holders
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18
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Part
II
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Item
5
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Market
for Registrant's Common Equity and Related Stockholder
Matters
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19
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Item
6
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Selected
Financial Data
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21
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Item
7
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Management's
Discussion and Analysis of Financial Condition and
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22
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Results
of Operations
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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44
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Item
8
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Financial
Statements and Supplementary Data
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45
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Report
of Independent Registered Public Accounting Firm
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45
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Consolidated
Balance Sheets
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46
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Consolidated
Statements of Income
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47
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Consolidated
Statements of Stockholders' Equity
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48
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Consolidated
Statements of Cash Flows
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49
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Notes
to Consolidated Financial Statements
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51
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Item
9
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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90
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Item
9A
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Controls
and Procedures
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90
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Item
9B
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Other
Information
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92
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Part
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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93
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Item
11
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Executive
Compensation
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93
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management
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93
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and
Related Stockholder Matters
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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93
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Item
14
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Principal
Accountant Fees and Services
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93
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Part
IV
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Item
15
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Exhibits
and Financial Statement Schedules
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94
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Signatures
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95
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2
PART
I
ITEM 1 BUSINESS
BRIEF HISTORY
Peoples
Financial Services Corp. (“PFSC” or the “Company”) was incorporated under the
laws of the Commonwealth of Pennsylvania on February 6, 1986, and is a one-bank
holding company headquartered in Hallstead, Pennsylvania.
The
Company is engaged primarily in commercial and retail banking services and in
businesses related to banking services through its subsidiaries, Peoples
National Bank (“PNB” or the “Bank”), Peoples Advisors, LLC (“Advisors”) and
Peoples Financial Capital Corporation. The Bank has two wholly owned
subsidiaries, Peoples Financial Leasing, LLC and Peoples Investment Holdings,
LLC. PNB was chartered in Hallstead, Pennsylvania in 1905 under the
name of The First National Bank of Hallstead. In 1965, the Hop Bottom National
Bank (chartered in 1910) merged with The First National Bank of Hallstead to
form Peoples National Bank of Susquehanna County. In 2001, the Bank changed its
name to Peoples National Bank. Advisors was formed in 2006 as a
member-managed limited liability company for the purpose of providing investment
advisory services to the general public. Peoples Financial Leasing, LLC, formed
in 2007, is a subsidiary of the Bank and provides employee leasing services to
the Bank. Peoples Investment Holdings, LLC, formed in 2007, is also a subsidiary
of the Bank and its main activities are the maintenance and management of its
intangible investments and the collection and distribution of the income from
such investments or from tangible investments located outside of Delaware.
Finally, Peoples Financial Capital Corporation which was also formed in 2007 is
a subsidiary of the Company and its main activities are the maintenance and
management of its intangible investments and the collection and distribution of
the income from such investments or from tangible investments located outside of
Delaware.
OPERATING
SEGMENTS
The
Company has one reportable operating segment, Community Banking, which consists
of commercial and retail banking, and other non-reportable operating segments,
as described in Note 1 of the Notes to Consolidated Financial Statements
included on page 58 of
this Report. The Segment Reporting information in Note 1 is incorporated by
reference into this Item 1.
SUPERVISION AND
REGULATION
The
Company and its subsidiaries are extensively regulated under federal and state
law. Generally, these laws and regulations are intended to protect depositors,
not shareholders. The following is a summary description of certain provisions
of law that affect the regulation of bank holding companies and banks. This
discussion is qualified in its entirety by reference to applicable laws and
regulations. Changes in law and regulation may have a material effect on the
business and prospects of the Company, PNB, and Advisors.
The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended, and is subject to regulation, supervision, and
examination by the Federal Reserve Board (“FRB”). The Company is required to
file annual and quarterly reports with the FRB and to provide the FRB with such
additional information as the FRB may require. The FRB also conducts
examinations of the Company.
With
certain limited exceptions, the Company is required to obtain prior approval
from the FRB before acquiring direct or indirect ownership or control of more
than 5% of any voting securities or substantially all of the assets of a bank or
bank holding company, or before merging or consolidating with another bank
holding company. Additionally, with certain exceptions, any person or entity
proposing to acquire control through direct or indirect ownership of 25% or more
of any voting securities of the Company is required to give 60 days written
notice of the acquisition to the FRB, which may prohibit the transaction, and to
publish notice to the public.
The
Company’s banking subsidiary is a federally chartered national banking
association regulated by the Office of the Comptroller of the Currency (“OCC”).
The OCC may prohibit an institution over which it has supervisory authority from
engaging in activities or investments that the agency believes constitute unsafe
or unsound banking practices. Federal banking regulators have extensive
enforcement authority over the institutions they regulate to prohibit or correct
activities that violate law, regulation or a regulatory agreement or which are
deemed to constitute unsafe or unsound practices.
3
Enforcement
actions may include:
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the
appointment of a conservator or receiver;
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the
issuance of a cease and desist order;
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the
termination of deposit insurance, the imposition of civil money penalties
on the institution, its directors, officers, employees and institution
affiliated parties;
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the
issuance of directives to increase capital;
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the
issuance of formal and informal agreements;
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the
removal of or restrictions on directors, officers, employees and
institution-affiliated parties; and
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the
enforcement of any such mechanisms through restraining orders or any other
court actions.
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PNB is
subject to certain restrictions on extensions of credit to executive officers,
directors, principal shareholders or any related interests of such persons which
generally require that such credit extensions be made on substantially the same
terms as are available to third persons dealing with PNB and not involving more
than the normal risk of repayment. Other laws tie the maximum amount that may be
loaned to any one customer and its related interests to capital levels of the
Bank.
Limitations on Dividends and Other
Payments
The
Company’s current ability to pay dividends is largely dependent upon the receipt
of dividends from its banking subsidiary, PNB. Both federal and state laws
impose restrictions on the ability of the Company to pay dividends. The FRB has
issued a policy statement that provides that, as a general matter, insured banks
and bank holding companies may pay dividends only out of prior operating
earnings. Under the National Bank Act, a national bank, such as PNB, may pay
dividends only out of the current year’s net profits and the net profits of the
last two years. In addition to these specific restrictions, bank regulatory
agencies, in general, also have the ability to prohibit proposed dividends by a
financial institution that would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
Permitted Non-Banking
Activities
Generally,
a bank holding company may not engage in any activities other than banking,
managing, or controlling its bank and other authorized subsidiaries, and
providing service to those subsidiaries. With prior approval of the FRB, the
Company may acquire more than 5% of the assets or outstanding shares of a
company engaging in non-bank activities determined by the FRB to be closely
related to the business of banking or of managing or controlling banks. The FRB
provides expedited procedures for expansion into approved categories of non-bank
activities.
Subsidiary
banks of a bank holding company are subject to certain quantitative and
qualitative restrictions:
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on
extensions of credit to the bank holding company or its
subsidiaries;
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on
investments in their securities; and
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on
the use of their securities as collateral for loans to any
borrower.
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These
regulations and restrictions may limit the Company’s ability to obtain funds
from PNB for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, PNB may not generally require a
customer to obtain other services from itself or the Company, and may not
require that a customer promise not to obtain other services from a competitor
as a condition to an extension of credit to the customer.
Under FRB
policy, a bank holding company is expected to act as a source of financial
strength to its subsidiary banks and to make capital injections into a troubled
subsidiary bank, and the FRB may charge the bank holding company with engaging
in unsafe and unsound practices for failure to commit resources to a subsidiary
bank when required. A required capital injection may be called for at a time
when the holding company does not have the resources to provide it. In addition,
depository institutions insured by the FDIC can be held liable for any losses
incurred by, or reasonably anticipated to be incurred by, the FDIC in connection
with the default of or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of the company causes a loss to the FDIC, other insured subsidiaries
of the company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guarantee liabilities generally
are superior in priority to the obligation of the depository institutions to its
stockholders due solely to their status as stockholders and obligations to other
affiliates.
4
Pennsylvania Law
As a
Pennsylvania bank holding company, the Company is subject to various
restrictions on its activities as set forth in Pennsylvania law. This is in
addition to those restrictions set forth in federal law. Under Pennsylvania law,
a bank holding company that desires to acquire a bank or bank holding company
that has its principal place of business in Pennsylvania must obtain permission
from the Pennsylvania Department of Banking.
Interstate Banking
Legislation
The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 were enacted
into law on September 29, 1994. The law provides that, among other things,
substantially all state law barriers to the acquisition of banks by out-of-state
bank holding companies were eliminated effective September 29, 1995. The law
also permits interstate branching by banks effective as of June 1, 1997, subject
to the ability of states to opt-out completely or to set an earlier effective
date.
FIRREA
(Financial Institution Reform, Recovery, and Enforcement Act)
FIRREA
was enacted into law in order to address the financial condition of the Federal
Savings and Loan Insurance Corporation, to restructure the regulation of the
thrift industry, and to enhance the supervisory and enforcement powers of the
federal bank and thrift regulatory agencies. As the primary federal regulator of
the Bank, the OCC is responsible for the supervision of the Bank. When dealing
with capital requirements, the OCC and FDIC have the flexibility to impose
supervisory agreements on institutions that fail to comply with regulatory
requirements. The imposition of a capital plan, termination of deposit
insurance, and removal or temporary suspension of an officer, director or other
institution-affiliated person may cause enforcement actions.
There are
three levels of civil penalties under FIRREA.
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The
first tier provides for civil penalties of up to $5,000 per day for any
violation of law or regulation.
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The
second tier provides for civil penalties of up to $25,000 per day if more
than a minimal loss or a pattern is involved.
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Finally,
civil penalties of up to $1 million per day may be assessed for knowingly
or recklessly causing a substantial loss to an institution or taking
action that results in a substantial pecuniary gain or other
benefit.
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Criminal
penalties are increased to $1 million per violation and may be up to $5 million
for continuing violations or for the actual amount of gain or loss. These
penalties may be combined with prison sentences of up to five
years.
FDICIA
(Federal Deposit Insurance Corporation Improvement Act of 1991)
In
December 1991, Congress enacted FDICIA which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things:
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publicly
available annual financial condition and management reports for financial
institutions, including audits by independent
accountants;
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the
establishment of uniform accounting standards by federal banking
agencies;
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the
establishment of a “prompt corrective action” system of regulatory
supervision and intervention, based on capitalization levels, with more
scrutiny and restrictions placed on depository institutions with lower
levels of capital;
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additional
grounds for the appointment of a conservator or receiver;
and
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restrictions
or prohibitions on accepting brokered deposits, except for institutions
which significantly exceed minimum capital
requirements.
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FDICIA
also provides for increased funding of the FDIC insurance funds and the
implementation of risk-based premiums.
A central
feature of FDICIA is the requirement that the federal banking agencies take
“prompt corrective action” with respect to depository institutions that do not
meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories:
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"well
capitalized"
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"adequately
capitalized"
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"under
capitalized"
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"significantly
undercapitalized" and
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"critically
undercapitalized".
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5
PNB is
currently classified as “well capitalized.” An institution may be deemed by the
regulators to be in a capitalization category that is lower than is indicated by
its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA
generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository fails to submit an acceptable plan, it is treated as if it is
“significantly undercapitalized”. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator; generally within 90 days of the
date such institution is determined to be critically under
capitalized.
FDICIA
provides the federal banking agencies with significantly expanded powers to take
enforcement action against institutions that fail to comply with capital or
other standards. Such actions may include the termination of deposit insurance
by the FDIC or the appointment of a receiver or conservator for the institution.
FDICIA also limits the circumstances under which the FDIC is permitted to
provide financial assistance to an insured institution before appointment of a
conservator or receiver.
Under
FDICIA, each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards
covering:
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internal
controls;
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information
systems and internal audit systems;
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loan
documentation;
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credit
underwriting;
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interest
rate exposure;
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asset
growth; and
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compensation
fees and benefits.
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Any
institution that fails to meet these standards may be required by the agency to
develop a plan acceptable to the agency, specifying the steps that the
institutions will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company, on
behalf of PNB, believes that it meets substantially all the standards that have
been adopted. FDICIA also imposed new capital standards on insured depository
institutions. Before establishing new branch offices, PNB must meet certain
minimum capital stock and surplus requirements and must obtain OCC
approval.
Risk-Based
Capital Requirements
The
federal banking regulators have adopted certain risk-based capital guidelines to
assist in the assessment of the capital adequacy of a banking organization’s
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit, and recourse agreements, which are
recorded as off-balance-sheet items. Under these guidelines, nominal dollar
amounts of assets and credit-equivalent amounts of off-balance-sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain US Treasury securities, to 100%
for assets with relatively high credit risk, such as business
loans.
A banking
organization’s risk-based capital ratios are obtained by dividing its qualifying
capital by its total risk adjusted assets. The regulators measure risk-adjusted
assets, which include off-balance-sheet items, against both total qualifying
capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and
Tier 1 capital.
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"Tier
1", or core capital, includes common equity, perpetual preferred stock
(excluding auction rate issues) and minority interest in equity accounts
of consolidated subsidiaries, less goodwill and other intangibles, subject
to certain exceptions.
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·
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"Tier
2", or supplementary capital, includes, among other things, limited life
preferred stock, hybrid capital instruments, mandatory convertible
securities, qualifying subordinated debt, and the allowance for loan and
lease losses, subject to certain limitations and less restricted
deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking
agencies.
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6
Banks and
bank holding companies subject to the risk-based capital guidelines are required
to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and
a ratio of total capital to risk-weighted assets of at least 8%. The appropriate
regulatory authority may set higher capital requirements when particular
circumstances warrant. As of December 31, 2009, PFSC’s ratio of Tier 1 capital
to risk-weighted assets stood at 12.30% and its ratio of total capital to
risk-weighted assets stood at 13.18%. In addition to risk-based capital, banks
and bank holding companies are required to maintain a minimum amount of Tier 1
capital to total assets, referred to as the leverage capital ratio, of at least
4.00%. As of December 31, 2009, the Company’s leverage-capital ratio was
9.92%.
Failure
to meet applicable capital guidelines could subject a banking organization to a
variety of enforcement actions including:
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·
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limitations
on its ability to pay dividends;
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·
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the
issuance by the applicable regulatory authority of a capital directive to
increase capital, and in the case of depository institutions, the
termination of deposit insurance by the FDIC, as well as to the measures
described under FDICIA as applicable to under capitalized
institutions.
|
In
addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of PNB to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the
Company.
Interest Rate
Risk
In August
1995 and May 1996, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank’s
capital adequacy, an assessment of the bank’s interest rate risk (“IRR”)
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization’s IRR management includes a measurement of Board of
Directors and senior management oversight, and a determination of whether a
banking organization’s procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking
organization. PNB has internal IRR models that are used to measure and monitor
IRR. In addition, an outside source also assesses IRR using its model on a
quarterly basis. Additionally, the regulatory agencies have been assessing IRR
on an informal basis for several years. For these reasons, the Company does not
expect the IRR evaluation in the agencies’ capital guidelines to result in
significant changes in capital requirements for PNB.
FDIC Insurance
Assessments
As a FDIC
member institution, PNB’s deposits are insured to a maximum of $250,000 per
depositor through the Bank Insurance Fund (“BIF”) that is administered by the
FDIC and each institution is required to pay semi-annual deposit insurance
premium assessments to the FDIC. Prior to 1997, only thrift institutions were
subject to assessments to raise funds to pay the financing corporate bonds. On
September 30, 1996, as part of the Omnibus Budget Act, Congress enacted the
Deposit Insurance Funds Act of 1996, which recapitalized the Savings Association
Insurance Fund (“SAIF”) and provided that BIF deposits would be subject to 1/5
of the assessment to which SAIF deposits are subject for FICO bond payments
through 1999. Beginning in 2000, BIF deposits and SAIF deposits were subject to
the same assessment for FICO bonds. The FICO assessment for PNB for 2009 was
$0.0104 for each $100 of BIF deposits.
The FDIC
adopted a risk-based deposit insurance assessment system that requires all
FDIC-insured institutions to pay quarterly premiums beginning in
2007. Annual premiums range from 12 and 14 basis points of deposits
for well-capitalized banks with the highest examination ratings to 50 basis
points for undercapitalized institutions. In 2007 and through the second quarter
of 2008, the Bank was able to offset the premium with an assessment credit of
$218,000 for premiums paid prior to 1996. Since the extinguishment of that
assessment credit, the Bank has seen an increase in the premium paid to the
levels stated for well-capitalized banks and the FDIC assessment for PNB for
2009 was $0.12659 for each $100 of BIF deposits.
Entering
2009, the Company anticipated a significant increase in the cost of federal
deposit insurance from the previous level of five to seven basis points to
between 12 and 14 basis points for the first quarter of 2009 and to between 10
and 14 basis points thereafter. The FDIC has also established a
program under which it fully guarantees all non-interest bearing transaction
accounts in excess of $250,000 (“TLGP”) and senior unsecured debt of a bank or
its holding company. The Bank elected to opt out of the debt guarantee program
but opted into the deposit guarantee program. The additional premium paid in
2009 under the TLGP was $.00108 for each $100 of transaction account deposits in
excess of $250,000. The FDIC also collected a special assessment of 5
basis points based on total assets less Tier 1 capital as reported in the Call
Report dated June 30, 2009. This special assessment was payable on
September 30, 2009 and was in the amount of $210,000.
7
Finally,
in 2009 the FDIC adopted a rule whereby banks would prepay three years of FDIC
premiums with the December 31, 2009 assessment. The FDIC assessment through
December 31, 2010 is based on the annualized rate of $0.14892 for each $100 of
BIF deposits and that is increased 3 basis points to $0.17892 for each $100 of
BIF deposits for the entirety of 2011 and 2012 with a 5 percent growth rate
projected for the deposit base.
Community Reinvestment
Act
The
Community Reinvestment Act of 1977, (“CRA”) is designed to create a system for
bank regulatory agencies to evaluate a depository institution’s record in
meeting the credit needs of its community. Until May 1995, a depository
institution was evaluated for CRA compliance based on twelve assessment
factors.
The CRA
regulations were completely revised as of July 1, 1995, (the revised CRA
regulation) to establish new performance-based standards for use in examining
for compliance.
The Bank
had its last CRA compliance examination in 2008 and received a “satisfactory”
rating.
Concentration
Payment
risk is a function of the economic climate in which the Bank’s lending
activities are conducted. Economic downturns in the economy generally or in a
particular sector could cause cash flow problems for customers and make loan
payments more difficult. The Bank attempts to minimize this risk by avoiding
loan concentrations to a single customer or to a small group of customers whose
loss would have a materially adverse effect on the financial condition of the
Bank.
Monetary Policy
The
earnings of a bank holding company are affected by the policies of regulatory
authorities, including the FRB, in connection with the FRB’s regulation of the
money supply. Various methods employed by the FRB are:
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open
market operations in United States Government
securities;
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changes
in the discount rate on member bank borrowings; and
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changes
in reserve requirements against member bank
deposits.
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These
methods are used in varying combinations to influence overall growth and
distribution of bank loans, investments, and deposits, and their use may also
affect interest rates charged on loans or paid on deposits. The monetary
policies of the FRB have had a significant effect on the operating results of
commercial banks in the past and are expected to do so in the
future.
RECENT
LEGISLATION
USA Patriot Act of
2001
In
October 2001, the USA Patriot Act of 2001 was enacted in response to the
terrorist attacks in New York, Pennsylvania and Washington D.C., which occurred
on September 11, 2001. The Patriot Act is intended to strengthen U.S. law
enforcement’s and the intelligence communities’ abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Financial Services Modernization
Legislation
In
November 1999, the Gramm-Leach-Bliley Act of 1999, or the GLB, was enacted. The
GLB repeals provisions of the Glass-Steagall Act which restricted the
affiliation of Federal Reserve member banks with firms “engaged principally” in
specified securities activities, and which restricted officer, director or
employee interlocks between a member bank and any company or person “primarily
engaged” in specified securities activities.
The
GLB also permits national banks to engage in expanded activities through the
formation of financial subsidiaries. A national bank may have a subsidiary
engaged in any activity authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the Bank Holding Company
Act or permitted by regulation.
8
To the
extent that the GLB permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The GLB is intended to grant to community banks certain powers as a matter of
right that larger institutions have accumulated on an ad hoc basis and which
unitary savings and loan holding companies already possess. Nevertheless, the
GLB may have the result of increasing the amount of competition that the
Registrant faces from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Registrant has.
Sarbanes-Oxley Act of
2002
On July
30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the
SOA. The stated goals of the SOA are to increase corporate responsibility, to
provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities
laws.
The SOA
is the most far-reaching U.S. securities legislation enacted in some time. The
SOA generally applies to all companies, both U.S. and non-U.S., that file or are
required to file periodic reports with the Securities and Exchange Commission
(the “SEC”) under the Securities Exchange Act of 1934, or the Exchange
Act. The legislation includes provisions, among other things,
governing the services that can be provided by a public company’s independent
auditors and the procedures for approving such services, requiring the chief
executive officer and principal accounting officer to certify certain matters
relating to the company’s periodic filings under the Exchange Act, requiring
expedited filings of reports by insiders of their securities transactions and
containing other provisions relating to insider conflicts of interest,
increasing disclosure requirements relating to critical financial accounting
policies and their application, increasing penalties for securities law
violations, and creating a new public accounting oversight board, a regulatory
body subject to SEC jurisdiction with broad powers to set auditing, quality
control and ethics standards for accounting firms.
The
Company does not believe that the application of these rules to the Company have
a material effect on its results of operations.
Regulation W
Transactions
between a bank and its “affiliates” are quantitatively and qualitatively
restricted under the Federal Reserve Act. The Federal Deposit Insurance Act
applies Sections 23A and 23B to insured nonmember banks in the same manner and
to the same extent as if they were members of the Federal Reserve System. The
Federal Reserve Board has also recently issued Regulation W, which co-defies
prior regulations under Sections 23A and 23B of the Federal Reserve Act and
interpretative guidance with respect to affiliate transactions. Regulation W
incorporates the exemption from the affiliate transaction rules but expands the
exemption to cover the purchase of any type of loan or extension of credit from
an affiliate. Affiliates of a bank include, among other entities, the bank’s
holding company and companies that are under common control with the bank. The
Company is considered to be an affiliate of the Bank. In general, subject to
certain specified exemptions, a bank or its subsidiaries are limited in their
ability to engage in “covered transactions” with affiliates:
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to
an amount equal to 10% of the bank's capital and surplus, in the case of
covered transactions with any one affiliate; and
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to
an amount equal to 20% of the bank's capital and surplus, in the case of
covered transactions with all
affiliates.
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In
addition, a bank and its subsidiaries may engage in covered transactions and
other specified transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the bank or its subsidiary,
as those prevailing at the time for comparable transactions with nonaffiliated
companies. A “covered transaction” includes:
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a
loan or extension of credit to an affiliate;
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a
purchase of, or an investment in, securities issued by an
affiliate;
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a
purchase of assets from an affiliate, with some
exceptions;
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the
acceptance of securities issued by an affiliate as collateral for a loan
or extension of credit to any party; and
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the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
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Regulation
W generally excludes all non-bank and non-savings association subsidiaries of
banks from treatment as affiliates, except to the extent that the Federal
Reserve Board decides to treat these subsidiaries as affiliates.
Concurrently
with the adoption of Regulation W, the Federal Reserve Board has proposed a
regulation which would further limit the amount of loans that could be purchased
by a bank from an affiliate to not more than 100% of the bank’s capital and
surplus.
9
Legislation and Regulatory
Changes
From time
to time, legislation is enacted that affects the cost of doing business or
limits the activities of a financial institution. We cannot predict the
likelihood of any major changes or the impact those changes may have on the
Company.
MARKET AREAS
The PNB
market areas are in the northeastern part of Pennsylvania with the primary focus
being Susquehanna and Wyoming Counties. With the addition of an office in
Conklin, Broome County, New York in 2003, and offices in the Village of Deposit
and Town of Chenango, both in Broome County, New York, in 2005, Broome County is
part of the Bank’s market area, particularly the Southern Tier that encompasses
the towns of Conklin, Kirkwood, Windsor, and Deposit. The Bank’s market area was
expanded further in 2008 with the addition of the Glenburn Township office. This
gave PNB its first physical presence in Lackawanna County, serving the northern
end of the county including the Clarks Summit area. In addition, parts of Wayne
and Bradford Counties in Pennsylvania that border Susquehanna and Wyoming
Counties are also considered part of the PNB market area.
The PNB
market area is situated between:
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the
city of Binghamton, Broome County, New York, located to the
north;
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the
city of Scranton, Lackawanna County, Pennsylvania, to the south;
and
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Wilkes-Barre,
Luzerne County, Pennsylvania, to the
southwest.
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Susquehanna
County could best be described as a bedroom county with a high percentage of its
residents commuting to work in Broome County, New York, or to the Scranton,
Pennsylvania, area. The southern part of Susquehanna County tends to gravitate
south for both employment and shopping, while the northern part of the county
goes north to Broome County, New York. The western part of Susquehanna County
gravitates south and west to and through Wyoming County. Wyoming County is home
to a Proctor & Gamble manufacturing facility. This is an economic stimulus
to Wyoming County and the surrounding areas.
The
majority of our offices are located in counties that would be considered
sparsely populated, as they are made up of many small towns and villages. The
latest population figures show Susquehanna County at approximately 42,000 and
Wyoming County at approximately 28,000 residents. Neither county is experiencing
growth. Broome County has approximately 196,000 residents and continues to
experience a population decline. The economy of Broome County has lost many
manufacturing jobs in the past twenty to twenty-five years. This trend
continues. Fortunately, the new employment centers are in the Town of Conklin
and the neighboring Town of Kirkwood. Both towns border Susquehanna County,
Pennsylvania. Lackawanna County has approximately 210,000 residents. Interstate
81 runs north and south through the eastern half of Susquehanna County and has
brought an influx of people from New Jersey and the Philadelphia area. These
people have purchased homes and land to build homes that are used as
vacation/recreation retreats and, quite often, become retirement
homes.
BUSINESS
Lending
Activities
PNB
provides a full range of retail and commercial banking services designed to meet
the borrowing and depository needs of small and medium sized businesses and
consumers in its market areas. A significant amount of PNB’s loans are to
customers located within its service areas. PNB has no foreign loans or highly
leveraged transaction loans, as defined by the FRB. A majority of the loans in
PNB’s portfolio have been originated by PNB. Policies adopted by the Board of
Directors are the basis by which PNB conducts its lending activities. These loan
policies grant individual lending officers authority to make secured and
unsecured loans in specific dollar amounts. Larger loans must be approved by
senior officers or by the Board of Directors. PNB’s management information
systems and loan review policies are designed to monitor lending to ensure
adherence to PNB’s loan policies.
The
commercial loans offered by PNB include:
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commercial
real estate loans;
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working
capital;
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equipment
and other commercial loans;
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construction
loans;
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SBA
guaranteed loans; and
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agricultural
loans.
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10
PNB’s
commercial real estate loans are used primarily to provide financing for retail
operations, manufacturing operations, farming operations, multi-family housing
units, and churches. Commercial real estate secured loans are generally written
for a term of 15 years or less or amortized over a longer period with balloon
payments at shorter intervals. Personal guarantees are obtained on nearly all
commercial loans. Credit analysis, loan review, and an effective collections
process are also used to minimize any potential losses. PNB employs four
full-time commercial lending officers. These four people are augmented by branch
managers who are authorized to make smaller, less complex, commercial
loans.
Payment
risk is a function of the economic climate in which PNB’s lending activities are
conducted; economic downturns in the economy generally or in a particular sector
could cause cash flow problems for customers and make loan payments more
difficult. PNB attempts to minimize this risk by avoiding concentrations of
credit to single borrowers or borrowers in a particular industry. Interest rate
risk would occur if PNB were to make loans at fixed rates in an environment in
which rates were rising thereby preventing PNB from making loans at the higher
prevailing rates. PNB attempts to mitigate this risk by making adjustable rate
commercial loans and, when extending fixed rate commercial loans, fixing loan
maturities at five years or less. Finally, collateral risk can occur if PNB’s
position in collateral taken as security for loan repayment is not adequately
secured. PNB attempts to minimize collateral risk by avoiding loan
concentrations to particular borrowers, by perfecting liens on collateral and by
obtaining appraisals on property prior to extending loans.
Consumer
loans offered by PNB include:
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residential
real estate loans;
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automobile
loans;
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manufactured
housing loans;
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personal
installment loans secured and unsecured for almost any
purpose;
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student
loans; and
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home
equity loans (fixed-rate term and open ended revolving lines of
credit).
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PNB
offers credit cards as an agent bank through another correspondent
bank.
Risks
applicable to consumer lending are similar to those applicable to commercial
lending. PNB attempts to mitigate payment risk in consumer lending by limiting
consumer lending products to a term of five years or less. To the extent that
PNB extends unsecured consumer loans, there is greater collateral risk; however,
credit checks and borrower history are obtained in all consumer loan
transactions.
Residential
mortgage products include adjustable-rate as well as conventional fixed-rate
loans. Terms vary from 1, 5, and 10-year adjustable rate loans to 5, 10, 15, 20,
and 30-year fully amortized fixed rate loans. Bi-weekly payment plans are also
available. Personal secured and unsecured revolving lines of credit with
variable interest rates and principal amounts ranging from $1,000 to $10,000 are
offered to credit-worthy customers. The largest segment of PNB’s installment
loan portfolio is fixed-rate loans. Most are secured either by automobiles,
motorcycles, snowmobiles, boats, other personal property, or by liens filed
against real estate. These loans are generally available in terms of up to 15
years with automobile loans having maturities of up to 60 months and real estate
loans having maturities up to 15 years. Loans secured by other collateral
usually require a maturity of less than 60 months. Home equity products include
both fixed-rate term products and also an open-end revolving line of credit with
a maximum loan-to-value ratio of 80% of current appraisal value. A special MGIC
program now offered through the Bank, allows for loans of up to 95% of the
appreciated value for qualified applicants. Credit checks, credit scoring, and
debt-to-income ratios within preset parameters are used to qualify
borrowers.
Mortgage
loans have historically had a longer average life than commercial or consumer
loans. Accordingly, payment and interest rate risks are greater in some respects
with mortgage loans than with commercial or consumer lending. Deposits, which
are used as the primary source to fund mortgage lending, tend to be of shorter
duration than the average maturities on residential mortgage loans and are more
susceptible to interest rate changes. Historical records indicate that our
mortgage loans, no matter what maturity, have an average life of less than seven
years. In 2003, the Bank started selling mortgages in the secondary market.
Mortgages are also written with adjustable rates. Mortgage lending is also
subject to economic downturns, in that increases in unemployment could adversely
affect the ability of borrowers to repay mortgage loans and decreases in
property values could affect the value of the real estate serving as collateral
for the loan.
11
Loan
growth remained steady in 2009 when compared to 2008 and
2007. Industry standard debt-to-income ratios and credit checks are
used to qualify borrowers on all consumer loans. Managers, assistant managers,
and customer service officers have retail lending authorities at each of the
full-service branch office locations. PNB has centralized loan administration at
its operations/administrative offices where mortgage underwriting and loan
review and analysis take place.
Loan Approval
Individual
loan authorities are established by PNB’s Board of Directors upon recommendation
by the chief credit officer. In establishing an individual’s loan authority, the
experience of the lender is taken into consideration, as well as the type of
lending in which the individual is involved. The President of PNB, along with
members of senior management (loan committee), has the authority to approve new
loans over $250,000 up to $2,000,000 and all aggregate loans $325,000 to
$2,500,000 following an analysis and review by credit analysts and commercial
lender. The full Board of Directors reviews on a monthly basis, all
loans approved by individual lenders and the officers’ loan committee. All loan
requests which are either complex in nature or exceed $2,000,000 new or
$2,500,000 aggregate must be analyzed and reviewed by the loan committee and
presented with a recommendation to the full Board of Directors for approval or
denial.
PNB
generally requires that loans secured by first mortgages or real estate have
loan-to-value ratios of less than 80% for loans secured by raw land or improved
property. In addition, in some instances for qualified borrowers, private
mortgage insurance is available for purchase that allows loan-to-value ratios to
go as high as 100%. PNB also participates in a guaranteed mortgage insurance
program. This allows PNB to make loans on real estate up to 100% of the value of
the property. Adjustable rate mortgage products, as well as conventional
fixed-rate products, are also available at PNB.
Deposit
Activities
PNB
offers a full range of deposit and banking services including:
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commercial
accounts such as checking products, cash management services remote
deposit capture (“RDC”), automated clearing house (“ACH”)
originations
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retirement
accounts such as Individual Retirement Accounts (“IRA”)
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consumer
interest bearing deposit services such as certificates of deposit, money
market accounts, NOW accounts, and savings accounts
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a
variety of ancillary checking account products such as automated teller
machines (“ATM’s”), point of sale (“POS”), as well as other miscellaneous
services
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These
miscellaneous services would include:
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safe
deposit boxes;
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night
depository services;
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merchant
credit cards;
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direct
deposit of payroll and other checks;
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U.S.
Savings Bonds;
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official
bank checks; and
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money
orders.
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The
principal sources of funds for PNB are core deposits that include demand
deposits, interest bearing transaction accounts, money market accounts, savings
deposits, and certificates of deposit. These deposits are solicited from
individuals, businesses, non-profit entities, and government authorities.
Substantially all of PNB’s deposits are from the local market areas surrounding
each of its offices.
Investment
Products
In 1999,
PNB entered into an agreement with T.H.E. Financial Services to sell investment
products. In September of 2003, T.H.E. Financial Services was acquired by
Financial Network Investment Corporation (FNIC) of Torrance,
California. PNB signed a contract dated September 29, 2003 with
FNIC. PNB discontinued broker-dealer services with FNIC and
contracted with Uvest Financial Services, Charlotte, North Carolina, effective
September 6, 2005. In 2005, Peoples Financial Services Corp. formed
Peoples Advisors, LLC (“Advisors”) as a member-managed limited liability company
under the laws of the Commonwealth of Pennsylvania, to be a wholly owned
subsidiary of the Corporation, for the purpose of providing investment advisory
services to the general public.
12
Investment Portfolio and
Activities
PNB’s
investment portfolio has several objectives.
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A
key objective is to provide a balance in PNB's asset mix of loans and
investments consistent with its liability structure, and to assist in
management of interest rate risk. The investments augment PNB's capital
position in the risk-based capital formula, providing the necessary
liquidity to meet fluctuations in credit demands of the community and also
fluctuations in deposit levels.
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In
addition, the portfolio provides collateral for pledging against public
funds, and a reasonable allowance for control of tax
liabilities.
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Finally,
the investment portfolio is designed to provide income for
PNB.
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In view
of the above objectives, the portfolio is treated conservatively by management
and only securities that pass those criteria are purchased.
Competition
PNB
operates in a fairly competitive environment, competing for deposits and loans
with commercial banks, thrifts, credit unions, and finance and mortgage
companies. Some of these competitors possess substantially greater financial
resources than those available to PNB. Also, certain of these institutions have
significantly higher lending limits than PNB and may provide various services
for their customers that are not presently available at
PNB. Financial institutions generally compete on the basis of rates
and service. PNB is subject to increasing competition from credit unions,
finance companies, and mortgage companies that may not be subject to the same
regulatory restrictions and taxations as commercial banks.
PNB will
seek to remain competitive with interest rates that it charges on its loans and
offers on deposits. It also believes that its success has been, and will
continue to be, due to its emphasis on community involvement, customer services,
and relationships. With consolidation continuing in the financial industry, and
particularly in PNB’s markets, smaller profitable banks are gaining
opportunities where larger institutions exit markets that are only marginally
profitable for them.
The
financial services industry in the Company’s service area is extremely
competitive. The Company’s competitors within its service area include banks and
bank holding companies with substantially greater resources. Many competitors
have substantially higher legal lending limits.
In
addition, savings banks, savings and loan associations, credit unions, money
market and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies offer products and services
similar to those offered by the Company and PNB, on competitive
terms.
Although
the Company has not done so, many bank holding companies have elected to become
financial holding companies under the Gramm-Leach-Bliley Act, which gives them a
broader range of products with which we must compete. Although the long-range
effects of this development cannot be predicted, most probably it will further
narrow the differences and intensify competition among commercial banks,
investment banks, insurance firms and other financial services
companies.
SEASONALITY
Management
does not feel that the deposits or the business of PNB in general are seasonal
in nature. The deposits may, however, vary with local and national economic
conditions but should not have a material effect on planning and policy
making.
CRITICAL ACCOUNTING
POLICIES
Disclosure
of the Company’s significant accounting policies is included in Note 1 to the
Consolidated Financial Statements. Some of these policies are particularly
sensitive requiring significant judgments, estimates and assumptions to be made
by management. Additional information is contained in Management’s Discussion
and Analysis for these issues, including the provision and allowance for loan
losses, which are located in Note 3 to the Consolidated Financial Statements;
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans; determination of other-than-temporary impairment losses
on securities, which is located in Note 2 to the Consolidated Financial
Statements; the valuation of deferred tax assets, which is located in Note 9 to
the consolidated financial statements; and the potential impairment of
restricted stock, which is located in Note 1 to the consolidated financial
statements.
13
Significant
estimates are made by management in determining the allowance for loan losses.
Consideration is given to a variety of factors in establishing this estimate. In
estimating the allowance for loan losses, management considers current economic
conditions, diversification of the loan portfolio, delinquency statistics,
results of internal loan review, financial and managerial strengths of
borrowers, adequacy of collateral, if collateral dependent, or present value of
future cash flows and other relevant factors. In estimating the
valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans, management considers current economic conditions and
appraised values of collateral, if collateral dependent.
Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. All of the Company’s investment securities classified as
available-for-sale are evaluated for OTTI under the rules for accounting for
certain investments in debt and equity securities.
In
determining OTTI under the rules for accounting for certain debt and equity
securities, management considers many factors, including: (1) the length of
time and the extent to which the fair value has been less than amortized cost,
(2) the financial condition and near-term prospects of the issuer,
(3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline
exists involves a high degree of subjectivity and judgment and is based on
information available to management at a point in time. An OTTI is deemed to
have occurred if there has been an adverse change in the remaining expected
future cash flows.
When an
OTTI occurs under the model, the amount of the OTTI recognized in earnings
depends on whether an entity intends to sell the security or more likely than
not will be required to sell the security before recovery of its amortized cost
basis less any current-period credit loss. If an entity intends to sell or more
likely than not will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date. If an entity
does not intend to sell the security and it is not more likely than not that the
entity will be required to sell the security before recovery of its amortized
cost basis less any current-period loss, the OTTI shall be separated into the
amount representing the credit loss and the amount related to all other factors.
The amount of the total OTTI related to the credit loss is determined based on
the present value of cash flows expected to be collected and is recognized in
earnings. The amount of the total OTTI related to other factors shall be
recognized in other comprehensive income, net of applicable tax benefit. The
previous amortized cost basis less the OTTI recognized in earnings shall become
the new amortized cost basis of the investment. As of December 31, 2009 the
Company does not intend to sell or more likely than not, be required to sell
these securities. Management believes that the unrealized losses
represent temporary impairment of the securities.
The deferred income taxes reflect temporary differences in the
recognition of the revenue and expenses for tax reporting and financial sttement
purposes, principally because certain items are recognized in different periods
for financial reporting and tax return purposes. Although realization is
not assured, the Company believes it is more likely than not that all deferred
tax assets will be realized.
As a
member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Company is
required to purchase and hold stock in the FHLB to satisfy membership and
borrowing requirements. This stock is restricted in that it can only be sold to
the FHLB or to another member institution, and all sales of FHLB stock must be
at par. As a result of these restrictions, FHLB stock is unlike other investment
securities insofar as there is no trading market for FHLB stock and the transfer
price is determined by FHLB membership rules and not by market participants. As
of December 31, 2009 and December 31, 2008, our FHLB stock totaled $2.771
million and $2.559 million, respectively.
In
December 2008, the FHLB voluntarily suspended dividend payments on its stock, as
well as the repurchase of excess stock from members. The FHLB cited a
significant reduction in the level of core earnings resulting from lower
short-term interest rates, the increased cost of liquidity, and constrained
access to the debt markets at attractive rates and maturities as the main
reasons for the decision to suspend dividends and the repurchase of excess
capital stock. The FHLB last paid a dividend in the third quarter of
2008.
FHLB
stock is held as a long-term investment and its value is determined based on the
ultimate recoverability of the par value. The Company evaluates impairment
quarterly. The decision of whether impairment exists is a matter of judgment
that reflects our view of the FHLB’s long-term performance, which includes
factors such as the following:
|
•
|
its
operating performance;
|
|
•
|
the
severity and duration of declines in the fair value of its net assets
related to its capital stock
amount;
|
14
|
•
|
its
commitment to make payments required by law or regulation and the level of
such payments in relation to its operating
performance;
|
|
•
|
the
impact of legislative and regulatory changes on the FHLB, and accordingly,
on the members of FHLB; and
|
|
•
|
its
liquidity and funding position.
|
After
evaluating all of these considerations, the Company concluded that the par value
of its investment in FHLB stock will be recovered. Accordingly, no impairment
charge was recorded on these securities for the year ended December 31, 2009 and
2008, respectively. Our evaluation of the factors described above in future
periods could result in the recognition of impairment charges on FHLB
stock.
INTERNET ADDRESS
DISCLOSURES
PNB’s
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and amendments to those reports can be found via a link to the SEC
Web page through our Website located at www.peoplesnatbank.com. This
website is available free of charge.
PNB has
posted its Code of Ethics for the chief executive officer, chief operation and
financial officer, and controller. This policy can be found at our Website
located at www.peoplesnatbank.com.
Copies are also available upon request and free of charge for Shareholders
without Web access.
STATISTICAL
DISCLOSURES
The
following statistical disclosures are included in Management’s Discussion and
Analysis, Item 7 hereof, and are incorporated by reference in this Item
1:
|
·
|
Interest
Rate Sensitivity Analysis;
|
|
·
|
Interest
Income and Expense, Volume and Rate Analysis;
|
|
·
|
Investment
Portfolio;
|
|
·
|
Loan
Maturity and Interest Rate Sensitivity;
|
|
·
|
Loan
Portfolio;
|
|
·
|
Allocation
of Allowance for Loan Losses;
|
|
·
|
Deposits;
and
|
|
·
|
Short-term
Borrowings.
|
ITEM
1A RISK FACTORS
Changes
in interest rates could reduce our income, cash flows and asset
values.
Our
income and cash flows and the value of our assets depend to a great extent on
the difference between the interest rates we earn on interest-earning assets,
such as loans and investment securities, and the interest rates we pay on
interest-bearing liabilities such as deposits and borrowings. These
rates are highly sensitive to many factors which are beyond our control,
including general economic conditions and policies of various governmental and
regulatory agencies and, in particular, the Board of Governors of the Federal
Reserve System. Changes in monetary policy, including changes in
interest rates, will influence not only the interest we receive on our loans and
investment securities and the amount of interest we pay on deposits and
borrowings, but will also affect our ability to originate loans and obtain
deposits and the value of our investment portfolio. If the rate of
interest we pay on our deposits and other borrowings increases more than the
rate of interest we earn on our loans and other investments, our net interest
income, and therefore our earnings, could be adversely affected. Our earnings
also could be adversely affected if the rates on our loans and other investments
fall more quickly than those on our deposits and other borrowings.
Economic
conditions either nationally or locally in areas in which our operations are
concentrated may adversely affect our business.
Deterioration
in local, regional, national or global economic conditions could cause us to
experience a reduction in deposits and new loans, an increase in the number of
borrowers who default on their loans and a reduction in the value of the
collateral securing their loans, all of which could adversely affect our
performance and financial condition. Unlike larger banks that are
more geographically diversified, we provide banking and financial services
locally. Therefore, we are particularly vulnerable to adverse local
economic conditions.
15
Our
financial condition and results of operations would be adversely affected if our
allowance for loan losses is not sufficient to absorb actual losses or if we are
required to increase our allowance.
Despite
our underwriting criteria, we may experience loan delinquencies and
losses. In order to absorb losses associated with nonperforming
loans, we maintain an allowance for loan losses based on, among other things,
historical experience, an evaluation of economic conditions, and regular reviews
of delinquencies and loan portfolio quality. Determination of the
allowance inherently involves a high degree of subjectivity and requires us to
make significant estimates of current credit risks and future trends, all of
which may undergo material changes. At any time, there are likely to
be loans in our portfolio that will result in losses but that have not been
identified as non-performing or potential problem credits. We cannot
be sure that we will be able to identify deteriorating credits before they
become nonperforming assets or that we will be able to limit losses on those
loans that are identified. We may be required to increase our
allowance for loan losses for any of several reasons. Regulators, in
reviewing our loan portfolio as part of a regulatory examination, may request
that we increase our allowance for loan losses. Changes in economic
conditions affects borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of our control, may require an increase in our allowance. In
addition, if charge-offs in future periods exceed our allowance for loan losses,
we will need additional increases in our allowance for loan
losses. Any increase in our allowance for loan losses will result in
a decrease in our net income and, possibly, our capital, and may materially
affect our results of operations in the period in which the allowance is
increased.
Competition
may decrease our growth or profits.
We face
substantial competition in all phases of our operations from a variety of
different competitors, including commercial banks, credit unions, consumer
finance companies, insurance companies and money market funds. There
is very strong competition among financial services providers in our principal
service area. Our competitors may have greater resources, higher
lending limits or larger branch systems than we do. Accordingly, they
may be able to offer a broader range of products and services as well as better
pricing for those products and services than we can. In addition,
some of the financial services organizations with which we compete are not
subject to the same degree of regulation as is imposed on federally insured
financial institutions. As a result, those non-bank competitors may
be able to access funding and provide various services more easily or at less
cost than we can, adversely affecting our ability to compete
effectively.
We
may be adversely affected by government regulation.
The
banking industry is heavily regulated. Banking regulations are
primarily intended to protect the federal deposit insurance funds and
depositors, not shareholders. Changes in the laws, regulations, and
regulatory practices affecting the banking industry may increase our cost of
doing business or otherwise adversely affect us and create competitive
advantages for others. Regulations affecting banks and financial
services companies undergo continuous change, and we cannot predict the ultimate
effect of these changes, which could have a material adverse effect on our
profitability or financial condition.
We
rely on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
We are,
and will continue to be, dependent upon the services of our management
team. The unexpected loss of services of any key management personnel
could have an adverse effect on our business and financial condition because of
their skills, knowledge of our market, years of industry experience and the
difficulty of promptly finding qualified replacement personnel.
Environmental
liability associated with lending activities could result in
losses.
In the
course of our business, we may foreclose on and take title to properties
securing our loans. If hazardous substances were discovered on any of
these properties, we could be liable to governmental entities or third parties
for the costs of remediation of the hazard, as well as for personal injury and
property damage. Many environmental laws can impose liability
regardless of whether we knew of, or were responsible for, the
contamination. In addition, if we arrange for the disposal of
hazardous or toxic substances at another site, we may be liable for the costs of
cleaning up and removing those substances from the site even if we neither own
nor operate the disposal site. Environmental laws may require us to
incur substantial expenses and may materially limit use of properties we acquire
through foreclosure, reduce their value or limit our ability to sell them in the
event of a default on the loans they secure. In addition, future laws
or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental
liability.
16
Failure
to implement new technologies in our operations may adversely affect our growth
or profits.
The
market for financial services, including banking services and consumer finance
services, is increasingly affected by advances in technology, including
developments in telecommunications, data processing, computers, automation,
Internet-based banking and telebanking. Our ability to compete
successfully in our markets may depend on the extent to which we are able to
exploit such technological changes. However, we can provide no
assurance that we will be able to properly or timely anticipate or implement
such technologies or properly train our staff to use such
technologies. Any failure to adapt to new technologies could
adversely affect our business, financial condition or operating
results.
An
investment in our common stock is not an insured deposit.
Our
common stock is not a bank deposit and, therefore, is not insured against loss
by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC,
or any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is subject to the same market
forces that affect the price of common stock in any company.
Our
legal lending limits are relatively low and restrict our ability to compete for
larger customers.
At
December 31, 2009, our lending limit per borrower was approximately $6,834,000
or approximately 15% of our unimpaired capital. Accordingly, the size of
loans that we can offer to potential borrowers (without participation by other
lenders) is less than the size of loans that many of our competitors with larger
capitalization are able to offer. Our legal lending limit also
impacts the efficiency of our lending operation because it tends to lower our
average loan size, which means we have to generate a higher number of
transactions to achieve the same portfolio volume. We may engage in
loan participations with other banks for loans in excess of our legal lending
limits. However, there can be no assurance that such participations
will be available at all or on terms which are favorable to us and our
customers.
Market
conditions may adversely affect our fee based investment business.
The
Company receives fee based revenues from commissions from the sale of securities
and investment advisory fees. In the event of decreased stock market
activity, the volume of trading facilitated by Uvest Financial Services will in
all likelihood decrease resulting in decreased commission revenue on purchases
and sales of securities. In addition, investment advisory fees, which
are generally based on a percentage of the total value of an investment
portfolio, will decrease in the event of decreases in the values of the
investment portfolios, for example, as a result of overall market
declines.
ITEM
1B UNRESOLVED STAFF COMMENTS
NONE.
ITEM
2 PROPERTIES
PNB has
four full-service banking offices in Susquehanna County that are located
in:
|
·
|
Borough
of Susquehanna Depot;
|
|
·
|
Hallstead
Plaza, Great Bend Township;
|
|
·
|
Borough
of Hop Bottom; and
|
|
·
|
Montrose,
Bridgewater Township.
|
PNB has
three full-service banking offices in Wyoming County that are located
in:
|
·
|
Borough
of Nicholson;
|
|
·
|
Meshoppen
Township; and
|
|
·
|
Tunkhannock
Borough.
|
PNB
entered into Lackawanna in 2008 with a de novo branch in
Glenburn. The Lackawanna County location is:
|
·
|
Glenburn
Township.
|
PNB has
three full-service banking offices in Broome County, New York that are located
in:
|
·
|
Town
of Conklin;
|
|
·
|
Town
of Chenango; and
|
|
·
|
Village
of Deposit.
|
17
The
administrative/operations office of the Company and PNB is located at 82
Franklin Avenue, Hallstead, Pennsylvania. The following departments are located
at that office:
|
·
|
commercial,
mortgage and consumer lending operations;
|
|
·
|
executive
offices;
|
|
·
|
marketing
department;
|
|
·
|
human
resources department;
|
|
·
|
deposit
account support services;
|
|
·
|
data
processing services; and
|
|
·
|
corporate
accounting.
|
All
offices are owned in fee title by PNB with the exception of the Hallstead Plaza,
Meshoppen and Town of Chenango offices. The Hallstead Plaza and Meshoppen
offices are subject to ground leases; and the Front Street office is subject to
a building lease. Each lease is either long-term expiring in September 2028 or
includes renewal options. Current lease payments range from $3,296 to $38,496
annually. The leases provide that the Bank pay property taxes, insurance, and
maintenance costs. Ten of the twelve offices provide drive-up banking services
and nine offices have 24-hour ATM services.
ITEM
3 LEGAL PROCEEDINGS
The
Company is subject to lawsuits and claims arising out of its
business. In the opinion of the Company’s management, after review
and consultation with counsel, any proceedings that may arise should not result
in judgments, which, in the aggregate, would have a material adverse effect on
the Company’s consolidated financial statements.
ITEM
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
18
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The
Company’s Common Stock is not listed on an exchange or quoted on the National
Association of Securities Dealers, Inc. Automated Quotation system (NASDAQ). The
Company’s common stock is traded sporadically in the over-the-counter market
and, accordingly, there is no established public trading market at this time.
The Company’s stock is listed on the OTC Bulletin Board under the symbol PFIS.
The cusip number is 711040-10-5. The investment firms of Boenning &
Scattergood, Inc. from West Conshohocken, Pennsylvania, and Stifel Nicolaus from
Livingston, New Jersey, make a limited market in the Company’s common stock. The
Company, and previously the Bank, have continuously paid dividends for more than
100 years and it is the intention to pay dividends in the future. However,
future dividends must necessarily depend upon earnings, financial condition,
appropriate legal restrictions, and other factors at the time that the Board of
Directors considers dividend payments. As of December 31, 2009, there were
27,449 outstanding options to purchase the Company’s common stock. See Note 8 of
the Consolidated Financial Statements for more information. Book value of common
stock at December 31, 2009, was $14.34 and on December 31, 2008, it was $12.69.
As of December 31, 2009, the Company had approximately 1,087 shareholders of
record. At such date, 3,136,156 shares of Common Stock were
outstanding.
The
following table reflects high and low bid prices for shares of the Company’s
Common Stock to the extent such information is available, and the dividends
declared with respect thereto during the preceding two years.
COMPANY
STOCK
|
2009
|
2008
|
|||||||||||||||||||||||
|
Price
Range
|
Dividends
|
Price
Range
|
Dividends
|
|||||||||||||||||||||
|
Low
|
High
|
Declared
|
Low
|
High
|
Declared
|
|||||||||||||||||||
|
First
Quarter
|
$ | 17.00 | $ | 18.50 | $ | .19 | $ | 22.00 | $ | 26.30 | $ | .19 | ||||||||||||
|
Second
Quarter
|
$ | 16.75 | $ | 17.40 | $ | .19 | $ | 22.50 | $ | 25.05 | $ | .19 | ||||||||||||
|
Third
Quarter
|
$ | 16.90 | $ | 17.40 | $ | .19 | $ | 22.35 | $ | 25.50 | $ | .19 | ||||||||||||
|
Fourth
Quarter
|
$ | 16.80 | $ | 18.25 | $ | .19 | $ | 18.05 | $ | 24.00 | $ | .19 | ||||||||||||
19
The
following table discloses the number of outstanding options, warrants and rights
granted by the Company to participants in equity compensation plans, as well as
the number of securities remaining available for future issuance under these
plans. The table provides this information separately for equity compensation
plans that have and have not been approved by security holders.
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans {excluding securities reflected in column (a)
}*
|
||||||||||
|
Equity compensation plans
approved by
stockholders
|
27,449 | $ | 22.43 | 65,751 | ||||||||
|
Equity compensation plans
not approved by
stockholders
|
0 | 0 | 0 | |||||||||
|
Total
|
27,449 | $ | 22.43 | 65,751 | ||||||||
*
Securities for future issuance are reserved and issued at the discretion of the
Board of Directors on an annual basis.
The
following table discloses the purchases made by the Company of shares of its
common stock in the fourth quarter of 2009.
|
MONTH
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
Maximum
number of shares that may yet be purchased under the plans or programs
(1)
|
||||||||||||
|
October
1, 2009 – October 31, 2009
|
0 | $ | 0 | 0 | 65,751 | |||||||||||
|
November
1, 2009 – November 30, 2009
|
0 | 0 | 0 | 65,751 | ||||||||||||
|
December
1, 2009 – December 31, 2009
|
0 | 0 | 0 | 65,751 | ||||||||||||
|
Total
|
0 | $ | 0 | 0 | 65,751 | |||||||||||
(1) On
July 2, 2001, the Board of Directors authorized the repurchase of 158,931 shares
of the Corporation’s common stock outstanding from shareholders.
The
performance graph formerly included in the Company’s Proxy Statement can now be
found in the Company’s Annual Report to its shareholders.
20
ITEM 6 SELECTED FINANCIAL
DATA
|
Consolidated
Financial Highlights
|
At
and For the Years Ended December 31,
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars
In Thousands, except Per Share Data)
|
||||||||||||||||||||
|
Net
Income
|
$ | 5,049 | $ | 3,039 | $ | 4,871 | $ | 4,129 | $ | 4,476 | ||||||||||
|
Return
on Average Assets
|
1.07 | % | 0.68 | % | 1.17 | % | 1.03 | % | 1.16 | % | ||||||||||
|
Return
on Average Equity
|
12.62 | % | 7.53 | % | 11.85 | % | 10.55 | % | 11.37 | % | ||||||||||
|
Shareholders'
Value
|
||||||||||||||||||||
|
Earnings
per Share, Basic
|
$ | 1.61 | $ | 0.97 | $ | 1.55 | $ | 1.31 | $ | 1.42 | ||||||||||
|
Earnings
per Share, Diluted
|
1.61 | 0.97 | 1.55 | 1.31 | 1.41 | |||||||||||||||
|
Regular
Cash Dividends
|
0.76 | 0.76 | 0.76 | 0.76 | 0.76 | |||||||||||||||
|
Special
Cash Dividends
|
0.00 | 0.00 | 0.00 | 0.00 | 1.00 | |||||||||||||||
|
Book
Value
|
14.34 | 12.69 | 13.64 | 13.16 | 12.55 | |||||||||||||||
|
Market
Value at End of the Year
|
18.05 | 18.05 | 26.30 | 26.00 | 31.45 | |||||||||||||||
|
Market
Value/Book Value Ratio
|
125.87 | % | 142.24 | % | 192.82 | % | 197.57 | % | 250.60 | % | ||||||||||
|
Price
Earnings Multiple
|
11.21 | X | 18.61 | X | 16.97 | X | 19.85 | X | 22.14 | X | ||||||||||
|
Dividend
Payout Ratio
|
47.16 | % | 78.35 | % | 48.92 | % | 57.93 | % | 53.50 | % | ||||||||||
|
Dividend
Yield
|
4.21 | % | 4.21 | % | 2.89 | % | 2.94 | % | 2.42 | % | ||||||||||
|
Safety and
Soundness
|
||||||||||||||||||||
|
Stockholders'
Equity/Asset Ratio
|
8.71 | % | 8.41 | % | 9.85 | % | 9.91 | % | 10.13 | % | ||||||||||
|
Allowance
for Loan Loss as a Percent of Loans
|
0.99 | % | 0.95 | % | 0.84 | % | 0.66 | % | 0.92 | % | ||||||||||
|
Net
Charge Offs/Total Loans
|
0.42 | % | 0.05 | % | (0.13 | %) | 0.33 | % | 0.29 | % | ||||||||||
|
Allowance
for Loan Loss/Nonaccrual Loans
|
132.00 | % | 498.67 | % | 620.51 | % | 402.70 | % | 206.62 | % | ||||||||||
|
Allowance
for Loan Loss/Non-performing Loans
|
100.33 | % | 58.68 | % | 620.51 | % | 248.89 | % | 183.74 | % | ||||||||||
|
Balance Sheet
Highlights
|
||||||||||||||||||||
|
Total
Assets
|
$ | 516,483 | $ | 472,376 | $ | 434,434 | $ | 416,268 | $ | 391,198 | ||||||||||
|
Total
Investments
|
130,506 | 107,589 | 109,471 | 107,788 | 105,778 | |||||||||||||||
|
Net
Loans
|
332,966 | 313,606 | 288,601 | 269,383 | 256,870 | |||||||||||||||
|
Allowance
for Loan Losses
|
3,337 | 3,002 | 2,451 | 1,792 | 2,375 | |||||||||||||||
|
Short-term
Borrowings
|
20,439 | 18,432 | 22,848 | 12,574 | 17,842 | |||||||||||||||
|
Long-term
Borrowings
|
38,750 | 39,691 | 38,534 | 36,525 | 34,770 | |||||||||||||||
|
Total
Deposits
|
410,038 | 371,268 | 327,430 | 323,613 | 296,962 | |||||||||||||||
|
Stockholders'
Equity
|
44,970 | 39,720 | 42,805 | 41,240 | 39,616 | |||||||||||||||
21
ITEM
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
consolidated review and analysis of Peoples Financial Services Corp. (the
Company) is intended to assist the reader in evaluating the Company’s
performance for the years ending December 31 2009, 2008, and 2007. The
information should be read in conjunction with the consolidated financial
statements and the accompanying notes to those statements.
Peoples
Financial Services Corp. (the Company) is the one-bank holding company of
Peoples National Bank (the Bank), which is wholly owned by the Company. The
Company and the Bank derive their primary income from the operation of a
commercial bank, including earning interest on loans and investment securities.
The Bank incurs interest expense in relation to deposits and other borrowings.
The Bank operates eleven full-service branches in the Hallstead Shopping Plaza,
Hop Bottom, Montrose, Susquehanna, Nicholson, Tunkhannock, Meshoppen, and
Glenburn, Pennsylvania and Conklin, Village of Deposit and Town of Chenango,
Broome County, New York. The Bank has on-site automated teller machines at all
offices except Hop Bottom and Meshoppen. The administrative offices and
operations offices are located in Hallstead, Pennsylvania. Principal market
areas are Susquehanna, Wyoming Counties and northern Lackawanna County in
Pennsylvania and the Southern Tier of Broome County, New York and the bordering
areas of those counties. As of December 31, 2009, the Bank employed 117
full-time employees and 22 part-time employees.
Forward
Looking Statements
When used
in this discussion, the words “believes”, “anticipates”, “contemplated”,
“expects”, or similar expressions are intended to identify forward looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Those
risks and uncertainties include changes in interest rates, the ability to
control costs and expenses, and general economic conditions. The Company
undertakes no obligation to publicly release the results of any revisions to
those forward looking statements that may be made to reflect events or
circumstances after this date or to reflect the occurrence of unanticipated
events.
Critical
Accounting Policies
Note 1 to
the Company’s consolidated financial statements lists significant accounting
policies used in the development and presentation of its financial statements.
This discussion and analysis, the significant accounting policies, and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of the Company and its results of operations.
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require the Company to
make estimates and assumptions. The Company believes that its determination of
the allowance for loan losses involves a higher degree of judgment and
complexity than the Company’s other significant accounting policies. Further,
these estimates can be materially impacted by changes in market conditions or
the actual or perceived financial condition of the Company’s borrowers,
subjecting the Company to significant volatility of earnings.
The
allowance for loan losses is established through the provision for loan losses,
which is a charge against earnings. Provisions for loan losses are made to
reserve for estimated probable losses on loans. The allowance for loan losses is
a significant estimate and is regularly evaluated by the Company for adequacy by
taking into consideration factors such as changes in the nature and volume of
the loan portfolio, trends in actual and forecasted credit quality, including
delinquency, charge-off and bankruptcy rates, and current economic conditions
that may affect a borrower’s ability to pay. The use of different estimates of
assumptions could produce a different provision for loan losses. For additional
discussion concerning the Company’s allowance for loan losses and related
matters, see “Provision for Loan Losses”.
In
determining the necessity of recording an other-than-temporary impairment on
securities owned by the Company, four main characteristics are considered;
the length of time and the extent to which the fair value has been less
than amortized cost, the financial condition and near-term prospects of the
issuer, whether the market decline was affected by macroeconomic conditions, and
whether the entity has the intent to sell the debt security or more likely than
not will be required to sell the debt security before its anticipated
recovery. The Company believes that the unrealized losses, at
December 31, 2009 and 2008 represent temporary impairment of the
securities.
22
The
deferred income taxes reflect temporary differences in the recognition of the
revenue and expenses for tax reporting and financial statement purposes,
principally because certain items are recognized in different periods for
financial reporting and tax return purposes. Although realization is
not assured, the Company believes it is more likely than not that all deferred
tax assets will be realized.
Restricted
stock which represents required investment in the common stock of correspondent
banks is carried at cost and as of December 31, 2009 and 2008, consists of the
common stock of Federal Home Loan Bank of Pittsburgh. In December
2008, the FHLB of Pittsburgh notified member banks that it was suspending
dividend payments and the repurchase of capital stock.
Management
evaluates the restricted stock for impairment in accordance with ASC Topic 942,
Accounting by Certain Entities (Including Entities With Trade Receivables) That
Lend to or Finance the Activities of Others. Management’s
determination of whether these investments are impaired is based on their
assessment of the ultimate recoverability of their cost rather than by
recognizing temporary decline in value. The determination of whether
a decline affects the ultimate recoverability of their cost is influenced by
criteria such as (1) the significance of the decline in net assets of the FHLB
as compared to the capital stock amount for the FHLB and length of time this
situation has persisted, (2) commitments by the FHLB to make payments required
by law or regulation and the level of such payments in relation to the operating
performance of the FHLB, and (3) the impact of legislative and regulatory
changes on institutions and, accordingly, on the customer base of the
FHLB. Management believes no impairment charge is necessary related
to the restricted stock as of December 31, 2009.
RESULTS OF
OPERATIONS
Net
Interest Income
Net
interest income is the main source of the Company’s income. It is the difference
between interest earned on assets and interest paid on liabilities. The
discussion of net interest income should be read in conjunction with Table 2:
“Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates
and Interest Differential”, and Table 3: “Rate/Volume Analysis of Changes in Net
Interest Income.”
The
following table shows the net interest income on a fully-tax-equivalent basis
for each of the three years ended December 2009, 2008, and 2007.
TABLE
1
Net
Interest Income
(In
Thousands)
|
Year-Ended
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Total
Interest Income
|
$ | 24,273 | $ | 25,479 | $ | 24,611 | ||||||
|
Tax
Exempt Loans
|
496 | 518 | 486 | |||||||||
|
Non-Taxable
Securities
|
1,091 | 892 | 885 | |||||||||
|
Total
Tax Equivalent Adjustment
|
1,587 | 1,410 | 1,371 | |||||||||
|
Total
Tax Equivalent Interest Income
|
25,860 | 26,889 | 25,982 | |||||||||
|
Total
Interest Expense
|
7,258 | 9,154 | 11,105 | |||||||||
|
Net
Interest Income (Fully Tax Equivalent Basis)
|
$ | 18,602 | $ | 17,735 | $ | 14,877 | ||||||
Table 2
includes the average balances, interest income and expense, and the average
rates earned and paid for assets and liabilities. For yield
calculation purposes, non-accruing loans are included in average loan balances.
Table 3 analyzes the components contributing to the changes in net interest
income and indicates the impact in either changes in rate or changes in
volume.
23
TABLE
2
Distribution
of Assets, Liabilities and Stockholders' Equity
Interest
Rates and Interest Differential
(In
Thousands)
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
|||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
||||||||||||||||||||||
|
ASSETS
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||
|
Loans
|
|||||||||||||||||||||||||||
|
Real
Estate
|
$ | 119,062 | $ | 7,186 | 6.04 | % | $ | 117,635 | $ | 7,602 | 6.46 | % | $ | 115,490 | $ | 7,615 | 6.59 | % | |||||||||
|
Installment
|
18,236 | 1,116 | 6.12 | % | 16,815 | 1,303 | 7.75 | % | 17,143 | 1,442 | 8.41 | % | |||||||||||||||
|
Commercial
|
161,762 | 10,143 | 6.27 | % | 140,903 | 9,917 | 7.04 | % | 123,854 | 9,424 | 7.61 | % | |||||||||||||||
|
Tax
Exempt (1)
|
22,516 | 962 | 6.48 | % | 22,913 | 1,005 | 6.65 | % | 21,165 | 943 | 6.75 | % | |||||||||||||||
|
Other
Loans
|
506 | 39 | 7.71 | % | 469 | 44 | 9.38 | % | 467 | 57 | 12.21 | % | |||||||||||||||
|
Total
Loans (1)
|
322,082 | 19,446 | 6.19 | % | 298,735 | 19,871 | 6.83 | % | 278,119 | 19,481 | 7.18 | % | |||||||||||||||
|
Investment
Securities (2)
|
|||||||||||||||||||||||||||
|
Taxable
|
53,945 | 2,675 | 4.96 | % | 67,897 | 3,771 | 5.55 | % | 65,438 | 3,351 | 5.12 | % | |||||||||||||||
|
Non-Taxable
(1)
|
52,326 | 2,118 | 6.13 | % | 42,859 | 1,731 | 6.12 | % | 44,192 | 1,717 | 5.89 | % | |||||||||||||||
|
Total
Securities (1)
|
106,271 | 4,793 | 5.54 | % | 110,756 | 5,502 | 5.77 | % | 109,630 | 5,068 | 5.43 | % | |||||||||||||||
|
Time
Deposits With
Other Banks
|
1,408 | 17 | 1.21 | % | 1,186 | 26 | 2.19 | % | 315 | 18 | 5.71 | % | |||||||||||||||
|
Fed
Funds Sold
|
9,617 | 17 | 0.18 | % | 6,817 | 80 | 1.17 | % | 723 | 44 | 6.09 | % | |||||||||||||||
|
Total
Earning Assets
(1)
|
439,378 | 24,273 | 5.89 | % | 417,494 | 25,479 | 6.44 | % | 388,787 | 24,611 | 6.68 | % | |||||||||||||||
|
Less:
Allowance for
Loan Losses
|
(2,969 | ) | (2,599 | ) | (2,025 | ) | |||||||||||||||||||||
|
Cash
and Due from
Banks
|
6,302 | 6,851 | 6,639 | ||||||||||||||||||||||||
|
Premises
and
Equipment,
Net
|
6,507 | 6,227 | 5,712 | ||||||||||||||||||||||||
|
Other
Assets
|
21,642 | 19,741 | 17,690 | ||||||||||||||||||||||||
|
Total
Assets
|
$ | 470,860 | $ | 447,714 | $ | 416,803 | |||||||||||||||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||||||||||||||||||||||
|
Deposits
|
|||||||||||||||||||||||||||
|
Interest
Bearing
Demand
|
$ | 35,697 | 324 | 0.91 | % | $ | 28,871 | 284 | 0.98 | % | $ | 25,341 | 290 | 1.14 | % | ||||||||||||
|
Regular
Savings
|
130,652 | 1,696 | 1.30 | % | 94,019 | 1,219 | 1.30 | % | 106,969 | 3,311 | 3.10 | % | |||||||||||||||
|
Money
Market Savings
|
32,771 | 343 | 1.05 | % | 33,858 | 600 | 1.77 | % | 35,355 | 1,089 | 3.08 | % | |||||||||||||||
|
Time
|
106,353 | 2,965 | 2.79 | % | 132,313 | 4,923 | 3.72 | % | 102,643 | 4,329 | 4.22 | % | |||||||||||||||
|
Total
Interest Bearing
Deposits
|
305,473 | 5,328 | 1.74 | % | 289,061 | 7,026 | 2.43 | % | 270,308 | 9,019 | 3.34 | % | |||||||||||||||
|
Other
Borrowings
|
59,141 | 1,930 | 3.26 | % | 58,368 | 2,128 | 3.65 | % | 50,183 | 2,086 | 4.16 | % | |||||||||||||||
|
Total
Interest Bearing Liabilities
|
364,614 | 7,258 | 1.99 | % | 347,429 | 9,154 | 2.63 | % | 320,491 | 11,105 | 3.46 | % | |||||||||||||||
|
Net
Interest Spread (1)
|
$ | 17,015 | 3.90 | % | $ | 16,325 | 3.81 | % | $ | 13,506 | 3.22 | % | |||||||||||||||
|
Non-Interest
Bearing
|
|||||||||||||||||||||||||||
|
Demand
Deposits
|
63,325 | 56,778 | 52,613 | ||||||||||||||||||||||||
|
Accrued
Expenses and
|
|||||||||||||||||||||||||||
|
Other
Liabilities
|
2,916 | 3,173 | 2,604 | ||||||||||||||||||||||||
|
Stockholders’
Equity
|
40,005 | 40,334 | 41,095 | ||||||||||||||||||||||||
|
Total
Liabilities and
|
|||||||||||||||||||||||||||
|
Stockholders’
Equity
|
$ | 470,860 | $ | 447,714 | $ | 416,803 | |||||||||||||||||||||
|
Interest
Income/Earning
Assets (1)
|
5.89 | % | 6.44 | % | 6.68 | % | |||||||||||||||||||||
|
Interest
Expense/Earning
Assets
|
1.65 | % | 2.19 | % | 2.86 | % | |||||||||||||||||||||
|
Net
Interest Margin
(1)
|
4.23 | % | 4.25 | % | 3.82 | % | |||||||||||||||||||||
|
(1)
|
Yields
on tax exempt assets have been calculated on a fully tax equivalent basis
assuming a tax rate of 34%.
|
|
(2)
|
Includes
investment in restricted stock at
cost.
|
24
TABLE
3
Rate/Volume Analysis of Changes in
Net Interest Income
(In
Thousands)
|
2009
to 2008
|
2008
to 2007
|
|||||||||||||||||||||||
|
Increase
(Decrease)
|
Change Due to Rate
|
Volume
|
Increase
(Decrease)
|
Change Due to Rate
|
Volume
|
|||||||||||||||||||
|
Interest
Income
|
||||||||||||||||||||||||
|
Real
Estate Loans
|
$ | (416 | ) | $ | (502 | ) | $ | 86 | $ | (13 | ) | $ | (152 | ) | $ | 139 | ||||||||
|
Installment
Loans
|
(187 | ) | (274 | ) | 87 | (139 | ) | (114 | ) | (25 | ) | |||||||||||||
|
Commercial
Loans
|
226 | (1,082 | ) | 1,308 | 493 | (707 | ) | 1,200 | ||||||||||||||||
|
Tax
Exempt Loans
|
(43 | ) | (26 | ) | (17 | ) | 62 | (15 | ) | 77 | ||||||||||||||
|
Other
Loans
|
(5 | ) | (8 | ) | 3 | (13 | ) | (13 | ) | 0 | ||||||||||||||
|
Total
Loans
|
(425 | ) | (1,892 | ) | 1,467 | 390 | (1,001 | ) | 1,391 | |||||||||||||||
|
Investment
Securities
|
||||||||||||||||||||||||
|
Taxable
|
(1,096 | ) | (404 | ) | (692 | ) | 420 | 283 | 137 | |||||||||||||||
|
Non-Taxable
|
387 | 4 | 383 | 14 | 68 | (54 | ) | |||||||||||||||||
|
Total
Securities
|
(709 | ) | (400 | ) | (309 | ) | 434 | 351 | 83 | |||||||||||||||
|
Time
Deposits with Other Banks
|
(9 | ) | (12 | ) | 3 | 8 | (11 | ) | 19 | |||||||||||||||
|
Fed
Funds Sold
|
(63 | ) | (68 | ) | 5 | 36 | (36 | ) | 72 | |||||||||||||||
|
Total
Interest Income
|
(1,206 | ) | (2,372 | ) | 1,166 | 868 | (697 | ) | 1,565 | |||||||||||||||
|
Interest
Expense
|
||||||||||||||||||||||||
|
Interest
Bearing Demand Deposits
|
40 | (22 | ) | 62 | (6 | ) | (41 | ) | 35 | |||||||||||||||
|
Regular
Savings Deposits
|
477 | 1 | 476 | (2,092 | ) | (1,924 | ) | (168 | ) | |||||||||||||||
|
Money
Market Savings Deposits
|
(257 | ) | (246 | ) | (11 | ) | (489 | ) | (462 | ) | (27 | ) | ||||||||||||
|
Time
Deposits
|
(1,958 | ) | (1,234 | ) | (724 | ) | 594 | (510 | ) | 1,104 | ||||||||||||||
|
Total
Interest Bearing Deposits
|
(1,698 | ) | (1,501 | ) | (197 | ) | (1,993 | ) | (2,937 | ) | 944 | |||||||||||||
|
Other
Borrowings
|
(198 | ) | (223 | ) | 25 | 42 | (256 | ) | 298 | |||||||||||||||
|
Total
Interest Expense
|
(1,896 | ) | (1,724 | ) | (172 | ) | (1,951 | ) | (3,193 | ) | 1,242 | |||||||||||||
|
Net
Interest Spread
|
$ | 690 | $ | (648 | ) | $ | 1,338 | $ | 2,819 | $ | 2,496 | $ | 323 | |||||||||||
Interest
income on total loans decreased in 2009. This decrease of $425,000 is shown in
Table 3. The table shows that there was an increase of $1,467,000 due to volume
and the drop in interest rates contributed a decrease in income of $1,892,000 in
2009. This compares to an increase of $1,391,000 due to volume and a decrease of
$1,001,000 due to rates in 2008. Lower interest rates in 2009 had a
severe impact on the Bank’s interest income mitigated somewhat by loan
growth. To view the loan portfolio growth numbers and interest yields
see Table 2 which shows the average balance in loans increased from $298,735,000
in 2008 to $322,082,000 in 2009 while at the same time the yield on loans
dropped from 6.83% in 2008 to 6.19% in 2009.
In 2009,
interest income on securities decreased $709,000 year over year from
2008. Table 3 shows that lower rates took $400,000 from interest
income, and the decrease in the average balance took another $309,000 from
income. The average investments as shown in Table 2 were $106,271,000
in 2009 compared to $110,756,000 in 2008. In comparison, in 2008 interest income
on securities increased $434,000 year over year with a $351,000 gain due to
higher rates and an increase of $83,000 due to volume.
Interest
income from federal funds sold decreased $63,000 from 2008 to 2009 because of
lower rates in 2009. The change in interest income from fed funds sold in the
previous year, from 2008 to 2007, was largely due to increases in balances
rather than rate. Average federal funds sold balance was $9,617,000
in 2009 compared to $6,817,000 in 2008. Average federal funds sold
were $723,000 in 2007. Interest income from time deposits with other banks also
decreased $9,000 in 2009 primarily due to lower rates.
25
On the
interest expense side, overall interest expenses decreased by
$1,896,000. Of this total, $1,724,000 was directly attributable to
reductions in interest rates. In 2008, the Bank had significant
deposit growth which factored into the increase in interest bearing liabilities
at a cost of $944,000 in additional interest expense for those
deposits. However, this cost was offset by $2,937,000 reduction in
deposit costs from interest rate decreases. The average balance
in interest bearing deposits was $305,473,000 in 2009 as compared to
$289,061,000 in 2008. Other borrowed funds costs decreased in 2009. The total
decrease was $198,000 of which $25,000 was extra expense because of volume and
$223,000 was saved on rate. In 2008, other borrowings expense increased $42,000.
Of this increase, $298,000 was due to the growth in borrowed funds and $256,000
was saved due to lower rates. The average balance of borrowed funds
was $59,141,000 in 2009 compared to $58,368,000 in 2008.
The last
line in Table 3 shows that the net interest spread increased $690,000 in 2009
compared to an increase of $2,819,000 in 2008. Table 3 shows the negative impact
that rates had on net interest income in 2009 compared to the positive impact
rates had on net interest income in 2008. Net growth in deposits and
loans also remained positive in both years contributing $1,338,000 in 2009 and
$323,000 in 2008 to income.
PROVISION FOR LOAN
LOSSES
The
provision and allowance for loan losses are based on management’s ongoing
assessment of the Company’s credit exposure and consideration of other relevant
factors. The allowance for loan losses is a valuation reserve that is available
to absorb future loan charge-offs. The provision for loan losses is the amount
charged to earnings on an annual basis. The factors considered in management’s
assessment of the reasonableness of the allowance for loan losses include
prevailing and anticipated economic conditions, assigned risk ratings on loan
exposures, the results of examinations and appraisals of the loan portfolio
conducted by federal regulatory authorities and an independent loan review firm,
the diversification and size of the loan portfolio, the level of and inherent
risk in non-performing assets, and any other factors deemed relevant by
management.
The
provision for loan losses was $1,735,000, $713,000 and $280,000 for the years
2009, 2008, and 2007, respectively. Net charge-offs for 2009 were $1,400,000
compared to $162,000 in 2008. As of December 31, 2009, the allowance for loan
loss was .99% of loans and at December 31, 2008, the ratio was .95% of loans.
After allocation of reserves to all non-accrual and special-mention loans, as
well as applying a percentage to outstanding loans based on the loss history of
such loans in each category and other qualitative factors, the opinion of
management was that the allowance for loan losses was proper and
sufficient. The allowance for loan losses is maintained at a level
considered adequate to provide for losses that can be reasonably
anticipated. Management’s periodic evaluation of the adequacy of the
allowance is based on the Bank’s past loan loss experience, known or inherent
risks in the portfolio, adverse situations that may affect the borrower’s
ability to repay, the estimated value of any underlying collateral, composition
of the loan portfolio, current economic conditions and other relevant
factors. Management believed that certain risks, primarily current
economic conditions, warranted an increase in the allowance for loan losses for
the year ended December 31, 2009. The ratio of allowance for loan loss to
non-performing loans was 100.33% at year end 2009 compared to 58.68% at year end
2008 and 620.51% at year end 2007.
26
The
following table analyzes the increase in total other income by comparing the
years 2009, 2008 and 2007.
TABLE
4
Non-Interest Income
(In
Thousands)
|
Year
Ended December
31,
|
Variance
2009
|
Variance
2008
|
||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
Amount
Of Change
|
Percent
Of Change
|
Amount
Of Change
|
Percent
Of
Change
|
||||||||||||||||||||||
|
Customer Service Fees
|
$ | 1,950 | $ | 2,006 | $ | 1,947 | $ | (56 | ) | (2.79 | %) | $ | 59 | 3.03 | % | |||||||||||||
|
Investment Division Commission Income
|
341 | 411 | 340 | (70 | ) | (17.03 | %) | 71 | 20.88 | % | ||||||||||||||||||
|
Earnings on Investment on Life Insurance
|
342 | 296 | 297 | 46 | 15.54 | % | (1 | ) | (0.34 | %) | ||||||||||||||||||
|
Premiums and fees on mortgage sales
|
438 | 148 | 69 | 290 | 195.95 | % | 79 | 114.49 | % | |||||||||||||||||||
|
Other Income
|
467 | 458 | 557 | 9 | 1.97 | % | (99 | ) | (17.77 | %) | ||||||||||||||||||
|
Gains on Sale of Interest in Insurance Agency
|
0 | 0 | 220 | 0 | 0.00 | % | (220 | ) | (100.00 | %) | ||||||||||||||||||
|
Gains (Losses) on Security Sales
|
(492 | ) | 128 | (122 | ) | (620 | ) | (484.38 | %) | 250 | (204.92 | %) | ||||||||||||||||
|
Other than Temporary Impairment
|
(206 | ) | (5,256 | ) | 0 | 5,050 | 96.08 | % | (5,256 | ) | (100.00 | %) | ||||||||||||||||
|
Total Other Income
|
$ | 2,840 | $ | (1,809 | ) | $ | 3,308 | $ | 4,649 | 256.99 | % | $ | (5,117 | ) | (154.69 | %) | ||||||||||||
OTHER INCOME
Non-Interest
Income
There was
an overall increase in non-interest income of $4,649,000 in
2009. This represents an increase of 256.99% in 2009 when compared to
a loss of $1,809,000 in 2008. For comparison, there was an overall decrease in
non-interest income of $5,117,000 or 154.69% in 2008 when compared to $3,308,000
in 2007.
The
non-interest income items that result in these variations are as
follows:
Non-interest
income includes items that are not related to interest rates on loans and
investments, but rather to services rendered and activities conducted in
conjunction with the operation of a commercial bank. Service charges earned on
deposit accounts is the largest single item in this category and represents fees
related to deposit accounts including overdraft fees, minimum balance fees, and
transaction fees. In 2009, service charges and fees decreased $56,000 or 2.79%
to $1,950,000 compared to $2,006,000 for 2008 which was an increase of $59,000
or 3.03% from the 2007 amount of $1,947,000.
Commissions
earned by the Investment Division were $341,000 in 2009 compared to $411,000 in
2008, a decrease of $70,000 or 17.03%. Investment activity slowed in 2009 as
more customers sought the safety of FDIC insurance offered by bank
deposits.
By
comparison, commissions earned by the Investment Division were $411,000 in 2008,
compared to $340,000 in 2007, an increase of $71,000, or 20.88%. As the
Investment Division grew and became more established, so did the commissions
earned on the assets managed. Additionally, a fee structure implemented in 2006
whereby fees on the front end were sacrificed in lieu of ongoing account
management fees was responsible for this increase as the Company began to see
positive results from the strategy.
Earnings
on investment in life insurance were $342,000 in 2009, compared to $296,000 in
2008, an increase of $46,000 or 15.54%. While there were no additional
investments in BOLI, there was a transfer of nearly $2,000,000 in BOLI
investment to a new carrier in which the crediting rates applied to the
insurance increased significantly.
Earnings
on investment in life insurance amounted to $296,000 in 2008, compared to
$297,000 in 2007, a decrease of $1,000, or 0.34%. There were no
additional investments to BOLI in 2008 and crediting rates remained steady for
that period.
27
Premiums
and fees on mortgage sales was $438,000 in 2009, compared to $148,000 in 2008,
an increase of $290,000 or 195.95% when compared to 2008. This was
due to a large volume of mortgage loan sales in 2009 at premium levels when
compared to 2008. Income recognized through mortgage sales has increased
steadily as more customers are attracted by the rates offered by Fannie
Mae.
For
comparison, Premiums and fees on mortgage sales was $148,000 in 2008, compared
to $69,000 in 2007, an increase of $79,000, or 114.49%. This was also
due to a larger volume of mortgage loan sales in 2008 at premium levels when
compared to 2007.
Other
income was $467,000 in 2009, compared to $458,000 in 2008, an increase of $9,000
or 1.97% when compared to 2008. This increase is not considered to be
significant.
By
comparison, other income was $458,000 in 2008, compared to $557,000 in 2007, a
decrease of $99,000, or 17.77%. This was primarily due to income
recognized through the operation of the insurance agency which was $70,000 in
2007. Insurance operations were discontinued in 2007. This decrease
accounted for the most significant portion of the overall decrease in other
income in 2008.
Gain on
sale of interest in insurance agency was $0 for 2009 and 2008 compared to
$220,000 for 2007. The Company realized a gain through the sale of
its 20% interest in Community Bankers Insurance Agency (CBIA) in May of 2007.
There was no comparable gain in 2009 or 2008. The Company does not expect the
sale of the insurance agency to have a significant impact on future
earnings.
In 2009,
The Company had losses of $492,000 realized through sales of available-for-sale
securities compared to a gain of $128,000 in 2008. This is a decrease
of $620,000 or 484.38%. Comparing 2008 to 2007, the Company had
$128,000 in realized gains through sales of available-for-sale securities
compared to $122,000 realized losses in 2007. This was an increase of
$250,000 or 204.92%. The increase experienced in 2008 was due to more favorable
market conditions for much of 2008.
As
previously mentioned in the discussion of securities, management evaluates
securities for other than temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) whether the market
decline was affected by macroeconomic conditions, and (4) whether the entity has
the intent to sell the debt security or more likely than not, will be required
to sell the debt security before its anticipated recovery. As such, a
determination was made in 2009 to record other than temporary impairment charges
in relation to three equity positions held by the Company in the amount of
$206,000. This compares to 2008 when other than temporary impairment charges
were recorded in relation to five equity positions held by the Company in the
amount of $387,000, 2 preferred equity positions held in the FHLMC (“Freddie
Mac’s) in the amount of $2,289,000 and 2 corporate bonds in the amount of
$2,580,000. The amount of impairment charged against income for the year ended
December 31, 2008 was $5,256,000. This represents an increase to income when
comparing 2009 to 2008 of $5,050,000 or 96.08%. The charges are not comparable
to the same period in 2007. These, as well as all securities will be
monitored in future quarters for any further deterioration.
As a
result of the Emergency Economic Stabilization Act of 2008 (EESA) the resulting
deferred tax asset created by the other-than-temporary impairment of the
Company’s preferred equity holdings in the FHLMC did not require a valuation
allowance to be recognized. The loss was determined to be ordinary for tax
purposes under the EESA and any future gains realized from selling those FHLMC
holdings would also be treated as ordinary for income tax
purposes. See Note 9 for further discussion of the realization of
deferred tax assets, included that portion related to capital losses on equity
securities.
28
TABLE
5
Non-Interest
Expense
(In
Thousands)
|
Year
Ended December
31,
|
Variance
2009
|
Variance
2008
|
||||||||||||||||||||||
|
2009
|
2008
|
2007
|
Amount
Of Change
|
Percent
Of Change
|
Amount
Of Change
|
Percent Of
Change
|
||||||||||||||||||
|
Salaries and Benefits
|
$ | 5,532 | $ | 4,831 | $ | 4,767 | $ | 701 | 14.51 | % | $ | 64 | 1.34 | % | ||||||||||
|
Occupancy Expenses
|
814 | 733 | 788 | 81 | 11.05 | % | (55 | ) | (6.98 | %) | ||||||||||||||
|
Furniture and Equipment Expense
|
546 | 493 | 508 | 53 | 10.75 | % | (15 | ) | (2.95 | %) | ||||||||||||||
|
FDIC Insurance and Assessments
|
900 | 227 | 151 | 673 | 296.48 | % | 76 | 50.33 | % | |||||||||||||||
|
Professional Fees and Outside Services
|
588 | 520 | 371 | 68 | 13.08 | % | 149 | 40.16 | % | |||||||||||||||
|
Computer Services and Supplies
|
1,053 | 970 | 785 | 83 | 8.56 | % | 185 | 23.57 | % | |||||||||||||||
|
Taxes, Other Than Payroll and Income
|
346 | 400 | 386 | (54 | ) | (13.50 | %) | 14 | 3.63 | % | ||||||||||||||
|
Impairment Charge-Other Real Estate
|
0 | 0 | 575 | 0 | 0.00 | % | (575 | ) | (100.00 | %) | ||||||||||||||
|
Amortization Expense-Deposit Premiums
|
258 | 258 | 255 | 0 | 0.00 | % | 3 | 1.18 | % | |||||||||||||||
|
Stationary and Printing Supplies
|
357 | 360 | 339 | (3 | ) | (0.83 | %) | 21 | 6.19 | % | ||||||||||||||
|
Advertising
|
297 | 201 | 154 | 96 | 47.76 | % | 47 | 30.52 | % | |||||||||||||||
|
Other Operating Expenses
|
1,457 | 1,684 | 1,487 | (227 | ) | (13.48 | %) | 197 | 13.25 | % | ||||||||||||||
|
Total Non-Interest Expense
|
$ | 12,148 | $ | 10,677 | $ | 10,566 | $ | 1,471 | 13.78 | % | $ | 111 | 1.05 | % | ||||||||||
OTHER EXPENSES
Non-Interest
Expense
Non-interest
expense includes all other expenses associated with the Company. Total
non-interest expense increased from $10,677,000 in 2008 to $12,148,000 in 2009.
This is an increase of $1,471,000 or 13.78%. Details of the components of
non-interest expense are listed below:
Salaries
and related benefits is the largest expense in this category and it increased
$701,000 or 14.51%, over the 2008 expense. The full-time equivalent number of
employees was 125 as of December 31, 2009, compared to 120 as of December 31,
2008. Full year employment costs associated with the Glenburn
Township office as compared to 2008 when salaries and benefits for this office
were only incurred in the fourth quarter as well as annual pay increases and
increased health insurance costs contributed to the overall increase in salary
and benefit expenses in 2009. Furthermore, 2009 was a year of transition as a
new President and Chief Executive Officer was appointed to the Company. Existing
employment clauses within the exiting President and Chief Executive Officer’s
contract caused the accrual of one additional year’s salary in
2009.
For
comparison, salaries and related benefits increased $64,000, or 1.34%, in 2008
over 2007. The full-time equivalent number of employees was 120 as of December
31, 2008, compared to 111 as of December 31, 2007. The jump in full-time
equivalent employees was the result of the new office opened in Glenburn
Township late in 2008. Aside from the increase to full-time
equivalents, normal yearly pay increases and increased health insurance costs
contributed to the overall increase in salary and benefit expense for
2008.
Occupancy
expense increased 11.05% or $81,000 in 2009 when compared to fiscal year 2008.
The largest increase in occupancy type expenses was the increase to depreciation
expense and maintenance related to the new office in Glenburn Township. Such
expenses associated with the new office caused an increase to occupancy expense
in 2009 of $60,000 or 18.75% to $380,000 compared to $320,000 for the same
period in 2008.
For
comparison, in 2008 occupancy expense decreased 6.98%, or $55,000, when compared
to 2007. The Company hired a new facilities manager in 2007 and one of the areas
of focus was various projects aimed at improving the overall condition of
Company facilities. Those projects were not duplicated in 2008, thus a savings
of approximately $55,000.
Furniture
and equipment expense also increased in 2009 to $546,000 or 10.75% compared to
2008 at $493,000. The increase in 2009 is in large part due to additional
depreciation costs associated with equipment in service at the Glenburn Township
office. Depreciation expense on furniture and equipment was $159,000 in 2009,
compared to $122,000 in 2008, an increase of $37,000 or 30.33%.
29
For
comparison, furniture and equipment expense decreased in 2008 to $493,000 or
2.95% compared to 2007 which came in at $508,000. The decrease in 2008 was due
to the age of teller equipment which was put in service in 2003. That
equipment came at a substantial cost that was fully depreciated midway through
2008 and as a result, related depreciation expense on computer equipment
decreased in 2008. Depreciation expense on furniture and equipment
was $386,000 in 2008 compared to $414,000 in 2007, a decrease of $28,000, or
6.76%.
FDIC
insurance and assessments were $900,000 in 2009 which compares to $227,000 in
2008, an increase of $673,000 or 296.48%. The increase is due to the new
risk-based deposit assessment system adopted by the FDIC beginning in 2007
whereby assessment rates were increased for all insured institutions. Under this
system, all FDIC insured institutions are required to pay deposit premiums. In
addition to the increased assessment rates, the FDIC levied a special one-time
assessment which was payable on September 30, 2009 in the amount of $210,000.
Refer to Part I, Item 1 for a discussion of FDIC Insurance and
assessments.
For
comparison, FDIC insurance and assessments were $227,000 in 2008 which compared
to $151,000 in 2007, an increase of $76,000, or 50.33%. This increase
was also due to the new risk-based deposit assessment system adopted by the FDIC
beginning in 2007. Under this system, all FDIC insured institutions are required
to pay deposit premiums. The additional premiums due were offset by credits
issued for premiums paid by the Company prior to 1996. Those credits for were
fully depleted in the first quarter of 2008. The increase in 2008 was
also due to the new risk-based deposit assessment system adopted by the FDIC
beginning in 2007.
Professional
fees and outside services were $588,000 in 2009 which compares to $520,000 in
2008, an increase of $68,000, or 13.08%. This increase is not deemed to be
indicative of any trends as expenses were incurred in 2009 in the amount of
$72,000 which were not included in the budget. These costs were associated with
consulting and review engagements.
For
comparison, professional fees and outside services were $520,000 in 2008 which
compared to $371,000 in 2007, an increase of $149,000, or 40.16%. This increase
too was not deemed to be indicative of any trends as expenses were incurred in
2008 in the amount of $70,000 which were not included in the budget. These costs
were associated to various consulting and review engagements as well as costs
associated with the Delaware companies. Professional fees and outside services
were budgeted at $377,000 for 2008.
Computer
services and supplies is another significant component of other expenses. This
category covers the expense of data processing for the Company. In
2009, the expense was $1,053,000 compared to $970,000 in 2008, an increase of
$83,000, or 8.56%. This increase is considered to be line with budget
expectations for 2009 as the Company works to implement new technologies to its
information technologies department. The 2009 budget for this line item was
$1,050,000.
For
comparison, in 2008, computer services and supplies were $970,000 compared to
$785,000 in 2007, an increase of $185,000, or 23.57%. This increase
was considered to be line with budget expectations for 2008.
Taxes,
other than payroll and income decreased in 2009 by $54,000, or 13.50%, to
$346,000, compared to 2008 which totaled $400,000. This decrease is
not considered to be significant and was in line with the budgeted amount of
$340,000 for 2009.
For
comparison, taxes, other than payroll and income, increased in 2008, to
$400,000, compared to $386,000 in 2007, an increase of $14,000, or
3.63%. This increase was not considered to be significant and it was
noted that shares tax owed to Pennsylvania grew as a proportion of the overall
growth in Company assets. The Company implemented a strategy in 2007
which limited this tax burden for future periods.
Amortization
expense-deposit acquisition premiums remained the same at $258,000 in
2009.
For
comparison, in 2008, amortization expense-deposit acquisition premiums increased
by $3,000 or 1.18%, to $258,000, compared to 2007 at $255,000. This
increase was not deemed to be material.
Stationary
and printing supplies decreased by $3,000 or 0.83%, to $357,000 compared to 2008
at $360,000. A decrease was budgeted for 2009.
Stationary
and printing supplies increased by $21,000 or 6.19% to $360,000 compared to 2007
at $339,000. This increase was within budget expectations for
2008.
30
Advertising
expense increased by $96,000 or 47.76%, to $297,000 in 2009 compared to 2008 at
$201,000. An increase was budgeted for 2009 as the Company continues to increase
its marketing efforts in new markets.
As a
comparison, Advertising expense increased by $47,000 or 30.52% to $201,000
compared to 2007 at $154,000. This increase was also within budget
expectations for 2008 as the Company contracted with an outside advertising firm
to implement a more aggressive marketing and promotional plan than in prior
years.
Every
other non-interest expense is in the category of other. In 2009, this expense
decreased $227,000 or 13.48% to $1,457,000 compared to $1,684,000 in 2008. This
line item is made up of various sundry accounts which appear to be in line with
budget expectations for 2009.
In 2008,
other non-interest expense increased $197,000 or 13.25% to $1,684,000 compared
to $1,487,000 in 2007. As with the 2009 results for other non-interest income,
this line item is made up of various sundry accounts which appear to have been
in line with budget expectations for 2008.
FEDERAL INCOME
TAXES
The
provision for income taxes in 2009 was $923,000 compared to $87,000 in 2008 and
$1,097,000 in 2007. The effective tax rate, which is the ratio of income tax
expense to income before taxes, was 15% in 2009, 3% in 2008, and 18% in 2007.
The tax rate for all periods was substantially less than the federal statutory
rate of 34% primarily due to tax-exempt securities and tax-exempt loan income
although 2008 does not compare to the previous two annual periods due to the
other-than-temporary security impairments recognized in that year. As such, the
effective tax rate increased in 2009 after decreasing in 2008
relative to 2007. Please refer to Note 9 of the Notes to Consolidated Financial
Statements included as part of this report for further analysis of federal
income tax expense for 2009.
QUARTERLY RESULTS
Table 6
shows the quarterly results of operations for the Company for 2009 and
2008. Interest income remained steady throughout
2009. This was due primarily to loan balances which increased 6.17%
in 2009. This helped to offset market rates and a net interest margin which
decreased slightly in 2009, 4.23% as compared to 4.25% in 2008.
Interest
expense decreased in the first half of 2009 as deposit balances shifted away
from traditionally higher rate time deposits and into lower cost savings
deposits that offer customers more flexibility and liquidity in their
funds. Average time deposits decreased to $106,000,000 for 2009 when
compared to $132,000,000 in 2008. Conversely, regular savings deposits saw the
average balance rise to $130,000,000 for 2009 versus $94,000,000 for
2008.
Provision
for possible loan losses saw a spike up in the second quarter of 2009 due to a
large commercial credit that had deteriorated to the point that the
recoverability of that credit became doubtful.
31
Table 6
shows that fluctuations were experienced in other-than-temporary security
impairments as well as gains and losses through sales of available-for-sale
securities in 2009 much the same as was experienced in 2008. This was
due to activity in the financial markets which caused the sale of investments at
gains or losses as well as the write down of investments in which management
questioned the ultimate recoverability.
Other
income and other expenses remained relatively stable throughout
2009.
TABLE
6
Quarterly Results of
Operations
(In
Thousands, Except for Per Share Data)
|
Quarter
Ended 2009
|
||||||||||||||||
|
31-Mar
|
30-Jun
|
30-Sep
|
31-Dec
|
|||||||||||||
|
Interest
Income
|
$ | 6,184 | $ | 6,108 | $ | 5,929 | $ | 6,052 | ||||||||
|
Interest
Expense
|
2,131 | 1,693 | 1,701 | 1,733 | ||||||||||||
|
Net
Interest Income
|
4,053 | 4,415 | 4,228 | 4,319 | ||||||||||||
|
Provision
for Loan Losses
|
165 | 1,040 | 165 | 365 | ||||||||||||
|
Securities
Gains (Losses)
|
179 | 339 | (1,169 | ) | 159 | |||||||||||
|
Other
Than Temporary Impairment
|
(76 | ) | (60 | ) | 0 | (70 | ) | |||||||||
|
Other
Income
|
808 | 1,010 | 811 | 909 | ||||||||||||
|
Other
Expense
|
2,921 | 3,218 | 2,942 | 3,067 | ||||||||||||
|
Income
Before taxes (Benefit)
|
1,878 | 1,446 | 763 | 1,885 | ||||||||||||
|
Income
Taxes (Benefit)
|
357 | 193 | (23 | ) | 396 | |||||||||||
|
Net
Income
|
$ | 1,521 | $ | 1,253 | $ | 786 | $ | 1,489 | ||||||||
|
Basic
Earnings per share
|
$ | 0.49 | $ | 0.40 | $ | 0.25 | $ | 0.47 | ||||||||
|
Diluted
Earnings per share
|
$ | 0.49 | $ | 0.40 | $ | 0.25 | $ | 0.47 | ||||||||
|
Quarter
Ended 2008
|
||||||||||||||||
|
31-Mar
|
30-Jun
|
30-Sep
|
31-Dec
|
|||||||||||||
|
Interest
Income
|
$ | 6,411 | $ | 6,308 | $ | 6,323 | $ | 6,437 | ||||||||
|
Interest
Expense
|
2,434 | 2,148 | 2,156 | 2,416 | ||||||||||||
|
Net
Interest Income
|
3,977 | 4,160 | 4,167 | 4,021 | ||||||||||||
|
Provision
for Loan Losses
|
120 | 135 | 165 | 293 | ||||||||||||
|
Securities
Gains (Losses)
|
26 | (10 | ) | 7 | 105 | |||||||||||
|
Other
Than Temporary Impairment
|
(182 | ) | (83 | ) | (4,869 | ) | (122 | ) | ||||||||
|
Other
Income
|
754 | 802 | 866 | 897 | ||||||||||||
|
Other
Expense
|
(2,661 | ) | (2,514 | ) | (2,731 | ) | (2,771 | ) | ||||||||
|
Income
(Loss) Before taxes (Benefit)
|
1,794 | 2,220 | (2,725 | ) | 1,837 | |||||||||||
|
Income
Taxes (Benefit)
|
(379 | ) | (516 | ) | 1,159 | (351 | ) | |||||||||
|
Net
(Loss) Income
|
$ | 1,415 | $ | 1,704 | $ | (1,566 | ) | $ | 1,486 | |||||||
|
Basic
Earnings (Loss) per share
|
$ | 0.45 | $ | 0.55 | $ | (0.50 | ) | $ | 0.47 | |||||||
|
Diluted
Earnings (Loss) per share
|
$ | 0.45 | $ | 0.55 | $ | (0.50 | ) | $ | 0.47 | |||||||
RETURN ON AVERAGE ASSETS AND AVERAGE
EQUITY
Return on
average assets (ROA) measures the Company’s net income in relation to its total
average assets. The Company’s ROA for 2009 was 1.07%, compared to 0.68% in
2008.
Return on
average equity (ROE) indicates how effectively the Company can generate net
income on the capital invested by its stockholders. ROE is calculated by
dividing net income by average stockholders’ equity. The Company’s
ROE for 2009 was 12.62%, compared to 7.53% for 2008.
32
FINANCIAL
CONDITION
The
Company’s financial condition can be evaluated in terms of trends in its sources
and uses of funds. The following table illustrates how the Company has managed
its sources and uses of funds that are directly affected by outside economic
factors, such as interest rate fluctuations:
TABLE
7
Sources, Uses of
Funds
(In
Thousands)
| 2009 | 2008 |
2007
|
||||||||||||||||||||||
|
Average
|
Increase/(Decrease)
|
Average
|
Increase/(Decrease)
|
Average
|
||||||||||||||||||||
|
Funding
Uses
|
Balance
|
Amount
|
Percent
|
Balance
|
Amount
|
Percent
|
Balance
|
|||||||||||||||||
|
|
||||||||||||||||||||||||
|
Real
Estate Loans
|
$ | 119,062 | $ | 1,427 | 1.21 | % | $ | 117,635 | $ | 2,145 | 1.86 | % | $ | 115,490 | ||||||||||
|
Consumer
Loans
|
18,236 | 1,421 | 8.45 | % | 16,815 | (328 | ) | (1.91 | %) | 17,143 | ||||||||||||||
|
Commercial
Loans
|
161,762 | 20,859 | 14.80 | % | 140,903 | 17,049 | 13.77 | % | 123,854 | |||||||||||||||
|
Tax
Exempt Loans
|
22,516 | (397 | ) | (1.73 | %) | 22,913 | 1,748 | 8.26 | % | 21,165 | ||||||||||||||
|
Other
Loans
|
506 | 37 | 7.89 | % | 469 | 2 | 0.43 | % | 467 | |||||||||||||||
|
Total
Loans
|
322,082 | 23,347 | 7.82 | % | 298,735 | 20,616 | 7.41 | % | 278,119 | |||||||||||||||
|
Less
Allowance for Loan Loss
|
(2,969 | ) | (370 | ) | 14.24 | % | (2,599 | ) | (574 | ) | 28.35 | % | (2,025 | ) | ||||||||||
|
Total
Loans with Loan Loss
|
319,113 | 22,977 | 7.76 | % | 296,136 | 20,042 | 7.26 | % | 276,094 | |||||||||||||||
|
Taxable
Securities
|
53,945 | (13,952 | ) | (20.55 | %) | 67,897 | 2,459 | 3.76 | % | 65,438 | ||||||||||||||
|
Non-Taxable
Securities
|
52,326 | 9,467 | 22.09 | % | 42,859 | (1,333 | ) | (3.02 | %) | 44,192 | ||||||||||||||
|
Total
Securities
|
106,271 | (4,485 | ) | (4.05 | %) | 110,756 | 1,126 | 1.03 | % | 109,630 | ||||||||||||||
|
Time
Deposit with Other Banks
|
1,408 | 222 | 18.72 | % | 1,186 | 871 | 276.51 | % | 315 | |||||||||||||||
|
Fed
Funds Sold
|
9,617 | 2,800 | 41.07 | % | 6,817 | 6,094 | 842.88 | % | 723 | |||||||||||||||
|
Total
Uses
|
$ | 436,409 | $ | 21,514 | 5.19 | % | $ | 414,895 | $ | 28,133 | 7.27 | % | $ | 386,762 | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Average
|
Increase/(Decrease)
|
Average
|
Increase/(Decrease)
|
Average
|
||||||||||||||||||||
|
Funding
Sources
|
Balance
|
Amount
|
Percent
|
Balance
|
Amount
|
Percent
|
Balance
|
|||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest
Bearing Demand Deposits
|
$ | 35,697 | $ | 6,826 | 23.64 | % | $ | 28,871 | $ | 3,530 | 13.93 | % | $ | 25,341 | ||||||||||
|
Regular
Savings Deposits
|
130,652 | 36,633 | 38.96 | % | 94,019 | (12,950 | ) | (12.11 | %) | 106,969 | ||||||||||||||
|
Money
Market Savings Deposits
|
32,771 | (1,087 | ) | (3.21 | %) | 33,858 | (1,497 | ) | (4.23 | %) | 35,355 | |||||||||||||
|
Time
Deposits
|
106,353 | (25,960 | ) | (19.62 | %) | 132,313 | 29,670 | 28.91 | % | 102,643 | ||||||||||||||
|
Total
Interest Bearing Deposits
|
305,473 | 16,412 | 5.68 | % | 289,061 | 18,753 | 6.94 | % | 270,308 | |||||||||||||||
|
Other
Borrowings
|
||||||||||||||||||||||||
|
Short-Term
Funds Borrowed
|
19,940 | 3,064 | 18.16 | % | 16,876 | 4,747 | 39.14 | % | 12,129 | |||||||||||||||
|
Long-Term
Funds Borrowed
|
39,201 | (2,291 | ) | (5.52 | %) | 41,492 | 3,438 | 9.03 | % | 38,054 | ||||||||||||||
|
Total
Funds Borrowed
|
59,141 | 773 | 1.32 | % | 58,368 | 8,185 | 16.31 | % | 50,183 | |||||||||||||||
|
Total
Deposits and Funds Borrowed
|
364,614 | 17,185 | 4.95 | % | 347,429 | 26,938 | 8.41 | % | 320,491 | |||||||||||||||
|
Other
Sources, net
|
71,795 | 4,329 | 6.42 | % | 67,466 | 1,195 | 1.80 | % | 66,271 | |||||||||||||||
|
Total
Sources
|
$ | 436,409 | $ | 21,514 | 5.19 | % | $ | 414,895 | $ | 28,133 | 7.27 | % | $ | 386,762 | ||||||||||
33
Total
Sources of funds were up $21,514,000 in average balances for 2009 which is a
5.19% increase. The primary source of the increase was in savings type deposits
with an increase of $36,633,000 or 38.96%. Interest bearing demand deposits were
the other big gainer and ended 2009 with an average balance of $35,697,000
compared to $28,871,000 in 2008, an increase of $6,826,000 or
23.64%. Borrowed Funds were up $773,000 or 1.32% ending the year with
an average balance of $59,141,000 compared to an average balance of $58,368,000
for 2008 and an average balance of $50,183,000 for 2007. In 2009, the Company
experienced significant deposit growth from its customer base in relation to
natural gas lease contracts. At the same time, short term funding rates were
falling significantly based on actions of the Federal Reserve. The Company
managed to retain and grow deposits by offering higher rate savings type
deposits that satisfied customer needs without undue strain to its net interest
margin.
On the
Asset side, the increase in funding was used to fill loan demand. The average
balance in loans less the loan loss allowance for 2009 was $319,113,000 compared
to an average balance of $296,136,000 in 2008 and $276,094,000 in
2007. Real estate loans were $1,427,000 or 1.21% higher in average
balance in 2009 averaging $119,062,000 compared to an average balance of
$117,635,000 in 2008. Commercial loans were up significantly in 2009 ending the
year with an average balance of $161,762,000 which is an increase of $20,859,000
or 14.80% over the 2008 average balance of $140,903,000. Securities
ended the 2009 year with an average balance of $106,271,000 compared to
$110,756,000 million in 2008, a decrease of $4,485,000 or 4.05%.
Loan Portfolio
Types
In 2009,
loans to commercial borrowers helped fuel the growth in net loans. Residential
mortgage loans decreased only slightly with lower interest rates and mortgage
finance companies making growth in this part of our loan portfolio
tougher.
TABLE
8
Loan
Portfolio
(In
Thousands)
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Commercial
|
$ | 198,086 | $ | 178,342 | $ | 155,796 | $ | 140,931 | $ | 132,054 | ||||||||||
|
Residential
Real Estate Mortgage
|
116,920 | 120,813 | 116,922 | 112,883 | 109,034 | |||||||||||||||
|
Consumer
|
20,802 | 16,988 | 17,889 | 16,947 | 17,780 | |||||||||||||||
|
Total
Loans
|
335,808 | 316,143 | 290,607 | 270,761 | 258,868 | |||||||||||||||
|
Deferred
Loan Fees and Costs
|
495 | 465 | 445 | 414 | 377 | |||||||||||||||
|
Total
Loans, net of Deferred
|
336,303 | 316,608 | $ | 291,052 | $ | 271,175 | $ | 259,245 | ||||||||||||
|
Allowance
for Loan Loss
|
(3,337 | ) | (3,002 | ) | (2,451 | ) | (1,792 | ) | (2,375 | ) | ||||||||||
|
Net
Loans
|
$ | 332,966 | $ | 313,606 | $ | 288,601 | $ | 269,383 | $ | 256,870 | ||||||||||
Loans
continued to increase in 2009, ending the year with $332,966,000 in net loans
compared to $313,606,000 at year-end 2008, an increase of 6.17%. Commercial
loans grew 11.07% to close the year at $198,086,000, compared to $178,342,000 at
year-end 2008.
Residential
mortgages were down 3.22% to $116,920,000, compared to $120,813,000 on December
31, 2008 a decrease of $3,893,000. Although our mortgage portfolio decreased in
2009, there was an additional $17,312,000 mortgage loans sold to Fannie Mae and
FHLB. The Bank will continue to sell mortgages on the secondary
market in order to attract and retain mortgage loans by offering more
competitive rates and terms.
The
continued growth in commercial lending was due, in part, to a concerted effort
on our part to continue to increase our exposure to this business
segment.
34
Loan Maturities
Table 9
shows the breakdown in maturity and type of our loan portfolio, including
non-accrual loans.
The Bank
has 9.19% of its loans maturing within the next year. Of those maturing within
one year, the majority are commercial loans with the remainder split between
mortgages and consumer loans. In the one-to-five year maturity range, the Bank
has 31.95% of its loan portfolio maturing. The over-five-year maturity group
makes up 58.86% of the portfolio.
For
comparison, at December 31, 2008, the Bank had 9.09% of its loans maturing
within one year. Of those maturing within one year, the majority again were
commercial loans with the remainder split between mortgages and consumer loans.
In the one-to-five year maturity range, the Bank had 22.61% of its portfolio.
The over-five-year maturity group made up 68.30% of the portfolio.
TABLE
9
Loan Maturities
(In
Thousands)
|
One
Year Or Less
|
Over
One Year Within Five Years
|
Over
Five Years
|
Total
Loans
|
|||||||||||||
|
Commercial
|
$ | 20,166 | $ | 67,733 | $ | 110,187 | $ | 198,086 | ||||||||
|
Real-Estate
Construction
|
0 | 0 | 0 | 0 | ||||||||||||
|
Real-Estate
Mortgage
|
5,946 | 25,985 | 84,989 | 116,920 | ||||||||||||
|
Installment
|
4,747 | 13,577 | 2,478 | 20,802 | ||||||||||||
|
Total
|
$ | 30,859 | $ | 107,295 | $ | 197,654 | $ | 335,808 | ||||||||
|
Total
Loans with Predetermined Rates
|
$ | 18,685 | $ | 53,100 | $ | 18,675 | $ | 90,460 | ||||||||
|
Total
Loans with Variable Rates
|
12,174 | 54,195 | 178,979 | 245,348 | ||||||||||||
|
Total
|
$ | 30,859 | $ | 107,295 | $ | 197,654 | $ | 335,808 | ||||||||
TABLE
10
Non-performing
Loans
(In
Thousands)
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Non-accrual
|
$ | 2,528 | $ | 829 | $ | 395 | $ | 445 | $ | 1,105 | ||||||||||
|
Restructured
|
559 | 4,042 | 0 | 0 | 0 | |||||||||||||||
|
Loans
Past Due 90 or More Days, Accruing Interest
|
239 | 245 | 91 | 275 | 0 | |||||||||||||||
|
Total
Nonperforming Loans
|
3,326 | 5,116 | 486 | 720 | 1,105 | |||||||||||||||
|
Foreclosed
Assets
|
5,534 | 5,171 | 4,675 | 5,062 | 117 | |||||||||||||||
|
Total
Nonperforming Assets
|
$ | 8,860 | $ | 10,287 | $ | 5,161 | $ | 5,782 | $ | 1,222 | ||||||||||
|
Nonperforming
Loans to Total Loans at Period-end
|
0.99 | % | 1.62 | % | 0.17 | % | 0.27 | % | 0.43 | % | ||||||||||
|
Nonperforming
Assets to Period-end Loans and Foreclosed Assets
|
2.60 | % | 3.20 | % | 1.75 | % | 2.10 | % | 0.47 | % | ||||||||||
|
Interest
Income That Would Have Been Recorded Under Original Terms
|
$ | 135 | $ | 26 | $ | 32 | $ | 84 | $ | 59 | ||||||||||
|
Interest
Income Recorded During the Period
|
$ | 43 | $ | 27 | $ | 15 | $ | 7 | $ | 9 | ||||||||||
|
Commitments
To Lend Additional Funds
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
35
Allowance for Loan
Losses
The
balance in the allowance for loan losses is based on management’s assessment of
the risk in the loan portfolio. Allocations to specific commercial loans are
made in adherence to ASC Topic 310. These allocations are based upon
the present value of expected future cash flows or the fair value of the
underlying collateral. In addition, management reviews the other components of
the loan portfolio through the loan review function and assigns internal grades
to loans based upon the perceived risks inherent in each loan. In that
determination, management reviews a number of factors including historical
analysis of similar credits, delinquency reports, ratio analysis as compared to
peers, concentration of credit risks, local economic conditions, and regulatory
evaluation of the allowance for loan losses. The allowance for loan losses is
maintained at a level considered adequate to provide for losses that can be
reasonably anticipated. Management’s periodic evaluation of the
adequacy of the allowance is based on the Bank’s past loan loss experience,
known or inherent risks in the portfolio, adverse situations that may affect the
borrower’s ability to repay, the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. Management believed that certain risks, primarily
current economic conditions, warranted an increase in the allowance for loan
losses for the year ended December 31, 2009 and as such, the Company allotted
$1,735,000 for provision for loan losses in 2009. This evaluation is reviewed
monthly by management and by the Board of Directors. Management believes that on
December 31, 2009, the allowance for loan losses was adequate to absorb
potential losses in the loan portfolio. However, this judgment is subjective and
a significant degradation in loan quality could require a change in the
estimates and therefore, a change in net income.
The
following is a summary of loans charged off, recoveries and provisions to the
allowance for loan losses for the periods presented.
TABLE
11
Summary of Loan Loss
Experience
(In
Thousands)
|
Year
Ended,
|
||||||||||||||||||||
|
Dec
2009
|
Dec
2008
|
Dec
2007
|
Dec
2006
|
Dec
2005
|
||||||||||||||||
|
Average
Total Loans
|
$ | 322,082 | $ | 298,735 | $ | 278,119 | $ | 267,610 | $ | 250,559 | ||||||||||
|
Balance
at Beginning of Period
|
$ | 3,002 | $ | 2,451 | $ | 1,792 | $ | 2,375 | $ | 2,739 | ||||||||||
|
Charge
Offs
|
||||||||||||||||||||
|
Commercial
|
1,367 | 142 | 0 | 797 | 633 | |||||||||||||||
|
Residential
Real Estate
|
46 | 4 | 0 | 21 | 31 | |||||||||||||||
|
Installment
|
134 | 100 | 73 | 98 | 129 | |||||||||||||||
|
Total
Charge Offs
|
1,547 | 246 | 73 | 916 | 793 | |||||||||||||||
|
Recoveries
|
||||||||||||||||||||
|
Commercial
|
98 | 44 | 422 | 5 | 0 | |||||||||||||||
|
Residential
Real Estate
|
3 | 2 | 3 | 5 | 0 | |||||||||||||||
|
Installment
|
46 | 38 | 27 | 21 | 37 | |||||||||||||||
|
Total
Recoveries
|
147 | 84 | 452 | 31 | 37 | |||||||||||||||
|
Net
Charge-Offs (Recoveries)
|
1,400 | 162 | (379 | ) | 885 | 756 | ||||||||||||||
|
Provision
for Loan Losses
|
1,735 | 713 | 280 | 302 | 392 | |||||||||||||||
|
Balance
at End of Period
|
$ | 3,337 | $ | 3,002 | $ | 2,451 | $ | 1,792 | $ | 2,375 | ||||||||||
|
Allowance
for Credit Losses to Period-end Total Loans
|
0.99 | % | 0.95 | % | 0.84 | % | 0.66 | % | 0.92 | % | ||||||||||
|
Allowance
for Credit Losses to Non-accrual Loans
|
132.00 | % | 498.67 | % | 620.51 | % | 402.70 | % | 206.62 | % | ||||||||||
|
Net
Charge-Offs (Recoveries) to Average Loans
|
.43 | % | .05 | % | (0.14 | %) | 0.33 | % | 0.29 | % | ||||||||||
36
TABLE
12
Allocation of Allowance
(In
Thousands)
The
following table details the allocation of the allowance for loan losses to
various categories:
|
Dec
2009
|
%
of Loan Type to Total Loans
|
Dec
2008
|
%
of Loan Type to Total Loans
|
Dec
2007
|
%
of Loan Type to Total Loans
|
|||||||||||||||||||
|
Commercial
|
$ | 1,979 | 58.99 | % | $ | 1,598 | 56.33 | % | $ | 1,428 | 53.70 | % | ||||||||||||
|
Residential
Real Estate Mortgage
|
610 | 34.82 | % | 627 | 38.29 | % | 738 | 40.15 | % | |||||||||||||||
|
Consumer
|
189 | 6.19 | % | 153 | 5.38 | % | 285 | 6.15 | % | |||||||||||||||
|
Non
Performing
|
559 | N/A | 624 | N/A | 0 | N/A | ||||||||||||||||||
|
Total
Allowance for Loan Losses
|
$ | 3,337 | 100.00 | % | $ | 3,002 | 100.00 | % | $ | 2,451 | 100.00 | % | ||||||||||||
|
Dec
2006
|
%
of Loan Type to Total loans
|
Dec
2005
|
%
of Loan Type to Total Loans
|
|||||||||||||
|
Commercial
|
$ | 1,429 | 52.05 | % | $ | 2,035 | 58.56 | % | ||||||||
|
Real
Estate Mortgage
|
274 | 41.69 | % | 286 | 38.11 | % | ||||||||||
|
Consumer
|
89 | 6.26 | % | 54 | 3.33 | % | ||||||||||
|
Non
Performing
|
0 | N/A | 0 | N/A | ||||||||||||
|
Total
Allowance for Loan Losses
|
$ | 1,792 | 100.00 | % | $ | 2,375 | 100.00 | % | ||||||||
Management
believes the allowance is adequate to cover the inherent risks associated with
the loan portfolio. While allocations have been established for particular loan
categories, management considers the entire allowance to be available to absorb
losses in any category.
SECURITIES
The
Company’s securities portfolio is classified, in its entirety, as
“available-for-sale” as shown in Table 13. Management believes that a portfolio
classification of all available-for-sale allows complete flexibility in the
investment portfolio. Using this classification, the Company intends to hold
these securities for an indefinite amount of time but not necessarily to
maturity. Such securities are carried at fair value with the unrealized holding
gains or losses, net of taxes, reported in the accumulated other comprehensive
loss component of the Company’s stockholders’ equity on the balance sheet. The
portfolio is structured to provide maximum return on investments while providing
a consistent source of liquidity and meeting strict risk standards.
Securities
available-for-sale increased by $22,917,000 in 2009. The securities
available-for-sale portfolio is comprised of U.S. Government Agency securities,
mortgage-backed securities, high-grade municipal securities, corporate-debt
securities, and equity securities. At December 31, 2009, the unrealized loss on
securities available-for-sale included in stockholders’ equity totaled
$2,258,000, net of tax, compared to unrealized losses of $4,755,000, net of tax,
at December 31, 2008. The weighted-average maturity of the securities
available-for-sale portfolio was ten years at December 31, 2009, with a
weighted-average yield of 3.67%.
At
December 31, 2009, the Company had 44 U.S. Government Agency securities, 61
obligations of state and political subdivisions, 5 mortgage-backed securities, 6
corporate debt securities, and 17 common equity securities in an unrealized loss
position.
37
At
December 31, 2009, 17 common equity securities had totaled unrealized losses of
$364,000. These securities have traditionally been high-performing
stocks. As a result of recent market volatility in financial stocks
from news of sub-prime lending problems, as well as concerns surrounding the
financial markets, liquidity and credit availability, the fair value of most of
the stocks held are “under water” as of December 31, 2009, and as such, are
considered to be impaired. The Company does not invest in bank stocks
with the intent to turn them over for a profit in the near-term. We
invest in those stocks that we believe to have potential to appreciate in value
over the long-term, while providing for a reasonable dividend
yield. We buy and hold those stocks that we believe have potential to
be an acquirer or to be acquired, providing additional value. Stocks
can be cyclical in nature and will experience some down
periods. Historically, bank stocks have sustained cyclical losses,
followed by periods of substantial gains, therefore we believe that both
unrealized losses and gains are likely to be temporary, when observing
performance in the banking sector.
In
management’s opinion, the unrealized losses on all other securities reflect
changes in interest rates subsequent to the acquisition of specific securities
and management believes that these unrealized losses represent a temporary
impairment of those securities. As long term rates increase, the
underlying value of securities owned by the Company decreases creating an
unrealized loss.
Reference
should be made to Note 14 of the consolidated financial statements for further
discussion of fair value. The fair value of the Company’s securities portfolio
is classified as Level 1, Level 2 or Level 3. Level 1 inputs are derived from
quoted prices within active markets for such securities. The Company
currently holds securities at Level 1 fair values of $1,081,000. Level 2 inputs
are derived from quoted prices in inactive markets or from other observable
inputs. The Company holds securities at Level 2 fair values of $129,425,000.
Finally, Level 3 inputs are unobservable and based on little or no market
activity. No Level 3 securities are currently held by the Company.
Level 1
securities held by the Company consist of the 17 aforementioned equity
positions. The fair value of these equity positions is based on quoted prices
received from the broker which are indicative of the most recent prices received
by sellers of those same positions in an active market.
Level 2
securities held by the Company are debt holdings from various market sectors. A
significant sector represented is the municipal markets. The value of this
sector has been adversely affected from the downgrades placed on the municipal
insurers by the rating agencies. The Company receives pricing for its debt
holdings from a third party bond accounting service. The service evaluates
pricing using a combination of data from vendors, internal pricing models as
well as assistance from their own fixed income analysts and traders. From these
multiple sources, the most accurate price is determined and utilized in fair
value reporting.
38
Table 13
shows the amortized cost and average yield of securities by maturity or call
date at December 31, 2009. Since the below table is by maturity or
call date, it will not match the maturity schedule in the 2009 consolidated
financial statements Note 2, which is done by contractual maturity.
TABLE
13
Securities by Maturities (Amortized
Cost)
(In
Thousands)
|
1
Year or Less
|
1-5
Years
|
5-10
Years
|
Over
10 Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||||||||
|
Balance
|
Yield
|
Balance
|
Yield
|
Balance
|
Yield
|
Balance
|
Yield
|
Balance
|
Yield
|
|||||||||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||||||||||
|
US
Government Agency
|
$ | 0 | 0.00 | % | $ | 38,026 | 2.52 | % | $ | 18,632 | 3.81 | % | $ | 4,331 | 4.50 | % | $ | 60,989 | 3.05 | % | ||||||||||||||||||||
|
State/County/Municipal
Obligations
|
391 | 3.68 | % | 7,783 | 3.64 | % | 10,145 | 3.99 | % | 34,517 | 4.21 | % | 52,836 | 4.08 | % | |||||||||||||||||||||||||
|
Taxable
Municipals
|
0 | 0.00 | % | 723 | 2.33 | % | 1,003 | 4.85 | % | 493 | 5.79 | % | 2,219 | 4.24 | % | |||||||||||||||||||||||||
|
Mortgage-Backed
Securities-Residential
|
1,058 | 5.43 | % | 2,100 | 5.48 | % | 677 | 5.89 | % | 591 | 6.06 | % | 4,426 | 5.61 | % | |||||||||||||||||||||||||
|
Collateralized
Mortgage Obligations
|
55 | 2.58 | % | 96 | 2.59 | % | 41 | 2.72 | % | 7 | 2.89 | % | 199 | 2.62 | % | |||||||||||||||||||||||||
|
Corporate/Other
Securities
|
0 | 0.00 | % | 1,000 | 3.00 | % | 9,211 | 5.72 | % | 1,527 | 1.47 | % | 11,738 | 4.94 | % | |||||||||||||||||||||||||
|
Preferred
Equity Securities
|
0 | 0.00 | % | 0 | 0.00 | % | 0 | 0.00 | % | 78 | 0.00 | % | 78 | 0.00 | % | |||||||||||||||||||||||||
|
Common
Equity Securities
|
0 | 0.00 | % | 0 | 0.00 | % | 0 | 0.00 | % | 1,442 | 1.65 | % | 1,442 | 1.65 | % | |||||||||||||||||||||||||
|
TOTAL
Available-for-Sale
|
$ | 1,504 | 4.87 | % | $ | 49,728 | 2.79 | % | $ | 39,709 | 4.24 | % | $ | 42,986 | 3.88 | % | $ | 133,927 | 3.67 | % | ||||||||||||||||||||
Table 14
shows the balance of securities for the past three years on December 31. More
details on securities can be found in Note 3 of the Consolidated Financial
Statements.
TABLE
14
Securities
(Fair Value)
(In
Thousands)
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
U.
S. Government/Agency Obligations
|
$ | 60,465 | $ | 7,958 | $ | 2,002 | ||||||
|
State/Municipal
Obligations
|
51,544 | 44,715 | 44,505 | |||||||||
|
Taxable
Municipal
|
2,156 | 3,060 | 1,994 | |||||||||
|
Mortgage-backed
Securities-Residential
|
4,637 | 30,602 | 42,586 | |||||||||
|
Collateralized
Mortgage Obligations
|
203 | 2,163 | 2,582 | |||||||||
|
Corporate/Other
Securities
|
10,334 | 16,970 | 11,265 | |||||||||
|
Preferred
Equity Securities
|
85 | 20 | 1,841 | |||||||||
|
Common
Equity Securities
|
1,082 | 2,101 | 2,696 | |||||||||
|
Total Securities
Available-for-Sale
|
$ | 130,506 | $ | 107,589 | $ | 109,471 | ||||||
39
DEPOSITS
Table 15
shows average deposits and other borrowings balances and rates for 2009, 2008
and 2007. The Company experienced growth of $16,412,000 in average interest
bearing deposits and $6,547,000 in average non-interest bearing deposits during
2009 compared to an increase of $18,753,000 in average interest bearing deposits
and $4,165,000 in average non-interest bearing deposits in
2008. Average savings accounts increased $36,633,000 in 2009 compared
to a decrease of $12,950,000 during 2008. Management attributes the growth in
savings to the increased use of the certificate of savings product as rates
stayed historically low throughout 2009. Average time deposits
decreased $25,960,000 in 2009 compared to an increase of $29,670,000 in 2008
when compared to 2007. In 2009, average other borrowings increased
$773,000 ending the year with an average balance of $59,141,000 compared to an
average balance of $58,368,000 in 2008.
TABLE
15
Average Deposits and Other
Borrowings
(In
Thousands)
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||
|
|
Amount
|
Rate
|
Diff
$
|
Amount
|
Rate
|
Diff
$
|
Amount
|
Rate
|
||||||||||||||||||||||||
|
Interest
Bearing Demand Deposits
|
$ | 35,697 | .91 | % | $ | 6,826 | $ | 28,871 | .98 | % | $ | 3,530 | $ | 25,341 | 1.14 | % | ||||||||||||||||
|
Savings
Deposits
|
130,652 | 1.30 | % | 36,633 | 94,019 | 1.30 | % | (12,950 | ) | 106,969 | 3.10 | % | ||||||||||||||||||||
|
Money
Market Savings
|
32,771 | 1.05 | % | (1,087 | ) | 33,858 | 1.77 | % | (1,497 | ) | 35,355 | 3.08 | % | |||||||||||||||||||
|
Time
Deposits
|
106,353 | 2.79 | % | (25,960 | ) | 132,313 | 3.72 | % | 29,670 | 102,643 | 4.22 | % | ||||||||||||||||||||
|
Total
Interest Bearing Deposits
|
305,473 | 1.74 | % | 16,412 | 289,061 | 2.43 | % | 18,753 | 270,308 | 3.34 | % | |||||||||||||||||||||
|
Other
Borrowings
|
59,141 | 3.26 | % | 773 | 58,368 | 3.65 | % | 8,185 | 50,183 | 4.16 | % | |||||||||||||||||||||
|
Total
Interest Bearing Liabilities
|
364,614 | 1.99 | % | 17,185 | 347,429 | 2.63 | % | 26,938 | 320,491 | 3.46 | % | |||||||||||||||||||||
|
Non-Interest
Bearing Demand Deposits
|
63,325 | 6,547 | 56,778 | 4,165 | 52,613 | |||||||||||||||||||||||||||
|
Total
|
$ | 427,939 | 1.70 | % | $ | 23,732 | $ | 404,207 | 2.26 | % | $ | 31,103 | $ | 373,104 | 2.98 | % | ||||||||||||||||
MATURITIES OF TIME
DEPOSITS
The
maturities on the time deposits of $100,000 and over are heavily distributed in
the three month or less category showing a concentration that could pose a
liquidity risk to the Bank. The concentration of short term certificates of
deposit are the result of lower savings interest rates and short term special
rates on certificates of deposit that came at a time in which the Bank was
experiencing a large influx of deposits from customers that had entered into
natural gas lease contracts. Management controls this risk through the monthly
monitoring procedures of the ALCO committee. Table 16 shows the
dollar amount of large time deposits in each time category as well as the
overall percentage of each category.
TABLE
16
Maturities
(In
Thousands)
|
December
31, 2009
|
||||||||
|
Amount
|
Percent
|
|||||||
|
Three
Months or Less
|
$ | 4,912 | 24.05 | % | ||||
|
Over
Three Months through Six Months
|
2,916 | 14.27 | % | |||||
|
Over
Six Months through Twelve Months
|
3,480 | 17.03 | % | |||||
|
Over
Twelve Months
|
9,121 | 44.65 | % | |||||
|
Total
|
$ | 20,429 | 100.00 | % | ||||
40
SHORT AND LONG-TERM
BORROWINGS
Short-term
borrowings, which are overnight or less than 30-day borrowings, consist of
securities sold under agreements to repurchase, Federal Home Loan Bank advances,
and U.S. Treasury tax and loan notes. Long-term borrowings consist of notes from
the Federal Home Loan Bank. These notes are secured under terms of a blanket
collateral agreement by a pledge of qualifying investment and mortgage-backed
securities, certain mortgage loans and a lien on FHLB stock. For more details on
short and long-term borrowings see Notes 6 and 7 of the Notes to Consolidated
Financial Statements.
TABLE
17
Borrowed
Funds
(In
Thousands)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Other
Short-Term Borrowings
|
$ | 20,439 | $ | 18,432 | ||||
|
FHLB
Long-Term Borrowings
|
38,750 | 39,691 | ||||||
|
Total
|
$ | 59,189 | $ | 58,123 | ||||
CAPITAL
ACCOUNTS
Total
stockholders’ equity increased 13.22%, or $5,250,000, from year-end 2008 to
finish at $44,970,000. A common ratio used to determine the effective use of
capital is the return on average equity. For the year ended December 31, 2009,
this ratio was 12.62%, compared to 7.53% for the year ended December 31, 2008.
The Bank’s goal is to maintain a strong capital position as well as to make the
best use of capital in the overall growth of the organization. At year-end 2009,
the equity-to-assets ratio was 8.71%, compared to 8.41% at year-end
2008.
Compare
2009 results to those experienced in 2008 when total stockholders’ equity
increased 7.21% or $3,085,000 over year-end 2007. The return on average equity
for the year ended December 31, 2008 ratio was 7.53%, compared to 11.38% for the
year ended December 31, 2007. At year-end 2008, the equity-to-assets
ratio was 8.41% compared to 9.85% at year-end 2007.
Net
income increased capital by $5,049,000 in 2009 and dividends decreased that
number by $2,381,000. The securities portfolio increased in value by
$2,497,000, net of tax in 2009. Since all of our securities are
available-for-sale, changes in market values adjusted for taxes are reflected in
the equity portion of the balance sheet. A total of
$85,000 in net treasury stock issued increased the capital account to equal the
total net change. From time to time, the Company has purchased PFSC
stock in the open market or from individuals to leverage the capital account and
to provide stock for our dividend reinvestment plan and stock compensation plan.
During the year 2009, no shares were purchased in this manner. There were 4,975
shares issued from the treasury stock account by individuals exercising options.
The investment banking firms of Boenning & Scattergood Inc. and Stifel
Nicolaus have been known to make markets in PFSC common stock.
Net
income increased capital by $3,039,000 in 2008 and dividends reduced that number
by $2,417,000. The securities portfolio decreased in value by $3,365,000 in
2008. Again, since all of our securities were available-for-sale, changes in
market values adjusted for taxes are reflected in the equity portion of the
balance sheet. A total of $272,000 in net treasury stock purchases increased the
capital account to equal the total net change.
The
following table represents the Company’s capital position as it compares to the
regulatory guidelines at December 31, 2009 and 2008.
TABLE
18
Capital
Ratios
|
December
31,
|
December
31,
|
Regulatory
|
||||||||||
|
2009
|
2008
|
Requirement
|
||||||||||
|
Tier
1 capital to risk-weighted assets
|
12.30 | % | 12.26 | % | 4.00 | % | ||||||
|
Total capital
to risk-weighted assets
|
13.18 | % | 13.10 | % | 8.00 | % | ||||||
|
Tier
1 capital to average assets-leverage ratio
|
9.92 | % | 9.31 | % | 4.00 | % | ||||||
41
INTEREST RATE
SENSITIVITY
The
operations of the Company do not subject it to foreign currency risk or
commodity price risk. The Company does not utilize interest rate swaps, caps, or
hedging transactions. In addition, the Company has no market risk sensitive
instruments entered into for trading purposes. However, the Company is subject
to interest rate risk and employs several different methods to manage and
monitor the risk.
Interest
rate sensitivity refers to the relationship between market interest rates and
the earnings volatility of the Company due to the repricing characteristics of
assets and liabilities. The responsibility for monitoring interest rate
sensitivity and policy decisions has been given to the Asset/Liability Committee
(ALCO) of the Bank. 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 analyze interest rate risk. In addition, an
outside source completes a quarterly analysis to confirm that 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 sets forth the Company’s interest sensitivity analysis as of December
31, 2009:
TABLE
19
Statement of Interest Sensitivity
Gap
(In
Thousands)
|
Maturity
or Repricing In:
|
||||||||||||||||||||
|
3
Months
|
3-6
Months
|
6-12
Months
|
1-5
Years
|
Over
5 Years
|
||||||||||||||||
|
RATE
SENSITIVE ASSETS
|
||||||||||||||||||||
|
Interest
Bearing Deposits With Other Banks
|
$ | 895 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
|
Federal
Funds Sold
|
10,761 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Securities
|
10,051 | 4,669 | 9,958 | 42,110 | 63,718 | |||||||||||||||
|
Loans
|
36,840 | 17,522 | 41,947 | 179,768 | 56,889 | |||||||||||||||
|
Total
Rate Sensitive Assets
|
58,547 | 22,191 | 51,905 | 221,878 | 120,607 | |||||||||||||||
|
Cumulative
Rate Sensitive Assets
|
58,547 | 80,738 | 132,643 | 354,521 | 475,128 | |||||||||||||||
|
RATE
SENSITIVE LIABILITIES
|
||||||||||||||||||||
|
Interest
Bearing Checking
|
45,146 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Money
Market Deposits
|
35,986 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Regular
Savings
|
170,981 | 0 | 0 | 0 | 0 | |||||||||||||||
|
CDs
and IRAs
|
21,618 | 11,800 | 16,768 | 34,801 | 1,103 | |||||||||||||||
|
Short-term
Borrowings
|
20,439 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Long-term
Borrowings
|
224 | 227 | 2,963 | 28,920 | 6,416 | |||||||||||||||
|
Total
Rate Sensitive Liabilities
|
294,394 | 12,027 | 19,731 | 63,721 | 7,519 | |||||||||||||||
|
Cumulative
Rate Sensitive Liabilities
|
$ | 294,394 | $ | 306,421 | $ | 326,152 | $ | 389,873 | $ | 397,392 | ||||||||||
|
Period
Gap
|
$ | (235,847 | ) | $ | 10,164 | $ | 32,174 | $ | 158,157 | $ | 113,088 | |||||||||
|
Cumulative
Gap
|
(235,847 | ) | (225,683 | ) | (193,509 | ) | (35,352 | ) | 77,736 | |||||||||||
|
Cumulative
RSA to RSL
|
19.89 | % | 26.35 | % | 40.67 | % | 90.93 | % | 119.56 | % | ||||||||||
|
Cumulative
Gap to Total Assets
|
(45.66 | %) | (43.70 | %) | (37.47 | %) | (6.84 | %) | 15.05 | % | ||||||||||
42
The Federal Reserve’s Open Market
Committee (FOMC) remained on hold for the entirety of 2009 with a Fed Funds
target rate of 0 to 25 basis points. The effect of this has been a
very steep yield curve that has persisted throughout 2009. The
overall level of market rates is still historically low, both on the short end
and the long end of the curve. The resulting net interest margin in
2009 decreased very slightly to 4.23% when compared to the net interest margin
of 4.25% for the year ended December 31, 2008. The asset side of the Company’s
balance sheet has remained less reactive to rate movements. While this has
presented a positive opportunity to the Company in the near-term, it also
presents some challenges. As customers seek more competitive rates on their
deposits, the Company has remained diligent in offering deposit alternatives for
customers. This has helped to mitigate the loss of deposits to
competitors.
Compare
these results to 2008 when the Fed Funds rate dropped rates aggressively by a
total of 425 basis points. This was done in hopes of stemming the
tide of negative economic events which began in 2007 with the sub-prime mortgage
crisis and continued through 2008 as foreclosure rates skyrocketed and home
values plummeted. For the year ended December 31, 2008, the overnight Fed Funds
Rate was decreased a total of 425 basis points ending the year at a target rate
of 0 to 25 basis points. The overall level of market rates dropped
dramatically in 2008, both on the short end and the long end of the
curve. The result was a net interest margin that rose to 4.25% for
the year ended December 31, 2008 compared to 3.82% for the year ended December
31, 2007.
LIQUIDITY
The
liquidity of the Company is reflected in its capacity to have sufficient amounts
of cash available to fund the needs of customer withdrawal requests, accommodate
loan demand, and maintain regulatory reserve requirements; that is to conduct
banking business. Additional liquidity is obtained by either increasing
liabilities or by decreasing assets. The primary source for increasing
liabilities is the generation of additional deposit accounts, which are managed
through our system of branches. In addition, loan payments on existing loans or
investments available-for-sale can generate additional liquidity. Other sources
include income from operations, decreases in federal funds sold or
interest-bearing deposits in other banks, securities sold under agreements to
repurchase, and borrowings from the Federal Home Loan Bank (FHLB). On December
31, 2009, the Bank had a borrowing capacity from the Federal Home Loan Bank of
approximately $152,330,000. During 2009, significant increases in
deposits has eliminated, at least in the near term, the Company’s dependence on
overnight borrowings at the Federal Home Loan Bank and provided the majority of
additional cash with operating activities also contributing to liquidity. The
additional deposits were used primarily to grant loans to
customers.
As
evidenced by the sources (uses) of funds (table 7), the interest rate
sensitivity analysis (table 19) and the list of contractual obligations (table
20 which follows this section), the Company has increased its short term funding
needs dramatically in 2009. This was part of a strategic initiative based on a
high demand for competitive rates by deposit holders in a low rate environment.
This course of action was made necessary in light of the large sums of money
flowing into the region due to natural gas drilling and exploration. Many of the
Company’s customers were the primary beneficiaries of those funds and the
Company felt this was an opportunity to expand current customer relationships as
well as attract new customers. As with all low rate environments however,
customers were generally unwilling to invest long term. Short term attractive
rates were offered by the Company and the result was a concentration in short
term obligations and higher rate savings type deposits. The Company feels that
it offers a variety of attractive deposit products at competitive rates that
will mitigate significant runoff in deposits from occurring. One such product is
the certificate of savings product which acts as a hybrid between a core savings
product and a short term certificate of deposit. This deposit product offers an
interest rate that far outweighs any comparable savings product on the market
and a quarterly limit placed on customer withdrawals which provide stability in
funding to the Company. This account has proven to be a deposit leader in the
past and the Company will rely on it to provide a source of funds. Beyond its
own product line up, the Company also has available to it open lines of credit
at the FHLB with current availability of approximately $113,580,000, Atlantic
Central Bankers Bank (ACBB) in the amount of $7,000,000 and the Federal Reserve
Bank of Philadelphia (FRB) that amount to $7,721,000. While the FHLB has been an
inexpensive source of funds in the past, current liquidity concerns surrounding
the FHLB have prompted the Company to explore additional funding options at the
FRB. Collateral standards of the FRB make it feasible to increase available
lines and open the Company up to yet another source of funding liquidity. This
was accomplished in 2009 and the open lines available at the FRB increased from
$1,500,000 to the current levels.
43
The
following table represents the aggregate on-and-off balance sheet contractual
obligations to make future payments.
TABLE
20
Contractual
Obligations
(In
Thousands)
|
December
31, 2009
|
||||||||||||||||||||
|
Less
than 1 Year
|
1-3
Years
|
4-5
Years
|
Over
5 Years
|
Total
|
||||||||||||||||
|
Time
Deposits
|
$ | 50,186 | $ | 20,468 | $ | 14,333 | $ | 1,103 | $ | 86,090 | ||||||||||
|
Long-term
Debt
|
3,414 | 12,206 | 16,714 | 6,416 | 38,750 | |||||||||||||||
|
Operating
Leases
|
90 | 87 | 62 | 126 | 365 | |||||||||||||||
|
Standby
Letters of Credit
|
9,617 | 2,074 | 1,765 | 2,235 | 15,691 | |||||||||||||||
| $ | 63,307 | $ | 34,835 | $ | 32,874 | $ | 9,880 | $ | 140,896 | |||||||||||
The
Company is not aware of any known trends or any known demands, commitments,
events or uncertainties, which would result in any material increase or decrease
in liquidity beyond those already discussed.
OFF-BALANCE-SHEET
ARRANGEMENTS
The
financial statements do not reflect various off-balance sheet arrangements that
are made in the normal course of business, which may involve some liquidity
risk. These commitments consist mainly of unfunded loans and letters of credit
made under the same standards as on-balance-sheet instruments. Unused
commitments, at December 31, 2009, totaled $54,395,000. Because these
instruments have fixed maturity dates, and because many of them will expire
without being drawn upon, they do not generally present any significant
liquidity risk. Management believes that any amounts actually drawn upon can be
funded in the normal course of operations.
The
Company has no investment in or financial relationship with any unconsolidated
entities that are even remotely likely to have a material effect on liquidity or
the availability of capital resources.
SUBSEQUENT EVENTS
NONE.
EFFECTS OF
INFLATION
The
majority of assets and liabilities of a financial institution are monetary in
nature and, therefore, differ greatly from commercial and industrial companies
that have significant investments in fixed assets or inventories. The precise
impact of inflation upon the Company is difficult to measure. Inflation may
affect the borrowing needs of consumers, thereby impacting the growth rate of
the Company’s assets. Inflation may also affect the general level of interest
rates, which can have a direct bearing on the Company.
Management
believes that the most significant impact on financial results is the Company’s
ability to react to changes in interest rates. As discussed previously,
management is attempting to maintain a position that is within conservative
parameters for interest sensitive assets and liabilities in order to be
protected against wide interest rate fluctuations.
ITEM
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
previously stated in this document, the Federal Reserve Bank remained on hold at
historically low overnight rate levels in 2009. This has caused the
steep yield curve to persist which can have an effect of increasing the Bank’s
earnings growth. This is due to the payment of lower, short-term
deposit interest while at the same time experiencing little or no deterioration
to interest income from longer maturity loans. With this being said,
the Bank monitors this interest sensitivity on a quarterly basis. The
results of the latest simulation follow. The simulation shows a possible
decrease in net interest income of 23.96%, or $4,413,000, in a +200 basis point
rate shock scenario over a one-year period. An increase of 9.83% or
$1,811,000 is shown in the model at a -200 basis point rate
shock. The Bank will continue to monitor this rate sensitivity going
forward. See previous discussions on Interest Rate
Sensitivity.
Equity
value at risk is monitored regularly and is within established policy
limits.
The
Company is not a party to any forward contract, interest rate swap, option
interest, or similar derivations instruments. The Company does not deal in
foreign currency.
44
ITEM
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Peoples
Financial Services Corp.
Hallstead,
Pennsylvania
We have
audited the accompanying consolidated balance sheets of Peoples Financial
Services Corp. and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, stockholders’ equity and cash flows
for each of the years in the three-year period ended December 31,
2009. Peoples Financial Service Corp.’s management is responsible for
these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Peoples Financial Services
Corp. and subsidiaries as of December 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Peoples Financial Services Corp.’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 15, 2010 expressed an unqualified opinion.
/s/
ParenteBeard LLC
ParenteBeard
LLC
Allentown,
Pennsylvania
March 15,
2010
45
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
Thousands, Except Share and Per Share Data)
|
||||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 7,259 | $ | 6,174 | ||||
|
Interest
bearing deposits in other banks
|
895 | 1,782 | ||||||
|
Federal
funds sold
|
10,761 | 10,577 | ||||||
|
Cash
and Cash Equivalents
|
18,915 | 18,533 | ||||||
|
Securities
available for sale
|
130,506 | 107,589 | ||||||
|
Loans
receivable, net of allowance for loan losses 2009 $3,337; and 2008
$3,002
|
332,966 | 313,606 | ||||||
|
Investment
in restricted stock, at cost
|
2,870 | 2,658 | ||||||
|
Premises
and equipment, net
|
7,509 | 7,542 | ||||||
|
Accrued
interest receivable
|
2,580 | 2,526 | ||||||
|
Intangible
assets
|
560 | 818 | ||||||
|
Other
real estate owned
|
5,534 | 5,171 | ||||||
|
Bank
owned life insurance
|
8,253 | 7,911 | ||||||
|
Other
assets
|
6,790 | 6,022 | ||||||
|
Total
Assets
|
$ | 516,483 | $ | 472,376 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest
bearing
|
$ | 71,835 | $ | 55,324 | ||||
|
Interest-bearing
|
338,203 | 315,944 | ||||||
|
Total
Deposits
|
410,038 | 371,268 | ||||||
|
Short-term
borrowings
|
20,439 | 18,432 | ||||||
|
Long-term
borrowings
|
38,750 | 39,691 | ||||||
|
Accrued
interest payable
|
446 | 1,649 | ||||||
|
Other
liabilities
|
1,840 | 1,616 | ||||||
|
Total
Liabilities
|
471,513 | 432,656 | ||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
stock, par value $2 per share; authorized 12,500,000 shares; issued
3,341,251 shares; outstanding 3,136,156 shares and 3,131,181 shares
December 31, 2009 and 2008, respectively
|
6,683 | 6,683 | ||||||
|
Surplus
|
3,098 | 3,100 | ||||||
|
Retained
earnings
|
42,043 | 39,375 | ||||||
|
Accumulated
other comprehensive loss
|
(2,258 | ) | (4,755 | ) | ||||
|
Treasury
stock, at cost, 205,095 and 210,070 shares at December 31, 2009 and 2008,
respectively
|
(4,596 | ) | (4,683 | ) | ||||
|
Total
Stockholders’ Equity
|
44,970 | 39,720 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 516,483 | $ | 472,376 | ||||
See
notes to consolidated financial statements
46
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated
Statements of Income
|
Years
Ended December 31,
|
|||
|
2009
|
2008
|
2007
|
|
|
(In
Thousands, Except Per Share Data)
|
|||
|
INTEREST
INCOME
|
|||
|
Loans
receivable, including fees
|
$19,446
|
$19,871
|
$19,481
|
|
Securities:
|
|||
|
Taxable
|
2,675
|
3,771
|
3,351
|
|
Tax-exempt
|
2,118
|
1,731
|
1,717
|
|
Other
|
34
|
106
|
62
|
|
Total
Interest Income
|
24,273
|
25,479
|
24,611
|
|
INTEREST
EXPENSE
|
|||
|
Deposits
|
5,328
|
7,026
|
9,019
|
|
Short-term
borrowings
|
315
|
390
|
640
|
|
Long-term
borrowings
|
1,615
|
1,738
|
1,446
|
|
Total
Interest Expense
|
7,258
|
9,154
|
11,105
|
|
Net
Interest Income
|
17,015
|
16,325
|
13,506
|
|
PROVISION
FOR LOAN LOSSES
|
1,735
|
713
|
280
|
|
Net
Interest Income after Provision for Loan Losses
|
15,280
|
15,612
|
13,226
|
|
OTHER
INCOME (LOSS)
|
|||
|
Customer
service fees
|
1,950
|
2,006
|
1,947
|
|
Investment
division commission income
|
341
|
411
|
340
|
|
Earnings
on investment in life insurance
|
342
|
296
|
297
|
|
Premiums
and fees on mortgage sales
|
438
|
148
|
69
|
|
Other
income
|
467
|
458
|
557
|
|
Realized
gain on sale of interest in insurance agency
|
0
|
0
|
220
|
|
Net
realized gains (losses) on sales of securities available for
sale
|
(492)
|
128
|
(122)
|
|
Other
than temporary security impairments
|
(206)
|
(5,256)
|
0
|
|
Total
Other Income (Loss)
|
2,840
|
(1,809)
|
3,308
|
|
OTHER
EXPENSES
|
|||
|
Salaries
and employee benefits
|
5,532
|
4,831
|
4,767
|
|
Occupancy
|
814
|
733
|
788
|
|
Equipment
|
546
|
493
|
508
|
|
FDIC
insurance and assessments
|
900
|
227
|
151
|
|
Professional
fees and outside services
|
588
|
520
|
371
|
|
Computer
service and supplies
|
1,053
|
970
|
785
|
|
Taxes,
other than payroll and income
|
346
|
400
|
386
|
|
Impairment
charge-other real estate owned
|
0
|
0
|
575
|
|
Amortization
expense – deposit acquisition premiums
|
258
|
258
|
255
|
|
Stationary
and printing supplies
|
357
|
360
|
339
|
|
Advertising
|
297
|
201
|
154
|
|
Other
|
1,457
|
1,684
|
1,487
|
|
Total
Other Expenses
|
12,148
|
10,677
|
10,566
|
|
Income
before Income Taxes
|
5,972
|
3,126
|
5,968
|
|
FEDERAL
INCOME TAXES
|
923
|
87
|
1,097
|
|
Net
Income
|
$5,049
|
$3,039
|
$4,871
|
|
EARNINGS
PER SHARE
|
|||
|
Basic
|
$1.61
|
$0.97
|
$1.55
|
|
Diluted
|
$1.61
|
$0.97
|
$1.55
|
|
Dividend
Declared Per Share
|
$.076
|
$.076
|
$.076
|
See
notes to consolidated financial statements
47
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity
Years
Ended December 31, 2009, 2008 and 2007
|
(In
Thousands, Except Share and Per Share Data)
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other Comprehensive Loss
|
Treasury
Stock
|
Total
|
||||||||||||||||||
|
Balance
- December 31, 2006
|
$ | 6,683 | $ | 3,046 | $ | 36,336 | $ | (395 | ) | $ | (4,430 | ) | $ | 41,240 | ||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
0 | 0 | 4,871 | 0 | 0 | 4,871 | ||||||||||||||||||
|
Net
change in unrealized gains (losses) on securities available for sale, net
of reclassification adjustment and taxes
|
0 | 0 | 0 | (995 | ) | 0 | (995 | ) | ||||||||||||||||
| Total Comprehensive Income | 3,876 | |||||||||||||||||||||||
|
Stock
option expense
|
0 | 3 | 0 | 0 | 0 | 3 | ||||||||||||||||||
|
Cash
dividends declared, ($0.76 per share)
|
0 | 0 | (2,383 | ) | 0 | 0 | (2,383 | ) | ||||||||||||||||
|
Shares
issued from treasury related to stock purchase plans (8,119
shares)
|
0 | 34 | 0 | 0 | 129 | 163 | ||||||||||||||||||
|
Purchase
of treasury stock (3,500 shares)
|
0 | 0 | 0 | 0 | (94 | ) | (94 | ) | ||||||||||||||||
|
Balance
- December 31, 2007
|
6,683 | 3,083 | 38,824 | (1,390 | ) | (4,395 | ) | 42,805 | ||||||||||||||||
|
Cumulative
effect of adoption of new accounting principle on January 1, 2008 (Note
1)
|
0 | 0 | (71 | ) | 0 | 0 | (71 | ) | ||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
income
|
0 | 0 | 3,039 | 0 | 0 | 3,039 | ||||||||||||||||||
|
Net
change in unrealized gains (losses) on securities available for sale, net
of reclassification adjustment and taxes
|
0 | 0 | 0 | (3,365 | ) | 0 | (3,365 | ) | ||||||||||||||||
|
Total
Comprehensive Loss
|
(326 | ) | ||||||||||||||||||||||
|
Stock
option expense
|
0 | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||
|
Cash
dividends declared, ($0.76 per share)
|
0 | 0 | (2,417 | ) | 0 | 0 | (2,417 | ) | ||||||||||||||||
|
Shares
issued from treasury related to stock purchase plans (12,688
shares)
|
0 | 16 | 0 | 0 | 218 | 234 | ||||||||||||||||||
|
Purchase
of treasury stock (20,000 shares)
|
0 | 0 | 0 | 0 | (506 | ) | (506 | ) | ||||||||||||||||
|
Balance
- December 31, 2008
|
6,683 | 3,100 | 39,375 | (4,755 | ) | (4,683 | ) | 39,720 | ||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
0 | 0 | 5,049 | 0 | 0 | 5,049 | ||||||||||||||||||
|
Net
change in unrealized gains (losses) on securities available for sale, net
of reclassification adjustment and taxes
|
0 | 0 | 0 | 2,497 | 0 | 2,497 | ||||||||||||||||||
|
Total
Comprehensive Income
|
7,546 | |||||||||||||||||||||||
|
Cash
dividends declared, ($0.76 per share)
|
0 | 0 | (2,381 | ) | 0 | 0 | (2,381 | ) | ||||||||||||||||
|
Shares
issued from treasury related to stock purchase plans (4,975
shares)
|
0 | (2 | ) | 0 | 0 | 87 | 85 | |||||||||||||||||
|
Balance
- December 31, 2009
|
$ | 6,683 | $ | 3,098 | $ | 42,043 | $ | (2,258 | ) | $ | (4,596 | ) | $ | 44,970 | ||||||||||
See
notes to consolidated financial statements
48
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 5,049 | $ | 3,039 | $ | 4,871 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
954 | 871 | 891 | |||||||||
|
Provision
for loan losses
|
1,735 | 713 | 280 | |||||||||
|
Gain
on sales or retirements of equipment
|
(5 | ) | (1 | ) | 0 | |||||||
|
Gain
on sale of other real estate owned
|
0 | (15 | ) | 0 | ||||||||
|
Impairment
charge-other real estate owned
|
0 | 0 | 575 | |||||||||
|
Amortization
of securities’ premiums and accretion of discounts, net
|
227 | 145 | 380 | |||||||||
|
Amortization
of deferred loan costs
|
261 | 304 | 254 | |||||||||
|
Gain
on sale of interest in insurance agency
|
0 | 0 | (220 | ) | ||||||||
|
(Gain)
loss on sales of securities available for sale, net
|
492 | (128 | ) | 122 | ||||||||
|
Other
than temporary security impairment
|
206 | 5,256 | 0 | |||||||||
|
Stock
option expense
|
0 | 1 | 3 | |||||||||
|
Deferred
income tax expense (benefit)
|
1,514 | (1,737 | ) | (83 | ) | |||||||
|
Net
earnings on investment in life insurance
|
(342 | ) | (296 | ) | (297 | ) | ||||||
|
Proceeds
from the sale of loans originated for sale
|
22,010 | 6,556 | 6,127 | |||||||||
|
Net
gain on sale of loans originated for sale
|
(284 | ) | (88 | ) | (38 | ) | ||||||
|
Loans
originated for sale
|
(23,064 | ) | (6,391 | ) | (6,166 | ) | ||||||
|
(Increase)
decrease in assets:
|
||||||||||||
|
Accrued
interest receivable
|
(54 | ) | (289 | ) | (382 | ) | ||||||
|
Other
assets
|
(3,568 | ) | (108 | ) | 275 | |||||||
|
Increase
(decrease)in liabilities:
|
||||||||||||
|
Accrued
interest payable
|
(1,203 | ) | 724 | 222 | ||||||||
|
Other
liabilities
|
224 | (347 | ) | 279 | ||||||||
|
Net
Cash Provided by Operating Activities
|
4,152 | 8,209 | 7,093 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Proceeds
from sale of interest in insurance agency
|
0 | 0 | 551 | |||||||||
|
Proceeds
from sale of available for sale securities
|
62,172 | 57,997 | 60,489 | |||||||||
|
Proceeds
from maturities of and principal repayments on available for sale
securities
|
8,274 | 5,138 | 16,220 | |||||||||
|
Purchase
of available for sale securities
|
(90,505 | ) | (71,624 | ) | (80,401 | ) | ||||||
|
Net
increase in loans
|
(20,510 | ) | (26,198 | ) | (19,993 | ) | ||||||
|
Net
(increase) decrease in investments in restricted stock
|
(212 | ) | 617 | (762 | ) | |||||||
|
Purchase
of premises and equipment
|
(658 | ) | (2,283 | ) | (325 | ) | ||||||
|
Proceeds
from sale or retirements of equipment
|
0 | 1 | 0 | |||||||||
|
Proceeds
from sale of other real estate
|
129 | 180 | 130 | |||||||||
|
Net
Cash Used in Investing Activities
|
(41,310 | ) | (36,172 | ) | (24,091 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Increase
in deposits
|
38,770 | 43,838 | 3,255 | |||||||||
|
Proceeds
from long-term borrowings
|
0 | 5,000 | 11,275 | |||||||||
|
Repayment
of long-term borrowings
|
(941 | ) | (3,843 | ) | (9,266 | ) | ||||||
|
Net
increase (decrease) in short-term borrowings
|
2,007 | (4,416 | ) | 10,274 | ||||||||
|
Proceeds
from sale of treasury stock
|
85 | 234 | 163 | |||||||||
|
Purchase
of treasury stock
|
0 | (506 | ) | (94 | ) | |||||||
|
Cash
dividends paid
|
(2,381 | ) | (2,417 | ) | (2,383 | ) | ||||||
|
Net
Cash Provided by Financing Activities
|
37,540 | 37,890 | 13,224 | |||||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
382 | 9,927 | (3,774 | ) | ||||||||
|
CASH
AND CASH EQUIVALENTS - BEGINNING
|
18,533 | 8,606 | 12,380 | |||||||||
|
CASH
AND CASH EQUIVALENTS - ENDING
|
$ | 18,915 | $ | 18,533 | $ | 8,606 | ||||||
See
notes to consolidated financial statements
49
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Continued)
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
SUPPLEMENTARY
CASH FLOWS INFORMATION
|
||||||||||||
|
Interest
paid
|
$ | 8,461 | $ | 8,430 | $ | 10,833 | ||||||
|
Income
taxes paid
|
$ | 815 | $ | 2,130 | $ | 805 | ||||||
|
SUPPLEMENTARY
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
||||||||||||
|
Foreclosed
real estate acquired in settlement of loans
|
$ | 492 | $ | 99 | $ | 318 | ||||||
See
notes to consolidated financial statements
50
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of Peoples Financial
Services Corp. (the “Company”) and its wholly-owned subsidiaries, Peoples
National Bank (the “Bank”), Peoples Advisors, LLC and Peoples Financial Capital
Corporation. The Bank has two wholly owned subsidiaries, Peoples Financial
Leasing, LLC and Peoples Investment Holdings, LLC. Peoples Financial Capital
Corporation, Peoples Investment Holdings, LLC, and Peoples Financial Leasing,
LLC were all incorporated in April of 2007. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Nature
of Operations
The
Company provides a variety of financial services, through the Bank, to
individuals, small businesses and municipalities through its eight Pennsylvania
offices located in Hallstead, Hop Bottom, Susquehanna, Montrose, Nicholson,
Meshoppen, Tunkhannock and Glenburn Township which are small communities in a
rural setting. In October of 2008, the Company opened its eighth
Pennsylvania office in Glenburn Township. This office is the Company’s first
presence in Lackawanna County. In 2002, the Company started operating in New
York with an office located in Norwich. The Company opened an office
in Conklin, New York, in March 2003 at which time the Norwich office was closed
and its deposits transferred to the Conklin office. The Company
opened two new offices in 2005, Deposit, New York, April 2005, and the Town of
Chenango, New York, June 2005. The Bank’s primary deposits are
checking accounts, savings accounts and certificates of deposit. Its
primary lending products are single-family residential loans and loans to small
businesses. As a national bank, the Bank is subject to regulation of
the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. The Company is subject to regulation of the Federal
Reserve Bank. Peoples Advisors, LLC is a member-managed liability
company under the laws of the Commonwealth of Pennsylvania for the purpose of
providing investment advisory services to the general public. Peoples Financial
Leasing, LLC provides employee leasing services to the Bank. Peoples Investment
Holdings, LLC is incorporated in the state of Delaware and maintains and manages
the intangible investments of the Bank and the collection and distribution of
the income from such investments or from tangible investments located outside of
Delaware. Peoples Financial Capital Corporation is also incorporated in the
state of Delaware and maintains and manages the intangible investments of the
Company and the collection and distribution of the income from such investments
or from tangible investments located outside of Delaware.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
51
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans, the valuation of deferred tax assets, the potential impairment of
restricted stock, and determination of other-than-temporary impairment losses on
securities.
Significant
Group Concentrations of Credit Risk
Most of
the Company’s activities are with customers located primarily in northern
Lackawanna, Susquehanna and Wyoming Counties of Pennsylvania, and Broome County
of New York. Note 2 discusses the types of securities in which the
Company invests. The concentrations of credit by type of loan are set
forth in Note 3. The Company does not have any significant
concentrations to any one industry or customer. Although the Company
has a diversified loan portfolio, its debtors’ ability to honor their contracts
is influenced by the region’s economy.
Presentation
of Cash Flows
For
purposes of cash flows, cash and cash equivalents include cash on hand and
amounts due from banks, interest-bearing deposits in other banks and federal
funds sold.
Securities
Securities
classified as available-for-sale are those securities that the Company intends
to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available-for-sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company’s assets
and liabilities, liquidity needs, regulatory capital considerations and other
similar factors. Securities available-for-sale are carried at fair
value. Unrealized gains or losses are reported as increases or
decreases in other comprehensive income, net of the related deferred tax
effect. Realized gains or losses, determined on the basis of the cost
of the specific securities sold, are included in earnings. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
Declines
in the fair value of available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses. In estimating OTTI under the rules for accounting for certain
debt and equity securities, management considers many factors, including: (1)
the length of time and the extent to which the fair value has been less than
amortized cost, (2) the financial condition and near-term prospects of the
issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
anticipated recovery.
52
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment
in Restricted Stock, at Cost
As a
member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Company is
required to purchase and hold stock in the FHLB to satisfy membership and
borrowing requirements. This stock is restricted in that it can only
be sold to the FHLB or to another member institution, and all sales of FHLB
stock must be at par. As a result of these restrictions, FHLB stock
is unlike other investment securities insofar as there is no trading market for
FHLB stock and the transfer price is determined by FHLB membership rules and not
by market participants. As of December 31, 2009 and December 31,
2008, our FHLB stock totaled $2,771,000 and $2,559,000
respectively.
In
December 2008, the FHLB voluntarily suspended dividend payments on its stock, as
well as the repurchase of excess stock from members. The FHLB cited a
significant reduction in the level of core earnings resulting from lower
short-term interest rates, the increased cost of liquidity, and constrained
access to the debt markets at attractive rates and maturities as the main
reasons for the decision to suspend dividends and the repurchase of excess
capital stock. The FHLB last paid a dividend in the third quarter of
2008.
FHLB
stock is held as a long-term investment and its value is determined based on the
ultimate recoverability of the par value. The Company evaluates
impairment quarterly. The decision of whether impairment exists is a
matter of judgment that reflects our view of the FHLB’s long-term performance,
which includes factors such as the following:
|
·
|
Its
operating performance;
|
|
·
|
The
severity and duration of declines in the fair value of its net assets
related to its capital stock amount;
|
|
·
|
Its
commitment to make payments required by law or regulation and the level of
such payments in relation to its operating performance;
|
|
·
|
The
impact of legislative and regulatory changes on the FHLB, and accordingly,
on the members of FHLB; and
|
|
·
|
Its
liquidity and funding position
|
After
evaluating all of these considerations, the Company concluded that the par value
of its investment in FHLB stock will be recovered. Accordingly, no
impairment charge was recorded on these securities for the year ended December
31, 2009. Our evaluation of the factors described above in future
periods could result in the recognition of impairment charges on FHLB
stock.
Loans
Receivable
Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized over the contractual life of the related loan
as an adjustment to the yield.
53
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The
accrual of interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectability of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well
secured. When a loan is placed on non-accrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued
in prior years is charged against the allowance for loan
losses. Interest received on non-accrual loans generally is either
applied against principal or reported as interest income, according to
management’s judgment as to the collectability of
principal. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectability of the
total contractual principal and interest is no longer in doubt.
Loans
Held for Sale
Loans
originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by aggregate outstanding
commitments from investors or current investor yield
requirements. Net unrealized losses are recognized through a
valuation allowance by charges to income. The Company had mortgages
of $770,000 and $0 held for sale at December 31, 2009 and 2008,
respectively.
Allowance
for Loan Losses
The
allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
The
allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management’s
periodic evaluation of the adequacy of the allowance is based on the Bank’s past
loan loss experience, known or inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay, the estimated value
of any underlying collateral, composition of the loan portfolio, current
economic conditions and other relevant factors. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The
allowance consists of specific, general and unallocated
components. The specific component relates to loans that are
classified as either doubtful, substandard or special mention. For
such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value for that
loan. The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
54
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price or the fair value of the collateral if the loan
is collateral dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line and
various accelerated methods over the following estimated useful lives of the
related assets:
|
Years
|
||||
|
Buildings
and improvements
|
7 - 40 | |||
|
Furniture,
fixtures and equipment
|
3 - 10 | |||
Maintenance,
repairs and minor replacements are expensed when incurred. Gains and
losses on routine dispositions are reflected in current operations.
Transfers
of Financial Assets
Transfers
of financial assets, which include loan participation sales, are accounted for
as sales, when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
55
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible
Assets
The Bank
has core deposit acquisition premiums, which are being amortized over an
estimated life of fifteen years using the straight-line method. These
intangible assets were $560,000 and $818,000 net of accumulated amortization of
$3,327,000 and $3,069,000 at December 31, 2009 and 2008,
respectively. Amortization expense was $258,000 for 2009, $258,000
for 2008 and $255,000 for 2007. Amortization expense is estimated to be $258,000
per year for the next two years and $44,000 in 2012 as the fifteen-year
amortization period expires.
Other
Real Estate Owned
Other
real estate owned is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. A loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral regardless
of whether formal foreclosure proceedings take place. Foreclosed
assets initially are recorded at fair value, net of estimated selling costs, at
the date of foreclosure establishing a new cost basis. Subsequent
declines in the recorded value of the property prior to its disposal and costs
to maintain the assets are included in other expense. In addition,
any gain or loss realized upon disposal is included in other income or
expense.
Bank
Owned Life Insurance
The
Company invests in bank owned life insurance (“BOLI”) as a source of funding for
employee benefit expenses. BOLI involves the purchasing of life
insurance by the Bank on a chosen group of employees. The Company is
the owner and beneficiary of the policies. This life insurance
investment is carried at the cash surrender value of the underlying
policies.
Income
Taxes
Deferred
income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment. Peoples Financial Services Corp. and its subsidiaries file
a consolidated federal income tax return.
Advertising
The
Company follows the policy of charging marketing and advertising costs to
expense as incurred. Advertising expense for the years ended
December 31, 2009, 2008, and 2007 was $297,000, $201,000 and $154,000,
respectively.
56
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings
per Share
Basic
earnings per share represent income available to common stockholders divided by
the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company
relate solely to outstanding stock options, and are determined using the
treasury stock method.
The
following table shows the amounts used in computing earnings per share for the
years ended December 31, 2009, 2008 and 2007:
|
Income
Numerator
|
Common
Shares Denominator
|
EPS
|
||||||||||
|
(In
Thousands, Except Per Share Data)
|
||||||||||||
|
2009:
|
||||||||||||
|
Basic
EPS
|
$ | 5,049 | 3,134 | $ | 1.61 | |||||||
|
Dilutive
effect of potential common stock, stock options (246
options)
|
0 | 0 | 0 | |||||||||
|
Diluted
EPS
|
$ | 5,049 | 3,134 | $ | 1.61 | |||||||
|
2008:
|
||||||||||||
|
Basic
EPS
|
$ | 3,039 | 3,128 | $ | .97 | |||||||
|
Dilutive
effect of potential common stock, stock options (4,523
options)
|
0 | 5 | .00 | |||||||||
|
Diluted
EPS
|
$ | 3,039 | 3,133 | $ | .97 | |||||||
|
2007:
|
||||||||||||
|
Basic
EPS
|
$ | 4,871 | 3,136 | $ | 1.55 | |||||||
|
Dilutive
effect of potential common stock, stock options (9,984
options)
|
0 | 10 | .00 | |||||||||
|
Diluted
EPS
|
$ | 4,871 | 3,146 | $ | 1.55 | |||||||
Stock
options for 22,179, 10,900, and 12,250 shares of common stock were anti-dilutive
and not considered in computing diluted earnings per share for the years ended
December 31, 2009, 2008, and 2007, respectively because they were considered
anti-dilutive.
57
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive
Income (Loss)
Accounting
principles generally accepted in the United States of America require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are reported as a
separate component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income (loss).
The
components of other comprehensive income (loss) and related tax effects for the
years ended December 31, 2009, 2008 and 2007 are as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Unrealized
holding gains (losses) on available for sale securities
|
$ | 3,084 | $ | (10,226 | ) | $ | (1,629 | ) | ||||
|
Reclassification
adjustment for (gains) losses realized in net income
|
492 | (128 | ) | 122 | ||||||||
|
Reclassification
adjustment for other than temporary impairment charges
|
206 | 5,256 | 0 | |||||||||
|
Net
Unrealized Gains (Losses)
|
3,782 | (5,098 | ) | (1,507 | ) | |||||||
|
Tax
effect
|
(1,285 | ) | 1,733 | 512 | ||||||||
|
Net
of Tax Amount
|
$ | 2,497 | $ | (3,365 | ) | $ | (995 | ) | ||||
Stock-Based
Compensation
As of
December 31, 2009 and 2008, all stock options were fully vested and there are no
unrecognized compensation costs related to stock options. There were
no stock options granted for the years ended December 31, 2009, 2008 and 2007,
respectively.
Segment
Reporting
The Bank
acts as an independent community financial services provider and offers
traditional banking and related financial services to individual, business and
government customers. Through its branch and automated teller machine
network, the Bank offers a full array of commercial and retail financial
services, including: the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of
other financial services.
Management
does not separately allocate expenses, including the cost of funding loan
demand, between the commercial and retail operations of the Bank. As
such, discrete information is not available and segment reporting would not be
meaningful.
Peoples
Advisors, LLC provides investment advisory services to the general
public. This company is included in the banking and financial
services segment of the Bank.
Peoples
Financial Leasing, LLC provides employee leasing services to the
Bank.
58
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment
Reporting (Continued)
Peoples
Investment Holdings, LLC manages the intangible investments of the Bank and the
collection and distribution of the income from such investments or from tangible
investments located outside of Delaware.
Peoples
Financial Capital Corporation maintains and manages the intangible investments
of the Company and the collection and distribution of the income from such
investments or from tangible investments located outside of
Delaware.
Off-Balance
Sheet Financial Instruments
In the
ordinary course of business, the Company has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they are funded.
|
|
Subsequent
Events
|
Effective
April 1, 2009, the Company adopted ASC Topic 855 Subsequent
Events. This topic establishes general standards for
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued. This topic sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition in the financial statements, identifies the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that should
be made about events or transactions that occur after the balance sheet
date.
New
Accounting Standards
ASC
Topic 105
In June
2009, the Financial Accounting Standards Board (FASB) issued ASC Topic 105,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162. This topic
replaces SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles, to establish the FASB Accounting Standards
Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with generally accepted accounting
principles in the United States. This topic is effective for interim
and annual periods ending after September 15, 2009. This guidance had no
impact on the Company’s consolidated financial statements upon
adoption. Where applicable, all guidance in these financial
statements refers to the codification references. ASC refers to Accounting
Standards Codification and ASU refers to Accounting Standards
Update.
59
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Standards (Continued)
ASU
2009-05
In August
2009, the FASB issued ASU 2009-05, Fair Value Measurements and
Disclosures (Topic 820): Measuring Liabilities at Fair
Value. The amendments within ASU 2009-05 clarify that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following techniques:
A
valuation technique that uses:
|
a.
|
The
quoted price of the identical liability when traded as an
asset.
|
|
b.
|
Quoted
prices for similar liabilities or similar liabilities when traded as
assets.
|
Another
valuation technique that is consistent with the principles of Topic
820.
Two
examples would be an income approach, such as a present value technique, or a
market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability.
When
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability.
Both a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements.
This
guidance is effective for the first reporting period (including interim periods)
beginning after issuance. The Company is currently reviewing the
effect this new pronouncement will have on its consolidated financial
statements.
60
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Standards (Continued)
ASU
2009-12
In
September 2009, the FASB issued ASU 2009-12, Fair Value Measurements and
Disclosures (Topic 820): Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent). The amendments within
ASU 2009-12:
|
·
|
Create
a practical expedient to measure the fair value of an investment in the
scope of the amendments in this ASU on the basis of the net asset value
per share of the investment (or its equivalent) determined as of the
reporting entity’s measurement date.
|
|
·
|
Require
disclosures by major category of investment about the attributes of those
investments, such as the nature of any restrictions on the investor’s
ability to redeem its investments at the measurement date, any unfunded
commitments, and the investment strategies of the
investees.
|
|
·
|
Improve
financial reporting by permitting use of a practical expedient, with
appropriate disclosures, when measuring the fair value of an alternative
investment that does not have a readily determinable fair
value.
|
|
·
|
Improve
transparency by requiring additional disclosures about investments in the
scope of the amendments in this ASU to enable users of financial
statements to understand the nature and risks of investments and whether
the investments are probable of being sold at amounts different from net
asset value per share.
|
The ASU
is effective for interim and annual periods ending after December 15,
2009. Early application is permitted in financial statements for earlier
interim and annual periods that have not been issued. The
adoption of this guidance had no effect on the Company’s consolidated financial
statements.
ASU
2009-16
In
October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets. This Update
amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets-an amendment of FASB Statement No. 140.
The amendments in this Update improve
financial reporting by eliminating the exceptions for qualifying special-purpose
entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In addition, the
amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for
transferred financial assets will also be improved through clarifications
of the requirements for isolation and limitations on portions of financial
assets that are eligible for sale accounting.
61
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Standards (Continued)
This
Update is effective at the start of a reporting entity’s first fiscal year
beginning after November 15, 2009. Early application is not
permitted. The Company is currently reviewing the effect this new
pronouncement will have on its consolidated financial statements.
ASU
2010-01
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) - Accounting for
Distributions to Shareholders with Components of Stock and
Cash. The amendments in this Update clarify that the stock
portion of a distribution to shareholders that allows them to elect to receive
cash or stock with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the aggregate is considered a share
issuance that is reflected in earnings per share prospectively and is not a
stock dividend. This Update codifies the consensus reached in EITF
Issue No. 09-E, “Accounting for Stock Dividends, Including Distributions to
Shareholders with Components of Stock and Cash.”
This
Update is effective for interim and annual periods ending on or after December
15, 2009, and should be applied on a retrospective basis. The Company
is currently reviewing the effect this new pronouncement will have on its
consolidated financial statements.
ASU
2010-06
The FASB
has issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification. Subtopic 820-10 to now
require:
|
·
|
A
reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers; and
|
|
·
|
In
the reconciliation for fair value measurements using significant
unobservable inputs, a reporting entity should present separately
information about purchases, sales, issuances, and
settlements.
|
In
addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures
|
·
|
For
purposes of reporting fair value measurement for each class of assets and
liabilities, a reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities; and
|
|
·
|
A
reporting entity should provide disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring
fair value measurements.
|
62
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Standards (Continued)
ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
adoption is permitted. The Company is currently reviewing the effect
this new pronouncement will have on its consolidated financial
statements.
Reclassifications
Certain
amounts in the 2008 and 2007 financial statements have been reclassified to
conform to 2009 presentation. Those reclassifications had no effect
on net income.
63
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SECURITIES
At
December 31, 2009 and 2008, the amortized cost and fair values of securities
available-for-sale are as follows:
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
December
31, 2009:
|
||||||||||||||||
|
U.S. Government agencies and corporations
|
$ | 60,989 | $ | 103 | $ | (627 | ) | $ | 60,465 | |||||||
|
Obligations of state and political subdivisions
|
52,836 | 191 | (1,483 | ) | 51,544 | |||||||||||
|
Taxable obligations of state and political subdivisions
|
2,219 | 20 | (83 | ) | 2,156 | |||||||||||
|
Corporate debt securities
|
11,738 | 67 | (1,471 | ) | 10,334 | |||||||||||
|
Mortgage-backed securities-residential
|
4,427 | 212 | (2 | ) | 4,637 | |||||||||||
|
Collateralized mortgage obligation-residential
|
198 | 5 | 0 | 203 | ||||||||||||
|
Preferred equity securities
|
78 | 7 | (0 | ) | 85 | |||||||||||
|
Common equity securities
|
1,442 | 4 | (364 | ) | 1,082 | |||||||||||
|
Total
|
$ | 133,927 | $ | 609 | $ | (4,030 | ) | $ | 130,506 | |||||||
|
December
31, 2008:
|
||||||||||||||||
|
U.S. Government agencies and corporations
|
$ | 7,891 | $ | 67 | $ | 0 | $ | 7,958 | ||||||||
|
Obligations of state and political subdivisions
|
47,914 | 120 | (3,319 | ) | 44,715 | |||||||||||
|
Taxable obligations of state and political subdivisions
|
3,166 | 0 | (106 | ) | 3,060 | |||||||||||
|
Corporate debt securities
|
20,828 | 40 | (3,898 | ) | 16,970 | |||||||||||
|
Mortgage-backed securities-residential
|
30,325 | 324 | (47 | ) | 30,602 | |||||||||||
|
Collateralized mortgage obligation-residential
|
2,162 | 1 | 0 | 2,163 | ||||||||||||
|
Preferred equity securities
|
78 | 0 | (58 | ) | 20 | |||||||||||
|
Common equity securities
|
2,428 | 25 | (352 | ) | 2,101 | |||||||||||
|
Total
|
$ | 114,792 | $ | 577 | $ | (7,780 | ) | $ | 107,589 | |||||||
64
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SECURITIES (CONTINUED)
The
amortized cost and fair value of securities as of December 31, 2009, by
contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without any penalties.
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
(In
Thousands)
|
||||||||
|
Due
in one year or less
|
$ | 0 | $ | 0 | ||||
|
Due
after one year through five years
|
40,771 | 40,366 | ||||||
|
Due
after five years through ten years
|
31,347 | 29,908 | ||||||
|
Due
after ten years
|
55,664 | 54,225 | ||||||
| 127,782 | 124,499 | |||||||
|
Mortgage-backed
securities-residential
|
4,427 | 4,637 | ||||||
|
Collateralized
mortgage obligation-residential
|
198 | 203 | ||||||
|
Equity
securities
|
1,520 | 1,167 | ||||||
| $ | 133,927 | $ | 130,506 | |||||
Proceeds
from sale of available-for-sale securities during 2009, 2008 and 2007 were
$62,172,000, $57,997,000, and $60,489,000, respectively. Gross gains
realized on these sales were $879,000, $412,000, and $186,000,
respectively. Gross losses on these sales were $1,371,000, $284,000,
and $308,000, respectively.
Securities
with a carrying value of $63,066,000 and $43,313,000 at December 31, 2009
and 2008, respectively, were pledged to secure public deposits and repurchase
agreements as required or permitted by law.
65
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SECURITIES (CONTINUED)
The
following tables show the Company’s investments’ gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at
December 31, 2009 and 2008 (in thousands):
December
31, 2009:
|
Less
Than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
|
US
Govt./Agency
|
$ | 49,953 | $ | (627 | ) | $ | 0 | $ | 0 | $ | 49,953 | $ | (627 | ) | ||||||||||
|
Obligations
of state and political subdivisions
|
23,138 | (322 | ) | 8,403 | (1,161 | ) | 31,541 | (1,483 | ) | |||||||||||||||
|
Taxable
obligations of state and political subdivisions
|
716 | (7 | ) | 417 | (76 | ) | 1,133 | (83 | ) | |||||||||||||||
|
Corporate
debt securities
|
0 | 0 | 8,809 | (1,471 | ) | 8,809 | (1,471 | ) | ||||||||||||||||
|
Mortgage-backed
securities-residential
|
114 | 0 | 121 | (2 | ) | 235 | (2 | ) | ||||||||||||||||
|
Common
equity securities
|
343 | (7 | ) | 619 | (357 | ) | 962 | (364 | ) | |||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | 74,264 | $ | (963 | ) | $ | 18,369 | $ | (3,067 | ) | $ | 92,633 | $ | (4,030 | ) | |||||||||
December
31, 2008:
|
Less
Than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
|
Obligations
of state and political subdivisions
|
$ | 34,301 | $ | (2,376 | ) | $ | 2,570 | $ | (943 | ) | $ | 36,871 | $ | (3,319 | ) | |||||||||
|
Taxable
obligations of state and political subdivisions
|
3,060 | (106 | ) | 0 | 0 | 3,060 | (106 | ) | ||||||||||||||||
|
Corporate
debt securities
|
8,752 | (2,878 | ) | 7,420 | (1,020 | ) | 16,172 | (3,898 | ) | |||||||||||||||
|
Mortgage-backed
securities-residential
|
11,242 | (41 | ) | 1,305 | (6 | ) | 12,547 | (47 | ) | |||||||||||||||
|
Preferred
equity securities
|
20 | (58 | ) | 0 | 0 | 20 | (58 | ) | ||||||||||||||||
|
Common
equity securities
|
166 | (37 | ) | 687 | (315 | ) | 853 | (352 | ) | |||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | 57,541 | $ | (5,496 | ) | $ | 11,982 | $ | (2,284 | ) | $ | 69,523 | $ | (7,780 | ) | |||||||||
66
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SECURITIES (CONTINUED)
At
December 31, 2009, the Company had 44 (all less than 12 months) U.S. Government
Agency securities with unrealized losses of $627,000, 61 (47 less than 12
months, 14 greater than 12 months) obligations of state and political
subdivisions with unrealized losses of $1,566,000, 5 (3 less than 12 months, 2
greater than 12 months) mortgage-backed securities with unrealized losses of
$2,000, 6 (all greater than 12 months) corporate debt securities with unrealized
losses of $1,471,000, and 17 (2 less than 12 months, 15 greater than 12 months)
common equity securities, with unrealized losses of $364,000. The majority of
the unrealized losses reflect changes in interest rates subsequent to the
acquisition of the specific securities and management believes that these
unrealized losses represent a temporary impairment of those
securities. As long term rates increase, the underlying value of
securities owned by the Company decreases, creating an unrealized
loss.
The
Company recorded other than temporary impairments of $206,000 for the year ended
December 31, 2009. These impairments were the result of writing down three
common equity securities. These write-downs were measured based on public market
prices. In reaching the determination to record these impairments, management
reviewed the facts and circumstances available surrounding the securities,
including the duration and amount of the unrealized loss, the financial
condition of the issuer and the prospects for a change in market value within a
reasonable period of time. Based on its assessment, management determined that
the impairment was other-than-temporary and that a charge was appropriate for
these securities. The entire charge was credit related and was
recorded in operations.
None of
the Company’s corporate debt securities are private label trust preferred
issuances. Rather, this portfolio contains corporate bond issuances
in large, national financial institutions. The Company sold a
corporate debt security (CIT Group, Inc.) in July 2009 for a $1,229,000
loss. This security was sold due to a decline in the issuer’s rating
which occurred in July 2009.
Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. All of the Company’s investment securities
classified as available-for-sale are evaluated for OTTI under the rules for
accounting for certain investments in debt and equity securities.
In
determining OTTI under the rules for accounting for certain debt and equity
securities, management considers many factors, including: (1) the
length of time and the extent to which the fair value has been less than
amortized cost, (2) the financial condition and near-term prospects of the
issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on information available to management at a point in
time. An OTTI is deemed to have occurred if there has been an adverse
change in the remaining expected future cash flows.
67
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SECURITIES (CONTINUED)
When an
OTTI occurs under the model, the amount of the OTTI recognized in earnings
depends on whether an entity intends to sell the security or more likely than
not will be required to sell the security before recovery of its amortized cost
basis less any current-period credit loss. If an entity intends to
sell or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the
OTTI shall be recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet
date. If an entity does not intend to sell the security and it is not
more likely than not that the entity will be required to sell the security
before recovery of its amortized cost basis less any current-period loss, the
OTTI shall be separated into the amount representing the credit loss and the
amount related to all other factors. The amount of the total OTTI
related to the credit loss is determined based on the present value of cash
flows expected to be collected and is recognized in earnings. The
amount of the total OTTI related to other factors shall be recognized in other
comprehensive income, net of applicable tax benefit. The previous
amortized cost basis less the OTTI recognized in earnings shall become the new
amortized cost basis of the investment. As of December 31, 2009, the
Company does not intend to sell and more likely than not, will not be required
to sell, these securities before recovery. Management believes that
the unrealized losses represent temporary impairment of the
securities.
NOTE
3 - LOANS RECEIVABLE
The
composition of loans receivable at December 31, 2009 and 2008 is as
follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
Thousands)
|
||||||||
|
Commercial
|
$ | 82,287 | $ | 71,258 | ||||
|
Real
estate:
|
||||||||
|
Commercial
|
115,799 | 107,084 | ||||||
|
Residential
|
116,920 | 120,813 | ||||||
|
Consumer
|
20,802 | 16,988 | ||||||
| 335,808 | 316,143 | |||||||
|
Unearned
net loan origination fees and costs
|
495 | 465 | ||||||
|
Allowance
for loan losses
|
(3,337 | ) | (3,002 | ) | ||||
| $ | 332,966 | $ | 313,606 | |||||
68
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - LOANS RECEIVABLE (CONTINUED)
A summary
of the transactions in the allowance for loan losses is as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Balance,
beginning
|
$ | 3,002 | $ | 2,451 | $ | 1,792 | ||||||
|
Provision for loan
losses
|
1,735 | 713 | 280 | |||||||||
|
Recoveries
|
147 | 84 | 452 | |||||||||
|
Loans charged off
|
(1,547 | ) | (246 | ) | (73 | ) | ||||||
|
Balance,
ending
|
$ | 3,337 | $ | 3,002 | $ | 2,451 | ||||||
The total
recorded investment in impaired loans was $3,326,000 and $5,116,000 at
December 31, 2009 and 2008, respectively. The required allowance
for loan losses on these loans was $559,000 and $624,000 at December 31, 2009
and 2008, respectively. At December 31, 2009, impaired loans of
$2,393,000 required a specific reserve of $559,000. At December 31,
2009 and 2008, impaired loans of $933,000 and $2,324,000 respectively, did not
require a specific reserve. For the years ended December 31,
2009, 2008 and 2007, the average balance of these impaired loans was $4,184,000,
$2,695,000, and $496,000, respectively. The Company recognizes income
on impaired loans under the cash basis when the collateral on the loan is
sufficient to cover the outstanding obligation to the Company. If
these factors do not exist, the Company will record all payments as a reduction
of principal on such loans.
The
recorded investment of impaired loans at December 31, 2009 and 2008 included
loans on which the accrual of interest has been discontinued of $2,528,000 and
$602,000 respectively. If interest on non-accrual loans had been
accrued throughout the period, interest income for the years ended December 31,
2009, 2008 and 2007, would have increased approximately $135,000, $26,000 and
$32,000 respectively. The amount of interest income on these loans
that was included in net income for the years ended December 31, 2009, 2008 and
2007 was $43,000, $27,000, and $15,000, respectively.
Loans
outstanding to directors, executive officers, principal stockholders or to their
affiliates totaled $2,146,000 and $2,665,000 at December 31, 2009 and 2008,
respectively. Advances and repayments during 2009 totaled $482,000
and $1,001,000, respectively. These loans are made during the
ordinary course of business at the Company’s normal credit
terms. There were no related party loans that were classified as
non-accrual, past due, or restructured or were considered a potential credit
risk at December 31, 2009 and 2008.
69
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - LOANS RECEIVABLE (CONTINUED)
The
Company has signed a participating member agreement to sell residential
mortgages to Fannie Mae. The balance of loans sold as of December 31, 2009 to
Fannie Mae is $27,574,000. The Company continues to service loans
that were sold to the FHLB of Pittsburgh (“FHLB”). The agreement,
with FHLB, included a maximum credit enhancement of $178,000 which the Company
may be required to pay if realized losses on any of the sold mortgages exceed
the amount held in the FHLB’s Spread Account. The FHLB is funding the
Spread Account at 0.25% of the outstanding balance of loans sold. The balance of
loans sold as of December 31, 2009 to FHLB is $7,601,000. The
Company’s historical losses on residential mortgages have been lower than the
amount being funded to the Spread Account. As such, the Company does
not anticipate recognizing any losses and accordingly, has not recorded a
liability for the credit enhancement. As compensation for the credit
enhancement, the FHLB is paying the Company 0.10% of the outstanding loan
balance in the portfolio on a monthly basis.
The
Company retains the servicing on the loans sold to Fannie Mae and FHLB and
receives a fee based upon the principal balance outstanding. During
the years ended 2009 and 2008, the Company recognized $242,000 and $60,000,
respectively, of servicing assets and amortized $76,000 and $24,000,
respectively. The balance outstanding was $285,000 and $119,000 at December 31,
2009 and 2008, respectively. The fair value of the servicing assets
was $285,000 and $119,000 at December 31, 2009 and 2008, respectively, and was
based on market quotes for pools of the mortgages stratified by rate and
maturity date.
NOTE
4 - PREMISES AND EQUIPMENT
Premises
and equipment at December 31, 2009 and 2008 are comprised of the
following:
|
2009
|
2008
|
|||||||
|
(In
Thousands)
|
||||||||
|
Land
|
$ | 805 | $ | 805 | ||||
|
Building
and improvements
|
8,004 | 7,567 | ||||||
|
Furniture,
fixtures and equipment
|
6,784 | 6,595 | ||||||
| 15,593 | 14,967 | |||||||
|
Accumulated
depreciation
|
(8,084 | ) | (7,425 | ) | ||||
| $ | 7,509 | $ | 7,542 | |||||
Depreciation
expense was $696,000, $613,000, and $636,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
70
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - DEPOSITS
The
composition of deposits at December 31, 2009 and 2008 were as
follows:
|
2009
|
2008
|
|||||||
|
(In
Thousands)
|
||||||||
|
Demand:
|
||||||||
|
Non-interest
bearing
|
$ | 71,835 | $ | 55,324 | ||||
|
Interest bearing
|
81,132 | 64,533 | ||||||
|
Savings
|
170,981 | 87,106 | ||||||
|
Time:
|
||||||||
|
$100,000 and over
|
20,429 | 47,622 | ||||||
|
Less than
$100,000
|
65,661 | 116,683 | ||||||
| $ | 410,038 | $ | 371,268 | |||||
At
December 31, 2009, the scheduled maturities of time deposits are as follows
(in thousands):
|
2010
|
$ | 50,186 | ||
|
2011
|
9,442 | |||
|
2012
|
11,026 | |||
|
2013
|
9,727 | |||
|
2014
|
4,606 | |||
|
Thereafter
|
1,103 | |||
| $ | 86,090 |
71
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - SHORT-TERM BORROWINGS
Securities
sold under agreements to repurchase and Federal Home Loan Bank advances
generally represent overnight or less than 30-day borrowings. U.S.
Treasury tax and loan notes for collections made by the Bank are payable on
demand. Short-term borrowings consisted of the following at
December 31, 2009, 2008 and 2007:
|
At
and for the year ended December 31, 2009
|
||||||||||||||||
|
Ending
Balance
|
Average
Balance
|
Maximum
Month-End Balance
|
Average
Rate
|
|||||||||||||
|
(Dollars
In Thousands)
|
||||||||||||||||
|
Securities
sold under agreements to repurchase
|
$ | 20,148 | $ | 19,271 | $ | 21,220 | 1.62 | % | ||||||||
|
Federal
Home Loan Bank
|
0 | 280 | 3,670 | 0.80 | % | |||||||||||
|
U.S.
Treasury tax and loan notes
|
291 | 451 | 668 | 0.00 | % | |||||||||||
|
|
$ | 20,439 | $ | 20,002 | $ | 25,558 | 1.57 | % | ||||||||
|
At
and for the year ended December 31, 2008
|
||||||||||||||||
|
Ending
Balance
|
Average
Balance
|
Maximum
Month-End Balance
|
Average
Rate
|
|||||||||||||
|
(Dollars
In Thousands)
|
||||||||||||||||
|
Securities
sold under agreements to repurchase
|
$ | 17,351 | $ | 12,775 | $ | 17,351 | 2.10 | % | ||||||||
|
Federal
Home Loan Bank
|
0 | 3,575 | 9,950 | 3.16 | % | |||||||||||
|
U.S.
Treasury tax and loan notes
|
1,081 | 524 | 1,081 | 1.45 | % | |||||||||||
| $ | 18,432 | $ | 16,874 | $ | 28,382 | 2.30 | % | |||||||||
|
At
and for the year ended December 31, 2007
|
||||||||||||||||
|
Ending
Balance
|
Average
Balance
|
Maximum
Month-End Balance
|
Average
Rate
|
|||||||||||||
|
(Dollars
In Thousands)
|
||||||||||||||||
|
Securities
sold under agreements to repurchase
|
$ | 10,281 | $ | 10,269 | $ | 11,722 | 3.01 | % | ||||||||
|
Federal
Home Loan Bank
|
11,965 | 6,029 | 12,716 | 5.07 | % | |||||||||||
|
U.S.
Treasury tax and loan notes
|
602 | 503 | 1,014 | 4.39 | % | |||||||||||
| $ | 22,848 | $ | 16,801 | $ | 25,452 | 3.79 | % | |||||||||
72
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - SHORT-TERM BORROWINGS (CONTINUED)
The Bank
has an agreement with the Federal Home Loan Bank (FHLB) which allows for
borrowings up to a percentage of qualifying assets. At
December 31, 2009, the Bank had a maximum borrowing capacity for short-term
and long-term advances of approximately $152,330,000 of which $38,750,000 was
outstanding in short and long-term borrowings. All advances from FHLB
are secured by qualifying assets of the Bank.
Securities
sold under repurchase agreements are retained under the Bank’s control at its
safekeeping agent. The Bank may be required to provide additional
collateral based on the fair value of the underlying securities. The
weighted average interest rate on securities sold under repurchase agreements at
December 31, 2009 was 1.62%.
Securities
owned by the Company provide collateral for U.S. Treasury tax and loan
notes.
The Bank
has a $7,000,000 line of credit for the sale of federal funds with Atlantic
Central Bankers Bank of which $0 was outstanding at December 31, 2009 and
2008. These borrowings are unsecured. The Bank also has a $7,721,000
line of credit available with the Federal Reserve Bank of Philadelphia of which
$0 was outstanding at December 31, 2009 and 2008. These borrowings are
secured with securities owned by the Bank.
NOTE
7 - LONG-TERM BORROWINGS
Long-term
debt consisted of advances from the Federal Home Loan Bank under various
notes.
|
Due
|
Convertible
|
Strike
Rate
|
Current
Interest Rate
|
2009
|
2008
|
|||||||||||||||
|
(Dollars
In Thousands)
|
||||||||||||||||||||
|
February
2009
|
N/A | N/A | 4.80 | % | $ | 0 | $ | 70 | ||||||||||||
|
August
2010
|
N/A | N/A | 4.85 | % | 2,500 | 2,500 | ||||||||||||||
|
September
2011
|
N/A | N/A | 5.05 | % | 341 | 523 | ||||||||||||||
|
October
2011
|
January
2010
|
8.0 | % | 4.47 | % | 2,500 | 2,500 | |||||||||||||
|
December
2011
|
N/A | N/A | 4.12 | % | 3,000 | 3,000 | ||||||||||||||
|
September
2012
|
March
2010
|
8.0 | % | 3.69 | % | 5,000 | 5,000 | |||||||||||||
|
January
2013
|
February
2010
|
N/A | 2.67 | % | 5,000 | 5,000 | ||||||||||||||
|
February
2013
|
March
2010
|
8.0 | % | 3.59 | % | 5,000 | 5,000 | |||||||||||||
|
June
2014
|
March
2010
|
8.0 | % | 4.47 | % | 5,000 | 5,000 | |||||||||||||
|
January
2015
|
January
2010
|
8.0 | % | 4.31 | % | 5,000 | 5,000 | |||||||||||||
|
November
2015
|
N/A | N/A | 4.67 | % | 1,423 | 1,627 | ||||||||||||||
|
February
2016
|
N/A | N/A | 4.86 | % | 740 | 840 | ||||||||||||||
|
February
2016
|
N/A | N/A | 4.86 | % | 740 | 841 | ||||||||||||||
|
February
2017
|
N/A | N/A | 4.99 | % | 2,506 | 2,790 | ||||||||||||||
| $ | 38,750 | $ | 39,691 | |||||||||||||||||
73
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - LONG-TERM BORROWINGS (CONTINUED)
On
convertible rate notes, the Federal Home Loan Bank has the option to convert the
notes at rates ranging from the three-month LIBOR (0.25 % at December 31,
2009) plus .15 % to plus .28 % on a quarterly basis, if greater than the
applicable strike rate, commencing on the conversion date. If
converted, the Bank has the option to repay these advances at each of the option
dates without penalty.
Maturities
of long-term debt, by contractual maturity, in years subsequent to
December 31, 2009 are as follows (in thousands):
|
2010
|
$ | 3,414 | ||
|
2011
|
6,409 | |||
|
2012
|
5,797 | |||
|
2013
|
10,836 | |||
|
2014
|
5,878 | |||
|
Thereafter
|
6,416 | |||
| $ | 38,750 |
The notes
are secured under terms of a blanket collateral agreement by a pledge of
qualifying investment and mortgage-backed securities, certain mortgage loans and
a lien on FHLB stock.
74
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCK PURCHASE PLANS
The
Company has a stock option plan covering non-employee directors and a stock
incentive plan for all officers and key employees. The Plan is
administered by a committee of the Board of Directors. Under the
Plan, 187,500 shares of common stock are reserved for possible
issuance. The number of shares available is subject to future
adjustment in the event of specified changes in the Company’s capital
structure. Under the Plan, the exercise price cannot be less than
100% of the fair market value on the date of grant. The vesting
period of options granted is at the discretion of the Board of
Directors. There are 65,751 shares available for grant under this
stock option plan as of December 31, 2009.
A summary
of transactions under this Plan were as follows:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Options
|
Weighted
Average Price
|
Options
|
Weighted
Average Price
|
Options
|
Weighted
Average Price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
33,549 | $ | 21.78 | 47,593 | $ | 20.75 | 56,467 | $ | 20.03 | |||||||||||||||
|
Granted
|
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
|
Exercised
|
(4,975 | ) | 17.10 | (12,694 | ) | 15.84 | (8,119 | ) | 16.54 | |||||||||||||||
|
Forfeited
|
(1,125 | ) | 26.63 | (1,350 | ) | 30.78 | (750 | ) | 30.78 | |||||||||||||||
|
Outstanding,
end of year
|
27,449 | $ | 22.43 | 33,549 | $ | 21.78 | 47,593 | $ | 20.75 | |||||||||||||||
|
Exercisable,
end of year
|
27,449 | $ | 22.43 | 33,549 | $ | 21.78 | 43,743 | $ | 20.15 | |||||||||||||||
The
weighted-average remaining contractual life of the options outstanding is
approximately 3 years at December 31, 2009. The weighted-average
remaining contractual life of options exercisable at December 31, 2009 is
approximately 3 years. Stock options outstanding at December 31,
2009 are exercisable at prices ranging from $16.50 to $34.10 a
share. At December 31, 2009 the aggregate intrinsic value of options
outstanding was $0 and the aggregate intrinsic value of options exercisable was
$0. At December 31, 2008, the aggregate intrinsic value of options
outstanding was $0 and the aggregate intrinsic value of options exercisable was
$0. At December 31, 2007, the aggregate intrinsic value of options
outstanding was $264,000 and the aggregate intrinsic value of options
exercisable was $269,000. The aggregate intrinsic value of options
exercised was $2,000, $96,000, and $29,000 for the years ended December 31,
2009, 2008, and 2007.
75
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCK PURCHASE PLANS (CONTINUED)
During
1999, the Company implemented a Dividend Reinvestment and Stock Purchase
Plan. Under the Plan, the Company registered with the Securities and
Exchange Commission 100,000 shares of the common stock to be sold pursuant to
the Plan. Participation is available to all common
stockholders. The Plan provides each participant with a simple and
convenient method of purchasing additional common shares without payment of any
brokerage commission or other service fees. The Plan may purchase
shares on the open market if available or they may be issued from treasury
shares. A participant in the Plan may elect to reinvest dividends on
all or part of their shares to acquire additional common stock. A
participant may withdraw from the Plan at any time. Effective in
2005, the Plan was amended to permit stockholders participating in the Plan to
purchase additional shares of common stock with voluntary cash payments of a
minimum of $100 and a maximum of $850 each calendar month. As of
December 31, 2009, there are 65,751 remaining shares available for issuance
under the Dividend Reinvestment and Stock Purchase Plan.
NOTE
9 - INCOME TAXES
The
Company adopted guidance in ASC Topic 740 regarding accounting for uncertainty
in income taxes as of January 1, 2007. The Company has evaluated its
tax positions as of January 1, 2007, December 31, 2007, December 31, 2008, and
December 31, 2009, respectively. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit
that has a likelihood of being realized on examination of more than 50
percent. For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded. Under the “more-likely-than-not”
threshold guidelines, the Company believes no significant uncertain tax
positions exist, either individually or in the aggregate, that would give rise
to the non-recognition of an existing tax benefit. As of January 1,
2007, December 31, 2007, December 31, 2008, and December 31, 2009, respectively,
the Company had no material unrecognized tax benefits or accrued interest and
penalties. The Company’s policy is to account for interest as a
component of interest expense and penalties as a component of other
expense. The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of the Commonwealth of Pennsylvania and State
of New York. The Company is no longer subject to examination by U.S.
Federal taxing authorities for years before 2006 and for all state income taxes
through 2006.
The
provision for federal income taxes consists of the following:
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Current
|
$ | (591 | ) | $ | 1,824 | $ | 1,180 | |||||
|
Deferred
|
1,514 | (1,737 | ) | (83 | ) | |||||||
| $ | 923 | $ | 87 | $ | 1,097 | |||||||
76
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - INCOME TAXES (CONTINUED)
The
components of the net deferred tax asset at December 31, 2009 and 2008 are
as follows:
|
2009
|
2008
|
|||||||
|
(In
Thousands)
|
||||||||
|
Deferred
tax asset:
|
||||||||
|
Allowance
for loan losses
|
$ | 753 | $ | 734 | ||||
|
Deferred
loan fees
|
3 | 3 | ||||||
|
Deferred
compensation
|
355 | 364 | ||||||
|
Other
|
92 | 32 | ||||||
|
Impairment
on securities
|
413 | 1,871 | ||||||
|
Capital
loss carry forward
|
15 | 152 | ||||||
|
Stock
option expense
|
2 | 2 | ||||||
|
Alternative
minimum tax credit
|
68 | 0 | ||||||
|
Impairment
charge—other real estate owned
|
195 | 195 | ||||||
|
Unrealized
loss on available for sale securities
|
1,164 | 2,449 | ||||||
| 3,060 | 5,802 | |||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
|
(346 | ) | (251 | ) | ||||
|
Interest
on preferred equity securities
|
(17 | ) | (17 | ) | ||||
|
Section
481 Adjustment-Prepaid Expenses
|
(68 | ) | (112 | ) | ||||
|
Section
481 Adjustment-Deferred Loan Costs
|
(256 | ) | (250 | ) | ||||
| (687 | ) | (630 | ) | |||||
|
Net
Deferred Tax Asset
|
$ | 2,373 | $ | 5,172 | ||||
Management
believes that future taxable income will satisfy this temporary difference
between the current book value of the Company’s assets and their taxable base.
Core earnings of the Company have remained strong and will continue to support
the recognition of the deferred tax asset based on future growth
projections.
77
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - INCOME TAXES (CONTINUED)
A
reconciliation of the provision for income taxes and the amount that would have
been provided at statutory rates for the years ended December 31 is as
follows:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
%
of Pretax Income
|
Amount
|
%
of Pretax Income
|
Amount
|
%
of Pretax Income
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||
|
Federal
income tax at statutory rate
|
$ | 2,030 | 34 | % | $ | 1,063 | 34 | % | $ | 2,029 | 34 | % | ||||||||||||
|
Tax
exempt interest
|
(1,037 | ) | (17 | ) | (938 | ) | (30 | ) | (907 | ) | (15 | ) | ||||||||||||
|
Non-deductible
interest
|
80 | 1 | 96 | 3 | 116 | 2 | ||||||||||||||||||
|
Officers’
life insurance income
|
(115 | ) | (2 | ) | (101 | ) | (3 | ) | (111 | ) | (2 | ) | ||||||||||||
|
Other,
net
|
(35 | ) | (1 | ) | (33 | ) | (1 | ) | (30 | ) | (1 | ) | ||||||||||||
| $ | 923 | 15 | % | $ | 87 | 3 | % | $ | 1,097 | 18 | % | |||||||||||||
The
income tax provision includes ($167,000), $44,000, and ($41,000), in 2009, 2008
and 2007, respectively, of income tax (benefit) expense on net realized
securities gains and losses.
NOTE
10 - EMPLOYEE BENEFIT PLANS
The
Company has an employee stock ownership and profit-sharing plan with 401(k)
provisions. The Plan is for the benefit of all employees who meet the
eligibility requirements set forth in the Plan. The amount of employer
contributions to the plan, including 401(k) matching contributions, is at the
discretion of the Board of Directors. Employer ESOP contributions are
allocated to participant accounts based on their percentage of total
compensation for the Plan year. During 2009, 2008 and 2007, ESOP
contributions to the Plan charged to operations were $204,000, $151,000, and
$167,000, respectively. During 2009, 2008 and 2007, employer 401(k)
matching contributions to the Plan charged to operations were $99,000, $94,000
and $80,000, respectively. At December 31, 2009, 157,326 shares
of the Company’s common stock were held in the Plan. In the event a
terminated Plan participant desires to sell his or her shares of the Company’s
stock, or for certain employees who elect to diversify their account balances,
the Company may be required to purchase the shares from the participant at their
fair market value.
The Bank
has deferred compensation agreements with its chief operating officer and
certain current and former directors that provide fixed retirement
benefits. The Bank’s deferred compensation liability as of
December 31, 2009 and 2008 was $1,043,000 and $1,071,000,
respectively. Payments to retired directors totaled $90,000 for each
of the years ended December 31, 2009, 2008 and 2007. The cost charged to
operations for these deferred compensation plans was $62,000, $58,000, and
$59,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTE
11 – CONTINGENCIES
The
Company is subject to lawsuits and claims arising out of its
business. In the opinion of the Company’s management, after review
and consultation with counsel, any proceedings that may arise should not result
in judgments, which, in the aggregate, would have a material adverse effect on
the Company’s consolidated financial statements.
78
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The
contract or notional amounts at December 31, 2009 and 2008 were as
follows:
|
2009
|
2008
|
|||||||
|
(In
Thousands)
|
||||||||
|
Commitments
to grant loans
|
$ | 5,714 | $ | 8,892 | ||||
|
Unfunded
commitments under lines of credit
|
32,990 | 30,687 | ||||||
|
Standby
letters of credit
|
15,691 | 5,259 | ||||||
| $ | 54,395 | $ | 44,838 | |||||
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
Company evaluates each customer’s credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management’s credit
evaluation. Collateral held varies but may include personal or
commercial real estate, accounts receivable, inventory and
equipment.
Outstanding
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.
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 December 31, 2009 and 2008 was $15,691,000
and $5,259,000, respectively and the approximate value of underlying collateral
upon liquidation that would be expected to cover this maximum potential exposure
was $12,214,000 and $4,168,000, respectively. The current amount of
the liability as of December 31, 2009 and 2008 for guarantees under standby
letters of credit issued is not material.
79
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - REGULATORY MATTERS
The Bank
is required to maintain average cash reserve balances in vault cash and with the
Federal Reserve Bank based on a percentage of deposits. The required
reserve balance at December 31, 2009 and 2008 was $899,000 and $576,000,
respectively.
Dividends
are paid by the Company from its assets, which are mainly provided by dividends
from the Bank. However, certain restrictions exist regarding the
ability of the Bank to transfer funds to the Company in the form of cash
dividends, loans or advances. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year’s earnings (as defined) plus
the retained earnings (as defined) from the prior two years.
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 2009, that the
Company and Bank meet all capital adequacy requirements to which they are
subject.
As of
December 31, 2009, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as “well capitalized” under the
regulatory framework for prompt corrective action. To be categorized
as “well capitalized”, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed the Bank’s category.
80
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - REGULATORY MATTERS (CONTINUED)
The
Company and Bank’s actual capital ratios as of December 31, 2009 and 2008,
and the minimum ratios required for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions are as
follows:
|
Actual
|
For
Capital Adequacy Purposes
|
To
be Well Capitalized under Prompt Corrective Action
Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
As
of December 31, 2009:
|
(Dollars
in Thousands)
|
|||||||||||||||||||||||
|
Total capital (to risk-weighted
assets):
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 50,004 | 13.18 | % | $ | ³30,358 | ³8.00 | % | N/A | N/A | ||||||||||||||
|
Peoples National
Bank
|
45,560 | 12.07 | ³30,202 | ³8.00 | $ | ³37,753 | ³10.00 | % | ||||||||||||||||
|
Tier 1 capital (to risk-weighted
assets):
|
||||||||||||||||||||||||
|
Consolidated
|
46,668 | 12.30 | ³15,179 | ³4.00 | N/A | N/A | ||||||||||||||||||
|
Peoples National
Bank
|
42,221 | 11.18 | ³15,101 | ³4.00 | ³22,652 | ³6.00 | ||||||||||||||||||
|
Tier 1 capital (to average
assets):
|
||||||||||||||||||||||||
|
Consolidated
|
46,668 | 9.92 | ³18,812 | ³4.00 | N/A | N/A | ||||||||||||||||||
|
Peoples National
Bank
|
42,221 | 8.68 | ³19,449 | ³4.00 | ³24,311 | ³5.00 | ||||||||||||||||||
|
As
of December 31, 2008:
|
||||||||||||||||||||||||
|
Total capital (to risk-weighted
assets):
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 46,659 | 13.10 | % | $ | ³28,490 | ³8.00 | % | N/A | N/A | ||||||||||||||
|
Peoples National
Bank
|
42,402 | 12.00 | ³28,261 | ³8.00 | $ | ³35,326 | ³10.00 | % | ||||||||||||||||
|
Tier 1 capital (to risk-weighted
assets):
|
||||||||||||||||||||||||
|
Consolidated
|
43,657 | 12.26 | ³14,245 | ³4.00 | N/A | N/A | ||||||||||||||||||
|
Peoples National
Bank
|
39,400 | 11.15 | ³14,130 | ³4.00 | ³21,196 | ³6.00 | ||||||||||||||||||
|
Tier 1 capital (to average
assets):
|
||||||||||||||||||||||||
|
Consolidated
|
43,657 | 9.31 | ³18,765 | ³4.00 | N/A | N/A | ||||||||||||||||||
|
Peoples National
Bank
|
39,400 | 8.45 | ³18,648 | ³4.00 | ³23,310 | ³5.00 | ||||||||||||||||||
81
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued ASC
Topic 860, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair value
measurements. This topic applies to other accounting pronouncements
that require or permit fair value measurements. The Company adopted
this topic effective for its fiscal years beginning January 1,
2008.
In
December 2007, the FASB issued ASC Topic 320, Effective Date of ASC Topic
860. ASC Topic 320 delays the effective date of ASC Topic 860
for all non-financial assets and liabilities, except those that are recognized
or disclosed at fair value on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008 and interim periods within those
fiscal years. As such, the Company only partially adopted the
provisions of ASC Topic 860 in 2008 and began to account and report for
non-financial assets and liabilities in 2009. In October 2008, the
FASB issued ASC Topic 820,
Determining the Fair Value of a Financial Asset When the Market for that Asset
is Not Active, to clarify the application of the provisions of ASC Topic
860 in an inactive market and how an entity would determine fair value in an
inactive market. The adoption of ASC Topic 860 and ASC Topic 820 had
no impact on the amounts reported in the consolidated financial statements.
ASC 860
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value
hierarchy under ASC Topic 860 are as follows:
Level 1: Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2: Quoted prices in
markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or
liability.
Level 3: Prices or valuation
techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported with little or no market
activity).
82
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
and December 31, 2008 are as follows:
| Description |
December
31, 2009
|
(Level
1) Quoted Prices in Active Markets for Identical Assets
|
(Level
2) Significant Other Observable Inputs
|
(Level
3) Significant Unobservable Inputs
|
||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
December
31, 2009 Securities available for sale
|
$ | 130,506 | $ | 1,081 | $ | 129,425 | $ | 0 | ||||||||
|
December
31, 2008 Securities available for sale
|
$ | 107,589 | $ | 1,010 | $ | 105,488 | $ | 1,091 | ||||||||
The
following table presents a reconciliation of the securities available for sale
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the year ended December 31, 2009:
|
2009
|
||||
|
(In
Thousands)
|
||||
|
Beginning
balance, January 1
|
$ | 1,091 | ||
|
Exchange of common stock
available for sale security for common stock security in another
institution
|
(1,091 | ) | ||
|
Ending
balance, December 31
|
$ | 0 | ||
83
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
and December 31, 2008 are as follows:
|
Description
|
December 31, 2009 |
(Level
1) Quoted Prices in Active Markets for Identical Assets
|
(Level
2) Significant Other Observable Inputs
|
(Level
3) Significant Unobservable Inputs
|
||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
December
31, 2009 Impaired loans
|
$ | 1,834 | $ | 0 | $ | 0 | $ | 1,834 | ||||||||
|
December
31, 2009 Other real estate owned
|
$ | 5,534 | $ | 0 | $ | 0 | $ | 5,534 | ||||||||
|
December
31, 2008 Impaired loans
|
$ | 2,168 | $ | 0 | $ | 0 | $ | 2,168 | ||||||||
|
December
31, 2008 Other real estate owned
|
$ | 5,171 | $ | 0 | $ | 0 | $ | 5,171 | ||||||||
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and
assumptions were used to estimate the fair values of the Company’s financial
instruments at December 31, 2009 and 2008:
Cash
and Cash Equivalents (Carried at Cost)
The
carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets’ fair values.
Securities
Available for Sale (Carried at Fair Value)
The fair
value of securities available for sale are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices. For certain securities which are not
traded in active markets or are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity and/or non-transferability, and such adjustments
are generally based on available market evidence (Level 3). In the
absence of such evidence, management’s best estimate is
used. Management’s best estimate consists of both internal and
external support on certain Level 3 investments. Internal cash flow
models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from
broker/dealers (where available) were used to support fair values of certain
Level 3 investments.
84
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans
Receivable (Carried at Cost)
The fair
values of loans, excluding impaired loans with specific loss allowances, are
estimated using discounted cash flow analyses, using market rates at the balance
sheet date that reflect the credit and interest rate-risk inherent in the
loans. Projected future cash flows are calculated based upon
contractual maturity or call dates, projected repayments and prepayments of
principal. Generally, for variable rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.
Impaired
Loans (Generally Carried at Fair Value)
Impaired
loans are those for which the Bank has measured and recorded impairment,
generally based on the fair value of the loan’s collateral. Fair
value is generally determined based upon independent third-party appraisals of
the properties, or discounted cash flows based upon the expected
proceeds. These assets are included as Level 3 fair values, based
upon the lowest level of input that is significant to the fair value
measurements. The fair value consists of the loan balances of
$2,393,000, net of a valuation allowance of $559,000. At December 31,
2008, the fair value consists of the loan balances of $2,792,000, net of a
valuation allowance of $624,000.
Restricted
Investment in Bank Stock (Carried at Cost)
The
carrying amount of restricted investment in bank stock (included in securities)
approximates fair value, and considers the limited marketability of such
securities.
Accrued
Interest Receivable and Payable (Carried at Cost)
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Deposit
Liabilities (Carried at Cost)
The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
85
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Short-Term
Borrowings (Carried at Cost)
The
carrying amounts of short-term borrowings approximate their fair
values.
Long-Term
Debt (Carried at Cost)
Fair
values of FHLB advances are estimated using discounted cash flow analysis, based
on quoted prices for new FHLB advances with similar credit risk characteristics,
terms and remaining maturity. These prices obtained from this active
market represent a market value that is deemed to represent the transfer price
if the liability were assumed by a third party.
Off-Balance
Sheet Financial Instruments (Disclosed at Cost)
Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged in the
market to enter into similar agreements, taking into account, the remaining
terms of the agreements and the counterparties’ credit standing.
The
estimated fair values of the Company’s financial instruments were as follows at
December 31, 2009 and 2008.
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash and cash
equivalents
|
$ | 18,915 | $ | 18,915 | $ | 18,533 | $ | 18,533 | ||||||||
|
Securities
available-for-sale
|
130,506 | 130,506 | 107,589 | 107,589 | ||||||||||||
|
Loans receivable,
net
|
332,966 | 383,273 | 313,606 | 364,501 | ||||||||||||
|
Investment
in restricted stock
|
2,870 | 2,870 | 2,658 | 2,658 | ||||||||||||
|
Accrued interest
receivable
|
2,580 | 2,580 | 2,526 | 2,526 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
410,038 | 411,043 | 371,268 | 373,147 | ||||||||||||
|
Short-term
borrowings
|
20,439 | 20,439 | 18,432 | 18,432 | ||||||||||||
|
Long-term
borrowings
|
38,750 | 39,255 | 39,691 | 40,283 | ||||||||||||
|
Accrued interest
payable
|
446 | 446 | 1,649 | 1,649 | ||||||||||||
|
Off-balance
sheet items:
|
||||||||||||||||
|
Commitments
to grant loans
|
- | - | - | - | ||||||||||||
|
Unfunded
commitments under lines of credit
|
- | - | - | - | ||||||||||||
|
Standby
letters of credit
|
- | - | - | - | ||||||||||||
86
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 - PARENT COMPANY ONLY FINANCIAL INFORMATION
Balance
Sheets
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
Thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Cash
|
$ | 1,285 | $ | 918 | ||||
|
Investment
in bank subsidiary
|
35,362 | 30,313 | ||||||
|
Investment
in non-bank subsidiary
|
5,472 | 5,576 | ||||||
|
Due
from subsidiaries
|
1,694 | 713 | ||||||
|
Securities
available for sale
|
1,081 | 2,102 | ||||||
|
Other
assets
|
155 | 155 | ||||||
|
Total
Assets
|
$ | 45,049 | $ | 39,777 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Other
liabilities
|
$ | 79 | $ | 57 | ||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock
|
6,683 | 6,683 | ||||||
|
Surplus
|
3,098 | 3,100 | ||||||
|
Retained
earnings
|
42,043 | 39,375 | ||||||
|
Accumulated
other comprehensive loss
|
(2,258 | ) | (4,755 | ) | ||||
| 49,566 | 44,403 | |||||||
|
Treasury
stock
|
(4,596 | ) | (4,683 | ) | ||||
|
Total
Stockholders’ Equity
|
44,970 | 39,720 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 45,049 | $ | 39,777 | ||||
87
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
Statements
of Income
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Dividends
from bank subsidiary
|
$ | 2,381 | $ | 2,729 | $ | 2,493 | ||||||
|
Other
income
|
663 | 492 | 166 | |||||||||
|
Other
expenses
|
606 | 817 | 78 | |||||||||
| 2,438 | 2,404 | 2,581 | ||||||||||
|
Income
tax expense
|
45 | 0 | 30 | |||||||||
| 2,393 | 2,404 | 2,551 | ||||||||||
|
Undistributed
net income of subsidiaries
|
2,656 | 635 | 2,320 | |||||||||
|
Net
Income
|
$ | 5,049 | $ | 3,039 | $ | 4,871 | ||||||
88
PEOPLES
FINANCIAL SERVICES CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS
OF CASH FLOWS
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 5,049 | $ | 3,039 | $ | 4,871 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Net
realized losses (gains) on sales of securities
|
(263 | ) | 14 | (63 | ) | |||||||
|
Other
than temporary security impairment
|
206 | 388 | 0 | |||||||||
|
Stock
option expense
|
0 | 1 | 3 | |||||||||
|
Undistributed
net income of subsidiaries
|
(2,656 | ) | (635 | ) | (2,320 | ) | ||||||
|
(Increase)
decrease in other assets
|
0 | 34 | (10 | ) | ||||||||
|
Increase
(Decrease) in due from subsidiaries
|
(716 | ) | (48 | ) | 52 | |||||||
|
Net
Cash Provided by Operating Activities
|
1,620 | 2,793 | 2,533 | |||||||||
|
CASH
FLOWS PROVIDED BY INVESTING ACTIVITIES
|
||||||||||||
|
Proceeds
from sale of available for sale securities
|
1,043 | 298 | 479 | |||||||||
|
Purchase
of available-for-sale securities
|
0 | (19 | ) | (987 | ) | |||||||
|
Net
Cash Provided by (Used In) Investing Activities
|
1,043 | 279 | (508 | ) | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Cash
dividends paid
|
(2,381 | ) | (2,417 | ) | (2,383 | ) | ||||||
|
Proceeds
from sale of treasury stock
|
85 | 234 | 163 | |||||||||
|
Purchase
of treasury stock
|
0 | (506 | ) | (94 | ) | |||||||
|
Net
Cash Used in Financing Activities
|
(2,296 | ) | (2,689 | ) | (2,314 | ) | ||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
367 | 383 | (289 | ) | ||||||||
|
CASH
AND CASH EQUIVALENTS - BEGINNING
|
918 | 535 | 824 | |||||||||
|
CASH
AND CASH EQUIVALENTS - ENDING
|
$ | 1,285 | $ | 918 | $ | 535 | ||||||
89
ITEM
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
NONE.
|
ITEM 9A CONTROLS AND
PROCEDURES
|
(a)
Management’s annual report on internal control over financial
reporting.
|
|
The
management of Peoples Financial Services Corp. and subsidiaries (the
“Company”) is responsible for designing, implementing, documenting, and
maintaining an adequate system of internal control over financial
reporting. An adequate system of internal control over financial reporting
encompasses the processes and procedures that have been established by
management to:
· maintain
records that accurately reflect the Company’s transactions;
· prepare
financial statement and footnote disclosures in accordance with accounting
principles generally accepted in the United States, that can be
relied upon by external users;
· prevent
and detect unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial
statements.
Management
is also responsible to perform an annual evaluation of the system of
internal control over financial reporting, including an assessment of the
effectiveness of that system. Management's assessment is based
on the criteria in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The COSO framework identifies
five defining characteristics of a system of internal control as
follows: an appropriate control environment; an adequate risk
assessment process; sufficient control activities; satisfactory
communication of pertinent information; and proper monitoring
controls.
Management
performed an assessment of the effectiveness of its internal control over
financial reporting in accordance with the COSO framework. As
part of this process, consideration was given to the potential existence
of deficiencies in either the design or operating effectiveness of
controls. Based on this assessment, management believes that
the Company maintained effective internal control over financial
reporting, including disclosure controls and procedures, as of December
31, 2009. Furthermore, during the conduct of its assessment,
management identified no material weakness in its financial reporting
control system.
The
Board of Directors of the Company, through its Audit Committee, provides
oversight to management’s conduct of the financial reporting process. The
Audit Committee, which is composed entirely of independent directors, is
also responsible to recommend the appointment of independent public
accountants. The Audit Committee also meets
with management, the internal audit
staff, and the
independent public accountants throughout
the year to provide assurance as to the adequacy of the financial
reporting process and to monitor the overall scope of the work performed
by the internal audit staff and the independent public
accountants.
The consolidated financial statements of the Company have been
audited by ParenteBeard LLC, an independent registered public accounting
firm, who was engaged to express an opinion as to the fairness of
presentation of such financial statements. In connection therewith,
ParenteBeard LLC is required to form its own opinion as to the
effectiveness of those controls. Their opinion on the fairness of
the financial statement presentation, and their opinion on internal
controls over financial reporting are included
herein.
|
|
(b)
Attestation report of the registered public accounting
firm.
|
90
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Peoples
Financial Services Corp.
Hallstead,
Pennsylvania
We
have audited Peoples Financial Services Corp. and subsidiaries (the
“Company”) internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report
on Internal Control. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal
control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
|
91
|
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance
sheets of Peoples Financial Services Corp. and subsidiaries as of December
31, 2009 and 2008 and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the years in the three
year period ended December 31, 2009, and our report dated March 15,
2010, expressed an unqualified opinion.
/s/
PARENTEBEARD LLC
ParenteBeard
LLC
Allentown,
Pennsylvania
March
15, 2010
|
|
(c)
Changes in internal controls.
|
|
There
were no changes in the Company’s internal controls over financial
reporting that occurred during the fourth fiscal quarter ending December
31, 2009 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial
reporting.
|
ITEM
9B OTHER INFORMATION
|
NONE.
|
92
PART
III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERANANCE
|
This
item is incorporated by reference under Section “Governance of the
Company” under the previously submitted document DEF 14A Proxy Statement
filed with the SEC.
|
ITEM
11 EXECUTIVE COMPENSATION
|
This
item is incorporated by reference under Section “Compensation Discussion
and Analysis” under the previously submitted document DEF 14A Proxy
Statement filed with the SEC.
|
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
This
item is incorporated by reference under Section “Share Ownership of
Management and Directors” under the previously submitted document DEF 14A
Proxy Statement filed with the SEC.
|
ITEM
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
This
item is incorporated by reference under Section “Compensation Discussion
and Analysis” under the previously submitted document DEF 14A Proxy
Statement filed with the SEC.
|
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND
SERVICES
|
This
item is incorporated by reference under Section “Report of the Audit
Committee” under the previously submitted document DEF 14A Proxy Statement
filed with the SEC.
|
93
PART IV
ITEM 15 EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
(3.1)
|
Articles
of Incorporation of Peoples Financial Services Corp.
(1);
|
||
|
(3.2)
|
Bylaws
of Peoples Financial Services Corp. as amended (2);
|
||
|
(10.4)
|
Termination
Agreement dated January 1, 1997, between Debra E. Dissinger and Peoples
Financial Services Corp.(1)*;
|
||
|
(10.6)
|
Supplemental
Executive Retirement Plan Agreement, dated December 3, 2004, for Debra E.
Dissinger(3)*;
|
||
|
(10.7)
|
Supplemental
Director Retirement Plan Agreement, dated December 3, 2004, for all
Non-Employee Directors of the Company(3)*;
|
||
|
(10.9)
|
Amendment
to Supplemental Executive Retirement Plan Agreement, dated December 30,
2005, for Debra E. Dissinger(4)*;
|
||
|
(10.10)
|
Amendment
to Supplemental Director Retirement Plan Agreement, dated December 30,
2005, for all Non-Employee Directors of the
Company(4)*;
|
||
|
(10.11)
|
Termination
Agreement dated January 1, 2007, between Stephen N. Lawrenson and Peoples
Financial Services Corp.(6)*;
|
||
|
(10.12)
|
Termination
Agreement dated January 1, 2007, between Joseph M. Ferretti and Peoples
Financial Services Corp.(6)*;
|
||
|
(10.13)
|
Employment
Agreement dated February, 2007, between Richard S. Lochen, Jr. and Peoples
Financial Services Corp.(5)*;
|
||
|
(10.14)
|
Termination
Agreement dated October 23, 2009, between Frederick J. Malloy and Peoples
Financial Services Corp.(9)*;
|
||
|
(10.15)
|
Employment
Agreement dated November 30, 2009, between Alan W. Dakey and Peoples
Financial Services Corp.(10)*;
|
||
|
(11)
|
The
statement regarding computation of per-share earnings required by this
exhibit is contained in Note 1 to the consolidated financial statements
captioned “Earnings Per Share”
|
||
|
(14)
|
Code
of Ethics, as amended(8);
|
||
|
(21)
|
Subsidiaries
of Peoples Financial Services Corp.(7);
|
||
|
(31.1)
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), filed
herewith;
|
||
|
(31.2)
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), filed
herewith;
|
||
|
(32.1)
|
Certification
of Chief Executive Officer pursuant to Section 1350 of Sarbanes-Oxley Act
of 2002, filed herewith; and
|
||
|
(32.2)
|
Certification
of Principal Financial Officer pursuant to Section 1350 of Sarbanes-Oxley
Act of 2002, filed herewith.
|
||
|
(1)
|
Incorporate
by reference to the Corporation’s Registration Statement on Form 10 as
filed with the U.S. Securities and Exchange Commission on March 4,
1998.
|
||
|
(2)
|
Incorporated
by reference to the Corporation’s Exhibit 3.2 on Form 10-Q filed with the
U.S. Securities and Exchange Commission on November 8,
2004.
|
||
|
(3)
|
Incorporated
by reference to the Corporation’s Exhibits 10.6 and 10.7 on Form 10-K
filed with the U.S. Securities and Exchange Commission on March 15,
2005.
|
||
|
(4)
|
Incorporated
by reference to the Corporation’s Exhibits 10.9, and 10.10 on Form 10-K
filed with the U.S. Securities and Exchange Commission on March 15,
2006.
|
||
|
(5)
|
Incorporated
by reference to the Corporation’s Exhibit 10.13 on Form 8K filed with the
U.S. Securities and Exchange Commission on February 16,
2007.
|
||
|
(6)
|
Incorporated
by reference to the Corporation’s Exhibits 10.11 and 10.12 on Form 10-Q
filed with the U.S. Securities and Exchange Commission on May 10,
2007.
|
||
|
(7)
|
Incorporated
by reference to the Corporation’s Exhibit 21 on Form 10-Q filed with the
U.S. Securities and Exchange Commission on August 9,
2007.
|
||
|
(8)
|
Incorporated
by reference to the Corporation’s Exhibit 14 as filed on Form 10Q with the
U.S. Securities and Exchange Commission on August 11,
2008.
|
||
|
(9)
|
Incorporated
by reference to the Corporation’s Exhibit 10.14 on Form 8K filed with the
U.S. Securities and Exchange Commission on October 27,
2009.
|
||
|
(10)
|
Incorporated
by reference to the Corporation’s Exhibit 10.15 on Form 8K filed with the
U.S. Securities and Exchange Commission on November 17,
2009.
|
||
| * | Exhibit is Compensatory | ||
94
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PEOPLES
FINANCIAL SERVICES CORP.
|
BY:
|
/s/
|
William
E. Aubrey II
William
E Aubrey II, Chairman, Board of Directors
|
|
/s/
|
Alan
W. Dakey
Alan
W. Dakey, President/CEO
|
|
|
/s/
|
Debra
E. Dissinger
Debra
E. Dissinger, Executive Vice President
|
|
|
/s/
|
Frederick
J. Malloy
Frederick
J. Malloy, VP/Controller
|
|
|
/s/
|
Richard
S. Lochen, Jr.
Richard
S. Lochen, Jr. Member, Board of Directors
|
|
|
/s/
|
George
H. Stover, Jr.
George
H. Stover, Jr. Member, Board of Directors
|
|
|
/s/
|
Ronald
G. Kukuchka
Ronald
G. Kukuchka, Member, Board of Directors
|
|
|
/s/
|
Joseph
T. Wright, Jr.
Joseph
T. Wright, Jr., Member, Board of Directors
|
|
|
/s/
|
Earle
A. Wootton
Earle
A. Wootton, Member, Board of Directors
|
95