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 March 31, 2020 

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: 7,343,240 at April 30, 2020. 

 

 

 

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

 

For the Quarter Ended March 31, 2020

 

 

 

 

 

 

 

Contents

 

 

 

Page No.

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION:

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2020 and 2019 (Unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2020 and 2019 (Unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2020 and 2019 (Unaudited)

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

Item 2. 

 

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

 

35

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

53

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

54

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

55

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

55

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

 

 

 

 

 

Item 3. 

 

Defaults upon Senior Securities

 

58

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

58

 

 

 

 

 

Item 5. 

 

Other Information

 

58

 

 

 

 

 

Item 6. 

 

Exhibits

 

58

 

 

 

 

 

 

 

Signatures

 

59

 

 

2

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

Assets:

 

 

 

 

 

 

 

Cash and due from banks:

 

 

 

 

 

 

 

Cash and due from banks

 

$

22,181

 

$

26,943

 

Interest-bearing deposits in other banks

 

 

13,146

 

 

4,210

 

Total cash and due from banks

 

 

35,327

 

 

31,153

 

Investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

302,884

 

 

330,478

 

Equity investments carried at fair value

 

 

299

 

 

423

 

Held-to-maturity: Fair value March 31, 2020, $7,687; December 31, 2019, $7,889     

 

 

7,520

 

 

7,656

 

Total investment securities

 

 

310,703

 

 

338,557

 

Loans

 

 

2,023,155

 

 

1,938,240

 

Less: allowance for loan losses

 

 

25,686

 

 

22,677

 

Net loans

 

 

1,997,469

 

 

1,915,563

 

Loans held for sale

 

 

270

 

 

986

 

Premises and equipment, net

 

 

48,619

 

 

47,932

 

Accrued interest receivable

 

 

7,283

 

 

6,981

 

Goodwill

 

 

63,370

 

 

63,370

 

Intangible assets, net

 

 

1,411

 

 

1,565

 

Other assets

 

 

79,320

 

 

69,220

 

Total assets

 

$

2,543,772

 

$

2,475,327

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

467,315

 

$

463,238

 

Interest-bearing

 

 

1,542,680

 

 

1,508,251

 

Total deposits

 

 

2,009,995

 

 

1,971,489

 

Short-term borrowings

 

 

164,150

 

 

152,150

 

Long-term debt

 

 

32,250

 

 

32,733

 

Accrued interest payable

 

 

1,336

 

 

1,277

 

Other liabilities

 

 

29,978

 

 

18,668

 

Total liabilities

 

 

2,237,709

 

 

2,176,317

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,343,240 shares at March 31, 2020 and 7,388,480 shares at December 31, 2019

 

 

14,670

 

 

14,777

 

Capital surplus

 

 

133,159

 

 

135,251

 

Retained earnings

 

 

154,806

 

 

152,187

 

Accumulated other comprehensive income (loss)

 

 

3,428

 

 

(3,205)

 

Total stockholders’ equity

 

 

306,063

 

 

299,010

 

Total liabilities and stockholders’ equity

 

$

2,543,772

 

$

2,475,327

 

 

See notes to unaudited 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)

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

    

2020

    

2019

 

Interest income:

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

Taxable

 

$

20,917

 

$

20,103

 

Tax-exempt

 

 

1,031

 

 

1,099

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

Taxable

 

 

1,548

 

 

1,010

 

Tax-exempt

 

 

299

 

 

562

 

Dividends

 

 

23

 

 

19

 

Interest on interest-bearing deposits in other banks

 

 

24

 

 

 8

 

Total interest income

 

 

23,842

 

 

22,801

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Interest on deposits

 

 

3,503

 

 

3,411

 

Interest on short-term borrowings

 

 

573

 

 

813

 

Interest on long-term debt

 

 

205

 

 

280

 

Total interest expense

 

 

4,281

 

 

4,504

 

Net interest income

 

 

19,561

 

 

18,297

 

Provision for loan losses

 

 

3,500

 

 

1,050

 

Net interest income after provision for loan losses

 

 

16,061

 

 

17,247

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Service charges, fees and commissions

 

 

1,605

 

 

1,719

 

Merchant services income

 

 

114

 

 

198

 

Commission and fees on fiduciary activities

 

 

506

 

 

507

 

Wealth management income

 

 

387

 

 

377

 

Mortgage banking income

 

 

137

 

 

148

 

Bank owned life insurance income

 

 

187

 

 

186

 

Interest rate swap revenue

 

 

470

 

 

280

 

Net (losses) gains on equity investment securities

 

 

(123)

 

 

 1

 

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

 

 

267

 

 

 

 

Total noninterest income

 

 

3,550

 

 

3,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits expense

 

 

7,856

 

 

7,595

 

Net occupancy and equipment expense

 

 

3,079

 

 

2,961

 

Amortization of intangible assets

 

 

154

 

 

192

 

Professional fees and outside services

 

 

365

 

 

331

 

FDIC insurance and assessments

 

 

74

 

 

259

 

Donations

 

 

338

 

 

332

 

Other expenses

 

 

1,785

 

 

1,820

 

Total noninterest expense

 

 

13,651

 

 

13,490

 

Income before income taxes

 

 

5,960

 

 

7,173

 

Income tax expense

 

 

679

 

 

761

 

Net income

 

 

5,281

 

 

6,412

 

 

 

 

 

 

 

 

 

Other comprehensive income :

 

 

 

 

 

 

 

Unrealized gain  on investment securities available-for-sale

 

 

7,629

 

 

2,439

 

Reclassification adjustment for net gain on sales included in net income

 

 

(267)

 

 

 

 

Change in derivative fair value

 

 

1,036

 

 

63

 

Other comprehensive income 

 

 

8,398

 

 

2,502

 

Income tax expense

 

 

1,765

 

 

526

 

Other comprehensive income , net of income taxes

 

 

6,633

 

 

1,976

 

Comprehensive income

 

$

11,914

 

$

8,388

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

Basic

 

$

0.72

 

$

0.87

 

Diluted

 

$

0.71

 

$

0.87

 

Average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

7,379,438

 

 

7,399,054

 

Diluted

 

 

7,406,291

 

 

7,408,536

 

Dividends declared

 

 

0.36

 

 

0.34

 

 

See notes to unaudited 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

 

 

 

 

 

    

Stock  

    

Surplus  

    

Earnings  

    

Income (Loss)  

    

Total

 

Balance, January 1, 2020

 

$

14,777

 

$

135,251

 

$

152,187

 

$

(3,205)

 

$

299,010

 

Net income

 

 

 

 

 

 

 

 

5,281

 

 

 

 

 

5,281

 

Other comprehensive income, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

6,633

 

 

6,633

 

Dividends declared: $0.36 per share

 

 

 

 

 

 

 

 

(2,662)

 

 

 

 

 

(2,662)

 

Stock based compensation

 

 

 

 

 

 5

 

 

 

 

 

 

 

 

 5

 

Share retirement: 53,746 shares

 

 

(107)

 

 

(2,097)

 

 

 

 

 

 

 

 

(2,204)

 

Balance, March 31, 2020

 

$

14,670

 

$

133,159

 

$

154,806

 

$

3,428

 

$

306,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited 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 Three Months Ended March 31,

    

2020

    

2019

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

5,281

 

$

6,412

 

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

 

 

 

 

 

 

 

Depreciation of premises and equipment

 

 

735

 

 

596

 

Amortization of right-of-use lease asset

 

 

104

 

 

92

 

Amortization of deferred loan costs

 

 

39

 

 

(107)

 

Amortization of intangibles

 

 

154

 

 

192

 

Amortization of low income housing partnerships

 

 

120

 

 

119

 

Provision for loan losses

 

 

3,500

 

 

1,050

 

Net unrealized (gain) loss on equity investment securities

 

 

123

 

 

(1)

 

Net (gain) loss on sale of other real estate owned

 

 

(4)

 

 

 8

 

Loans originated for sale

 

 

(2,297)

 

 

(1,501)

 

Proceeds from sale of loans originated for sale

 

 

3,023

 

 

2,278

 

Net gain on sale of loans originated for sale

 

 

(10)

 

 

(28)

 

Net amortization of investment securities

 

 

281

 

 

474

 

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

 

 

(267)

 

 

 

 

Bank owned life insurance income

 

 

(187)

 

 

(186)

 

Deferred income tax expense

 

 

619

 

 

13

 

Stock based compensation

 

 

 5

 

 

83

 

Net change in:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(302)

 

 

(96)

 

Other assets

 

 

(10,038)

 

 

(3,836)

 

Accrued interest payable

 

 

59

 

 

(317)

 

Other liabilities

 

 

10,014

 

 

2,545

 

Net cash provided by operating activities

 

 

10,952

 

 

7,790

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sales of investment securities available-for-sale

 

 

26,502

 

 

 

 

Proceeds from repayments of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

17,522

 

 

14,287

 

Held-to-maturity

 

 

135

 

 

196

 

Purchases of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

(9,080)

 

 

(13,021)

 

Net purchase of restricted equity securities

 

 

(482)

 

 

(964)

 

Net increase in lending activities

 

 

(86,062)

 

 

(26,629)

 

Purchases of premises and equipment

 

 

(627)

 

 

(1,062)

 

Proceeds from the sale of premises and equipment

 

 

 

 

 

23

 

Proceeds from sale of other real estate owned

 

 

157

 

 

84

 

Net cash used in investing activities

 

 

(51,935)

 

 

(27,086)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

38,506

 

 

(6,792)

 

Repayment of long-term debt

 

 

(483)

 

 

(460)

 

Net increase in short-term borrowings

 

 

12,000

 

 

22,500

 

Retirement of common stock

 

 

(2,204)

 

 

 

 

Cash dividends paid

 

 

(2,662)

 

 

(2,516)

 

Net cash provided by financing activities

 

 

45,157

 

 

12,732

 

Net increase (decrease) in cash and cash equivalents

 

 

4,174

 

 

(6,564)

 

Cash and cash equivalents at beginning of period

 

 

31,153

 

 

32,616

 

Cash and cash equivalents at end of period

 

$

35,327

 

$

26,052

 

 

6

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

    

2020

    

2019

    

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

4,222

 

$

4,821

 

Income taxes

 

 

 

 

 

1,100

 

Noncash items:

 

 

 

 

 

 

 

Transfers of loans to other real estate

 

$

626

 

$

85

 

Initial recognition of right-of-use assets

 

 

899

 

 

5,513

 

Initial recognition of lease liability

 

 

899

 

 

5,513

 

 

See notes to unaudited consolidated financial statements

 

 

 

7

Table of Contents

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-nine full-service community banking offices located within the Bucks, 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 three months ended and as of March 31, 2020, 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, 2019. 

 

Significant events: COVID-19

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to the United States and throughout the world. On March 11, 2020, the World Health Organization declared COVID-19, a global pandemic. In the United States, the rapid spread of the COVID-19 virus invoked various federal and state authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Reserve System’s Federal Open Market Committee (“FOMC”) to aggressively cut the target federal funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve rolled out various market support programs to ease the stress on financial markets.

 

As the COVID-19 events unfolded throughout the first quarter of 2020, the Company implemented its pandemic plan and executed various strategies and protocols intended to protect its employees, maintain services for customers, assure the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. The Company imposed business travel restrictions, implemented quarantine and work

8

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 

from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. The Company also maintained active communications with its primary regulatory agencies and critical vendors in an effort to assure that all mission-critical activities and functions would be performed in line with regulatory expectations and the Company’s service standards.

 

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The COVID-19 pandemic and its associated impacts on trade (including supply chains), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole.

 

The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves. During March, the Company reviewed its commercial loan and commercial real estate portfolios and determined approximately $1.2 billion or 73% is categorized as non-life sustaining and subject to shutdown. Based on management’s application of its allowance for loan losses methodology and changes to the economic qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions and the increased inherent risk in the loan portfolio, first quarter 2020 results included $3.5 million in provision for loan and lease losses. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

 

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. Through May 6, 2020, the Company granted payment deferral requests for up to four months to 390 business loans and for up to six months on 451 consumer loans, representing $313.6 million of the Company’s loan balances. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

 

The Company has also participated as a lender in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a $349 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Paycheck Protection Program (“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. Between April 3 and April 17, 2020, the Company processed 836 applications providing over $177.9 million in loans through Phase I of the SBA PPP with an average loan amount of $213 thousand.  Through May 6, 2020, the Company processed another 455 applications providing over $24.0 million in loans through Phase II of the PPP with an average loan amount of $53 thousand furthering Peoples’ commitment to support small businesses.  Funding these loans will generate approximately $6.6 

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 

million of SBA processing fees.   The Company intends to utilize the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to replace liquidity used to fund PPP loans.

 

The Company also has goodwill with a net carrying value of $63.4 million at March 31, 2020 and December 31, 2019. The Company completes a goodwill impairment analysis at least annually, or more often if events and circumstances indicate that there may be impairment. In connection with the emergence of COVID-19 as a global pandemic and the decline in our stock price during the 2020 first quarter, management performed a qualitative assessment to determine whether goodwill was impaired.  Management assessed factors that could potentially indicate impairment, including: regional and national economic conditions, banking industry conditions and trends, historical financial performance, and other banking specific factors.  After assessing the factors in totality, management determined that it was more likely than not that the fair value of the Company is higher than its book value as of March 31, 2020, and, therefore, goodwill is not considered impaired. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods with no assurance that the future impairment assessments or tests will not result in a charge to earnings.

 

 

Recent accounting standards:

 

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.

 

 

In November 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. 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.

 

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. The Company adopted this guidance effective January 1, 2020. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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” which 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. The Company adopted this guidance effective January 1, 2020. The adoption of this guidance on January 1, 2020 did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)”, which provides changes to the disclosure requirements for defined benefit plans. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are a result of the disclosure framework project that focuses on improvements to the effectiveness of disclosures in the notes to financial statements. The amendments remove and add certain disclosure requirements. The disclosure requirements being removed relating to public companies are (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, (2) the amount and timing of plan assets expected to be returned to the employer, (3) the 2001 disclosure requirement relating to Japanese Welfare Pension Insurance Law, (4) related party disclosures about the amount of future annual benefits covered by insurance, and (5) the effects of a one-percentage-point change in assumed health care cost trends on the benefit cost and obligation. The disclosure requirements being added relating to public companies are (1) the weighted-average interest crediting rates for cash balance plans, and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for the Company on January 1, 2021 and early adoption is permitted. The amendments should be applied retrospectively however, the Company does not expect the guidance to have a material impact on its disclosures to the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for a limited time period to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in ASU 2020-04 are elective for entities with contracts, including derivative contracts, that reference LIBOR or some other reference rate that are expected to be discontinued. For the Company's cash flow hedges, ASU 2020-04 allows: (i) an entity to change the reference rate without having to designate the hedging relationship; (ii) for cash flow hedges in which the designated hedged risk is LIBOR, allows an entity to assert that it remains probable that the hedged forecasted transaction will occur; and (iii) allows an entity to change the designated method used to assess hedge effectiveness and simplifies or temporarily suspends the assessment of hedge effectiveness for hedging relationships. ASU 2020-04 must be applied prospectively and was effective immediately upon issuance and remains effective through December 31, 2022. The Company is currently evaluating the impact that adopting this new accounting standard will have on the consolidated financial statements.

 

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 

2. Other comprehensive income (loss):  

The components of other comprehensive income (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, benefit plan adjustments and adjustments to derivative fair values.

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at March 31, 2020 and December 31, 2019 are as follows:

 

 

 

 

 

 

 

 

 

 

    

 

March 31, 2020

    

 

December 31, 2019

 

Net unrealized gain on investment securities available-for-sale

 

$

9,197

 

$

1,835

 

Income tax

 

 

1,932

 

 

385

 

Net of income taxes

 

 

7,265

 

 

1,450

 

Benefit plan adjustments

 

 

(6,579)

 

 

(6,579)

 

Income tax

 

 

(1,382)

 

 

(1,382)

 

Net of income taxes

 

 

(5,197)

 

 

(5,197)

 

Derivative adjustments

 

 

1,723

 

 

687

 

Income tax

 

 

363

 

 

144

 

Net of income taxes

 

 

1,360

 

 

543

 

Accumulated other comprehensive income (loss)

 

$

3,428

 

$

(3,205)

 

 

 

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.

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three months ended March 31,2020 and 2019: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

For the Three Months Ended March 31 

 

Basic  

 

Diluted  

 

Basic  

 

Diluted  

 

Net income

    

$

5,281

    

$

5,281

    

$

6,412

    

$

6,412

    

Average common shares outstanding

 

 

7,379,438

 

 

7,406,291

 

 

7,399,054

 

 

7,408,536

 

Earnings per share

 

$

0.72

 

$

0.71

 

$

0.87

 

$

0.87

 

 

 

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 

4. Investment securities:

 

The amortized cost and fair value of investment securities aggregated by investment category at March 31, 2020 and December 31, 2019 are summarized as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

March 31, 2020

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

21,471

 

$

650

 

 

 

 

$

22,121

 

U.S. government-sponsored enterprises

 

 

83,028

 

 

1,562

 

 

 

 

 

84,590

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

32,116

 

 

772

 

$

328

 

 

32,560

 

Tax-exempt

 

 

38,392

 

 

1,596

 

 

 8

 

 

39,980

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

 

7,125

 

 

178

 

 

 3

 

 

7,300

 

U.S. government-sponsored enterprises

 

 

98,880

 

 

4,143

 

 

 3

 

 

103,020

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

12,675

 

 

638

 

 

 

 

 

13,313

 

Total

 

$

293,687

 

$

9,539

 

$

342

 

$

302,884

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt state and municipals

 

$

6,851

 

$

153

 

$

15

 

$

6,989

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

 

28

 

 

 

 

 

 

 

 

28