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, 20212022
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: 7,202,3167,170,660 at July 30, 2021.August l, 2022.
PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q
For the Quarter Ended June 30, 20212022
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Contents | | | | Page No. |
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PART I. | | FINANCIAL INFORMATION: | | |
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| | Consolidated Balance Sheets at June 30, | | 3 |
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| | | 8 | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
Peoples Financial Services Corp.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | ||
|
| June 30, 2021 |
| December 31, 2020 |
|
| June 30, 2022 |
| December 31, 2021 |
| ||||
Assets: | | | | | | | | | | | | | | |
Cash and due from banks: | | | | | | | | |||||||
Cash and cash equivalents | | | | | | | | |||||||
Cash and due from banks | | $ | 41,789 | | $ | 29,287 | | | $ | 39,693 | | $ | 30,415 | |
Interest-bearing deposits in other banks | | | 10,262 | | | 15,905 | | | | 8,040 | | | 7,093 | |
Federal funds sold | |
| 196,000 | |
| 183,000 | | |
| | |
| 242,425 | |
Total cash and due from banks | | | 248,051 | | | 228,192 | | |||||||
Total cash and cash equivalents | | | 47,733 | | | 279,933 | | |||||||
| | | | |
| | | | | | |
| | |
Investment securities: | | | | | | | | | | | | | | |
Available-for-sale | |
| 336,449 | |
| 295,911 | | |
| 513,911 | |
| 517,321 | |
Equity investments carried at fair value | | | 142 | | | 138 | | | | 121 | | | 140 | |
Held-to-maturity: Fair value June 30, 2021, $7,294; December 31, 2020, $7,513 | |
| 7,104 | |
| 7,225 | | |||||||
Held-to-maturity: Fair value June 30, 2022, $84,076; December 31, 2021, $70,446 | |
| 94,446 | |
| 71,213 | | |||||||
Total investment securities | |
| 343,695 | |
| 303,274 | | |
| 608,478 | |
| 588,674 | |
Loans | |
| 2,236,826 | |
| 2,177,982 | | |
| 2,565,579 | |
| 2,329,173 | |
Less: allowance for loan losses | |
| 26,739 | |
| 27,344 | | |
| 29,374 | |
| 28,383 | |
Net loans | |
| 2,210,087 | |
| 2,150,638 | | |
| 2,536,205 | |
| 2,300,790 | |
Loans held for sale | | | 1,545 | | | 837 | | | | 681 | | | 408 | |
Premises and equipment, net | |
| 46,305 | |
| 47,045 | | |
| 53,094 | |
| 51,502 | |
Accrued interest receivable | |
| 7,844 | |
| 8,255 | | |
| 9,303 | |
| 8,528 | |
Goodwill | |
| 63,370 | |
| 63,370 | | |
| 63,370 | |
| 63,370 | |
Intangible assets, net | |
| 710 | |
| 960 | | |
| 276 | |
| 468 | |
Bank owned life insurance | | | 42,750 | | | 42,316 | | | | 47,968 | | | 42,754 | |
Other assets | |
| 33,379 | |
| 38,915 | | |
| 54,431 | |
| 33,056 | |
Total assets | | $ | 2,997,736 | | $ | 2,883,802 | | | $ | 3,421,539 | | $ | 3,369,483 | |
| | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | |
Noninterest-bearing | | $ | 672,274 | | $ | 622,475 | | | $ | 747,558 | | $ | 737,756 | |
Interest-bearing | |
| 1,939,492 | |
| 1,814,638 | | |
| 2,163,725 | |
| 2,225,641 | |
Total deposits | |
| 2,611,766 | |
| 2,437,113 | | |
| 2,911,283 | |
| 2,963,397 | |
Short-term borrowings | |
| | |
| 50,000 | | |
| 129,170 | |
| | |
Long-term debt | |
| 3,752 | |
| 14,769 | | |
| 1,646 | |
| 2,711 | |
Subordinated debentures | | | 33,000 | | | 33,000 | | | | 33,000 | | | 33,000 | |
Accrued interest payable | |
| 469 | |
| 736 | | |
| 1,269 | |
| 408 | |
Other liabilities | |
| 23,858 | |
| 31,307 | | |
| 33,274 | |
| 29,841 | |
Total liabilities | |
| 2,672,845 | |
| 2,566,925 | | |
| 3,109,642 | |
| 3,029,357 | |
| | | | | | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | | | | | | |
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,202,728 shares at June 30, 2021 and 7,215,202 shares at December 31, 2020 | |
| 14,407 | |
| 14,431 | | |||||||
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,179,037 shares at June 30, 2022 and 7,169,372 shares at December 31, 2021 | |
| 14,346 | |
| 14,341 | | |||||||
Capital surplus | |
| 128,719 | |
| 129,274 | | |
| 126,986 | |
| 127,549 | |
Retained earnings | |
| 183,702 | |
| 171,023 | | |
| 217,139 | |
| 203,750 | |
Accumulated other comprehensive income (loss) | |
| (1,937) | |
| 2,149 | | |||||||
Accumulated other comprehensive loss | |
| (46,574) | |
| (5,514) | | |||||||
Total stockholders’ equity | |
| 324,891 | |
| 316,877 | | |
| 311,897 | |
| 340,126 | |
Total liabilities and stockholders’ equity | | $ | 2,997,736 | | $ | 2,883,802 | | | $ | 3,421,539 | | $ | 3,369,483 | |
See notes to unaudited consolidated financial statements
3
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||||||
June 30, |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Interest income: | | | | | | | | | | | | | |
Interest and fees on loans: | | | | | | | | | | | | | |
Taxable | | $ | 20,029 | | $ | 21,160 | | $ | 40,929 | | $ | 42,077 | |
Tax-exempt | |
| 965 | |
| 941 | |
| 1,835 | |
| 1,972 | |
Interest and dividends on investment securities: | | | | | | | | | | | | | |
Taxable | |
| 1,276 | |
| 1,420 | |
| 2,519 | |
| 2,968 | |
Tax-exempt | |
| 411 | |
| 295 | |
| 801 | |
| 594 | |
Dividends | |
| 25 | |
| 25 | |
| 48 | |
| 48 | |
Interest on interest-bearing deposits in other banks | |
| 2 | |
| 5 | |
| 4 | |
| 29 | |
Interest on federal funds sold | |
| 55 | |
| 6 | | | 104 | | | 6 | |
Total interest income | |
| 22,763 | |
| 23,852 | |
| 46,240 | |
| 47,694 | |
| | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | |
Interest on deposits | |
| 1,941 | |
| 2,864 | |
| 4,033 | |
| 6,367 | |
Interest on short-term borrowings | |
| 6 | |
| 102 | |
| 77 | |
| 675 | |
Interest on long-term debt | |
| 82 | |
| 231 | |
| 185 | |
| 436 | |
Interest on subordinated debt | | | 444 | | | 148 | | | 887 | | | 148 | |
Total interest expense | |
| 2,473 | |
| 3,345 | |
| 5,182 | |
| 7,626 | |
Net interest income | |
| 20,290 | |
| 20,507 | |
| 41,058 | |
| 40,068 | |
Provision (credit) for loan losses | |
| 100 | |
| 1,800 | |
| (400) | |
| 5,300 | |
Net interest income after provision (credit) for loan losses | |
| 20,190 | |
| 18,707 | |
| 41,458 | |
| 34,768 | |
| | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | |
Service charges, fees, commissions and other | |
| 1,625 | |
| 1,433 | |
| 2,809 | |
| 3,038 | |
Merchant services income | |
| 508 | |
| 472 | |
| 601 | |
| 586 | |
Commission and fees on fiduciary activities | |
| 553 | |
| 493 | |
| 1,086 | |
| 999 | |
Wealth management income | |
| 417 | |
| 231 | |
| 775 | |
| 618 | |
Mortgage banking income | |
| 208 | |
| 312 | |
| 520 | |
| 449 | |
Increase in cash surrender value of life insurance | |
| 225 | |
| 193 | |
| 444 | |
| 380 | |
Interest rate swap (expense) revenue | | | (132) | | | 249 | | | 665 | | | 719 | |
Net gain (loss) on equity investment securities | | | (17) | |
| 39 | |
| 4 | |
| (84) | |
Net gain on sale of investment securities available-for-sale | |
| | |
| | |
| | |
| 267 | |
Total noninterest income | |
| 3,387 | |
| 3,422 | |
| 6,904 | |
| 6,972 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Salaries and employee benefits expense | |
| 7,250 | |
| 7,048 | |
| 13,820 | |
| 14,904 | |
Net occupancy and equipment expense | |
| 3,047 | |
| 3,042 | |
| 6,314 | |
| 6,121 | |
Amortization of intangible assets | |
| 125 | |
| 154 | |
| 250 | |
| 308 | |
Professional fees and outside services | | | 577 | | | 611 | | | 1,016 | | | 976 | |
FDIC insurance and assessments | | | 271 | | | 336 | | | 531 | | | 410 | |
Donations | | | 379 | | | 341 | | | 718 | | | 679 | |
Other expenses | |
| 1,879 | |
| 1,710 | |
| 3,508 | |
| 3,495 | |
Total noninterest expense | |
| 13,528 | |
| 13,242 | |
| 26,157 | |
| 26,893 | |
Income before income taxes | |
| 10,049 | |
| 8,887 | |
| 22,205 | |
| 14,847 | |
Income tax expense | |
| 1,518 | |
| 1,311 | |
| 4,196 | |
| 1,990 | |
Net income | |
| 8,531 | |
| 7,576 | |
| 18,009 | |
| 12,857 | |
| | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Unrealized gain (loss) on investment securities available-for-sale | |
| 2,470 | |
| 2,094 | |
| (5,279) | |
| 9,723 | |
Reclassification adjustment for net gain on sales included in net income | |
| | |
| | |
| | |
| (267) | |
Change in derivative fair value | | | (135) | | | (543) | | | 106 | | | 493 | |
Other comprehensive income (loss) | |
| 2,335 | | | 1,551 | | | (5,173) | | | 9,949 | |
Income tax expense (benefit) | |
| 490 | |
| 325 | |
| (1,087) | |
| 2,090 | |
Other comprehensive income (loss), net of income taxes | |
| 1,845 | |
| 1,226 | |
| (4,086) | |
| 7,859 | |
Comprehensive income | | $ | 10,376 | | $ | 8,802 | | $ | 13,923 | | $ | 20,716 | |
| | | | | | | | | | | | | |
Per share data: | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | |
Basic | | $ | 1.18 | | $ | 1.03 | | $ | 2.50 | | $ | 1.75 | |
Diluted | | $ | 1.18 | | $ | 1.03 | | $ | 2.49 | | $ | 1.74 | |
Average common shares outstanding: | | | | | | | | | | | | | |
Basic | |
| 7,204,261 | |
| 7,341,636 | |
| 7,207,588 | |
| 7,360,517 | |
Diluted | |
| 7,239,325 | |
| 7,376,700 | |
| 7,242,652 | |
| 7,391,202 | |
Dividends declared | | $ | 0.37 | | $ | 0.36 | | | 0.74 | | | 0.72 | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||||||
June 30, |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Interest income: | | | | | | | | | | | | | |
Interest and fees on loans: | | | | | | | | | | | | | |
Taxable | | $ | 22,009 | | $ | 20,029 | | $ | 42,862 | | $ | 40,929 | |
Tax-exempt | |
| 1,218 | |
| 965 | |
| 2,379 | |
| 1,835 | ��� |
Interest and dividends on investment securities: | | | | | | | | | | | | | |
Taxable | |
| 2,108 | |
| 1,276 | |
| 4,080 | |
| 2,519 | |
Tax-exempt | |
| 515 | |
| 411 | |
| 1,025 | |
| 801 | |
Dividends | |
| 2 | |
| 25 | |
| 2 | |
| 48 | |
Interest on interest-bearing deposits in other banks | |
| 18 | |
| 2 | |
| 20 | |
| 4 | |
Interest on federal funds sold | |
| 22 | |
| 55 | | | 95 | | | 104 | |
Total interest income | |
| 25,892 | |
| 22,763 | |
| 50,463 | |
| 46,240 | |
| | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | |
Interest on deposits | |
| 1,597 | |
| 1,941 | |
| 3,065 | |
| 4,033 | |
Interest on short-term borrowings | |
| 122 | |
| 6 | |
| 122 | |
| 77 | |
Interest on long-term debt | |
| 23 | |
| 82 | |
| 51 | |
| 185 | |
Interest on subordinated debt | | | 443 | | | 444 | | | 887 | | | 887 | |
Total interest expense | |
| 2,185 | |
| 2,473 | |
| 4,125 | |
| 5,182 | |
Net interest income | |
| 23,707 | |
| 20,290 | |
| 46,338 | |
| 41,058 | |
Provision (credit) for loan losses | |
| 950 | |
| 100 | |
| 1,250 | |
| (400) | |
Net interest income after provision (credit) for loan losses | |
| 22,757 | |
| 20,190 | |
| 45,088 | |
| 41,458 | |
| | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | |
Service charges, fees, commissions and other | |
| 1,761 | |
| 1,625 | |
| 3,453 | |
| 2,809 | |
Merchant services income | |
| 562 | |
| 508 | |
| 676 | |
| 601 | |
Commission and fees on fiduciary activities | |
| 551 | |
| 553 | |
| 1,106 | |
| 1,086 | |
Wealth management income | |
| 374 | |
| 417 | |
| 725 | |
| 775 | |
Mortgage banking income | |
| 128 | |
| 208 | |
| 272 | |
| 520 | |
Increase in cash surrender value of life insurance | |
| 244 | |
| 225 | |
| 462 | |
| 444 | |
Interest rate swap revenue | | | 284 | | | (132) | | | 627 | | | 665 | |
Net (loss) gain on equity investment securities | | | (23) | |
| (17) | |
| (19) | |
| 4 | |
Total noninterest income | |
| 3,881 | |
| 3,387 | |
| 7,302 | |
| 6,904 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Salaries and employee benefits expense | |
| 7,851 | |
| 7,250 | |
| 15,891 | |
| 13,820 | |
Net occupancy and equipment expense | |
| 3,950 | |
| 3,047 | |
| 7,775 | |
| 6,314 | |
Amortization of intangible assets | |
| 97 | |
| 125 | |
| 193 | |
| 250 | |
Net gain on sale of other real estate owned | |
| (20) | | | (29) | |
| (478) | | | (75) | |
Professional fees and outside services | | | 766 | | | 569 | | | 1,236 | | | 1,016 | |
FDIC insurance and assessments | | | 319 | | | 271 | | | 645 | | | 531 | |
Donations | | | 331 | | | 379 | | | 665 | | | 718 | |
Other expenses | |
| 2,199 | |
| 1,846 | |
| 3,855 | |
| 3,513 | |
Total noninterest expense | |
| 15,493 | |
| 13,458 | |
| 29,782 | |
| 26,087 | |
Income before income taxes | |
| 11,145 | |
| 10,119 | |
| 22,608 | |
| 22,275 | |
Income tax expense | |
| 1,792 | |
| 1,588 | |
| 3,625 | |
| 4,266 | |
Net income | |
| 9,353 | |
| 8,531 | |
| 18,983 | |
| 18,009 | |
| | | | | | | | | | | | | |
Other comprehensive (loss) gain: | | | | | | | | | | | | | |
Unrealized (loss) gain on investment securities available-for-sale | |
| (18,669) | |
| 2,470 | |
| (51,281) | |
| (5,279) | |
Change in derivative fair value | | | (201) | | | (135) | | | (694) | | | 106 | |
Other comprehensive (loss) income | |
| (18,870) | | | 2,335 | | | (51,975) | | | (5,173) | |
Income tax (benefit) expense | |
| (3,963) | |
| 490 | |
| (10,915) | |
| (1,087) | |
Other comprehensive (loss) income, net of income taxes | |
| (14,907) | |
| 1,845 | |
| (41,060) | |
| (4,086) | |
Comprehensive (loss) income | | $ | (5,554) | | $ | 10,376 | | $ | (22,077) | | $ | 13,923 | |
| | | | | | | | | | | | | |
Per share data: | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | |
Basic | | $ | 1.30 | | $ | 1.18 | | $ | 2.65 | | $ | 2.50 | |
Diluted | | $ | 1.30 | | $ | 1.18 | | $ | 2.63 | | $ | 2.49 | |
Average common shares outstanding: | | | | | | | | | | | | | |
Basic | |
| 7,171,909 | |
| 7,204,261 | |
| 7,172,181 | |
| 7,207,588 | |
Diluted | |
| 7,215,365 | |
| 7,239,325 | |
| 7,215,890 | |
| 7,242,652 | |
Dividends declared | | $ | 0.39 | | $ | 0.37 | | $ | 0.78 | | $ | 0.74 | |
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, 2021 | | $ | 14,431 | | $ | 129,274 | | $ | 171,023 | | $ | 2,149 | | $ | 316,877 | |
Net income | | | | | | | |
| 9,478 | | | | | | 9,478 | |
Other comprehensive loss, net of income taxes | | | | | | | | | | |
| (5,931) | | | (5,931) | |
Dividends declared: $0.37 per share | | | | | | | |
| (2,665) | | | | | | (2,665) | |
Stock based compensation | | | | | | 89 | | | | | | | | | 89 | |
Share retirement: 13,101 shares | | | (26) | | | (491) | | | | | | | | | (517) | |
Common stock grants awarded, net of unearned compensation of $182: 9,192 shares | | | 18 | | | (18) | | | | | | | | | | |
Balance, March 31, 2021 | | $ | 14,423 | | $ | 128,854 | | $ | 177,836 | | $ | (3,782) | | $ | 317,331 | |
| | | | | | | | | | | | | | | | |
Net income | | | | | | | | | 8,531 | | | | | | 8,531 | |
Other comprehensive income, net of income taxes | | | | | | | | | | | | 1,845 | | | 1,845 | |
Dividends declared: $0.37 per share | | | | | | | | | (2,665) | | | | | | (2,665) | |
Stock based compensation | | | | | | 177 | | | | | | | | | 177 | |
Share retirement: 7,828 shares | | | (16) | | | (312) | | | | | | | | | (328) | |
Balance, June 30, 2021 | | | 14,407 | | | 128,719 | | | 183,702 | | | (1,937) | | | 324,891 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| 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 | |
| | | | | | | | | | | | | | | | |
Net income | | | | | | | |
| 7,576 | | | | | | 7,576 | |
Other comprehensive loss, 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 |
| | Loss |
| Total |
| ||||
Balance, January 1, 2022 | | $ | 14,341 | | $ | 127,549 | | $ | 203,750 | | $ | (5,514) | | $ | 340,126 | |
Net income | | | | | | | |
| 9,630 | | | | | | 9,630 | |
Other comprehensive loss, net of income taxes | | | | | | | | | | | | (26,153) | | | (26,153) | |
Dividends declared: $0.39 per share | | | | | | | |
| (2,796) | | | | | | (2,796) | |
Stock based compensation | | | | | | (28) | | | | | | | | | (28) | |
Restricted stock issued: 12,332 shares, (unearned income $210k) | | | 24 | | | (24) | | | | | | | | | | |
Share retirement: 6,714 shares | | | (13) | | | (305) | | | | | | | | | (318) | |
Balance, March 31, 2022 | | $ | 14,352 | | $ | 127,192 | | $ | 210,584 | | $ | (31,667) | | $ | 320,461 | |
| | | | | | | | | | | | | | | | |
Net income | | | | | | | | | 9,353 | | | | | | 9,353 | |
Other comprehensive loss, net of income taxes | | | | | | | | | | | | (14,907) | | | (14,907) | |
Dividends declared: $0.39 per share | | | | | | | | | (2,798) | | | | | | (2,798) | |
Stock based compensation | | | | | | 116 | | | | | | | | | 116 | |
Restricted stock issued: 4,071 shares, (unearned income $210k) | | | 8 | | | (8) | | | | | | | | | | |
Share retirement: 6,853 shares | | | (14) | | | (314) | | | | | | | | | (328) | |
Balance, June 30, 2022 | | $ | 14,346 | | $ | 126,986 | | $ | 217,139 | | $ | (46,574) | | $ | 311,897 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| Accumulated | | | |
| |
| | | | | | | | | | | Other | | | |
| |
| | Common | | Capital | | Retained | | Comprehensive | | | |
| ||||
|
| Stock |
| Surplus |
| Earnings |
| | Income (Loss) |
| Total |
| ||||
Balance, January 1, 2021 | | $ | 14,431 | | $ | 129,274 | | $ | 171,023 | | $ | 2,149 | | $ | 316,877 | |
Net income | | | | | | | |
| 9,478 | | | | | | 9,478 | |
Other comprehensive loss, net of income taxes | | | | | | | | | | |
| (5,931) | | | (5,931) | |
Dividends declared: $0.37 per share | | | | | | | |
| (2,665) | | | | | | (2,665) | |
Stock based compensation | | | | |
| 89 | | | | | | | | | 89 | |
Restricted stock issued: 9,192 shares, (unearned income $182k) | | | 18 | | | (18) | | | | | | | | | | |
Share retirement: 13,101 shares | | | (26) | | | (491) | | | | | | | | | (517) | |
Balance, March 31, 2021 | | $ | 14,423 | | $ | 128,854 | | $ | 177,836 | | $ | (3,782) | | $ | 317,331 | |
| | | | | | | | | | | | | | | | |
Net income | | | | | | | |
| 8,531 | | | | | | 8,531 | |
Other comprehensive income, net of income taxes | | | | | | | | | | |
| 1,845 | | | 1,845 | |
Dividends declared: $0.37 per share | | | | | | | |
| (2,665) | | | | | | (2,665) | |
Stock based compensation | | | | |
| 177 | | | | | | | | | 177 | |
Share retirement: 7,828 shares | | | (16) | | | (312) | | | | | | | | | (328) | |
Balance, June 30, 2021 | | $ | 14,407 | | $ | 128,719 | | $ | 183,702 | | $ | (1,937) | | $ | 324,891 | |
| | | | | | | | | | | | | | | | |
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, |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| ||||
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income | | $ | 18,009 | | $ | 12,857 | | | $ | 18,983 | | $ | 18,009 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | |
Depreciation of premises and equipment | |
| 1,352 | |
| 1,458 | | |
| 994 | |
| 1,352 | |
Amortization of right-of-use lease asset | | | 204 | | | 209 | | | | 294 | | | 204 | |
Accretion of deferred loan fees, net | |
| (2,614) | | | (665) | | |||||||
Amortization (accretion) of deferred loan fees, net | |
| 965 | | | (2,614) | | |||||||
Amortization of intangibles | |
| 250 | |
| 308 | | |
| 193 | |
| 250 | |
Amortization of low income housing partnerships | | | 240 | | | 262 | | | | 241 | | | 240 | |
(Credit) provision for loan losses | |
| (400) | |
| 5,300 | | |||||||
Net unrealized (gain) loss on equity investment securities | | | (4) | | | 84 | | |||||||
Provision (credit) for loan losses | |
| 1,250 | |
| (400) | | |||||||
Net unrealized loss (gain) on equity investment securities | | | 19 | | | (4) | | |||||||
Net gain on sale of other real estate owned | |
| (75) | |
| (4) | | |
| (478) | |
| (75) | |
Loans originated for sale | |
| (11,398) | | | (16,215) | | |
| (3,454) | | | (11,398) | |
Proceeds from sale of loans originated for sale | |
| 10,863 | | | 15,148 | | |
| 3,200 | | | 10,863 | |
Net gain on sale of loans originated for sale | |
| (173) | | | (156) | | |
| (19) | | | (173) | |
Net amortization of investment securities | |
| 551 | |
| 553 | | |
| 799 | |
| 551 | |
Net gain on sale of investment securities available-for-sale | | | | | | (267) | | |||||||
Increase in cash surrender value of life insurance | |
| (444) | |
| (380) | | |
| (462) | |
| (444) | |
Deferred income tax expense | |
| 620 | |
| 619 | | |
| | |
| 620 | |
Stock based compensation | |
| 266 | |
| 191 | | |
| 88 | |
| 266 | |
Net change in: | | | | | | | | | | | | | | |
Accrued interest receivable | |
| 411 | |
| (1,387) | | |
| (777) | |
| 411 | |
Other assets | |
| (1,137) | |
| (11,444) | | |
| (2,045) | |
| (1,137) | |
Accrued interest payable | |
| (267) | |
| (405) | | |
| 861 | |
| (267) | |
Other liabilities | |
| (3,253) | |
| 13,586 | | |
| (1,914) | |
| (3,253) | |
Net cash provided by operating activities | |
| 13,001 | |
| 19,652 | | |
| 18,738 | |
| 13,001 | |
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 | |
| 19,496 | |
| 34,520 | | |
| 20,816 | |
| 19,496 | |
Held-to-maturity | |
| 119 | |
| 253 | | |
| 2,546 | |
| 119 | |
Purchases of investment securities: | | | | | | | | | | | | | | |
Available-for-sale | |
| (65,862) | |
| (9,080) | | |
| (69,392) | |
| (65,862) | |
Net redemption of restricted equity securities | |
| 2,272 | |
| 4,849 | | |||||||
Net increase in lending activities | |
| (56,492) | |
| (244,675) | | |||||||
Held-to-maturity | | | (25,872) | |
| | | |||||||
Net (purchase) redemption of restricted equity securities | |
| (4,492) | |
| 2,272 | | |||||||
Net increase in loans | |
| (237,630) | |
| (56,492) | | |||||||
Purchases of premises and equipment | |
| (816) | |
| (1,214) | | |
| (2,880) | |
| (816) | |
Investment in bank owned life insurance | | | (5,881) | | | | | |||||||
Proceeds from bank owned life insurance | | | 1,129 | | | | | |||||||
Proceeds from sale of other real estate owned | |
| 680 | |
| 157 | | |
| 967 | |
| 680 | |
Net cash used in investing activities | |
| (100,603) | |
| (188,688) | | |
| (320,689) | |
| (100,603) | |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Net increase in deposits | |
| 174,653 | |
| 238,635 | | |||||||
Proceeds from Paycheck Protection Program Liquidity Facility | | | | | | 103,650 | | |||||||
Repayment of Paycheck Protection Program Liquidity Facility | | | | | | (63,475) | | |||||||
Proceeds from subordinated debentures | | | | | | 33,000 | | |||||||
Net (decrease) increase in deposits | |
| (52,114) | |
| 174,653 | | |||||||
Repayment of long-term debt | |
| (11,017) | |
| (11,970) | | |
| (1,065) | |
| (11,017) | |
Net decrease in short-term borrowings | |
| (50,000) | |
| (102,150) | | |||||||
Net increase (decrease) in short-term borrowings | |
| 129,170 | |
| (50,000) | | |||||||
Retirement of common stock | |
| (845) | | | (2,568) | | |
| (646) | | | (845) | |
Cash dividends paid | |
| (5,330) | |
| (5,305) | | |
| (5,594) | |
| (5,330) | |
Net cash provided by financing activities | |
| 107,461 | |
| 189,817 | | |
| 69,751 | |
| 107,461 | |
Net increase in cash and cash equivalents | |
| 19,859 | |
| 20,781 | | |||||||
Net (decrease) increase in cash and cash equivalents | |
| (232,200) | |
| 19,859 | | |||||||
Cash and cash equivalents at beginning of period | |
| 228,192 | |
| 31,153 | | |
| 279,933 | |
| 228,192 | |
Cash and cash equivalents at end of period | | $ | 248,051 | | $ | 51,934 | | | $ | 47,733 | | $ | 248,051 | |
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, |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| ||||
Supplemental disclosures: | | | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | | | |
Interest | | $ | 5,449 | | $ | 8,031 | | | $ | 3,264 | | $ | 5,449 | |
Income taxes | |
| 2,500 | |
| | | |
| 5,285 | |
| 2,500 | |
Noncash items: | | | | | | | | | | | | | | |
Transfers of loans to other real estate | | $ | 57 | | $ | 730 | | | | | | $ | 57 | |
Initial recognition of right-of-use assets | | | | | | 899 | | |||||||
Initial recognition of lease liability | | | | | | 899 | |
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 (“the Bank”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through NaN full-service community banking offices located within Allegheny, Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna and Wyoming Counties of Pennsylvania, Middlesex County of New Jersey and Broome County of New York.
Basis of presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the 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 and six months ended and as of June 30, 2021,2022, 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, 2020.2021.
Significant events: COVID-19Third Quarter Dividend Decl
Operationally, as COVID-19 events unfold, our continued priority is the health and safety of our customers and employees. We continue to follow the recommendations of our state governments as to conducting business and continue to maintain safety protocols. Currently all our offices have returned to pre-pandemic operating hours with full lobby access.aration
On March 22, 2020,July 29, 2022, the federal banking agencies issued an “Interagency StatementBoard of Directors declared a third quarter dividend of $0.40 per share. The dividend is payable on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” The guidance explained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basisSeptember 15, 2022 to borrowers who were currentshareholders of record as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of DecemberAugust 31, 2019 are not TDRs. On December 27, 2020, another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated. During 2020, the Bank had applied this guidance and modified 479 commercial loans with an outstanding balance of $306.8 million and 512 consumer loans with an outstanding balance of $23.3 million. As of June 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms with the exception of 4
8
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
consumer loans with a total outstanding balance of $68 thousand. Of the 4 remaining consumer loans, 2 loans with outstanding balances totaling $32 thousand are non-performing.
The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,450 PPP loans totaling $217.5 million in principal, with an average loan size of $150,000. The PPP loans originated during 2020 generated net fees totaling $5.2 million. These fees are deferred and accreted into interest income over the contractual period of 24 months or 60 months, as applicable. Upon SBA forgiveness, unamortized fees are then recognized into interest income. Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income until these loans are forgiven or paid off. The initial PPP expired on August 8, 2020. Through December 31, 2020, PPP loans totaling $27.8 million had been forgiven by the SBA and a total of $2.3 million in PPP net fees had been recognized by the Bank.
On December 27, 2020, another COVID-19 relief bill was signed that extended and modified several provisions of the PPP. This included an additional allocation of $284 billion. The SBA reactivated the PPP on January 11, 2021. The Bank originated additional loans through the PPP, which expired on May 31, 2021. In the six months ended June 30, 2021, the Bank had generated and received SBA approval on 1,062 PPP loans totaling $121.6 million and generated $4.4 million in related deferred PPP net fees. In the six months ended June 30, 2021, PPP loans totaling $156.9 million had been forgiven by the SBA and a total of $2.8 million in PPP net fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.2022.
Recent accounting standards:
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by the Company as of the required effective dates. The following should be read in conjunction with "Note 1 Summary of significant accounting policies" of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2020. 2021.
Unless otherwise discussed, management believes the impact of any recently issued standards, including those issued but not yet effective, will not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update (“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:
|
| ||
|
|
98
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
|
| ||
|
|
Recently Issued But Not Yet Effective Accounting Pronouncements
We are evaluatingASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the impactmeasurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the ASU on our consolidated financial statements.loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, to our allowance for loan losses, we will also record an allowanceASU 2016-13 amends the accounting for credit losses on debt securities insteadand purchased financial assets with credit deterioration. The effect of applyingimplementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Company has formed a committee and engaged outside vendors to implement a platform to utilize the impairment model currently utilized.alternative loss estimation methodologies in determining the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The amountCompany is required to adopt this guidance effective January 1, 2023.
ASU No. 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan. Additionally, the ASU requires disclosure of current period gross writeoffs by year of origination for financing receivables. The Company is required to adopt this guidance effective January 1, 2023. The Company does not believe adoption of this ASU will have a material impact on its financial results and will add the required disclosures for gross chargeoffs in its financial statements upon adoption 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.
new standard.
In March 2020, the FASB issued ASU 2020-04, “ReferenceReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional expedients and exceptions for a limited time periodguidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform on financial reporting. to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:
● | Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. | ||
● | Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue. |
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 Bank'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 assessmenteffective as of hedge effectiveness for hedging relationships. ASU 2020-04 must be applied prospectively and was effective immediately upon issuance and remains effectiveMarch 12, 2020 through December 31, 2022.
The Company adoptedexpects to apply the amendments inprospectively for applicable loan and other contracts within the effective period of ASU 2020-04 as of the March 12, 2020 issuance date, on a prospective basis. The adoption did not have an immediate direct impact to the consolidated financial statements. As contracts are modified through December 2022, we will assess the impact based on this guidance. The Company does not expect there will be a material impact to the consolidated financial statements.2020-04.
2. Other comprehensive income (loss):loss:
The components of other comprehensive income (loss)loss and their related tax effects are reported in the consolidated statements of income and comprehensive income. The accumulated other comprehensive income (loss)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.
109
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The components of accumulated other comprehensive income (loss)loss included in stockholders’ equity at June 30, 20212022 and December 31, 20202021 are as follows:
| | | | | | | | | | | | | | |
|
| | June 30, 2021 |
| | December 31, 2020 |
|
| | June 30, 2022 |
| | December 31, 2021 |
|
Net unrealized gain on investment securities available-for-sale | | $ | 4,417 | | $ | 9,696 | | |||||||
Income tax expense | |
| 928 | |
| 2,036 | | |||||||
Net unrealized loss on investment securities available-for-sale | | $ | (53,072) | | $ | (1,791) | | |||||||
Income tax benefit | |
| (11,145) | |
| (376) | | |||||||
Net of income taxes | |
| 3,489 | |
| 7,660 | | |
| (41,927) | |
| (1,415) | |
Benefit plan adjustments | |
| (7,977) | |
| (7,977) | | |
| (5,868) | |
| (5,868) | |
Income tax benefit | |
| (1,675) | |
| (1,675) | | |
| (1,232) | |
| (1,232) | |
Net of income taxes | |
| (6,302) | |
| (6,302) | | |
| (4,636) | |
| (4,636) | |
Derivative adjustments | |
| 1,108 | |
| 1,002 | | |
| (14) | |
| 680 | |
Income tax | |
| 232 | |
| 211 | | |||||||
Income tax (benefit) expense | |
| (3) | |
| 143 | | |||||||
Net of income taxes | |
| 876 | |
| 791 | | |
| (11) | |
| 537 | |
Accumulated other comprehensive income (loss) | | $ | (1,937) | | $ | 2,149 | | |||||||
Accumulated other comprehensive loss | | $ | (46,574) | | $ | (5,514) | |
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 and six months ended June 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | | 2022 | | 2021 | | ||||||||||||||||
For the Three Months Ended June 30, |
| Basic |
| Diluted |
| Basic |
| Diluted |
|
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||||||
Net income |
| $ | 8,531 |
| $ | 8,531 |
| $ | 7,576 |
| $ | 7,576 |
|
| $ | 9,353 |
| $ | 9,353 |
| $ | 8,531 |
| $ | 8,531 |
|
Average common shares outstanding | |
| 7,204,261 | |
| 7,239,325 | |
| 7,341,636 | |
| 7,376,700 | | |
| 7,171,909 | |
| 7,215,365 | |
| 7,204,261 | |
| 7,239,325 | |
Earnings per share | | $ | 1.18 | | $ | 1.18 | | $ | 1.03 | | $ | 1.03 | | | $ | 1.30 | | $ | 1.30 | | $ | 1.18 | | $ | 1.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | | 2022 | | 2021 | | ||||||||||||||||
For the Six Months Ended June 30 | | Basic | | Diluted | | Basic | | Diluted | | |||||||||||||||||
For the Six Months Ended June 30, | | Basic | | Diluted | | Basic | | Diluted | | |||||||||||||||||
Net income |
| $ | 18,009 |
| $ | 18,009 |
| $ | 12,857 | | $ | 12,857 |
|
| $ | 18,983 |
| $ | 18,983 |
| $ | 18,009 | | $ | 18,009 |
|
Average common shares outstanding | |
| 7,207,588 | |
| 7,242,652 | |
| 7,360,517 | |
| 7,391,202 | | |
| 7,172,181 | |
| 7,215,890 | |
| 7,207,588 | |
| 7,242,652 | |
Earnings per share | | $ | 2.50 | | $ | 2.49 | | $ | 1.75 | | $ | 1.74 | | | $ | 2.65 | | $ | 2.63 | | $ | 2.50 | | $ | 2.49 | |
1110
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 June 30, 20212022 and December 31, 20202021 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | | Gross | | Gross | | | | | ||||
| | Amortized | | Unrealized | | Unrealized | | Fair |
| | Amortized | | Unrealized | | Unrealized | | Fair |
| ||||||||
June 30, 2021 |
| Cost |
| Gains |
| Losses |
| Value |
| |||||||||||||||||
June 30, 2022 |
| Cost |
| Gains |
| Losses |
| Value |
| |||||||||||||||||
Available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 16,483 | | $ | 260 | | | | | $ | 16,743 | | | $ | 252,706 | | $ | 24 | | $ | 16,272 | | $ | 236,458 | |
U.S. government-sponsored enterprises | | | 56,591 | | | 868 | | | | | | 57,459 | | | | 23,616 | | | 2 | | | 453 | | | 23,165 | |
State and municipals: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | |
| 59,423 | | | 1,544 | | $ | 514 | |
| 60,453 | | |
| 69,950 | | | 49 | | | 10,027 | |
| 59,972 | |
Tax-exempt | |
| 73,067 | |
| 2,660 | | | 621 | |
| 75,106 | | |
| 100,547 | |
| 80 | | | 11,355 | |
| 89,272 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies | |
| 2,618 | |
| 96 | | | | |
| 2,714 | | |
| 1,290 | |
| | | | 14 | |
| 1,276 | |
U.S. government-sponsored enterprises | |
| 108,269 | |
| 1,340 | |
| 1,864 | |
| 107,745 | | |
| 102,500 | |
| | |
| 14,544 | |
| 87,956 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government-sponsored enterprises | |
| 12,581 | |
| 684 | |
| | |
| 13,265 | | |
| 12,374 | |
| | |
| 272 | |
| 12,102 | |
Corporate debt securities | | | 3,000 | | | | | | 36 | | | 2,964 | | | | 4,000 | | | | | | 290 | | | 3,710 | |
Total | | $ | 332,032 | | $ | 7,452 | | $ | 3,035 | | $ | 336,449 | | | $ | 566,983 | | $ | 155 | | $ | 53,227 | | $ | 513,911 | |
Held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tax-exempt state and municipals | | $ | 6,847 | | $ | 183 | | | | | $ | 7,030 | | | $ | 11,257 | | $ | 10 | | $ | 978 | | $ | 10,289 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies | |
| 16 | |
| | | | | |
| 16 | | |
| 18,168 | |
| | | | 1,894 | |
| 16,274 | |
U.S. government-sponsored enterprises | |
| 241 | |
| 7 | | | | |
| 248 | | |
| 65,021 | |
| | | | 7,508 | |
| 57,513 | |
Total | | $ | 7,104 | | $ | 190 | | $ | | | $ | 7,294 | | | $ | 94,446 | | $ | 10 | | $ | 10,380 | | $ | 84,076 | |
| | | | | | | | | | | | | |
|
| | |
| Gross |
| Gross |
| | |
| ||
| | Amortized | | Unrealized | | Unrealized | | Fair |
| ||||
December 31, 2021 |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available-for-sale: | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 193,849 | | $ | 107 | | $ | 2,382 | | $ | 191,574 | |
U.S. government-sponsored enterprises | | | 33,435 | | | 343 | | | | |
| 33,778 | |
State and municipals: | |
| | | | | | | | | | | |
Taxable | |
| 69,066 | |
| 994 | | | 1,082 | |
| 68,978 | |
Tax-exempt | |
| 96,412 | |
| 2,452 | |
| 614 | |
| 98,250 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | |
| 1,790 | |
| 53 | |
| | |
| 1,843 | |
U.S. government-sponsored enterprises | |
| 109,018 | |
| 939 | |
| 2,925 | |
| 107,032 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government-sponsored enterprises | | | 12,542 | | | 406 | | | | | | 12,948 | |
Corporate debt securities | | | 3,000 | | | | | | 82 | | | 2,918 | |
Total | | $ | 519,112 | | $ | 5,294 | | $ | 7,085 | | $ | 517,321 | |
Held-to-maturity: | | | | | | | | | | | | | |
Tax-exempt state and municipals | | $ | 11,476 | | $ | 126 | | $ | 56 | | $ | 11,546 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | | | 18,802 | |
| | | | 392 | |
| 18,410 | |
U.S. government-sponsored enterprises | |
| 40,935 | |
| 3 | | | 448 | |
| 40,490 | |
Total | | $ | 71,213 | | $ | 129 | | $ | 896 | | $ | 70,446 | |
11
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Restricted Investment In Stock
Restricted investment in stock includes Federal Home Loan Bank (“FHLB”) stock with a carrying cost of $8,495 and $4,003 at June 30, 2022 and December 31, 2021, respectively, and Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 at June 30, 2022 and December 31, 2021, respectively, which are included in other assets in the consolidated balance sheets. FHLB and ACBB stock was issued as a requirement to facilitate participation in borrowing and other banking services. The investment in FHLB stock may fluctuate, as it is based on the member bank’s use of FHLB’s services.
These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) quarterly. As of June 30, 2022, there was 0 OTTI associated with these investments.
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2022, is summarized as follows:
| | | | |
| | Fair |
| |
June 30, 2022 |
| Value |
| |
Within one year | | $ | 29,255 | |
After one but within five years | |
| 205,194 | |
After five but within ten years | |
| 83,195 | |
After ten years | |
| 92,422 | |
| |
| 410,066 | |
Mortgage-backed and other amortizing securities | |
| 103,845 | |
Total | | $ | 513,911 | |
The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2022, is summarized as follows:
| | | | | | | |
| | Amortized | | Fair |
| ||
June 30, 2022 |
| Cost |
| Value |
| ||
Within one year | | $ | | | $ | | |
After one but within five years | | | | | | | |
After five but within ten years | | | 8,092 | | | 7,429 | |
After ten years | | | 3,165 | | | 2,860 | |
| |
| 11,257 | |
| 10,289 | |
Mortgage-backed securities | |
| 83,189 | |
| 73,787 | |
Total | | $ | 94,446 | | $ | 84,076 | |
Securities with a carrying value of $176,683 and $203,580 at June 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2022 and December 31, 2021, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. government agencies and sponsored enterprises, that exceeded 10.0 percent of stockholders’ equity.
12
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | |
|
| | |
| Gross |
| Gross |
| | |
| ||
| | Amortized | | Unrealized | | Unrealized | | Fair |
| ||||
December 31, 2020 |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available-for-sale: | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 18,478 | | $ | 427 | | | | | $ | 18,905 | |
U.S. government-sponsored enterprises | | | 63,834 | | | 1,354 | | $ | | |
| 65,188 | |
State and municipals: | |
| | | | | | | | | | | |
Taxable | |
| 53,297 | |
| 2,099 | |
| 30 | |
| 55,366 | |
Tax-exempt | |
| 53,977 | |
| 3,054 | |
| 37 | |
| 56,994 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | |
| 3,553 | |
| 154 | |
| | |
| 3,707 | |
U.S. government-sponsored enterprises | |
| 79,457 | |
| 1,930 | |
| 136 | |
| 81,251 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government-sponsored enterprises | | | 12,619 | | | 881 | | | | | | 13,500 | |
Corporate debt securities | | | 1,000 | | | | | | | | | 1,000 | |
Total | | $ | 286,215 | | $ | 9,899 | | $ | 203 | | $ | 295,911 | |
Held-to-maturity: | | | | | | | | | | | | | |
Tax-exempt state and municipals | | $ | 6,849 | | $ | 275 | | $ | | | $ | 7,124 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | | | 21 | |
| | | | | |
| 21 | |
U.S. government-sponsored enterprises | |
| 355 | |
| 13 | | | | |
| 368 | |
Total | | $ | 7,225 | | $ | 288 | | $ | | | $ | 7,513 | |
Equity Securities
At June 30, 2021, our equity security portfolio consisted of stock of 1 financial institution. At June 30, 2021 and December 31, 2020, we had $142 and $138 respectively, in equity securities recorded at fair value. At June 30, 2021, the fair value of our equity portfolio was lower than the cost basis by $11. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2021 (in thousands):
| | | | | | |
| | | | | | |
Three Months Ended June 30, |
| | 2021 |
| | 2020 |
Net gain (loss) recognized during the period on equity securities | | $ | (17) | | $ | 39 |
Less: Net gain (loss) recognized during the period on equity securities sold during the period | |
| | |
| |
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date | | $ | (17) | | $ | 39 |
| |
| | |
| |
| |
| | |
| |
For the Six Months Ended June 30, |
| | 2021 |
| | 2020 |
Net gain (loss) recognized during the period on equity securities | | $ | 4 | | $ | (84) |
Less: Net gain (loss) recognized during the period on equity securities sold during the period | |
| | |
| |
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date | | $ | 4 | | $ | (84) |
Restricted Investment In Stock
Restricted investment in stock includes Federal Home Loan Bank (“FHLB”) stock with a carrying cost of $3,083 and $5,355 at June 30, 2021 and December 31, 2020, respectively, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 at June 30, 2021 and December 31, 2020, respectively, and VISA Class B stock with a carrying
13
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
cost of $0 at June 30, 2021 and December 31, 2020, which are included in other assets in the consolidated balance sheets. FHLB and ACBB stock was issued as a requirement to facilitate participation in borrowing and other banking services. The investment in FHLB stock may fluctuate, as it is based on the member bank’s use of FHLB’s services.
The Company owns 44,982 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Company’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6228 as of June 30, 2021), which is periodically adjusted to reflect Visa’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B stock. Due to the lack of orderly trades and public information of such trades, Visa Class B stock has no readily determinable fair value.
These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) periodically. As of June 30, 2021, there was 0 OTTI associated with these investments.
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2021, is summarized as follows:
| | | | |
| | Fair |
| |
June 30, 2021 |
| Value |
| |
Within one year | | $ | 41,834 | |
After one but within five years | |
| 37,132 | |
After five but within ten years | |
| 37,203 | |
After ten years | |
| 93,277 | |
| |
| 209,446 | |
Mortgage-backed and other amortizing securities | |
| 127,003 | |
Total | | $ | 336,449 | |
The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2021, is summarized as follows:
| | | | | | | |
| | Amortized | | Fair |
| ||
June 30, 2021 |
| Cost |
| Value |
| ||
Within one year | | $ | 175 | | $ | 175 | |
After five but within ten years | | | 2,228 | | | 2,298 | |
After ten years | | | 4,444 | | | 4,557 | |
| |
| 6,847 | |
| 7,030 | |
Mortgage-backed securities | |
| 257 | |
| 264 | |
Total | | $ | 7,104 | | $ | 7,294 | |
Securities with a carrying value of $181,693 and $165,982 at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2021 and December 31, 2020, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. government agencies and sponsored enterprises, that exceeded 10.0 percent of stockholders’ equity.
14
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not been recognized at June 30, 20212022 and December 31, 2020,2021, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
| ||||||||||||
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| | | | Less Than 12 Months | | | | 12 Months or Greater | | | | Total | | ||||||||||||||||||
June 30, 2021 |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| |||||||||||||||||||||||||||||||
| | Number of | | | | | | | | Number of | | | | | | | | Number of | | | | | | |
| |||||||||||||||||||
| | Securities in a | | Fair | | Unrealized | | Securities in a | | Fair | | Unrealized | | Securities in a | | Fair | | Unrealized | | |||||||||||||||||||||||||
June 30, 2022 |
| Loss Position |
| Value |
| Losses |
| Loss Position |
| Value |
| Losses |
| Loss Position |
| Value |
| Losses |
| |||||||||||||||||||||||||
U.S. Treasury securities | | 53 | | $ | 232,013 | | $ | 16,272 | |
| | $ | | | $ | | | 53 | | $ | 232,013 | | $ | 16,272 | | |||||||||||||||||||
U.S. government-sponsored enterprises | | 5 | | | 16,662 | | | 453 | | | | | | | | | | 5 | | | 16,662 | | | 453 | | |||||||||||||||||||
State and municipals: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 24,966 | | $ | 514 | | | | | | | | $ | 24,966 | | $ | 514 | | | 50 | | | 45,783 | | | 7,083 | | 14 | | | 10,707 | | | 2,944 | | 64 | | | 56,490 | | | 10,027 | |
Tax-exempt | | | 29,981 | | | 621 | | | | | | | | | 29,981 | | | 621 | | | 92 | | | 70,020 | | | 9,523 | | 23 | | | 12,370 | | | 2,810 | | 115 | | | 82,390 | | | 12,333 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies | | 9 | | | 17,550 | | | 1,908 | | | | | | | | | | 9 | | | 17,550 | | | 1,908 | | |||||||||||||||||||
U.S. government-sponsored enterprises | | 30 | | | 91,177 | | | 11,118 | | 10 | | | 53,591 | | | 10,934 | | 40 | | | 144,768 | |
| 22,052 | | |||||||||||||||||||
Commercial mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
U.S. government-sponsored enterprises | | | 77,089 | | | 1,863 | | $ | 201 | | $ | 1 | | | 77,290 | |
| 1,864 | | | 4 | |
| 12,102 | |
| 272 | | | | | | | | | | 4 | |
| 12,102 | |
| 272 | |
Corporate debt securities | | | 2,964 | | | 36 | | | | | | | | | 2,964 | | | 36 | | | 4 | | | 2,811 | | | 189 | | 2 | | | 899 | | | 101 | | 6 | | | 3,710 | | | 290 | |
Total | | $ | 135,000 | | $ | 3,034 | | $ | 201 | | $ | 1 | | $ | 135,201 | | $ | 3,035 | | | 247 | | $ | 488,118 | | $ | 46,818 | | 49 | | $ | 77,567 | | $ | 16,789 | | 296 | | $ | 565,685 | | $ | 63,607 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | | | Less Than 12 Months | | | | 12 Months or Greater | | | | Total |
| ||||||||||||||||||||||||
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| | Number of | | | | | | | | Number of | | | | | | | | Number of | | | | | | |
| ||||||
December 31, 2020 |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| |||||||||||||||||||||||||||||||
| | Securities in a | | Fair | | Unrealized | | Securities in a | | Fair | | Unrealized | | Securities in a | | Fair | | Unrealized | | |||||||||||||||||||||||||
December 31, 2021 |
| Loss Position |
| Value |
| Losses |
| Loss Position |
| Value |
| Losses |
| Loss Position |
| Value |
| Losses |
| |||||||||||||||||||||||||
U.S. Treasury securities | | 42 | | $ | 179,974 | | $ | 2,382 | |
| | $ | | | $ | | | 42 | | $ | 179,974 | | $ | 2,382 | | |||||||||||||||||||
State and municipals: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 9,246 | | $ | 30 | | | | | | | | $ | 9,246 | | $ | 30 | | | 27 | | | 26,827 | | | 718 | | 8 | | | 8,008 | | | 364 | | 35 | | | 34,835 | | | 1,082 | |
Tax-exempt | |
| 6,786 | |
| 37 | | | | |
| | |
| 6,786 | |
| 37 | | | 61 | |
| 38,693 | |
| 358 | | 2 | | | 10,319 | |
| 313 | | 63 | |
| 49,012 | |
| 671 | |
Residential mortgage-backed securities: | | | | |
| | | | | | | | |
| | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies | | 3 | | | 18,398 | |
| 391 | | | | | | | | | | 3 | |
| 18,398 | |
| 391 | | |||||||||||||||||||
U.S. government-sponsored enterprises | |
| 11,553 | | | 135 | | $ | 284 | | $ | 1 | | | 11,837 | | | 136 | | | 13 | |
| 77,875 | |
| 1,454 | | 7 | | | 48,276 | | | 1,920 | | 20 | |
| 126,151 | |
| 3,374 | |
Corporate debt securities | | 4 | |
| 2,449 | |
| 51 | | 1 | | | 470 | | | 30 | | 5 | |
| 2,919 | |
| 81 | | |||||||||||||||||||
Total | | $ | 27,585 | | $ | 202 | | $ | 284 | | $ | 1 | | $ | 27,869 | | $ | 203 | | | 150 | | $ | 344,216 | | $ | 5,354 | | 18 | | $ | 67,073 | | $ | 2,627 | | 168 | | $ | 411,289 | | $ | 7,981 | |
Management, from a credit risk perspective, has taken action to identify and assess its COVID-19 related credit exposures based on asset class. No specific COVID-19 related credit impairment was identified within our investment securities portfolio, including our municipal securities, during the first six months of 2021. The Company had 14 mortgage-backed securities, NaN tax-exempt municipals, NaN taxable municipals and 5 corporate bonds that were in unrealized loss positions at June 30, 2021. Of these securities, 2 mortgage-backed securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes insignificantly higher market interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no known material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2021.2022. There was 0 OTTI recognized for the three or six months ended June 30,2021 2022 and 2020.2021.
5. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 20212022 and December 31, 20202021 are summarized as follows. The Company had net deferred loan origination fees of $2,995$602 and $1,567 at June 30, 2022 and December 31, 2021, respectively. The decrease to the fees since year-end is due in part to the forgiveness by the Small Business Administration (“SBA”) of Paycheck Protection Program (“PPP”) loans.
1513
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | |
| | | | | | | |
|
| | June 30, 2022 |
| | December 31, 2021 |
|
Commercial | | $ | 596,809 | | $ | 613,127 | |
Real estate: | | | | | | | |
Commercial | |
| 1,569,658 | |
| 1,343,539 | |
Residential | |
| 317,672 | |
| 297,624 | |
Consumer | |
| 81,440 | |
| 74,883 | |
Total | | $ | 2,565,579 | | $ | 2,329,173 | |
PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years or five years, if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. PPP fees are deferred and accreted into interest income over the contractual period of 24 months or 60 months, as applicable. Upon SBA forgiveness, unamortized fees are then recognized into interest income.
The Bank originated additional loans through the PPP, which expired on May 31, 2021. During 2021, the Bank had generated and received SBA approval on 1,062 PPP loans totaling $121,599 and generated $4,370 in related deferred PPP net fees.
Net deferred loan origination fees remaining related to PPP loans is $392 at June 30, 2022, compared to $1,659 at December 31, 2021. The PPP loans are included in the commercial loan classification and had an outstanding balance at June 30, 2022 of $27,036 comprised of $13,921 remaining from those originated during 2021 as part of round two and $13,115 remaining from loans originated during 2020 under round one of the program. At December 31, 2021, PPP loans had outstanding balances totaling $68,893. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. At June 30, 2022, there were 2 loans past due totaling $7. At December 31, 2021, the outstanding PPP balance was considered current.
14
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
$2,058 at June 30, 2021 and December 31, 2020, respectively. The increase is due in part to net fees of $4.4 million from $121.6 million of PPP loans originated during the first six months of 2021.
| | | | | | | |
|
| | June 30, 2021 |
| | December 31, 2020 |
|
Commercial | | $ | 671,977 | | $ | 679,286 | |
Real estate: | | | | | | | |
Commercial | |
| 1,203,958 | |
| 1,137,990 | |
Residential | |
| 281,500 | |
| 277,414 | |
Consumer | |
| 79,391 | |
| 83,292 | |
Total | | $ | 2,236,826 | | $ | 2,177,982 | |
The PPP loans are included in the commercial loan classification and had an outstanding balance at June 30, 2021 of $154,421 comprised of $121,599 originated during 2021 as part of round two and $32,822 remaining from loans originated during 2020 under round one of the program. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. The outstanding balance is considered current at June 30, 2021.
The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 20212022 and 20202021 are summarized as follows:
| | | | | | | | | | | | | | | | | ||||||||||||||||
| |
| | | Real estate | | | | | | | | ||||||||||||||||||||
June 30, 2022 |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total |
| |||||||||||||||||||||
Allowance for loan losses: | | | | | | | | | | | | | | | | | ||||||||||||||||
Beginning Balance April 1, 2022 | | $ | 7,593 | | $ | 16,789 | | $ | 3,255 | | $ | 770 | | $ | 28,407 | | ||||||||||||||||
Charge-offs | |
| | |
| | |
| (2) | |
| (96) | |
| (98) | | ||||||||||||||||
Recoveries | |
| 20 | |
| 61 | |
| | |
| 34 | |
| 115 | | ||||||||||||||||
Provisions (credits) | |
| 153 | |
| 719 | |
| (33) | |
| 111 | |
| 950 | | ||||||||||||||||
Ending balance | | $ | 7,766 | | $ | 17,569 | | $ | 3,220 | | $ | 819 | | $ | 29,374 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Real estate | | | | | | | | | | | | Real estate | | | | | | | | ||||||||
June 30, 2021 |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total |
|
| Commercial |
| Commercial |
| Residential | | Consumer | | Total |
| ||||||||||
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance April 1, 2021 | | $ | 8,215 | | $ | 14,703 | | $ | 2,994 | | $ | 871 | | $ | 26,783 | | | $ | 8,215 | | $ | 14,703 | | $ | 2,994 | | $ | 871 | | $ | 26,783 | |
Charge-offs | |
| | |
| (144) | |
| (2) | |
| (44) | |
| (190) | | |
| | |
| (144) | |
| (2) | |
| (44) | |
| (190) | |
Recoveries | |
| 18 | |
| 8 | |
| 1 | |
| 19 | |
| 46 | | |
| 18 | |
| 8 | |
| 1 | |
| 19 | |
| 46 | |
Provisions (credits) | |
| 287 | |
| (286) | |
| 76 | |
| 23 | |
| 100 | | |
| 287 | |
| (286) | |
| 76 | |
| 23 | |
| 100 | |
Ending balance | | $ | 8,520 | | $ | 14,281 | | $ | 3,069 | | $ | 869 | | $ | 26,739 | | | $ | 8,520 |
| $ | 14,281 | | $ | 3,069 | | $ | 869 | | $ | 26,739 | |
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | | | | Real estate | | | | | | | | ||||||||||||||||||||
June 30, 2020 |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total |
| |||||||||||||||||||||
Allowance for loan losses: | | | | | | | | | | | | | | | | | ||||||||||||||||
Beginning Balance April 1, 2020 | | $ | 7,969 | | $ | 13,007 | | $ | 3,624 | | $ | 1,086 | | $ | 25,686 | | ||||||||||||||||
Charge-offs | |
| (335) | |
| (47) | |
| (81) | |
| (154) | |
| (617) | | ||||||||||||||||
Recoveries | |
| 31 | |
| | |
| 3 | |
| 54 | |
| 88 | | ||||||||||||||||
Provisions | |
| 822 | |
| 895 | |
| 21 | |
| 62 | |
| 1,800 | | ||||||||||||||||
Ending balance | | $ | 8,487 |
| $ | 13,855 | | $ | 3,567 | | $ | 1,048 | | $ | 26,957 | |
| | | | | | | | | | | | | | | | | ||||||||||||||||
|
| | | | Real estate | | | | | | | | ||||||||||||||||||||
June 30, 2022 |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total | | |||||||||||||||||||||
Allowance for loan losses: |
| | | | | | | | | | | | | | | | ||||||||||||||||
Beginning Balance January 1, 2022 |
| $ | 8,453 | | $ | 15,928 | | $ | 3,209 | | $ | 793 | | $ | 28,383 | | ||||||||||||||||
Charge-offs |
|
| (161) | |
| (132) | |
| (2) | |
| (158) | |
| (453) | | ||||||||||||||||
Recoveries |
|
| 29 | |
| 77 | |
| 3 | |
| 85 | |
| 194 | | ||||||||||||||||
Provisions (credits) |
|
| (555) | |
| 1,696 | |
| 10 | |
| 99 | |
| 1,250 | | ||||||||||||||||
Ending balance |
| $ | 7,766 |
| $ | 17,569 | | $ | 3,220 | | $ | 819 | | $ | 29,374 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | Real estate | | | | | | | | | | | | Real estate | | | | | | | | ||||||||
June 30, 2021 |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total | |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total | | ||||||||||
Allowance for loan losses: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance January 1, 2021 |
| $ | 8,734 | | $ | 14,559 | | $ | 3,129 | | $ | 922 | | $ | 27,344 | | | $ | 8,734 | | $ | 14,559 | | $ | 3,129 | | $ | 922 | | $ | 27,344 | |
Charge-offs |
|
| (15) | |
| (240) | |
| (24) | |
| (106) | |
| (385) | | |
| (15) | |
| (240) | |
| (24) | |
| (106) | |
| (385) | |
Recoveries |
|
| 79 | |
| 66 | |
| 2 | |
| 33 | |
| 180 | | |
| 79 | |
| 66 | |
| 2 | |
| 33 | |
| 180 | |
Provisions |
|
| (278) | |
| (104) | |
| (38) | |
| 20 | |
| (400) | | ||||||||||||||||
Provisions (credits) | |
| (278) | |
| (104) | |
| (38) | |
| 20 | |
| (400) | | ||||||||||||||||
Ending balance |
| $ | 8,520 |
| $ | 14,281 | | $ | 3,069 | | $ | 869 | | $ | 26,739 | | | $ | 8,520 | | $ | 14,281 | | $ | 3,069 | | $ | 869 | | $ | 26,739 | |
| | | | | | | | | | | | | | | | |
1615
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | Real estate | | | | | | | | ||||
June 30, 2020 |
| Commercial |
| Commercial |
| Residential | | Consumer | | Total | | |||||
Allowance for loan losses: | | | | | | | | | | | | | | | | |
Beginning Balance January 1, 2020 | | $ | 6,888 | | $ | 11,496 | | $ | 3,226 | | $ | 1,067 | | $ | 22,677 | |
Charge-offs | |
| (985) | |
| (47) | |
| (135) | |
| (248) | |
| (1,415) | |
Recoveries | |
| 298 | |
| | |
| 13 | |
| 84 | |
| 395 | |
Provisions | |
| 2,286 | |
| 2,406 | |
| 463 | |
| 145 | |
| 5,300 | |
Ending balance | | $ | 8,487 | | $ | 13,855 | | $ | 3,567 | | $ | 1,048 | | $ | 26,957 | |
The Company’s allowance for loan losses decreased $0.6 million or 2.2% during the first six months of 2021, due primarily to a $0.4 million release from allowance for loan losses in the current period resulting from improved credit quality and a reversal of the COVID-related asset quality qualitative adjustment made in the year ago period in our allowance for loan losses methodology. The allowance for loan losses equaled $26.7 million or 1.20% of loans, net at June 30, 2021 compared to $27.3 million or 1.26% of loans, net, at December 31, 2020. Excluding PPP loans that do not carry an allowance for loan losses due to a 100% government guarantee, the ratio equaled 1.28% at June 30, 2021. Loans charged-off, net of recoveries, for the six months ended June 30, 2021, equaled $0.2 million or 0.02% of average loans, compared to $1.0 million or 0.10% of average loans for the comparable period last year. The decrease to charge-offs in the current period resulted from improved credit quality; the year ago period included a $0.6 million fully charged-off commercial credit and an additional $0.3 million of commercial credits originated in our King of Prussia market. Loans charged-off, net of recoveries, for the three months ended June 30, 2021, equaled $0.1 million or 0.03% of average lons, compared to $0.5 million or 0.05% of average loans for the comparable period last year. The current period includes a $0.1 million partial charge down of a hospitality related credit; the year ago period included a fully charged off small business line of credit of $0.3 million and higher dealer indirect auto loan charge-offs.
The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2021 and December 31, 2020 is summarized as follows:
| | | | | | | | | | | | | | | | |
| | |
| | Real estate | | | | | | |
| ||||
June 30, 2021 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| |||||
Allowance for loan losses: | |
|
| | | | | | | | | | | | | |
Ending balance | | $ | 8,520 | | $ | 14,281 |
| $ | 3,069 | | $ | 869 | | $ | 26,739 |
|
Ending balance: individually evaluated for impairment |
|
| 549 | | | 87 | | | 58 | | | | |
| 694 |
|
Ending balance: collectively evaluated for impairment |
| $ | 7,971 | | $ | 14,194 | | $ | 3,011 | | $ | 869 | | $ | 26,045 |
|
Loans receivable: | | | | | | | | | | | | | | | | |
Ending balance | | $ | 671,977 | | $ | 1,203,958 |
| $ | 281,500 | | $ | 79,391 | | $ | 2,236,826 |
|
Ending balance: individually evaluated for impairment | |
| 2,071 | | | 3,683 | | | 1,466 | | | 76 | |
| 7,296 |
|
Ending balance: collectively evaluated for impairment | | $ | 669,906 | | $ | 1,200,275 | | $ | 280,034 | | $ | 79,315 | | $ | 2,229,530 |
|
| | | | | | | | | | | | | | | | |
17
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | ||
| | |
| | Real estate | | | | | | |
| ||||
December 31, 2020 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| |||||
Allowance for loan losses: | |
|
| | | | | | | | | | | | | |
Ending balance | | $ | 8,734 | | $ | 14,559 |
| $ | 3,129 | | $ | 922 | | $ | 27,344 |
|
Ending balance: individually evaluated for impairment |
|
| 947 | | | 180 | | | 75 | | | | |
| 1,202 |
|
Ending balance: collectively evaluated for impairment |
| $ | 7,787 | | $ | 14,379 | | $ | 3,054 | | $ | 922 | | $ | 26,142 |
|
Loans receivable: | | | | | | | | | | | | | | | | |
Ending balance | | $ | 679,286 | | $ | 1,137,990 |
| $ | 277,414 | | $ | 83,292 | | $ | 2,177,982 |
|
Ending balance: individually evaluated for impairment | |
| 4,297 | | | 3,952 | | | 1,546 | | | 111 | |
| 9,906 |
|
Ending balance: collectively evaluated for impairment | | $ | 674,989 | | $ | 1,134,038 | | $ | 275,868 | | $ | 83,181 | | $ | 2,168,076 |
|
The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2022 and December 31, 2021 is summarized as follows:
| | | | | | | | | | | | | | | | |
| | |
| | Real estate | | | | | | |
| ||||
June 30, 2022 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| |||||
Allowance for loan losses: | |
|
| | | | | | | | | | | | | |
Ending balance | | $ | 7,766 | | $ | 17,569 |
| $ | 3,220 | | $ | 819 | | $ | 29,374 |
|
Ending balance: individually evaluated for impairment |
|
| 34 | | | 15 | | | 48 | | | | |
| 97 |
|
Ending balance: collectively evaluated for impairment |
| $ | 7,732 | | $ | 17,554 | | $ | 3,172 | | $ | 819 | | $ | 29,277 |
|
Loans receivable: | | | | | | | | | | | | | | | | |
Ending balance | | $ | 596,809 | | $ | 1,569,658 |
| $ | 317,672 | | $ | 81,440 | | $ | 2,565,579 |
|
Ending balance: individually evaluated for impairment | |
| 160 | | | 2,903 | | | 1,267 | | | | |
| 4,330 |
|
Ending balance: collectively evaluated for impairment | | $ | 596,649 | | $ | 1,566,755 | | $ | 316,405 | | $ | 81,440 | | $ | 2,561,249 |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | ||
| | |
| | Real estate | | | | | | |
| ||||
December 31, 2021 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| |||||
Allowance for loan losses: | |
|
| | | | | | | | | | | | | |
Ending balance | | $ | 8,453 | | $ | 15,928 |
| $ | 3,209 | | $ | 793 | | $ | 28,383 |
|
Ending balance: individually evaluated for impairment |
|
| 40 | | | 109 | | | 26 | | | | |
| 175 |
|
Ending balance: collectively evaluated for impairment |
| $ | 8,413 | | $ | 15,819 | | $ | 3,183 | | $ | 793 | | $ | 28,208 |
|
Loans receivable: | | | | | | | | | | | | | | | | |
Ending balance | | $ | 613,127 | | $ | 1,343,539 |
| $ | 297,624 | | $ | 74,883 | | $ | 2,329,173 |
|
Ending balance: individually evaluated for impairment | |
| 199 | | | 2,889 | | | 1,274 | | | | |
| 4,362 |
|
Ending balance: collectively evaluated for impairment | | $ | 612,928 | | $ | 1,340,650 | | $ | 296,350 | | $ | 74,883 | | $ | 2,324,811 |
|
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
● | Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention. |
● | Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification. |
16
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
● | Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. |
● | Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
● | Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. |
The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | |
| | | | | Special | | | | | | | | | |
| |
June 30, 2022 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
Commercial | | $ | 587,907 | | $ | 8,077 | | $ | 825 | | $ | | | $ | 596,809 | |
Real estate: | | | | | | | | | | | | | | | | |
Commercial | |
| 1,555,363 | |
| 8,028 | |
| 6,267 | | | | |
| 1,569,658 | |
Residential | |
| 315,835 | |
| 119 | |
| 1,718 | | | | |
| 317,672 | |
Consumer | |
| 81,131 | |
| | |
| 309 | | | | |
| 81,440 | |
Total | | $ | 2,540,236 | | $ | 16,224 | | $ | 9,119 | | $ | | | $ | 2,565,579 | |
| | | | | | | | | | | | | | | | |
| | | | | Special | | | | | | | | | |
| |
December 31, 2021 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
Commercial | | $ | 611,151 | | $ | 896 | | $ | 1,080 | | $ | | | $ | 613,127 | |
Real estate: | | | | | | | | | | | | | | | | |
Commercial | |
| 1,324,646 | |
| 13,939 | |
| 4,954 | | | | |
| 1,343,539 | |
Residential | |
| 294,892 | |
| 333 | |
| 2,399 | | | | |
| 297,624 | |
Consumer | |
| 74,744 | |
| | |
| 139 | | | | |
| 74,883 | |
Total | | $ | 2,305,433 | | $ | 15,168 | | $ | 8,572 | | $ | | | $ | 2,329,173 | |
The increase to special mention commercial loans is primarily the result of the downgrade of 1 credit with an outstanding balance of $7,800 due to insufficient cash flows as the borrower’s operations have not stabilized in the anticipated timeframe. The decrease to special mention commercial real estate loans is due in part to an upgrade of a $3,531 credit resulting from improved financial performance and satisfactory repayment history and the payoff of a $2,429 credit. The increase to substandard commercial real estate loans is primarily due to the downgrade of three credits totaling $1,745 as a result of repayment uncertainty. These downgrades were offset by the payoff/reduction of various credits. Substandard residential real estate loans decreased $681 primarily due to the payoff of a $538 credit.
1817
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | |
| | | | | Special | | | | | | | | | |
| |
June 30, 2021 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
Commercial | | $ | 655,924 | | $ | 13,752 | | $ | 2,301 | | $ | | | $ | 671,977 | |
Real estate: | | | | | | | | | | | | | | | | |
Commercial | |
| 1,182,725 | |
| 12,909 | |
| 8,324 | | | | |
| 1,203,958 | |
Residential | |
| 278,115 | |
| 613 | |
| 2,772 | | | | |
| 281,500 | |
Consumer | |
| 79,316 | |
| | |
| 75 | | | | |
| 79,391 | |
Total | | $ | 2,196,080 | | $ | 27,274 | | $ | 13,472 | | $ | | | $ | 2,236,826 | |
| | | | | | | | | | | | | | | | |
| | | | | Special | | | | | | | | | |
| |
December 31, 2020 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
Commercial | | $ | 660,559 | | $ | 14,305 | | $ | 4,422 | | $ | | | $ | 679,286 | |
Real estate: | | | | | | | | | | | | | | | | |
Commercial | |
| 1,107,699 | |
| 17,517 | |
| 12,774 | | | | |
| 1,137,990 | |
Residential | |
| 274,327 | |
| 144 | |
| 2,943 | | | | |
| 277,414 | |
Consumer | |
| 83,215 | |
| | |
| 77 | | | | |
| 83,292 | |
Total | | $ | 2,125,800 | | $ | 31,966 | | $ | 20,216 | | $ | | | $ | 2,177,982 | |
The decrease to substandard commercial loans resulted primarily from a $1.5 million relationship that was paid off during the six month period ended June 30, 2021 and a $0.5 million principal reduction to an outstanding credit. The decrease in special mention commercial real estate loans resulted primarily from an upgrade to a $5.3 million credit due to a credit enhancement and satisfactory repayment history. The decrease in substandard commercial real estate loans resulted from a refinance of a credit related to the hospitality industry that is secured by a NaN percent SBA guarantee.
Information concerning nonaccrual loans by major loan classification at June 30, 20212022 and December 31, 20202021 is summarized as follows:
| | | | | | | |
|
| | June 30, 2021 |
| | December 31, 2020 |
|
Commercial | | $ | 1,640 | | $ | 3,822 | |
Real estate: | | | | | | | |
Commercial | |
| 3,025 | |
| 3,262 | |
Residential | |
| 876 | |
| 922 | |
Consumer | |
| 76 | |
| 111 | |
Total | | $ | 5,617 | | $ | 8,117 | |
19
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The decrease to non-accrual loans since year end was due primarily to a $1.5 million payoff of a specific commercial relationship and $0.5 million principal payment on an existing commercial credit.
| | | | | | | |
|
| | June 30, 2022 |
| | December 31, 2021 |
|
Commercial | | $ | 147 | | $ | 185 | |
Real estate: | | | | | | | |
Commercial | |
| 1,889 | |
| 1,793 | |
Residential | |
| 613 | |
| 694 | |
Consumer | |
| 270 | |
| 139 | |
Total | | $ | 2,919 | | $ | 2,811 | |
TheNonaccrual loans increased $108 from year end December 31, 2021 due to increases in commercial real estate and consumer loans, partially offset by reduced commercial and residential real estate loans.The major classifications of loans by past due status are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| Greater |
| | |
| | |
| | |
| Loans > 90 |
| ||
| | 30-59 Days | | 60-89 Days | | than 90 | | Total Past | | | | | | | | Days and |
| |||||
June 30, 2021 | | Past Due | | Past Due | | Days | | Due | | Current | | Total Loans | | Accruing |
| |||||||
Commercial | | $ | 53 | | | | | $ | 1,640 | | $ | 1,693 | | $ | 670,284 | | $ | 671,977 | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 814 | | | | |
| 3,025 | |
| 3,839 | |
| 1,200,119 | |
| 1,203,958 | | | | |
Residential | |
| 348 | | $ | 220 | | | 925 | |
| 1,493 | |
| 280,007 | |
| 281,500 | | $ | 49 | |
Consumer | |
| 347 | |
| 78 | |
| 76 | |
| 501 | |
| 78,890 | |
| 79,391 | |
| | |
Total | | $ | 1,562 | | $ | 298 | | $ | 5,666 | | $ | 7,526 | | $ | 2,229,300 | | $ | 2,236,826 | | $ | 49 | |
Improved credit quality resulted in lower levels of past due loans from year end.
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| Greater |
| | |
| | |
| | |
| Loans > 90 |
| ||
| | 30-59 Days | | 60-89 Days | | than 90 | | Total Past | | | | | | | | Days and |
| |||||
December 31, 2020 | | Past Due | | Past Due | | Days | | Due | | Current | | Total Loans | | Accruing |
| |||||||
Commercial | | $ | 73 | | | | | $ | 3,822 | | $ | 3,895 | | $ | 675,391 | | $ | 679,286 | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 344 | | $ | 134 | |
| 3,262 | |
| 3,740 | |
| 1,134,250 | |
| 1,137,990 | | | | |
Residential | |
| 2,072 | |
| 480 | |
| 993 | |
| 3,545 | |
| 273,869 | |
| 277,414 | | $ | 71 | |
Consumer | |
| 374 | |
| 63 | |
| 111 | |
| 548 | |
| 82,744 | |
| 83,292 | |
| | |
Total | | $ | 2,863 | | $ | 677 | | $ | 8,188 | | $ | 11,728 | | $ | 2,166,254 | | $ | 2,177,982 | | $ | 71 | |
2018
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| Greater |
| | |
| | |
| | |
| Loans > 90 |
| ||
| | 30-59 Days | | 60-89 Days | | than 90 | | Total Past | | | | | | | | Days and |
| |||||
June 30, 2022 | | Past Due | | Past Due | | Days | | Due | | Current | | Total Loans | | Accruing |
| |||||||
Commercial | | $ | 78 | | $ | 19 | | $ | 127 | | $ | 224 | | $ | 596,585 | | $ | 596,809 | | $ | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 1,561 | | | 240 | |
| 708 | |
| 2,509 | |
| 1,567,149 | |
| 1,569,658 | | | | |
Residential | |
| 270 | | | 475 | | | 375 | |
| 1,120 | |
| 316,552 | |
| 317,672 | | | 190 | |
Consumer | |
| 523 | | | 179 | |
| 123 | |
| 825 | |
| 80,615 | |
| 81,440 | |
| | |
Total | | $ | 2,432 | | $ | 913 | | $ | 1,333 | | $ | 4,678 | | $ | 2,560,901 | | $ | 2,565,579 | | $ | 190 | |
Improved credit quality resulted in lower levels of past due loans from year end.
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| Greater |
| | |
| | |
| | |
| Loans > 90 |
| ||
| | 30-59 Days | | 60-89 Days | | than 90 | | Total Past | | | | | | | | Days and |
| |||||
December 31, 2021 | | Past Due | | Past Due | | Days | | Due | | Current | | Total Loans | | Accruing |
| |||||||
Commercial | | $ | 101 | | | 155 | | $ | 158 | | $ | 414 | | $ | 612,713 | | $ | 613,127 | | $ | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 768 | | $ | 423 | |
| 834 | |
| 2,025 | |
| 1,341,514 | |
| 1,343,539 | | | | |
Residential | |
| 1,552 | |
| 207 | |
| 265 | |
| 2,024 | |
| 295,600 | |
| 297,624 | | | 13 | |
Consumer | |
| 477 | |
| 163 | |
| 51 | |
| 691 | |
| 74,192 | |
| 74,883 | |
| | |
Total | | $ | 2,898 | | $ | 948 | | $ | 1,308 | | $ | 5,154 | | $ | 2,324,019 | | $ | 2,329,173 | | $ | 13 | |
The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 20212022 and June 30, 2020,2021, and as of and for the year ended December 31, 20202021 by major loan classification:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | This Quarter | | Year-to-Date | | | | | | | | | | | | This Quarter | | Year-to-Date | | ||||||||||||||||
| | | | | Unpaid | | | | | Average | | Interest |
| Average | | Interest |
| | | | | Unpaid | | | | | Average | | Interest |
| Average | | Interest |
| ||||||||||
| | Recorded | | Principal | | Related | | Recorded | | Income |
| Recorded | | Income |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| Recorded | | Income |
| ||||||||||||||
June 30, 2021 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
June 30, 2022 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
With no related allowance: |
| | |
| | |
| | |
| | |
| | | | | |
| | | |
| | |
| | |
| | |
| | |
| | | | | |
| | | |
Commercial | | $ | 1,105 | | $ | 1,603 | | | | | $ | 889 | | $ | 3 | | $ | 1,343 | | $ | 7 | | | $ | 126 | | $ | 471 | | | | | $ | 132 | | $ | 2 | | $ | 141 | | $ | 4 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 3,009 | |
| 3,970 | | | | |
| 3,145 | |
| 9 | |
| 2,887 | |
| 15 | | |
| 2,473 | |
| 3,262 | | | | |
| 2,611 | |
| 10 | |
| 2,532 | |
| 22 | |
Residential | |
| 1,007 | |
| 1,185 | | | | |
| 1,064 | |
| 4 | |
| 1,071 | |
| 10 | | |
| 996 | |
| 1,181 | | | | |
| 935 | |
| 6 | |
| 914 | |
| 10 | |
Consumer | |
| 76 | |
| 86 | | | | |
| 85 | | | | |
| 94 | | | | | |
| 270 | |
| 283 | | | | |
| 238 | | | | |
| 205 | | | | |
Total | |
| 5,197 | |
| 6,844 | | | | |
| 5,183 | |
| 16 | |
| 5,395 | |
| 32 | | |
| 3,865 | |
| 5,197 | | | | |
| 3,916 | |
| 18 | |
| 3,792 | |
| 36 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 966 | |
| 999 | | | 549 | |
| 1,472 | |
| 5 | |
| 1,663 | |
| 10 | | |
| 34 | |
| 34 | | $ | 34 | |
| 28 | |
| | |
| 32 | |
| | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 674 | |
| 771 | |
| 87 | |
| 692 | |
| 6 | |
| 988 | |
| 10 | | |
| 430 | |
| 442 | |
| 15 | |
| 435 | |
| 4 | |
| 461 | |
| 8 | |
Residential | |
| 459 | |
| 470 | |
| 58 | |
| 441 | |
| 3 | |
| 447 | |
| 7 | | |
| 271 | |
| 276 | |
| 48 | |
| 273 | |
| 3 | |
| 315 | |
| 6 | |
Consumer | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | ||||||||||||||||||||||
Total | |
| 2,099 | |
| 2,240 | |
| 694 | |
| 2,605 | |
| 14 | |
| 3,098 | |
| 27 | | |
| 735 | |
| 752 | |
| 97 | |
| 736 | |
| 7 | |
| 808 | |
| 14 | |
Total impaired loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 2,071 | |
| 2,602 | |
| 549 | |
| 2,361 | |
| 8 | |
| 3,006 | |
| 17 | | |
| 160 | |
| 505 | |
| 34 | |
| 160 | |
| 2 | |
| 173 | |
| 4 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 3,683 | |
| 4,741 | |
| 87 | |
| 3,837 | |
| 15 | |
| 3,875 | |
| 25 | | |
| 2,903 | |
| 3,704 | |
| 15 | |
| 3,046 | |
| 14 | |
| 2,993 | |
| 30 | |
Residential | |
| 1,466 | |
| 1,655 | |
| 58 | |
| 1,505 | |
| 7 | |
| 1,518 | |
| 17 | | |
| 1,267 | |
| 1,457 | |
| 48 | |
| 1,208 | |
| 9 | |
| 1,229 | |
| 16 | |
Consumer | |
| 76 | |
| 86 | |
| | |
| 85 | |
| | |
| 94 | |
| | | |
| 270 | |
| 283 | |
| | |
| 238 | |
| | |
| 205 | |
| | |
Total | | $ | 7,296 | | $ | 9,084 | | $ | 694 | | $ | 7,788 | | $ | 30 | | $ | 8,493 | | $ | 59 | | | $ | 4,600 | | $ | 5,949 | | $ | 97 | | $ | 4,652 | | $ | 25 | | $ | 4,600 | | $ | 50 | |
2119
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | For the Year Ended |
| | | | | | | | | | | For the Year Ended |
| ||||||||
| | | | | Unpaid | | | | | Average | | Interest |
| | | | | Unpaid | | | | | Average | | Interest |
| ||||||
| | Recorded | | Principal | | Related | | Recorded | | Income |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| ||||||||||
December 31, 2020 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| |||||||||||||||||||||
December 31, 2021 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| |||||||||||||||||||||
With no related allowance: |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
| | | |
Commercial | | $ | 2,251 | | $ | 3,421 | | | | | $ | 2,915 | | $ | 30 | | | $ | 158 | | $ | 481 | | | | | $ | 964 | | $ | 13 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 2,372 | |
| 2,964 | | | | |
| 2,148 | |
| 28 | | |
| 2,376 | |
| 3,120 | | | | |
| 2,719 | |
| 22 | |
Residential | |
| 1,086 | |
| 1,263 | | | | |
| 1,223 | |
| 21 | | |
| 873 | |
| 1,073 | | | | |
| 1,016 | |
| 19 | |
Consumer | |
| 111 | |
| 121 | | | | |
| 167 | | | | | |
| 139 | |
| 148 | | | | |
| 100 | | | | |
Total | |
| 5,820 | |
| 7,769 | | | | |
| 6,453 | |
| 79 | | |
| 3,546 | |
| 4,822 | | | | |
| 4,799 | |
| 54 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 2,046 | |
| 2,094 | | | 947 | |
| 2,038 | |
| 17 | | |
| 41 | |
| 41 | | | 40 | |
| 1,091 | |
| 15 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 1,580 | |
| 1,710 | |
| 180 | |
| 1,687 | |
| 36 | | |
| 513 | |
| 543 | |
| 109 | |
| 802 | |
| 22 | |
Residential | |
| 460 | |
| 482 | |
| 75 | |
| 624 | |
| 13 | | |
| 401 | |
| 401 | |
| 26 | |
| 436 | |
| 13 | |
Consumer | | | | |
| | |
| | |
| | |
| | | | | | |
| | |
| | |
| | |
| | |
Total | |
| 4,086 | |
| 4,286 | |
| 1,202 | |
| 4,349 | |
| 66 | | |
| 955 | |
| 985 | |
| 175 | |
| 2,329 | |
| 50 | |
Total impaired loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 4,297 | |
| 5,515 | |
| 947 | |
| 4,953 | |
| 47 | | |
| 199 | |
| 522 | |
| 40 | |
| 2,055 | |
| 28 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 3,952 | |
| 4,674 | |
| 180 | |
| 3,835 | |
| 64 | | |
| 2,889 | |
| 3,663 | |
| 109 | |
| 3,521 | |
| 44 | |
Residential | |
| 1,546 | |
| 1,745 | |
| 75 | |
| 1,847 | |
| 34 | | |
| 1,274 | |
| 1,474 | |
| 26 | |
| 1,452 | |
| 32 | |
Consumer | |
| 111 | |
| 121 | |
| | |
| 167 | |
| | | |
| 139 | |
| 148 | |
| | |
| 100 | |
| | |
Total | | $ | 9,906 | | $ | 12,055 | | $ | 1,202 | | $ | 10,802 | | $ | 145 | | | $ | 4,501 | | $ | 5,807 | | $ | 175 | | $ | 7,128 | | $ | 104 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | This Quarter | | Year-to-Date | | | | | | | | | | | | This Quarter | | Year-to-Date | | ||||||||||||||||
| | | | | Unpaid | | | | | Average | | Interest |
| Average | | Interest |
| | | | | Unpaid | | | | | Average | | Interest |
| Average | | Interest |
| ||||||||||
| | Recorded | | Principal | | Related | | Recorded | | Income |
| Recorded | | Income |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| Recorded | | Income |
| ||||||||||||||
June 30, 2020 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
June 30, 2021 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
With no related allowance: |
| | |
| | |
| | |
| | |
| | | | | |
| | | |
| | |
| | |
| | |
| | |
| | | | | |
| | | |
Commercial | | $ | 2,921 | | $ | 3,480 | | | | | $ | 3,314 | | $ | 9 | | $ | 3,422 | | $ | 25 | | | $ | 1,105 | | $ | 1,603 | | | | | $ | 889 | | $ | 3 | | $ | 1,343 | | $ | 7 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 2,042 | |
| 2,606 | | | | |
| 2,153 | | | 17 | |
| 2,074 | | | 22 | | |
| 3,009 | |
| 3,970 | | | | |
| 3,145 | | | 9 | |
| 2,887 | | | 15 | |
Residential | |
| 1,115 | |
| 1,273 | | | | |
| 1,122 | | | 5 | |
| 1,321 | | | 10 | | |
| 1,007 | |
| 1,185 | | | | |
| 1,064 | | | 4 | |
| 1,071 | | | 10 | |
Consumer | |
| 160 | |
| 178 | | | | |
| 181 | | | | |
| 207 | | | | | |
| 76 | |
| 86 | | | | |
| 85 | | | | |
| 94 | | | | |
Total | |
| 6,238 | |
| 7,537 | | | | |
| 6,770 | | | 31 | |
| 7,024 | | | 57 | | |
| 5,197 | |
| 6,844 | | | | |
| 5,183 | | | 16 | |
| 5,395 | | | 32 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 2,487 | |
| 2,516 | | $ | 1,339 | |
| 2,222 | | | | |
| 1,821 | | | 6 | | |
| 966 | |
| 999 | | $ | 549 | |
| 1,472 | | | 5 | |
| 1,663 | | | 10 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 2,448 | |
| 2,774 | |
| 239 | |
| 1,856 | |
| | |
| 1,614 | |
| | | |
| 674 | |
| 771 | |
| 87 | |
| 692 | |
| 6 | |
| 988 | |
| 10 | |
Residential | |
| 810 | |
| 878 | |
| 163 | |
| 758 | |
| 3 | |
| 650 | |
| 7 | | |
| 459 | |
| 470 | |
| 58 | |
| 441 | |
| 3 | |
| 447 | |
| 7 | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | |
| 5,745 | |
| 6,168 | |
| 1,741 | |
| 4,836 | |
| 3 | |
| 4,085 | |
| 13 | | |
| 2,099 | |
| 2,240 | |
| 694 | |
| 2,605 | |
| 14 | |
| 3,098 | |
| 27 | |
Total impaired loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 5,408 | |
| 5,996 | |
| 1,339 | |
| 5,536 | |
| 9 | |
| 5,243 | |
| 31 | | |
| 2,071 | |
| 2,602 | |
| 549 | |
| 2,361 | |
| 8 | |
| 3,006 | |
| 17 | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | |
| 4,490 | |
| 5,380 | |
| 239 | |
| 4,009 | |
| 17 | |
| 3,688 | |
| 22 | | |
| 3,683 | |
| 4,741 | |
| 87 | |
| 3,837 | |
| 15 | |
| 3,875 | |
| 25 | |
Residential | |
| 1,925 | |
| 2,151 | |
| 163 | |
| 1,880 | |
| 8 | |
| 1,971 | |
| 17 | | |
| 1,466 | |
| 1,655 | |
| 58 | |
| 1,505 | |
| 7 | |
| 1,518 | |
| 17 | |
Consumer | |
| 160 | |
| 178 | | | | |
| 181 | | | | |
| 207 | | | | | |
| 76 | |
| 86 | | | | |
| 85 | | | | |
| 94 | | | | |
Total | | $ | 11,983 | | $ | 13,705 | | $ | 1,741 | | $ | 11,606 | | $ | 34 | | $ | 11,109 | | $ | 70 | | | $ | 7,296 | | $ | 9,084 | | $ | 694 | | $ | 7,788 | | $ | 30 | | $ | 8,493 | | $ | 59 | |
2220
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Loan Modifications/Troubled Debt Restructurings/COVID-19
Included in the commercial loan and commercialreal estate and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $1,468 at June 30, 2022, $1,649 at December 31, 2021 and $2,637 at June 30, 2021, $2,818 at December 31, 2020 and $3,168 at June 30, 2020.2021.
Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:
● | Rate Modification - A modification in which the interest rate is changed to a below market rate. |
● | Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed. |
● | Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. |
● | Combination Modification - Any other type of modification, including the use of multiple categories above. |
There were 0 loans modified as troubled debt restructurings during the three and six months ended June 30, 2022 or 2021. The following table provides the number of loans modified in a trouble debt restructuring and the pre- and post-modification recorded during the three and six months ended June 30, 2020.
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, 2020 | | For the Six Months Ended June 30, 2020 | ||||||||||||
| | | | | Pre-Modification | | Post-Modification | | | | | Pre-Modification | | | Post-Modification | |
| | Number | | Recorded | | Recorded | | Number | | | Recorded | | | Recored | ||
| | of Loans |
| Investment |
| Investment |
| of Loans |
| | Investment |
| | Investment | ||
Commercial real estate | | 3 | | $ | 1,073 | | $ | 1,073 | | 3 | | $ | 1,073 | | $ | 1,073 |
Commercial and industrial | | 1 | | | 12 | | | 12 |
| 1 | | | 12 | | | 12.00 |
Total | | 4 | | $ | 1,085 | | $ | 1,085 |
| 4 | | $ | 1,085 | | $ | 1,085 |
During the three months and six months ended June 31,30, 2022, or 2021, there were 0 payment defaults on troubled debt restructurings. During the three and six months ended June 30, 2020, there was 1 payment default on a residential real estate loan in the amount of $52.
The Company received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and agreed to many such deferrals during 2020. The federal banking regulators issued guidance and encouraged banks to work prudently with, and provide short-term payment accommodations to borrowers affected by COVID-19. Section 4013 of the CARES Act includes a provision for the Company to opt out of applying the troubled debt restructuring (“TDR”) guidance for certain loan modifications and specified that such modifications made on loans that were current as of December 31, 2019 do not need to be classified as TDRs. Peoples applied this guidance. Similarly, FASB confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.
Beginning in March 2020, the Company began receiving COVID-19 related requests for temporary modifications to the repayment structure for borrower loans. As of June 30, 2021, 4 consumer loans not classified as TDRs remained on deferral with principal balances aggregating $69 thousand.
23
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
6. Other assets:
The increase in other assets was due to the increase to the net deferred tax asset related to the higher unrealized loss of the available-for-sale securities portfolio. The components of other assets at June 30, 2021,2022, and December 31, 20202021 are summarized as follows:
| | | | | | | | | | | ��� | | | |
|
| | June 30, 2021 |
| | December 31, 2020 |
|
| | June 30, 2022 |
| | December 31, 2021 |
|
Other real estate owned | | $ | 260 | | $ | 864 | | | $ | 121 | | $ | 609 | |
Investment in low income housing partnership | |
| 6,092 | |
| 6,332 | | |
| 5,659 | |
| 5,900 | |
Mortgage servicing rights | |
| 835 | |
| 838 | | |
| 919 | |
| 882 | |
Restricted equity securities (FHLB and other) | |
| 3,125 | |
| 5,397 | | |
| 8,537 | |
| 4,045 | |
Net deferred tax asset | | | 4,234 | | | 3,768 | | | | 16,266 | | | 5,355 | |
Interest rate floor | | | 1,303 | | | 1,678 | | | | 97 | | | 844 | |
Interest rate swaps | | | 10,023 | | | 13,693 | | | | 14,720 | | | 9,026 | |
Other assets | |
| 7,507 | |
| 6,345 | | |
| 8,112 | |
| 6,395 | |
Total | | $ | 33,379 | | $ | 38,915 | | | $ | 54,431 | | $ | 33,056 | |
| | | | | | | | | | | | | | |
7. Fair value estimates:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.
21
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.
Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:
● | Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
● | Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
● | Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
24
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.
During the periods ended June 30, 20212022 and December 31, 20202021 there were 0 transfers in or out of Level 3.
The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:
Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.
Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.
Interest rate swaps and options: The Company’s interest rate swaps and options are reported at fair value utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for interest rate, forward rates, rate volatility, and volatility surface. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2021 and December 31, 2020 are summarized as follows:
| | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| ||||||||||
| | | | Quoted Prices in | | Significant | | Significant |
| ||||
| | | | Active Markets for | | Other Observable | | Unobservable |
| ||||
| | | | Identical Assets | | Inputs | | Inputs |
| ||||
June 30, 2021 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 16,743 |
| $ | 16,743 |
| | |
| $ | | |
U.S. government-sponsored enterprises | | | 57,459 | | | | | $ | 57,459 | | | | |
State and municipals: | | | | | | | | | | | | | |
Taxable | |
| 60,453 | | | | |
| 60,453 | | | | |
Tax-exempt | |
| 75,106 | | | | |
| 75,106 | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | |
| 2,714 | | | | |
| 2,714 | | | | |
U.S. government-sponsored enterprises | |
| 121,010 | | | | |
| 121,010 | | | | |
Corporate debt securities | | | 2,964 | | | | | | 2,964 | | | | |
Common equity securities | | | 142 | | | 142 | | | | | | | |
Total investment securities | | $ | 336,591 | | $ | 16,885 | | $ | 319,706 | | $ | | |
Loan held for sale | | $ | 1,545 | | | | | $ | 1,545 | | | | |
Interest rate floor-other assets | | $ | 1,303 | | | | | $ | 1,303 | | | | |
Interest rate swap-other assets | | $ | 10,023 | | | | | $ | 10,023 | | | | |
Interest rate swap-other liabilities | | $ | (9,777) | | | | | $ | (9,777) | | | | |
| | | | | | | | | | | | | |
2522
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| ||||||||||
| | | | | Quoted Prices in | | Significant | | Significant |
| |||
| | | | Active Markets for | | Other Observable | | Unobservable |
| ||||
| | | | Identical Assets | | Inputs | | Inputs |
| ||||
December 31, 2020 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 18,905 |
| $ | 18,905 |
| | |
| $ | | |
U.S. government-sponsored enterprises | | | 65,188 | | | | | $ | 65,188 | | | | |
State and municipals: | | | | | | | | | | | | | |
Taxable | |
| 55,366 | | | | |
| 55,366 | | | | |
Tax-exempt | |
| 56,994 | | | | |
| 56,994 | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | |
| 3,707 | | | | |
| 3,707 | | | | |
U.S. government-sponsored enterprises | |
| 94,751 | | | | |
| 94,751 | | | | |
Corporate debt securities | | | 1,000 | | | | | | 1,000 | | | | |
Common equity securities | |
| 138 | | | 138 | | | | | | | |
Total investment securities | | $ | 296,049 | | $ | 19,043 | | $ | 277,006 | | $ | | |
Loan held for sale | | $ | 837 | | | | | $ | 837 | | | | |
Interest rate floor-other assets | | $ | 1,678 | | | | | $ | 1,678 | | | | |
Interest rate swap-other assets | | $ | 13,693 | | | | | $ | 13,693 | | | | |
Interest rate swap-other liabilities | | $ | (14,099) | | | | | $ | (14,099) | | | | |
| | | | | | | | | | | | | |
Assets and liabilities measured at fair value on a nonrecurringrecurring basis at June 30, 20212022 and December 31, 20202021 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| | Fair Value Measurement Using |
| ||||||||||||||||||||
| | | | | Quoted Prices in | | Significant | | Significant |
| | | | Quoted Prices in | | Significant | | Significant |
| |||||||
| | | | Active Markets for | | Other Observable | | Unobservable |
| | | | Active Markets for | | Other Observable | | Unobservable |
| ||||||||
| | | | Identical Assets | | Inputs | | Inputs |
| | | | Identical Assets | | Inputs | | Inputs |
| ||||||||
June 30, 2021 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
Impaired loans |
| $ | 1,405 |
| | |
| | |
| $ | 1,405 | | |||||||||||||
Other real estate owned | | $ | 29 | | | | | | | | $ | 29 | | |||||||||||||
June 30, 2022 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
U.S. Treasury securities |
| $ | 236,458 |
| $ | 236,458 |
| $ | |
| $ | | | |||||||||||||
U.S. government-sponsored enterprises | | | 23,165 | | | | | | 23,165 | | | | | |||||||||||||
State and municipals: | | | | | | | | | | | | | | |||||||||||||
Taxable | |
| 59,972 | | | | |
| 59,972 | | | | | |||||||||||||
Tax-exempt | |
| 89,272 | | | | |
| 89,272 | | | | | |||||||||||||
Mortgage-backed securities: | | | | | | | | | | | | | | |||||||||||||
U.S. government agencies | |
| 1,276 | | | | |
| 1,276 | | | | | |||||||||||||
U.S. government-sponsored enterprises | |
| 100,058 | | | | |
| 100,058 | | | | | |||||||||||||
Corporate debt securities | | | 3,710 | | | | | | 3,710 | | | | | |||||||||||||
Common equity securities | | | 121 | | | 121 | | | | | | | | |||||||||||||
Total investment securities | | $ | 514,032 | | $ | 236,579 | | $ | 277,453 | | $ | | | |||||||||||||
Loan held for sale | | $ | 681 | | | | | $ | 681 | | | | | |||||||||||||
Interest rate floor-other assets | | $ | 97 | | | | | $ | 97 | | | | | |||||||||||||
Interest rate swap-other assets | | $ | 14,720 | | | | | $ | 14,720 | | | | | |||||||||||||
Interest rate swap-other liabilities | | $ | (13,982) | | | | | $ | (13,982) | | | | | |||||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| ||||||||||
| | | | | Quoted Prices in | | Significant Other | | Significant |
| |||
| | | | Active Markets for | | Observable | | Unobservable |
| ||||
| | | | Identical Assets | | Inputs | | Inputs |
| ||||
December 31, 2020 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Impaired loans |
| $ | 2,884 |
| | |
| | |
| $ | 2,884 | |
Other real estate owned | | $ | 527 | | | | | | | | $ | 527 | |
Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
| | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| ||||||||||
| | | | | Quoted Prices in | | Significant | | Significant |
| |||
| | | | Active Markets for | | Other Observable | | Unobservable |
| ||||
| | | | Identical Assets | | Inputs | | Inputs |
| ||||
December 31, 2021 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 191,574 |
| $ | 191,574 |
| | |
| $ | | |
U.S. government-sponsored enterprises | | | 33,778 | | | | | $ | 33,778 | | | | |
State and municipals: | | | | | | | | | | | | | |
Taxable | |
| 68,978 | | | | |
| 68,978 | | | | |
Tax-exempt | |
| 98,250 | | | | |
| 98,250 | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | |
U.S. government agencies | |
| 1,843 | | | | |
| 1,843 | | | | |
U.S. government-sponsored enterprises | |
| 119,980 | | | | |
| 119,980 | | | | |
Corporate debt securities | | | 2,918 | | | | | | 2,918 | | | | |
Common equity securities | |
| 140 | | | 140 | | | | | | | |
Total investment securities | | $ | 517,461 | | $ | 191,714 | | $ | 325,747 | | $ | | |
Loan held for sale | | $ | 408 | | | | | $ | 408 | | | | |
Interest rate floor-other assets | | $ | 844 | | | | | $ | 844 | | | | |
Interest rate swap-other assets | | $ | 9,026 | | | | | $ | 9,026 | | | | |
Interest rate swap-other liabilities | | $ | (8,811) | | | | | $ | (8,811) | | | | |
| | | | | | | | | | | | | |
26
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
| | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| |||||||
| | Fair Value | | | | | | Range |
| |
June 30, 2021 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |
Impaired loans |
| $ | 1,405 |
| Appraisal of collateral |
| Appraisal adjustments |
| 17.9% to 97.0% (23.9)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.5)% | |
Other real estate owned | | $ | 29 |
| Appraisal of collateral |
| Appraisal adjustments |
| 71.5% to 71.5% (71.5)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.0)% | |
| | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| |||||||
| | Fair Value | | | | | | Range |
| |
December 31, 2020 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |
Impaired loans |
| $ | 2,884 |
| Appraisal of collateral |
| Appraisal adjustments |
| 9.0% to 97.0% (28.2)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.5)% | |
Other real estate owned | | $ | 527 |
| Appraisal of collateral |
| Appraisal adjustments |
| 3.1% to 58.1% (29.9)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.0)% | |
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
2723
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021 are summarized as follows:
| | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| ||||||||||
| | | | | Quoted Prices in | | Significant | | Significant |
| |||
| | | | Active Markets for | | Other Observable | | Unobservable |
| ||||
| | | | Identical Assets | | Inputs | | Inputs |
| ||||
June 30, 2022 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Impaired loans |
| $ | 638 |
| | |
| | |
| $ | 638 | |
| | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| ||||||||||
| | | | | Quoted Prices in | | Significant Other | | Significant |
| |||
| | | | Active Markets for | | Observable | | Unobservable |
| ||||
| | | | Identical Assets | | Inputs | | Inputs |
| ||||
December 31, 2021 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Impaired loans |
| $ | 780 |
| | |
| | |
| $ | 780 | |
Other real estate owned | | $ | 487 | | | | | | | | $ | 487 | |
Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
| | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| |||||||
| | Fair Value | | | | | | Range |
| |
June 30, 2022 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |
Impaired loans |
| $ | 638 |
| Appraisal of collateral |
| Appraisal adjustments |
| 19.8% to 97.0% (70.5)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.2)% | |
| | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| |||||||
| | Fair Value | | | | | | Range |
| |
December 31, 2021 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |
Impaired loans |
| $ | 780 |
| Appraisal of collateral |
| Appraisal adjustments |
| 6.4% to 97.0% (65.2)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.1)% | |
Other real estate owned | | $ | 487 |
| Appraisal of collateral |
| Appraisal adjustments |
| 35.9% to 35.9% (35.9)% | |
| | | | | |
| Liquidation expenses |
| 3.0% to 6.0% (5.0)% | |
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
24
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The carrying and fair values of the Company’s financial instruments at June 30, 20212022 and December 31, 20202021 and their placement within the fair value hierarchy are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| Fair Value Hierarchy |
|
| | |
| | |
| Fair Value Hierarchy |
| ||||||||||||||
| | | | | | | | Quoted |
| | |
| | |
| | | | | | | | Quoted |
| | |
| | |
| ||
| | | | | | | | Prices in | | | | | | |
| | | | | | | | Prices in | | | | | | |
| ||
| | | | | | | | Active | | Significant | | | |
| | | | | | | | Active | | Significant | | | |
| ||||
| | | | | | | | Markets for | | Other | | Significant |
| | | | | | | | Markets for | | Other | | Significant |
| ||||||
| | | | | | | | Identical | | Observable | | Unobservable |
| | | | | | | | Identical | | Observable | | Unobservable |
| ||||||
| | Carrying | | Fair | | Assets | | Inputs | | Inputs |
| | Carrying | | Fair | | Assets | | Inputs | | Inputs |
| ||||||||||
June 30, 2021 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
June 30, 2022 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 248,051 | | $ | 248,051 | | $ | 248,051 | | | | | | | | | $ | 47,733 | | $ | 47,733 | | $ | 47,733 | | | | | | | |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale | |
| 336,449 | |
| 336,449 | | | 16,743 | | $ | 319,706 | | | | | |
| 513,911 | |
| 513,911 | | | 236,458 | | $ | 277,453 | | | | |
Common equity securities | | | 142 | | | 142 | | | 142 | | | | | | | | | | 121 | | | 121 | | | 121 | | | | | | | |
Held-to-maturity | |
| 7,104 | |
| 7,294 | | | | |
| 7,294 | | | | | |
| 94,446 | |
| 84,076 | | | | |
| 84,076 | | | | |
Loans held for sale | |
| 1,545 | |
| 1,545 | | | | |
| 1,545 | | | | | |
| 681 | |
| 681 | | | | |
| 681 | | | | |
Net loans | |
| 2,210,087 | |
| 2,183,217 | | | | | | | | $ | 2,183,217 | | |
| 2,536,205 | |
| 2,507,034 | | | | | | | | $ | 2,507,034 | |
Accrued interest receivable | |
| 7,844 | |
| 7,844 | | | | |
| 7,844 | | | | | |
| 9,303 | |
| 9,303 | | | | |
| 9,303 | | | | |
Mortgage servicing rights | |
| 835 | |
| 1,264 | | | | |
| 1,264 | | | | | |
| 919 | |
| 1,414 | | | | |
| 1,414 | | | | |
Restricted equity securities (FHLB and other) | | | 3,125 | |
| 3,125 | | | | |
| 3,125 | | | | | | | 8,537 | |
| 8,537 | | | | |
| 8,537 | | | | |
Interest rate floor | | | 1,303 | | | 1,303 | | | | | | 1,303 | | | | | | | 97 | | | 97 | | | | | | 97 | | | | |
Interest rate swaps | |
| 10,023 | |
| 10,023 | | | | |
| 10,023 | | | | | |
| 14,720 | |
| 14,720 | | | | |
| 14,720 | | | | |
Total | | $ | 2,826,508 | | $ | 2,800,257 | | | | | | | | | | | | $ | 3,226,673 | | $ | 3,187,627 | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 2,611,766 | | $ | 2,614,117 | | | | | $ | 2,614,117 | | | | | | $ | 2,911,283 | | $ | 2,903,800 | | | | | $ | 2,903,800 | | | | |
Short-term borrowings | | | 129,170 | | | 129,083 | | | | | | 129,083 | | | | | ||||||||||||||||
Long-term debt | |
| 3,752 | |
| 3,890 | | | | |
| 3,890 | | | | | |
| 1,646 | |
| 1,657 | | | | |
| 1,657 | | | | |
Subordinated debentures | |
| 33,000 | |
| 32,733 | | | | |
| 32,733 | | | | | |
| 33,000 | |
| 33,286 | | | | |
| 33,286 | | | | |
Accrued interest payable | | | 469 | |
| 469 | | | | | | 469 | | | | | | | 1,269 | |
| 1,269 | | | | | | 1,269 | | | | |
Interest rate swaps | |
| 9,777 | |
| 9,777 | | | | | | 9,777 | | | | | |
| 13,982 | |
| 13,982 | | | | | | 13,982 | | | | |
Total | | $ | 2,658,764 | | $ | 2,660,986 | | | | | | | | | | | | $ | 3,090,350 | | $ | 3,083,077 | | | | | | | | | | |
2825
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| Fair Value Hierarchy |
|
| | |
| | |
| Fair Value Hierarchy |
| ||||||||||||||
| | | | | | | | Quoted |
| | |
| | |
| | | | | | | | Quoted |
| | |
| | |
| ||
| | | | | | | | Prices in | | | | | | |
| | | | | | | | Prices in | | | | | | |
| ||
| | | | | | | | Active | | Significant | | | |
| | | | | | | | Active | | Significant | | | |
| ||||
| | | | | | | | Markets for | | Other | | Significant |
| | | | | | | | Markets for | | Other | | Significant |
| ||||||
| | | | | | | | Identical | | Observable | | Unobservable |
| | | | | | | | Identical | | Observable | | Unobservable |
| ||||||
| | Carrying | | Fair | | Assets | | Inputs | | Inputs |
| | Carrying | | Fair | | Assets | | Inputs | | Inputs |
| ||||||||||
December 31, 2020 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
December 31, 2021 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 228,192 | | $ | 228,192 | | $ | 228,192 | | | | | | | | | $ | 279,933 | | $ | 279,933 | | $ | 279,933 | | | | | | | |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale | |
| 295,911 | |
| 295,911 | | | 18,905 | | $ | 277,006 | | | | | |
| 517,321 | |
| 517,321 | | | 191,574 | | $ | 325,747 | | | | |
Common equity securities | | | 138 | | | 138 | | | 138 | | | | | | | | | | 140 | | | 140 | | | 140 | | | | | | | |
Held-to-maturity | |
| 7,225 | |
| 7,513 | | | | |
| 7,513 | | | | | |
| 71,213 | |
| 70,446 | | | | |
| 70,446 | | | | |
Loans held for sale | |
| 837 | |
| 837 | | | | |
| 837 | | | | | |
| 408 | |
| 408 | | | | |
| 408 | | | | |
Net loans | |
| 2,150,638 | |
| 2,145,752 | | | | | | | | $ | 2,145,752 | | |
| 2,300,790 | |
| 2,261,586 | | | | | | | | $ | 2,261,586 | |
Accrued interest receivable | |
| 8,255 | |
| 8,255 | | | | |
| 8,255 | | | | | |
| 8,528 | |
| 8,528 | | | | |
| 8,528 | | | | |
Mortgage servicing rights | |
| 838 | |
| 1,269 | | | | |
| 1,269 | | | | | |
| 882 | |
| 1,357 | | | | |
| 1,357 | | | | |
Restricted equity securities (FHLB and other) | |
| 5,397 | |
| 5,397 | | | | |
| 5,397 | | | | | |
| 4,045 | |
| 4,045 | | | | |
| 4,045 | | | | |
Interest rate floor | | | 1,678 | | | 1,678 | | | | | | 1,678 | | | | | | | 844 | | | 844 | | | | | | 844 | | | | |
Interest rate swaps | | | 13,693 | | | 13,693 | | | | | | 13,693 | | | | | | | 9,026 | | | 9,026 | | | | | | 9,026 | | | | |
Total | | $ | 2,712,802 | | $ | 2,708,635 | | | | | | | | | | | | $ | 3,193,130 | | $ | 3,153,634 | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 2,437,113 | | $ | 2,441,014 | | | | | $ | 2,441,014 | | | | | | $ | 2,963,397 | | $ | 2,963,547 | | | | | $ | 2,963,547 | | | | |
Long-term debt | |
| 14,769 | |
| 15,073 | | | | |
| 15,073 | | | | | |
| 2,711 | |
| 2,778 | | | | |
| 2,778 | | | | |
Subordinated debentures | | | 33,000 | | | 33,096 | | | | | | 33,096 | | | | | | | 33,000 | | | 32,337 | | | | | | 32,337 | | | | |
Accrued interest payable | |
| 736 | |
| 736 | | | | | | 736 | | | | | |
| 408 | |
| 408 | | | | | | 408 | | | | |
Interest rate swaps | | | 14,099 | | | 14,099 | | | | | | 14,099 | | | | | | | 8,811 | | | 8,811 | | | | | | 8,811 | | | | |
Total | | $ | 2,499,717 | | $ | 2,504,018 | | | | | | | | | | | | $ | 3,008,327 | | $ | 3,007,881 | | | | | | | | | | |
2926
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
8. Employee benefit plans:
The Company provides an Employee Stock Ownership Plan (“ESOP”) and a Retirement Profit Sharing Plan. The Company also maintains Supplemental Executive Retirement Plans (“SERPs”) and an Employees’ Pension Plan, which is currently frozen.
For the three and six months ended June 30, salaries and employee benefits expense includes approximately $308 and $597 in 2022, and $342 and $648 in 2021 and $353 and $660 in 2020 relating to the employee benefit plans.
| | | | | | | | | | | | |
| | | | | ||||||||
| | Pension Benefits | | Pension Benefits | ||||||||
Three Months Ended June 30, |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Components of net periodic pension benefit: |
| | |
| | |
| | |
| | |
Interest cost | | $ | 105 | | $ | 163 | | $ | 114 | | $ | 105 |
Expected return on plan assets | |
| (322) | |
| (371) | |
| (352) | |
| (322) |
Amortization of unrecognized net gain | |
| 76 | |
| 65 | |
| 50 | |
| 76 |
Net periodic benefit | | $ | (141) | | $ | (143) | | $ | (188) | | $ | (141) |
| | | | | | | ||||||
| | | | | | | ||||||
| | | | | ||||||||
| | Pension Benefits | | Pension Benefits | ||||||||
Six Months Ended June 30, |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Components of net periodic pension benefit: |
| | |
| | |
| | |
| | |
Interest cost | | $ | 210 | | $ | 217 | | $ | 228 | | $ | 210 |
Expected return on plan assets | |
| (644) | |
| (494) | |
| (704) | |
| (644) |
Amortization of unrecognized net gain | |
| 152 | |
| 87 | |
| 99 | |
| 152 |
Net periodic benefit | | $ | (282) | | $ | (190) | | $ | (377) | | $ | (282) |
In May 2017, the Company’s stockholders approved the 2017 equity incentive plan (“2017 Plan”). The 2017 Plan allows for eligible participants to be granted equity awards. Under the 2017 Plan the Compensation Committee of the Board of Directors has the authority to, among other things:
● | Select the persons to be granted awards under the 2017 Plan. |
● | Determine the type, size and term of awards. |
● | Determine whether such performance objectives and conditions have been met. |
● | Accelerate the vesting or excercisability of an award. |
Persons eligible to receive awards under the 2017 Plan include directors, officers, employees, consultants and other service providers of the Company and its subsidiaries.
As of June 30, 2021,2022, there were 37,15117,365 shares of the Company’s common stock available for grant as awards pursuant to the 2017 Plan. If any outstanding awards under the 2017 Plan are forfeited by the holder or canceled by the Company, the underlying shares would be available for regrant to others.
The 2017 Plan authorizes grants of stock options, stock appreciation rights, cash awards, performance awards, restricted stock and restricted stock units.
For the six months ended June 30, 20212022 and 2020,2021, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan, with an aggregate of 19,81819,787 shares and 16,26919,818 shares underlying such awards, respectively.
The non-performance restricted stock grants made in 2022, 2021 and 2020 vest equally over three years. The performance-based restricted stock units vest over three fiscal years and include conditions based on the Company’s
3027
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The non-performance restricted stock grants made in 2021, 2020 and 2019 vest equally over three years. The performance-based restricted stock units vest over three fiscal years and include conditions based on the Company’s three year cumulative diluted earnings per share and three-year average return on equity or tangible equity that determines the number of restricted stock units that may vest.
The Company expenses the fair value of all-share based compensation over the requisite service period commencing at grant date. The fair value of restricted stock is expensed on a straight-line basis. Compensation is recognized over the vesting period and adjusted based on the performance criterea. The Company classifies share-based compensation for employees within “salaries and employee benefits expense” on the consolidated statements of income and comprehensive income.
The Company recognized net compensation costs of $191 and $390 for the three and six months ended June 30, 2022 for awards granted under the 2017 Plan. The Company recognized compensation expense of $177 and $266 for the three and six months ended June 30, 2021 for awards granted under the 2017 Plan. The Company recognized compensation expense of $186 and $191 for the three and six months ended June 30, 2020 for awards granted under the 2017 Plan. As of June 30, 2021,2022, the Company had $1,304$1,412 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of under 2.12.0 years.
9. Derivatives and hedging activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets. assets and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income/expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium. During 2020, suchSuch derivatives werehave been used to hedge the variable cash flows associated with existing variable-rate assets and issuances of debt. During the six months ended June 30, 2021, the Company terminated the interest rate swap associated with floating-rate borrowings and accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amount was a loss of $25.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Incomeaccumulated other comprehensive income (loss) and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company’s variable-rate debt/assets. During the next twelve months, the Company estimates that an additional $536$41 will be reclassified as an increase to interest income.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such
3128
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2021,2022, the Company had 8289 interest rate swaps with an aggregate notional amount of $401,874$418,159 related to this program.
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 20212022 and December 31, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Asset Derivatives | | Asset Derivatives | | Liability Derivatives | | Liability Derivatives | | | | Asset Derivatives | | Asset Derivatives | | Liability Derivatives | | Liability Derivatives | ||||||||||||||||||||||||
| | | | As of June 30, 2021 (1) | | As of December 31, 2020 | | As of June 30, 2021 (1) | | As of December 31, 2020 | | | | As of June 30, 2022 | | As of December 31, 2021 (1) | | As of June 30, 2022 | | As of December 31, 2021 (2) | ||||||||||||||||||||||||
|
| Notional |
| Balance Sheet |
| | |
| Balance Sheet |
| | |
| Balance Sheet |
| | |
| Balance Sheet |
| | |
| Notional |
| Balance Sheet |
| | |
| Balance Sheet |
| | |
| Balance Sheet |
| | |
| Balance Sheet |
| | |
| | Amount | | Location | | Fair Value | | Location | | Fair Value | | Location | | Fair Value | | Location | | Fair Value | | Amount | | Location | | Fair Value | | Location | | Fair Value | | Location | | Fair Value | | Location | | Fair Value | ||||||||
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Floor | $ | 25,000 | | Other Assets | | $ | 1,303 | | Other Assets | | $ | 1,678 | | | | | | | | | | | $ | 25,000 | | Other Assets | | $ | 97 | | Other Assets | | $ | 844 | | | | | | | | | | |
Cash Flow Swap | $ | 50,000 | | | | | | | | | | | | Other Liabilities | | $ | | | Other Liabilities | | $ | 485 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Total derivatives designated as hedging instruments | | | | | | $ | 1,303 | | | | $ | 1,678 | | | | $ | | | | | $ | 485 | | | | | | $ | 97 | | | | $ | 844 | | | | $ | | | | | $ | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments |
| | |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
| | |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
Interest Rate Swaps (2) | $ | 401,874 | | Other Assets |
| $ | 10,023 |
| Other Assets |
| $ | 13,693 |
| Other Liabilities |
| $ | 9,777 |
| Other Liabilities | | $ | 13,614 | $ | 418,159 | | Other Assets |
| $ | 14,720 |
| Other Assets |
| $ | 9,026 |
| Other Liabilities |
| $ | 13,985 |
| Other Liabilities | | $ | 8,811 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total derivatives not designated as hedging instruments |
| | |
| | $ | 10,023 |
|
| | $ | 13,693 |
|
| | $ | 9,777 |
|
| | $ | 13,614 |
| | |
| | $ | 14,720 |
|
| | $ | 9,026 |
|
| | $ | 13,985 |
|
| | $ | 8,811 |
(1) | Amounts include accrued interest. |
(2) | Notional amount of interest rate swaps at December 31, |
3229
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income (loss) as of June 30, 20212022 and June 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | | | | | | | | | | Location of | | | | | | Amount of | | | Amount of | ||||||||||||||||||||
| | | Amount of | | | Amount of | | | Amount of | | Gain or (Loss) | | | Amount of | | | Gain (Loss) | | | Gain (Loss) | ||||||||||||||||||||
| | | Gain (Loss) | | | Gain (Loss) | | | Loss | | Recognized from | | | Gain (Loss) | | | Reclassified | | | Reclassified | ||||||||||||||||||||
| | | Recognized in | | | Recognized in | | | Recognized in | | Accumulated | | | Reclassified | | | from Accumulated | | | from Accumulated | ||||||||||||||||||||
Derivatives in | | | OCI on | | | OCI Included | | | OCI Excluded | | Other Comprehensive | | | from Accumulated | | | OCI into Income | | | OCI into Income | ||||||||||||||||||||
Hedging |
|
| Derivative |
|
| Component |
|
| Component |
| Income into |
|
| OCI into Income |
|
| Included Component |
|
| Excluded Component | ||||||||||||||||||||
Relationships | | | | | | June 30, 2022 | | | | | Income | | | | | | June 30, 2022 | | | | ||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | $ | | | $ | | | | | | Interest Expense | | $ | | | $ | | | | | ||||||||||||||||||||
Cash Flow Swap | | | | | | | | | | | Other expense | | | | | | | | | | ||||||||||||||||||||
Interest Rate Floor (*) | | $ | (469) | | $ | (493) | | $ | 24 | | Interest Income | | $ | 224 | | $ | 256 | | $ | (32) | ||||||||||||||||||||
Total | | $ | (469) | | $ | (493) | | $ | 24 | | | | $ | 224 | | $ | 256 | | $ | (32) | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Location of | | | | | | Amount of | | | Amount of | | | | | | | | | | | Location of | | | | | | Amount of | | | Amount of |
| | | Amount of | | | Amount of | | | Amount of | | Gain or (Loss) | | | Amount of | | | Gain (Loss) | | | Gain (Loss) | | | Amount of | | | Amount of | | | Amount of | | Gain or (Loss) | | | Amount of | | | Gain | | | Loss |
| | | Gain (Loss) | | | Gain (Loss) | | | Loss | | Recognized from | | | Gain (Loss) | | | Reclassified | | | Reclassified | | | Gain | | | Gain | | | Gain | | Recognized from | | | Loss | | | Reclassified | | | Reclassified |
| | | Recognized in | | | Recognized in | | | Recognized in | | Accumulated | | | Reclassified | | | from Accumulated | | | from Accumulated | | | Recognized in | | | Recognized in | | | Recognized in | | Accumulated | | | Reclassified | | | from Accumulated | | | from Accumulated |
Derivatives in | | | OCI on | | | OCI Included | | | OCI Excluded | | Other Comprehensive | | | from Accumulated | | | OCI into Income | | | OCI into Income | | | OCI on | | | OCI Included | | | OCI Excluded | | Other Comprehensive | | | from Accumulated | | | OCI into Income | | | OCI into Income |
Hedging |
|
| Derivative |
|
| Component |
|
| Component |
| Income into |
|
| OCI into Income |
|
| Included Component |
|
| Excluded Component | |
| Derivative | |
| Component | |
| Component | | Income into | |
| OCI into Income | |
| Included Component | |
| Excluded Component |
Relationships | | | | | | June 30, 2021 | | | | | Income | | | | | | June 30, 2021 | | | | | | | | | June 30, 2021 | | | | | Income | | | | | | June 30, 2021 | | | |
Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash Flow Swap | | $ | 401 | | $ | 401 | | | | | Interest Expense | | $ | (23) | | $ | (23) | | | — | | $ | 401 | | $ | 401 | | | | | Interest Expense | | $ | (23) | | $ | (23) | | | |
Cash Flow Swap | | | | | | | | | | | Other expense | | | (25) | | | (25) | | | | | | | | | | | | | | Other Expense | | | (25) | | | (25) | | | |
Interest Rate Floor (*) | | $ | (76) | | $ | (83) | | $ | 7 | | Interest Income | | $ | 268 | | $ | 300 | | $ | (32) | | $ | (25) | | $ | (83) | | $ | 7 | | Interest Income | | $ | 268 | | $ | 300 | | $ | (32) |
Total | | $ | 325 | | $ | 318 | | $ | 7 | | | | $ | 220 | | $ | 252 | | $ | (32) | | $ | 376 | | $ | 318 | | $ | 7 | | | | $ | 220 | | $ | 252 | | $ | (32) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Location of | | | | | | Amount of | | | Amount of | | | | | | | | | | | | | | | | | | | | |
| | | Amount of | | | Amount of | | | Amount of | | Gain or (Loss) | | | Amount of | | | Gain | | | Loss | ||||||||||||||||||||
| | | Gain | | | Gain | | | Gain | | Recognized from | | | Loss | | | Reclassified | | | Reclassified | ||||||||||||||||||||
| | | Recognized in | | | Recognized in | | | Recognized in | | Accumulated | | | Reclassified | | | from Accumulated | | | from Accumulated | ||||||||||||||||||||
Derivatives in | | | OCI on | | | OCI Included | | | OCI Excluded | | Other Comprehensive | | | from Accumulated | | | OCI into Income | | | OCI into Income | ||||||||||||||||||||
Hedging | |
| Derivative | |
| Component | |
| Component | | Income into | |
| OCI into Income | |
| Included Component | |
| Excluded Component | ||||||||||||||||||||
Relationships | | | | | | June 30, 2020 | | | | | Income | | | | | | June 30, 2020 | | | | ||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
Cash Flow Swap | | $ | (510) | | $ | (510) | | | | | Interest Expense | | $ | 73 | | $ | 73 | | | | ||||||||||||||||||||
Interest Rate Floor (*) | | $ | 150 | | $ | 151 | | $ | (1) | | Interest Income | | $ | 146 | | $ | 178 | | $ | (32) | ||||||||||||||||||||
Total | | $ | (360) | | $ | (359) | | $ | (1) | | | | $ | 219 | | $ | 251 | | $ | (32) | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
* | Amounts disclosed are gross and not net of taxes. |
3330
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income and Comprehensive Income
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 20212022 and June 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | |||
| | | Location and Amount of Gain or (Loss) Recognized in | | | Location and Amount of Gain or (Loss) Recognized in | ||||||||||||||||||
| | | Income on Fair Value and Cash Flow Hedging | | | Income on Fair Value and Cash Flow Hedging | ||||||||||||||||||
| | | Relationships | | | Relationships | ||||||||||||||||||
| | | For the three months ended June 30, | | | For the three months ended June 30, | ||||||||||||||||||
| | | 2021 | | | 2021 | | | 2020 | | 2020 | | | 2022 | | 2022 | | | 2021 | | 2021 | |||
|
|
| Interest Income |
|
| Interest Expense |
|
| Interest Income | |
| Interest Expense |
|
| Interest Income |
|
| Interest Expense |
|
| Interest Income | |
| Interest Expense |
Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded | | $ | 134 | | | | | $ | 110 | | | 73 | | $ | 93 | | $ | | | $ | 134 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The effects of fair value and cash flow hedging: | | | | | | | | | | | | | | | | | | | | | | | | |
Gain or (loss) on cash flow hedging relationships | | | | | | | | | | | | | | | | | | | | | | | | |
Interest contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | $ | 134 | | | | | $ | 110 | | | 73 | | $ | 93 | | $ | | | $ | 134 | | $ | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component | | $ | 150 | | | | | $ | 126 | | | 73 | | $ | 109 | | $ | | | $ | 150 | | $ | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component | | $ | (16) | | | | | $ | (16) | | | | | $ | (16) | | | | | $ | (16) | | $ | |
| | | | | | | | | | | | | | | | | | | | | | | ||
| | | Location and Amount of Gain or (Loss) Recognized in | | | Location and Amount of Gain or (Loss) Recognized in | ||||||||||||||||||
| | | Income on Fair Value and Cash Flow Hedging | | | Income on Fair Value and Cash Flow Hedging | ||||||||||||||||||
| | | Relationships | | | Relationships | ||||||||||||||||||
| | | For the six months ended June 30, | | | For the six months ended June 30, | ||||||||||||||||||
| | | 2021 | | | 2021 | | | 2020 | | 2020 | | | 2022 | | 2022 | | | 2021 | | 2021 | |||
|
|
| Interest Income |
|
| Interest Expense |
|
| Interest Income | |
| Interest Expense |
|
| Interest Income |
|
| Interest Expense |
|
| Interest Income | |
| Interest Expense |
Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded | | $ | 268 | | $ | (48) | | $ | 146 | | $ | 73 | | $ | 224 | | $ | | | $ | 268 | | $ | (48) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The effects of fair value and cash flow hedging: | | | | | | | | | | | | | | | | | | | | | | | | |
Gain or (loss) on cash flow hedging relationships | | | | | | | | | | | | | | | | | | | | | | | | |
Interest contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | $ | 268 | | $ | (23) | | $ | 146 | | $ | 73 | | $ | 224 | | $ | | | $ | 268 | | $ | (23) |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring | | | | | $ | (25) | | | | | | | | | | | $ | | | | | | $ | (25) |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component | | $ | 300 | | $ | (48) | | $ | 178 | | $ | 73 | | $ | 256 | | $ | | | $ | 300 | | $ | (48) |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component | | $ | (32) | | | | | $ | (32) | | $ | | | $ | (32) | | | | | $ | (32) | | $ | |
Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2022 and 2021.
3431
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2021 and 2020.
| | | | | | | | | | | | | | |
| | | | Amount of Gain | | Amount of Loss |
| Amount of Gain | | Amount of Gain | ||||
| | | | Recognized in | | Recognized in |
| Recognized in | | Recognized in | ||||
| | Location of Gain or (Loss) | | Income | | Income |
| Income | | Income | ||||
| | Recognized in Income on | | Three Months Ended | | Six Months Ended |
| Three Months Ended | | Six Months Ended | ||||
Derivatives Not Designated as Hedging Instruments |
| Derivative |
| June 30, 2021 |
| June 30, 2021 |
| June 30, 2020 |
| June 30, 2020 | ||||
| | | | | | | | | | | | | | |
Interest Rate Swaps |
| Interest rate swap revenue | | $ | (237) | | $ | 168 | | $ | (10) | | $ | (141) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Fee Income | | Interest rate swap revenue | | $ | 105 | | $ | 497 | | $ | 259 | | $ | 860 |
| | | | | | | | | | | | | | |
| | | | Amount of Gain | | Amount of Gain |
| Amount of Gain | | Amount of Loss | ||||
| | | | Recognized in | | Recognized in |
| Recognized in | | Recognized in | ||||
| | Location of Gain or (Loss) | | Income | | Income |
| Income | | Income | ||||
| | Recognized in Income on | | Three Months Ended | | Six Months Ended |
| Three Months Ended | | Six Months Ended | ||||
Derivatives Not Designated as Hedging Instruments |
| Derivative |
| June 30, 2022 |
| June 30, 2022 |
| June 30, 2021 |
| June 30, 2021 | ||||
| | | | | | | | | | | | | | |
Interest Rate Swaps |
| Interest rate swap revenue | | $ | 283 | | $ | 523 | | $ | (237) | | $ | 168 |
Other Contracts | | | | | 1 | | | 4 | | | | | | |
Total |
|
| | $ | 284 | | $ | 527 | | $ | (237) | | $ | 168 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Fee Income | | Fee income | | $ | 1 | | $ | 104 | | $ | 105 | | $ | 497 |
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 20212022 and December 31, 2020.2021. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Offsetting of Derivative Assets | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
as of June 30, 2021 | | | | | | | | | | | | | ||||||||||||||||||||||||
as of June 30, 2022 | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | ||||||||||||||
| | Gross | | | | Net Amounts | | | | | | | | Gross | | | | Net Amounts | | | | | | | ||||||||||||
| | Amounts of | | Gross Amounts | | of Assets | | | | | | | | Amounts of | | Gross Amounts | | of Assets | | | | | | | ||||||||||||
| | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | ||||||||||||
|
| Assets |
| Balance Sheet |
| Balance Sheet |
| Instruments |
| Received |
| Amount |
| Assets |
| Balance Sheet |
| Balance Sheet |
| Instruments |
| Received |
| Amount | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Derivatives | | $ | 11,326 | | $ | | | $ | 11,326 | | $ | 2,767 | | | | | $ | 8,559 | | $ | 14,816 | | $ | | | $ | 14,816 | | $ | 100 | | | 11,220 | | $ | 3,496 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Offsetting of Derivative Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
as of June 30, 2021 | | | | | | | | | | | | | ||||||||||||||||||||||||
as of June 30, 2022 | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | ||||||||||||||
| | Gross | | | | Net Amounts | | | | | | | | | Gross | | | | Net Amounts | | | | | | | | ||||||||||
| | Amounts of | | Gross Amounts | | of Assets | | | | | | | | | Amounts of | | Gross Amounts | | of Liabilities | | | | | | | | ||||||||||
| | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | ||||||||||||
| | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Paid | | Amount | | Liabilities | | Balance Sheet | | Balance Sheet | | Instruments | | Paid | | Amount | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Derivatives | | $ | 9,777 | | $ | | | $ | 9,777 | | $ | 2,767 | | | 5,729 | | $ | 1,281 | | $ | 13,985 | | $ | | | $ | 13,985 | | $ | 100 | | | 7,830 | | $ | 6,055 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Offsetting of Derivative Assets | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
as of December 31, 2020 | | | | | | | | | | | | | ||||||||||||||||||||||||
as of December 31, 2021 | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | ||||||||||||||
| | Gross | | | | Net Amounts | | | | | | | | | Gross | | | | Net Amounts | | | | | | | | ||||||||||
| | Amounts of | | Gross Amounts | | of Assets | | | | | | | | | Amounts of | | Gross Amounts | | of Assets | | | | | | | | ||||||||||
| | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | ||||||||||||
| | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Received | | Amount | | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Received | | Amount | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Derivatives | | $ | 15,371 | | $ | | | $ | 15,371 | | $ | 1,678 | | | | | $ | 13,693 | | $ | 9,870 | | $ | | | $ | 9,870 | | $ | 3,218 | | | | | $ | 6,652 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Offsetting of Derivative Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
as of December 31, 2020 | | | | | | | | | | | | | ||||||||||||||||||||||||
as of December 31, 2021 | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | ||||||||||||||
| | Gross | | | | Net Amounts | | | | | | | | | Gross | | | | Net Amounts | | | | | | | | ||||||||||
| | Amounts of | | Gross Amounts | | of Assets | | | | | | | | | Amounts of | | Gross Amounts | | of Liabilities | | | | | | | | ||||||||||
| | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | | Recognized | | Offset in the | | presented in the | | Financial | | Cash Collateral | | Net | ||||||||||||
| | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Paid | | Amount | | Liabilities | | Balance Sheet | | Balance Sheet | | Instruments | | Paid | | Amount | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Derivatives | | $ | 14,099 | | $ | | | $ | 14,099 | | $ | 1,678 | | | 12,421 | | $ | | | $ | 8,818 | | $ | | | $ | 8,818 | | $ | 3,218 | | | 5,600 | | $ | |
3532
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
Credit-risk-related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of June 30, 2022, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3,402. As of December 31, 2021, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5,729. As of December 31, 2020, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $12,421.$5,600. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and hashad posted collateral of $8,030 against its obligations under these agreements as of$7,830 with dealer counterparties at June 30, 2021, compared to having posted collateral of $15,360 with counterparties at2022 and December 31, 2020.2021. Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the agreement. The cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the cash collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.
10. Deposits
The major components of interest-bearing and noninterest-bearing deposits at June 30, 20212022 and December 31, 20202021 are summarized as follows:
| | | | | | | | | | | | | | |
At the period end |
| June 30, 2021 |
| December 31, 2020 |
|
| June 30, 2022 |
| December 31, 2021 |
| ||||
Interest-bearing deposits: | | | | | | | | | | | | | | |
Money market accounts | | $ | 559,719 | | $ | 496,634 | | | $ | 592,989 | | $ | 588,245 | |
Now accounts | |
| 609,586 | |
| 567,087 | | |
| 752,397 | |
| 851,086 | |
Savings accounts | |
| 469,993 | |
| 431,224 | | |
| 518,146 | |
| 491,796 | |
Time deposits less than $250 | |
| 209,772 | |
| 221,446 | | |
| 219,690 | |
| 203,719 | |
Time deposits $250 or more | |
| 90,422 | |
| 98,247 | | |
| 80,503 | |
| 90,795 | |
Total interest-bearing deposits | |
| 1,939,492 | |
| 1,814,638 | | |
| 2,163,725 | |
| 2,225,641 | |
Noninterest-bearing deposits | |
| 672,274 | |
| 622,475 | | |
| 747,558 | |
| 737,756 | |
Total deposits | | $ | 2,611,766 | | $ | 2,437,113 | | | $ | 2,911,283 | | $ | 2,963,397 | |
The growth inTotal deposits occurred in non-maturity deposits as demand for liquid accounts elevateddecreased $52,114 from December 31, 2021 due primarily to low interest rates. Strong organic growth of core deposits from new and existing relationships, inflowsoutflows of public fund NOW accounts and reductions to high balance time deposits proceedsas these customers are typically more price-sensitive. Brokered deposits added during the three months ended June 30, 2022 totaled $25,317 and were used to offset a portion of PPP loans retained onthe deposit byoutflows and lock-in then current interest rates, as our commercial borrowers, and federal government stimulus payments contributedexpectation is for interest rates to continue to increase throughout the increase. Timeremainder of 2022. Of the brokered deposits less than $250 decreased dueadded during the current period, $11,400 are callable which gives the Bank the option to $12.5 million of matured brokered deposits. Time deposits $250 thousand or more decreased due tocall the maturity of a few large public fund certificates of deposit.deposit after the initial three month term.
11. Borrowings
Short-term borrowings consists of FHLB advances representing overnight borrowings or with stated original terms of less than twelve months and other borrowings related to collateral held from derivative counterparties. Total short-term borrowings at June 30, 2022 were $129,170 as compared to 0 short-term borrowings at December 31, 2021. The increase in short-term borrowings was due primarily to fund a portion of loan growth and replace deposit outflows during the three months ended June 30, 2022, as overnight borrowings with the FHLB were $117,950 at June 30, 2022.
3633
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
11. Borrowings
Short-termOther borrowings, consists of FHLB advances representing overnight borrowings or with stated original terms of less than twelve monthswhich include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $11,220 and other borrowings relatedincreased due to collateral held from derivative counterparties. At June 30, 2021 there were 0 short-term borrowings outstanding, as excess liquidity was used to payoff borrowings.higher market interest rates. The table below outlines short-term borrowings at and for the six months ended June 30, 20212022 and for the year ended December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At and for the six months ended June 30, 2021 | | | At and for the six months ended June 30, 2022 | ||||||||||||||||||||||
| | | | | | | | | | | | | Weighted |
| | | | | | | | | | | | | Weighted |
|
| | | | | | | | Maximum | | Weighted | | Average |
| | | | | | | | Maximum | | Weighted | | Average |
| ||
| | Ending | | Average | | Month-End | | Average | | Rate at |
| | Ending | | Average | | Month-End | | Average | | Rate at End |
| ||||||
|
| Balance |
| Balance |
| Balance |
| Rate |
| June 30,2021 |
|
| Balance |
| Balance |
| Balance |
| Rate |
| of the Period |
| ||||||
Other borrowings |
| $ | |
| $ | 589 |
| $ | 1,980 |
| 0.06 | % | | % |
| $ | 11,220 |
| $ | 5,466 |
| $ | 11,220 |
| 0.83 | % | 1.58 | % |
FHLB advances | | | | | | 28,177 | | | 50,000 |
| 0.55 | | | | | | 117,950 | | | 13,669 | | | 117,950 |
| 1.63 | % | 1.75 | |
Total short-term borrowings | | $ | | | $ | 28,766 | | $ | 51,980 |
| 0.54 | % | | % | | | 129,170 | | | 19,135 | | | 129,170 |
| 1.29 | % | 1.74 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At and for the year ended December 31, 2020 |
| | At and for the year ended December 31, 2021 |
| ||||||||||||||||||||||
| | | | | | | | | | | Weighted | | Weighted |
| | | | | | | | | | | Weighted | | Weighted |
|
| | | | | | | | Maximum | | Average | | Average |
| | | | | | | | Maximum | | Average | | Average |
| ||
| | Ending | | Average | | Month-End | | Rate for | | Rate at End |
| | Ending | | Average | | Month-End | | Rate for | | Rate at End |
| ||||||
|
| Balance |
| Balance |
| Balance |
| the Year |
| of the Year |
|
| Balance |
| Balance |
| Balance |
| the Year |
| of the Year |
| ||||||
FHLB advances | | $ | 50,000 | | $ | 83,716 | | $ | 179,199 |
| 1.01 | % | 0.40 | % | | $ | | | $ | 13,973 | | $ | 50,000 |
| 0.56 | % | | % |
The Company has an agreement with the FHLB which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At June 30, 2021,2022, the maximum borrowing capacity was $814,067$1,018,230 of which $3,752$119,596 was outstanding in borrowings and $242,485$283,500 was used to issue standby letters of credit to collateralize public fund deposits. At December 31, 2020,2021, the maximum borrowing capacity was $807,042$896,130 of which $64,769$2,711 was outstanding in borrowings and $218,350$373,035 was used to issue standby letters of credit to collateralize public fund deposits.
Advances with the FHLB are secured under terms of a blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral, such as investments and mortgage-backed securities and mortgage loans. Interest accrues daily on the FHLB advances based on rates of the FHLB discount notes. The overnight borrowing rate resets each day.
Long-term debt consisting of advances from the FHLB at June 30, 20212022 and December 31, 20202021 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Interest Rate |
| | |
| | |
| | Interest Rate | |
| | |
| | |
| |
Due | | Fixed | | | | June 30, 2021 | | | December 31, 2020 |
|
| Fixed | | | | June 30, 2022 | | | December 31, 2021 |
|
June 2021 | | 1.99 | | | $ | | | $ | 10,000 | | ||||||||||
March 2023 | | 4.69 | | | | 3,752 | | | 4,769 | | | 4.69 | | | $ | 1,646 | | | 2,711 | |
| | | | | $ | 3,752 | | $ | 14,769 | | | | | | $ | 1,646 | | $ | 2,711 | |
Maturities of long-term debt, by contractual maturity, for the remainder of 20212022 and subsequent years are as follows:
| | | | | | | | |
2021 |
| $ | 1,041 | | ||||
2022 | |
| 2,156 | | |
| 1,091 | |
2023 | |
| 555 | | |
| 555 | |
| | $ | 3,752 | | | $ | 1,646 | |
The advances from the FHLB totaling $3,752$1,646 are not convertible.
12. Subordinated debt
On June 1, 2020, the Company sold $33,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are intended to be treatedqualify as Tier 2 capital for regulatory capital purposes.
37
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The 2020 Notes bear interest at a rate of 5.375% per year for the first five years and then float based on a benchmark rate (as defined), provided that the interest rate applicable to the outstanding principal balance during the period the 2020 Notes are floating will at no time be less the 4.75%. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2020, for the first five years after issuance and will be payable quarterly
34
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
in arrears thereafter on March 1, June 1, September 1, and December 1. The 2020 Notes will mature on June 1, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after June 1, 2025 and prior to June 1, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, the Company may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100%) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.
Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar proceeding by or against the Company or the Bank.
13. Income taxes
The effective tax rate of the Company was 15.1% and 18.9% for the three and six months ended June 30, 2021 compared to 14.8% and 13.4% for the three and six months ended June 30, 2020. The six months ended June 30, 2021 includes a $621 deferred tax adjustment related to prior periods and the Company’s frozen pension plan. Excluding this adjustment, the effective tax rate would be 16.1% for the six month period ended June 30, 2021, an increase from the year ago period’s 13.4% due to a lower proportion of tax exempt income recognized in 2021 when compared to 2020. Before tax investment tax credits amounted to $273 and $543 for the three and six months ended June 30, 2021 compared to before tax investment tax credits and other credits of $273 and $546 for those same periods last year.
3835
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Cautionary Note Regarding Forward-Looking Statements:
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Peoples Financial Services Corp. and its subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: the COVID-19 crisis and the governmental responses to the crisis; the effects of any recession in the United States; the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine; risks associated with business combinations; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; inability of third party service providers to perform; and our ability to prevent, detect and respond to cyberattacks. Additional factors that may affect our results are discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020,2021, in Part II, Item 1A of this report and in reports we file with the Securities and Exchange Commission from time to time.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts may have been reclassified to conform with the current year’s presentation. Any reclassifications did not have any effect on our operating results or financial position.
Critical Accounting Policies:
Disclosure of our significant accounting policies is included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2020.2021, which is incorporated herein by reference. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.
Operating Environment:
On March 11, 2020,During the World Health Organization declared a coronavirus, identified as COVID-19, a global pandemic. In the United States, the rapid spreadsecond quarter of 2022, restrictive measures related to the COVID-19 virus invoked various federal, statepandemic continued to ease, both on a national level and local authoritiesmore specifically in the Company's market area. Most businesses have reopened at full capacity, that has improved commercial and consumer activity which is begininning to make emergency declarations and issue executive ordersreturn to limit the spreadpre-pandemic levels. Risk 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 itsfurther
3936
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
anticipated negative impact on economic activity severely disrupted domestic financial markets prompting the Federal Reserve System’s 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.
During the first six months of 2021, restrictive measures related to the COVID-19 pandemic began to ease, both on a national level and more specifically in the Company's market area. Most businesses have reopened at full capacity, which has improved commercial and consumer activity but still has not returned to pre-pandemic levels. While the overall outlook has improved based on the availability of the vaccine to all adults and older children, there has been a recent rise in hospitalization and infection rates caused by the Delta variant, a rapidly spreading strain of coronavirus. Therefore, the risk of further resurgence and possible reimplementation of restrictions remains. If there is a resurgence in the virus, the Company could experience adverse effects on its business, financial condition, results of operations and cash flows.
From a lending perspective, loan growth, excluding our PPP loan transactions, improvedcontinued to improve during the second quarter as momentum from our entrance in two new markets continues and overall economic activity began to improveimproved in all our markets. The PPP loans approved and funded during 2020 totaling $217.5 million had outstanding balances at December 31, 2020 of $189.6 million and have remaining balances of $32.8 milliondeclined to $27,036 at June 30 2021. Our lending team, 2022 and credit professionals have assisted our small business customers to secure $157.1 million of loan forgiveness from the SBA. During 2021, we originated $121.6 of new loans under the second round of PPP to support our small business customers still impacted by COVID-19. We expect the majority of PPPthese loans to be forgiven during the remaining months of 2021.
by year-end. From a credit riskdeposit perspective, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may have experienced financial hardship due to COVID-19 related challenges, and at the start of the pandemic, the Company granted payment deferral requestscompetition for up to six months to a total of 481 commercial loans with outstanding loan balances of $306.9 million and to 505 consumer loans with outstanding balances of $23.3 million. At June 30, 2021, all commercial and consumer loans, with the exception of four consumer loans, have come off of deferralfunding has increased as borrowers have begun to make their regular payments.excess liquidity held by banks has been deployed into loans.
During the second quarter, high inflation continued, interest rates increased and the likelihood of a recession remained. As a result, the level of loan growth experienced in the first half of the year may not be experienced in the second half of 2022.
Inflation increased during the second quarterfirst half of 20212022 to a levellevels well above the FOMC’sFederal Open Market Committee’s
(“FOMC”) long-term desired 2% level for items other than food and energy. ForCore inflation, as measured by the 12 months ended June 30, 2021, the consumer price indexConsumer Price Index (“CPI”) registered 4.5%. CPI registered 1.6%, excluding items known for the 12 months ended March 31, 2021their volatility such as food and December 31, 2020. The all items index increased 5.4%energy, was 5.9% for the 12 months ending June 30, 2021, up from2022. When including food and energy, CPI was 9.1% due primarily to higher energy costs.
Concerns over the readinghigh inflation rate have resulted in central bankers in the U.S. and abroad adjusting interest rates. The FOMC has increased rates three times through June 30, 2022 beginning with a 25 basis point increase in March, a 50 basis point increase in May and a 75 basis point increase in June. In addition there was another 75 basis point increase in July.
Gross domestic product (“GDP”) decreased for the 12 months ending March 31, 2021 which was reportedsecond consecutive quarter. It decreased at 2.6% and December 31, 2020 which was reported at 1.4%. This was the largest 12 month increase since a 5.4% increasean annual rate of 0.9% for the period ended August 31, 2008. As the U.S. economy continues to rebound from the initial slowdown in the second quarter and 1.6% for the first quarter compared to an increase of 2020 that was brought6.9% in the fourth quarter of 2021 on reduced exports, federal spending, private investment and state/local government spending. Business investment, which accounts for approximately 15% of GDP, has ramped up investment since the initial impact of the pandemic; however, investment is unsteady as noted by a decrease in investment in office buildings and retail space (which is driven by increased online shopping and working from home) investment in equipment and intellectual property expanding during the nation wide shutdown, gross domestic productpandemic and continues to be strong.
Per the U.S Bureau of Economic Analysys (“GDP”BEA”), the valuepersonal consumption index (“PCE”), which represents 70% of alleconomic output, for June increased 6.8% from one year ago, reflecting increases in both goods and services produced inservices. Excluding food and energy the nation, came in with an initial second quarter 2021 readingPCE price index for June increased 4.8% from one year ago.
Home sales were down 8.1% from a year ago, after two years of a 6.5% annualized rate, off from the consensus forecast of 8.4% for the quarter. Personal consumption lead the growth, up 11.8%, aidedheightened activity and have returned to prepandemic levels and will likely be impacted by two stimulus programs. Meanwhile, residential investment disappointed and was down 9.8% as housing unaffordability has taken a toll on activity.higher interest rates.
Goodwill:
The Company has goodwill with a net carrying value of $63.4 million$63,370 at June 30, 20212022 and December 31, 2020.2021. The Company's policy is to test goodwill for impairment annually on December 31 or on an interim basis if an event triggering impairment may have occurred. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. At June 30, 2021,2022, we evaluated whether any events occurred or circumstances changed that would more likely than not reduce the Company's fair value below its carrying value. We noted no such matters. There is no assurance that changes in events or circumstances in the future will not result in impairment.
Review of Financial Position:
Total assets increased $52,056 or 3.1% annualized, to $3,421,539 at June 30, 2022, from $3,369,483 at December 31, 2021. The increase in assets during the six months was due to loan and investment growth, funded primarily with our
4037
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Review of Financial Position:
Total assets increased $113,934, or 8.0% annualized, to $2,997,736 at June 30, 2021, from $2,883,802 at December 31, 2020.federal funds sold balances and short-term borrowings. Total loans increased to $2,236,826$2,565,579 at June 30 2021,2022, compared to $2,177,982$2,329,173 at December 31, 2020,2021, an increase of $58,844.$236,406. Excluding PPP loans and a net decrease of $35,278$41,857 to PPP loan balances, loan growth during the first six months of 20212022 totaled $94,122,$278,263, or 9.5%24.8% annualized. Investments increased $40,421$19,804 or 13.3% due to6.8% annualized as the purchase of higher yielding investment securities with a portion of our lower earning excess cash position. Strong growthposition during the first three months of deposits resulted in an increase2022 offset the reduction to our overnight federalthe fair value of the available-for-sale investment portfolio due to higher market rates. Federal funds sold position of $13,000 sincebalances decreased $242,425 to $0 at June 30, 2022 from $242,425 at December 31, 2020.2021. Deposits increased by $174,653 or 14.5% annualized, the result of strong organic growth of core depositsdecreased $52,114 to $2,911,283 at June 30, 2022 from new and existing relationships, inflows of public fund deposits, and federal government stimulus payments.$2,963,397. Interest-bearing deposits increased $124,854decreased $61,916 while noninterest-bearing deposits increased $49,799. Deposit growth and our excess cash position were utilized to pay down$9,802. Total short-term borrowings and payoff a matured long-term borrowing.at June 30, 2021 totaled $129,170. Total borrowingsstockholders’ equity decreased $28,229 or 8.3%, from $340,126 at year-end 2021 to $311,897 at June 30, 2021 total $3,752. Total stockholders’ equity increased $8,014 or 2.5%, from $316,877 at year-end 2020 to $324,891 at June 30, 2021 due to2022 as net income partiallywas offset by a decrease to accumulated other comprehensive income (“AOCI”), resulting from a decreasean increase to the unrealized gainloss on investment securities, and dividends paid to shareholders. For the six months ended June 30, 2021,2022, total assets averaged $2,955,524,$3,344,220, an increase of $366,979$388,696 from $2,588,545$2,955,524 for the same period of 2020.2021.
Investment Portfolio:
The majority of the investment portfolio is classified as available-for-sale, which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when market opportunities occur. Investment securities available-for-sale totaled $336,449$513,911 at June 30, 2021, an increase2022, a decrease of $40,538,$3,410, or 13.7%0.7% from $295,911$517,321 at December 31, 2020.2021. The increasedecrease was due to a decline in the market value of the available-for-sale portfolio of $51,281 since December 31, 2021, due to the rapid increase of market rates, and principal received from mortgage-backed securities and maturing bonds, partially offset by the purchase of U.S. Treasury notes, taxable and tax-exempt municipal bonds and mortgage-backed securities as we deployed a portion of excess cash into higher earning assets. A decrease inassets primarily during the market value of the available-for-sale portfolio of $5,279 since December 31, 2020, due to higher market rates and principal received from mortgage-backed securities and maturing bonds partially offset the increases.three months ended March 31. Investment securities held-to-maturity totaled $7,104$94,446 at June 30, 2021, a decrease2022, an increase of $121 or 1.7%$23,233 from $7,225$71,213 at December 31, 2020 due2021 as a portion of newly purchased low coupon securities were classified as held-to-maturity to payments received on mortgage backed securities.mitigate market value risk.
For the six months ended June 30, 2021,2022, the investment portfolio averaged $337,741,$649,110, an increase of $27,816$311,369 or 9.0%92.2% compared to $309,925$337,741 for the same period last year. Average tax-exempt municipal bonds have increased $29,110$35,402 or 62.9%47.0% to $75,366$110,768 for the six months ended June 30, 20202022 from $46,256$75,366 during the comparable period of 2020.2021. The increase in tax-exempt municipal bonds is due to purchases during the last twelve months with a portion of excess liquidity. The tax-equivalent yield on the investment portfolio decreased 3047 basis points to 2.14%1.67% for the six months ended June 30, 2021,2022, from 2.44%2.14% for the comparable period of 2020.2021. The decrease in yield is due to lower reinvestment rates for cash flow from matured and called bonds.
Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the AOCI component of stockholders’ equity. We reported net unrealized gains,losses, included as a separate component of stockholders’ equity of $3,489$41,927 net of deferred income taxes of $928$11,145 at June 30, 2021,2022, and net unrealized gainslosses of $7,660,$1,415, net of deferred income taxes of $2,036,$376, at December 31, 2020.2021.
Management, from a credit risk perspective, has taken action to identify and assess its COVID-19 related credit exposures based on asset class. No specific COVID-19 related credit impairment was identified within our investment securities portfolio, including our municipal securities, during the first six months of 2021.2022.
Our Asset/Liability Committee (“ALCO”) reviews the performance and risk elements of the investment portfolio quarterly. Through active balance sheet management and analysis of the securities portfolio, we endeavor to maintain sufficient liquidity to satisfy depositor requirements and meet the credit needs of our customers.
4138
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Loan Portfolio:
Total loans increased to $2,236,826$2,565,579 at June 30, 20212022 from $2,177,982$2,329,173 at December 31, 2020,2021, an increase of $58,844. Loan activity improved$236,406. Our recent entrance into the Greater Pittsburgh market and Piscataway, New Jersey via community banking offices has resulted in positive loan opportunities and has contributed to the overall loan growth since year-end as the economic outlook improved and certain government restrictions began to ease. yearend.
Our loan growth is due to increases in commercial real estate loans and tax-free commercial loans, offset by a reduction in PPP loan balances. At June 30, 2021,2022, we have 144had 16 loans totaling $32,822$13,115 remaining from PPP loans originated during 2020 compared to 1,304and 67 loans totaling $189,699 at December 31, 2020. We$13,921 remaining from the second PPP program, and we expect the majority of the remaining $32,822 to be forgiven during 2021. During 2021, we funded an additional 1,062 loans totaling $121,599 under the SBA's second PPP loan program.2022. Excluding the PPP loans, total loans have increased $94,122$278,263 or 9.5%24.8% annually. Commercial real estate loans increased $65,968$226,119 or 11.7%33.9% annualized, to $1,203,958$1,569,657 at June 30, 20212022 compared to $1,137,990$1,343,539 at December 31, 20202021 due to increased activity in all our markets. Commercial and industrial loans, excluding PPP, increased $27,969$25,539 to $517,556$569,773 at June 30, 20212022 compared to $489,587$544,234 at December 31, 20202021 due to growth of tax-exempt loans. We continue to actively pursue commercial and industrial loans as this segment of our loan portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and wealth management relationships which generate additional fee income.
Consumer loans decreased $3,901,increased $6,557, or 9.4%17.7% on an annualized basis, to $79,391$81,440 at June 30, 20212022 compared to $83,292$74,883 at December 31, 2020.2021. The decreaseincrease in consumer loans was primarily due to payoffs outpacing dealer indirect auto loan origination volumes. Lower origination volumes have resulted from changes to the structure of the Bank’sand other consumer loan pricing. volumes.
Residential real estate loans increased $4,086,$20,048, or 3.0%13.6% on an annualized basis, to $281,500$317,672 at June 30, 20212022 compared to $277,414$297,624 at December 31, 2020.2021. The increase in residential mortgages is due to increased refinance and purchase activity duringprior to the current low rate environment coupled withrecent increase to mortgage rates, increased home equity loan activity, and a higher percentage of loans not eligible to be sold into the secondary market, including jumbo mortgages.
For the six months ended June 30, 2021,2022, total loans excluding PPP loans, averaged $2,005,898,$2,369,330, an increase of $24,453$363,432 or 1.2%18.1% compared to $1,981,445$2,005,898 for the same period of 2020.2021. The PPP loans averaged $196,240$40,079 for the six months ended June 30, 20212022 and yielded 3.91%.7.45% due to the acceleration of unamortized net fees and interest earned. The tax-equivalent yield on the entire loan portfolio was 3.96%3.84% for the six months ended June 30, 2021,2022, a 3812 basis point decrease from the comparable period last year. The decrease in yield is primarily due to decreases in market rates. The FOMC took aggressive steps in March 2020 to combat the COVID-19 pandemic by cutting the federal funds rate 100 basis points to a target rangelower levels of 0.00% to 0.25% during an emergency meeting which followed an emergency 50 basis point cut on March 3, 2020. ThePPP fees and interest earned along with lower market rates negatively impacted our floating and adjustable rate loans and yields on new loan originations.origination.
In addition to the risks inherent in our loan portfolio, in the normal course of business, we are also a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as on-balance sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements.
Unused commitments at June 30, 2021,2022, totaled $513,629,$676,636, consisting of $460,944$617,371 in unfunded commitments of existing loan facilities and $52,685$59,265 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments at December 31, 20202021 totaled $426,486,$553,373, consisting of $392,058$495,119 in unfunded commitments of existing loans and $34,428$58,254 in standby letters of credit.
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Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Asset Quality:
National, Pennsylvania, New York and market area unemployment rates at June 30, 2021 and 2020, are summarized as follows:
| | | | | |
|
| 2021 |
| 2020 |
|
United States |
| 5.9 | % | 13.0 | % |
New York (statewide) |
| 8.3 | | 9.9 | |
Pennsylvania (statewide) |
| 6.9 | | 9.7 | |
Broome County | | 6.4 | | 9.7 | |
Bucks County | | 5.7 | | 9.1 | |
Lackawanna County |
| 7.6 | | 10.5 | |
Lebanon County | | 6.1 | | 8.7 | |
Lehigh County |
| 7.5 | | 10.3 | |
Luzerne County |
| 9.0 | | 11.8 | |
Monroe County |
| 8.3 | | 13.0 | |
Montgomery County | | 5.4 | | 8.3 | |
Northampton County | | 6.5 | | 10.0 | |
Schuylkill County | | 7.3 | | 10.1 | |
Susquehanna County |
| 5.9 | | 8.5 | |
Wayne County |
| 7.3 | | 10.8 | |
Wyoming County |
| 7.1 | % | 9.7 | % |
43
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
The employment situation improved nationally as well as in New York, Pennsylvania and in all of the thirteen counties representing our market areas in Pennsylvania and New York from one year ago when comparing June 30, 2021 to June 30, 2020. The United States economy added 720,000 total nonfarm payrolls for the month of June 2021. Projections for our local market unemployment are not readily available, however the most current economic statistics as of June 30, 2021 show continuing jobless claims of over 3.4 million. This remains elevated as does the unemployment rate at 5.9% per the latest report from the Bureau of Labor Statistics at June 30, 2021.
Distribution of nonperforming assets
| | | | | | | �� |
| | | June 30, 2021 | | | December 31, 2020 | |
Nonaccrual loans: | | | | | | | |
Commercial | | $ | 1,182 | | $ | 3,359 | |
Real estate: | | | | | | | |
Commercial | |
| 2,487 | |
| 2,642 | |
Residential | |
| 834 | |
| 869 | |
Consumer | |
| 76 | |
| 111 | |
Total nonaccrual loans | |
| 4,579 | |
| 6,981 | |
Troubled debt restructured loans: | | | | | | | |
Commercial | | | 874 | |
| 920 | |
Real estate: | | | | | | | |
Commercial | |
| 1,196 | | | 1,310 | |
Residential | |
| 567 | | | 588 | |
Total troubled debt restructured loans | |
| 2,637 | |
| 2,818 | |
Accruing loans past due 90 days or more: | | | | | | | |
Real estate: | | | | | | | |
Residential | |
| 49 | |
| 71 | |
Total accruing loans past due 90 days or more | |
| 49 | |
| 71 | |
Total nonperforming loans | |
| 7,265 | |
| 9,870 | |
Foreclosed assets | |
| 29 | |
| 632 | |
Total nonperforming assets | | $ | 7,294 | | $ | 10,502 | |
Nonperforming loans as a percentage of loans, net | |
| 0.32 | % |
| 0.45 | % |
Nonperforming assets as a percentage of total assets | |
| 0.24 | % |
| 0.36 | % |
| | | | | | | |
| | | June 30, 2022 | | | December 31, 2021 | |
Nonaccrual loans | | $ | 2,919 | | $ | 2,811 | |
Troubled debt restructured loans (including nonaccrual TDR) | | | 1,468 | | | 1,649 | |
Accruing loans past due 90 days or more: | | | 190 | | | 13 | |
Total nonperforming loans | | | 4,577 | | | 4,473 | |
Foreclosed assets | | | | | | 488 | |
Total nonperforming assets | | $ | 4,577 | | $ | 4,961 | |
Loans modified in a troubled debt restructuring (TDR): | | | | | | | |
Performing TDR loans | | $ | 1,468 | | $ | 1,649 | |
Total TDR loans | | $ | 1,468 | | $ | 1,649 | |
Total loans held for investment | | $ | 2,565,579 | | $ | 2,329,173 | |
Nonaccrual loans as a percentage of loans held for investment | | | 0.11 | % | | 0.12 | % |
Allowance for loan losses | |
| 29,374 | |
| 28,383 | |
Allowance for loan losses as a percentage of loans held for investment | | | 1.14 | % | | 1.22 | % |
Allowance for loan losses as a percentage of nonaccrual loans | | | 1006.30 | % |
| 1009.71 | % |
Nonperforming loans as a percentage of loans, net | |
| 0.18 | % |
| 0.19 | % |
We experienced improved asset quality during the first six months of 20212022 as evidenced by a decrease of $3,208$384 in nonperforming assets. Nonperforming assets totaled $7,294$4,577 or 0.24%0.14% of total assets at June 30, 2021,2022, a decrease from $10,502$4,961 or 0.36%0.15% of total assets at December 31, 2020. Improvement in each category from year-end2021. This was experienced.the result of the sale of foreclosed assets during the first quarter 2022.
Loans on nonaccrual status, excluding troubletroubled debt restructured nonaccrual loans, decreased $2,402increased $108 to $4,579$2,919 at June 30, 20212022 from $6,981$2,811 at December 31, 2020.2021. The decreaseincrease to nonaccrual loans since year-end is due primarily due to a $1,511 payoffthe increase of one commercial credit and a $500 principal payment$134 to another credit.the indirect auto portfolio. Restructured loans decreased $181 to $2,637$1,468 at June 30, 20212022 from $2,818$1,649 at December 31, 20202021 due to payments received. Foreclosed assets decreased $603 due to the sale of two properties with larger balances. Foreclosed assets comprised two$488. There were no foreclosed properties at June 30, 2021 and five2022 compared to three properties at December 31, 2020, respectively.2021.
Generally, maintaining a high loan to deposit ratio is our primary goal in order to drive profitability. However, this objective is superseded by our goal of strong asset quality to ensure that asset quality remains strong. We continued our efforts to maintain sound underwriting standards for both commercial and consumer credit. Most commercial lending is done primarily with locally owned small businesses.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of
44
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended December 13, 2006, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310, “Receivables,” for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, credit administration identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. We consistently use loss experience from the latest
40
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
twelve quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements to this Quarterly Report.
The Company’s allowance for loan losses decreased $605increased $991 or 2.2% in 2021, due to a $400 release from3.49% during the allowance for loan losses in the current period resulting from improved credit quality and the resulting reversalfirst six months of the COVID-related asset quality qualitative factor adjustment made in the year ago period in our methodology, partially offset by non-PPP loan growth in the current period. The allowance for loan losses at June 30, 2021 continued to reflect the provisions added during 2020 from our adjustment of qualitative factors in our allowance for loan losses methodology, due to economic decline and expectation of increased credit losses from COVID-19's adverse impact on economic and business operating conditions.2022. The allowance for loan losses equaled $26,739$29,374 or 1.20%1.14% of loans, net at June 30, 20212022 compared to $27,344$28,383 or 1.26%1.22% of loans, net, at December 31, 2020.2021. Excluding PPP loans whichthat do not carry an allowance for loan losses due to a 100% government guarantee, the ratio equaled 1.28%1.16% at June 30, 2021.2022. Loans charged-off, net of recoveries, for the six months ended June 30, 2021,2022, equaled $205$259 or 0.02% of average loans, compared to $1,021$205 or 0.10%0.02% of average loans for the comparable period last year which includedyear. The increase to charge-offs in the current period is due to the delinquency status of one commercial relationship and subsequent net charge-off of one specific commercial credit totaling $553 and two small business lines of credit totaling $398, offset by a recovery of $200 on an unrelated commercial credit.$139.
Deposits:
We attract the majority of our deposits from within our market area that stretches from Montgomery County in southeastern Pennsylvania to Broome County in the Southern Tier of New York State to Lebanon County in Central Pennsylvania through the offering of various deposit instruments including demand deposit accounts, NOW accounts, money market deposit accounts, savings accounts, and time deposits, including certificates of deposit and IRA’s.IRAs. For the six months ended June 30, 2021,2022, total deposits increased $174,653decreased $52,114 or 7.2%1.76% to $2,611,766$2,911,283 from $2,437,113$2,963,397 at December 31, 2020.2021. The growth of deposits isdecrease was the result of elevated demand for liquid accounts due to low interest rates and economic uncertainty, strong organic growth of core deposits from new and existing relationships, inflowsoutflows of public fund NOW accounts and reductions to high balance time deposits and proceeds from federal government stimulus payments. as these customers are price sensitive. Brokered deposits increased $25,300 during the three months ended June 30, 2022 to offset a portion of the deposit outflow.
Interest-bearing deposits increased $124,854decreased $61,916 while noninterest-bearing deposits increased $49,799.$9,802. Interest-bearing transaction accounts, including NOW and money market accounts increaseddecreased by $105,584,$93,945, or 9.9%6.5%, to $1,169,305$1,345,386 at June 30, 2021,2022, from $1,063,721$1,439,331 at December 31, 2020,2021, savings accounts increased $38,769$26,350 to $469,993$518,146 as of June 30, 20212022 from $431,224$491,796 at December 31, 2020. 2021. Time deposits less than $250 decreased $11,674,increased $15,971, or 5.3%7.8%, to $209,772$219,690 at June 30, 2021,2022, from $221,446$203,719 at December 31, 20202021 partially due in part to redemptionthe addition of $12,500$25,317 of brokered cerificatescertificates of deposit. Time deposits $250 or more decreased $7,825,$10,292, or 8.0%11.3% to $90,422$80,503 at June 30, 20212022 from $98,247$90,795 at year end 2020 due to the redemption of a large municipal account.2021.
For the six months ended June 30, interest-bearing deposits averaged $2,189,477 in 2022 compared to $1,877,950 in 2021, compared to $1,565,053 in 2020, an increase of $312,897$311,527 or 20.0%16.6%. The cost of interest-bearing deposits was 0.43%0.28% in 20212022 compared to 0.82%0.43% for the same period last year. For the first six months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.37% in 2022 and 0.54% in 2021 and 0.88% in 2020.2021. The lower costs are due primarily to our actions to lower deposit rates to mitigate net interest margin compression. We intend to monitor deposit rates; the FOMC increased the federal funds target rate three times for a decrease in short-term market rates,total of 150 basis points through June 30, 2022 and another 75 basis points on July 27, 2022 with the result ofexpectation that the FOMC’s aggressive actionFOMC will continue to cutmove to increase the federal funds rate during March 2020 to fight a recession by cuttingcombat inflation. The volume and velocity of the federal funds rate 150 basis points in response to the COVID-19 global pandemic and economic
45
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
slowdown. We intend to continue to reduce deposit rates basedincreases will place pressure on our expectation market rates will remain at historical lows for the foreseeable future based on the recent statement by the FOMC. deposit costs.
Borrowings:
The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB. In addition, the Bank may borrow from the Federal Reserve utilizing the Discount Window.
Overall, total borrowings at June 30, 2021,2022, totaled $3,752$163,816, including long-term and subordinated debt, compared to $64,769$35,711 at December 31, 2020, a decrease2021, an increase of $61,017.$128,105. ThereTotal short-term borrowings at June 30, 2022 were $129,170 as compared to no short-term borrowings outstanding at December 31, 2021. The increase in short-term borrowings was due primarily to fund a portion of loan growth and replace deposit outflows during the three months ended June 30, 2021 compared2022, as overnight borrowings with the FHLB were $117,950 at June 30, 2022. Other borrowings, which include cash collateral pledged by derivative counterparties to $50,000 at December 31, 2020. Short-term borrowings were paid off during April 2021 with our excess cash position.offset interest rate exposure, totaled $11,220 and increased due to
41
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
higher market interest rates. Long-term debt was $3,752$1,646 at June 30, 2022 compared to $2,711 at year end 2021. Subordinated debt outstanding at June 30, 2022 and December 31, 2021 compared to $14,769 at year end 2020, the majority of the decrease was due to the maturity and subsequent payoff of a $10,000 term borrowing.$33,000.
Market Risk Sensitivity:
Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”) associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.
Due to economic uncertainty and the decreases to short-term market rates at the onset of the pandemic, economic uncertainty and more recently the expectationincrease in market rates and anticipation of historically low rates for the foreseeable future,FOMC to aggressively move the federal funds rate higher to mitigate inflation, it has become challenging to manage IRR. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by our board of directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.
The ALCO, comprised of members of our board of directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.
Our cumulative one-year RSA/RSL ratio equaled 1.12% at June 30, 2022, a decrease from 1.16% at December 31, 2021. As previously mentioned, a positive gap indicates that if interest rates increase, our earnings would likely be favorably impacted. Given the current economic conditions and outlook, and the action by the FOMC to increase the federal funds rate 225 basis points from March 1, 2022 to date and an expectation the FOMC will continue to increase the federal funds rate to mitigate inflation, we should experience increased net interest income. The overall focus of ALCO is to maintain a well-balanced interest rate risk position in order to safeguard future earnings. The current position at June 30, 2022, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to increase as market rates increase. However, these forward-looking statements are qualified in the aforementioned section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Management’s Discussion and Analysis.
4642
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Our cumulative one-year RSA/RSL ratio equaled 1.91% at June 30, 2021, an increase from 1.39% at December 31, 2020. The increase is due in part to a higher overnight federal funds sold balance of $196,000 and a reduction in borrowings of $61,017. Given the action by the FOMC to lower the targeted federal funds rate 150 basis points during March 2020 to combat economic slowdown and recessionary fears, the focus of ALCO has been to create a balanced static gap position. With regard to RSA, we predominantly offer medium-term, fixed-rate loans as well as adjustable rate loans. With respect to RSL, we are offering short term certificates of deposit and keeping our borrowings short-term in an attempt to decrease duration. The current position at June 30, 2021, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to decrease as market rates decrease. However, these forward-looking statements are qualified in the aforementioned section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Management’s Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity analysis presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such an analysis.
As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at June 30, 2021,2022, produced results similar to those indicated by the one-year static gap position. In addition, parallel and instantaneous shifts in interest rates under various interest rate shocks resulted in changes in net interest income that were well within ALCO policy limits during the first year of simulation. We will continue to monitor our IRR throughout 20212022 and endeavor to employ deposit and loan pricing strategies and direct the reinvestment of loan and investment repayments in order to manage our IRR position.
Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.
Liquidity:
Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:
● | Funding new and existing loan commitments; |
● | Payment of deposits on demand or at their contractual maturity; |
● | Repayment of borrowings as they mature; |
● | Payment of lease obligations; and |
● | Payment of operating expenses. |
These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted and strategies are developed to ensure adequate liquidity at all times.
47
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale.
Our ALCO generally meets quarterly, and most recently met in May, to review our interest rate risk profile, capital adequacy and liquidity contingency funding plan due to the uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic.liquidity. Management believes the Company’s liquidity position is strong. At June 30, 2021,2022, the Company’s cash and due from banks balances were $248,051 million$47,733 and we maintained $146.7 million$224,916 of availability at the Federal Reserve Bank’s discount window. The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury and U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities. This portfolio serves as a ready source of liquidity and capital. At June 30, 2021,2022, the Company’s available-for-sale investment securities portfolio totaled $336.4 million, $161.9 million$513,911, $348,501 of which were unencumbered. Net unrealized gainslosses on the portfolio were $4.4 million.$53,072. The Bank’s unused borrowing capacity at the Federal Home Loan Bank of PittsburghFHLB at June 30, 20212022 was $567.6 million.$614,895.
43
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after June 30, 2021.2022. Our noncore funds at June 30, 2021,2022, were comprised of time deposits in denominations of $100 or more and other borrowings. These funds are not considered to be a strong source of liquidity because they are very interest rate sensitive and are considered to be highly volatile. At June 30 2021,, 2022, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was negative 2.0%10.0%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled negative 5.2% due to our short-term investments including $196.0 million of federal funds sold, exceeding our noncore funds.6.4%. Comparatively, our overall noncore dependence ratio at year-end 20202021 was 2.8%negative 3.0% and our net short-term noncore funding dependence ratio was negative 1.3%5.6%, indicating that our reliance on noncore funds has decreasedincreased both in the short-term and overall due to our strong non-maturityrelatively static deposit balances and use of our federal funds sold to fund loan and investment growth.
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, increased $19,859decreased $232,200 during the six months ended June 30, 2021.2022. Cash and cash equivalents increased $20,781$19,859 for the same period last year. For the six months ended June 30, 2022, net cash inflows of $69,751 from financial activities and $18,738 from operating activities were offset by net cash outflows of $320,689 from investing activities. For the same period of 2021, net cash inflows of $13,001 from operating activities and $107,461 from financing activities were partially offset by net cash outflows of $100,603 from investing activities. For the same period of 2020, net cash inflows of $19,652 from operating activities and $189,817 from financing activities were partially offset by net cash outflows of $188,688 from investing activities.
Operating activities provided net cash of $13,001$18,738 for the six months ended June 30, 2021,2022, and $19,652$13,001 for the corresponding six months of 2020.2021. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for loan losses, is the primary source of funds from operations.
Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $100,603$320,689 for the six months ended June 30 2021,, 2022, compared to using net cash of $188,688$100,603 for the same period of 2020. In 2021, the2021. The combination of purchases of investment securities and an increase in lending activities were the primary factors causing the net cash outflow from investing activities while an increase in lending activities was the primary factor during the 2020 comparable period.both periods.
Financing activities provided net cash of $69,751 for the six months ended June 30, 2022, and provided net cash of $107,461 for the six months ended June 30, 2021, and provided net cash of $189,817 for the corresponding six months of 2020. Deposit2021. In 2022, short term borrowings provided the predominant financing activity of $129,170, partially offset by a decrease of $52,114 in deposits. During 2021, deposit gathering iswas our predominant financing activity. Deposits provided cash of $174,653 for the six months ended June 30, 2021. Comparatively, deposits provided $238,635 for the same period of 2020.2021 while short term borrowings declined $50,000. We continue to seek low-cost deposits from new markets and customers as well as existing customers, including municipalities and school districts. In the event that loan growth should exceed the growth in deposits, short-term and long-term borrowings provide additional funding. Short term borrowings decreased $50,000 in the six months ended June 30, 2021 compared to a decrease of $102,150 for the comparable period in 2020. Long term
48
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
borrowings were paid down and used $11,017 during the six months ended June 30 2021. Comparatively, long term borrowings including PPPLF net proceeds and issuance of $33,000 subordinated debt provided $61,205 of funding for the comparable period in 2020.
We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds will enable us to meet all cash obligations as they come due.
Capital:
Stockholders’ equity totaled $324,891$311,897 or $45.11$43.50 per share at June 30, 2021,2022, compared to $316,877$340,126 or $43.92$47.44 per share at December 31, 2020. Net income of $18,009 for the six months ended June 30, 2021 was the primary factor leading to the improved capital position.2021. Stockholders’ equity was reduced during the six month period ended June 30, 20212022 by cash dividends declared of $5,330,$5,594, a decrease to AOCI of $4,086$41,060 primarily due to a decreasean increase to the unrealized gainloss on investment securities from higher market rates, and the repurchase of 20,92913,567 common shares totaling $845.$646. Net income of $18,983 for the six months ended June 30, 2022 was added to our capital position during the period.
Higher market rates since year end resulted in a mark-to-market impact on the available for sale portfolio of $40,512, which runs through AOCI and affects our book value, but not our regulatory capital ratios.
44
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Dividends declared equaled $0.74$0.78 per share through the six months ended June 30, 20212022 and $0.72$0.74 per share for the same period of 2020.2021. The dividend payout ratio was 29.7%29.5% for the six months ended June 30, 20212022 and 41.4%29.7% for the same period of 2020.2021. The Company has paid cash dividends since its formation as a bank holding company in 1986. It is the present intention of the Board of Directors to continue this dividend payment policy. The Board declared on July 30, 202129, 2022 a third quarter dividend of $0.38$0.40 per share payable on September 15, 2021.2022 to shareholders of record as of August 31, 2022. Further dividends, however, must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant including the adverse impact of COVID-19, at the time the Board of Directors considers payment of dividends.
Current rules, which implemented the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act, call for the following capital requirements: (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%; (ii) a minimum ratio of tier 1 capital to risk-weighted assets of 6%; (iii) a minimum ratio of total capital to risk-weighted assets of 8%; and (iv) a minimum leverage ratio of 4%. In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.
The adequacy of capital is reviewed on an ongoing basis with reference to the size, composition and quality of resources and regulatory guidelines. We seek to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. At June 30, 2021,2022, the Bank’s Tier 1 capital to total average assets was 9.88%9.78% as compared to 10.08%9.58% at December 31, 2020.2021. The Bank’s Tier 1 capital to risk weighted asset ratio was 13.63%12.81% and the total capital to risk weighted asset ratio was 14.88%13.97% at June 30, 2021.2022. These ratios were 13.73%13.76% and 14.98%15.01% at December 31, 2020.2021. The Bank’s common equity Tier 1 to risk weighted asset ratio was 13.63%12.81% at June 30, 20212022 compared to 13.73%13.76% at December 31, 2020. The slight decrease in the Bank’s capital ratios was due to the upstream of a $6.8 million dividend to the Company for general corporate purposes.2021. The Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards at June 30, 2021.2022.
Review of Financial Performance:
Peoples reported net income of $18,009,$9,353, or $2.49$1.30 per diluted share for the three months ended June 30, 2022, a 10.2% increase when compared to $8,531, or $1.18 per share for the comparable period of 2021. The increase in earnings for the three months ended June 30, 2022 is due to a $3,417 increase to net interest income and $494 increase in noninterest income during the current three month period when compared to the year ago period. Partially offsetting the increases were a $850 increase in provision for loan losses due to strong loan growth in the current period, and higher noninterest expenses of $2,035 due to higher salaries and benefits and occupancy and equipment costs in part due to our investment in our market expansion strategy and digital technology upgrade.
Peoples reported net income of $18,983, or $2.63 per diluted share for the six months ended June 30 2021,, 2022, an increase of 40.1%5.6% when compared to $12,857,$18,009, or $1.74$2.49 per diluted share for the comparable period of 2020.2021. The increase in earnings forin the six months ended June 30, 20212022 is the producta result of an increase in pre-provisionincreased net interest income of $990, due primarily$5,280 and an increase of $398 in noninterest income. Partially offsetting the increases were a $1,650 increase in provision for loan losses and an increase of $3,695 to lower funding costs of $2,444,noninterest expense. Strong loan growth resulted in a decrease to the provision for loan losses of $5,700 from improved$1,250 in the current six month period, as compared to a credit quality and a releaseto the loan loss provision of $400 from the allowance for loan losses, which reflects a reversal of the COVID-related asset quality qualitative factor adjustment made in the year ago period. Higher noninterest expenses were mainly due to higher salaries and benefits of $2,071 and higher occupancy and equipment costs of $1,461 in part due to our investment in our market expansion strategy and digital technology upgrade which commenced during the final six months of 2021.
Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.12% for the second quarter of 2022 compared to 1.14% for the same period of 2021. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 11.71% for the second quarter of 2022 compared to 10.71% for the comparable period in our allowance for loan losses methodology, and lower noninterest expenses of $736. Partially offsetting the increase was a higher provision for2021.
4945
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
income taxes of $2,206 resulting in part to a $621 deferred tax adjustment from prior periods. Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.23% for the first six months of 2021 compared to 1.00% for the same period of 2020. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 11.35% for the first six months of 2021 compared to 8.48% for the comparable period in 2020.
Non-GAAP Financial Measures:
The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare Peoples’ consolidated financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, Peoples’ non-GAAP measures may not be comparable to non-GAAP measures of other companies. The tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% for 20212022 and 2020.2021.
The following table reconciles the non-GAAP financial measures of FTE net interest income for the three and six months ended June 30, 2022 and 2021:
| | | | | | | |
Three months ended June 30 |
| 2022 |
| 2021 |
| ||
Interest income (GAAP) | | $ | 25,892 | | $ | 22,763 | |
Adjustment to FTE | |
| 461 | |
| 366 | |
Interest income adjusted to FTE (non-GAAP) | |
| 26,353 | |
| 23,129 | |
Interest expense | |
| 2,185 | |
| 2,473 | |
Net interest income adjusted to FTE (non-GAAP) | | $ | 24,168 | | $ | 20,656 | |
| | | | | | | |
Six months ended June 30 |
| 2022 |
| 2021 | | ||
Interest income (GAAP) | | $ | 50,463 | | $ | 46,240 | |
Adjustment to FTE | |
| 905 | |
| 701 | |
Interest income adjusted to FTE (non-GAAP) | |
| 51,368 | |
| 46,941 | |
Interest expense | |
| 4,125 | |
| 5,182 | |
Net interest income adjusted to FTE (non-GAAP) | | $ | 47,243 | | $ | 41,759 | |
5046
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
The following table reconciles the non-GAAP financial measures of FTE net interest income for the three and six months ended June 30, 2021 and 2020:
| | | | | | | |
Three months ended June 30 |
| 2021 |
| 2020 |
| ||
Interest income (GAAP) | | $ | 22,763 | | $ | 23,852 | |
Adjustment to FTE | |
| 366 | |
| 329 | |
Interest income adjusted to FTE (non-GAAP) | |
| 23,129 | |
| 24,181 | |
Interest expense | |
| 2,473 | |
| 3,345 | |
Net interest income adjusted to FTE (non-GAAP) | | $ | 20,656 | | $ | 20,836 | |
| | | | | | | |
Six months ended June 30 |
| 2021 |
| 2020 | | ||
Interest income (GAAP) | | $ | 46,240 | | $ | 47,694 | |
Adjustment to FTE | |
| 701 | |
| 682 | |
Interest income adjusted to FTE (non-GAAP) | |
| 46,941 | |
| 48,376 | |
Interest expense | |
| 5,182 | |
| 7,626 | |
Net interest income adjusted to FTE (non-GAAP) | | $ | 41,759 | | $ | 40,750 | |
The efficiency ratio is noninterest expenses, less amortization of intangible assets, as a percentage of FTE net interest income plus noninterest income less gains on equity securities and gains on sale of assets. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP for the three and six months ended June 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | | |
Three months ended June 30 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| ||||
Efficiency ratio (non-GAAP): | | | | | | | | | | | | | | |
Noninterest expense (GAAP) | | $ | 13,528 | | $ | 13,242 | | | $ | 15,493 | | $ | 13,458 | |
Less: amortization of intangible assets expense | |
| 125 | |
| 154 | | |
| 97 | |
| 125 | |
Noninterest expense adjusted for amortization of assets expense (non-GAAP) | | | 13,403 | | | 13,088 | | | | 15,396 | | | 13,333 | |
| | | | | | | | | | | | | | |
Net interest income (GAAP) | | | 20,290 | | | 20,507 | | | | 23,707 | | | 20,290 | |
Plus: taxable equivalent adjustment | | | 366 | | | 329 | | | | 461 | | | 366 | |
Noninterest income (GAAP) | | | 3,387 | | | 3,422 | | | | 3,881 | | | 3,387 | |
Less: net gains (losses) on equity securities | | | (17) | | | 39 | | |||||||
Net interest income (FTE) plus noninterest income (non-GAAP) | | $ | 24,060 | | $ | 24,219 | | | $ | 28,049 | | $ | 24,043 | |
| | | | | | | | | | | | | | |
Efficiency ratio (non-GAAP) | | | 55.7 | % | | 54.0 | % | | | 54.9 | % | | 55.5 | % |
| | | | | | | | | | | | | | |
Six months ended June 30 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| ||||
Efficiency ratio (non-GAAP): | | | | | | | | | | | | | | |
Noninterest expense (GAAP) | | $ | 26,157 | | $ | 26,893 | | | $ | 29,782 | | $ | 26,157 | |
Less: amortization of intangible assets expense | |
| 250 | |
| 308 | | |
| 193 | |
| 250 | |
Noninterest expense adjusted for amortization of assets expense (non-GAAP) | | | 25,907 | | | 26,585 | | | | 29,589 | | | 25,907 | |
| | | | | | | | | | | | | | |
Net interest income (GAAP) | | | 41,058 | | | 40,068 | | | | 46,338 | | | 41,058 | |
Plus: taxable equivalent adjustment | | | 701 | | | 682 | | | | 905 | | | 701 | |
Noninterest income (GAAP) | | | 6,904 | | | 6,972 | | | | 7,302 | | | 6,904 | |
Less: net (losses) gains on equity securities | | | 4 | | | (84) | | |||||||
Less: net gains on sale of assets | | | | | | 267 | | |||||||
Net interest income (FTE) plus noninterest income (non-GAAP) | | $ | 48,659 | | $ | 47,539 | | | $ | 54,545 | | $ | 48,663 | |
| | | | | | | | | | | | | | |
Efficiency ratio (non-GAAP) | | | 53.24 | % | | 55.92 | % | | | 54.3 | % | | 53.2 | % |
51
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Net Interest Income:
Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings, and subordinated debt comprise interest-bearing liabilities. Net interest income is impacted by:
● | Variations in the volume, rate and composition of earning assets and interest-bearing liabilities; |
● | Changes in general market rates; and |
● | The level of nonperforming assets. |
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more
47
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 21.0% in 20212022 and 2020.2021.
For the three months ended June 30, tax-equivalent net interest income decreased $180increased $3,512 to $24,168 in 2022 from $20,656 in 2021 from $20,836 in 2020.2021. The net interest spread decreasedincreased to 2.95% for the three months ended June 30, 2022 from 2.81% for the three months ended June 30, 2021 from 3.15% for the three months ended June 30, 2020 as the earning asset yield decreased 58increased 2 basis points while the average rate paid on interest bearing liabilities decreased 2511 basis points. The tax-equivalent net interest margin decreasedincreased to 2.96%3.06% for the second quarter of 20212022 from 3.36%2.96% for the comparable period of 2020.2021.
For the three months ended June 30, tax-equivalent interest income, a non-GAAP measure, on earning assets decreased $1,052,increased $3,224, to $26,353 in 2022 as compared to $23,129 in 2021 as compared to $24,181 in 2020.2021. The overall yield on earning assets, on a fully tax-equivalent basis, decreased 58increased 2 basis points for the three months ended June 30, 20212022 to 3.32%3.34% as compared to 3.90%3.32% for the three months ended June 30 2020., 2021. The decrease in yield onincrease to tax-equivalent interest income is due to the higher earning asset base of $367,654. The higher volume is partially offset by the earning assets resulted from a 33 basis point decrease in loan yields, 3.83% for the second quarter of 2021 compared to 4.16% for the same period last year. Loan yields decreased due to lower rates onrepricing downward and new loan originations during 2021, coupled with adjustable and variable rate loans repricing into ainvestment purchases being added at lower rate environment.portfolio rates. PPP loan interest income and net fees totaled $1,343$440 and the yield was 2.73%5.2% during the current quarter. Excluding the PPP loans, the loan yield was 3.94%3.81%. The overall yield earned on investments decreased 2846 basis points in the second quarter of 20212022 to 2.13%1.67% from 2.41%2.13% for the second quarter of 20202021 as investment cashflow from high yielding matured and pre-refunded municipal bonds are deployed into lower yielding bonds and federal funds sold.bonds. Average investment balances were $39,385$321,205 higher when comparing the current and year ago quarter. Average federal funds sold decreased $196,327 to $23,920 for the three months ended June 30, 2022 and yielded 0.37%, as compared to $220,247 and yield of 0.10% in the year ago period. We recognized the negative impact to the overall net interest margin due to the high federal funds sold balances and invested a portion into the investment portfolio during the current three month period to improve interest income and asset yield. We expect asset yields to continue to move downwardupward as asset cash flow reprices lowerreprice higher due to the FOMC’s policyrecent increase to hold rates at historically low levels. the federal funds rate by the FOMC and expectation of further rate increases by the FOMC to combat inflation.
Total interest expense decreased $872$288 to $2,185 for the three months ended June 30, 2022 from $2,473 for the three months ended June 30, 2021 from $3,345 for the three months ended June 30, 2020.2021. The total cost of funds decreased 2511 basis points for the three months ended June 30 2021, 2022 to 0.50%0.39% as compared to 0.75%0.50% in the year ago period. The decrease in costs was due to lower rates on interest bearing deposits partially offset by higher average balances. The average rate paid on deposits declined as we decreased deposit rates throughout 2021 and early in response2022 to the aforementioned FOMC decision tomitigate margin compression during hold rates ata historically low levelsrate environment.. We expect our cost of funds to continuecome under pressure over the remaining months of 2022 as market rates have risen rapidly since year end as the FOMC aggressively increases interest rates in an attempt to decline as time deposits mature and reinvest into lower rates and we continue to lower all our interest-bearing deposit rates to mitigate compression to our net interest margin.curb inflation.
5248
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Net interest income changes due to rate and volume for the six months ended June 30
| | | | | | | | | | | | | | | | | | | | |
| | 2021 vs 2020 | | | 2022 vs 2021 | | ||||||||||||||
| | Increase (decrease) | | | Increase (decrease) | | ||||||||||||||
| | attributable to | | | attributable to | | ||||||||||||||
| | Total | | Rate | | Volume | | | Total | | Rate | | Volume | | ||||||
Interest income: |
| | |
| | |
| | |
|
| | |
| | |
| | |
|
Loans: | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | (1,148) | | $ | (7,176) | | $ | 6,028 | | | $ | 1,933 | | $ | (1,901) | | $ | 3,834 | |
Tax-exempt | |
| (173) | |
| (430) | |
| 257 | | |
| 688 | | | (908) | | | 1,596 | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Taxable | |
| (449) | |
| (434) | |
| (15) | | |
| 1,515 | | | (1,652) | | | 3,167 | |
Tax-exempt | |
| 262 | |
| (349) | |
| 611 | | |
| 284 | | | (353) | | | 637 | |
Interest-bearing deposits | |
| (25) | |
| (26) | |
| 1 | | |
| 16 | | | 18 | | | (2) | |
Federal funds sold | |
| 98 | | | (7) | |
| 105 | | |
| (9) | | | 144 | | | (153) | |
Total interest income | |
| (1,435) | |
| (8,422) | |
| 6,987 | | |
| 4,427 | |
| (4,652) | |
| 9,079 | |
Interest expense: | | | | | | | | | | | | | | | | | | | | |
Money market accounts | |
| (574) | |
| (1,779) | |
| 1,205 | | |
| (266) | | $ | (606) | | $ | 340 | |
NOW accounts | |
| (333) | |
| (1,494) | |
| 1,161 | | |
| (96) | | | (840) | | | 744 | |
Savings accounts | |
| (51) | |
| (147) | |
| 96 | | |
| (1) | | | (47) | | | 46 | |
Time deposits less than $100 | |
| (429) | |
| (141) | |
| (288) | | |
| (154) | | | (147) | | | (7) | |
Time deposits $100 or more | |
| (947) | |
| (736) | |
| (211) | | |
| (451) | | | (356) | | | (95) | |
Short-term borrowings | |
| (598) | |
| (247) | |
| (351) | | |
| 45 | | | 120 | | | (75) | |
Long-term debt | |
| (251) | |
| 527 | |
| (778) | | |
| (134) | | | 205 | | | (339) | |
Subordinated debt | | | 739 | | | | | | 739 | | | | | | | | | | | |
Total interest expense | |
| (2,444) | |
| (4,017) | |
| 1,573 | | |
| (1,057) | |
| (1,671) | |
| 614 | |
Net interest income - non-GAAP | | $ | 1,009 | | $ | (4,405) | | $ | 5,414 | | | $ | 5,484 | | $ | (2,981) | | $ | 8,465 | |
Tax-equivalent net interest income, a non-GAAP measure, was $41,759$47,243 in the six months ended June 30, 20212022 and $40,750$41,759 in the comparable period last year. There was a positive volume variance that was partially offset by a negative rate variance. The growth in average earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income, a non-GAAP measure, of $5,414.$8,465. A rate variance resulted in a decrease in net interest income of $4,405.$2,981.
Average earning assets increased $365,129$404,072 to $3,161,391 for the six months ended June 30, 2022 from $2,757,319 for the six months ended June 30, 2021 from $2,392,190 for the six months ended June 30, 2020 and accounted for a $6,987$9,079 increase in interest income. Average loans increased $139,043,$207,270, which caused interest income to increase $6,285.$5,430. Specifically, average PPP loans totaled $40,079 and generated $1,481 of interest and net fees in the current period compared to average PPP loans of $196,240 and generated $3,811 of interest and net fees.fees in the prior period. Average taxable investments decreased $1,294increased $275,967 comparing 20212022 and 2020,2021, which resulted in decreasedincreased interest income of $15$3,167 while average tax-exempt investments increased $29,110,$35,402, which resulted in an increase to interest income of $611.$637. Average federal funds sold decreased $113,375 for the six months ended June 30, 2022 which resulted in a decrease of $153 to interest income.
Average interest-bearing liabilities rose $212,243$291,323 to $2,243,797 for the six months ended June 30, 2022 from $1,952,474 for the six months ended June 30, 2021 from $1,740,231 for the six months ended June 30, 2020 resulting in a net increase in interest expense of $1,573. Large$614. Interest-bearing transaction accounts, including money market, NOW and savings accounts grew $335,934, which in aggregate caused a $1,130 increase in interest expense. In addition, large denomination time deposits averaged $27,698$23,235 less in the current period and caused interest expense to decrease $211.$95. A decrease of $45,820$1,173 in average time deposits less than $100 thousand decreased interest expense by $288.$7. In addition, interest-bearing transaction accounts, including money market, NOW and savings accounts grew $386,415, which in aggregate caused a $2,462 increase in interest expense. Short-termshort-term borrowings averaged $89,018$9,631 lower and decreased interest expense $351$75 while long-term debt averaged $39,099$10,572 lower and decreased interest expense by $778$339 comparing the first six months of 20212022 and 2020. Subordinated debt averaged $27,463 more during the six months ended June 30, 2021 when compared to the same period in 2020 and increased interest expense by $739.2021.
An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets decreased 64 basis points while there was a 34 basis point decrease in the cost of funds. As a result, tax-equivalent net interest income decreased $4,405
5349
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets decreased 15 basis points while there was a 17 basis point decrease in the cost of funds. As a result, tax-equivalent net interest income decreased $2,981 comparing the six months ended June 30, 20212022 and 2020.2021. The tax-equivalent yield on earning assets was 3.43%3.28% in the 20212022 period compared to 4.07%3.43% in 20202021 resulting in a decrease in interest income of $8,422.$4,652. The yield on the taxable investment portfolio decreased 3344 basis points to 1.97%1.53% during the six months ended June 30, 20212022 from 2.30%1.97% in the year ago period, resulting in a decrease of $434.$1,652. The yield on the tax exempt investment portfolio decreased 5635 basis points to 2.71%2.36% during the six months ended June 30, 20212022 from 3.27%2.71% in the year ago period, resulting in a decrease of $349.$353. The tax-equivalent yield on the loan portfolio decreased 3812 basis points to 3.84% in 2022 from 3.96% in 2021 from 4.34% in 2020 and resulted in a decrease to interest income of $7,606.$2,809.
PPP loans yielded 7.45% during the six months ended June 30, 2022 compared to 3.92% in the year ago period. The decrease resulted from the higher interest income versus PPP loan forgiveness and the accretion of deferred fees.
A favorable rate variance was experienced in the cost of funds.funds as incremental deposit rate reductions have been completed to mitigate the effect of low market rates to our net interest income. We experienced decreases in the rates paid on most of the major categories of interest-bearing liabilities. The cost of money market accounts decreased 46 basis points comparing the six months ended June 30, 2021 and 2020. The decrease resulted in a decrease in interest expense of $1,779. The cost of NOW accounts decreased 33deposits declined 15 basis points and resulted in a $1,494$1,996 reduction of interest expense. The cost of savings accounts decreased 4 basis points and resulted in a $147 reduction of interest expense. With regard to time deposits, the average rate paid for time deposits less than $100 thousand decreased 18 basis points while time deposits $100 thousand or more decreased 79 basis points, which together resulted in a $877 decrease in interest expense.expense with the largest decreases being our money market and NOW account products. The average rate paid on short-term borrowings decreased 61 basis points in the 2021 period when compared to the year ago period, causing a $247 decrease indeposit interest expense. Interest expense increased $527 from a 123declines were partially offset by an 83 basis point increase in the average rate paid on long-term debt.cost of borrowings that increased interest expense $325.
5450
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include available-for-sale securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate of 21%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | Three months ended | | ||||||||||||||||||||||||||||
| | June 30, 2021 | | June 30, 2020 | | | June 30, 2022 | | June 30, 2021 | | ||||||||||||||||||||||||
| | Average | | Interest Income/ | | Yield/ | | Average | | Interest Income/ | | Yield/ | | | Average | | Interest Income/ | | Yield/ | | Average | | Interest Income/ | | Yield/ | | ||||||||
|
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate | |
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate | | ||||||||
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 2,075,808 | | $ | 20,029 | | 3.87 | % | $ | 2,032,852 | | $ | 21,160 | | 4.19 | % | | $ | 2,254,405 | | $ | 22,009 | | 3.92 | % | $ | 2,075,808 | | $ | 20,029 | | 3.87 | % |
Tax-exempt | | | 148,747 | | | 1,222 | | 3.30 | | | 127,624 | | | 1,191 | | 3.75 | | | | 211,885 | | | 1,541 | | 2.92 | | | 148,747 | | | 1,222 | | 3.30 | |
Total loans | | | 2,224,555 | | | 21,251 | | 3.83 | | | 2,160,476 | | | 22,351 | | 4.16 | | | | 2,466,290 | | | 23,550 | | 3.83 | | | 2,224,555 | | | 21,251 | | 3.83 | |
Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 264,490 | | | 1,301 | | 1.97 | | | 260,160 | | | 1,445 | | 2.23 | | | | 553,078 | | | 2,110 | | 1.53 | | | 264,490 | | | 1,301 | | 1.97 | |
Tax-exempt | | | 78,521 | | | 520 | | 2.66 | | | 43,466 | | | 374 | | 3.46 | | | | 111,138 | | | 652 | | 2.35 | | | 78,521 | | | 520 | | 2.66 | |
Total investments | | | 343,011 | | | 1,821 | | 2.13 | | | 303,626 | | | 1,819 | | 2.41 | | | | 664,216 | | | 2,762 | | 1.67 | | | 343,011 | | | 1,821 | | 2.13 | |
Interest-bearing deposits | | | 9,653 | | | 2 | | 0.08 | | | 12,595 | | | 5 | | 0.16 | | | | 10,694 | | | 18 | | 0.68 | | | 9,653 | | | 2 | | 0.08 | |
Federal funds sold | | | 220,247 | | | 55 | | 0.10 | | | 17,480 | | | 6 | | 0.14 | | | | 23,920 | | | 22 | | 0.37 | | | 220,247 | | | 55 | | 0.10 | |
Total earning assets | | | 2,797,466 | | | 23,129 | | 3.32 | % | | 2,494,177 | | | 24,181 | | 3.90 | % | | | 3,165,120 | | | 26,353 | | 3.34 | % | | 2,797,466 | | | 23,129 | | 3.32 | % |
Less: allowance for loan losses | | | 27,163 | | | | | | | | 26,000 | | | | | | | | | 28,839 | | | | | | | | 27,163 | | | | | | |
Other assets | | | 226,245 | | | | | | | | 236,017 | | | | | | | | | 210,739 | | | | | | | | 226,245 | | | | | | |
Total assets | | $ | 2,996,548 | | $ | 23,129 | | | | $ | 2,704,194 | | $ | 24,181 | | | | | $ | 3,347,020 | | $ | 26,353 | | | | $ | 2,996,548 | | $ | 23,129 | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market accounts | | $ | 542,600 | | $ | 533 | | 0.39 | % | $ | 402,705 | | $ | 614 | | 0.61 | % | | $ | 588,222 | | $ | 448 | | 0.31 | % | $ | 542,600 | | $ | 533 | | 0.39 | % |
NOW accounts | | | 609,283 | | | 561 | | 0.37 | | | 436,020 | | | 827 | | 0.76 | | | | 782,501 | | | 577 | | 0.30 | | | 609,283 | | | 561 | | 0.37 | |
Savings accounts | | | 465,916 | | | 96 | | 0.08 | | | 397,267 | | | 122 | | 0.12 | | | | 518,847 | | | 99 | | 0.08 | | | 465,916 | | | 96 | | 0.08 | |
Time deposits less than $100 | | | 128,037 | | | 373 | | 1.17 | | | 174,271 | | | 552 | | 1.27 | | | | 125,653 | | | 306 | | 0.98 | | | 128,037 | | | 373 | | 1.17 | |
Time deposits $100 or more | | | 175,918 | | | 378 | | 0.86 | | | 195,578 | | | 749 | | 1.54 | | | | 152,346 | | | 167 | | 0.44 | | | 175,918 | | | 378 | | 0.86 | |
Total interest-bearing deposits | | | 1,921,754 | | | 1,941 | | 0.41 | | | 1,605,841 | | | 2,864 | | 0.72 | | | | 2,167,569 | | | 1,597 | | 0.30 | | | 1,921,754 | | | 1,941 | | 0.41 | |
Short-term borrowings | | | 7,300 | | | 6 | | 0.33 | | | 93,447 | | | 102 | | 0.44 | | | | 34,953 | | | 122 | | 1.40 | | | 7,300 | | | 6 | | 0.33 | |
Long-term debt | | | 11,025 | | | 82 | | 2.98 | | | 82,117 | | | 231 | | 1.13 | | | | 1,901 | | | 23 | | 4.85 | | | 11,025 | | | 82 | | 2.98 | |
Subordinated debt | | | 33,000 | | | 444 | | 5.38 | | | 11,074 | | | 148 | | 5.38 | | | | 33,000 | | | 443 | | 5.38 | | | 33,000 | | | 444 | | 5.38 | |
Total borrowings | | | 51,325 | | | 532 | | 0.69 | | | 186,638 | | | 481 | | 1.04 | | | | 69,854 | | | 588 | | 3.38 | | | 51,325 | | | 532 | | 0.69 | |
Total interest-bearing liabilities | | | 1,973,079 | | | 2,473 | | 0.50 | | | 1,792,479 | | | 3,345 | | 0.75 | | | | 2,237,423 | | | 2,185 | | 0.39 | | | 1,973,079 | | | 2,473 | | 0.50 | |
Noninterest-bearing deposits | | | 680,431 | | | | | | | | 574,194 | | | | | | | | | 756,226 | | | | | | | | 680,431 | | | | | | |
Other liabilities | | | 23,420 | | | | | | | | 28,798 | | | | | | | | | 33,079 | | | | | | | | 23,420 | | | | | | |
Stockholders’ equity | | | 319,618 | | | | | | | | 308,723 | | | | | | | | | 320,292 | | | | | | | | 319,618 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,996,548 | | | 2,473 | | | | $ | 2,704,194 | | | 3,345 | | | | | $ | 3,347,020 | | | 2,185 | | | | $ | 2,996,548 | | | 2,473 | | | |
Net interest income/spread | | | | | $ | 20,656 | | 2.81 | % | | | | $ | 20,836 | | 3.15 | % | | | | | $ | 24,168 | | 2.95 | % | | | | $ | 20,656 | | 2.82 | % |
Net interest margin | | | | | | | | 2.96 | % | | | | | | | 3.36 | % | | | | | | | | 3.06 | % | | | | | | | 2.96 | % |
Tax-equivalent adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | $ | 257 | | | | | | | $ | 250 | | | | | | | | $ | 324 | | | | | | | $ | 257 | | | |
Investments | | | | | | 109 | | | | | | | | 79 | | | | | | | | | 137 | | | | | | | | 109 | | | |
Total adjustments | | | | | $ | 366 | | | | | | | $ | 329 | | | | | | | | $ | 461 | | | | | | | $ | 366 | | | |
5551
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended |
| | Six months ended |
| ||||||||||||||||||||||||||||
| | June 30, 2021 |
| June 30, 2020 |
| | June 30, 2022 |
| June 30, 2021 |
| ||||||||||||||||||||||||
| | Average | | Interest Income/ | | Yield/ |
| Average | | Interest Income/ | | Yield/ |
| | Average | | Interest Income/ | | Yield/ |
| Average | | Interest Income/ | | Yield/ |
| ||||||||
|
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
|
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
| ||||||||
Assets: |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 2,065,024 | | $ | 40,929 |
| 4.00 | % | $ | 1,931,653 | | $ | 42,077 |
| 4.38 | % | | $ | 2,201,621 | | $ | 42,862 |
| 3.93 | % | $ | 2,065,024 | | $ | 40,929 |
| 4.00 | % |
Tax-exempt | |
| 137,114 | |
| 2,323 |
| 3.42 | |
| 131,442 | |
| 2,496 |
| 3.82 | | |
| 207,788 | |
| 3,011 |
| 2.92 | |
| 137,114 | |
| 2,323 |
| 3.42 | |
Total loans | | | 2,202,138 | | | 43,252 | | 3.96 | | | 2,063,095 | | | 44,573 | | 4.34 | | | | 2,409,409 | | | 45,873 | | 3.84 | | | 2,202,138 | | | 43,252 | | 3.96 | |
Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | |
| 262,375 | |
| 2,567 |
| 1.97 | |
| 263,669 | |
| 3,016 |
| 2.30 | | |
| 538,342 | |
| 4,082 |
| 1.53 | |
| 262,375 | |
| 2,567 |
| 1.97 | |
Tax-exempt | |
| 75,366 | |
| 1,014 |
| 2.71 | |
| 46,256 | |
| 752 |
| 3.27 | | |
| 110,768 | |
| 1,298 |
| 2.36 | |
| 75,366 | |
| 1,014 |
| 2.71 | |
Total investments | | | 337,741 | | | 3,581 | | 2.14 | | | 309,925 | | | 3,768 | | 2.44 | | | | 649,110 | | | 5,380 | | 1.67 | | | 337,741 | | | 3,581 | | 2.14 | |
Interest-bearing deposits | |
| 11,378 | |
| 4 |
| 0.07 | |
| 11,272 | |
| 29 |
| 0.52 | | |
| 10,185 | |
| 20 |
| 0.40 | |
| 11,378 | |
| 4 |
| 0.07 | |
Federal funds sold | | | 206,062 | | | 104 | | 0.10 | | | 7,898 | | | 6 | | 0.15 | | | | 92,687 | | | 95 | | 0.21 | | | 206,062 | | | 104 | | 0.10 | |
Total earning assets | |
| 2,757,319 | |
| 46,941 |
| 3.43 | % |
| 2,392,190 | |
| 48,376 |
| 4.07 | % | |
| 3,161,391 | |
| 51,368 |
| 3.28 | % |
| 2,757,319 | |
| 46,941 |
| 3.43 | % |
Less: allowance for loan losses | |
| 27,426 | | | | | | |
| 24,572 | | | | | | | |
| 28,779 | | | | | | |
| 27,426 | | | | | | |
Other assets | |
| 225,631 | | | | | | |
| 220,927 | | | | | | | |
| 211,608 | | | | | | |
| 225,631 | | | | | | |
Total assets | | $ | 2,955,524 | | $ | 46,941 | | | | $ | 2,588,545 | | $ | 48,376 | | | | | $ | 3,344,220 | | $ | 51,368 | | | | $ | 2,955,524 | | $ | 46,941 | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market accounts | | $ | 523,557 | | $ | 1,099 |
| 0.42 | % | $ | 383,203 | | $ | 1,673 |
| 0.88 | % | | $ | 592,085 | | $ | 833 |
| 0.28 | % | $ | 523,557 | | $ | 1,099 |
| 0.42 | % |
NOW accounts | |
| 590,418 | |
| 1,160 |
| 0.40 | |
| 413,565 | |
| 1,493 |
| 0.73 | | |
| 801,155 | |
| 1,064 |
| 0.27 | |
| 590,418 | |
| 1,160 |
| 0.40 | |
Savings accounts | |
| 455,698 | |
| 193 |
| 0.09 | |
| 386,490 | |
| 244 |
| 0.13 | | |
| 512,367 | |
| 192 |
| 0.08 | |
| 455,698 | |
| 193 |
| 0.09 | |
Time deposits less than $100 | |
| 127,799 | |
| 762 |
| 1.20 | |
| 173,619 | |
| 1,191 | | 1.38 | | |
| 126,626 | |
| 608 |
| 0.97 | |
| 127,799 | |
| 762 | | 1.20 | |
Time deposits $100 or more | |
| 180,478 | |
| 819 |
| 0.92 | |
| 208,176 | |
| 1,766 |
| 1.71 | | |
| 157,243 | |
| 368 |
| 0.47 | |
| 180,478 | |
| 819 |
| 0.92 | |
Total interest-bearing deposits | | | 1,877,950 | | | 4,033 | | 0.43 | | | 1,565,053 | | | 6,367 | | 0.82 | | | | 2,189,476 | | | 3,065 | | 0.28 | | | 1,877,950 | | | 4,033 | | 0.43 | |
Short-term borrowings | |
| 28,766 | |
| 77 |
| 0.54 | |
| 117,784 | |
| 675 |
| 1.15 | | |
| 19,135 | |
| 122 |
| 1.29 | |
| 28,766 | |
| 77 |
| 0.54 | |
Long-term debt | |
| 12,758 | |
| 185 |
| 2.92 | |
| 51,857 | |
| 436 |
| 1.69 | | |
| 2,186 | |
| 51 |
| 4.70 | |
| 12,758 | |
| 185 |
| 2.92 | |
Subordinated debt | | | 33,000 | | | 887 | | 5.38 | | | 5,537 | | | 148 | | 5.38 | | | | 33,000 | | | 887 | | 5.42 | | | 33,000 | | | 887 | | 5.38 | |
Total borrowings | | | 74,524 | | | 1,149 | | 3.11 | | | 175,178 | | | 1,259 | | 1.45 | | | | 54,321 | | | 1,060 | | 3.94 | | | 74,524 | | | 1,149 | | 3.11 | |
Total interest-bearing liabilities | |
| 1,952,474 | |
| 5,182 |
| 0.54 | |
| 1,740,231 | |
| 7,626 |
| 0.88 | | |
| 2,243,797 | |
| 4,125 |
| 0.37 | |
| 1,952,474 | |
| 5,182 |
| 0.54 | |
Noninterest-bearing deposits | |
| 657,744 | | | | | | |
| 518,351 | | | | | | | |
| 745,348 | | | | | | |
| 657,744 | | | | | | |
Other liabilities | |
| 25,385 | | | | | | |
| 24,947 | | | | | | | |
| 30,816 | | | | | | |
| 25,385 | | | | | | |
Stockholders’ equity | |
| 319,921 | | | | | | |
| 305,016 | | | | | | | |
| 324,259 | | | | | | |
| 319,921 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,955,524 | | | 5,182 | | | | $ | 2,588,545 | | | 7,626 | | | | | $ | 3,344,220 | | | 4,125 | | | | $ | 2,955,524 | | | 5,182 | | | |
Net interest income/spread | | | | | $ | 41,759 |
| 2.89 | % | | | | $ | 40,750 |
| 3.19 | % | | | | | $ | 47,243 |
| 2.91 | % | | | | $ | 41,759 |
| 2.89 | % |
Net interest margin | | | | | | |
| 3.05 | % | | | | | |
| 3.43 | % | | | | | | |
| 3.01 | % | | | | | |
| 3.05 | % |
Tax-equivalent adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | $ | 488 | | | | | | | $ | 524 | | | | | | | | $ | 632 | | | | | | | $ | 488 | | | |
Investments | | | | |
| 213 | | | | | | |
| 158 | | | | | | | |
| 273 | | | | | | |
| 213 | | | |
Total adjustments | | | | | $ | 701 | | | | | | | $ | 682 | | | | | | | | $ | 905 | | | | | | | $ | 701 | | | |
52
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Provision for Loan Losses:
We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan
56
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We generally make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2021.2022.
For the three months ended June 30, 2021,2022, the provision for loan losses decreased $1,700increased $850 to $100$950 from $1,800$100 in the year ago period which reflected an increase to the asset quality qualitative factors in our allowance for loan losses methodology due to deferments requested on commercial loans and resulting risk rating migration.improving credit trends. The provision for loan losses in the three month period ended June 30, 20212022 is the result of growth of non-PPP loans and improved asset quality and reversal of the COVID-related asset quality qualitative adjustment made in the year ago period in our allowance for loan losses methodology.credit quality.
The provision for loan losses was a credit of $400$1,250 for the six months ended June 30, 2021,2022, an increase of $1,650 from a decreasecredit of $5,700 from the $5,300 provision$400 for the comparable period of 2020.2021. The lowerhigher provision in the six month period ended June 30, 20212022 is the result of $278,263 in loan growth during the period. The credit in the prior year period was due to improved credit quality and the resulting reversal of the COVID-relatedCOVID related asset quality qualitative factor adjustment made in the year ago period in our allowance for loan losses methodology. The higher provision in the year ago period reflects changes made to the qualitative factors related to economic and credit quality declines resulting from the onset of the coronavirus pandemic and its uncertain economic impact.adjustments.
Noninterest Income:
Noninterest income for the three months ended June 30, 20212022 was $3,881, an increase of $494 or 14.6% from $3,387 in 2021. The increase was primarily due to higher revenue from commercial loan interest rate swaps and services charges, fees, commissions and other, partially offset by reduced mortgage banking fees. Commercial loan interest rate swap income increased $416 due to higher credit value adjustment in the quarter compared to a slight decrease of $35 or 1.0% from $3,422 in 2020.year ago. Services charges, fees, commissions and other were higher in the current period by $192$136 due to increased debit card interchange revenue and slightly higher service charges on consumer and commercial deposit accounts. Wealth managementMortgage banking revenue increased $186declined $80 in the three month period ended June 30 2021, 2022 due to a higher numberlower volumes of transactions as the year ago period was negatively impacted by the COVID-19 shutdown. Revenue generated from our commercial loan interest rate swaps decreased $381 from the year ago period due to a lower number of transactions and a lower credit valuation adjustment, and mortgage banking revenue declined $104 in the three month period ended June 30, 2021 from a lower percentage of mortgages eligible to beloans being sold into the secondary market.
Noninterest income for the six months ended June 30, 20212022 was $6,904, a slight decrease$7,302, an increase of $68$398 or 1.0%5.8% from $6,972$6,904 in the year ago period. The year agoDuring the period, included a net gain of $183 from a sale of a pool of municipal bonds, offset by an unrealized loss related to our equity security while the current period includes a $4 net gain to our equity security. Serviceservice charges, fees, commissions and other are lowerincreased $644 due in part to the six month period ended June 30, 2021 by $229 asreversal of an accrual adjustment toof a $335 bank owned life insurance benefit of $335, a lower Federal Home Loan Bank dividend of $89 and a $115 decrease to service charges onin the year ago period, an increase in consumer and commercial deposit accounts were partially offset by a $284 increaseservice charges and higher revenue related to our debit card interchange revenue. Wealth management revenue increased $157 inactivity. Mortgage banking income decreased $248 during the six month periodmonths ended June 30, 2021 due to a higher number of transactions and commissions and fees on fiduciary activities increased $87 due primarily to market appreciation of assets under management. The increase in cash surrender value of life insurance of $64 or 16.8% is due in part2022 compared to the addition of a new policy.
While positive developments have occurred related to the pandemic and macro economic conditions, uncertainty exists, and a resurgence in the virus could adversely effect our noninterest income. Service chargesprior year on deposits may decline due to waived overdraft fees, lower transaction volumes and higher customer savings rates. Restrictions that may be put in place related to seating capacities by state governmental authorities could cause a decrease to our merchant services revenue and debit card interchange income. Also, our wealth management revenue may decline due to financial market turmoil and lower transaction volumes.sales volume.
Noninterest Expenses:
In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries,
57
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, including FDIC assessment, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.
Noninterest expense increased $286$2,035 or 2.2%15.1% to $13,528$15,493 for the three months ended June 30, 2021,2022, from $13,242$13,458 for the three months ended June 30, 2020. Personnel costs increased 2.9% from the year ago period, net occupancy and equipment costs were unchanged, and all other expense categories, which include professional fees and outside services, FDIC insurance and assessments, donations and other miscellaneous expenses, increased 2.5% comparing the three months ended June 30, 2021 and 2020.
2021. Salaries and employee benefits which compriseincreased $601 or 8.3% due to annual merit increases and the majoritythe addition of noninterest expense, totaled $7,250 for the three months ended June 30, 2021, an increaselending teams and credit support staff in our newest expansion markets of $202 or 2.9% when compared to the same year ago period. The increase in the current period is due primarily to higher deferred costs, which are recorded as a contra-salary expense, of $787 in the year ago period related to a higher number of PPP loan originations. Salary expense decreased $353 in the three month period ended June 30, 2021 as employee incentives related to the processing of the PPP loans were paid outPiscataway, New Jersey and Pittsburgh, Pennsylvania that opened during the year ago period and employee benefits expense decreased $232 due to lower payroll taxes and health insurance costs.
Other expenses, excluding net occupancyfourth quarter of 2021. Occupancy and equipment expense, for the three months ended June 30, 2021 increased $79 or 2.5%, to $3,231 from $3,152 in the comparable year ago period. Pennsylvania shares tax expense increased $139expenses were higher by $903 in the current period due to our annual asset growth,information technology investments related to mobile/digital banking solutions implemented during the second half of 2021. Professional and consulting and advisory fees increased $99 in part due our digital/mobile banking initiative,$197 and legal and professional fees decreased $145 in the current period in part to improved credit quality.
For the six months ended June 30, noninterest expense decreased $736 or 2.7% to $26,157 in 2021 from $26,893 in 2020. During the six months ended June 30, 2020, personnel costs were 7.3% lower, occupancy and equipment costs 3.2% higher and all other expenses, were 2.6% lower. Salarieswhich includes account processing and employee benefits expense totaled $13,820 for the six months ending June 30, 2021, a decrease of $1,084 or 7.3% when compared to $14,904 for the same period of 2020. The decrease in the current six month period is due primarily to deferred loan origination cost benefit of $441 related to the origination of PPP loans during 2021, a lower number of full-time equivalent employees due to three branch closures during the last six months of 2020, and lower health insurance and other employee benefit costs.
The six month period ended June 30, 2021 resulted in a $193 or 3.2% increase to $6,314 in net occupancy and equipment expense compared to $6,121 for the same period in 2020. Technology costs related to our investment in a new digital banking platform resulted in theadvertising, increased expense in the current period. In general, as we expand and increase our presence in new markets, depreciation expenses and technology costs associated with the implementation and maintenance of new infrastructure within those markets increases.
For the six months ended June 30, all other expense categories increased $155 or 2.6% to $6,023 in 2021 compared to $5,868 in 2020. Amortization expense related to intangible assets declined $58; state taxes increased $203 in the current period due to higher Pennsylvania shares tax expense resulting from our annual asset growth, FDIC assessments increased $121 when comparing the six months ended June 30, 2021 to the same period in 2020 due to a FDIC small bank assessment credit recognized in the year ago period. Partially offsetting the increases were lower legal and professional expenses resulting from improved credit quality.
We recognize total noninterest expenses could increase as we incur additional costs related to office and branch cleaning, computer and technology capabilities and other items needed to address a possible resurgence of COVID-19. Additionally, legal and professional expenses may increase related to our loan portfolio and possible losses incurred due to economic hardships resulting from the pandemic.
$353.
5853
Peoples Financial Services Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
For the six months ended June 30, noninterest expense increased $3,695 or 14.2% to $29,782 in 2022 from $26,087 in 2021. During the six months ended June 30, 2022, salaries and employee benefits expense totaled $15,891, an increase of $2,071 or 15.0% when compared to $13,820 for the same period of 2021 due primarily to annual merit increases, our investment into our newest markets and lower deferred loan origination costs, which are recorded as a contra-salary expense. Occupancy and equipment expense increased $1,461 or 23.1% to $7,775 in the six month period due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021 and additional costs related to entrance into the Piscataway, New Jersey and Pittsburgh, Pennsylvanita markets. Other expenses included professional, consulting and loan account processing fees.
Income Taxes:
We recorded income tax expense of $1,518$1,792 or 15.1%16.1% of pre-tax income, and $4,196$3,625 or 18.9%16.0% of pre-tax income for the three and six months ended June 30 2021,, 2022, respectively. This compares to the three and six month periods ended June 30, 20202021 in which we recorded tax expense of $1,311$1,588 or 14.8%15.7% of pre-tax income, and $1,990$4,266 or 13.4%18.9% of pre-tax income, respectively. The six months ended June 30, 2021 includecurrent year to date period benefited from a higher level of tax-exempt income while the prior year included a $621 deferred tax adjustment related to prior periods and the Company’s frozen pension plan.adjustment. Excluding this adjustment, the effective tax rate would behave been 16.1% for the six month period ended June 30, 2021, an increase from the year ago period’s 13.4% due to a lower proportion of tax exempt income recognized in the first six months of 2021 when compared to the same period in 2020. The three and six months ended June 30, 2021 include the benefit of before tax investment tax credits totaling $273 and $543 compared to before tax investment tax credits and other credits of $273 and $546 for the same period last year.2021.
5954
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk to our earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”), which arises from our lending, investing and deposit gathering activities. Our market risk sensitive instruments consist of derivative and non-derivative financial instruments, none of which are entered into for trading purposes. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in reported earnings and/or the market value of net worth. Variations in interest rates affect the underlying economic value of assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value, and provide a basis for the expected change in future earnings related to interest rates. Interest rate changes affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. IRR is inherent in the role of banks as financial intermediaries.
A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.
Interest rate risk is the risk of loss to future earnings due to changes in interest rates. ALCOThe Asset Liability Committee (“ALCO”) is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Generally quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the Company’s board of directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Company’s liquidity, capital adequacy, growth, risk and profitability goals and are within policy limits.
The Company utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and off-balance sheet interest rate contracts to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Note 915 to the UnauditedAudited Consolidated Financial Statements for additional information.
The ALCO uses income simulation to measure interest rate risk inherent in the Company’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Company’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost time deposits to higher-costhigher cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed typically quarterly by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the Company’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of June 30, 20212022 and December 31, 2020,2021, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Company. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Company’s balance sheet remain stable for a 24-month and 60-month period. In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 24-month and 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.scenarios
Model results at June 30, 2021 2022 indicated a significantly higher starting level of net interest income (“NII”) compared to the December 31, 20202021 model as the balance sheet growth, offset compressiona shift in balance sheet mix and higher assumed market rates led to an increase to the balance sheet spread. Asspread of 27 basis points. After the first twelve months of the model simulation, progresses, reductions to assumed asset replacement rates erodes the benefit to NII. Our interest rate profile depicts a
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relatively well matchedbenefit to NII increases as a result of the higher assumed replacement rates on assets resulting from the FOMC’s recent increase to the federal funds rate. Our interest rate risk position in the near term. As the simulation progresses,exhibits a benefit to rising interest rates emergesafter the first twelve months and then throughout the simulations while a flat andsustained falling rate environment presents challengesthe greatest potential exposure to the annual run rate of NII.earnings. This balance sheet position at June 30, 2022 is less asset-sensitive than the simulation at December 31, 2021 was similarindicated due to the position indicated by simulation asaddition of December 31, 2020. fixed rate assets to mitigate our exposure to flat and falling rates.
The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Company’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
During the first half of 2022, the FOMC began to increase the federal funds target rate in part to mitigate historically high inflation. Since March 2022 there have been four rate increases totaling 225 basis points. Through June 30, 2022, we have realized higher rates on our existing adjustable rate loans and new originations while we have been able to hold our funding costs relatively stable. However, our funding costs may increase in the future as a result of the FOMC rate adjustments and local competition for deposits and negatively impact our net interest income.
The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at June 30, 2021,2022, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | June 30, 2022 |
| ||||||||||||
| | % Change in |
| | % Change in |
| ||||||||||||
Changes in Interest Rates (basis points) | | Net Interest Income | | Economic Value of Equity |
| | Net Interest Income | | Economic Value of Equity |
| ||||||||
|
| Metric |
| Policy |
| Metric |
| Policy |
|
| Metric |
| Policy |
| Metric |
| Policy |
|
+400 |
| 15.8 | | (20.0) | | 17.1 | | (40.0) | |
| (8.0) | | (20.0) | | (23.5) | | (40.0) | |
+300 |
| 11.6 | | (20.0) | | 13.5 | | (30.0) | |
| (6.0) | | (20.0) | | (17.6) | | (30.0) | |
+200 |
| 7.4 | | (10.0) | | 9.2 | | (20.0) | |
| (4.0) | | (10.0) | | (11.5) | | (20.0) | |
+100 |
| 3.5 | | (10.0) | | 6.1 | | (10.0) | |
| (1.7) | | (10.0) | | (4.8) | | (10.0) | |
Static | | | | | | | | | | | | | | | | | | |
-100 |
| (2.0) | | (10.0) | | (24.4) | | (10.0) | |
| (2.6) | | (10.0) | | (0.5) | | (10.0) | |
Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending June 30, 2021,2022, would increase 3.5%decrease 1.7% from model results using current interest rates. Additional disclosures about market risk are included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020,2021, and in Part I, Item 2 of this quarterly report, in each case under the heading “Market Risk Sensitivity,” and are incorporated into this Item 3 by reference.
With rates having fallen materially in 2020 to historical lows, the down 100 basis point scenario would result in market rates reaching floored values which can produce a distorted view ofThe Company has certain loans and derivative instruments whose interest rate risk metrics.
In responseis indexed to the economic disruption and uncertainty brought on by the COVID-19 pandemic, the FOMC lowered the federal funds target rate a total of 150 basis points in two emergency actions during March 2020 with an expectation that the CommitteeLondon Inter Bank Offered Rate (“LIBOR”). The LIBOR index will maintain a low interest rate environmentbe discontinued for the foreseeable future. Given the Company's current asset/liability position, the significantly lower market interest rates may have a negative impact on our earning asset yields and variable-rate loans indexed to prime and LIBOR.
U.S. Dollar settings effective June 30, 2023. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by the end of 2021. The Company has contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. The Company has formed a LIBOR transition team which is currently monitoring this activityactivity. The Company has begun transitioning LIBOR-indexed loans to alternative indexes, including prime and evaluatingTerm SOFR, and adjusting the risks involved.spread to maintain the overall yield.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
At June 30, 2021,2022, the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and
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procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at June 30, 2021,2022, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed,
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summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.
(b) Changes in internal control.
There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company during the six-months ended June 30, 20212022 and through the date of this quarterly report on Form 10-Q.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the year ended December 31, 2020 (20202021 (2021 Form 10-K) describes market, credit, and business operations risk factors that could affect our business, results of operations or financial condition including, among other things, outbreaks of highly infectious or contagious diseases. There have been no material changes from the risk factors as previously disclosed in our 20202021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 29, 2021, our board of directors authorized a common stock repurchase plan whereby we are authorized to repurchase up to 343,400 shares of our outstanding common stock through open market purchases.
The following purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a)(3), of the Company’s common stock during each of the months for the quarter ended June 30, 2021.2022.
| | | | | | | | | | | | | | | | �� | | | | |
|
| | | |
|
| Total Number of |
| Maximum Number |
|
| | | |
|
| Total Number of |
| Maximum Number |
|
| | | | | | | Shares Purchased | | of Shares that may |
| | | | | | | Shares Purchased | | of Shares that may |
|
| | | | | | | as Part of Publicly | | yet be Purchased |
| | | | | | | as Part of Publicly | | yet be Purchased |
|
| | Total Number of | | | Average Price | | Announced | | Under the |
| | Total Number of | | | Average Price | | Announced | | Under the |
|
Month Ending |
| Shares Purchased |
| | Paid Per Share |
| Programs |
| Programs |
|
| Shares Purchased |
| | Paid Per Share |
| Programs |
| Programs |
|
April 30, 2021 | | 7,652 | | $ | 41.80 | | 216,781 | | 335,169 | | ||||||||||
May 31, 2021 | | 176 | | $ | 41.86 | | 216,957 | | 334,993 | | ||||||||||
June 30, 2021 | | | | $ | | | 216,957 | | 334,993 | | ||||||||||
April 30, 2022 | | 6,853 | | $ | 47.83 | | 263,880 | | 288,070 | | ||||||||||
May 31, 2022 | | | | | | | 263,880 | | 288,070 | | ||||||||||
June 30, 2022 | | | | | | | 263,880 | | 288,070 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Item Number | | Description | | Page |
31.1 | | | 65 | |
| | | | |
31.2 | | CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a). (a). | | 66 |
| | | | |
32 | | | 67 | |
| | | | |
101 | | The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended June 30, 2021, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | | |
| | | | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | |
| | | | |
Item Number | | Description |
| | |
10.1 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
31.1 | | |
| | |
31.2 | | CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a). (a). |
| | |
32 | | |
| | |
101 | | The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended June 30, 2022, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. |
| | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| | |
*Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto, duly authorized.
| Peoples Financial Services Corp. |
| (Registrant) |
| |
Date: August | /s/ Craig W. Best |
| Craig W. Best |
| Chief Executive Officer |
| (Principal Executive Officer) |
| |
Date: August | /s/ John R. Anderson, III |
| John R. Anderson, III |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer and Principal Accounting Officer) |
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