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PEOPLES FINANCIAL SERVICES CORP. - Quarter Report: 2015 September (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2015

or

Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from

001-36388

(Commission File Number)

 


 

PEOPLES FINANCIAL SERVICES CORP.

(Exact name of registrant as specified in its charter)

 


 

Pennsylvania

23-2391852

(State of

incorporation)

(IRS Employer

ID Number)

 

 

150 North Washington Avenue, Scranton, PA

18503

(Address of principal executive offices)

(Zip code)

 

(570) 346-7741

(Registrant’s telephone number, including area code)

 


 

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      No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files.    Yes      No   

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.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes      No   

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 7,426,282 at October 30, 2015.

 

 

 


 

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

 

For the Quarter Ended September 30, 2015

 

 

 

 

 

 

 

Contents

 

 

 

Page No.

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION:

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2015 and December 31, 2014

 

 

 

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Nine months ended September 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine months ended September 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine months ended September 30, 2015 and 2014

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

38 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

38 

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

39 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

39 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39 

 

 

 

 

 

Item 3. 

 

Defaults upon Senior Securities

 

39 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

39 

 

 

 

 

 

Item 5. 

 

Other Information

 

39 

 

 

 

 

 

Item 6. 

 

Exhibits

 

40 

 

 

 

 

 

 

 

Signatures

 

41 

 

 

2


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

 

September 30, 2015

    

 

December 31, 2014

 

Assets:

 

 

 

 

 

 

 

Cash and due from banks

 

$

36,015

 

$

24,656

 

Interest-bearing deposits in other banks

 

 

4,970

 

 

6,770

 

Federal funds sold

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

299,832

 

 

339,586

 

Held-to-maturity: Fair value September 30, 2015, $13,582; December 31, 2014, $15,215

 

 

13,107

 

 

14,665

 

Total investment securities

 

 

312,939

 

 

354,251

 

Loans held for sale

 

 

3,439

 

 

3,486

 

Loans, net

 

 

1,270,545

 

 

1,209,894

 

Less: allowance for loan losses

 

 

12,043

 

 

10,338

 

Net loans

 

 

1,258,502

 

 

1,199,556

 

Premises and equipment, net

 

 

27,002

 

 

25,433

 

Accrued interest receivable

 

 

5,327

 

 

5,580

 

Goodwill

 

 

63,370

 

 

63,370

 

Intangible assets

 

 

4,606

 

 

5,501

 

Other assets

 

 

56,600

 

 

53,066

 

Total assets

 

$

1,772,770

 

$

1,741,669

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

303,741

 

$

313,498

 

Interest-bearing

 

 

1,140,909

 

 

1,112,060

 

Total deposits

 

 

1,444,650

 

 

1,425,558

 

Short-term borrowings

 

 

30,250

 

 

19,557

 

Long-term debt

 

 

31,000

 

 

33,140

 

Accrued interest payable

 

 

496

 

 

574

 

Other liabilities

 

 

14,286

 

 

16,061

 

Total liabilities

 

 

1,520,682

 

 

1,494,890

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding:    September 30, 2015,  7,519,109 shares; December 31, 2014,  7,548,358 shares

 

 

15,038

 

 

15,097

 

Capital surplus

 

 

139,263

 

 

140,214

 

Retained earnings

 

 

99,165

 

 

92,297

 

Accumulated other comprehensive loss

 

 

(1,378)

 

 

(829)

 

Total stockholders’ equity

 

 

252,088

 

 

246,779

 

Total liabilities and stockholders’ equity

 

$

1,772,770

 

$

1,741,669

 

 

See notes to consolidated financial statements

 

3


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

    

2015

    

2014

    

2015

    

2014

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

13,341

 

$

13,876

 

$

40,072

 

$

41,035

 

Tax-exempt

 

 

585

 

 

465

 

 

1,714

 

 

1,607

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

792

 

 

1,007

 

 

2,508

 

 

2,877

 

Tax-exempt

 

 

858

 

 

816

 

 

2,498

 

 

2,462

 

Dividends

 

 

9

 

 

2

 

 

24

 

 

32

 

Interest on interest-bearing deposits in other banks

 

 

13

 

 

10

 

 

39

 

 

29

 

Interest on federal funds sold

 

 

 

 

 

16

 

 

9

 

 

64

 

Total interest income

 

 

15,598

 

 

16,192

 

 

46,864

 

 

48,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,229

 

 

1,354

 

 

3,689

 

 

4,125

 

Interest on short-term borrowings

 

 

11

 

 

9

 

 

23

 

 

67

 

Interest on long-term debt

 

 

245

 

 

279

 

 

756

 

 

864

 

Total interest expense

 

 

1,485

 

 

1,642

 

 

4,468

 

 

5,056

 

Net interest income

 

 

14,113

 

 

14,550

 

 

42,396

 

 

43,050

 

Provision for loan losses

 

 

900

 

 

666

 

 

2,400

 

 

2,724

 

Net interest income after provision for loan losses

 

 

13,213

 

 

13,884

 

 

39,996

 

 

40,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges, fees and commissions

 

 

1,531

 

 

1,634

 

 

4,685

 

 

4,815

 

Merchant services income

 

 

1,183

 

 

1,002

 

 

2,936

 

 

2,784

 

Commission and fees on fiduciary activities

 

 

541

 

 

575

 

 

1,487

 

 

1,690

 

Wealth management income

 

 

224

 

 

217

 

 

627

 

 

569

 

Mortgage banking income

 

 

197

 

 

142

 

 

667

 

 

434

 

Life insurance investment income

 

 

192

 

 

109

 

 

569

 

 

565

 

Net gain on sale of investment securities available-for-sale

 

 

147

 

 

701

 

 

979

 

 

861

 

Total noninterest income

 

 

4,015

 

 

4,380

 

 

11,950

 

 

11,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits expense

 

 

5,397

 

 

4,754

 

 

16,243

 

 

14,883

 

Net occupancy and equipment expense

 

 

2,246

 

 

2,020

 

 

6,863

 

 

6,080

 

Merchant services expense

 

 

823

 

 

662

 

 

2,006

 

 

1,722

 

Amortization of intangible assets

 

 

296

 

 

334

 

 

896

 

 

1,010

 

Acquisition related expense

 

 

 

 

 

109

 

 

 

 

 

1,725

 

Other expenses

 

 

2,944

 

 

3,205

 

 

8,303

 

 

9,190

 

Total noninterest expense

 

 

11,706

 

 

11,084

 

 

34,311

 

 

34,610

 

Income before income taxes

 

 

5,522

 

 

7,180

 

 

17,635

 

 

17,434

 

Income tax expense

 

 

1,113

 

 

1,944

 

 

3,751

 

 

4,169

 

Net income

 

 

4,409

 

 

5,236

 

 

13,884

 

 

13,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investment securities available-for-sale

 

 

826

 

 

(825)

 

 

134

 

 

2,811

 

Reclassification adjustment for net gain on sales included in net income

 

 

(147)

 

 

(701)

 

 

(979)

 

 

(861)

 

Other comprehensive income (loss)

 

 

679

 

 

(1,526)

 

 

(845)

 

 

1,950

 

Income tax expense (benefit) related to other comprehensive loss

 

 

237

 

 

(534)

 

 

(296)

 

 

682

 

Other comprehensive income (loss), net of income taxes

 

 

442

 

 

(992)

 

 

(549)

 

 

1,268

 

Comprehensive income

 

$

4,851

 

$

4,244

 

$

13,335

 

$

14,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

$

0.70

 

$

1.84

 

$

1.76

 

Diluted

 

$

0.58

 

$

0.70

 

$

1.84

 

$

1.76

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,536,824

 

 

7,548,358

 

 

7,543,751

 

 

7,548,983

 

Diluted

 

 

7,536,824

 

 

7,548,358

 

 

7,543,751

 

 

7,566,456

 

Dividends declared

 

$

0.31

 

$

0.31

 

$

0.93

 

$

0.93

 

 

See notes to consolidated financial statements

 

4


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

 

    

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Capital

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

 

    

Stock  

    

Surplus  

    

Earnings  

    

Income/(Loss)  

    

Stock  

    

Total  

 

Balance, January 1, 2015

 

$

15,097

 

$

140,214

 

$

92,297

 

$

(829)

 

$

 

 

$

246,779

 

Stock based compensation

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

 

 

52

 

Net income

 

 

 

 

 

 

 

 

13,884

 

 

 

 

 

 

 

 

13,884

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

(549)

 

 

 

 

 

(549)

 

Dividends declared: $0.93 per share

 

 

 

 

 

 

 

 

(7,016)

 

 

 

 

 

 

 

 

(7,016)

 

Shares retired: 29,249 shares

 

 

(59)

 

 

(1,003)

 

 

 

 

 

 

 

 

 

 

 

(1,062)

 

Balance, September 30, 2015

 

 

15,038

 

 

139,263

 

 

99,165

 

 

(1,378)

 

 

 

 

 

252,088

 

Balance, January 1, 2014

 

 

15,614

 

 

146,109

 

 

84,008

 

 

(698)

 

 

(6,241)

 

 

238,792

 

Net income

 

 

 

 

 

 

 

 

13,265

 

 

 

 

 

 

 

 

13,265

 

Other comprehensive income, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

1,268

 

 

 

 

 

1,268

 

Dividends declared: $0.93 per share

 

 

 

 

 

 

 

 

(7,021)

 

 

 

 

 

 

 

 

(7,021)

 

Shares retired: 3,386 shares

 

 

(7)

 

 

(102)

 

 

 

 

 

 

 

 

 

 

 

(109)

 

Reissuance under option plan: 600 shares

 

 

 

 

 

28

 

 

 

 

 

 

 

 

11

 

 

39

 

Repurchase and held: 1,800 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(70)

 

 

(70)

 

Retirement of stock options

 

 

 

 

 

(95)

 

 

 

 

 

 

 

 

 

 

 

(95)

 

Retirement of treasury stock

 

 

(510)

 

 

(5,790)

 

 

 

 

 

 

 

 

6,300

 

 

 

 

Balance, September 30, 2014

 

$

15,097

 

$

140,150

 

$

90,252

 

$

570

 

$

 

 

$

246,069

 

 

See notes to consolidated financial statements

 

5


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

    

2015

    

2014

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

13,884

 

$

13,265

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation of premises and equipment

 

 

1,178

 

 

1,322

 

Amortization of deferred loan costs

 

 

440

 

 

171

 

Amortization of intangibles

 

 

896

 

 

1,010

 

Net accretion of purchase accounting adjustments on tangible assets

 

 

(708)

 

 

(2,683)

 

Provision for loan losses

 

 

2,400

 

 

2,724

 

Net gain on sale of other real estate owned

 

 

(132)

 

 

(60)

 

Net loss on disposal of equipment

 

 

87

 

 

63

 

Loans originated for sale

 

 

(20,664)

 

 

(7,346)

 

Proceeds from sale of loans originated for sale

 

 

21,378

 

 

6,752

 

Net gain on sale of loans originated for sale

 

 

(667)

 

 

(610)

 

Net amortization of investment securities

 

 

3,171

 

 

3,230

 

Net gain on sale of investment securities

 

 

(979)

 

 

(861)

 

Life insurance investment income

 

 

(569)

 

 

(592)

 

Deferred income tax expense

 

 

119

 

 

 

 

Stock based compensation

 

 

52

 

 

11

 

Net change in:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

253

 

 

485

 

Other assets

 

 

(3,062)

 

 

(3,455)

 

Accrued interest payable

 

 

(78)

 

 

(126)

 

Other liabilities

 

 

(1,827)

 

 

1,546

 

Net cash provided by operating activities

 

 

15,172

 

 

14,846

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sales of investment securities available-for-sale

 

 

65,858

 

 

15,389

 

Proceeds from repayments of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

41,659

 

 

32,022

 

Held-to-maturity

 

 

1,526

 

 

1,989

 

Purchases of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

(70,768)

 

 

(98,898)

 

Held-to-maturity

 

 

 

 

 

 

 

Net redemption of restricted equity securities

 

 

343

 

 

56

 

Net increase in lending activities

 

 

(61,940)

 

 

(3,341)

 

Purchases of premises and equipment

 

 

(2,924)

 

 

(1,059)

 

Proceeds from the sale of premises and equipment

 

 

14

 

 

25

 

Proceeds from sale of other real estate owned

 

 

484

 

 

409

 

Net cash used in investing activities

 

 

(25,748)

 

 

(53,408)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in deposits

 

 

19,619

 

 

46,939

 

Repayment of long-term debt

 

 

(2,099)

 

 

(2,682)

 

Net increase (decrease) in short-term borrowings

 

 

10,693

 

 

(15,538)

 

Redemption of common stock

 

 

(1,062)

 

 

(70)

 

Settlement of stock options

 

 

 

 

 

(95)

 

Purchase of treasury stock

 

 

 

 

 

(70)

 

Cash dividends paid

 

 

(7,016)

 

 

(7,021)

 

Net cash provided by financing activities

 

 

20,135

 

 

21,463

 

Net increase (decrease) in cash and cash equivalents

 

 

9,559

 

 

(17,099)

 

Cash and cash equivalents at beginning of year

 

 

31,426

 

 

51,310

 

Cash and cash equivalents at end of year

 

$

40,985

 

$

34,211

 

6


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

    

2015

    

2014

    

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

5,114

 

$

5,182

 

Income taxes

 

 

2,900

 

 

3,100

 

Noncash items:

 

 

 

 

 

 

 

Transfers of loans to other real estate

 

$

370

 

$

541

 

Retirement of treasury shares

 

 

 

 

 

6,300

 

 

 

 

 

 

 

 

 

Acquisition:

 

 

 

 

 

 

 

Fair value of assets acquired:

 

 

 

 

 

 

 

Loans, net

 

$

216

 

$

1,900

 

Premises and equipment

 

 

(76)

 

 

(76)

 

Core deposit and other intangible assets

 

 

(896)

 

 

(1,010)

 

 

 

$

(756)

 

$

814

 

 

 

 

 

 

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

 

 

Deposits

 

$

527

 

$

818

 

Long-term debt

 

 

41

 

 

41

 

 

 

$

568

 

$

859

 

 

See notes to consolidated financial statements

 

7


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

1. Summary of significant accounting policies:

 

Nature of operations:

 

Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company (“Peoples Bank”), including its subsidiaries, Peoples Advisors, LLC and Penseco Realty, Inc. (collectively, the “Company” or “Peoples”). The Company services its retail and commercial customers through twenty-six full-service community banking offices located within the Lackawanna, Lehigh, Luzerne, Monroe, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York.

 

Basis of presentation:

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The operating results and financial position of the Company for the three and nine months ended and as of September 30, 2015, are not necessarily indicative of the results of operations and financial position that may be expected in the future.

 

The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, determination of other-than-temporary impairment losses on securities, impairment of goodwill and fair value of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2014.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2015, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

Recent accounting standards:

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.”

 

ASU 2015-03 requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. The ASU provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs. Further, the amendments require the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt.

 

The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments must be applied retrospectively. The adoption of ASU 2015-03 on January 1, 2016, is not expected to have a material effect on the operating results or financial position of the Company.

 

8


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

In July 2015, the FASB issued ASU 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient.”

 

The amendments in ASU 2015-12 (i) require fully benefit-responsive investment contracts to be measured, presented and disclosed only at contract value, not fair value; (ii) simplify the investment disclosure requirements; and (iii) provide a measurement date practical expedient for employee benefit plans.

 

Part I. Fully Benefit-Responsive Investment Contracts – the amendments designate contract value as the only required measurement for fully benefit-responsive investments contracts within the scope of Topics 962 and 965, eliminating the requirement to measure, present and disclose such contracts also at fair value and reconcile fair value to contract value.

 

Part II. Plan Investment Disclosures – the amendments eliminate certain disclosure requirements for both participant-directed investments and nonparticipant-directed investments, and also reduce disclosures required specifically for investments using the net asset value per share practical expedient. The amendments also require that both participant-directed and nonparticipant-directed investments be grouped only by general type, eliminating the need to disaggregate the investments in multiple ways (i.e., also on the basis of nature, characteristics, and risks as required by Topic 820, Fair Value Measurement).

 

Part III. Measurement Date Practical Expedient – the amendments provide a measurement date practical expedient for employee benefit plans similar to the practical expedient allowing employers to measure defined benefit plan assets on a month-end date that is nearest to the employer’s fiscal year-end, when the fiscal period does not coincide with a month-end.

 

The amendments are effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for all three parts individually or in the aggregate. Parts I and II of the ASU should be applied retrospectively, while Part III should be applied prospectively. Only the nature and reason for the change in accounting principle is required to be disclosed in the annual period of adoption. The adoption of ASU 2015-12 on January 1, 2016, is not expected to have a material effect on the operating results or financial position of the Company.

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts (Topic 606): Deferral of the Effective Date.”

ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017.  Early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. The adoption of ASU 2015-14 on January 1, 2018, is not expected to have a material effect on the operating results or financial position of the Company.

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.”

 

ASU 2015-15 codifies a Securities and Exchange Commission (“SEC”) staff announcement that entities are permitted to defer and present debt issuance costs related to line-of-credit arrangements as assets. ASU 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 is effective immediately. The adoption of ASU 2015-15 did not have a material effect on the operating results or financial position of the Company.

 

In September, 2015, the FASB issued ASU 2015-16, “Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.”

 

ASU 2015-16 requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings

9


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

 

In addition, the amendments in the proposed Update would require an entity to disclose, either on the face of the income statement or in the notes, the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.

 

The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The amendments in this Update should be applied prospectively to measurement-period adjustments that occur after the effective date of this ASU. The adoption of ASU 2015-16 on January 1, 2016, is not expected to have a material effect on the operating results or financial position of the Company.

 

 

2. Other comprehensive income (loss):

 

The components of other comprehensive loss and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income. The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale and benefit plan adjustments.

 

The components of accumulated other comprehensive loss included in stockholders’ equity at September 30, 2015 and December 31, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

    

 

September 30, 2015

    

 

December 31, 2014

 

Net unrealized gain on investment securities available-for-sale

 

$

5,447

 

$

6,292

 

Income tax expense (benefit)

 

 

1,906

 

 

2,202

 

Net of income taxes

 

 

3,541

 

 

4,090

 

Benefit plan adjustments

 

 

(7,567)

 

 

(7,567)

 

Income tax expense (benefit)

 

 

(2,648)

 

 

(2,648)

 

Net of income taxes

 

 

(4,919)

 

 

(4,919)

 

Accumulated other comprehensive loss

 

$

(1,378)

 

$

(829)

 

 

10


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2015 and 2014 is as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

    

2015

    

2014

 

Unrealized gain (loss) on investment securities available-for-sale

 

$

826

 

$

(825)

 

Net gain on the sale of investment securities available-for-sale(1)

 

 

(147)

 

 

(701)

 

Other comprehensive income (loss) gain before taxes

 

 

679

 

 

(1,526)

 

Income tax expense (benefit)

 

 

237

 

 

(534)

 

Other comprehensive income (loss)

 

$

442

 

$

(992)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

    

2015

    

2014

 

Unrealized gain (loss) on investment securities available-for-sale

 

$

134

 

$

2,811

 

Net gain on the sale of investment securities available-for-sale(1)

 

 

(979)

 

 

(861)

 

Other comprehensive income (loss) gain before taxes

 

 

(845)

 

 

1,950

 

Income tax expense (benefit)

 

 

(296)

 

 

682

 

Other comprehensive income (loss)

 

$

(549)

 

$

1,268

 

 


(1)Represents amounts reclassified out of accumulated comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.

 

3. 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.

 

There were no shares considered anti-dilutive for the three and nine month periods ended September 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

For the Three Months Ended September 30, 

    

Basic  

    

Diluted  

    

Basic  

    

Diluted  

 

Net Income (Numerator)

    

$

4,409

    

$

4,409

    

$

5,236

    

$

5,236

    

Average common shares outstanding (Denominator)

 

 

7,536,824

 

 

7,536,824

 

 

7,548,358

 

 

7,548,358

 

Earnings per share

 

$

0.58

 

$

0.58

 

$

0.70

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

For the Nine Months Ended September 30, 

 

Basic  

 

Diluted  

 

Basic  

 

Diluted  

 

Net Income (Numerator)

    

$

13,884

    

$

13,884

    

$

13,265

    

$

13,265

    

Average common shares outstanding (Denominator)

 

 

7,543,751

 

 

7,543,751

 

 

7,548,983

 

 

7,566,456

 

Earnings per share

 

$

1.84

 

$

1.84

 

$

1.76

 

$

1.76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

4. Investment securities:

 

The amortized cost and fair value of investment securities aggregated by investment category at September 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

September 30, 2015

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

15,915

 

$

152

 

 

 —

 

$

16,067

 

U.S. Government-sponsored enterprises

 

 

79,077

 

 

547

 

$

1

 

 

79,623

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

15,886

 

 

864

 

 

19

 

 

16,731

 

Tax-exempt

 

 

113,198

 

 

3,913

 

 

302

 

 

116,809

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

34,027

 

 

198

 

 

31

 

 

34,194

 

U.S. Government-sponsored enterprises

 

 

36,282

 

 

235

 

 

109

 

 

36,408

 

Total

 

$

294,385

 

$

5,909

 

$

462

 

$

299,832

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt state and municipals

 

$

7,369

 

$

125

 

$

50

 

$

7,444

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

88

 

 

1

 

 

 —

 

 

89

 

U.S. Government-sponsored enterprises

 

 

5,650

 

 

399

 

 

 —

 

 

6,049

 

Total

 

$

13,107

 

$

525

 

$

50

 

$

13,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2014

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

48,393

 

$

157

 

 

 

 

$

48,550

 

U.S. Government-sponsored enterprises

 

 

95,990

 

 

337

 

$

82

 

 

96,245

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

16,490

 

 

943

 

 

26

 

 

17,407

 

Tax-exempt

 

 

87,954

 

 

4,971

 

 

24

 

 

92,901

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

37,511

 

 

132

 

 

167

 

 

37,476

 

U.S. Government-sponsored enterprises

 

 

46,956

 

 

277

 

 

226

 

 

47,007

 

Total

 

$

333,294

 

$

6,817

 

$

525

 

$

339,586

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt state and municipals

 

$

7,370

 

$

105

 

$

38

 

$

7,437

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

100

 

 

2

 

 

 

 

 

102

 

U.S. Government-sponsored enterprises

 

 

7,195

 

 

481

 

 

 

 

 

7,676

 

Total

 

 

14,665

 

$

588

 

$

38

 

$

15,215

 

 

12


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at September 30, 2015, is summarized as follows:

 

 

 

 

 

 

 

 

Fair

 

September 30, 2015

    

Value 

 

Within one year

 

$

33,161

 

After one but within five years

 

 

98,388

 

After five but within ten years

 

 

46,705

 

After ten years

 

 

50,976

 

 

 

 

229,230

 

Mortgage-backed securities

 

 

70,602

 

Total

 

$

299,832

 

 

 The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at September 30, 2015, is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

September 30, 2015

    

Cost 

    

Value  

 

Within one year

 

 

 

 

 

 

 

After one but within five years

 

$

503

 

$

515

 

After five but within ten years

 

 

 —

 

 

 —

 

After ten years

 

 

6,866

 

 

6,929

 

 

 

 

7,369

 

 

7,444

 

Mortgage-backed securities

 

 

5,738

 

 

6,138

 

Total

 

$

13,107

 

$

13,582

 

 

Securities with a carrying value of $206,467 and $216,192 at September 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and repurchase agreements as required or permitted by law.

 

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At September 30, 2015 and December 31, 2014, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.

 

The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months 

 

12 Months or More 

 

Total 

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

September 30, 2015

    

Value 

    

Losses 

    

Value 

    

Losses 

    

Value 

    

Losses 

 

U.S. Government-sponsored enterprises

    

$

3,006

    

$

1

    

$

 

    

$

 

    

$

3,006

    

$

1

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

 

 

 

 

 

546

 

 

19

 

 

546

 

 

19

 

Tax-exempt

 

 

41,034

 

 

325

 

 

789

 

 

27

 

 

41,823

 

 

352

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

877

 

 

7

 

 

5,119

 

 

24

 

 

5,996

 

 

31

 

U.S. Government-sponsored enterprises

 

 

9,819

 

 

20

 

 

6,682

 

 

89

 

 

16,501

 

 

109

 

Total

 

$

54,736

 

$

353

 

$

13,136

 

$

159

 

$

67,872

 

$

512

 

 

 

13


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months  

 

12 Months or More  

 

Total  

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

December 31, 2014

    

Value 

    

Losses  

    

Value 

    

Losses  

    

Value  

    

Losses 

 

U.S. Government-sponsored enterprises

    

$

21,228

    

$

33

    

$

7,954

    

$

49

    

$

29,182

    

$

82

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

 

 

 

 

 

544

 

 

26

 

 

544

 

 

26

 

Tax-exempt

 

 

4,702

 

 

23

 

 

2,423

 

 

39

 

 

7,125

 

 

62

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

20,148

 

 

167

 

 

 

 

 

 

 

 

20,148

 

 

167

 

U.S. Government-sponsored enterprises

 

 

22,870

 

 

226

 

 

 

 

 

 

 

 

22,870

 

 

226

 

Total

 

$

68,948

 

$

449

 

$

10,921

 

$

114

 

$

79,869

 

$

563

 

 

The Company had 97 investment securities, consisting of 76 tax-exempt state and municipal obligations, one taxable state and municipal obligation, one U.S. Government-sponsored enterprise security, and 19 mortgage-backed securities that were in unrealized loss positions at September 30, 2015. Of these securities, one taxable state and municipal obligation, eight mortgage-backed securities and three tax-exempt state and municipal securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at September 30, 2015. There was no OTTI recognized for the three or nine months ended September 30, 2015 and 2014.

 

The Company had 52 investment securities, consisting of 16 tax-exempt state and municipal obligations, one taxable state and municipal obligation, nine U.S. Government-sponsored enterprise securities and 26 mortgage-backed securities that were in unrealized loss positions at December 31, 2014. Of these securities, two U.S. Government-sponsored enterprise securities, four tax-exempt state and municipal securities, and one taxable state and municipal obligation were in a continuous unrealized loss position for twelve months or more.

 

5. Loans, net and allowance for loan losses:

 

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2015 and December 31, 2014 are summarized as follows. Net deferred loan costs were $686 and $651 at September 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

    

 

September 30, 2015

    

 

December 31, 2014

 

Commercial

 

$

342,937

 

$

319,590

 

Real estate:

 

 

 

 

 

 

 

Commercial

 

 

529,499

 

 

493,481

 

Residential

 

 

306,740

 

 

322,454

 

Consumer

 

 

91,369

 

 

74,369

 

Total

 

$

1,270,545

 

$

1,209,894

 

 

14


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Real estate

 

 

 

 

 

 

 

September 30, 2015

    

Commercial

    

Commercial

    

Residential

    

Consumer

    

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance July 1, 2015

   

$

2,435

 

$

3,190

 

$

4,027

 

$

1,776

 

$

11,428

 

Charge-offs

   

 

 

 

 

(120)

 

 

(128)

 

 

(67)

 

 

(315)

 

Recoveries

   

 

2

 

 

2

 

 

2

 

 

24

 

 

30

 

Provisions

   

 

 

 

 

342

 

 

369

 

 

189

 

 

900

 

Ending balance

   

$

2,437

 

$

3,414

 

$

4,270

 

$

1,922

 

$

12,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

    

 

 

 

 

 

September 30, 2014

    

Commercial

    

Commercial

    

Residential

    

Consumer

    

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance July 1, 2014

   

$

2,201

 

$

2,675

 

$

3,458

 

$

1,288

 

$

9,622

 

Charge-offs

   

 

 

 

 

(57)

 

 

(56)

 

 

(64)

 

 

(177)

 

Recoveries

   

 

5

 

 

22

 

 

 

 

 

33

 

 

60

 

Provisions

   

 

152

 

 

185

 

 

239

 

 

90

 

 

666

 

Ending balance

   

$

2,358

 

$

2,825

 

$

3,641

 

$

1,347

 

$

10,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Real estate  

 

   

 

 

 

 

 

September 30, 2015

    

Commercial

    

Commercial  

    

Residential  

    

Consumer  

    

Total

 

Allowance for loan losses:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance January 1, 2015

  

$

2,321 

  

$

3,037 

 

$

3,690 

 

$

1,290 

 

$

10,338 

 

Charge-offs

  

 

(40)

 

 

(199)

 

 

(362)

 

 

(253)

 

 

(854)

 

Recoveries

  

 

66 

  

 

 

 

10 

 

 

75 

 

 

159 

 

Provisions

  

 

90 

  

 

568 

 

 

932 

 

 

810 

 

 

2,400 

 

Ending balance

  

$

2,437 

  

$

3,414 

 

$

4,270 

 

$

1,922 

 

$

12,043 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate  

 

   

 

 

 

 

 

September 30, 2014

    

Commercial

    

Commercial  

    

Residential  

    

Consumer  

    

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance January 1, 2014

 

$

2,008

 

$

2,394

 

$

3,135

 

$

1,114

 

$

8,651

 

Charge-offs

 

 

(376)

 

 

(489)

 

 

(566)

 

 

(219)

 

 

(1,650)

 

Recoveries

 

 

6

 

 

291

 

 

38

 

 

111

 

 

446

 

Provisions

 

 

720

 

 

629

 

 

1,034

 

 

341

 

 

2,724

 

Ending balance

 

$

2,358

 

$

2,825

 

$

3,641

 

$

1,347

 

$

10,171

 

 

15


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2015 and December 31, 2014 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Real estate

 

 

 

 

 

 

 

 

 

 

September 30, 2015

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

Unallocated

    

   Total

 

Allowance for loan losses:

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,437

 

$

3,414

  

$

4,270

 

$

1,922

 

$

 

 

$

12,043

  

Ending balance: individually evaluated for impairment

 

 

2,032

 

 

269

 

 

1,000

 

 

179

 

 

 

 

 

3,480

  

Ending balance: collectively evaluated for impairment

 

 

405

 

 

3,038

 

 

3,270

 

 

1,743

 

 

 

 

 

8,456

  

Ending balance: loans acquired with deteriorated credit quality

 

$

 

 

$

107

  

$

 

 

$

 

 

 

 

 

$

107

  

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

342,937

 

$

529,499

  

$

306,740

 

$

91,369

 

$

 

 

$

1,270,545

  

Ending balance: individually evaluated for impairment

 

 

3,120

 

 

5,309

 

 

4,829

 

 

191

 

 

 

 

 

13,449

  

Ending balance: collectively evaluated for impairment

 

 

338,780

 

 

522,812

 

 

301,857

 

 

91,178

 

 

 

 

 

1,254,627

  

Ending balance: loans acquired with deteriorated credit quality

 

 

1,037

 

 

1,378

 

 

54

 

 

 

 

 

 

 

$

2,469

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Real estate

 

 

 

 

 

 

 

 

 

 

December 31, 2014

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

Unallocated

    

   Total

 

Allowance for loan losses:

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,321

 

$

3,037

  

$

3,690

 

$

1,290

 

$

 

 

$

10,338

  

Ending balance: individually evaluated for impairment

 

 

1,072

 

 

805

  

 

767

 

 

38

 

 

 

 

 

2,682

  

Ending balance: collectively evaluated for impairment

 

 

1,081

 

 

2,125

  

 

2,921

 

 

1,252

 

 

 

 

 

7,379

  

Ending balance: loans acquired with deteriorated credit quality

 

$

168

 

$

107

  

$

2

 

$

 

 

 

 

 

$

277

  

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

319,590

 

$

493,481

  

$

322,454

 

$

74,369

 

$

 

 

$

1,209,894

  

Ending balance: individually evaluated for impairment

 

 

2,595

 

 

5,084

  

 

4,001

 

 

127

 

 

 

 

 

11,807

  

Ending balance: collectively evaluated for impairment

 

 

315,642

 

 

487,024

  

 

318,395

 

$

74,242

 

 

 

 

 

1,195,303

  

Ending balance: loans acquired with deteriorated credit quality

 

$

1,353

 

$

1,373

  

$

58

 

 

 

 

$

 

 

$

2,784

  

 

 

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

 

·

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

 

·

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan

16


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

 

·

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

 

·

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

·

Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

 

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

September 30, 2015

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

 

$

329,803

 

$

3,690

 

$

9,444

 

$

 

 

$

342,937

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

502,017

 

 

10,395

 

 

17,087

 

 

 

 

 

529,499

 

Residential

 

 

295,998

 

 

1,438

 

 

9,304

 

 

 

 

 

306,740

 

Consumer

 

 

91,178

 

 

 

 

 

191

 

 

 

 

 

91,369

 

Total

 

$

1,218,996

 

$

15,523

 

$

36,026

 

$

 

 

$

1,270,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

December 31, 2014

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

 

$

306,066

 

$

6,135

 

$

7,389

 

$

 

 

$

319,590

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

472,270

 

 

9,858

 

 

11,353

 

 

 

 

 

493,481

 

Residential

 

 

312,086

 

 

2,123

 

 

8,245

 

 

 

 

 

322,454

 

Consumer

 

 

74,250

 

 

13

 

 

106

 

 

 

 

 

74,369

 

Total

 

$

1,164,672

 

$

18,129

 

$

27,093

 

$

 

 

$

1,209,894

 

 

Information concerning nonaccrual loans by major loan classification at September 30, 2015 and December 31, 2014 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

    

 

September 30, 2015

    

 

December 31, 2014

 

Commercial

 

$

1,444

 

$

1,322

 

Real estate:

 

 

 

 

 

 

 

Commercial

 

 

3,415

 

 

3,732

 

Residential

 

 

4,326

 

 

3,523

 

Consumer

 

 

190

 

 

122

 

Total

 

$

9,375

 

$

8,699

 

 

17


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The major classifications of loans by past due status are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Greater

    

 

 

    

 

 

    

 

 

    

Loans > 90

 

 

 

30-59 Days

 

60-89 Days

 

than 90

 

Total Past

 

 

 

 

 

 

 

Days and

 

September 30, 2015

 

Past Due  

 

Past Due  

 

Days  

 

Due  

 

Current  

 

Total Loans  

 

Accruing  

 

Commercial

 

$

503

 

$

 

 

$

1,444

 

$

1,947

 

$

340,990

 

$

342,937

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,371

 

 

908

 

 

3,415

 

 

5,694

 

 

523,805

 

 

529,499

 

 

 

 

Residential

 

 

883

 

 

631

 

 

5,684

 

 

7,198

 

 

299,542

 

 

306,740

 

$

1,358

 

Consumer

 

 

608

 

 

258

 

 

463

 

 

1,329

 

 

90,040

 

 

91,369

 

 

273

 

Total

 

$

3,365

 

$

1,797

 

$

11,006

 

$

16,168

 

$

1,254,377

 

$

1,270,545

 

$

1,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Greater

    

 

 

    

 

 

    

 

 

    

Loans > 90

 

 

 

30-59 Days

 

60-89 Days

 

than 90

 

Total Past

 

 

 

 

 

 

 

Days and

 

December 31, 2014

 

Past Due  

 

Past Due  

 

Days  

 

Due  

 

Current  

 

Total Loans  

 

Accruing  

 

Commercial

 

$

898

 

$

117

 

$

1,322

 

$

2,337

 

$

317,253

 

$

319,590

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,100

 

 

888

 

 

3,868

 

 

6,856

 

 

486,625

 

 

493,481

 

$

136

 

Residential

 

 

3,154

 

 

1,239

 

 

4,585

 

 

8,978

 

 

313,476

 

 

322,454

 

 

1,062

 

Consumer

 

 

848

 

 

247

 

 

547

 

 

1,642

 

 

72,727

 

 

74,369

 

 

425

 

Total

 

$

7,000

 

$

2,491

 

$

10,322

 

$

19,813

 

$

1,190,081

 

$

1,209,894

 

$

1,623

 

 

The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2015 and September 30, 2014, and as of and for the year ended, December 31, 2014 by major loan classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This Quarter

 

 

Year-to-Date

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Recorded

 

Income

 

September 30, 2015

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

    

Investment  

    

Recognized  

 

With no related allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

    

 

 

 

Commercial

 

$

1,561

 

$

3,024

 

 

 

 

$

1,610

 

$

33

 

$

1,980

 

$

70

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,410

 

 

3,102

 

 

 

 

 

2,275

 

 

25

 

 

2,335

 

 

72

 

Residential

 

 

2,784

 

 

2,967

 

 

 

 

 

2,759

 

 

1

 

 

2,579

 

 

3

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

Total

 

 

6,755

 

 

9,093

 

 

 

 

 

6,644

 

 

59

 

 

6,911

 

 

145

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,596

 

 

2,596

 

$

2,032

 

 

1,954

 

 

13

 

 

1,675

 

 

40

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

4,277

 

 

4,277

 

 

376

 

 

4,797

 

 

21

 

 

4,389

 

 

86

 

Residential

 

 

2,099

 

 

2,099

 

 

1,000

 

 

1,903

 

 

7

 

 

1,697

 

 

24

 

Consumer

 

 

191

 

 

191

 

 

179

 

 

164

 

 

 

 

 

116

 

 

 

 

Total

 

 

9,163

 

 

9,163

 

 

3,587

 

 

8,818

 

 

41

 

 

7,877

 

 

150

 

Commercial

 

 

4,157

 

 

5,620

 

 

2,032

 

 

3,564

 

 

46

 

 

3,655

 

 

110

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,687

 

 

7,379

 

 

376

 

 

7,072

 

 

46

 

 

6,724

 

 

158

 

Residential

 

 

4,883

 

 

5,066

 

 

1,000

 

 

4,662

 

 

8

 

 

4,276

 

 

27

 

Consumer

 

 

191

 

 

191

 

 

179

 

 

164

 

 

 

 

 

133

 

 

 

 

Total

 

$

15,918

 

$

18,256

 

$

3,587

 

$

15,462

 

$

100

 

$

14,788

 

$

295

 

 

18


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended  

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

 

 

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

 

 

 

 

 

 

December 31, 2014

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

 

 

 

 

 

 

With no related allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,379

 

$

4,084

 

 

 

 

$

2,669

 

 

141

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,932

 

 

3,690

 

 

 

 

 

7,944

 

 

120

 

 

 

 

 

 

 

Residential

 

 

2,672

 

 

2,857

 

 

 

 

 

2,731

 

 

4

 

 

 

 

 

 

 

Consumer

 

 

83

 

 

83

 

 

 

 

 

94

 

 

 

 

 

 

 

 

 

 

Total

 

 

8,066

 

 

10,714

 

 

 

 

 

13,438

 

 

265

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,569

 

 

1,569

 

$

1,240

 

 

1,787

 

$

58

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,525

 

 

3,525

 

 

912

 

 

2,293

 

 

28

 

 

 

 

 

 

 

Residential

 

 

1,387

 

 

1,387

 

 

769

 

 

590

 

 

10

 

 

 

 

 

 

 

Consumer

 

 

44

 

 

44

 

 

38

 

 

10

 

 

1

 

 

 

 

 

 

 

Total

 

 

6,525

 

 

6,525

 

 

2,959

 

 

4,680

 

 

97

 

 

 

 

 

 

 

Commercial

 

 

3,948

 

 

5,653

 

 

1,240

 

 

4,456

 

 

199

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,457

 

 

7,215

 

 

912

 

 

10,237

 

 

148

 

 

 

 

 

 

 

Residential

 

 

4,059

 

 

4,244

 

 

769

 

 

3,321

 

 

14

 

 

 

 

 

 

 

Consumer

 

 

127

 

 

127

 

 

38

 

 

104

 

 

1

 

 

 

 

 

 

 

Total

 

$

14,591

 

$

17,239

 

$

2,959

 

$

18,118

 

$

362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This Quarter

 

 

Year-to-Date

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Recorded

 

Income

 

September 30, 2014

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

    

Investment  

    

Recognized  

 

With no related allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

    

 

 

 

Commercial

 

$

2,352

 

$

4,076

 

 

 

 

$

2,501

 

 

19

 

$

2,771

 

 

71

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

5,275

 

 

6,074

 

 

 

 

 

7,587

 

 

20

 

 

9,238

 

 

58

 

Residential

 

 

2,629

 

 

2,816

 

 

 

 

 

2,675

 

 

1

 

 

2,758

 

 

3

 

Consumer

 

 

64

 

 

64

 

 

 

 

 

81

 

 

 

 

 

101

 

 

 

 

Total

 

 

10,320

 

 

13,030

 

 

 

 

 

12,844

 

 

40

 

 

14,868

 

 

132

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,781

 

 

1,781

 

$

1,163

 

 

1,769

 

$

20

 

 

1,825

 

$

63

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,893

 

 

3,893

 

 

660

 

 

2,640

 

 

14

 

 

1,816

 

 

43

 

Residential

 

 

750

 

 

750

 

 

275

 

 

504

 

 

4

 

 

428

 

 

4

 

Consumer

 

 

17

 

 

17

 

 

17

 

 

9

 

 

 

 

 

3

 

 

 

 

Total

 

 

6,441

 

 

6,441

 

 

2,115

 

 

4,922

 

 

38

 

 

4,072

 

 

110

 

Commercial

 

 

4,133

 

 

5,857

 

 

1,163

 

 

4,270

 

 

39

 

 

4,596

 

 

134

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

9,168

 

 

9,967

 

 

660

 

 

10,227

 

 

34

 

 

11,054

 

 

101

 

Residential

 

 

3,379

 

 

3,566

 

 

275

 

 

3,179

 

 

5

 

 

3,186

 

 

7

 

Consumer

 

 

81

 

 

81

 

 

17

 

 

90

 

 

 

 

 

104

 

 

 

 

Total

 

$

16,761

 

$

19,471

 

$

2,115

 

$

17,766

 

$

78

 

$

18,940

 

$

242

 

 

 Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,962 at September 30, 2015, $2,933 at December 31, 2014 and $2,500 at September 30, 2014.

 

19


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

 

·

Rate Modification - A modification in which the interest rate is changed to a below market rate.

 

·

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

 

·

Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time.

 

·

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

 

·

Combination Modification - Any other type of modification, including the use of multiple categories above.

 

There were no  loans modified as troubled debt restructurings for the three months ended September 30, 2015 or September 30, 2014. There were eight loans modified as troubled debt restructurings for the nine months ended September 30, 2015, in the amount of $542. There was one loan modified as a troubled debt restructuring for the nine months ended September 30, 2014 in the amount of $2,500. During the three and nine months ended September 30, 2015 and 2014, there were no defaults on loans restructured within the last twelve months.

 

6. Other assets:

 

The components of other assets at September 30, 2015, and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

    

 

September 30, 2015

    

 

December 31, 2014

 

Other real estate owned

 

$

457

 

$

561

 

Investment in residential housing program

 

 

6,894

 

 

4,329

 

Mortgage servicing rights

 

 

514

 

 

676

 

Bank owned life insurance

 

 

30,575

 

 

29,983

 

Restricted equity securities

 

 

3,344

 

 

3,687

 

Other assets

 

 

14,816

 

 

13,830

 

Total

 

$

56,600

 

$

53,066

 

 

 

7. Fair value estimates:

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

 

 

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

20


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

 

·

Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

·

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

·

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

 

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

 

Cash and cash equivalents: The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.

 

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model. 

 

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

 

 

Net loans: For adjustable-rate loans that re-price frequently and with no significant credit risk, fair values are based on carrying values. The fair values of other non-impaired loans are estimated using discounted cash flow analysis, using interest rates currently offered in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.

 

Loans acquired in connection with business combinations are recorded at their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjust for the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on distressed loans represents the portion of the loan balance that has been deemed uncollectible based on the management’s expectations of future cash flows for each respective loan.

 

21


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Mortgage servicing rights: To determine the fair value, the Company estimates the present value of future cash flows incorporating assumptions such as cost of servicing, discount rates, prepayment speeds and default rates. 

 

Accrued interest receivable: The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.

 

Restricted equity securities: The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.

 

Deposits: The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from such low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The carrying values of adjustable-rate, fixed-term time deposits approximate their fair values at the reporting date. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.

 

The fair value assigned to the core deposit intangible asset represents the future economic benefit of the potential cost savings from acquiring core deposits in the 2013 Penseco merger compared to the cost of obtaining alternative funding such as brokered deposits from market sources. Management utilized an income valuation approach to present value the estimated future cash savings in order to determine the fair value of the intangible asset.

 

Short-term borrowings: The carrying values of short-term borrowings approximate fair value.

 

Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.

 

Accrued interest payable: The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.

 

Off-balance sheet financial instruments:

 

The majority of commitments to extend credit, unused portions of lines of credit and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable of either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values of off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet financial instruments was not material at September 30, 2015 and December 31, 2014.

 

 

22


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

September 30, 2015

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Treasury securities

    

$

16,067

    

$

16,067

    

 

 

    

$

 

 

U.S. Government-sponsored enterprises

 

 

79,623

 

 

 -

 

$

79,623

 

 

 -

 

State and Municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

16,731

 

 

 -

 

 

16,731

 

 

 -

 

Tax-exempt

 

 

116,809

 

 

 -

 

 

116,809

 

 

 -

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

34,194

 

 

 -

 

 

34,194

 

 

 -

 

U.S. Government-sponsored enterprises

 

 

36,408

 

 

 -

 

 

36,408

 

 

 -

 

Total

 

$

299,832

 

$

16,067

 

$

283,765

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

December 31, 2014

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Government-sponsored enterprises

    

$

48,550

    

 

48,550

    

$

 

    

$

 

 

U.S. Government-sponsored enterprises

 

 

96,245

 

 

 

 

 

96,245

 

 

 

 

State and Municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

17,407

 

 

 

 

 

17,407

 

 

 

 

Tax-exempt

 

 

92,901

 

 

 

 

 

92,901

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

37,476

 

 

 

 

 

37,476

 

 

 

 

U.S. Government-sponsored enterprises

 

 

47,007

 

 

 

 

 

47,007

 

 

 

 

Total

 

$

339,586

 

$

48,550

 

$

291,036

 

$

 

 

 

Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

September 30, 2015

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

7,031

    

 

 

    

 

 

    

$

7,031

 

Other real estate owned

 

$

348

 

 

 

 

 

 

 

$

348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

December 31, 2014

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

4,414

    

 

 

    

 

 

    

$

4,414

 

Other real estate owned

 

$

218

 

 

 

 

 

 

 

$

218

 

 

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

23


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements 

 

 

 

Fair Value

 

 

 

 

 

Range

 

September 30, 2015

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

7,031

    

Appraisal of collateral

    

Appraisal adjustments

    

3.0% to 77.0%   (58.0)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.4)%

 

Other real estate owned

 

$

348

 

Appraisal of collateral

 

Appraisal adjustments

 

20.0% to 77.9%   (42.4)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.0)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements 

 

 

 

Fair Value

 

 

 

 

 

Range

 

December 31, 2014

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

4,414

    

Appraisal of collateral

    

Appraisal adjustments

    

2.6% to 61.1%   (24.5)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.5)%

 

Other real estate owned

 

$

218

 

Appraisal of collateral

 

Appraisal adjustments

 

19.7% to 47.8%   (30.5)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.0)%

 

 

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 Inputs which are not identifiable.

 

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

The carrying and fair values of the Company’s financial instruments at September 30, 2015 and December 31, 2014 and their placement within the fair value hierarchy are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Fair Value Hierarchy 

 

 

 

 

 

 

 

 

 

Quoted

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

 

September 30, 2015

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,985

 

$

40,985

 

$

40,985

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

299,832

 

 

299,832

 

$

16,067

 

$

283,765

 

 

 

 

Held-to-maturity

 

 

13,107

 

 

13,582

 

 

 

 

 

13,582

 

 

 

 

Loans held for sale

 

 

3,439

 

 

3,445

 

 

 

 

 

3,445

 

 

 

 

Net loans

 

 

1,258,502

 

 

1,271,728

 

 

 

 

 

 

 

$

1,271,728

 

Accrued interest receivable

 

 

5,327

 

 

5,327

 

 

 

 

 

5,327

 

 

 

 

Mortgage servicing rights

 

 

514

 

 

1,114

 

 

 

 

 

1,114

 

 

 

 

Restricted equity securities

 

 

3,344

 

 

3,344

 

 

 

 

 

3,344

 

 

 

 

Total

 

$

1,625,050

 

$

1,639,357

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,444,650

 

$

1,446,393

 

 

 

 

 

1,446,393

 

 

 

 

Short-term borrowings

 

 

30,250

 

 

30,250

 

 

 

 

 

30,250

 

 

 

 

Long-term debt

 

 

31,000

 

 

32,614

 

 

 

 

 

32,614

 

 

 

 

Accrued interest payable

 

 

496

 

 

496

 

 

 

 

$

496

 

 

 

 

Total

 

$

1,506,396

 

$

1,509,753

 

 

 

 

 

 

 

 

 

 

 

 

 

24


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Fair Value Hierarchy 

 

 

 

 

 

 

 

 

 

Quoted

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

 

December 31, 2014

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,426

 

$

31,426

 

$

31,426

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

339,586

 

 

339,586

 

$

48,550

 

$

291,036

 

 

 

 

Held-to-maturity

 

 

14,665

 

 

15,215

 

 

 

 

 

15,215

 

 

 

 

Loans held for sale

 

 

3,486

 

 

3,492

 

 

 

 

 

3,492

 

 

 

 

Net loans

 

 

1,199,556

 

 

1,210,369

 

 

 

 

 

 

 

$

1,210,369

 

Accrued interest receivable

 

 

5,580

 

 

5,580

 

 

 

 

 

5,580

 

 

 

 

Mortgage servicing rights

 

 

676

 

 

1,466

 

 

 

 

 

1,466

 

 

 

 

Restricted equity securities

 

 

3,687

 

 

3,687

 

 

 

 

 

3,687

 

 

 

 

Total

 

$

1,598,662

 

$

1,610,821

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,425,558

 

$

1,427,081

 

 

 

 

 

1,427,081

 

 

 

 

Short-term borrowings

 

 

19,557

 

 

19,557

 

 

 

 

 

19,557

 

 

 

 

Long-term debt

 

 

33,140

 

 

34,772

 

 

 

 

 

34,772

 

 

 

 

Accrued interest payable

 

 

574

 

 

574

 

 

 

 

$

574

 

 

 

 

Total

 

$

1,478,829

 

$

1,481,984

 

 

 

 

 

 

 

 

 

 

 

 

8. Employee benefit plans:

 

The Company provides an Employee Stock Ownership Plan (“ESOP”) and a Retirement Profit Sharing Plan. The Company also maintains a Supplemental Executive Retirement Plan (“SERP”), an Employees’ Pension Plan, which is currently frozen, and a Postretirement Plan Life Insurance plan which was curtailed in 2013.

 

For the three and nine months ended September 30, salaries and employee benefits expense includes approximately $368 and $820 in 2015 and $581 and $1,744 in 2014 relating to the employee benefit plans.

 

Components of net periodic benefit cost are as follows:

 

 

 

 

 

 

 

 

 

 

Postretirement Life

 

 

 

Insurance Benefits

 

 

 

Pension Benefits

 

Three Months Ended September 30, 

    

2015

    

2014

    

Components of net periodic pension cost:

    

 

 

    

 

 

 

Service cost

 

$

174

 

$

169

 

Interest cost

 

 

(233)

 

 

(227)

 

Amortization of unrecognized net gain

 

 

50

 

 

23

 

Net periodic other benefit cost

 

$

(9)

 

$

(35)

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Nine Months Ended September 30, 

    

2015

    

2014

    

Components of net periodic pension cost:

    

 

 

    

 

 

 

Service cost

 

$

522

 

$

507

 

Interest cost

 

 

(699)

 

 

(681)

 

Amortization of unrecognized net gain

 

 

150

 

 

69

 

Net periodic other benefit cost

 

$

(27)

 

$

(105)

 

 

 

 

 

 

 

 

 

25


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Cautionary Note Regarding Forward-Looking Statements:

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Peoples Financial Services Corp. and its direct and indirect subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.

 

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: our ability to achieve the intended benefits of the 2013 merger with Penseco Financial Services Corporation or other risks associated with business combinations; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; and inability of third party service providers to perform. Additional factors that may affect our results are discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, and in reports we file with the Securities and Exchange Commission from time to time.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Peoples Financial Services Corp. does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts may have been reclassified to conform with the current year’s presentation. Any reclassifications did not have any effect on the operating results or financial position of the Company.

 

Critical Accounting Policies:

 

Disclosure of our significant accounting policies are included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2014. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

 

Operating Environment:

 

The Federal Open Market Committee (“FOMC”) was expected to begin to raise the federal funds rate starting late in the third quarter of 2015. That time has come and passed and the FOMC did not start the tightening of monetary policy. The FOMC noted improvement in labor markets, and modest improvements to household spending and business fixed investment. Further improvement to the unemployment rate and labor markets were also cited within the minutes of the September FOMC meeting. However, gross domestic product (“GDP”), the value of all goods and services produced in the Nation, grew at an annual rate of 1.5% for the third quarter of 2015, down from 3.9% for the second quarter of 2015 while the consumer price index (“CPI”) increased only moderately for the 12 months ended September 2015 at 1.9%.

26


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

 

Review of Financial Position:

 

Total assets increased $31,101, or 2.4% annualized, to $1,772,770 at September 30, 2015, from $1,741,669 at December 31, 2014. Loans, net increased to $1,270,545 at September 30, 2015, compared to $1,209,894 at December 31, 2014, an increase of $60,651 or 6.7% annualized. The increase in loans, net during 2015 has been funded through a decrease in investment securities available-for-sale and an increase in deposits. Investment securities decreased $41,312 or 11.7% in 2015. Interest-bearing deposits increased $28,849, while noninterest-bearing deposits decreased $9,757. Total stockholders’ equity increased $5,309 or at an annual rate of 2.9%, from $246,779 at year-end 2014 to $252,088 at September 30, 2015. In the third quarter of 2015, total assets increased $25,015 or 1.4% while loans, net increased $39,004 or 3.2% and deposits increased $19,883 or 1.4%. For the nine months ended September 30, 2015, total assets averaged $1,730,193, an increase of $19,097 from $1,711,096 for the same period of 2014.

 

Investment Portfolio:

 

The majority of the investment portfolio is held as available-for-sale, which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when market opportunities occur. Investment securities available-for-sale totaled $299,832 at September 30, 2015, a decrease of $39,754, or 11.7% from $339,586 at December 31, 2014. The decrease was primarily a result of the sale of U.S. Treasury securities in response to changes in the slope of the yield curve and in order to fund loan demand. Investment securities held-to-maturity totaled $13,107 at September 30, 2015, a decrease of $1,558 or 10.6% from $14,665 at December 31, 2014 due to payments received from mortgage backed holdings. For the three months ended September 30, 2015, total investments decreased $19,477 resulting primarily from the sale of U.S. Treasury securities.

 

For the nine months ended September 30, 2015, the investment portfolio averaged $314,919, a decrease of $16,292 or 4.9% compared to $331,211 for the same period last year. The tax-equivalent yield on the investment portfolio remained the same at 2.70% for the nine months ended September 30, 2015, compared to the same period of 2014. The tax-equivalent yield decreased from 2.74% in the second quarter of 2015 to 2.60% in the third quarter of 2015. 

 

Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported net unrealized holding gains, included as a separate component of stockholders’ equity of $3,541, net of deferred income taxes of $1,906, at September 30, 2015, and $4,090, net of deferred income taxes of $2,202, at December 31, 2014.

 

Our Asset/Liability Committee (“ALCO”) reviews the performance and risk elements of the investment portfolio quarterly. Through active balance sheet management and analysis of the securities portfolio, we endeavor to maintain sufficient liquidity to satisfy depositor requirements and meet the credit needs of our customers.

 

Loan Portfolio:

 

Loans, net increased for the third quarter of 2015, and the nine month period ended September 30, 2015. Loans, net increased to $1,270,545 at September 30, 2015 from $1,209,894 at December 31, 2014, an increase of $60,651 or 6.7% annualized. The growth reflected increases in commercial loans, commercial real estate loans and consumer loans, partially offset by a decrease in residential real estate loans. Commercial loans increased $23,347, or 9.8% annualized, to $342,937 at September 30, 2015 compared to $319,590 at December 31, 2014. Commercial real estate loans increased $36,018 or 9.8% annualized, to $529,499 at September 30, 2015 compared to $493,481 at December 31, 2014. Consumer loans increased $17,000, or 30.6% on an annualized basis, to $91,369 at September 30, 2015 compared to $74,369 at December 31, 2014. The primary contributor to the growth in consumer loans was indirect loans which have increased $20,585.

 

Residential real estate loans decreased $15,714, or 6.5% on an annualized basis, to $306,740 at September 30, 2015 compared to $322,454 at December 31, 2014. In lieu of carrying residential loans in portfolio, the bank is originating more loans held for sale through the first nine months in 2015. Residential loans originated thus far in 2015 classified as held for sale totaled $20,664 compared to $7,346 for the same period in 2014. For the quarter ended September 30, 2015, loans, net in aggregate increased $39,004. Increases in commercial loans of $20,519, commercial real estate loans of $17,664 and consumer loans of $6,648 were offset by a decrease in residential mortgages of $5,827.

27


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

 

 

For the nine months ended September 30, 2015, loans, net averaged $1,237,401, an increase of $53,008 or 4.5% compared to $1,184,393 for the same period of 2014. The tax-equivalent yield on the loan portfolio was 4.61% for the nine months ended September 30, 2015, a 30 basis point decrease from the comparable period last year. Loan accretion income in the first nine months of 2015 and 2014, which we recognized as a result of the 2013 Penseco merger, was $475 and $1,900. As a result, the tax-equivalent yield on the loan portfolio would have decreased 14 basis points comparing the nine month ended September 30, 2015 and 2014. The tax-equivalent yield on the loan portfolio decreased 11 basis points in the third quarter of 2015 to 4.52% from 4.63% in the second quarter of 2015.

 

In addition to the risks inherent in our loan portfolio, in the normal course of business, we are also a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as on-balance sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the financial statements.

 

Unused commitments at September 30, 2015, totaled $316,036, consisting of $296,203 in unfunded commitments of existing loan facilities and $19,833 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments at December 31, 2014 totaled $266,570, consisting of $235,961 in unfunded commitments of existing loans and $30,609 in standby letters of credit.

 

Asset Quality:

 

National, Pennsylvania, New York and market area unemployment rates at September 30, 2015 and 2014, are summarized as follows:

 

 

 

 

 

 

 

 

    

September 30, 2015

    

September 30, 2014

 

United States

 

4.9

%  

5.7

%  

Pennsylvania (statewide)

 

4.9

 

5.1

 

Lackawanna County

 

6.0

 

5.7

 

Lehigh county

 

5.6

 

5.3

 

Luzerne County

 

6.6

 

6.2

 

Monroe County

 

6.5

 

6.6

 

Susquehanna County

 

5.2

 

4.8

 

Wayne County

 

5.0

 

5.1

 

Wyoming County

 

5.9

 

5.7

 

New York (statewide)

 

4.8

 

5.8

 

Broome County

 

5.5

%  

6.1

%  

 

The employment conditions improved for the Nation, Pennsylvania, and New York but in only three of the seven counties representing our market areas in Pennsylvania and New York from one year ago. Unemployment rates remained elevated relative to historical levels within many of our market areas.

 

Our asset quality weakened slightly in 2015. Nonperforming assets increased $852 or 7.8% to $11,735 at September 30, 2015, from $10,883 at December 31, 2014. We experienced an increase in nonaccrual and restructured loans and accruing loans past due 90 days or more, which was only partially offset by a decline in other real estate owned. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 0.92% at September 30, 2015 compared to 0.90% at December 31, 2014.

 

Loans on nonaccrual status increased $676 to $9,375 at September 30, 2015 from $8,699 at December 31, 2014. The majority of the increase from year end was due to an increase of $803 in residential real estate loans and $122 in commercial loans on nonaccrual status. Nonaccrual commercial real estate loans decreased $317 while nonaccrual consumer loans increased $68. Other real estate owned decreased $104 to $457 at September 30, 2015 from $561 at December 31, 2014.

 

28


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

For the three months ended September 30, 2015, nonperforming assets increased to $11,735 from $10,549 at June 30, 2015. Increases in nonaccrual and restructured loans of $503, accruing loans past due 90 days or more of $559 and other real estate owned of $124 accounted for the change.

 

Generally, maintaining a high loan to deposit ratio is our primary goal in order to maximize profitability. However, this objective is superseded by our attempts to assure that asset quality remains strong. We continued our efforts to maintain sound underwriting standards for both commercial and consumer credit. Most commercial lending is done primarily with locally owned small businesses.

 

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended December 13, 2006, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, “Receivables,” for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

 

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, loan review identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. Internal loan review grades are assigned quarterly to loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions and events, however, we consistently utilize the same grading system each quarter. We consistently use loss experience from the latest twelve quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements to this Quarterly Report.

 

 The allowance for loan losses increased $1,705 to $12,043 at September 30, 2015, from $10,338 at the end of 2014. For the nine months ended September 30, 2015, net charge-offs were $695 or 0.08% of average loans outstanding, a $509 decrease compared to $1,204 or 0.14% of average loans outstanding in the same period of 2014. Net charge-offs were $285 or 0.09% of average loans outstanding in the third quarter of 2015, a $168 increase compared to $117 or 0.04% of average loans outstanding in the third quarter of 2014.

 

Deposits:

 

We attract the majority of our deposits from within our eight county market area that stretches from the Lehigh Valley in Pennsylvania to Broome County in the Southern Tier of New York State through the offering of various deposit instruments including demand deposit accounts, NOW accounts, money market deposit accounts, savings accounts, and time deposits, including certificates of deposit and IRA’s. For the nine months ended September 30, 2015, total deposits increased to $1,444,650 from $1,425,558 at December 31, 2014. Interest-bearing deposits increased $28,849 while noninterest-bearing deposits declined $9,757. Interest-bearing transaction accounts, including NOW and money market accounts, increased $30,136, or 8.9% annualized, to $482,502 at September 30, 2015, from $452,366 at December 31, 2014. Time deposits less than $100 increased $7,376, or 5.1% annualized, to $199,266 at September 30, 2015, from $191,890 at December 31, 2014. Declines in savings accounts of $4,259 and time deposits $100 or more of $4,404 were recorded in the nine months ended September 30, 2015.

 

For the three months ended September 30, 2015, total deposits increased $19,883 or 5.5% annualized. Growth in interest-bearing and noninterest-bearing demand deposits, time deposits less than $100 and time deposits of $100 or more, more than offset declines in savings deposits.

 

29


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

For the nine months ended September 30, 2015 interest-bearing deposits averaged $1,124,689 in 2015 compared to $1,118,101 in 2014. The cost of interest-bearing deposits was 0.44% in 2015 compared to 0.49% for the same period last year. For the first nine months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.51% in 2015 compared to 0.58% in 2014. The cost of interest-bearing liabilities did not change when comparing the second and third quarters of 2015.

 

Borrowings:

 

The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB.

 

Total short-term borrowings at September 30, 2015, totaled $30,250 compared to $19,557 at December 31, 2014, an increase of $10,693. Long-term debt was $31,000 at September 30, 2015, compared to $33,140 at year end 2014. The increase in short-term borrowing was a function of strong loan demand whereas the decline in long-term debt was a product of monthly contractual amortized payments made during the nine months ended September 30, 2015.

 

Market Risk Sensitivity:

 

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily “IRR” associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

 

As a result of economic uncertainty and a prolonged era of historically low market rates, it has become challenging to manage IRR. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by the Board of Directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.

 

The ALCO, comprised of members of our Board of Directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

30


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

Our cumulative one-year RSA/RSL ratio equaled 2.14% at September 30, 2015. Given the length of time that market rates have been at historical lows and the potential for rates to increase in the future, the focus of ALCO has been to create a positive static gap position. With regard to RSA, we predominantly offer medium- term, fixed-rate loans as well as adjustable rate loans. With respect to RSL, we offer longer term promotional certificates of deposit in an attempt to increase duration. The current position at September 30, 2015, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing increases in market rates, to increase net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

 

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.

 

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at September 30, 2015, produced results similar to those indicated by the one-year static gap position. In addition, parallel and instantaneous shifts in interest rates under various interest rate shocks resulted in changes in net interest income that were well within ALCO policy limits. We will continue to monitor our IRR throughout 2015 and endeavor to employ deposit and loan pricing strategies and direct the reinvestment of loan and investment repayments in order to manage our IRR position.

 

Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.

 

Liquidity:

 

Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:

 

·

Funding new and existing loan commitments;

 

·

Payment of deposits on demand or at their contractual maturity;

 

·

Repayment of borrowings as they mature;

 

·

Payment of lease obligations; and

 

·

Payment of operating expenses.

 

These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted and strategies are developed to ensure adequate liquidity at all times.

 

Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

 

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans

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Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

maturing after September 30, 2015. Our noncore funds at September 30, 2015, were comprised of time deposits in denominations of $100 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly volatile. At September 30, 2015, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 8.9%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 3.8%. Comparatively, our overall noncore dependence ratio at year-end 2014 was 8.5% and our net short-term noncore funding dependence ratio was 3.0% at year-end, indicating that our reliance on noncore funds has increased slightly.

 

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, increased $9,559 during the nine months ended September 30, 2015. Cash and cash equivalents decreased $17,099 for the same period last year. For the nine months ended September 30, 2015, net cash inflows of $15,172 from operating activities and $20,135 from financing activities were partially offset by net cash outflows of $25,748 from investing activities. For the same period of 2014, net cash inflows of $14,846 from operating activities and $21,463 from financing activities were more than offset by net cash outflows of $53,408 from investing activities.

 

Operating activities provided net cash of $15,172 for the nine months ended September 30, 2015, and $14,846 for the corresponding nine months of 2014. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for loan losses, is the primary source of funds from operations.

 

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $25,748 for the nine months ended September 30, 2015, compared to $53,408 for the same period of 2014. In 2015, an increase in lending activities was the primary factor causing the net cash outflow from investing activities. Investment portfolio activities was the predominant factor causing the net cash outflow from investing activities in 2014.

 

 Financing activities provided net cash of $20,135 for the nine months ended September 30, 2015, and provided net cash of $21,463 for the corresponding nine months of 2014. Deposit gathering is our predominant financing activity. Deposits increased for both the nine months ended September 30, 2015 and 2014. The net increase in deposits totaled $19,619 in the nine months ended September 30, 2015. Comparatively, deposit gathering provided net cash of $46,939 for the same period of 2014. We continued to attract deposits from new and existing customers, including municipalities and school districts, as well as deposits gathered in relation to natural gas activity within existing markets in Susquehanna and Wyoming Counties of Pennsylvania.

 

We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds will enable us to meet all cash obligations as they come due.

 

Capital:

 

Stockholders’ equity totaled $252,088 or $33.53 per share at September 30, 2015, compared to $246,779 or $32.69 per share at December 31, 2014. Net income of $13,884 for the nine months ended September 30, 2015 was the primary factor leading to the improved capital position. Stockholders’ equity was also affected by cash dividends declared of $7,016, shares retired of $1,062, stock based compensation of $52, and an other comprehensive loss resulting from market value fluctuations in the investment portfolio of $549.

 

Dividends declared equaled $0.93 per share in 2015 and 2014. The dividend payout ratio was 50.5% for the nine months ended September 30, 2015 and 52.8% for the same period of 2014. The merger agreement pursuant to which we merged with Penseco in 2013 contemplates that, unless 80 percent of our board of directors determines otherwise, we will pay a quarterly cash dividend in an amount no less than $0.31 per share through 2018, provided that sufficient funds are legally available, and that Peoples and Peoples Bank remain “Well-capitalized” in accordance with applicable regulatory guidelines. It is the intention of the Board of Directors to continue to pay cash dividends in the future. However, these

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Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

decisions are affected by operating results, financial and economic decisions, capital and growth objectives, appropriate dividend restrictions and other relevant factors.

 

In July 2013, the Board of Directors of the FRB approved the Basel III interim final rule (“Basel III”) which is intended to strengthen the quality and increase the required level of regulatory capital for a more stable and resilient banking system. The changes include: (i) a new regulatory capital measure, Common Equity Tier 1 (“CET1”), which is limited to capital elements of the highest quality; (ii) a new definition and increase of tier 1 capital which is now comprised of CET1 and Additional Tier 1; (iii) changes in calculation of some risk-weighted assets and off-balance sheet exposure; and (iv) a capital conservation buffer that will limit capital distributions, stock redemptions, and certain discretionary bonus payments if the institution does not maintain capital in excess of the minimum capital requirements. These new capital rules took effect for our Bank on January 1, 2015 and reporting began with the March 31, 2015 call report.

 

The adequacy of capital is reviewed on an ongoing basis with reference to the size, composition and quality of resources and regulatory guidelines. We seek to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. At September 30, 2015, the Bank’s Tier 1 capital to total average assets was 10.86% as compared to 10.42% at December 31, 2014. The Bank’s Tier 1 capital to risk weighted asset ratio was 13.92% and the total capital to risk weighted asset ratio was 14.84% at September 30, 2015. These ratios were 14.28% and 15.15% at December 31, 2014. The Bank’s common equity Tier 1 to risk weighted asset ratio was 13.92% at September 30, 2015. The Bank was deemed to be well-capitalized under regulatory standards at September 30, 2015.

 

Review of Financial Performance:

 

Net income for the third quarter of 2015 equaled $4,409 or $0.58 per share compared to $5,236 or $0.70 per share for the third quarter of 2014. Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.00% for the third quarter of 2015 compared to 1.20% for the same period of 2014. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 7.00% for the third quarter of 2015 compared to 8.49% for the third quarter of 2014. Net income for the nine months ended September 30, 2015 equaled $13,884 or $1.84 per share compared to $13,265 or $1.76 per share for the same period of 2014. Our ROA and ROE were 1.07% and 7.47% through nine months in 2015 compared to 1.04% and 7.37% for the same period of 2014. Gains on sale of investment securities were $979 for the nine months ended September 30, 2015 and $861 for the comparable period in 2014. The results for the nine months ended September 30, 2014 included pre-tax acquisition related expenses of $1,725.

 

Net Interest Income:

 

Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:

 

·

Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;

 

·

Changes in general market rates; and

 

·

The level of nonperforming assets.

 

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 35.0% in 2015 and 2014.

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Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

 

For the three months ended September 30, tax-equivalent net interest income decreased $349 to $14,891 in 2015 from $15,240 in 2014. The net interest spread decreased to 3.61% for the three months ended September 30, 2015 from 3.69% for the three months ended September 30, 2014. The tax-equivalent net interest margin decreased to 3.74% for the third quarter of 2015 from 3.84% for the comparable period of 2014. The tax-equivalent net interest margin for the second quarter of 2015 was 3.84%. Loan accretion in the third quarter of 2015 related to loans acquired in the 2013 Penseco merger was $128, resulting in an increase in the tax-equivalent net interest margin of 4 basis points. Comparatively, loan interest recognized on these loans in the third quarter of 2014 was $470 resulting in an increase in the tax-equivalent net interest margin of 12 basis points. Without such interest income, the tax equivalent net interest margin for the three months ended September 30 would have been 3.70% in 2015 and 3.72% in 2014.

 

For the three months ended September 30, tax-equivalent interest income on earning assets decreased $506, to $16,376 in 2015 as compared to $16,882 in 2014. The overall yield on earning assets, on a fully tax-equivalent basis, decreased 14 basis points for the three months ended September 30, 2015 at 4.11% as compared to 4.25% for the three months ended September 30, 2014. The decrease in the yield on earning assets resulted from lower yielding assets replacing higher yielding assets as the result of loan growth and payments and maturities of the higher yielding assets. The overall yield earned on loans decreased 37 basis points for the third quarter of 2015 to 4.52% from 4.89% for the third quarter of 2014. Average loans increased to $1,250,736 for the quarter ended September 30, 2015 compared to $1,184,102 for the same period in 2014. The resulting tax-equivalent interest earned on loans was $14,242 for the three month period ended September 30, 2015 compared to $14,591 for the same period in 2014, a decrease of $349.

 

Total interest expense decreased $157, to $1,485 for the three months ended September 30, 2015 from $1,642 for the three months ended September 30, 2014. A favorable rate variance caused the decrease. An increase in the average volume of interest bearing liabilities of $12,536 was more than offset by a 6 basis point decrease in the cost of funds comparing the three months ended September 30, 2015 and 2014.

 

 For the nine months ended September 30, tax-equivalent net interest income decreased $577 to $44,664 in 2015 from $45,241 in 2014. The net interest spread decreased to 3.69% for the nine months ended September 30, 2015 from 3.73% for the nine months ended September 30, 2014. The tax-equivalent net interest margin for the nine months ended September 30 was 3.82% in 2015 compared to 3.88% in 2014. Loan interest income in the nine months ended September 30, 2015 related to loans acquired in the fourth quarter of 2013 was $475, resulting in an increase in the tax-equivalent net interest margin of 4 basis points. Comparatively, loan interest income on these loans recognized in the nine months of 2014 was $1,900 resulting in an increase in the tax-equivalent net interest margin of 16 basis points. Without such interest income, the tax equivalent net interest margin for the nine months ended September 30 would have been 3.78% in 2015 and 3.72% in 2014.

 

For the nine months ended September 30, 2015, tax-equivalent interest income decreased $1,165, to $49,132 as compared to $50,297 for the nine months ended September 30, 2014. A volume variance attributable to changes in the average volume of earning assets over interest-bearing liabilities was more than offset by an unfavorable rate variance due to a greater reduction in the yield on earning assets compared to the cost of funds.

 

Average earning assets grew $5,258 compared to a decrease in average interest-bearing liabilities of $4,394 comparing the nine months ended September 30, 2015 and 2014. The yield on earning assets decreased 11 basis points as compared to a 7 basis point drop in fund costs.

 

The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include

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Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

available-for-sale securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate of 35%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 2015

 

September 2014

 

 

 

Average

 

Interest Income/

 

Yield/

 

Average

 

Interest Income/

 

Yield/

 

 

    

Balance  

    

Interest

    

Rate  

    

Balance  

    

Interest

    

Rate  

    

Assets:

    

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

1,165,215

 

$

40,072

 

4.60

%  

$

1,116,432

 

$

41,035

 

4.91

%  

Tax-exempt

 

 

72,186

 

 

2,638

 

4.89

 

 

67,961

 

 

2,472

 

4.86

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

210,439

 

 

2,507

 

1.59

 

 

231,457

 

 

2,909

 

1.68

 

Tax-exempt

 

 

104,480

 

 

3,843

 

4.92

 

 

99,754

 

 

3,788

 

5.08

 

Interest-bearing deposits

 

 

6,473

 

 

63

 

1.30

 

 

5,843

 

 

29

 

0.66

 

Federal funds sold

 

 

4,987

 

 

9

 

0.24

 

 

37,081

 

 

64

 

0.23

 

Total earning assets

 

 

1,563,780

 

 

49,132

 

4.20

%  

 

1,558,528

 

 

50,297

 

4.31

%  

Less: allowance for loan losses

 

 

11,028

 

 

 

 

 

 

 

9,162

 

 

 

 

 

 

Other assets

 

 

177,441

 

 

 

 

 

 

 

161,730

 

 

 

 

 

 

Total assets

 

$

1,730,193

 

 

 

 

 

 

$

1,711,096

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

197,112

 

 

485

 

0.33

%  

$

213,230

 

 

596

 

0.37

%  

NOW accounts

 

 

267,797

 

 

726

 

0.36

 

 

225,328

 

 

577

 

0.34

 

Savings accounts

 

 

399,060

 

 

623

 

0.21

 

 

374,351

 

 

770

 

0.28

 

Time deposits less than $100

 

 

172,806

 

 

1,369

 

1.06

 

 

211,966

 

 

1,542

 

0.97

 

Time deposits $100 or more

 

 

87,914

 

 

486

 

0.74

 

 

93,226

 

 

640

 

0.92

 

Short-term borrowings

 

 

8,581

 

 

23

 

0.36

 

 

16,160

 

 

67

 

0.55

 

Long-term debt

 

 

32,010

 

 

756

 

3.16

 

 

35,413

 

 

864

 

3.26

 

Total interest-bearing liabilities

 

 

1,165,280

 

 

4,468

 

0.51

 

 

1,169,674

 

 

5,056

 

0.58

 

Noninterest-bearing deposits

 

 

301,619

 

 

 

 

 

 

 

288,786

 

 

 

 

 

 

Other liabilities

 

 

14,686

 

 

 

 

 

 

 

12,143

 

 

 

 

 

 

Stockholders’ equity

 

 

248,608

 

 

 

 

 

 

 

240,493

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,730,193

 

 

 

 

 

 

$

1,711,096

 

 

 

 

 

 

Net interest income/spread

 

 

 

 

$

44,664

 

3.69

%  

 

 

 

$

45,241

 

3.73

%  

Net interest margin

 

 

 

 

 

 

 

3.82

%  

 

 

 

 

 

 

3.88

%  

Tax-equivalent adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

$

923

 

 

 

 

 

 

$

865

 

 

 

Investments

 

 

 

 

 

1,345

 

 

 

 

 

 

 

1,326

 

 

 

Total adjustments

 

 

 

 

$

2,268

 

 

 

 

 

 

$

2,191

 

 

 

 

Provision for Loan Losses:

 

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of September 30, 2015.

 

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Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

For the three and nine months ended September 30, 2015, the provision for loan losses totaled $900 and $2,400, compared to $666 and $2,724 for those same periods in 2014. The increase in the provision in the third quarter of 2015 was a result of an increase in loan growth and the level of nonperforming loans.

 

Noninterest Income:

 

For the nine months ended September 30, 2015, noninterest income totaled $11,950, an increase of $232 or 2.0% from $11,718 for the comparable period of 2014. Service charges, fees and commissions decreased $130, or 2.7% to $4,685 through nine months in 2015 from $4,815 for the same period in 2014. Merchant services income increased $152 to $2,936 for the nine months ended September 30, 2015 from $2,784 for the same period last year as a result of an increase in the number of merchant accounts serviced. Income generated from commissions and fees on fiduciary activities decreased $203 to $1,487 for the nine months ended September 30, 2015 in comparison to $1,690 for the same period in 2014 due to a decrease in executor fees settled in 2015. Income generated from our wealth management division increased $58 to $627 through the first nine months of 2015 in comparison to $569 over that same period in 2014. Mortgage banking income increased $233 to $667 for the first nine months of 2015 compared to $434 for the comparable period in 2014 as the volume of loans originated for sale continued to improve. Life insurance investment income increased $4 to $569 for the nine months ended September 30, 2015 from $565 for the same period in 2014. Beginning late in the third quarter of 2014, we began to incur offsets to life insurance income that represent mortality costs to the life insurance and the variance is normalized as of the end of the third quarter of 2015. Gains from the sale of investment securities available-for-sale increased to $979 for the nine months ended September 30, 2015 compared to $861 for the same period in 2014 as we took advantage of the significant improvement in the value of U.S. Treasury securities brought on by the reduction in market yields.

 

Noninterest income decreased $365 or 8.3% to $4,015 in the third quarter of 2015 from $4,380 for the same period in 2014. Increases in income from merchant services, wealth management, mortgage banking and life insurance income were more than offset by declines in service charges, fees and commissions, commissions and fees on fiduciary activities and net gains on sale of investment securities available-for-sale.

 

Noninterest Expenses:

 

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, including FDIC assessment, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.

 

For the third quarter, noninterest expense increased $622 or 5.6% to $11,706 in 2015 from $11,084 in 2014. For the nine months ended September 30, 2015, noninterest expense decreased $299 or 0.9% to $34,311 in 2015 from $34,610 in 2014. Personnel costs increased 9.1%, net occupancy and equipment costs increased 12.9%, merchant services expense increased 16.5% and other expenses decreased by 9.7% comparing year-to-date 2015 and 2014.

 

Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled $5,397 for the third quarter of 2015, an increase of $643 or 13.5% when compared to the third quarter of 2014. Salaries and employee benefits expense totaled $16,243 for the nine months ended September 30, 2015 compared to $14,883 for the same period of 2014, an increase of $1,360 or 9.1%. Severances paid out to eliminate certain duplicated positions along with the addition of salaries and benefit costs to add staffing in wealth management, Lehigh Valley and credit more than offset the cost savings associated with certain downsizing initiatives.

 

Merchant services expense increased $161 or 24.3% to $823 for the three months ended September 30, 2015 from $662 for the same period in 2014. Merchant services expense increased $284 or 16.5% to $2,006 for the nine months ended

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Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

September 30, 2015 from $1,722 for the year earlier period. Both the quarterly and nine month results were a product of higher interchange fees being paid to the service providers. The increases correlate directly to the increases in merchant services income for the quarter and nine months ended September 30, 2015.

 

We experienced a $226 or 11.2% increase in net occupancy and equipment expense comparing $2,246 for the third quarter of 2015 and $2,020 for the same period in 2014. Net occupancy and equipment expense increased $783 or 12.9% comparing the nine months ended September 30, 2015 at $6,863 and September 30, 2014 at $6,080. The increase in net occupancy and equipment expense was caused by costs associated with the Lehigh Valley branch during 2015, and costs associated with excessive snow removal costs during the first part of 2015.

 

For the third quarter, other expenses decreased $261 or 8.1% to $2,944 from $3,205 comparing 2015 to 2014. For the nine months ended September 30, 2015, other expenses decreased $887 or 9.7% to $8,303 as compared to $9,190 for the same period of 2014. The decrease was the result of realizing cost synergies as we begin to achieve certain of the intended benefits of the 2013 merger with Penseco.

 

Income Taxes:

 

We recorded income tax expense of $1,113 or 20.2% of pre-tax income, and $1,944 or 27.1% of pre-tax income for the three months ended September 30, 2015 and 2014. We recorded income tax expense of $3,751 or 21.3% of pre-tax income, and $4,169 or 23.9% of pre-tax income for the nine months ended September 30, 2015 and 2014. The nine months ended September 30, 2015 includes before tax investment tax credits of $1,088 compared to $439 for that same period last year.

 

 

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Peoples Financial Services Corp.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Market risk is the risk to our earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”), which arises from our lending, investing and deposit gathering activities. Our market risk sensitive instruments consist of non-derivative financial instruments, none of which are entered into for trading purposes. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in reported earnings and/or the market value of net worth. Variations in interest rates affect the underlying economic value of assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value, and provide a basis for the expected change in future earnings related to interest rates. Interest rate changes affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. IRR is inherent in the role of banks as financial intermediaries.

 

A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

 

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at September 30, 2015, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

% Change in  

 

Changes in Interest Rates (basis points)

 

Net Interest Income 

 

Economic Value of Equity 

 

 

    

Metric 

    

Policy 

    

Metric 

    

Policy 

 

+400

    

6.1

    

(20.0)

    

6.9

    

(45.0)

 

+300

 

4.9

 

(20.0)

 

6.6

 

(35.0)

 

+200

 

3.3

 

(10.0)

 

5.3

 

(25.0)

 

+100

 

1.6

 

(10.0)

 

3.4

 

(15.0)

 

Static

 

 

 

 

 

 

 

 

 

-100

 

(3.2)

 

(10.0)

 

(12.4)

 

(15.0)

 

 

Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending September 30, 2015, would increase slightly at 1.6 percent from model results using current interest rates. Additional disclosures about market risk are included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, under the heading “Market Risk Sensitivity,” and are incorporated into this Item 3 by reference. There were no material changes in our market risk from December 31, 2014.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures.

 

At September 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at September 30, 2015, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide

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Peoples Financial Services Corp.

 

reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control.

 

There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II—OTHER INFORMATION 

 

Item 1. Legal Proceedings.

 

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company in 2014 and through the date of this quarterly report on Form 10-Q.

 

Item 1A. Risk Factors.  

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On January 30, 2015, the Board of Directors authorized the repurchase of up to 370,000 shares of the Company’s common stock. The following purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a) (3), of the Company’s common stock during each of the months for the quarter ended September 30, 2015. At September 30, 2015, there were 338,951 shares available for repurchase under the 2015 Stock Repurchase Program with an expiration date of December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Total Number of

    

Maximum Number

 

 

 

 

 

 

 

Shares Purchased

 

of Shares that may

 

 

 

 

 

 

 

as Part of Publicly

 

yet be Purchased

 

 

 

Total Number of

 

Average Price

 

Announced

 

Under the

 

Month Ending 

    

Shares Purchased

    

Paid Per Share

    

Programs(1)

    

Programs(1)

 

July 1, 2015 - July 31, 2015

 

 

 

 

 

 

 

362,567

 

August 1, 2015 - August 31, 2015

 

5,540

$

36.26

 

5,540

 

357,027

 

September 1, - September 30, 2015

 

18,076

 

35.73

 

18,076

 

338,951

 

Total

 

23,616

$

35.85

 

23,616

 

 

 

 

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.  

 

None.

 

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Peoples Financial Services Corp.

 

Item 6. Exhibits.  

 

 

 

10.1

Material Contracts-First Amendment to Amended and Restated Deferred Compensation Plan #2, dated August 29, 2015, by and between Peoples Security Bank and Trust Company and Craig Best, incorporated by reference to Exhibit 10.1 to the Registrant’s form 8-K filed with the Commission on September 3, 2015.

 

 

31.1

Chief Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a).

 

 

31.2

Chief Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a).

 

 

32

Chief Executive Officer and Chief Financial Officer certifications pursuant to Section 1350.

 

 

101+

Interactive Data File

 


+

As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

 

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Peoples Financial Services Corp.

 

 

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.

 

(Registrant)

 

 

Date: November 6, 2015

/s/ Craig W. Best

 

Craig W. Best

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date: November 6, 2015

/s/ Scott A. Seasock

 

Scott A. Seasock

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)

 

 

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Peoples Financial Services Corp.

 

 

EXHIBIT INDEX

 

Item Number

 

Description

 

Page

 

 

 

 

 

10.1

 

Material Contracts-First Amendment to Amended and Restated Deferred Compensation Plan #2, dated August 29, 2015, by and between Peoples Security Bank and Trust Company and Craig Best, incorporated by reference to Exhibit 10.1 to the Registrant’s form 8-K filed with the Commission on September 3, 2015.

 

 

 

 

 

 

 

31.1

 

CEO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).

 

43 

 

 

 

 

 

31.2

 

CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).

 

44 

 

 

 

 

 

32

 

CEO and CFO Certifications Pursuant to Section 1350.

 

45 

 

 

 

 

 

101

 

The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended September 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

 

 

 

42