pfis_Current_Folio

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 March 31, 2017

◻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, a smaller reporting company, or an emerging growth company as defined in Rule 12b-2 of the Exchange Act.


Large accelerated filer	◻	Accelerated filer	☒

Non-accelerated filer	◻	Smaller reporting company	◻
Emerging growth company	◻		

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

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: 7,396,163 at April 30, 2017.

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except share data)


	March 31, 2017		December 31, 2016
Assets:
Cash and due from banks:
Cash and due from banks	$	31,511	$	39,496
Interest-bearing deposits in other banks		304		445
Total cash and due from banks		31,815		39,941
Investment securities:
Available-for-sale		264,644		259,410
Held-to-maturity: Fair value March 31, 2017, $10,359; December 31, 2016, $10,714		10,180		10,517
Total investment securities		274,824		269,927
Loans, net		1,559,867		1,532,965
Less: allowance for loan losses		16,969		15,961
Net loans		1,542,898		1,517,004
Loans held for sale		444
Premises and equipment, net		34,967		33,260
Accrued interest receivable		5,604		6,228
Goodwill		63,370		63,370
Intangible assets, net		3,944		4,211
Other assets		65,640		65,501
Total assets	$	2,023,506	$	1,999,442

Liabilities:
Deposits:
Noninterest-bearing	$	358,538	$	353,686
Interest-bearing		1,257,006		1,235,071
Total deposits		1,615,544		1,588,757
Short-term borrowings		77,475		82,700
Long-term debt		57,615		58,134
Accrued interest payable		457		462
Other liabilities		13,096		12,771
Total liabilities		1,764,187		1,742,824

Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,396,163 shares at March 31, 2017 and 7,394,143 shares at December 31, 2016		14,792		14,788
Capital surplus		134,884		134,871
Retained earnings		113,621		111,114
Accumulated other comprehensive loss		(3,978)		(4,155)
Total stockholders’ equity		259,319		256,618
Total liabilities and stockholders’ equity	$	2,023,506	$	1,999,442

See notes to consolidated financial statements

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)


For the Three Months Ended March 31,	2017		2016
Interest income:
Interest and fees on loans:
Taxable	$	15,541	$	14,346
Tax-exempt		726		751
Interest and dividends on investment securities:
Taxable		697		687
Tax-exempt		794		875
Dividends		12		10
Interest on interest-bearing deposits in other banks		29		17
Total interest income		17,799		16,686

Interest expense:
Interest on deposits		1,434		1,283
Interest on short-term borrowings		174		77
Interest on long-term debt		348		360
Total interest expense		1,956		1,720
Net interest income		15,843		14,966
Provision for loan losses		1,200		1,200
Net interest income after provision for loan losses		14,643		13,766

Noninterest income:
Service charges, fees and commissions		1,572		1,444
Merchant services income		1,015		914
Commission and fees on fiduciary activities		508		482
Wealth management income		319		412
Mortgage banking income		179		204
Life insurance investment income		189		193
Net gain on sale of investment securities available-for-sale				242
Total noninterest income		3,782		3,891

Noninterest expense:
Salaries and employee benefits expense		6,275		5,332
Net occupancy and equipment expense		2,394		2,437
Merchant services expense		730		632
Amortization of intangible assets		268		305
Other expenses		2,689		2,912
Total noninterest expense		12,356		11,618
Income before income taxes		6,069		6,039
Income tax expense		1,269		1,157
Net income		4,800		4,882

Other comprehensive income:
Unrealized gain on investment securities available-for-sale		273		995
Reclassification adjustment for net gain on sales included in net income				(242)
Other comprehensive income		273		753
Income tax related to other comprehensive income		96		264
Other comprehensive income, net of income taxes		177		489
Comprehensive income	$	4,977	$	5,371

Per share data:
Net income:
Basic	$	0.65	$	0.66
Diluted	$	0.65	$	0.66
Average common shares outstanding:
Basic		7,394,143		7,403,510
Diluted		7,394,143		7,403,510
Dividends declared	$	0.31	$	0.31

See notes to consolidated financial statements

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
	Stock		Surplus		Earnings		Loss		Total
Balance, January 1, 2017	$	14,788	$	134,871	$	111,114	$	(4,155)	$	256,618
Stock based compensation				17						17
Net income						4,800				4,800
Other comprehensive income, net of income taxes								177		177
Dividends declared: $0.31 per share						(2,293)				(2,293)
Common stock grants awarded, net of unearned compensation of $81: 2,020 shares		4		(4)
Balance, March 31, 2017	$	14,792	$	134,884	$	113,621	$	(3,978)	$	259,319

Balance, January 1, 2016	$	14,821	$	135,371	$	100,701	$	(2,125)	$	248,768
Stock based compensation				18						18
Net income						4,882				4,882
Other comprehensive income, net of income taxes								489		489
Dividends declared: $0.31 per share						(2,295)				(2,295)
Shares retired: 11,308 shares		(22)		(395)						(417)
Balance, March 31, 2016	$	14,799	$	134,994	$	103,288	$	(1,636)	$	251,445

See notes to consolidated financial statements

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)


For the Three Months Ended March 31,	2017		2016
Cash flows from operating activities:
Net income	$	4,800	$	4,882
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		451		392
Amortization of deferred loan costs		211		169
Amortization of intangibles		268		305
Net accretion of purchase accounting adjustments on tangible assets				(275)
Amortization of loss on investment tax credits		117		125
Provision for loan losses		1,200		1,200
Net gain on sale of other real estate owned		(1)		(11)
Loans originated for sale		(5,141)		(5,268)
Proceeds from sale of loans originated for sale		4,734		5,394
Net gain on sale of loans originated for sale		(37)		(204)
Net amortization of investment securities		759		1,041
Net gain on sale of investment securities available-for-sale				(242)
Life insurance investment income		(189)		(193)
Stock based compensation		17		18
Net change in:
Accrued interest receivable		624		341
Other assets		(580)		(583)
Accrued interest payable		(5)		(54)
Other liabilities		308		(404)
Net cash provided by operating activities		7,536		6,633
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale				10,271
Proceeds from repayments of investment securities:
Available-for-sale		9,285		10,453
Held-to-maturity		331		418
Purchases of investment securities:
Available-for-sale		(14,999)
Net redemption (purchase) of restricted equity securities		270		(798)
Net increase in lending activities		(27,349)		(69,321)
Investment in low income housing investment tax credits				(2,050)
Purchases of premises and equipment		(2,158)		(1,646)
Purchase of investment in life insurance				(1,500)
Proceeds from sale of other real estate owned		208		83
Net cash used in investing activities		(34,412)		(54,090)
Cash flows from financing activities:
Net increase in deposits		26,787		19,798
Repayment of long-term debt		(519)		(573)
Net (decrease) increase in short-term borrowings		(5,225)		22,025
Retirement of common stock				(417)
Cash dividends paid		(2,293)		(2,295)
Net cash provided by financing activities		18,750		38,538
Net decrease in cash and cash equivalents		(8,126)		(8,919)
Cash and cash equivalents at beginning of period		39,941		32,917
Cash and cash equivalents at end of period	$	31,815	$	23,998

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 subsidiary, Peoples Advisors, LLC (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, Montgomery, Northampton, 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 months ended and as of March 31, 2017, 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, 2016.

Recent accounting standards:

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. During 2016, the FASB issued ASU Nos. 2016-10, 2016-12 and 2016-20 that provide additional guidance related to the identification of performance obligations within a contract, assessing collectability, contract costs, and other technical corrections and improvements. ASU 2014-09 will become effective for the Company for the annual period beginning after December 15, 2017 and for interim periods within the annual period. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. The Company has not selected a transition method. The Company has completed an evaluation of its revenue-producing contracts and determined they are primarily agreements that are not within the scope of this standard. As a result, the Company does not expect the adoption of this standard to have a material impact to the Company’s reported revenues and interest income. The Company is continuing to evaluate the impact on other revenue and income sources.

In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01, “Financial Instruments – Overall.” The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity

investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of this guidance on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee's perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessess. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company’s initial findings conclude that the new pronouncement will not have a significant impact on its consolidated financial statements as the current projected minimum lease payments under existing lease contracts subject to the new pronouncement are less than one percent of its current assets.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU will have a significant impact on the Company’s calculation and accounting for its Allowance for Loan Losses as well as credit losses related to investment securities available-for-sale. A summary of significant provisions of this ASU is as follows:

			The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
			The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.



This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignificant

amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.



This ASU will be effective for the Company for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations; however, it is anticipated that the allowance will increase upon adoption and that the increased allowance level will decrease regulatory capital and ratios..

In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) –Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues with the objective of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Company, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Company anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Company’s annual and interim goodwill impairment tests beginning in the first quarter of 2020.

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 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 March 31, 2017 and December 31, 2016 is as follows:


	March 31, 2017		December 31, 2016
Net unrealized gain on investment securities available-for-sale	$	826	$	553
Income tax		289		193
Net of income taxes		537		360
Benefit plan adjustments		(6,946)		(6,946)
Income tax		(2,431)		(2,431)
Net of income taxes		(4,515)		(4,515)
Accumulated other comprehensive loss	$	(3,978)	$	(4,155)

Other comprehensive income (loss) and related tax effects for the three months ended March 31, 2017 and 2016 is as follows:


Three Months Ended March 31,	2017		2016
Unrealized gain on investment securities available-for-sale	$	273	$	995
Net gain on the sale of investment securities available-for-sale(1)				(242)
Other comprehensive income gain before taxes		273		753
Income tax expense		96		264
Other comprehensive income	$	177	$	489

(1)Represents amounts reclassified out of accumulated comprehensive loss 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 month periods ended March 31, 2017 and 2016.


	2017				2016
For the Three Months Ended March 31	Basic		Diluted		Basic		Diluted
Net Income	$	4,800	$	4,800	$	4,882	$	4,882
Average common shares outstanding		7,394,143		7,394,143		7,403,510		7,403,510
Earnings per share	$	0.65	$	0.65	$	0.66	$	0.66

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at March 31, 2017 and December 31, 2016 are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2017	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	20,050	$	1	$	156	$	19,895
U.S. Government-sponsored enterprises		83,677		72		1,277		82,472
State and municipals:
Taxable		14,663		604				15,267
Tax-exempt		105,894		2,104		461		107,537
Mortgage-backed securities:
U.S. Government agencies		19,321		47		36		19,332
U.S. Government-sponsored enterprises		20,213		46		118		20,141
Total	$	263,818	$	2,874	$	2,048	$	264,644
Held-to-maturity:
Tax-exempt state and municipals	$	6,861	$	86	$	83	$	6,864
Mortgage-backed securities:
U.S. Government agencies		64						64
U.S. Government-sponsored enterprises		3,255		176				3,431
Total	$	10,180	$	262	$	83	$	10,359


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2016	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	7,570			$	132	$	7,438
U.S. Government-sponsored enterprises		82,314	$	79		1,480		80,913
State and municipals:
Taxable		14,698		566		39		15,225
Tax-exempt		110,931		2,309		640		112,600
Mortgage-backed securities:
U.S. Government agencies		21,041		48		47		21,042
U.S. Government-sponsored enterprises		22,303		48		159		22,192
Total	$	258,857	$	3,050	$	2,497	$	259,410
Held-to-maturity:
Tax-exempt state and municipals	$	6,862	$	72


Contents		Page No.

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at March 31, 2017 and December 31, 2016	3

	Consolidated Statements of Income and Comprehensive Income for the Three months ended March 31, 2017 and 2016	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Three months ended March 31, 2017 and 2016	5

	Consolidated Statements of Cash Flows for the Three months ended March 31, 2017 and 2016	6

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

	Signatures	41


For the Three Months Ended March 31,	2017		2016
Supplemental disclosures:
Cash paid during the period for:
Interest	$	1,961	$	1,931
Income taxes
Noncash items:
Transfers of loans to other real estate	$	50	$	524