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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 June 30, 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: 7,284,209 at July 31, 2020.

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended June 30, 2020

Contents

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

Financial Statements

Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 2019

3

Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2020 and 2019 (Unaudited)

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, and June 30, 2020 and 2019 (Unaudited)

5

Consolidated Statements of Cash Flows for the Six Months ended June 30, 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

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

Item 4.

Controls and Procedures

59

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

60

Item 1A.

Risk Factors

60

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

Defaults upon Senior Securities

63

Item 4.

Mine Safety Disclosures

63

Item 5.

Other Information

63

Item 6.

Exhibits

64

Signatures

65

2

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

    

June 30, 2020

    

December 31, 2019

 

Assets:

Cash and due from banks:

Cash and due from banks

$

27,146

$

26,943

Interest-bearing deposits in other banks

14,788

4,210

Federal funds sold

 

10,000

 

Total cash and due from banks

51,934

31,153

 

Investment securities:

Available-for-sale

 

287,709

 

330,478

Equity investments carried at fair value

338

423

Held-to-maturity: Fair value June 30, 2020, $7,717; December 31, 2019, $7,889

 

7,401

 

7,656

Total investment securities

 

295,448

 

338,557

Loans

 

2,181,909

 

1,938,240

Less: allowance for loan losses

 

26,957

 

22,677

Net loans

 

2,154,952

 

1,915,563

Loans held for sale

1,939

986

Premises and equipment, net

 

48,378

 

47,932

Accrued interest receivable

 

8,368

 

6,981

Goodwill

 

63,370

 

63,370

Intangible assets, net

 

1,257

 

1,565

Other assets

 

74,778

 

69,220

Total assets

$

2,700,424

$

2,475,327

Liabilities:

Deposits:

Noninterest-bearing

$

575,206

$

463,238

Interest-bearing

 

1,634,918

 

1,508,251

Total deposits

 

2,210,124

 

1,971,489

Short-term borrowings

 

50,000

 

152,150

Long-term debt

 

60,938

 

32,733

Subordinated debentures

33,000

Accrued interest payable

 

872

 

1,277

Other liabilities

 

33,446

 

18,668

Total liabilities

 

2,388,380

 

2,176,317

Stockholders’ equity:

Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,332,856 shares at June 30, 2020 and 7,388,480 shares at December 31, 2019

 

14,649

 

14,777

Capital surplus

 

133,002

 

135,251

Retained earnings

 

159,739

 

152,187

Accumulated other comprehensive income (loss)

 

4,654

 

(3,205)

Total stockholders’ equity

 

312,044

 

299,010

Total liabilities and stockholders’ equity

$

2,700,424

$

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)

Three Months Ended

Six Months Ended

June 30, 

    

2020

    

2019

    

2020

    

2019

 

Interest income:

Interest and fees on loans:

Taxable

$

21,160

$

20,641

$

42,077

$

40,744

Tax-exempt

 

941

 

1,109

 

1,972

 

2,208

Interest and dividends on investment securities:

Taxable

 

1,420

 

1,025

 

2,968

 

2,035

Tax-exempt

 

295

 

520

 

594

 

1,082

Dividends

 

25

 

22

 

48

 

41

Interest on interest-bearing deposits in other banks

 

5

 

15

 

29

 

23

Interest on federal funds sold

 

6

 

6

Total interest income

 

23,852

 

23,332

 

47,694

 

46,133

Interest expense:

Interest on deposits

 

2,864

 

3,713

 

6,367

 

7,124

Interest on short-term borrowings

 

102

 

595

 

675

 

1,408

Interest on long-term debt

 

231

 

296

 

436

 

576

Interest on subordinated debt

148

148

Total interest expense

 

3,345

 

4,604

 

7,626

 

9,108

Net interest income

 

20,507

 

18,728

 

40,068

 

37,025

Provision for loan losses

 

1,800

 

350

 

5,300

 

1,400

Net interest income after provision for loan losses

 

18,707

 

18,378

 

34,768

 

35,625

Noninterest income:

Service charges, fees and commissions

 

1,433

 

1,981

 

3,038

 

3,700

Merchant services income

 

472

 

457

 

586

 

655

Commission and fees on fiduciary activities

 

493

 

492

 

999

 

999

Wealth management income

 

231

 

370

 

618

 

747

Mortgage banking income

 

312

 

137

 

449

 

285

Bank owned life insurance income

 

193

 

192

 

380

 

378

Interest rate swap revenue

249

509

719

789

Net gains (losses) on equity investment securities

39

 

(9)

 

(84)

 

(8)

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

 

 

23

 

267

 

23

Total noninterest income

 

3,422

 

4,152

 

6,972

 

7,568

Salaries and employee benefits expense

 

7,048

 

8,037

 

14,904

 

15,632

Net occupancy and equipment expense

 

3,042

 

2,849

 

6,121

 

5,810

Amortization of intangible assets

 

154

 

182

 

308

 

374

Professional fees and outside services

611

525

976

856

FDIC insurance and assessments

336

288

410

547

Donations

341

359

679

691

Other expenses

 

1,710

 

2,189

 

3,495

 

4,009

Total noninterest expense

 

13,242

 

14,429

 

26,893

 

27,919

Income before income taxes

 

8,887

 

8,101

 

14,847

 

15,274

Income tax expense

 

1,311

 

957

 

1,990

 

1,718

Net income

 

7,576

 

7,144

 

12,857

 

13,556

Other comprehensive income :

Unrealized gain on investment securities available-for-sale

 

2,094

 

2,611

 

9,723

 

5,050

Reclassification adjustment for net gain on sales included in net income

 

 

(23)

 

(267)

 

(23)

Change in derivative fair value

(543)

443

493

506

Other comprehensive income

 

1,551

3,031

9,949

5,533

Income tax expense

 

325

 

636

 

2,090

 

1,162

Other comprehensive income , net of income taxes

 

1,226

 

2,395

 

7,859

 

4,371

Comprehensive income

$

8,802

$

9,539

$

20,716

$

17,927

Per share data:

Net income:

Basic

$

1.03

$

0.96

$

1.75

$

1.83

Diluted

$

1.03

$

0.96

$

1.74

$

1.83

Average common shares outstanding:

Basic

 

7,341,636

 

7,399,302

 

7,360,517

 

7,399,178

Diluted

 

7,376,700

 

7,413,114

 

7,391,202

 

7,410,558

Dividends declared

$

0.36

$

0.34

0.72

0.68

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: 53,476 shares

(107)

(2,097)

(2,204)

Balance, March 31, 2020

$

14,670

$

133,159

$

154,806

$

3,428

$

306,063

Net income

7,576

7,576

Other comprehensive income, net of income taxes

1,226

1,226

Dividends declared: $0.36 per share

(2,643)

(2,643)

Stock based compensation

186

186

Share retirement: 10,383 shares

(21)

(343)

(364)

Balance, June 30, 2020

14,649

133,002

159,739

4,654

312,044

    

    

    

    

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 loss, 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

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 Six Months Ended June 30,

    

2020

    

2019

    

Cash flows from operating activities:

Net income

$

12,857

$

13,556

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

Depreciation of premises and equipment

 

1,458

 

1,227

Amortization of right-of-use lease asset

209

187

Amortization of deferred loan costs

 

(665)

(156)

Amortization of intangibles

 

308

 

374

Amortization of low income housing partnerships

262

238

Provision for loan losses

 

5,300

 

1,400

Net unrealized loss on equity investment securities

85

8

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

 

(4)

 

20

Loans originated for sale

 

(16,215)

(5,848)

Proceeds from sale of loans originated for sale

 

15,148

5,813

Net gain on sale of loans originated for sale

 

(156)

(47)

Net amortization of investment securities

 

553

 

895

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

(267)

(23)