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PFIS Peoples Financial Services

Filed: 7 May 21, 12:32pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2021

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: 7,203,641 at April 30, 2021.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended March 31, 2021

Contents

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

Financial Statements

Consolidated Balance Sheets at March 31, 2021 (Unaudited) and December 31, 2020

3

Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2021 and 2020 (Unaudited)

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2021 and 2020 (Unaudited)

5

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2021 and 2020 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

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

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

Item 4.

Controls and Procedures

54

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

55

Item 1A.

Risk Factors

55

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

56

Item 6.

Exhibits

56

Signatures

57

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

    

March 31, 2021

    

December 31, 2020

 

Assets:

Cash and due from banks:

Cash and due from banks

$

30,786

$

29,287

Interest-bearing deposits in other banks

8,432

15,905

Federal funds sold

 

264,100

 

183,000

Total cash and due from banks

303,318

228,192

 

Investment securities:

Available-for-sale

 

333,753

 

295,911

Equity investments carried at fair value

159

138

Held-to-maturity: Fair value March 31, 2021, $7,389; December 31, 2020, $7,513

 

7,166

 

7,225

Total investment securities

 

341,078

 

303,274

Loans

 

2,179,534

 

2,177,982

Less: allowance for loan losses

 

26,783

 

27,344

Net loans

 

2,152,751

 

2,150,638

Loans held for sale

458

837

Premises and equipment, net

 

46,777

 

47,045

Accrued interest receivable

 

8,206

 

8,255

Goodwill

 

63,370

 

63,370

Intangible assets, net

 

835

 

960

Bank owned life insurance

42,530

42,316

Other assets

 

36,146

 

38,915

Total assets

$

2,995,469

$

2,883,802

Liabilities:

Deposits:

Noninterest-bearing

$

661,262

$

622,475

Interest-bearing

 

1,889,154

 

1,814,638

Total deposits

 

2,550,416

 

2,437,113

Short-term borrowings

 

51,980

 

50,000

Long-term debt

 

14,264

 

14,769

Subordinated debentures

33,000

33,000

Accrued interest payable

 

1,120

 

736

Other liabilities

 

27,358

 

31,307

Total liabilities

 

2,678,138

 

2,566,925

Stockholders’ equity:

Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,211,293 shares at March 31, 2021 and 7,215,202 shares at December 31, 2020

 

14,423

 

14,431

Capital surplus

 

128,854

 

129,274

Retained earnings

 

177,836

 

171,023

Accumulated other comprehensive income (loss)

 

(3,782)

 

2,149

Total stockholders’ equity

 

317,331

 

316,877

Total liabilities and stockholders’ equity

$

2,995,469

$

2,883,802

See notes to unaudited consolidated financial statements

3

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,

    

2021

    

2020

 

Interest income:

Interest and fees on loans:

Taxable

$

20,900

$

20,917

Tax-exempt

 

870

 

1,031

Interest and dividends on investment securities:

Taxable

 

1,243

 

1,548

Tax-exempt

 

390

 

299

Dividends

 

23

 

23

Interest on interest-bearing deposits in other banks

 

2

 

24

Interest on federal funds sold

49

Total interest income

 

23,477

 

23,842

Interest expense:

Interest on deposits

 

2,092

 

3,503

Interest on short-term borrowings

 

71

 

573

Interest on long-term debt

 

103

 

205

Interest on subordinated debt

443

Total interest expense

 

2,709

 

4,281

Net interest income

 

20,768

 

19,561

(Credit) provision for loan losses

 

(500)

 

3,500

Net interest income after (credit) provision for loan losses

 

21,268

 

16,061

Noninterest income:

Service charges, fees, commissions and other

 

1,184

 

1,605

Merchant services income

 

93

 

114

Commission and fees on fiduciary activities

 

533

 

506

Wealth management income

 

358

 

387

Mortgage banking income

 

312

 

137

Increase in cash surrender value of life insurance

 

219

 

187

Interest rate swap revenue

797

470

Net gain (loss) on equity investment securities

 

21

 

(123)

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

 

 

267

Total noninterest income

 

3,517

 

3,550

Salaries and employee benefits expense

 

6,570

 

7,856

Net occupancy and equipment expense

 

3,267

 

3,079

Amortization of intangible assets

 

125

 

154

Professional fees and outside services

439

365

FDIC insurance and assessments

260

74

Donations

339

338

Other expenses

 

1,629

 

1,785

Total noninterest expense

 

12,629

 

13,651

Income before income taxes

 

12,156

 

5,960

Income tax expense

 

2,678

 

679

Net income

 

9,478

 

5,281

Other comprehensive income (loss):

Unrealized gain (loss) on investment securities available-for-sale

 

(7,750)

 

7,629

Reclassification adjustment for net gain on sales included in net income

 

 

(267)

Change in derivative fair value

242

1,036

Other comprehensive income (loss)

(7,508)

8,398

Income tax expense (benefit)

 

(1,577)

 

1,765

Other comprehensive income (loss), net of income taxes

 

(5,931)

 

6,633

Comprehensive income

$

3,547

$

11,914

Per share data:

Net income:

Basic

$

1.31

$

0.72

Diluted

$

1.31

$

0.71

Average common shares outstanding:

Basic

 

7,210,952

 

7,379,438

Diluted

 

7,246,016

 

7,405,703

Dividends declared

0.37

0.36

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

    

    

    

    

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

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 Three Months Ended March 31,

    

2021

    

2020

    

Cash flows from operating activities:

Net income

$

9,478

$

5,281

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

Depreciation of premises and equipment

 

680

 

735

Amortization of right-of-use lease asset

109

104

Amortization of deferred loan costs, net

 

626

39

Amortization of intangibles

 

125

 

154

Amortization of low income housing partnerships

120

120

(Credit) provision for loan losses

 

(500)

 

3,500

Net unrealized (gain) loss on equity investment securities

(21)

123

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

 

10

 

(4)

Loans originated for sale

 

(4,869)

(2,297)

Proceeds from sale of loans originated for sale

 

5,382

3,023

Net gain on sale of loans originated for sale

 

(134)

(10)

Net amortization of investment securities

 

260

 

281

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

(267)

Increase in cash surrender value of life insurance

 

(219)

 

(187)

Deferred income tax expense

 

620

 

619

Stock based compensation

 

89

 

5

Net change in:

Accrued interest receivable

 

49

 

(302)

Other assets

 

(918)

 

(10,038)

Accrued interest payable

 

384

 

59

Other liabilities

 

383

 

10,014

Net cash provided by operating activities

 

11,654

 

10,952

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

 

12,876

 

17,522

Held-to-maturity

 

58

 

135

Purchases of investment securities:

Available-for-sale

 

(58,726)

 

(9,080)

Net purchase of restricted equity securities

 

(64)

 

(482)

Net increase in lending activities

 

(2,296)

 

(86,062)

Purchases of premises and equipment

 

(521)

 

(627)

Proceeds from sale of other real estate owned

 

549

 

157

Net cash used in investing activities

 

(48,124)

 

(51,935)

Cash flows from financing activities:

Net increase in deposits

 

113,303

 

38,506

Repayment of long-term debt

 

(505)

 

(483)

Net increase in short-term borrowings

 

1,980

 

12,000

Retirement of common stock

 

(517)

(2,204)

Cash dividends paid

 

(2,665)

 

(2,662)

Net cash provided by financing activities

 

111,596

 

45,157

Net increase in cash and cash equivalents

 

75,126

 

4,174

Cash and cash equivalents at beginning of period

 

228,192

 

31,153

Cash and cash equivalents at end of period

$

303,318

$

35,327

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,

    

2021

    

2020

    

Supplemental disclosures:

Cash paid during the period for:

Interest

$

2,325

$

4,222

Income taxes

 

 

Noncash items:

Transfers of loans to other real estate

$

57

$

626

Initial recognition of right-of-use assets

899

Initial recognition of lease liability

899

See notes to unaudited consolidated financial statements

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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 (“Peoples Bank”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through NaN full-service community banking offices located within Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna and Wyoming Counties of Pennsylvania 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 months ended and as of March 31, 2021, 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.

Significant events: COVID-19

Operationally, as COVID-19 related events unfold, our continued priority is the health and safety of our customers and employees. We recently worked with local government and health professionals and have had opportunities to offer our eligible employees and their family members appointments to receive the COVID-19 vaccine.  We continue to follow the recommendations of our state governments as to conducting business and have maintained safety protocols. Currently all our offices have returned to pre-pandemic operating hours with limited lobby access.

We participated in the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Paycheck Protection Program (“PPP”), a $350 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the Small Business Administration (“SBA”).  During 2020, we approved 1,450 PPP loans totaling $217.5 million. Substantially all of the loans were made to existing customers, funded under the two year PPP loan program, and the loan proceeds initially were deposited with our institution.  PPP loan forgiveness commenced during the fourth quarter of 2020 and we continue to process loan forgiveness applications.  At March 31, 2021, we have 468 loans totaling $100.8 million remaining compared to 1,304 loans totaling $189.7 million at December 31, 2020. We expect the majority of the remaining $100.8 million to be forgiven during 2021. During the first quarter of 2021, we funded an additional 885 loans totaling $100.0 million under the SBA’s second PPP loan program.   The application process for the second PPP loan program ends May 31, 2021. 

8

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

From a credit risk perspective, we took actions to identify and assess our COVID-19 related credit exposures based on asset class and borrower type. From the onset of the crisis, we worked to proactively monitor our loan portfolio by contacting many of our borrowers to evaluate the impact of the pandemic on them, their businesses and the underlying collateral for our loans. The Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges.  At the start of the pandemic, the Company granted payment deferral requests 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. Outstanding loan balances remaining in deferral at March 31, 2021 totaled $1.3 million, a decrease of $4.8 million from the $6.1 million at December 31, 2020. As a percentage of total loan balances, excluding PPP loans, loans in deferral represented less than 0.1% of loans outstanding at March 31, 2021 compared to 0.3% of loans outstanding at December 31, 2020. At March 31, 2021, commercial loan balances remaining in deferral total $1.0 million while consumer loans total $0.3 million. Loan deferrals and modifications have been executed consistent with the guidelines of the CARES Act. Pursuant to the CARES Act, loan deferrals are not included in our nonperforming loans disclosed in our financial statement footnotes. Loans in deferral status will continue to accrue interest during the deferral period unless otherwise classified as nonperforming.

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 2020 Form 10-K. 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:

 

The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

The amendments in the ASU retain many of the disclosure requirements related to credit quality in current GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.

This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignifcant amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.

In November 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. At the relevant time, the Company qualified as a smaller reporting company and therefore guidance is effective for the Company in 2023. The Company will record the effect of implementing this ASU through a

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

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

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

The Company adopted the amendments in 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.

2. Other comprehensive income (loss):

The components of other comprehensive income (loss) and their related tax effects are reported in the consolidated statements of income and comprehensive income. The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale, benefit plan adjustments and adjustments to derivative fair values.

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at March 31, 2021 and December 31, 2020 are as follows:

    

March 31, 2021

    

December 31, 2020

 

Net unrealized gain on investment securities available-for-sale

$

1,946

$

9,696

Income tax

 

409

 

2,036

Net of income taxes

 

1,537

 

7,660

Benefit plan adjustments

 

(7,977)

 

(7,977)

Income tax benefit

 

(1,675)

 

(1,675)

Net of income taxes

 

(6,302)

 

(6,302)

Derivative adjustments

 

1,244

 

1,002

Income tax

 

262

 

211

Net of income taxes

 

982

 

791

Accumulated other comprehensive income (loss)

$

(3,782)

$

2,149

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.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three months ended March 31, 2021 and 2020:

2021

2020

For the Three Months Ended March 31 

Basic  

Diluted  

Basic  

Diluted  

Net income

    

$

9,478

    

$

9,478

    

$

5,281

$

5,281

    

Average common shares outstanding

 

7,210,952

 

7,246,016

 

7,379,438

 

7,405,703

Earnings per share

$

1.31

$

1.31

$

0.72

$

0.71

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at March 31, 2021 and December 31, 2020 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

 

March 31, 2021

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

U.S. Treasury securities

$

18,481

$

344

$

18,825

U.S. government-sponsored enterprises

56,620

963

57,583

State and municipals:

Taxable

 

56,931

944

$

1,251

 

56,624

Tax-exempt

 

70,113

 

2,426

779

 

71,760

Residential mortgage-backed securities:

U.S. government agencies

 

3,061

 

125

 

3,186

U.S. government-sponsored enterprises

 

112,501

 

1,363

 

2,855

 

111,009

Commercial mortgage-backed securities:

U.S. government-sponsored enterprises

 

12,600

 

677

 

 

13,277

Corporate debt securities

1,500

2

13

1,489

Total

$

331,807

$

6,844

$

4,898

$

333,753

Held-to-maturity:

Tax-exempt state and municipals

$

6,848

$

214

$

7,062

Residential mortgage-backed securities:

U.S. government agencies

 

18

 

 

18

U.S. government-sponsored enterprises

 

300

 

9

 

309

Total

$

7,166

$

223

$

$

7,389

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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 March 31, 2021, our equity security portfolio consisted of stock of 1 financial institution. At March 31, 2021 and December 31, 2020, we had $159 and $138 respectively, in equity securities recorded at fair value. At March 31, 2021, the fair value of our equity portfolio exceeded the cost basis by $5. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2021 (in thousands):

For the Three Months Ended March 31,

    

2021

    

2020

Net gain (loss) recognized during the period on equity securities

$

21

$

(123)

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

$

21

$

(123)

Restricted Investment In Stock

Restricted investment in stock includes Federal Home Loan Bank (“FHLB”) stock with a carrying cost of $5,419 and $5,355 at March 31, 2021 and December 31, 2020, respectively, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42, and VISA Class B stock with a carrying cost of $0 at March 31, 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 March 31, 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

12

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 March 31, 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 March 31, 2021, is summarized as follows:

Fair

 

March 31, 2021

    

Value

 

Within one year

$

39,394

After one but within five years

 

41,919

After five but within ten years

 

25,997

After ten years

 

95,819

 

203,129

Mortgage-backed and other amortizing securities

 

130,624

Total

$

333,753

 The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at March 31, 2021, is summarized as follows:

Amortized

Fair

 

March 31, 2021

    

Cost 

    

Value  

 

Within one year

$

175

$

177

After five but within ten years

523

546

After ten years

6,150

6,339

 

6,848

 

7,062

Mortgage-backed securities

 

318

 

327

Total

$

7,166

$

7,389

Securities with a carrying value of $174,711 and $165,982 at March 31, 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 March 31, 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.

13

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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 March 31, 2021 and December 31, 2020, 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

 

March 31, 2021

    

Value 

    

Losses 

    

Value 

    

Losses 

    

Value 

    

Losses 

 

State and municipals:

Taxable

$

28,025

$

1,251

$

28,025

$

1,251

Tax-exempt

30,795

779

30,795

779

Residential mortgage-backed securities:

U.S. government-sponsored enterprises

82,687

2,854

$

243

$

1

82,930

 

2,855

Corporate debt securities

987

13

987

13

Total

$

142,494

$

4,897

$

243

$

1

$

142,737

$

4,898

Less Than 12 Months  

12 Months or More  

Total  

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

December 31, 2020

    

Value 

    

Losses  

    

Value 

    

Losses  

    

Value  

    

Losses 

 

State and municipals:

Taxable

$

9,246

$

30

$

9,246

$

30

Tax-exempt

 

6,786

 

37

 

 

6,786

 

37

Residential mortgage-backed securities:

 

 

 

U.S. government-sponsored enterprises

 

11,553

135

$

284

$

1

11,837

136

Total

$

27,585

$

202

$

284

$

1

$

27,869

$

203

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 quarter of 2021. The Company had 15 mortgage-backed securities, NaN tax-exempt municipals, NaN taxable municipals and 2 corporate bonds that were in unrealized loss positions at March 31, 2021. Of these securities, 2 mortgage-backed securittes 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 in 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 March 31, 2021. There was 0 OTTI recognized for the three months ended March 31, 2021 and 2020.

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at March 31, 2021 and December 31, 2020 are summarized as follows. The Company had net deferred loan origination fees of $2,684 and

14

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

$2,058 at March 31, 2021 and December 31, 2020, respectively. The increase is due in part to net fees from $100.0 million of PPP loans originated during the first three months of 2021.

    

March 31, 2021

    

December 31, 2020

 

Commercial

$

677,090

$

679,286

Real estate:

Commercial

 

1,150,567

 

1,137,990

Residential

 

273,226

 

277,414

Consumer

 

78,651

 

83,292

Total

$

2,179,534

$

2,177,982

The PPP loans are included in the commercial loan classification and had an outstanding balance at March 31, 2021 of $200,774 comprised of $99,984 originated during 2021 as part of round two and $100,790 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 March 31, 2021.

The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2021 and 2020 are summarized as follows:

    

Real estate

March 31, 2021

    

Commercial

    

Commercial

    

Residential

Consumer

Total

 

Allowance for loan losses:

Beginning Balance January 1, 2021

$

8,734

$

14,559

$

3,129

$

922

$

27,344

Charge-offs

 

(15)

 

(96)

 

(22)

 

(62)

 

(195)

Recoveries

 

61

 

58

 

1

 

14

 

134

Provisions (credits)

 

(565)

 

182

 

(114)

 

(3)

 

(500)

Ending balance

$

8,215

$

14,703

$

2,994

$

871

$

26,783

Real estate

March 31, 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

 

(650)

 

 

(54)

 

(94)

 

(798)

Recoveries

 

267

 

 

10

 

30

 

307

Provisions

 

1,464

 

1,511

 

442

 

83

 

3,500

Ending balance

$

7,969

  

$

13,007

$

3,624

$

1,086

$

25,686

The Company’s allowance for loan losses decreased $0.6 million or 2.1% during the first three months of 2021, due primarily to a $0.5 million release from allowance for loan losses in the current period resulting from improved credit quality and a slight decrease in non-PPP loan balances. The allowance for loan losses equaled $26.8 million or 1.23% of loans, net at March 31, 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 1.35% at March 31, 2021. Loans charged-off, net of recoveries, for the three months ended March 31, 2021, equaled less than $0.1 million or 0.01% of average loans, compared to $0.5 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.

15

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2021 and December 31, 2020 is summarized as follows:

  

Real estate

 

March 31, 2021

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

   Total

 

Allowance for loan losses:

 

  

Ending balance

$

8,215

$

14,703

  

$

2,994

$

871

$

26,783

  

Ending balance: individually evaluated for impairment

 

 

697

108

64

 

869

  

Ending balance: collectively evaluated for impairment

 

$

7,518

$

14,595

$

2,930

$

871

$

25,914

  

Loans receivable:

Ending balance

$

677,090

$

1,150,567

  

$

273,226

$

78,651

$

2,179,534

  

Ending balance: individually evaluated for impairment

 

2,651

3,990

1,543

94

 

8,278

  

Ending balance: collectively evaluated for impairment

$

674,439

$

1,146,577

$

271,683

$

78,557

$

2,171,256

  

  

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 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.

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

16

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 March 31, 2021 and December 31, 2020:

Special

 

March 31, 2021

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

$

660,558

$

13,728

$

2,804

$

$

677,090

Real estate:

Commercial

 

1,123,315

 

17,615

 

9,637

 

1,150,567

Residential

 

269,856

 

619

 

2,751

 

273,226

Consumer

 

78,556

 

 

95

 

78,651

Total

$

2,132,285

$

31,962

$

15,287

$

$

2,179,534

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 period ended March 31, 2021. 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 seventy-five percent SBA guarantee.

Information concerning nonaccrual loans by major loan classification at March 31, 2021 and December 31, 2020 is summarized as follows:

    

March 31, 2021

    

December 31, 2020

 

Commercial

$

2,198

$

3,822

Real estate:

Commercial

 

3,311

 

3,262

Residential

 

825

 

922

Consumer

 

94

 

111

Total

$

6,428

$

8,117

17

Table of Contents

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 to the $1.5 million payoff of a specific commercial relationship.

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

 

March 31, 2021

Past Due  

Past Due  

Days  

Due  

Current  

Total Loans  

Accruing  

 

Commercial

$

150

$

2,198

$

2,348

$

674,742

$

677,090

Real estate:

Commercial

 

343

$

57

 

3,311

 

3,711

 

1,146,856

 

1,150,567

Residential

 

1,444

 

996

 

2,440

 

270,786

 

273,226

$

171

Consumer

 

151

 

37

 

94

 

282

 

78,369

 

78,651

 

Total

$

2,088

$

94

$

6,599

$

8,781

$

2,170,753

$

2,179,534

$

171

Improved credit quality resulted in lower levels of past due loans from year end. The addition of 1 residential mortgage resulted in the increase to loans greater than 90 days and accruing.

    

    

    

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

18

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2021 and March 31, 2020, and as of and for the year ended December 31, 2020 by major loan classification:

For the Quarter Ended

Unpaid

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

 

March 31, 2021

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

    

    

    

    

Commercial

$

673

$

1,108

$

1,462

$

4

Real estate:

Commercial

 

3,280

 

4,051

 

2,826

 

6

Residential

 

1,121

 

1,241

 

1,104

 

6

Consumer

 

94

 

105

 

103

Total

 

5,168

 

6,505

 

5,495

 

16

With an allowance recorded:

Commercial

 

1,978

 

2,041

697

 

2,012

 

5

Real estate:

Commercial

 

710

 

796

 

108

 

1,145

 

4

Residential

 

422

 

457

 

64

 

441

 

4

Consumer

 

 

 

 

 

Total

 

3,110

 

3,294

 

869

 

3,598

 

13

Total impaired loans

Commercial

 

2,651

 

3,149

 

697

 

3,474

 

9

Real estate:

Commercial

 

3,990

 

4,847

 

108

 

3,971

 

10

Residential

 

1,543

 

1,698

 

64

 

1,545

 

10

Consumer

 

94

 

105

 

 

103

 

Total

$

8,278

$

9,799

$

869

$

9,093

$

29

19

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Year Ended  

 

Unpaid

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

 

December 31, 2020

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

    

    

    

    

Commercial

$

2,251

$

3,421

$

2,915

$

30

Real estate:

Commercial

 

2,372

 

2,964

 

2,148

 

28

Residential

 

1,086

 

1,263

 

1,223

 

21

Consumer

 

111

 

121

 

167

Total

 

5,820

 

7,769

 

6,453

 

79

With an allowance recorded:

Commercial

 

2,046

 

2,094

947

 

2,038

 

17

Real estate:

Commercial

 

1,580

 

1,710

 

180

 

1,687

 

36

Residential

 

460

 

482

 

75

 

624

 

13

Consumer

 

 

 

 

Total

 

4,086

 

4,286

 

1,202

 

4,349

 

66

Total impaired loans

Commercial

 

4,297

 

5,515

 

947

 

4,953

 

47

Real estate:

Commercial

 

3,952

 

4,674

 

180

 

3,835

 

64

Residential

 

1,546

 

1,745

 

75

 

1,847

 

34

Consumer

 

111

 

121

 

 

167

 

Total

$

9,906

$

12,055

$

1,202

$

10,802

$

145

For the Quarter Ended

Unpaid

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

 

March 31, 2020

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

    

    

    

    

Commercial

$

3,706

$

4,249

$

3,672

$

16

Real estate:

Commercial

 

2,263

 

2,574

 

2,091

5

Residential

 

1,129

 

1,369

 

1,424

5

Consumer

 

201

 

219

 

231

Total

 

7,299

 

8,411

 

7,418

26

With an allowance recorded:

Commercial

 

1,956

 

1,974

$

764

 

1,488

6

Real estate:

Commercial

 

1,263

 

1,924

 

270

 

1,197

 

Residential

 

706

 

735

 

192

 

571

 

4

Consumer

Total

 

3,925

 

4,633

 

1,226

 

3,256

 

10

Total impaired loans

Commercial

 

5,662

 

6,223

 

764

 

5,160

 

22

Real estate:

Commercial

 

3,526

 

4,498

 

270

 

3,288

 

5

Residential

 

1,835

 

2,104

 

192

 

1,995

 

9

Consumer

 

201

 

219

 

231

Total

$

11,224

$

13,044

$

1,226

$

10,674

$

36

20

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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 commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,740 at March 31 2021, $2,818 at December 31, 2020 and $2,140 at March 31, 2020.

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 months ended March 31, 2021 and 2020.

During the three months ended March 31, 2021, there were 0 payment defaults on troubled debt restructurings. During the three months ended March 31, 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 March 31, 2021, 6 commercial loans and 15 consumer loans not classified as TDRs remain on deferral with principal balances aggregating $1.3 million, representing less than 0.1% of loans outstanding.

21

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

6. Other assets:

The components of other assets at March 31, 2021, and December 31, 2020 are summarized as follows:

    

March 31, 2021

    

December 31, 2020

 

Other real estate owned

$

362

$

864

Investment in low income housing partnership

 

6,212

 

6,332

Mortgage servicing rights

 

833

 

838

Restricted equity securities (FHLB and other)

 

5,461

 

5,397

Net deferred tax asset

4,724

3,768

Interest rate floor

1,455

1,678

Interest rate swaps

10,239

13,693

Other assets

 

6,860

 

6,345

Total

$

36,146

$

38,915

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.

 

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.

22

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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 March 31, 2021 and December 31, 2020 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 March 31, 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

 

March 31, 2021

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Treasury securities

    

$

18,825

    

$

18,825

    

    

$

U.S. government-sponsored enterprises

57,583

$

57,583

State and municipals:

Taxable

 

56,624

 

56,624

Tax-exempt

 

71,760

 

71,760

Mortgage-backed securities:

U.S. government agencies

 

3,186

 

3,186

U.S. government-sponsored enterprises

 

124,286

 

124,286

Corporate debt securities

1,489

1,489

Common equity securities

159

159

Total investment securities

$

333,912

$

18,984

$

314,928

$

Loan held for sale

$

458

$

458

Interest rate floor-other assets

$

1,455

$

1,455

Interest rate swap-other assets

$

9,980

$

9,980

Interest rate swap-other liabilities

$

(9,496)

$

(9,496)

23

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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 nonrecurring basis at March 31, 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

 

March 31, 2021

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

2,241

    

    

    

$

2,241

Other real estate owned

$

131

$

131

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.

24

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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

 

March 31, 2021

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

2,241

    

Appraisal of collateral

    

Appraisal adjustments

    

17.9% to 97.0%  (24.8)%

 

Liquidation expenses

 

3.0% to 6.0% (5.5)%

Other real estate owned

$

131

 

Appraisal of collateral

 

Appraisal adjustments

 

20.0% to 58.1%  (39.5)%

 

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.

25

Table of Contents

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 March 31, 2021 and December 31, 2020 and their placement within the fair value hierarchy are as follows:

    

    

    

Fair Value Hierarchy 

 

Quoted

   

   

 

Prices in

 

Active

Significant

 

Markets for

Other

Significant

 

Identical

Observable

Unobservable

 

Carrying

Fair

Assets

Inputs

Inputs

 

March 31, 2021

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

Cash and due from banks

$

303,318

$

303,318

$

303,318

Investment securities:

Available-for-sale

 

333,753

 

333,753

18,825

$

314,928

Common equity securities

159

159

159

Held-to-maturity

 

7,166

 

7,389

 

7,389

Loans held for sale

 

458

 

458

 

458

Net loans

 

2,152,751

 

2,133,875

$

2,133,875

Accrued interest receivable

 

8,206

 

8,206

 

8,206

Mortgage servicing rights

 

833

 

1,261

 

1,261

Restricted equity securities (FHLB and other)

5,461

 

5,461

 

5,461

Interest rate floor

1,455

1,455

1,455

Interest rate swaps

 

9,980

 

9,980

 

9,980

Total

$

2,823,540

$

2,805,315

Financial liabilities:

Deposits

$

2,550,416

$

2,552,977

$

2,552,977

Long-term debt

 

14,264

 

14,481

 

14,481

Subordinated debentures

 

33,000

 

32,574

 

32,574

Accrued interest payable

1,120

 

1,120

1,120

Interest rate swaps

 

9,496

 

9,496

9,496

Total

$

2,608,296

$

2,610,648

26

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

    

    

    

Fair Value Hierarchy 

 

Quoted

    

    

 

Prices in

 

Active

Significant

 

Markets for

Other

Significant

 

Identical

Observable

Unobservable

 

Carrying

Fair

Assets

Inputs

Inputs

 

December 31, 2020

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

Cash and due from banks

$

228,192

$

228,192

$

228,192

Investment securities:

Available-for-sale

 

295,911

 

295,911

18,905

$

277,006

Common equity securities

138

138

138

Held-to-maturity

 

7,225

 

7,513

 

7,513

Loans held for sale

 

837

 

837

 

837

Net loans

 

2,150,638

 

2,145,752

$

2,145,752

Accrued interest receivable

 

8,255

 

8,255

 

8,255

Mortgage servicing rights

 

838

 

1,269

 

1,269

Restricted equity securities (FHLB and other)

 

5,397

 

5,397

 

5,397

Interest rate floor

1,678

1,678

1,678

Interest rate swaps

13,693

13,693

13,693

Total

$

2,712,802

$

2,708,635

Financial liabilities:

Deposits

$

2,437,113

$

2,441,014

$

2,441,014

Long-term debt

 

14,769

 

15,073

 

15,073

Subordinated debentures

33,000

33,096

33,096

Accrued interest payable

 

736

 

736

736

Interest rate swaps

14,099

14,099

14,099

Total

$

2,499,717

$

2,504,018

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 months ended March 31, salaries and employee benefits expense includes approximately $306 in 2021 and 2020 relating to the employee benefit plans.

Pension Benefits

Three Months Ended March 31, 

    

2021

    

2020

Components of net periodic pension benefit:

    

    

Interest cost

$

105

$

54

Expected return on plan assets

 

(322)

 

(123)

Amortization of unrecognized net gain

 

76

 

22

Net periodic benefit

$

(141)

$

(47)

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.

27

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 March 31, 2021, there were 37,151 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 three months ended March 31, 2021 and 2020, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan, with an aggregate of 19,818 shares and 16,269 shares underlying such awards, respectively.

 

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 $89 for the three months ended March 31, 2021 for awards granted under the 2017 Plan. The Company recognized compensation expense of $5 for the three months ended March 31, 2020 for awards granted under the 2017 Plan. As of March 31, 2021, the Company had $1,494 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 2.2 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.  

28

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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, such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets and issuances of debt. During the first quarter of 2021, the Company terminated a $50 million cash flow hedge. The termination of the cash flow hedge included a $25 early termination fee which was charged to other expenses on the statement of income and comprehensive income.

The Company executed an interest rate swap to reduce its exposure to variability in the interest rate associated with floating-rate borrowings. 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 Income 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 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 2021, the Company estimates that an additional $404 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 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 March 31, 2021, the Company had 83 interest rate swaps with an aggregate notional amount of $408,138 related to this program.

29

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 March 31, 2021 and December 31, 2020.

Asset Derivatives

Asset Derivatives

Liability Derivatives

Liability Derivatives

As of March 31, 2021

As of December 31, 2020 (1)

As of March 31, 2021

As of December 31, 2020 (2)

    

Notional

    

Balance Sheet

    

    

Balance Sheet

    

    

Balance Sheet

    

    

Balance Sheet

    

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

$

1,455

Other Assets

$

1,678

Cash Flow Swap

$

50,000

Other Liabilities

$

Other Liabilities

$

485

Total derivatives designated as hedging instruments

$

1,455

$

1,678

$

$

485

Derivatives not designated as hedging instruments

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest Rate Swaps (3)

$

408,138

Other Assets

 

$

9,980

 

Other Assets

 

$

13,693

 

Other Liabilities

 

$

9,496

 

Other Liabilities

$

13,614

Total derivatives not designated as hedging instruments

 

  

$

9,980

 

  

$

13,693

 

  

$

9,496

 

  

$

13,614

(1)Assets amount does not include accrued interest receivable of $258.
(2)Liabilities amount does not include accrued interest payable of $258.
(3)Notional amount of interest rate swaps at March 31, 2020 $225,376.

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 March 31, 2021 and March 31, 2020.

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

March 31, 2021

Income

March 31, 2021

Derivatives in Cash Flow Hedging Relationships 

Cash Flow Swap

$

401

$

401

Interest Expense

$

(48)

$

(23)

(25)

Interest Rate Floor (*)

$

(76)

$

(85)

$

9

Interest Income

$

133

$

149

$

(16)

Total

$

325

$

316

$

9

$

85

$

126

$

(41)

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

March 31, 2020

Income

March 31, 2020

Derivatives in Cash Flow Hedging Relationships 

Interest Rate Floor (*)

$

(1,072)

$

(1,104)

$

36

Interest Income

$

36

$

52

$

(16)

*Amounts disclosed are gross and not net of taxes.

30

Table of Contents

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 months ended March 31, 2021 and March 31, 2020.

Location and Amount of Gain or (Loss) Recognized in

Income on Fair Value and Cash Flow Hedging

Relationships

2021

2021

2020

2020

  

  

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

$

(23)

$

36

$

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

$

(23)

$

36

$

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component

$

150

$

52

$

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component

$

(16)

$

(16)

$

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 months ended March 31, 2021 and 2020.

Amount of Gain

Amount of Loss

 

 Recognized in

 Recognized in

 

Location of Gain or (Loss)

Income 

Income

 

Recognized in Income on

Three Months Ended

Three Months Ended

 

Derivatives Not Designated as Hedging Instruments

    

Derivative

    

March 31, 2021

    

March 31, 2020

 

Interest Rate Swaps

 

Interest rate swap revenue

$

405

$

(131)

Fee Income

Interest rate swap revenue

$

392

$

601

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2021 and December 31, 2020. The net amounts of derivative assets or liabilities can be

31

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 March 31, 2021

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

  

Assets

  

Balance Sheet

  

Balance Sheet

  

Instruments

  

Received

  

Amount

Derivatives

$

11,542

$

$

11,542

$

$

11,542

Offsetting of Derivative Liabilities

as of March 31, 2021

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Balance Sheet

Instruments

Received

Amount

Derivatives

$

9,603

$

$

9,603

$

$

9,603

Offsetting of Derivative Assets

as of December 31, 2020

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Balance Sheet

Instruments

Received

Amount

Derivatives

$

15,371

$

$

15,371

$

$

15,371

Offsetting of Derivative Liabilities

as of December 31, 2020

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Balance Sheet

Instruments

Received

Amount