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, 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: 7,388,480 at October 31, 2019.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended September 30, 2019

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, June 30 and September 30, 2019 and 2018 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months ended September 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	50
Item 4.	Controls and Procedures	51
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
	Signatures	53

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS 

(Dollars in thousands, except share data)

	September 30, 2019		December 31, 2018
Assets:
Cash and due from banks:
Cash and due from banks	$	35,908	$	32,569
Interest-bearing deposits in other banks		5,275		47
Total cash and due from banks		41,183		32,616
Federal funds sold		10,100
Investment securities:
Available-for-sale		268,823		269,682
Equity investments carried at fair value		297		291
Held-to-maturity: Fair value September 30, 2019, $8,016; December 31, 2018, $8,380		7,808		8,361
Total investment securities		276,928		278,334
Loans, net		1,881,090		1,823,266
Less: allowance for loan losses		22,392		21,379
Net loans		1,858,698		1,801,887
Loans held for sale		1,390		749
Premises and equipment, net		47,437		38,889
Accrued interest receivable		6,655		7,115
Goodwill		63,370		63,370
Intangible assets, net		1,738		2,296
Other assets		65,200		63,737
Total assets	$	2,372,699	$	2,288,993
Liabilities:
Deposits:
Noninterest-bearing	$	440,582	$	410,260
Interest-bearing		1,560,703		1,464,762
Total deposits		2,001,285		1,875,022
Short-term borrowings				86,500
Long-term debt		52,509		37,906
Accrued interest payable		1,461		1,195
Other liabilities		21,277		9,756
Total liabilities		2,076,532		2,010,379
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,388,760 shares at September 30, 2019 and 7,399,054 shares at December 31, 2018		14,778		14,798
Capital surplus		135,106		135,310
Retained earnings		149,740		136,582
Accumulated other comprehensive loss		(3,457)		(8,076)
Total stockholders’ equity		296,167		278,614
Total liabilities and stockholders’ equity	$	2,372,699	$	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				Nine Months Ended
September 30,	2019		2018		2019		2018
Interest income:
Interest and fees on loans:
Taxable	$	20,940	$	18,798	$	61,684	$	54,546
Tax-exempt		1,066		919		3,274		2,660
Interest and dividends on investment securities:
Taxable		1,092		998		3,127		2,790
Tax-exempt		411		639		1,493		2,001
Dividends		19		16		60		51
Interest on interest-bearing deposits in other banks		27		49		50		131
Interest on federal funds sold		77				77
Total interest income		23,632		21,419		69,765		62,179
Interest expense:
Interest on deposits		3,966		2,342		11,090		6,135
Interest on short-term borrowings		83		809		1,491		2,317
Interest on long-term debt		347		315		923		936
Total interest expense		4,396		3,466		13,504		9,388
Net interest income		19,236		17,953		56,261		52,791
Provision for loan losses		700		1,050		2,100		3,150
Net interest income after provision for loan losses		18,536		16,903		54,161		49,641
Noninterest income:
Service charges, fees and commissions		2,161		1,883		6,650		5,856
Merchant services income		182		128		837		687
Commission and fees on fiduciary activities		569		570		1,568		1,552
Wealth management income		395		305		1,142		1,048
Mortgage banking income		172		163		457		472
Life insurance investment income		189		190		567		568
Net gains on equity investment securities		14		14		6		14
Net gains on sale of investment securities available-for-sale						23
Net gain on sale of credit card loans								291
Total noninterest income		3,682		3,253		11,250		10,488
Salaries and employee benefits expense		8,056		6,946		23,688		21,291
Net occupancy and equipment expense		2,997		2,681		8,807		8,215
Amortization of intangible assets		183		220		557		670
Professional fees and outside services		487		431		1,343		1,500
FDIC insurance and assessments		68		247		615		830
Donations		386		355		1,077		1,011
Other expenses		1,902		1,657		5,911		5,597
Total noninterest expense		14,079		12,537		41,998		39,114
Income before income taxes		8,139		7,619		23,413		21,015
Income tax expense		991		902		2,709		2,487
Net income		7,148		6,717		20,704		18,528
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale		161		(1,179)		5,211		(4,394)
Reclassification adjustment for net gain on sales included in net income						(23)
Change in derivative fair value		153				659
Other comprehensive gain (loss)		314		(1,179)		5,847		(4,394)
Income tax expense (benefit)		66		(248)		1,228		(925)
Other comprehensive income (loss), net of income taxes		248		(931)		4,619		(3,469)
Comprehensive income	$	7,396	$	5,786	$	25,323	$	15,059
Per share data:
Net income:
Basic	$	0.97	$	0.91	$	2.80	$	2.50
Diluted	$	0.97	$	0.91	$	2.80	$	2.50
Average common shares outstanding:
Basic		7,394,992		7,399,054		7,397,768		7,397,373
Diluted		7,394,992		7,399,054		7,397,768		7,397,373
Dividends declared	$	0.34	$	0.33		1.02		0.98

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						6,412				6,412
Other comprehensive income, net of income taxes								1,976		1,976
Dividends declared: $0.34 per share						(2,516)				(2,516)
Stock based compensation				83						83
Balance, March 31, 2019		14,798		135,393		140,478		(6,100)		284,569
Net income						7,144				7,144
Other comprehensive income, net of income taxes								2,395		2,395
Dividends declared: $0.34 per share						(2,516)				(2,516)
Stock based compensation				157						157
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
Net income						7,148				7,148
Other comprehensive income, net of income taxes								248		248
Dividends declared: $0.34 per share						(2,514)				(2,514)
Stock based compensation				157						157
Share retirement: 10,318 shares		(20)		(435)						(455)
Balance, September 30, 2019	$	14,778	$	135,106	$	149,740	$	(3,457)	$	296,167
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Income (Loss)		Total
Balance, January 1, 2018	$	14,793	$	135,043	$	121,353	$	(6,213)	$	264,976
Net income						5,854				5,854
Other comprehensive loss, net of income taxes								(1,875)		(1,875)
Dividends declared: $0.32 per share						(2,368)				(2,368)
Reclassification related to adoption of ASU 2016-01						2		(2)
Stock based compensation				37						37
Balance, March 31, 2018		14,793		135,080		124,841		(8,090)		266,624
Net income						5,957				5,957
Other comprehensive loss, net of income taxes								(663)		(663)
Dividends declared: $0.33 per share						(2,442)				(2,442)
Stock based compensation				68						68
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
Net income						6,717				6,717
Other comprehensive loss, net of income taxes								(931)		(931)
Dividends declared: $0.33 per share						(2,442)				(2,442)
Stock based compensation				83						83
Balance, September 30, 2018	$	14,798	$	135,226	$	132,631	$	(9,684)	$	272,971

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 Nine Months Ended September 30,	2019		2018
Cash flows from operating activities:
Net income	$	20,704	$	18,528
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,881		1,728
Amortization of right-of-use lease asset		293
Amortization of deferred loan costs		(159)		729
Amortization of intangibles		557		670
Amortization of low income housing partnerships		357		349
Provision for loan losses		2,100		3,150
Net unrealized gain on equity investment securities		(6)
Net loss (gain) on sale of other real estate owned		20		(17)
Loans originated for sale		(11,945)		(9,931)
Proceeds from sale of loans originated for sale		11,374		10,013
Net gain on sale of loans originated for sale		(70)		(74)
Net amortization of investment securities		1,279		1,718
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		(567)		(568)
Stock based compensation		397		188
Net change in:
Accrued interest receivable		460		371
Other assets		(4,633)		516
Accrued interest payable		266		248
Other liabilities		4,998		(2,967)
Net cash provided by operating activities		27,283