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 June 30, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common stock, $2.00 par value	PFIS	The Nasdaq Stock Market

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 every Interactive Data File required to be submitted 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 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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” 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: 7,399,078 at July 31, 2019.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended June 30, 2019

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2019 and 2018 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months ended June 30, 2019 and 2018 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults upon Senior Securities	50
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51
	Signatures	51

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS 

(Dollars in thousands, except share data)

	June 30, 2019		December 31, 2018
Assets:
Cash and due from banks:
Cash and due from banks	$	26,615	$	32,569
Interest-bearing deposits in other banks		3,347		47
Total cash and due from banks		29,962		32,616
Investment securities:
Available-for-sale		261,665		269,682
Equity investments carried at fair value		283		291
Held-to-maturity: Fair value June 30, 2019, $8,151; December 31, 2018, $8,380		7,969		8,361
Total investment securities		269,917		278,334
Loans, net		1,858,799		1,823,266
Less: allowance for loan losses		21,930		21,379
Net loans		1,836,869		1,801,887
Loans held for sale		831		749
Premises and equipment, net		46,468		38,889
Accrued interest receivable		7,303		7,115
Goodwill		63,370		63,370
Intangible assets, net		1,921		2,296
Other assets		67,625		63,737
Total assets	$	2,324,266	$	2,288,993
Liabilities:
Deposits:
Noninterest-bearing	$	419,995	$	410,260
Interest-bearing		1,456,804		1,464,762
Total deposits		1,876,799		1,875,022
Short-term borrowings		82,700		86,500
Long-term debt		52,980		37,906
Accrued interest payable		1,058		1,195
Other liabilities		19,146		9,756
Total liabilities		2,032,683		2,010,379
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,399,078 shares at June 30, 2019 and 7,399,054 shares at December 31, 2018		14,798		14,798
Capital surplus		135,384		135,310
Retained earnings		145,106		136,582
Accumulated other comprehensive loss		(3,705)		(8,076)
Total stockholders’ equity		291,583		278,614
Total liabilities and stockholders’ equity	$	2,324,266	$	2,288,993

See notes to unaudited consolidated financial statements

3

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

	Three Months Ended				Six Months Ended
June 30,	2019		2018		2019		2018
Interest income:
Interest and fees on loans:
Taxable	$	20,641	$	18,239	$	40,744	$	35,748
Tax-exempt		1,109		871		2,208		1,741
Interest and dividends on investment securities:
Taxable		1,025		934		2,035		1,792
Tax-exempt		520		661		1,082		1,362
Dividends		22		19		41		35
Interest on interest-bearing deposits in other banks		15		42		23		82
Total interest income		23,332		20,766		46,133		40,760
Interest expense:
Interest on deposits		3,713		1,959		7,124		3,793
Interest on short-term borrowings		595		841		1,408		1,508
Interest on long-term debt		296		315		576		621
Total interest expense		4,604		3,115		9,108		5,922
Net interest income		18,728		17,651		37,025		34,838
Provision for loan losses		350		1,050		1,400		2,100
Net interest income after provision for loan losses		18,378		16,601		35,625		32,738
Noninterest income:
Service charges, fees and commissions		2,490		1,885		4,489		3,973
Merchant services income		457		309		655		559
Commission and fees on fiduciary activities		492		485		999		982
Wealth management income		370		332		747		743
Mortgage banking income		137		162		285		309
Life insurance investment income		192		191		378		378
Net losses (gains) on equity investment securities		(9)		8		(8)
Net gains on sale of investment securities available-for-sale		23				23
Net gain on sale of credit card loans				291				291
Total noninterest income		4,152		3,663		7,568		7,235
Salaries and employee benefits expense		8,037		7,390		15,632		14,345
Net occupancy and equipment expense		2,849		2,720		5,810		5,534
Amortization of intangible assets		182		220		374		450
Professional fees and outside services		525		446		856		1,069
FDIC insurance and assessments		288		297		547		583
Donations		359		343		691		656
Other expenses		2,189		2,080		4,009		3,940
Total noninterest expense		14,429		13,496		27,919		26,577
Income before income taxes		8,101		6,768		15,274		13,396
Income tax expense		957		811		1,718		1,585
Net income		7,144		5,957		13,556		11,811
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale		2,611		(839)		5,050		(3,215)
Reclassification adjustment for net gain on sales included in net income		(23)				(23)
Change in derivative fair value		443				506
Other comprehensive gain (loss)		3,031		(839)		5,533		(3,215)
Income tax expense (benefit)		637		(176)		1,162		(677)
Other comprehensive income (loss), net of income taxes		2,394		(663)		4,371		(2,538)
Comprehensive income	$	9,538	$	5,294	$	17,927	$	9,273
Per share data:
Net income:
Basic	$	0.96	$	0.81	$	1.83	$	1.60
Diluted	$	0.96	$	0.81	$	1.83	$	1.60
Average common shares outstanding:
Basic		7,399,302		7,396,533		7,399,178		7,396,519
Diluted		7,399,302		7,396,533		7,399,178		7,396,519
Dividends declared	$	0.34	$	0.33		0.68		0.65

See notes to unaudited consolidated financial statements

4

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		Income (Loss)		Total
Balance, January 1, 2019	$	14,798	$	135,310	$	136,582	$	(8,076)	$	278,614
Net income						13,556				13,556
Other comprehensive income, net of income taxes								4,371		4,371
Dividends declared: $0.68 per share						(5,032)				(5,032)
Stock based compensation				240						240
Share retirement: 3,830 shares		(8)		(158)						(166)
Common stock grants awarded, net of unearned compensation of $164: 3,854 shares		8		(8)
Balance, June 30, 2019	$	14,798	$	135,384	$	145,106	$	(3,705)	$	291,583
Balance, January 1, 2018	$	14,793	$	135,043	$	121,353	$	(6,213)	$	264,976
Net income						11,811				11,811
Other comprehensive loss, net of income taxes								(2,538)		(2,538)
Dividends declared: $0.65 per share						(4,810)				(4,810)
Stock based compensation				105						105
Reclassification related to adoption of ASU 2016-01						2		(2)
Common stock grants awarded, net of unearned compensation of $113: 2,548 shares		5		(5)
Balance, June 30, 2018	$	14,798	$	135,143	$	128,356	$	(8,753)	$	269,544

See notes to unaudited consolidated financial statements

5

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2019		2018
Cash flows from operating activities:
Net income	$	13,556	$	11,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,227		1,140
Amortization of right-of-use lease asset		187
Amortization of deferred loan costs		(156)		482
Amortization of intangibles		374		450
Amortization of low income housing partnerships		238		233
Provision for loan losses		1,400		2,100
Net unrealized loss on equity investment securities		8
Net loss on sale of other real estate owned		20		19
Loans originated for sale		(5,848)		(5,932)
Proceeds from sale of loans originated for sale		5,813		6,074
Net gain on sale of loans originated for sale		(47)		(36)
Net amortization of investment securities		895		1,197
Net gain on sale of investment securities available-for-sale		(23)
Net gain on sale of credit card loans held for sale				(291)
Life insurance investment income		(378)		(378)
Stock based compensation		240		105
Net change in:
Accrued interest receivable		(188)		134
Other assets		(4,114)		(1,187)
Accrued interest payable		(137)		41
Other liabilities		3,022		(914)
Net cash provided by operating activities		16,089		15,048
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale		9,677
Proceeds from repayments of investment securities:
Available-for-sale		24,651		15,445
Held-to-maturity		387		485
Purchases of investment securities:
Available-for-sale		(22,151)		(22,627)
Net purchase of restricted equity securities		(371)		(2,794)
Proceeds from sale of student loan portfolio				3,171
Net increase in lending activities		(36,380)		(68,291)
Purchases of premises and equipment		(2,541)		(1,071)
Proceeds from the sale of premises and equipment		21		340
Proceeds from sale of other real estate owned		111		200
Net cash used in investing activities		(26,596)		(75,142)
Cash flows from financing activities:
Net increase (decrease) in deposits		1,777		(157)
Proceeds from long-term debt		16,000
Repayment of long-term debt		(926)		(823)
Net (decrease) increase in short-term borrowings		(3,800)		63,775
Retirement of common stock		(166)
Cash dividends paid		(5,032)		(4,810)
Net cash provided by financing activities		7,853		57,985
Net decrease in cash and cash equivalents		(2,654)		(2,109)
Cash and cash equivalents at beginning of period		32,616		37,488
Cash and cash equivalents at end of period	$	29,962	$	35,379

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2019		2018
Supplemental disclosures:
Cash paid during the period for:
Interest	$	9,245	$	5,881
Income taxes		2,200		2,050
Noncash items:
Transfers of loans to other real estate	$	172	$	495
Initial recognition of right-of-use assets		6,523
Initial recognition of lease liability		6,523

See notes to unaudited consolidated financial statements

7

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(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. Unless the context indicates otherwise, all references in this quarterly report to “Peoples”, “Company”, “Bank”, “we”, “us” and “our” refer to Peoples Financial Services Corp., its subsidiaries and its and their respective predecessors. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within the Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York. Additionally, we operate a Limited Purpose Banking Office(“LPO”) located in and serving Schuylkill County, Pennsylvania.

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 consolidated 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 consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the six months ended and as of June 30, 2019, are not necessarily indicative of the results of consolidated 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, and impairment of goodwill. 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, 2018.

Recent accounting standards:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”.  From the lessees’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.  The ROU asset and lease liability are calculated based on the present value of future lease payments using an estimated incremental borrowing rate.  The Company utilized the incremental borrowing rate of interest on a collateralized basis for the lease term as quoted by the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income for a lessee.  From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating.  A lease is 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 amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

8

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The new standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. In order to establish the value of the ROU and lease liability and in accordance with the guidance, management determined the term of the leases held by carefully evaluating and assessing each lease and applying economic and other relevant factors to determine whether the Company is reasonably certain to exercise or not to exercise a renewal option within each lease. We have also elected an accounting policy not to restate comparative periods upon adoption. The Company elected to adopt this pronouncement using the optional transition method under ASU 2018-11 as of January 1, 2019 and recorded right-of-use assets and lease liabilities for operating leases of $6,523 on its consolidated balance sheets, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income and comprehensive income.

In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments were adopted on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842) Codification Improvements” which was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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 GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU 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.

9

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 In July 2019, the FASB agreed to issue a proposal to delay the effective date for smaller reporting companies, which the Company currently qualifies as such. If approved, the proposal could delay the effective date until 2023, though the Company may need to adopt earlier if it no longer qualifies as a smaller reporting company. 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.

We are evaluating the impact of the ASU on our consolidated financial statements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements”. In accordance with the Concepts Statement, this ASU removes, modifies and adds select disclosure requirements under Topic 820 after consideration of costs and benefits. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public entities, with early adoption permitted. The adoption of this guidance on January 1, 2020 is not expected to have a material effect on the Company’s consolidated financial statements.

2. Other comprehensive 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, benefit plan adjustments and adjustments to derivative fair values.

The components of accumulated other comprehensive loss included in stockholders’ equity at June 30, 2019 and December 31, 2018 are as follows:

		June 30, 2019		December 31, 2018
Net unrealized loss on investment securities available-for-sale	$	1,776	$	(3,251)
Income tax		373		(683)
Net of income taxes		1,403		(2,568)
Benefit plan adjustments		(7,218)		(7,218)
Income tax		(1,516)		(1,516)
Net of income taxes		(5,702)		(5,702)
Derivative adjustments		752		246
Income tax		158		52
Net of income taxes		594		194
Accumulated other comprehensive loss	$	(3,705)	$	(8,076)

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.

10

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

There were no shares considered anti-dilutive for the three and six month periods ended June 30, 2019 and 2018.

2019 2018