.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 20172019
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) |
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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:
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or(or for such shorter period that the registrant was required to submit and post such files.files). Yes ☒ No ◻☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as definedor 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.
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Large accelerated filer |
| Accelerated filer | ☒ | |
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Non-accelerated filer |
| Smaller reporting company |
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Emerging growth company |
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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: 7,396,5057,388,480 at October 31, 2017.2019.
PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q
For the Quarter Ended September 30, 20172019
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Contents |
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| FINANCIAL |
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| Consolidated Balance Sheets at September 30, |
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| Notes to |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Quantitative and Qualitative Disclosures |
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2
Peoples Financial Services Corp.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except share and per share data)
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| September 30, 2017 |
| December 31, 2016 |
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| September 30, 2019 |
| December 31, 2018 |
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Assets: |
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Cash and due from banks: |
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Cash and due from banks |
| $ | 31,839 |
| $ | 39,496 |
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| $ | 35,908 |
| $ | 32,569 |
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Interest-bearing deposits in other banks |
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| 1,067 |
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| 445 |
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| 5,275 |
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| 47 |
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Total cash and due from banks |
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| 32,906 |
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| 39,941 |
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| 41,183 |
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| 32,616 |
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Federal funds sold |
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| 10,100 |
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Investment securities: |
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Available-for-sale |
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| 259,138 |
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| 259,410 |
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| 268,823 |
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| 269,682 |
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Held-to-maturity: Fair value September 30, 2017, $9,912; December 31, 2016, $10,714 |
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| 9,564 |
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| 10,517 |
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Equity investments carried at fair value |
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| 297 |
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| 291 |
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Held-to-maturity: Fair value September 30, 2019, $8,016; December 31, 2018, $8,380 |
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| 7,808 |
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| 8,361 |
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Total investment securities |
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| 268,702 |
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| 269,927 |
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| 276,928 |
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| 278,334 |
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Loans, net |
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| 1,632,515 |
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| 1,532,965 |
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| 1,881,090 |
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| 1,823,266 |
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Less: allowance for loan losses |
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| 18,831 |
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| 15,961 |
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| 22,392 |
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| 21,379 |
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Net loans |
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| 1,613,684 |
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| 1,517,004 |
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| 1,858,698 |
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| 1,801,887 |
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Loans held for sale |
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| 460 |
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| 1,390 |
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| 749 |
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Premises and equipment, net |
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| 37,373 |
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| 33,260 |
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| 47,437 |
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| 38,889 |
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Accrued interest receivable |
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| 5,908 |
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| 6,228 |
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| 6,655 |
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| 7,115 |
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Goodwill |
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| 63,370 |
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| 63,370 |
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| 63,370 |
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| 63,370 |
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Intangible assets, net |
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| 3,427 |
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| 4,211 |
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| 1,738 |
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| 2,296 |
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Other assets |
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| 66,406 |
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| 65,501 |
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| 65,200 |
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| 63,737 |
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Total assets |
| $ | 2,092,236 |
| $ | 1,999,442 |
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| $ | 2,372,699 |
| $ | 2,288,993 |
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Liabilities: |
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Deposits: |
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Noninterest-bearing |
| $ | 372,146 |
| $ | 353,686 |
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| $ | 440,582 |
| $ | 410,260 |
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Interest-bearing |
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| 1,315,709 |
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| 1,235,071 |
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| 1,560,703 |
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| 1,464,762 |
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Total deposits |
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| 1,687,855 |
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| 1,588,757 |
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| 2,001,285 |
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| 1,875,022 |
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Short-term borrowings |
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| 71,900 |
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| 82,700 |
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| 86,500 |
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Long-term debt |
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| 50,199 |
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| 58,134 |
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| 52,509 |
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| 37,906 |
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Accrued interest payable |
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| 481 |
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| 462 |
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| 1,461 |
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| 1,195 |
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Other liabilities |
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| 15,505 |
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| 12,771 |
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| 21,277 |
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| 9,756 |
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Total liabilities |
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| 1,825,940 |
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| 1,742,824 |
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| 2,076,532 |
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| 2,010,379 |
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Stockholders’ equity: |
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Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,396,505 shares at September 30, 2017 and 7,394,143 shares at December 31, 2016 |
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| 14,793 |
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| 14,788 |
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Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,388,760 shares at September 30, 2019 and 7,399,054 shares at December 31, 2018 |
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| 14,778 |
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| 14,798 |
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Capital surplus |
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| 134,988 |
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| 134,871 |
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| 135,106 |
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| 135,310 |
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Retained earnings |
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| 119,971 |
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| 111,114 |
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| 149,740 |
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| 136,582 |
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Accumulated other comprehensive loss |
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| (3,456) |
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| (4,155) |
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| (3,457) |
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| (8,076) |
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Total stockholders’ equity |
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| 266,296 |
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| 256,618 |
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| 296,167 |
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| 278,614 |
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Total liabilities and stockholders’ equity |
| $ | 2,092,236 |
| $ | 1,999,442 |
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| $ | 2,372,699 |
| $ | 2,288,993 |
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See notes to unaudited consolidated financial statements
3
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except share and per share data)
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| Three Months Ended |
| Nine Months Ended |
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| Three Months Ended |
| Nine Months Ended |
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September 30, |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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Interest income: |
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Interest and fees on loans: |
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Taxable |
| $ | 16,535 |
| $ | 15,294 |
| $ | 48,021 |
| $ | 44,400 |
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| $ | 20,940 |
| $ | 18,798 |
| $ | 61,684 |
| $ | 54,546 |
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Tax-exempt |
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| 813 |
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| 770 |
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| 2,334 |
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| 2,301 |
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| 1,066 |
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| 919 |
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| 3,274 |
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| 2,660 |
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Interest and dividends on investment securities: |
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Taxable |
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| 714 |
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| 575 |
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| 2,130 |
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| 1,879 |
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| 1,092 |
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| 998 |
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| 3,127 |
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| 2,790 |
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Tax-exempt |
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| 716 |
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| 861 |
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| 2,262 |
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| 2,611 |
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| 411 |
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| 639 |
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| 1,493 |
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| 2,001 |
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Dividends |
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| 13 |
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| 10 |
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| 37 |
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| 31 |
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| 19 |
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| 16 |
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| 60 |
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| 51 |
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Interest on interest-bearing deposits in other banks |
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| 40 |
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| 15 |
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| 107 |
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| 47 |
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| 27 |
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| 49 |
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| 50 |
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| 131 |
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Interest on federal funds sold |
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| 77 |
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| 77 |
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Total interest income |
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| 18,831 |
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| 17,525 |
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| 54,891 |
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| 51,269 |
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| 23,632 |
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| 21,419 |
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| 69,765 |
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| 62,179 |
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Interest expense: |
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Interest on deposits |
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| 1,654 |
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| 1,356 |
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| 4,617 |
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| 3,961 |
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| 3,966 |
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| 2,342 |
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| 11,090 |
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| 6,135 |
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Interest on short-term borrowings |
|
| 177 |
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| 116 |
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| 599 |
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| 282 |
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| 83 |
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| 809 |
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| 1,491 |
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| 2,317 |
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Interest on long-term debt |
|
| 344 |
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| 353 |
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| 1,041 |
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| 1,067 |
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| 347 |
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| 315 |
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| 923 |
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| 936 |
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Total interest expense |
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| 2,175 |
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| 1,825 |
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| 6,257 |
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| 5,310 |
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| 4,396 |
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| 3,466 |
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| 13,504 |
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| 9,388 |
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Net interest income |
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| 16,656 |
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| 15,700 |
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| 48,634 |
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| 45,959 |
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| 19,236 |
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| 17,953 |
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| 56,261 |
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| 52,791 |
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Provision for loan losses |
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| 1,200 |
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| 1,200 |
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| 3,600 |
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| 3,600 |
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| 700 |
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| 1,050 |
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| 2,100 |
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| 3,150 |
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Net interest income after provision for loan losses |
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| 15,456 |
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| 14,500 |
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| 45,034 |
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| 42,359 |
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| 18,536 |
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| 16,903 |
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| 54,161 |
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| 49,641 |
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Noninterest income: |
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Service charges, fees and commissions |
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| 2,156 |
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| 1,542 |
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| 5,410 |
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| 4,513 |
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| 2,161 |
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| 1,883 |
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| 6,650 |
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| 5,856 |
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Merchant services income |
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| 165 |
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| 1,257 |
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| 2,358 |
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| 3,209 |
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| 182 |
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| 128 |
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| 837 |
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| 687 |
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Commission and fees on fiduciary activities |
|
| 540 |
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| 539 |
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| 1,542 |
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| 1,495 |
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| 569 |
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| 570 |
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| 1,568 |
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| 1,552 |
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Wealth management income |
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| 414 |
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| 271 |
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| 1,081 |
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| 979 |
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| 395 |
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| 305 |
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| 1,142 |
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| 1,048 |
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Mortgage banking income |
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| 193 |
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| 217 |
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| 576 |
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| 616 |
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| 172 |
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| 163 |
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| 457 |
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| 472 |
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Life insurance investment income |
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| 193 |
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| 199 |
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| 577 |
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| 594 |
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| 189 |
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| 190 |
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| 567 |
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| 568 |
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Net gain on sale of investment securities available-for-sale |
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| 623 |
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Net gain on sale of merchant services business |
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| 2,278 |
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Net gains on equity investment securities |
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| 14 |
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| 14 |
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| 6 |
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| 14 |
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Net gains on sale of investment securities available-for-sale |
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| 23 |
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Net gain on sale of credit card loans |
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| 291 |
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Total noninterest income |
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| 3,661 |
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| 4,025 |
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| 13,822 |
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| 12,029 |
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| 3,682 |
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| 3,253 |
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| 11,250 |
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| 10,488 |
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Noninterest expense: |
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Salaries and employee benefits expense |
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| 6,550 |
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| 5,466 |
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| 19,851 |
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| 16,702 |
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| 8,056 |
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| 6,946 |
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| 23,688 |
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| 21,291 |
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Net occupancy and equipment expense |
|
| 2,483 |
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| 2,316 |
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| 7,327 |
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| 6,998 |
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| 2,997 |
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| 2,681 |
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| 8,807 |
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| 8,215 |
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Merchant services expense |
|
| 33 |
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| 890 |
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| 1,796 |
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| 2,270 |
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Amortization of intangible assets |
|
| 259 |
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| 297 |
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| 785 |
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| 899 |
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| 183 |
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| 220 |
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| 557 |
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| 670 |
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Professional fees and outside services |
|
| 487 |
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| 431 |
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| 1,343 |
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| 1,500 |
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FDIC insurance and assessments |
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| 68 |
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| 247 |
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| 615 |
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| 830 |
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Donations |
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| 386 |
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| 355 |
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| 1,077 |
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| 1,011 |
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Other expenses |
|
| 3,155 |
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| 3,048 |
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| 9,079 |
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| 8,879 |
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| 1,902 |
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| 1,657 |
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| 5,911 |
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| 5,597 |
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Total noninterest expense |
|
| 12,480 |
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| 12,017 |
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| 38,838 |
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| 35,748 |
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|
| 14,079 |
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| 12,537 |
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| 41,998 |
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| 39,114 |
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Income before income taxes |
|
| 6,637 |
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| 6,508 |
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| 20,018 |
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| 18,640 |
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| 8,139 |
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| 7,619 |
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| 23,413 |
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| 21,015 |
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Income tax expense |
|
| 1,287 |
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| 1,390 |
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| 4,209 |
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| 3,785 |
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|
| 991 |
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| 902 |
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| 2,709 |
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| 2,487 |
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Net income |
|
| 5,350 |
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| 5,118 |
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| 15,809 |
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| 14,855 |
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|
| 7,148 |
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| 6,717 |
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| 20,704 |
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| 18,528 |
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Other comprehensive income: |
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Unrealized (loss) gain on investment securities available-for-sale |
|
| (381) |
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| (1,120) |
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| 1,076 |
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| 1,003 |
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Other comprehensive income (loss): |
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Unrealized gain (loss) on investment securities available-for-sale |
|
| 161 |
|
| (1,179) |
|
| 5,211 |
|
| (4,394) |
| |||||||||||||
Reclassification adjustment for net gain on sales included in net income |
|
|
|
|
|
|
|
|
|
|
| (623) |
|
|
|
|
|
|
|
|
| (23) |
|
|
|
|
Other comprehensive (loss) income |
|
| (381) |
|
| (1,120) |
|
| 1,076 |
|
| 380 |
| |||||||||||||
Income tax related to other comprehensive (loss) income |
|
| (133) |
|
| (392) |
|
| 377 |
|
| 133 |
| |||||||||||||
Other comprehensive (loss) income, net of income taxes |
|
| (248) |
|
| (728) |
|
| 699 |
|
| 247 |
| |||||||||||||
Change in derivative fair value |
|
| 153 |
|
|
|
|
| 659 |
|
|
|
| |||||||||||||
Other comprehensive gain (loss) |
|
| 314 |
|
| (1,179) |
|
| 5,847 |
|
| (4,394) |
| |||||||||||||
Income tax expense (benefit) |
|
| 66 |
|
| (248) |
|
| 1,228 |
|
| (925) |
| |||||||||||||
Other comprehensive income (loss), net of income taxes |
|
| 248 |
|
| (931) |
|
| 4,619 |
|
| (3,469) |
| |||||||||||||
Comprehensive income |
| $ | 5,102 |
| $ | 4,390 |
| $ | 16,508 |
| $ | 15,102 |
|
| $ | 7,396 |
| $ | 5,786 |
| $ | 25,323 |
| $ | 15,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.72 |
| $ | 0.69 |
| $ | 2.14 |
| $ | 2.01 |
|
| $ | 0.97 |
| $ | 0.91 |
| $ | 2.80 |
| $ | 2.50 |
|
Diluted |
| $ | 0.72 |
| $ | 0.69 |
| $ | 2.14 |
| $ | 2.01 |
|
| $ | 0.97 |
| $ | 0.91 |
| $ | 2.80 |
| $ | 2.50 |
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 7,396,505 |
|
| 7,394,143 |
|
| 7,395,612 |
|
| 7,397,581 |
|
|
| 7,394,992 |
|
| 7,399,054 |
|
| 7,397,768 |
|
| 7,397,373 |
|
Diluted |
|
| 7,396,505 |
|
| 7,394,143 |
|
| 7,395,612 |
|
| 7,397,581 |
|
|
| 7,394,992 |
|
| 7,399,054 |
|
| 7,397,768 |
|
| 7,397,373 |
|
Dividends declared |
| $ | 0.32 |
| $ | 0.31 |
| $ | 0.94 |
| $ | 0.93 |
|
| $ | 0.34 |
| $ | 0.33 |
|
| 1.02 |
|
| 0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
4
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
| |
|
| Common |
| Capital |
| Retained |
| Comprehensive |
|
|
|
|
|
|
| ||||
|
| Stock |
| Surplus |
| Earnings |
| Income (Loss) |
|
|
| Total |
| ||||||
Balance, January 1, 2017 |
| $ | 14,788 |
| $ | 134,871 |
| $ | 111,114 |
| $ | (4,155) |
|
|
|
| $ | 256,618 |
|
Stock based compensation |
|
|
|
|
| 122 |
|
|
|
|
|
|
|
|
|
|
| 122 |
|
Net income |
|
|
|
|
|
|
|
| 15,809 |
|
|
|
|
|
|
|
| 15,809 |
|
Other comprehensive income, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| 699 |
|
|
|
|
| 699 |
|
Dividends declared: $0.94 per share |
|
|
|
|
|
|
|
| (6,952) |
|
|
|
|
|
|
|
| (6,952) |
|
Common stock grants awarded, net of unearned compensation of $53: 2,362 shares |
|
| 5 |
|
| (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 |
| $ | 14,793 |
| $ | 134,988 |
| $ | 119,971 |
| $ | (3,456) |
|
|
|
| $ | 266,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016 |
| $ | 14,821 |
| $ | 135,371 |
| $ | 100,701 |
| $ | (2,125) |
|
|
|
| $ | 248,768 |
|
Stock based compensation |
|
|
|
|
| 53 |
|
|
|
|
|
|
|
|
|
|
| 53 |
|
Net income |
|
|
|
|
|
|
|
| 14,855 |
|
|
|
|
|
|
|
| 14,855 |
|
Other comprehensive income, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| 247 |
|
|
|
|
| 247 |
|
Dividends declared: $0.93 per share |
|
|
|
|
|
|
|
| (6,879) |
|
|
|
|
|
|
|
| (6,879) |
|
Shares retired: 16,463 shares |
|
| (33) |
|
| (571) |
|
|
|
|
|
|
|
|
|
|
| (604) |
|
Balance, September 30, 2016 |
| $ | 14,788 |
| $ | 134,853 |
| $ | 108,677 |
| $ | (1,878) |
|
|
| $ |
| 256,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
| |
|
| Common |
| Capital |
| Retained |
| Comprehensive |
|
|
|
| ||||
|
| Stock |
| Surplus |
| Earnings |
| Income (Loss) |
| Total |
| |||||
Balance, January 1, 2019 |
| $ | 14,798 |
| $ | 135,310 |
| $ | 136,582 |
| $ | (8,076) |
| $ | 278,614 |
|
Net income |
|
|
|
|
|
|
|
| 6,412 |
|
|
|
|
| 6,412 |
|
Other comprehensive income, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| 1,976 |
|
| 1,976 |
|
Dividends declared: $0.34 per share |
|
|
|
|
|
|
|
| (2,516) |
|
|
|
|
| (2,516) |
|
Stock based compensation |
|
|
|
|
| 83 |
|
|
|
|
|
|
|
| 83 |
|
Balance, March 31, 2019 |
|
| 14,798 |
|
| 135,393 |
|
| 140,478 |
|
| (6,100) |
|
| 284,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
| 7,144 |
|
|
|
|
| 7,144 |
|
Other comprehensive income, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| 2,395 |
|
| 2,395 |
|
Dividends declared: $0.34 per share |
|
|
|
|
|
|
|
| (2,516) |
|
|
|
|
| (2,516) |
|
Stock based compensation |
|
|
|
|
| 157 |
|
|
|
|
|
|
|
| 157 |
|
Share retirement: 3,830 shares |
|
| (8) |
|
| (158) |
|
|
|
|
|
|
|
| (166) |
|
Common stock grants awarded, net of unearned compensation of $164: 3,854 shares |
|
| 8 |
|
| (8) |
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019 |
|
| 14,798 |
|
| 135,384 |
|
| 145,106 |
|
| (3,705) |
|
| 291,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
| 7,148 |
|
|
|
|
| 7,148 |
|
Other comprehensive income, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| 248 |
|
| 248 |
|
Dividends declared: $0.34 per share |
|
|
|
|
|
|
|
| (2,514) |
|
|
|
|
| (2,514) |
|
Stock based compensation |
|
|
|
|
| 157 |
|
|
|
|
|
|
|
| 157 |
|
Share retirement: 10,318 shares |
|
| (20) |
|
| (435) |
|
|
|
|
|
|
|
| (455) |
|
Balance, September 30, 2019 |
| $ | 14,778 |
| $ | 135,106 |
| $ | 149,740 |
| $ | (3,457) |
| $ | 296,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
| |
|
| Common |
| Capital |
| Retained |
| Comprehensive |
|
|
|
| ||||
|
| Stock |
| Surplus |
| Earnings |
| Income (Loss) |
| Total |
| |||||
Balance, January 1, 2018 |
| $ | 14,793 |
| $ | 135,043 |
| $ | 121,353 |
| $ | (6,213) |
| $ | 264,976 |
|
Net income |
|
|
|
|
|
|
|
| 5,854 |
|
|
|
|
| 5,854 |
|
Other comprehensive loss, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| (1,875) |
|
| (1,875) |
|
Dividends declared: $0.32 per share |
|
|
|
|
|
|
|
| (2,368) |
|
|
|
|
| (2,368) |
|
Reclassification related to adoption of ASU 2016-01 |
|
|
|
|
|
|
|
| 2 |
|
| (2) |
|
|
|
|
Stock based compensation |
|
|
|
|
| 37 |
|
|
|
|
|
|
|
| 37 |
|
Balance, March 31, 2018 |
|
| 14,793 |
|
| 135,080 |
|
| 124,841 |
|
| (8,090) |
|
| 266,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
| 5,957 |
|
|
|
|
| 5,957 |
|
Other comprehensive loss, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| (663) |
|
| (663) |
|
Dividends declared: $0.33 per share |
|
|
|
|
|
|
|
| (2,442) |
|
|
|
|
| (2,442) |
|
Stock based compensation |
|
|
|
|
| 68 |
|
|
|
|
|
|
|
| 68 |
|
Common stock grants awarded, net of unearned compensation of $113: 2,548 shares |
|
| 5 |
|
| (5) |
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 |
|
| 14,798 |
|
| 135,143 |
|
| 128,356 |
|
| (8,753) |
|
| 269,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
| 6,717 |
|
|
|
|
| 6,717 |
|
Other comprehensive loss, net of income taxes |
|
|
|
|
|
|
|
|
|
|
| (931) |
|
| (931) |
|
Dividends declared: $0.33 per share |
|
|
|
|
|
|
|
| (2,442) |
|
|
|
|
| (2,442) |
|
Stock based compensation |
|
|
|
|
| 83 |
|
|
|
|
|
|
|
| 83 |
|
Balance, September 30, 2018 |
| $ | 14,798 |
| $ | 135,226 |
| $ | 132,631 |
| $ | (9,684) |
| $ | 272,971 |
|
See notes to unaudited consolidated financial statements
5
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 15,809 |
| $ | 14,855 |
|
| $ | 20,704 |
| $ | 18,528 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of premises and equipment |
|
| 1,401 |
|
| 1,208 |
|
|
| 1,881 |
|
| 1,728 |
|
Amortization of right-of-use lease asset |
|
| 293 |
|
|
|
| |||||||
Amortization of deferred loan costs |
|
| 662 |
|
| 575 |
|
|
| (159) |
|
| 729 |
|
Amortization of intangibles |
|
| 785 |
|
| 899 |
|
|
| 557 |
|
| 670 |
|
Amortization of loss on investment tax credits |
|
| 352 |
|
| 358 |
| |||||||
Amortization of low income housing partnerships |
|
| 357 |
|
| 349 |
| |||||||
Provision for loan losses |
|
| 3,600 |
|
| 3,600 |
|
|
| 2,100 |
|
| 3,150 |
|
Net gain on sale of other real estate owned |
|
| (50) |
|
| (25) |
| |||||||
Net unrealized gain on equity investment securities |
|
| (6) |
|
|
|
| |||||||
Net loss (gain) on sale of other real estate owned |
|
| 20 |
|
| (17) |
| |||||||
Loans originated for sale |
|
| (16,927) |
|
| (17,432) |
|
|
| (11,945) |
|
| (9,931) |
|
Proceeds from sale of loans originated for sale |
|
| 16,622 |
|
| 17,688 |
|
|
| 11,374 |
|
| 10,013 |
|
Net gain on sale of loans originated for sale |
|
| (155) |
|
| (616) |
|
|
| (70) |
|
| (74) |
|
Net amortization of investment securities |
|
| 2,130 |
|
| 2,826 |
|
|
| 1,279 |
|
| 1,718 |
|
Net gain on sale of investment securities available-for-sale |
|
|
|
|
| (623) |
|
|
| (23) |
|
|
|
|
Net gain on sale of merchant services business |
|
| (2,278) |
|
|
|
| |||||||
Net gain on sale of credit card loans held for sale |
|
|
|
|
| (291) |
| |||||||
Life insurance investment income |
|
| (577) |
|
| (594) |
|
|
| (567) |
|
| (568) |
|
Stock based compensation |
|
| 122 |
|
| 53 |
|
|
| 397 |
|
| 188 |
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
| 320 |
|
| 487 |
|
|
| 460 |
|
| 371 |
|
Other assets |
|
| (1,780) |
|
| (1,799) |
|
|
| (4,633) |
|
| 516 |
|
Accrued interest payable |
|
| 19 |
|
| (126) |
|
|
| 266 |
|
| 248 |
|
Other liabilities |
|
| 2,665 |
|
| (671) |
|
|
| 4,998 |
|
| (2,967) |
|
Net cash provided by operating activities |
|
| 22,720 |
|
| 20,663 |
|
|
| 27,283 |
|
| 24,360 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available-for-sale |
|
|
|
|
| 27,408 |
|
|
| 9,677 |
|
|
|
|
Proceeds from repayments of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
| 44,489 |
|
| 42,277 |
|
|
| 45,790 |
|
| 24,087 |
|
Held-to-maturity |
|
| 936 |
|
| 1,221 |
|
|
| 547 |
|
| 710 |
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
| (45,254) |
|
| (36,462) |
|
|
| (50,670) |
|
| (32,723) |
|
Net redemption (purchase) of restricted equity securities |
|
| 710 |
|
| (1,508) |
| |||||||
Net redemption of restricted equity securities |
|
| 2,992 |
|
| 735 |
| |||||||
Proceeds from sale of student loan portfolio |
|
|
|
|
| 5,103 |
| |||||||
Proceeds from sale of credit card loan portfolio |
|
|
|
|
| 2,407 |
| |||||||
Net increase in lending activities |
|
| (101,320) |
|
| (183,482) |
|
|
| (58,987) |
|
| (96,916) |
|
Investment in low income housing investment tax credits |
|
|
|
|
| (2,045) |
| |||||||
Purchases of premises and equipment |
|
| (5,514) |
|
| (6,100) |
|
|
| (4,296) |
|
| (1,979) |
|
Purchase of investment in life insurance |
|
|
|
|
| (1,500) |
| |||||||
Proceeds from the sale of merchant services business |
|
| 2,300 |
|
|
|
| |||||||
Proceeds from the sale of premises and equipment |
|
| 21 |
|
| 341 |
| |||||||
Proceeds from investment in life insurance |
|
|
|
|
| 304 |
| |||||||
Proceeds from sale of other real estate owned |
|
| 487 |
|
| 702 |
|
|
| 111 |
|
| 582 |
|
Net cash used in investing activities |
|
| (103,166) |
|
| (159,489) |
|
|
| (54,815) |
|
| (97,349) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
| 99,098 |
|
| 110,000 |
|
|
| 126,263 |
|
| 108,846 |
|
Proceeds from long-term debt |
|
| 16,000 |
|
|
|
| |||||||
Repayment of long-term debt |
|
| (7,935) |
|
| (1,669) |
|
|
| (1,397) |
|
| (1,273) |
|
Net (decrease) increase in short-term borrowings |
|
| (10,800) |
|
| 36,975 |
| |||||||
Net decrease in short-term borrowings |
|
| (86,500) |
|
| (24,225) |
| |||||||
Retirement of common stock |
|
|
|
|
| (604) |
|
|
| (621) |
|
|
|
|
Cash dividends paid |
|
| (6,952) |
|
| (6,879) |
|
|
| (7,546) |
|
| (7,252) |
|
Net cash provided by financing activities |
|
| 73,411 |
|
| 137,823 |
|
|
| 46,199 |
|
| 76,096 |
|
Net decrease in cash and cash equivalents |
|
| (7,035) |
|
| (1,003) |
| |||||||
Net increase in cash and cash equivalents |
|
| 18,667 |
|
| 3,107 |
| |||||||
Cash and cash equivalents at beginning of period |
|
| 39,941 |
|
| 32,917 |
|
|
| 32,616 |
|
| 37,488 |
|
Cash and cash equivalents at end of period |
| $ | 32,906 |
| $ | 31,914 |
|
| $ | 51,283 |
| $ | 40,595 |
|
6
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
(Dollars in thousands)thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 6,238 |
| $ | 5,436 |
|
| $ | 8,842 |
| $ | 9,140 |
|
Income taxes |
|
| 4,100 |
|
| 3,900 |
|
|
| 3,300 |
|
| 2,550 |
|
Noncash items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of loans to other real estate |
| $ | 479 |
| $ | 761 |
|
| $ | 253 |
| $ | 623 |
|
|
|
|
|
|
|
|
| |||||||
Initial recognition of right-of-use assets |
|
| 6,523 |
|
|
|
| |||||||
Initial recognition of lease liability |
|
| 6,523 |
|
|
|
|
See notes to unaudited consolidated financial statements
7
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 (“Company. Unless the context indicates otherwise, all references in this quarterly report to “Peoples”, “Company”, “Bank”, “we”, “us” and “our” refer to Peoples Bank”)Financial Services Corp., including its subsidiary, Peoples Advisors, LLC (collectively, the “Company” or “Peoples”).subsidiaries and its and their respective predecessors. The Company services its retail and commercial customers through twenty-seventwenty-eight full-service community banking offices located within the Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York. Additionally, we operate a Limited Purpose Banking Office (“LPO”) located in and serving Schuylkill County, Pennsylvania.
Basis of presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’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 nine months ended and as of September 30, 2017,2019, 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 and fair value of assets acquired and liabilities assumed in business combinations.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 yearperiod ended December 31, 2016.
Derivative instruments and hedging activities
The Financial Accounting Standards Board (“FASB”) ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings.
8
In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.2018.
Recent accounting standards:
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. DuringFebruary 2016, the FASB issued ASU Nos. 2016-10, 2016-12 and 2016-20 that provide additional guidance related to the identification of performance obligations within a contract, assessing collectability, contract costs, and other technical corrections and improvements. ASU 2014-09 will become effective for the Company for the annual period beginning after December 15, 2017 and for interim periods within the annual period. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. The Company has not selected a transition method. However, the Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Based on the Company’s analysis of the effect of the new standard on its recurring revenue streams, it does not expect these changes to have a significant impact on the Company’s financial statements. Upon adoption on January 1, 2018, no significant adjustment to opening retained earnings is expected.
In January 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) No. 2016-01, “Financial Instruments – Overall.” The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of this guidance on the Company’s financial statements but due to the nature of the Company’s investments it is not expected to have a significant impact, if any.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee'slessees’s perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The ROU asset and lease liability are calculated based on the present value of future lease payments using an estimated incremental borrowing rate. The Company utilized the incremental borrowing rate of interest on a collateralized basis for the lease term as quoted by the Federal Home Loan Bank of Pittsburgh (“FHLB”).
Leases will beare classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income statement for a lessee. From the lessor'slessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will beis treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard isamendments in this ASU were effective for fiscal yearsannual periods, and interim periods within those annual periods, beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company’s initial findings conclude that the new2018.
98
The new standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. In order to establish the value of the ROU and lease liability and in accordance with the guidance, management determined the term of the leases held by carefully evaluating and assessing each lease and applying economic and other relevant factors to determine whether the Company is reasonably certain to exercise or not to exercise a renewal option within each lease. We have also elected an accounting policy not to restate comparative periods upon adoption. The Company elected to adopt this pronouncement willusing the optional transition method under ASU 2018-11 as of January 1, 2019 and recorded right-of-use assets and lease liabilities for operating leases of $6,523 on its consolidated balance sheets, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income and comprehensive income.
In July 2018, the FASB issued ASU 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments were adopted on January 1, 2019 and did not have a significantmaterial impact on itsthe Company’s consolidated financial statements asstatements.
In March 2019, the current projected minimum lease payments under existing lease contracts subjectFASB issued ASU 2019-01, “Leases (Topic 842) Codification Improvements” which was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the new pronouncementstatement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are less than one percent of its current assets.also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial“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 Allowanceallowance for Loan Lossesloan 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 |
| The amendments in the |
| This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignificant | ||
amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition. |
9
| |
| In October 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company currently qualifies as a smaller reporting company and therefore guidance is effective for the Company |
The Company cannot yet determineWe are evaluating the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standardASU on our consolidated financial condition or resultsstatements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of operations. Further, any impact onapplying the allowance uponimpairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption is currently unknown but any change in allowance levels will affect regulatory capitaldate as well as economic conditions and ratios.forecasts at that time.
In June 2016,August 2018, the FASB issued ASU 2016-15,2018-13 Fair Value Measurement (Topic 820): “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the FASB Concepts Statement, of Cash Flows (Topic 230) –Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues“Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements”. In accordance with the objectiveConcepts Statement, this ASU removes, modifies and adds select disclosure requirements under Topic 820 after consideration of reducing diversity in practice in how certain cash receiptscosts and cash payments are presentedbenefits. ASU 2018-13 is effective for fiscal years, and classified ininterim periods within those fiscal years, beginning after December 15, 2019 for public entities, with early adoption permitted. The adoption of this guidance on January 1, 2020 is not expected to have a material effect on the statement of cash flows. For the Company, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Company anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” - Intangibles –- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to simplify the accountingtest goodwill for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test
10
thusby eliminating the needrequirement to determinecalculate the implied fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU,goodwill to measure a goodwill impairment charge. This accounting guidance will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Company’sinterim and annual and interim goodwill impairment tests beginning in the first quarter of 2020.
In August 2017, the Financial Accounting Standards Board issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal yearsperiods beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on2019 (effective January 1, 2019.2020 for the Company). Adoption of this ASU 2017-12 requiresis not expected to have a modified retrospective transition method in which the Company will recognize the cumulative effect of the changematerial impact on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on ourCompany’s consolidated financial statements, as exposure to derivatives contracts is only offered under special circumstances. The Company will continue to assess the financial statement impact as adoption draws closer and/or exposure to derivatives contracts grows to a level deemed to be material.statements.
2. Other comprehensive loss:
The components of other comprehensive loss and their related tax effects are reported in the Consolidated Statementsconsolidated statements of Incomeincome and Comprehensive Income.comprehensive income. The accumulated other comprehensive loss included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale, and benefit plan adjustments.adjustments and adjustments to derivative fair values.
The components of accumulated other comprehensive loss included in stockholders’ equity at September 30, 20172019 and December 31, 2016 is2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
|
| December 31, 2016 |
|
|
| September 30, 2019 |
|
| December 31, 2018 |
|
Net unrealized gain on investment securities available-for-sale |
| $ | 1,629 |
| $ | 553 |
| |||||||
Net unrealized gain (loss) on investment securities available-for-sale |
| $ | 1,937 |
| $ | (3,251) |
| |||||||
Income tax |
|
| 570 |
|
| 193 |
|
|
| 407 |
|
| (683) |
|
Net of income taxes |
|
| 1,059 |
|
| 360 |
|
|
| 1,530 |
|
| (2,568) |
|
Benefit plan adjustments |
|
| (6,946) |
|
| (6,946) |
|
|
| (7,218) |
|
| (7,218) |
|
Income tax |
|
| (2,431) |
|
| (2,431) |
|
|
| (1,516) |
|
| (1,516) |
|
Net of income taxes |
|
| (4,515) |
|
| (4,515) |
|
|
| (5,702) |
|
| (5,702) |
|
Derivative adjustments |
|
| 905 |
|
| 246 |
| |||||||
Income tax |
|
| 190 |
|
| 52 |
| |||||||
Net of income taxes |
|
| 715 |
|
| 194 |
| |||||||
Accumulated other comprehensive loss |
| $ | (3,456) |
| $ | (4,155) |
|
| $ | (3,457) |
| $ | (8,076) |
|
Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
Three Months Ended September 30, |
| 2017 |
| 2016 | ||
Unrealized loss on investment securities available-for-sale |
| $ | (381) |
| $ | (1,120) |
Net gain on the sale of investment securities available-for-sale(1) |
|
|
|
|
|
|
Other comprehensive loss before taxes |
|
| (381) |
|
| (1,120) |
Income tax benefit |
|
| (133) |
|
| (392) |
Other comprehensive loss before taxes |
| $ | (248) |
| $ | (728) |
1110
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
| 2017 |
| 2016 |
| ||
Unrealized gain on investment securities available-for-sale |
| $ | 1,076 |
| $ | 1,003 |
|
Net gain on the sale of investment securities available-for-sale(1) |
|
|
|
|
| (623) |
|
Other comprehensive income gain before taxes |
|
| 1,076 |
|
| 380 |
|
Income tax expense |
|
| 377 |
|
| 133 |
|
Other comprehensive income |
| $ | 699 |
| $ | 247 |
|
(1)Represents amounts reclassified out of accumulated other comprehensive loss and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.
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.
There were no shares considered anti-dilutive for the three and nine month periods ended September 30, 20172019 and 2016.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||||||||||||||
For the Three Months Ended September 30, |
| Basic |
| Diluted |
| Basic |
| Diluted |
|
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||||||
Net Income |
| $ | 5,350 |
| $ | 5,350 |
| $ | 5,118 |
| $ | 5,118 |
|
| $ | 7,148 |
| $ | 7,148 |
| $ | 6,717 |
| $ | 6,717 |
|
Average common shares outstanding |
|
| 7,396,505 |
|
| 7,396,505 |
|
| 7,394,143 |
|
| 7,394,143 |
|
|
| 7,394,992 |
|
| 7,394,992 |
|
| 7,399,054 |
|
| 7,399,054 |
|
Earnings per share |
| $ | 0.72 |
| $ | 0.72 |
| $ | 0.69 |
| $ | 0.69 |
|
| $ | 0.97 |
| $ | 0.97 |
| $ | 0.91 |
| $ | 0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||||||||||||||
For the Nine Months Ended September 30 |
| Basic |
| Diluted |
| Basic |
| Diluted |
|
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||||||
Net Income |
| $ | 15,809 |
| $ | 15,809 |
| $ | 14,855 |
| $ | 14,855 |
| |||||||||||||
Net income |
| $ | 20,704 |
| $ | 20,704 |
| $ | 18,528 |
| $ | 18,528 |
| |||||||||||||
Average common shares outstanding |
|
| 7,395,612 |
|
| 7,395,612 |
|
| 7,397,581 |
|
| 7,397,581 |
|
|
| 7,397,768 |
|
| 7,397,768 |
|
| 7,397,373 |
|
| 7,397,373 |
|
Earnings per share |
| $ | 2.14 |
| $ | 2.14 |
| $ | 2.01 |
| $ | 2.01 |
|
| $ | 2.80 |
| $ | 2.80 |
| $ | 2.50 |
| $ | 2.50 |
|
12
4. Investment securities:
The amortized cost and fair value of investment securities aggregated by investment category at September 30, 20172019 and December 31, 20162018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Gross |
|
|
|
|
|
|
|
| Gross |
| Gross |
|
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||||||
September 30, 2017 |
| Cost |
| Gains |
| Losses |
| Value |
| |||||||||||||||||
September 30, 2019 |
| Cost |
| Gains |
| Losses |
| Value |
| |||||||||||||||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
| $ | 20,045 |
| $ | 29 |
| $ | 28 |
| $ | 20,046 |
|
| $ | 23,963 |
| $ | 120 |
| $ | 17 |
| $ | 24,066 |
|
U.S. Government-sponsored enterprises |
|
| 85,482 |
|
| 83 |
|
| 915 |
|
| 84,650 |
|
|
| 92,223 |
|
| 107 |
|
| 340 |
|
| 91,990 |
|
State and municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 14,594 |
|
| 615 |
|
| 2 |
|
| 15,207 |
|
|
| 21,392 |
|
| 346 |
|
| 238 |
|
| 21,500 |
|
Tax-exempt |
|
| 98,494 |
|
| 2,062 |
|
| 51 |
|
| 100,505 |
|
|
| 60,794 |
|
| 920 |
|
| 31 |
|
| 61,683 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 16,045 |
|
| 21 |
|
| 33 |
|
| 16,033 |
|
|
| 9,536 |
|
| 95 |
|
| 18 |
|
| 9,613 |
|
U.S. Government-sponsored enterprises |
|
| 16,492 |
|
| 29 |
|
| 95 |
|
| 16,426 |
|
|
| 45,284 |
|
| 820 |
|
| 63 |
|
| 46,041 |
|
Commercial Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 6,326 |
|
|
|
|
| 85 |
|
| 6,241 |
|
|
| 13,694 |
|
| 236 |
|
|
|
|
| 13,930 |
|
Common equity securities |
|
| 30 |
|
|
|
|
|
|
|
| 30 |
| |||||||||||||
Total |
| $ | 257,508 |
| $ | 2,839 |
| $ | 1,209 |
| $ | 259,138 |
|
| $ | 266,886 |
| $ | 2,644 |
| $ | 707 |
| $ | 268,823 |
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipals |
| $ | 6,859 |
| $ | 185 |
| $ | 2 |
| $ | 7,042 |
|
| $ | 6,853 |
| $ | 182 |
|
|
|
| $ | 7,035 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 58 |
|
|
|
|
|
|
|
| 58 |
|
|
| 33 |
|
|
|
|
|
|
|
| 33 |
|
U.S. Government-sponsored enterprises |
|
| 2,647 |
|
| 165 |
|
|
|
|
| 2,812 |
|
|
| 922 |
|
| 27 |
| $ | 1 |
|
| 948 |
|
Total |
| $ | 9,564 |
| $ | 350 |
| $ | 2 |
| $ | 9,912 |
|
| $ | 7,808 |
| $ | 209 |
| $ | 1 |
| $ | 8,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Gross |
|
|
|
| ||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
December 31, 2016 |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
| $ | 7,570 |
|
|
|
| $ | 132 |
| $ | 7,438 |
|
U.S. Government-sponsored enterprises |
|
| 82,314 |
| $ | 79 |
|
| 1,480 |
|
| 80,913 |
|
State and municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 14,698 |
|
| 566 |
|
| 39 |
|
| 15,225 |
|
Tax-exempt |
|
| 110,931 |
|
| 2,309 |
|
| 640 |
|
| 112,600 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 21,041 |
|
| 48 |
|
| 47 |
|
| 21,042 |
|
U.S. Government-sponsored enterprises |
|
| 22,303 |
|
| 48 |
|
| 159 |
|
| 22,192 |
|
Total |
| $ | 258,857 |
| $ | 3,050 |
| $ | 2,497 |
| $ | 259,410 |
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipals |
| $ | 6,862 |
| $ | 72 |
| $ | 67 |
| $ | 6,867 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 68 |
|
| 1 |
|
|
|
|
| 69 |
|
U.S. Government-sponsored enterprises |
|
| 3,587 |
|
| 191 |
|
|
|
|
| 3,778 |
|
Total |
| $ | 10,517 |
| $ | 264 |
| $ | 67 |
| $ | 10,714 |
|
1311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Gross |
|
|
|
| ||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
December 31, 2018 |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
| $ | 25,948 |
|
| 9 |
| $ | 365 |
| $ | 25,592 |
|
U.S. Government-sponsored enterprises |
|
| 94,999 |
| $ | 2 |
|
| 2,183 |
|
| 92,818 |
|
State and municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 13,544 |
|
| 309 |
|
|
|
|
| 13,853 |
|
Tax-exempt |
|
| 86,361 |
|
| 338 |
|
| 745 |
|
| 85,954 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 12,663 |
|
| 50 |
|
| 84 |
|
| 12,629 |
|
U.S. Government-sponsored enterprises |
|
| 33,149 |
|
| 49 |
|
| 401 |
|
| 32,797 |
|
Commercial Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 6,269 |
|
|
|
|
| 230 |
|
| 6,039 |
|
Total |
| $ | 272,933 |
| $ | 757 |
| $ | 4,008 |
| $ | 269,682 |
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipals |
| $ | 6,855 |
| $ | 12 |
| $ | 43 |
| $ | 6,824 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 42 |
|
|
|
|
|
|
|
| 42 |
|
U.S. Government-sponsored enterprises |
|
| 1,464 |
|
| 55 |
|
| 5 |
|
| 1,514 |
|
Total |
| $ | 8,361 |
| $ | 67 |
| $ | 48 |
| $ | 8,380 |
|
Equity Securities
Our equity securities portfolio consists of stock of two other financial institutions. At September 30, 2019 and December 31, 2018, we had $297 and $291 respectively, in equity securities recorded at fair value. At September 30, 2019, the fair value of our equity portfolio exceeded the cost basis by $20. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
| 2019 |
|
| 2018 |
Net gains recognized during the period on equity securities |
| $ | 14 |
| $ | 14 |
Less: Net gains recognized during the period on equity securities sold during the period |
|
|
|
|
|
|
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date |
| $ | 14 |
| $ | 14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
| 2019 |
|
| 2018 |
Net gains recognized during the period on equity securities |
| $ | 6 |
| $ | 14 |
Less: Net gains recognized during the period on equity securities sold during the period |
|
|
|
|
|
|
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date |
| $ | 6 |
| $ | 14 |
Restricted Investment In Stock
Restricted investment in stock includes FHLB with a carrying cost of $4,428 and $7,420 at September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018, are included in other assets in the consolidated balance sheets. FHLB and ACBB stock was issued as a requirement to facilitate participation
12
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 decrease in FHLB stock from December 31, 2018 is due to lower borrowings.
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 September 30, 2019), 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 September 30, 2019, there was no 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 September 30, 2017,2019, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Fair |
| ||
September 30, 2017 |
| Value |
| |||||
September 30, 2019 |
| Value |
| |||||
Within one year |
| $ | 15,858 |
|
| $ | 33,989 |
|
After one but within five years |
|
| 148,810 |
|
|
| 121,112 |
|
After five but within ten years |
|
| 40,582 |
|
|
| 11,846 |
|
After ten years |
|
| 15,158 |
|
|
| 28,871 |
|
|
|
| 220,408 |
|
|
| 195,818 |
|
Mortgage-backed securities |
|
| 38,700 |
| ||||
Mortgage-backed and other amortizing securities |
|
| 73,005 |
| ||||
Total |
| $ | 259,108 |
|
| $ | 268,823 |
|
The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at September 30, 2017,2019, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortized |
| Fair |
|
| Amortized |
| Fair |
| ||||
September 30, 2017 |
| Cost |
| Value |
| |||||||||
September 30, 2019 |
| Cost |
| Value |
| |||||||||
Within one year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one but within five years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five but within ten years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After ten years |
| $ | 6,859 |
| $ | 7,042 |
|
| $ | 6,853 |
| $ | 7,035 |
|
|
|
| 6,859 |
|
| 7,042 |
|
|
| 6,853 |
|
| 7,035 |
|
Mortgage-backed securities |
|
| 2,705 |
|
| 2,870 |
|
|
| 955 |
|
| 981 |
|
Total |
| $ | 9,564 |
| $ | 9,912 |
|
| $ | 7,808 |
| $ | 8,016 |
|
Securities with a carrying value of $165,205$142,963 and $144,750$161,647 at September 30, 20172019 and December 31, 2016,2018, 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 September 30, 20172019 and December 31, 2016,2018, 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.
1413
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”)OTTI has not been recognized at September 30, 20172019 and December 31, 2016,2018, 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 |
|
| Less Than 12 Months |
| 12 Months or More |
| Total |
| ||||||||||||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||||||||
September 30, 2017 |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| |||||||||||||||||||||||||
September 30, 2019 |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| |||||||||||||||||||||||||
U.S. Treasury securities |
| $ | 5,494 |
| $ | 28 |
|
|
|
|
|
|
| $ | 5,494 |
| $ | 28 |
|
| $ | 4,524 |
| $ | 2 |
| $ | 5,482 |
| $ | 15 |
| $ | 10,006 |
| $ | 17 |
|
U.S. Government-sponsored enterprises |
|
| 48,573 |
|
| 376 |
| $ | 29,309 |
| $ | 539 |
|
| 77,882 |
|
| 915 |
|
|
| 29,242 |
|
| 129 |
|
| 38,468 |
|
| 211 |
|
| 67,710 |
|
| 340 |
|
State and municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 551 |
|
| 2 |
|
|
|
|
|
|
|
| 551 |
|
| 2 |
|
|
| 8,970 |
|
| 238 |
|
|
|
|
|
|
|
| 8,970 |
|
| 238 |
|
Tax-exempt |
|
| 5,330 |
|
| 50 |
|
| 2,482 |
|
| 3 |
|
| 7,812 |
|
| 53 |
|
|
| 6,139 |
|
| 29 |
|
| 1,101 |
|
| 2 |
|
| 7,240 |
|
| 31 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 5,671 |
|
| 13 |
|
| 3,175 |
|
| 20 |
|
| 8,846 |
|
| 33 |
|
|
| 423 |
|
| 1 |
|
| 4,346 |
|
| 17 |
|
| 4,769 |
|
| 18 |
|
U.S. Government-sponsored enterprises |
|
| 8,492 |
|
| 25 |
|
| 4,775 |
|
| 70 |
|
| 13,267 |
|
| 95 |
|
|
| 3,997 |
|
| 12 |
|
| 5,502 |
|
| 52 |
|
| 9,499 |
|
| 64 |
|
Commercial Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
U.S. Government-sponsored enterprises |
|
| 6,241 |
|
| 85 |
|
|
|
|
|
|
|
| 6,241 |
|
| 85 |
| |||||||||||||||||||
Total |
| $ | 80,352 |
| $ | 579 |
| $ | 39,741 |
| $ | 632 |
| $ | 120,093 |
| $ | 1,211 |
|
| $ | 53,295 |
| $ | 411 |
| $ | 54,899 |
| $ | 297 |
| $ | 108,194 |
| $ | 708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less Than 12 Months |
| 12 Months or More |
| Total |
|
| Less Than 12 Months |
| 12 Months or More |
| Total |
| ||||||||||||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||||||||
December 31, 2016 |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| |||||||||||||||||||||||||
December 31, 2018 |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| |||||||||||||||||||||||||
U.S. Treasury securities |
| $ | 7,438 |
| $ | 132 |
|
|
|
|
|
|
| $ | 7,438 |
| $ | 132 |
|
| $ | 1,995 |
| $ | 2 |
| $ | 19,671 |
| $ | 363 |
| $ | 21,666 |
| $ | 365 |
|
U.S. Government-sponsored enterprises |
|
| 59,460 |
|
| 1,480 |
|
|
|
|
|
|
|
| 59,460 |
|
| 1,480 |
|
|
| 2,037 |
|
| 1 |
|
| 89,729 |
|
| 2,182 |
|
| 91,766 |
|
| 2,183 |
|
State and municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 1,035 |
|
| 39 |
|
|
|
|
|
|
|
| 1,035 |
|
| 39 |
| |||||||||||||||||||
Tax-exempt |
|
| 55,166 |
|
| 707 |
| $ | 226 |
|
|
|
|
| 55,392 |
|
| 707 |
|
|
| 9,022 |
|
| 74 |
|
| 52,352 |
|
| 714 |
|
| 61,374 |
|
| 788 |
|
Residential Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 5,917 |
|
| 27 |
|
| 1,496 |
| $ | 20 |
|
| 7,413 |
|
| 47 |
|
|
|
|
|
|
|
|
| 7,800 |
|
| 84 |
|
| 7,800 |
|
| 84 |
|
U.S. Government-sponsored enterprises |
|
| 16,412 |
|
| 85 |
|
| 2,712 |
|
| 74 |
|
| 19,124 |
|
| 159 |
|
|
| 12,851 |
|
| 55 |
|
| 13,881 |
|
| 351 |
|
| 26,732 |
|
| 406 |
|
Commercial Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
U.S. Government-sponsored enterprises |
|
|
|
|
|
|
|
| 6,039 |
|
| 230 |
|
| 6,039 |
|
| 230 |
| |||||||||||||||||||
Total |
| $ | 145,428 |
| $ | 2,470 |
| $ | 4,434 |
| $ | 94 |
| $ | 149,862 |
| $ | 2,564 |
|
| $ | 25,905 |
| $ | 132 |
| $ | 189,472 |
| $ | 3,924 |
| $ | 215,377 |
| $ | 4,056 |
|
The Company had 7472 investment securities, consisting of 1110 tax-exempt and 9 taxable state and municipal obligations, 24 U.S. Treasury securities, one taxable municipal obligation, 2925 U.S. Government-sponsored enterprise securities, and 3124 mortgage-backed securities that were in unrealized loss positions at September 30, 2017.2019. Of these securities, 42 U.S. Treasury securities, 17 U.S. Government-sponsored enterprise securities, 2 tax-exempt state and municipal obligations, 14and 20 mortgage-backed securities and 10 U.S. Government-sponsored enterprise 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 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 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 September 30, 2017.2019. There was no OTTI recognized for the three or nine months ended September 30, 20172019 and 2016.
The Company had 163 investment securities, consisting of 107 tax-exempt state and municipal obligations, 2 taxable state and municipal obligations, 2 U.S. Treasury securities, 22 U.S. Government-sponsored enterprise securities and 30 mortgage-backed securities that were in unrealized loss positions at December 31, 2016. Of these securities, 9 mortgage-backed securities, and 2 tax-exempt state and municipal securities were in a continuous unrealized loss position for twelve months or more.
2018.
1514
5. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 20172019 and December 31, 20162018 are summarized as follows. Net deferred loan costs were $646$903 and $579$744 at September 30, 20172019 and December 31, 2016.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
|
| December 31, 2016 |
|
|
| September 30, 2019 |
|
| December 31, 2018 |
|
Commercial |
| $ | 449,464 |
| $ | 408,814 |
|
| $ | 497,985 |
| $ | 494,134 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 751,510 |
|
| 700,144 |
|
|
| 976,258 |
|
| 907,803 |
|
Residential |
|
| 289,582 |
|
| 289,781 |
|
|
| 299,209 |
|
| 299,876 |
|
Consumer |
|
| 141,959 |
|
| 134,226 |
|
|
| 107,638 |
|
| 121,453 |
|
Total |
| $ | 1,632,515 |
| $ | 1,532,965 |
|
| $ | 1,881,090 |
| $ | 1,823,266 |
|
The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 20172019 and 20162018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
| ||||||||
September 30, 2017 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Unallocated |
| Total |
| ||||||||||||||||||||||
September 30, 2019 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| ||||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance July 1, 2017 |
| $ | 4,426 |
| $ | 6,587 |
| $ | 5,196 |
| $ | 1,593 |
| $ |
|
| $ | 17,802 |
| ||||||||||||||||
Beginning Balance July 1, 2019 |
| $ | 6,142 |
| $ | 11,042 |
| $ | 3,615 |
| $ | 1,131 |
| $ | 21,930 |
| |||||||||||||||||||
Charge-offs |
|
| (17) |
|
|
|
|
| (82) |
|
| (169) |
|
|
|
|
| (268) |
|
|
| (26) |
|
| (34) |
|
| (104) |
|
| (144) |
|
| (308) |
|
Recoveries |
|
| 3 |
|
| 41 |
|
| 4 |
|
| 49 |
|
|
|
|
| 97 |
|
|
| 12 |
|
|
|
|
| 11 |
|
| 47 |
|
| 70 |
|
Provisions |
|
| 358 |
|
| 566 |
|
| 175 |
|
| 101 |
|
|
|
|
| 1,200 |
|
|
| (205) |
|
| 762 |
|
| 34 |
|
| 109 |
|
| 700 |
|
Ending balance |
| $ | 4,770 |
| $ | 7,194 |
| $ | 5,293 |
| $ | 1,574 |
| $ |
|
| $ | 18,831 |
|
| $ | 5,923 |
| $ | 11,770 |
| $ | 3,556 |
| $ | 1,143 |
| $ | 22,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
| ||||||||
September 30, 2016 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Unallocated |
| Total |
| ||||||||||||||||||||||
September 30, 2018 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| ||||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance July 1, 2016 |
| $ | 3,263 |
| $ | 5,077 |
| $ | 4,465 |
| $ | 1,679 |
| $ | 315 |
| $ | 14,799 |
| ||||||||||||||||
Beginning Balance July 1, 2018 |
| $ | 5,191 |
| $ | 10,058 |
| $ | 3,156 |
| $ | 1,168 |
| $ | 19,573 |
| |||||||||||||||||||
Charge-offs |
|
|
|
|
| (72) |
|
| (153) |
|
| (130) |
|
|
|
|
| (355) |
|
|
| (148) |
|
| (63) |
|
|
|
|
| (117) |
|
| (328) |
|
Recoveries |
|
| 2 |
|
| 28 |
|
| 4 |
|
| 34 |
|
|
|
|
| 68 |
|
|
| 12 |
|
| 26 |
|
| 13 |
|
| 67 |
|
| 118 |
|
Provisions |
|
| 321 |
|
| 548 |
|
| 245 |
|
| 86 |
|
|
|
|
| 1,200 |
|
|
| 414 |
|
| 421 |
|
| 153 |
|
| 62 |
|
| 1,050 |
|
Ending balance |
| $ | 3,586 |
| $ | 5,581 |
| $ | 4,561 |
| $ | 1,669 |
| $ | 315 |
| $ | 15,712 |
|
| $ | 5,469 |
| $ | 10,442 |
| $ | 3,322 |
| $ | 1,180 |
| $ | 20,413 |
|
1615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
| ||||||||
September 30, 2017 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Unallocated |
| Total |
| ||||||||||||||||||||||
September 30, 2019 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| ||||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance January 1, 2017 |
| $ | 3,799 |
| $ | 5,847 |
| $ | 4,707 |
|
| 1,608 |
|
|
|
|
| 15,961 |
| ||||||||||||||||
Beginning Balance January 1, 2019 |
| $ | 5,516 |
| $ | 10,736 |
| $ | 3,892 |
|
| 1,235 |
|
| 21,379 |
| |||||||||||||||||||
Charge-offs |
|
| (49) |
|
| (367) |
|
| (105) |
|
| (489) |
|
|
|
|
| (1,010) |
|
|
| (113) |
|
| (383) |
|
| (406) |
|
| (356) |
|
| (1,258) |
|
Recoveries |
|
| 16 |
|
| 96 |
|
| 30 |
|
| 138 |
|
|
|
|
| 280 |
|
|
| 22 |
|
|
|
|
| 27 |
|
| 122 |
|
| 171 |
|
Provisions |
|
| 1,004 |
|
| 1,618 |
|
| 661 |
|
| 317 |
|
|
|
|
| 3,600 |
|
|
| 498 |
|
| 1,417 |
|
| 43 |
|
| 142 |
|
| 2,100 |
|
Ending balance |
| $ | 4,770 |
| $ | 7,194 |
| $ | 5,293 |
| $ | 1,574 |
| $ |
|
| $ | 18,831 |
|
| $ | 5,923 |
| $ | 11,770 |
| $ | 3,556 |
| $ | 1,143 |
| $ | 22,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
| ||||||||
September 30, 2016 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Unallocated |
| Total |
| ||||||||||||||||||||||
September 30, 2018 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| ||||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance January 1, 2016 |
| $ | 3,042 |
| $ | 4,245 |
| $ | 4,082 |
| $ | 1,583 |
| $ | 23 |
| $ | 12,975 |
| ||||||||||||||||
Beginning Balance January 1, 2018 |
| $ | 5,513 |
| $ | 8,944 |
| $ | 3,111 |
| $ | 1,392 |
| $ | 18,960 |
| |||||||||||||||||||
Charge-offs |
|
| (396) |
|
| (175) |
|
| (279) |
|
| (260) |
|
|
|
|
| (1,110) |
|
|
| (150) |
|
| (1,232) |
|
| (381) |
|
| (389) |
|
| (2,152) |
|
Recoveries |
|
| 38 |
|
| 58 |
|
| 39 |
|
| 112 |
|
|
|
|
| 247 |
|
|
| 128 |
|
| 83 |
|
| 80 |
|
| 164 |
|
| 455 |
|
Provisions |
|
| 902 |
|
| 1,453 |
|
| 719 |
|
| 234 |
|
| 292 |
|
| 3,600 |
|
|
| (22) |
|
| 2,647 |
|
| 512 |
|
| 13 |
|
| 3,150 |
|
Ending balance |
| $ | 3,586 |
| $ | 5,581 |
| $ | 4,561 |
| $ | 1,669 |
| $ | 315 |
| $ | 15,712 |
|
| $ | 5,469 |
| $ | 10,442 |
| $ | 3,322 |
| $ | 1,180 |
| $ | 20,413 |
|
The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 20172019 and December 31, 20162018 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
| |||||||||
September 30, 2017 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Unallocated |
| Total |
| ||||||||||||||||||||||
September 30, 2019 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| ||||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ | 4,770 |
| $ | 7,194 |
| $ | 5,293 |
| $ | 1,574 |
| $ |
|
| $ | 18,831 |
|
| $ | 5,923 |
| $ | 11,770 |
| $ | 3,556 |
| $ | 1,143 |
| $ | 22,392 |
|
Ending balance: individually evaluated for impairment |
|
| 436 |
|
| 631 |
|
| 616 |
|
| 23 |
|
|
|
|
| 1,706 |
|
|
| 394 |
|
| 225 |
|
| 196 |
|
|
|
|
| 815 |
|
Ending balance: collectively evaluated for impairment |
|
| 4,334 |
|
| 6,563 |
|
| 4,677 |
|
| 1,551 |
|
|
|
|
| 17,125 |
|
| $ | 5,529 |
| $ | 11,545 |
| $ | 3,360 |
| $ | 1,143 |
| $ | 21,577 |
|
Ending balance: loans acquired with deteriorated credit quality |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| ||||||||||||||||
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ | 449,464 |
| $ | 751,510 |
| $ | 289,582 |
| $ | 141,959 |
| $ |
|
| $ | 1,632,515 |
|
| $ | 497,985 |
| $ | 976,258 |
| $ | 299,209 |
| $ | 107,638 |
| $ | 1,881,090 |
|
Ending balance: individually evaluated for impairment |
|
| 2,789 |
|
| 4,062 |
|
| 3,697 |
|
| 194 |
|
|
|
|
| 10,742 |
|
|
| 4,772 |
|
| 3,603 |
|
| 2,450 |
|
| 262 |
|
| 11,087 |
|
Ending balance: collectively evaluated for impairment |
|
| 446,322 |
|
| 746,802 |
|
| 285,854 |
|
| 141,765 |
|
|
|
|
| 1,620,743 |
|
| $ | 493,213 |
| $ | 972,655 |
| $ | 296,759 |
| $ | 107,376 |
| $ | 1,870,003 |
|
Ending balance: loans acquired with deteriorated credit quality |
| $ | 353 |
| $ | 646 |
| $ | 31 |
| $ |
|
| $ |
|
| $ | 1,030 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate |
|
|
|
|
|
|
| |||||||||
December 31, 2016 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Unallocated |
| Total |
| ||||||||||||||||||||||
December 31, 2018 |
| Commercial |
| Commercial |
| Residential |
| Consumer |
| Total |
| ||||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ | 3,799 |
| $ | 5,847 |
| $ | 4,707 |
| $ | 1,608 |
| $ |
|
| $ | 15,961 |
|
| $ | 5,516 |
| $ | 10,736 |
| $ | 3,892 |
| $ | 1,235 |
| $ | 21,379 |
|
Ending balance: individually evaluated for impairment |
|
| 225 |
|
| 1,197 |
|
| 520 |
|
|
|
|
|
|
|
| 1,942 |
|
|
| 50 |
|
| 403 |
|
| 666 |
|
| 60 |
|
| 1,179 |
|
Ending balance: collectively evaluated for impairment |
|
| 3,574 |
|
| 4,650 |
|
| 4,187 |
|
| 1,608 |
|
|
|
|
| 14,019 |
|
| $ | 5,466 |
| $ | 10,333 |
| $ | 3,226 |
| $ | 1,175 |
| $ | 20,200 |
|
Ending balance: loans acquired with deteriorated credit quality |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| ||||||||||||||||
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ | 408,814 |
| $ | 700,144 |
| $ | 289,781 |
| $ | 134,226 |
| $ |
|
| $ | 1,532,965 |
|
| $ | 494,134 |
| $ | 907,803 |
| $ | 299,876 |
| $ | 121,453 |
| $ | 1,823,266 |
|
Ending balance: individually evaluated for impairment |
|
| 1,724 |
|
| 5,820 |
|
| 3,543 |
|
| 155 |
|
|
|
|
| 11,242 |
|
|
| 2,237 |
|
| 3,121 |
|
| 4,071 |
|
| 212 |
|
| 9,641 |
|
Ending balance: collectively evaluated for impairment |
|
| 406,127 |
|
| 692,987 |
|
| 286,201 |
|
| 134,071 |
|
|
|
|
| 1,519,386 |
|
| $ | 491,897 |
| $ | 904,682 |
| $ | 295,805 |
| $ | 121,241 |
| $ | 1,813,625 |
|
Ending balance: loans acquired with deteriorated credit quality |
| $ | 963 |
| $ | 1,337 |
| $ | 37 |
| $ |
|
| $ |
|
| $ | 2,337 |
|
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:
· |
|
· | Special |
· |
|
· | 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. |
· |
|
1817
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 September 30, 20172019 and December 31, 2016:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
|
|
| ||
September 30, 2017 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||||||||||||||||||
September 30, 2019 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||||||||||||||||||
Commercial |
| $ | 441,503 |
| $ | 5,028 |
| $ | 2,933 |
| $ |
|
| $ | 449,464 |
|
| $ | 488,395 |
| $ | 1,971 |
| $ | 7,619 |
| $ |
|
| $ | 497,985 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 724,659 |
|
| 14,730 |
|
| 12,121 |
|
|
|
|
| 751,510 |
|
|
| 948,854 |
|
| 2,644 |
|
| 24,760 |
|
|
|
|
| 976,258 |
|
Residential |
|
| 283,690 |
|
| 19 |
|
| 5,873 |
|
|
|
|
| 289,582 |
|
|
| 296,565 |
|
|
|
|
| 2,644 |
|
|
|
|
| 299,209 |
|
Consumer |
|
| 141,618 |
|
|
|
|
| 341 |
|
|
|
|
| 141,959 |
|
|
| 107,354 |
|
|
|
|
| 284 |
|
|
|
|
| 107,638 |
|
Total |
| $ | 1,591,470 |
| $ | 19,777 |
| $ | 21,268 |
| $ |
|
| $ | 1,632,515 |
|
| $ | 1,841,168 |
| $ | 4,615 |
| $ | 35,307 |
| $ |
|
| $ | 1,881,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
|
|
| |
December 31, 2018 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
Commercial |
| $ | 491,531 |
| $ | 869 |
| $ | 1,734 |
| $ |
|
| $ | 494,134 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 886,849 |
|
| 8,934 |
|
| 12,020 |
|
|
|
|
| 907,803 |
|
Residential |
|
| 295,758 |
|
| 357 |
|
| 3,761 |
|
|
|
|
| 299,876 |
|
Consumer |
|
| 121,229 |
|
|
|
|
| 224 |
|
|
|
|
| 121,453 |
|
Total |
| $ | 1,795,367 |
| $ | 10,160 |
| $ | 17,739 |
| $ |
|
| $ | 1,823,266 |
|
The increase in substandard loans from December 31, 2018 to September 30, 2019 is primarily associated with the reclassification of several larger commercial credits to this category. The largest relationship totals $10.4 million and consists of commercial real estate and equipment financing for a borrowing group that has encountered some financial difficulties. The second largest reclassification consists of a $5.3 million commercial real estate construction loan that experienced significant construction delays. The construction is complete and the certificate of occupancy has been issued for the property. The Bank considers both of these credit relationships to be well secured and both relationships were current as of September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
|
|
| |
December 31, 2016 |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
Commercial |
| $ | 398,867 |
| $ | 6,222 |
| $ | 3,725 |
| $ |
|
| $ | 408,814 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 674,914 |
|
| 10,392 |
|
| 14,838 |
|
|
|
|
| 700,144 |
|
Residential |
|
| 282,737 |
|
| 233 |
|
| 6,811 |
|
|
|
|
| 289,781 |
|
Consumer |
|
| 133,983 |
|
|
|
|
| 243 |
|
|
|
|
| 134,226 |
|
Total |
| $ | 1,490,501 |
| $ | 16,847 |
| $ | 25,617 |
| $ |
|
| $ | 1,532,965 |
|
Information concerning nonaccrual loans by major loan classification at September 30, 20172019 and December 31, 20162018 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
|
| December 31, 2016 |
|
|
| September 30, 2019 |
|
| December 31, 2018 |
|
Commercial |
| $ | 1,263 |
| $ | 934 |
|
| $ | 3,343 |
| $ | 776 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 4,233 |
|
| 7,016 |
|
|
| 3,246 |
|
| 2,663 |
|
Residential |
|
| 3,031 |
|
| 3,003 |
|
|
| 1,548 |
|
| 2,580 |
|
Consumer |
|
| 194 |
|
| 155 |
|
|
| 262 |
|
| 212 |
|
Total |
| $ | 8,721 |
| $ | 11,108 |
|
| $ | 8,399 |
| $ | 6,231 |
|
The major classifications of loans by past due status are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Greater |
|
|
|
|
|
|
|
|
|
| Loans > 90 |
|
|
|
|
|
|
|
| Greater |
|
|
|
|
|
|
|
|
|
| Loans > 90 |
| ||||
|
| 30-59 Days |
| 60-89 Days |
| than 90 |
| Total Past |
|
|
|
|
|
|
| Days and |
|
| 30-59 Days |
| 60-89 Days |
| than 90 |
| Total Past |
|
|
|
|
|
|
| Days and |
| ||||||||||
September 30, 2017 |
| Past Due |
| Past Due |
| Days |
| Due |
| Current |
| Total Loans |
| Accruing |
| |||||||||||||||||||||||||||||
September 30, 2019 |
| Past Due |
| Past Due |
| Days |
| Due |
| Current |
| Total Loans |
| Accruing |
| |||||||||||||||||||||||||||||
Commercial |
| $ | 260 |
| $ | 84 |
| $ | 1,263 |
| $ | 1,607 |
| $ | 447,857 |
| $ | 449,464 |
|
|
|
|
| $ | 9 |
| $ | 25 |
| $ | 3,396 |
| $ | 3,430 |
| $ | 494,555 |
| $ | 497,985 |
| $ | 53 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 831 |
|
| 135 |
|
| 4,233 |
|
| 5,199 |
|
| 746,311 |
|
| 751,510 |
|
|
|
|
|
| 776 |
|
| 159 |
|
| 3,300 |
|
| 4,235 |
|
| 972,023 |
|
| 976,258 |
|
| 54 |
|
Residential |
|
| 1,756 |
|
| 147 |
|
| 4,312 |
|
| 6,215 |
|
| 283,367 |
|
| 289,582 |
| $ | 1,281 |
|
|
| 656 |
|
| 996 |
|
| 1,827 |
|
| 3,479 |
|
| 295,730 |
|
| 299,209 |
|
| 279 |
|
Consumer |
|
| 846 |
|
| 357 |
|
| 423 |
|
| 1,626 |
|
| 140,333 |
|
| 141,959 |
|
| 229 |
|
|
| 435 |
|
| 146 |
|
| 262 |
|
| 843 |
|
| 106,795 |
|
| 107,638 |
|
|
|
|
Total |
| $ | 3,693 |
| $ | 723 |
| $ | 10,231 |
| $ | 14,647 |
| $ | 1,617,868 |
| $ | 1,632,515 |
| $ | 1,510 |
|
| $ | 1,876 |
| $ | 1,326 |
| $ | 8,785 |
| $ | 11,987 |
| $ | 1,869,103 |
| $ | 1,881,090 |
| $ | 386 |
|
1918
The Company classifies all nonaccrual loans in the greater than 90 days category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Greater |
|
|
|
|
|
|
|
|
|
| Loans > 90 |
|
|
|
|
|
|
|
| Greater |
|
|
|
|
|
|
|
|
|
| Loans > 90 |
| ||||
|
| 30-59 Days |
| 60-89 Days |
| than 90 |
| Total Past |
|
|
|
|
|
|
| Days and |
|
| 30-59 Days |
| 60-89 Days |
| than 90 |
| Total Past |
|
|
|
|
|
|
| Days and |
| ||||||||||
December 31, 2016 |
| Past Due |
| Past Due |
| Days |
| Due |
| Current |
| Total Loans |
| Accruing |
| |||||||||||||||||||||||||||||
December 31, 2018 |
| Past Due |
| Past Due |
| Days |
| Due |
| Current |
| Total Loans |
| Accruing |
| |||||||||||||||||||||||||||||
Commercial |
| $ | 249 |
| $ | 75 |
| $ | 934 |
| $ | 1,258 |
| $ | 407,556 |
| $ | 408,814 |
|
|
|
|
| $ | 973 |
| $ | 79 |
| $ | 776 |
| $ | 1,828 |
| $ | 492,306 |
| $ | 494,134 |
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 4,782 |
|
| 527 |
|
| 7,016 |
|
| 12,325 |
|
| 687,819 |
|
| 700,144 |
|
|
|
|
|
| 1,889 |
|
| 218 |
|
| 2,736 |
|
| 4,843 |
|
| 902,960 |
|
| 907,803 |
| $ | 73 |
|
Residential |
|
| 2,100 |
|
| 354 |
|
| 3,561 |
|
| 6,015 |
|
| 283,766 |
|
| 289,781 |
| $ | 558 |
|
|
| 2,486 |
|
| 1,545 |
|
| 3,430 |
|
| 7,461 |
|
| 292,415 |
|
| 299,876 |
|
| 850 |
|
Consumer |
|
| 962 |
|
| 259 |
|
| 441 |
|
| 1,662 |
|
| 132,564 |
|
| 134,226 |
|
| 286 |
|
|
| 756 |
|
| 292 |
|
| 212 |
|
| 1,260 |
|
| 120,193 |
|
| 121,453 |
|
|
|
|
Total |
| $ | 8,093 |
| $ | 1,215 |
| $ | 11,952 |
| $ | 21,260 |
| $ | 1,511,705 |
| $ | 1,532,965 |
| $ | 844 |
|
| $ | 6,104 |
| $ | 2,134 |
| $ | 7,154 |
| $ | 15,392 |
| $ | 1,807,874 |
| $ | 1,823,266 |
| $ | 923 |
|
The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 20172019 and September 30, 2016,2018, and as of and for the year ended December 31, 20162018 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 |
| ||||||||||||||
September 30, 2017 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
September 30, 2019 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
With no related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 2,310 |
| $ | 2,455 |
|
|
|
| $ | 1,945 |
| $ | 28 |
| $ | 1,765 |
| $ | 63 |
|
| $ | 3,766 |
| $ | 4,272 |
|
|
|
| $ | 4,131 |
| $ | 18 |
| $ | 3,974 |
| $ | 52 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 2,900 |
|
| 3,192 |
|
|
|
|
| 2,979 |
|
| 6 |
|
| 3,009 |
|
| 19 |
|
|
| 2,981 |
|
| 3,219 |
|
|
|
|
| 2,969 |
|
| 8 |
|
| 2,501 |
|
| 31 |
|
Residential |
|
| 2,303 |
|
| 2,727 |
|
|
|
|
| 2,193 |
|
| 4 |
|
| 2,235 |
|
| 10 |
|
|
| 1,644 |
|
| 1,974 |
|
|
|
|
| 1,132 |
|
| 6 |
|
| 1,273 |
|
| 17 |
|
Consumer |
|
| 171 |
|
| 183 |
|
|
|
|
| 180 |
|
|
|
|
| 175 |
|
|
|
|
|
| 262 |
|
| 275 |
|
|
|
|
| 257 |
|
|
|
|
| 226 |
|
|
|
|
Total |
|
| 7,684 |
|
| 8,557 |
|
|
|
|
| 7,297 |
|
| 38 |
|
| 7,184 |
|
| 92 |
|
|
| 8,653 |
|
| 9,740 |
|
|
|
|
| 8,489 |
|
| 32 |
|
| 7,974 |
|
| 100 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 833 |
|
| 910 |
| $ | 436 |
|
| 783 |
|
|
|
|
| 943 |
|
|
|
|
|
| 1,006 |
|
| 1,008 |
|
| 394 |
|
| 1,213 |
|
| 9 |
|
| 1,010 |
|
| 21 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 1,807 |
|
| 2,073 |
|
| 631 |
|
| 1,673 |
|
| 6 |
|
| 2,402 |
|
| 13 |
|
|
| 622 |
|
| 1,103 |
|
| 225 |
|
| 766 |
|
|
|
|
| 1,030 |
|
| 10 |
|
Residential |
|
| 1,425 |
|
| 1,663 |
|
| 616 |
|
| 1,330 |
|
| 8 |
|
| 1,270 |
|
| 22 |
|
|
| 806 |
|
| 813 |
|
| 196 |
|
| 1,234 |
|
| 8 |
|
| 1,651 |
|
| 26 |
|
Consumer |
|
| 23 |
|
| 23 |
|
| 23 |
|
| 34 |
|
|
|
|
| 23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 20 |
|
|
|
|
Total |
|
| 4,088 |
|
| 4,669 |
|
| 1,706 |
|
| 3,820 |
|
| 14 |
|
| 4,638 |
|
| 35 |
|
|
| 2,434 |
|
| 2,924 |
|
| 815 |
|
| 3,213 |
|
| 17 |
|
| 3,711 |
|
| 57 |
|
Total impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Commercial |
|
| 3,143 |
|
| 3,365 |
|
| 436 |
|
| 2,728 |
|
| 28 |
|
| 2,708 |
|
| 63 |
|
|
| 4,772 |
|
| 5,280 |
|
| 394 |
|
| 5,344 |
|
| 27 |
|
| 4,984 |
|
| 73 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 4,707 |
|
| 5,265 |
|
| 631 |
|
| 4,652 |
|
| 12 |
|
| 5,411 |
|
| 32 |
|
|
| 3,603 |
|
| 4,322 |
|
| 225 |
|
| 3,735 |
|
| 8 |
|
| 3,531 |
|
| 41 |
|
Residential |
|
| 3,728 |
|
| 4,390 |
|
| 616 |
|
| 3,523 |
|
| 12 |
|
| 3,505 |
|
| 32 |
|
|
| 2,450 |
|
| 2,787 |
|
| 196 |
|
| 2,366 |
|
| 14 |
|
| 2,924 |
|
| 43 |
|
Consumer |
|
| 194 |
|
| 206 |
|
| 23 |
|
| 214 |
|
|
|
|
| 198 |
|
|
|
|
|
| 262 |
|
| 275 |
|
|
|
|
| 257 |
|
|
|
|
| 246 |
|
|
|
|
Total |
| $ | 11,772 |
| $ | 13,226 |
| $ | 1,706 |
| $ | 11,117 |
| $ | 52 |
| $ | 11,822 |
| $ | 127 |
|
| $ | 11,087 |
| $ | 12,664 |
| $ | 815 |
| $ | 11,702 |
| $ | 49 |
| $ | 11,685 |
| $ | 157 |
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2016 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| |||||||||||||||||||||
December 31, 2018 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| |||||||||||||||||||||
With no related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 2,404 |
| $ | 3,213 |
|
|
|
| $ | 1,461 |
| $ | 48 |
|
| $ | 1,562 |
| $ | 1,900 |
|
|
|
| $ | 1,318 |
| $ | 67 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 2,364 |
|
| 3,018 |
|
|
|
|
| 4,300 |
|
| 71 |
|
|
| 1,969 |
|
| 2,299 |
|
|
|
|
| 2,822 |
|
| 28 |
|
Residential |
|
| 2,205 |
|
| 2,388 |
|
|
|
|
| 2,133 |
|
| 35 |
|
|
| 1,970 |
|
| 2,658 |
|
|
|
|
| 2,193 |
|
| 22 |
|
Consumer |
|
| 155 |
|
| 155 |
|
|
|
|
| 147 |
|
|
|
|
|
| 152 |
|
| 160 |
|
|
|
|
| 135 |
|
|
|
|
Total |
|
| 7,128 |
|
| 8,774 |
|
|
|
|
| 8,041 |
|
| 154 |
|
|
| 5,653 |
|
| 7,017 |
|
|
|
|
| 6,468 |
|
| 117 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 283 |
|
| 283 |
| $ | 225 |
|
| 859 |
|
|
|
|
|
| 675 |
|
| 675 |
|
| 50 |
|
| 1,006 |
|
| 30 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 4,793 |
|
| 4,793 |
|
| 1,197 |
|
| 2,366 |
|
| 2 |
|
|
| 1,152 |
|
| 1,323 |
|
| 403 |
|
| 1,676 |
|
| 18 |
|
Residential |
|
| 1,375 |
|
| 1,376 |
|
| 520 |
|
| 1,185 |
|
| 7 |
|
|
| 2,101 |
|
| 2,328 |
|
| 666 |
|
| 1,585 |
|
| 22 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
| 50 |
|
|
|
|
|
| 60 |
|
| 60 |
|
| 60 |
|
| 21 |
|
|
|
|
Total |
|
| 6,451 |
|
| 6,452 |
|
| 1,942 |
|
| 4,460 |
|
| 9 |
|
|
| 3,988 |
|
| 4,386 |
|
| 1,179 |
|
| 4,288 |
|
| 70 |
|
Total impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Commercial |
|
| 2,687 |
|
| 3,496 |
|
| 225 |
|
| 2,320 |
|
| 48 |
|
|
| 2,237 |
|
| 2,575 |
|
| 50 |
|
| 2,324 |
|
| 97 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 7,157 |
|
| 7,811 |
|
| 1,197 |
|
| 6,666 |
|
| 73 |
|
|
| 3,121 |
|
| 3,622 |
|
| 403 |
|
| 4,498 |
|
| 46 |
|
Residential |
|
| 3,580 |
|
| 3,764 |
|
| 520 |
|
| 3,318 |
|
| 42 |
|
|
| 4,071 |
|
| 4,986 |
|
| 666 |
|
| 3,778 |
|
| 44 |
|
Consumer |
|
| 155 |
|
| 155 |
|
|
|
|
| 197 |
|
|
|
|
|
| 212 |
|
| 220 |
|
| 60 |
|
| 156 |
|
|
|
|
Total |
| $ | 13,579 |
| $ | 15,226 |
| $ | 1,942 |
| $ | 12,501 |
| $ | 163 |
|
| $ | 9,641 |
| $ | 11,403 |
| $ | 1,179 |
| $ | 10,756 |
| $ | 187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| ||||||||||||||
September 30, 2016 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
September 30, 2018 |
| Investment |
| Balance |
| Allowance |
| Investment |
| Recognized |
| Investment |
| Recognized |
| |||||||||||||||||||||||||||||
With no related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 970 |
| $ | 1,876 |
|
|
|
| $ | 1,133 |
| $ | 10 |
| $ | 1,214 |
|
| 40 |
|
| $ | 1,356 |
| $ | 1,538 |
|
|
|
| $ | 1,269 |
| $ | 17 |
| $ | 1,257 |
| $ | 50 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 6,156 |
|
| 6,812 |
|
|
|
|
| 5,837 |
|
| 9 |
|
| 4,396 |
|
| 70 |
|
|
| 3,414 |
|
| 3,666 |
|
|
|
|
| 3,143 |
|
| 5 |
|
| 3,036 |
|
| 20 |
|
Residential |
|
| 2,171 |
|
| 2,354 |
|
|
|
|
| 2,056 |
|
| 3 |
|
| 2,263 |
|
| 14 |
|
|
| 2,366 |
|
| 3,003 |
|
|
|
|
| 2,256 |
|
| 7 |
|
| 2,249 |
|
| 15 |
|
Consumer |
|
| 188 |
|
| 188 |
|
|
|
|
| 173 |
|
|
|
|
| 119 |
|
|
|
|
|
| 142 |
|
| 149 |
|
|
|
|
| 101 |
|
|
|
|
| 131 |
|
|
|
|
Total |
|
| 9,485 |
|
| 11,230 |
|
|
|
|
| 9,199 |
|
| 22 |
|
| 7,992 |
|
| 124 |
|
|
| 7,278 |
|
| 8,356 |
|
|
|
|
| 6,769 |
|
| 29 |
|
| 6,673 |
|
| 85 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 1,396 |
|
| 1,396 |
| $ | 895 |
|
| 1,006 |
|
|
|
|
| 954 |
| $ |
|
|
|
| 939 |
|
| 1,086 |
| $ | 93 |
|
| 1,020 |
|
| 7 |
|
| 1,089 |
|
| 23 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 743 |
|
| 743 |
|
| 337 |
|
| 821 |
|
|
|
|
| 1,877 |
|
|
|
|
|
| 1,669 |
|
| 1,774 |
|
| 462 |
|
| 1,712 |
|
| 8 |
|
| 1,807 |
|
| 18 |
|
Residential |
|
| 1,093 |
|
| 1,093 |
|
| 638 |
|
| 1,186 |
|
|
|
|
| 1,263 |
|
| 4 |
|
|
| 1,312 |
|
| 1,508 |
|
| 362 |
|
| 1,369 |
|
| 5 |
|
| 1,456 |
|
| 13 |
|
Consumer |
|
| 41 |
|
| 41 |
|
| 41 |
|
| 56 |
|
|
|
|
| 80 |
|
|
|
|
|
| 14 |
|
| 14 |
|
| 14 |
|
| 9 |
|
|
|
|
| 11 |
|
|
|
|
Total |
|
| 3,273 |
|
| 3,273 |
|
| 1,911 |
|
| 3,069 |
|
| — |
|
| 4,174 |
|
| 4 |
|
|
| 3,934 |
|
| 4,382 |
|
| 931 |
|
| 4,110 |
|
| 20 |
|
| 4,363 |
|
| 54 |
|
Total impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Commercial |
|
| 2,366 |
|
| 3,272 |
|
| 895 |
|
| 2,139 |
|
| 10 |
|
| 2,168 |
|
| 40 |
|
|
| 2,295 |
|
| 2,624 |
|
| 93 |
|
| 2,289 |
|
| 24 |
|
| 2,346 |
|
| 73 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
| 6,899 |
|
| 7,555 |
|
| 337 |
|
| 6,658 |
|
| 9 |
|
| 6,273 |
|
| 70 |
|
|
| 5,083 |
|
| 5,440 |
|
| 462 |
|
| 4,855 |
|
| 13 |
|
| 4,843 |
|
| 38 |
|
Residential |
|
| 3,264 |
|
| 3,447 |
|
| 638 |
|
| 3,242 |
|
| 3 |
|
| 3,526 |
|
| 18 |
|
|
| 3,678 |
|
| 4,511 |
|
| 362 |
|
| 3,625 |
|
| 12 |
|
| 3,705 |
|
| 28 |
|
Consumer |
|
| 229 |
|
| 229 |
|
| 41 |
|
| 229 |
|
|
|
|
| 199 |
|
|
|
|
|
| 156 |
|
| 163 |
|
| 14 |
|
| 110 |
|
|
|
|
| 142 |
|
|
|
|
Total |
| $ | 12,758 |
| $ | 14,503 |
| $ | 1,911 |
| $ | 12,268 |
| $ | 22 |
| $ | 12,166 |
| $ | 128 |
|
| $ | 11,212 |
| $ | 12,738 |
| $ | 931 |
| $ | 10,879 |
| $ | 49 |
| $ | 11,036 |
| $ | 139 |
|
20
Included in the commercial real estate,loan and commercial and residential real estate and commercial loan categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $3,365$2,262 at September 30, 2017, $1,9092019, $2,779 at December 31, 20162018 and $2,666$3,230 at September 30, 2016.2018.
21
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. |
· | Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time. |
· | 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 four loans, representing two credit relationships, modified as troubled debt restructurings for the three months ended September 30, 2017 totaling $1,249. For the nine months ended September 30, 2017, six loans were modified as troubled debt restructurings in the amount of $1,658. There were no loans modified as troubled debt restructurings forduring the three or nine months ended September 30, 2019. For the three months ended September 30, 2016. For the nine months ended September 30, 2016,2018, there were no loans modified as troubled debt restructurings. There was one commercial real estate loan modified as a troubled debt restructuring induring the amount of $75.During the three and nine months ended September 30, 2017, there were no payment defaults on loans restructured within2018 in the last twelve months.amount of $340. During the three months ended September 30, 2016,2019, there were no payment defaults on loans restructured within the last twelve months.troubled debt restructings and one commercial real estate loan paid-off totaling $332. During the nine months ended September 30, 2016,2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off. During the three months ended September 30, 2018, there was one payment default on a restructured residential real estate loan with an outstanding balance of $6. During the nine months ended September 30, 2018, there were two payment defaults on restructured residential real estate loans totaling $208.with a total outstanding balance of $64.
6. Other assets and gain on sale of merchant services business:assets:
The components of other assets at September 30, 2017,2019, and December 31, 20162018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
|
Other real estate owned |
| $ | 485 |
| $ | 376 |
|
Investment in low income housing partnership |
|
| 7,020 |
|
| 7,377 |
|
Mortgage servicing rights |
|
| 730 |
|
| 718 |
|
Bank owned life insurance |
|
| 34,853 |
|
| 34,288 |
|
Restricted equity securities |
|
| 4,470 |
|
| 7,462 |
|
Net deferred tax asset |
|
| 3,853 |
|
| 5,081 |
|
Interest rate floor |
|
| 1,170 |
|
| 553 |
|
Interest rate swaps |
|
| 6,065 |
|
| 108 |
|
Other assets |
|
| 6,554 |
|
| 7,774 |
|
Total |
| $ | 65,200 |
| $ | 63,737 |
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
|
| December 31, 2016 |
|
Other real estate owned |
| $ | 358 |
| $ | 393 |
|
Investment in residential housing program |
|
| 7,959 |
|
| 8,312 |
|
Mortgage servicing rights |
|
| 728 |
|
| 698 |
|
Bank owned life insurance |
|
| 33,646 |
|
| 33,073 |
|
Restricted equity securities |
|
| 6,341 |
|
| 7,051 |
|
Other assets |
|
| 17,374 |
|
| 15,974 |
|
Total |
| $ | 66,406 |
| $ | 65,501 |
|
In the second quarter of 2017, the Company entered into and executed a merchant asset sales agreement with a third party to sell and transfer the Company’s merchant business. Proceeds from the sale were received on June 30, 2017 in the amount of $2,300. In connection with the sale, merchant related equipment in the amount of $22 previously included in other assets above were sold, resulting in a net gain of $2,278 to the Company which is included in noninterest income in the accompanying consolidated statements of income for the nine months ended September 30, 2017. The sale represents the entirety of the Company’s merchant services business and the Company will no longer originate any proprietary merchant service relationships. The Company did not receive an ownership interest in the unrelated purchaser of the merchant business. The $2,300 represents the entire consideration received by the Company under the merchant asset sales agreement and there is no form of contingent consideration. Separate from the merchant asset sales
2221
agreement, the Company entered into a marketing and sales agreement with the merchant business purchaser to share in future revenue generated from the sold merchant portfolio, and from new merchant referrals.
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. |
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 September 30, 2019 and December 31, 2018 there were no significant transfers between Level 1 and Level 2 and no 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:
Cash and cash equivalents: The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.
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.
23
Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.
22
Peoples Financial Services Corp.
Net loans:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For adjustable-rate loans that re-price frequently and with no significant credit risk, fair values are based on carrying values. The fair values of other non-impaired loans are estimated using discounted cash flow analysis, using interest rates currently offered
(Dollars in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.thousands, except per share data)
Mortgage servicing rights: To determine the fair value, the Company estimates the present value of future cash flows incorporating assumptions such as cost of servicing, discount rates, prepayment speeds and default rates.
Accrued interest receivable: The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.
Restricted equity securities: The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.
Deposits: The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from such low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The carrying values of adjustable-rate, fixed-term time deposits approximate their fair values at the reporting date. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.
Short-term borrowings: The carrying values of short-term borrowings approximate fair value.
Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.
Accrued interest payable: The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.
Interest rate swaps: The Company’s interest rate swaps 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 swaps, Libor rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.
Off-balance sheet financial instruments:
The majority of commitments to extend credit, unused portions of lines of creditAssets and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable of either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values of off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Theliabilities measured at fair value of off-balance sheet financial instruments was not materialon a recurring basis at September 30, 20172019 and December 31, 2016.2018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement Using |
| ||||||||||
|
|
|
| Quoted Prices in |
| Significant |
| Significant |
| ||||
|
|
|
| Active Markets for |
| Other Observable |
| Unobservable |
| ||||
|
|
|
| Identical Assets |
| Inputs |
| Inputs |
| ||||
September 30, 2019 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 24,066 |
| $ | 24,066 |
|
|
|
| $ |
|
|
U.S. Government-sponsored enterprises |
|
| 91,990 |
|
|
|
| $ | 91,990 |
|
|
|
|
State and Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 21,500 |
|
|
|
|
| 21,500 |
|
|
|
|
Tax-exempt |
|
| 61,683 |
|
|
|
|
| 61,683 |
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 9,613 |
|
|
|
|
| 9,613 |
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 59,971 |
|
|
|
|
| 59,971 |
|
|
|
|
Common equity securities |
|
| 297 |
|
| 297 |
|
|
|
|
|
|
|
Interest rate floor-other assets |
|
| 1,170 |
|
|
|
|
| 1,170 |
|
|
|
|
Interest rate swap-other assets |
|
| 6,065 |
|
|
|
|
| 6,065 |
|
|
|
|
Interest rate swap-other liabilities |
|
| (6,085) |
|
|
|
|
| (6,085) |
|
|
|
|
Total |
| $ | 270,270 |
| $ | 24,363 |
| $ | 245,907 |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement Using |
| ||||||||||
|
|
|
|
| Quoted Prices in |
| Significant |
| Significant |
| |||
|
|
|
| Active Markets for |
| Other Observable |
| Unobservable |
| ||||
|
|
|
| Identical Assets |
| Inputs |
| Inputs |
| ||||
December 31, 2018 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 25,592 |
| $ | 25,592 |
|
|
|
| $ |
|
|
U.S. Government-sponsored enterprises |
|
| 92,818 |
|
|
|
| $ | 92,818 |
|
|
|
|
State and Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 13,853 |
|
|
|
|
| 13,853 |
|
|
|
|
Tax-exempt |
|
| 85,954 |
|
|
|
|
| 85,954 |
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 12,629 |
|
|
|
|
| 12,629 |
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 38,836 |
|
|
|
|
| 38,836 |
|
|
|
|
Common equity securities |
|
| 291 |
|
| 291 |
|
|
|
|
|
|
|
Interest rate floor-other assets |
|
| 553 |
|
|
|
|
| 553 |
|
|
|
|
Interest rate swap-other assets |
|
| 108 |
|
|
|
|
| 108 |
|
|
|
|
Interest rate swap-other liabilities |
|
| (138) |
|
|
|
|
| (138) |
|
|
|
|
Total |
| $ | 270,496 |
| $ | 25,883 |
| $ | 244,613 |
| $ |
|
|
2423
Assets and liabilities measured at fair value on a recurringnonrecurring basis at September 30, 20172019 and December 31, 20162018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement Using |
| ||||||||||
|
|
|
| Quoted Prices in |
| Significant |
| Significant |
| ||||
|
|
|
| Active Markets for |
| Other Observable |
| Unobservable |
| ||||
|
|
|
| Identical Assets |
| Inputs |
| Inputs |
| ||||
September 30, 2017 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 20,046 |
| $ | 20,046 |
|
|
|
| $ |
|
|
U.S. Government-sponsored enterprises |
|
| 84,650 |
|
|
|
| $ | 84,650 |
|
|
|
|
State and Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 15,207 |
|
|
|
|
| 15,207 |
|
|
|
|
Tax-exempt |
|
| 100,505 |
|
|
|
|
| 100,505 |
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 16,033 |
|
|
|
|
| 16,033 |
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 22,667 |
|
|
|
|
| 22,667 |
|
|
|
|
Common equity securities |
|
| 30 |
|
| 30 |
|
|
|
|
|
|
|
Interest Rate Swap-other assets |
|
| 548 |
|
|
|
|
| 548 |
|
|
|
|
Interest Rate Swap-other liabilities |
|
| (603) |
|
|
|
|
| (603) |
|
|
|
|
Total |
| $ | 259,083 |
| $ | 20,076 |
| $ | 239,007 |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement Using |
| ||||||||||
|
|
|
|
| Quoted Prices in |
| Significant |
| Significant |
| |||
|
|
|
| Active Markets for |
| Other Observable |
| Unobservable |
| ||||
|
|
|
| Identical Assets |
| Inputs |
| Inputs |
| ||||
December 31, 2016 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
U.S. Treasury securities |
| $ | 7,438 |
| $ | 7,438 |
|
|
|
| $ |
|
|
U.S. Government-sponsored enterprises |
|
| 80,913 |
|
|
|
| $ | 80,913 |
|
|
|
|
State and Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 15,225 |
|
|
|
|
| 15,225 |
|
|
|
|
Tax-exempt |
|
| 112,600 |
|
|
|
|
| 112,600 |
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 21,042 |
|
|
|
|
| 21,042 |
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 22,192 |
|
|
|
|
| 22,192 |
|
|
|
|
Total |
| $ | 259,410 |
| $ | 7,438 |
| $ | 251,972 |
| $ |
|
|
Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016 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 |
| ||||||||
September 30, 2017 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
September 30, 2019 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
Impaired loans |
| $ | 1,613 |
|
|
|
|
|
|
| $ | 1,613 |
|
| $ | 1,619 |
|
|
|
|
|
|
| $ | 1,619 |
|
Other real estate owned |
| $ | 358 |
|
|
|
|
|
|
| $ | 358 |
|
| $ | 357 |
|
|
|
|
|
|
| $ | 357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement Using |
|
| Fair Value Measurement Using |
| ||||||||||||||||||||
|
|
|
|
| Quoted Prices in |
| Significant Other |
| Significant |
|
|
|
|
| Quoted Prices in |
| Significant Other |
| Significant |
| ||||||
|
|
|
| Active Markets for |
| Observable |
| Unobservable |
|
|
|
| Active Markets for |
| Observable |
| Unobservable |
| ||||||||
|
|
|
| Identical Assets |
| Inputs |
| Inputs |
|
|
|
| Identical Assets |
| Inputs |
| Inputs |
| ||||||||
December 31, 2016 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
December 31, 2018 |
| Amount |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
Impaired loans |
| $ | 3,193 |
|
|
|
|
|
|
| $ | 3,193 |
|
| $ | 2,809 |
|
|
|
|
|
|
| $ | 2,809 |
|
Other real estate owned |
| $ | 371 |
|
|
|
|
|
|
| $ | 371 |
|
| $ | 234 |
|
|
|
|
|
|
| $ | 234 |
|
25
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 |
|
| Quantitative Information about Level 3 Fair Value Measurements |
| ||||||||||||||
|
| Fair Value |
|
|
|
|
| Range |
|
| Fair Value |
|
|
|
|
| Range |
| ||
September 30, 2017 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |||||||||||
September 30, 2019 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |||||||||||
Impaired loans |
| $ | 1,613 |
| Appraisal of collateral |
| Appraisal adjustments |
| 5.9% to 98.2% (77.3)% |
|
| $ | 1,619 |
| Appraisal of collateral |
| Appraisal adjustments |
| 7.6% to 97.0% (73.4)% |
|
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (4.8)% |
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (5.3)% |
|
Other real estate owned |
| $ | 358 |
| Appraisal of collateral |
| Appraisal adjustments |
| 25.0% to 38.2% (26.9)% |
|
| $ | 357 |
| Appraisal of collateral |
| Appraisal adjustments |
| 20.0% to 48.8% (31.2)% |
|
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (5.0)% |
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (5.0)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quantitative Information about Level 3 Fair Value Measurements |
|
| Quantitative Information about Level 3 Fair Value Measurements |
| ||||||||||||||
|
| Fair Value |
|
|
|
|
| Range |
|
| Fair Value |
|
|
|
|
| Range |
| ||
December 31, 2016 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |||||||||||
December 31, 2018 |
| Estimate |
| Valuation Techniques |
| Unobservable Input |
| (Weighted Average) |
| |||||||||||
Impaired loans |
| $ | 3,193 |
| Appraisal of collateral |
| Appraisal adjustments |
| 18.0% to 97.0% (74.5)% |
|
| $ | 2,809 |
| Appraisal of collateral |
| Appraisal adjustments |
| 7.1% to 97.0% (61.8)% |
|
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (5.3)% |
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (4.4)% |
|
Other real estate owned |
| $ | 371 |
| Appraisal of collateral |
| Appraisal adjustments |
| 25.0% to 54.6% (43.1)% |
|
| $ | 234 |
| Appraisal of collateral |
| Appraisal adjustments |
| 26.0% to 73.3% (38.9)% |
|
|
|
|
|
|
|
| Liquidation expenses |
| 3.0% to 6.0% (5.0)% | �� |
|
|
|
|
|
| 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 Inputsinputs 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.
2624
The carrying and fair values of the Company’s financial instruments at September 30, 20172019 and December 31, 20162018 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 |
| ||||||||||
September 30, 2017 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
September 30, 2019 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 32,906 |
| $ | 32,906 |
| $ | 32,906 |
|
|
|
|
|
|
|
| $ | 51,283 |
| $ | 51,283 |
| $ | 51,283 |
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
| 259,686 |
|
| 259,686 |
|
| 20,076 |
| $ | 239,610 |
|
|
|
|
|
| 268,823 |
|
| 268,823 |
|
| 24,066 |
| $ | 244,757 |
|
|
|
|
Common equity securities |
|
| 297 |
|
| 297 |
|
| 297 |
|
|
|
|
|
|
| ||||||||||||||||
Held-to-maturity |
|
| 9,564 |
|
| 9,912 |
|
|
|
|
| 9,912 |
|
|
|
|
|
| 7,808 |
|
| 8,016 |
|
|
|
|
| 8,016 |
|
|
|
|
Loans held for sale |
|
| 460 |
|
| 460 |
|
|
|
|
| 460 |
|
|
|
|
|
| 1,390 |
|
| 1,390 |
|
|
|
|
| 1,390 |
|
|
|
|
Net loans |
|
| 1,613,684 |
|
| 1,595,623 |
|
|
|
|
|
|
| $ | 1,595,623 |
|
|
| 1,858,698 |
|
| 1,832,080 |
|
|
|
|
|
|
| $ | 1,832,080 |
|
Accrued interest receivable |
|
| 5,908 |
|
| 5,908 |
|
|
|
|
| 5,908 |
|
|
|
|
|
| 6,655 |
|
| 6,655 |
|
|
|
|
| 6,655 |
|
|
|
|
Mortgage servicing rights |
|
| 728 |
|
| 1,655 |
|
|
|
|
| 1,655 |
|
|
|
|
|
| 730 |
|
| 1,739 |
|
|
|
|
| 1,739 |
|
|
|
|
Restricted equity securities |
|
| 6,341 |
|
| 6,341 |
|
|
|
|
| 6,341 |
|
|
|
|
|
| 4,470 |
|
| 4,470 |
|
|
|
|
| 4,470 |
|
|
|
|
Interest rate swap |
|
| 548 |
|
| 548 |
|
|
|
|
| 548 |
|
|
|
| ||||||||||||||||
Interest rate floor |
|
| 1,170 |
|
| 1,170 |
|
|
|
|
| 1,170 |
|
|
|
| ||||||||||||||||
Interest rate swaps |
|
| 6,065 |
|
| 6,065 |
|
|
|
|
| 6,065 |
|
|
|
| ||||||||||||||||
Total |
| $ | 1,929,825 |
| $ | 1,912,579 |
|
|
|
|
|
|
|
|
|
|
| $ | 2,207,389 |
| $ | 2,181,988 |
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 1,687,855 |
| $ | 1,686,678 |
|
|
|
| $ | 1,686,678 |
|
|
|
|
| $ | 2,001,285 |
| $ | 2,001,911 |
|
|
|
| $ | 2,001,911 |
|
|
|
|
Short-term borrowings |
|
| 71,900 |
|
| 71,900 |
|
|
|
|
| 71,900 |
|
|
|
| ||||||||||||||||
Long-term debt |
|
| 50,199 |
|
| 50,984 |
|
|
|
|
| 50,984 |
|
|
|
|
|
| 52,509 |
|
| 52,875 |
|
|
|
|
| 52,875 |
|
|
|
|
Accrued interest payable |
|
| 481 |
|
| 481 |
|
|
|
|
| 481 |
|
|
|
|
|
| 1,461 |
|
| 1,461 |
|
|
|
|
| 1,461 |
|
|
|
|
Interest rate swap |
|
| 603 |
|
| 603 |
|
|
|
|
| 603 |
|
|
|
| ||||||||||||||||
Interest rate swaps |
|
| 6,085 |
|
| 6,085 |
|
|
|
|
| 6,085 |
|
|
|
| ||||||||||||||||
Total |
| $ | 1,811,038 |
| $ | 1,810,646 |
|
|
|
|
|
|
|
|
|
|
| $ | 2,061,340 |
| $ | 2,062,332 |
|
|
|
|
|
|
|
|
|
|
2725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2016 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
December 31, 2018 |
| Value |
| Value |
| (level 1) |
| (level 2) |
| (Level 3) |
| |||||||||||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 39,941 |
| $ | 39,941 |
| $ | 39,941 |
|
|
|
|
|
|
|
| $ | 32,616 |
| $ | 32,616 |
| $ | 32,616 |
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
| 259,410 |
|
| 259,410 |
| $ | 7,438 |
| $ | 251,972 |
|
|
|
|
|
| 269,682 |
|
| 269,682 |
|
| 25,952 |
| $ | 244,090 |
|
|
|
|
Common equity securities |
|
| 291 |
|
| 291 |
|
| 291 |
|
|
|
|
|
|
| ||||||||||||||||
Held-to-maturity |
|
| 10,517 |
|
| 10,714 |
|
|
|
|
| 10,714 |
|
|
|
|
|
| 8,361 |
|
| 8,380 |
|
|
|
|
| 8,380 |
|
|
|
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 749 |
|
| 749 |
|
|
|
|
| 749 |
|
|
|
|
Net loans |
|
| 1,517,004 |
|
| 1,507,936 |
|
|
|
|
|
|
| $ | 1,507,936 |
|
|
| 1,801,887 |
|
| 1,762,449 |
|
|
|
|
|
|
| $ | 1,762,449 |
|
Accrued interest receivable |
|
| 6,228 |
|
| 6,228 |
|
|
|
|
| 6,228 |
|
|
|
|
|
| 7,115 |
|
| 7,115 |
|
|
|
|
| 7,115 |
|
|
|
|
Mortgage servicing rights |
|
| 698 |
|
| 1,587 |
|
|
|
|
| 1,587 |
|
|
|
|
|
| 718 |
|
| 1,710 |
|
|
|
|
| 1,710 |
|
|
|
|
Restricted equity securities |
|
| 7,051 |
|
| 7,051 |
|
|
|
|
| 7,051 |
|
|
|
|
|
| 7,462 |
|
| 7,462 |
|
|
|
|
| 7,462 |
|
|
|
|
Interest rate floor |
|
| 553 |
|
| 553 |
|
|
|
|
| 553 |
|
|
|
| ||||||||||||||||
Interest rate swaps |
|
| 108 |
|
| 108 |
|
|
|
|
| 108 |
|
|
|
| ||||||||||||||||
Total |
| $ | 1,840,849 |
| $ | 1,832,867 |
|
|
|
|
|
|
|
|
|
|
| $ | 2,129,542 |
| $ | 2,091,115 |
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 1,588,757 |
| $ | 1,587,701 |
|
|
|
| $ | 1,587,701 |
|
|
|
|
| $ | 1,875,022 |
| $ | 1,874,520 |
|
|
|
| $ | 1,874,520 |
|
|
|
|
Short-term borrowings |
|
| 82,700 |
|
| 82,700 |
|
|
|
|
| 82,700 |
|
|
|
|
|
| 86,500 |
|
| 86,500 |
|
|
|
|
| 86,500 |
|
|
|
|
Long-term debt |
|
| 58,134 |
|
| 58,987 |
|
|
|
|
| 58,987 |
|
|
|
|
|
| 37,906 |
|
| 38,071 |
|
|
|
|
| 38,071 |
|
|
|
|
Accrued interest payable |
|
| 462 |
|
| 462 |
|
|
|
|
| 462 |
|
|
|
|
|
| 1,195 |
|
| 1,195 |
|
|
|
|
| 1,195 |
|
|
|
|
Interest rate swaps |
|
| 138 |
|
| 138 |
|
|
|
|
| 138 |
|
|
|
| ||||||||||||||||
Total |
| $ | 1,730,053 |
| $ | 1,729,850 |
|
|
|
|
|
|
|
|
|
|
| $ | 2,000,761 |
| $ | 2,000,424 |
|
|
|
|
|
|
|
|
|
|
8. Employee benefit plans:
The Company provides an Employee Stock Ownership Plan (“ESOP”) and a Retirement Profit Sharing Plan. The Company also maintains a Supplemental Executive Retirement PlanPlans (“SERP”SERPs”) and an Employees’ Pension Plan, which is currently frozen.
For the three and nine months ended September 30, salaries and employee benefits expense includes approximately $311$327 and $982$1,081, respectively in 20172019 and $240$330 and $843$1,073, respectively in 20162018 relating to the employee benefit plans.
|
|
|
|
|
|
|
|
|
| ||||
|
| Pension Benefits | ||||
Three Months Ended September 30, |
| 2019 |
| 2018 | ||
Components of net periodic pension cost: |
|
|
|
|
|
|
Interest cost |
| $ | 128 |
| $ | 233 |
Expected return on plan assets |
|
| (217) |
|
| (360) |
Amortization of unrecognized net gain |
|
| 45 |
|
| 73 |
Net periodic benefit cost |
| $ | (44) |
| $ | (54) |
|
|
| ||||
|
| Pension Benefits | ||||
Nine Months Ended September 30, |
| 2019 |
| 2018 | ||
Components of net periodic pension cost: |
|
|
|
|
|
|
Interest cost |
| $ | 447 |
| $ | 389 |
Expected return on plan assets |
|
| (759) |
|
| (600) |
Amortization of unrecognized net gain |
|
| 159 |
|
| 122 |
Net periodic benefit cost |
| $ | (153) |
| $ | (89) |
2826
Components
The Company contributed $2,700 to the pension plan during the third quarter of net periodic benefit2018. This contribution reduced the unfunded portion of the pension plan and also reduced future premium costs associated with the plan. Previously, the Company paid a fixed premium cost are as follows:of $18 annually with an additional $92 for the variable portion of the premium. This was reduced to $0 with the current funding status of the pension.
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Pension Benefits |
| ||||
Three Months Ended September 30, |
| 2017 |
| 2016 |
| ||
Components of net periodic pension cost: |
|
|
|
|
|
|
|
Interest cost |
| $ | 217 |
| $ | 166 |
|
Expected return on plan assets |
|
| (305) |
|
| (223) |
|
Amortization of unrecognized net gain |
|
| 65 |
|
| 52 |
|
Net periodic other benefit cost |
| $ | (23) |
| $ | (5) |
|
|
|
| |||||
|
| Pension Benefits | |||||
Nine Months Ended September 30, |
| 2017 |
| 2016 |
| ||
Components of net periodic pension cost: |
|
|
|
|
|
|
|
Interest cost |
| $ | 433 |
| $ | 499 |
|
Expected return on plan assets |
|
| (610) |
|
| (670) |
|
Amortization of unrecognized net gain |
|
| 130 |
|
| 156 |
|
Net periodic other benefit cost |
| $ | (47) |
| $ | (15) |
|
The 2008 long-term incentive plan (“2008 Plan”) allowsallowed for eligible participants to be granted equity awards. The plan was a legacy plan of Penseco Financial Services Corporation. Under the 2008 Plan the Compensation Committee of the board of directors has broad authority with respect toNo awards grantedmay be made under the 2008 Plan including, without limitation, the authority to:after January 15, 2018.
|
|
|
|
|
|
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 boardBoard of directorsDirectors 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 2008 and 2017 PlansPlan include directors, officers, employees, consultants and other service providers of the Company and its subsidiaries, except that incentive stock option may be granted only to individuals who are employees on the date of grant.subsidiaries.
As of September 30, 2017,2019, there were 120,116 shares of the Company’s common stock available for grant as awards pursuant to the 2008 Plan and there were 98,46261,346 shares of the Company’s common stock available for grant as awards pursuant to the 2017 Plan. The 2008 Plan will expireexpired in January 2018. While the 2008 Plan2018but will remain in effect in accordance with its terms to govern outstanding awards under that plan, the Company intends to make future grantsplan. If any outstanding awards under the 2017 Plan. If any outstanding awardsPlan are forfeited by the holder or canceled by the Company, the underlying shares would be available for regrant to others.
29
The 2008 Plan authorizes grants of stock options, stock appreciation rights, dividend equivalents, performance awards, restricted stock and restricted stock units. The 2017 Plan authorizes grants of stock options, stock appreciation rights, cash awards, performance awards, restricted stock and restricted stock units.
In 2017,For the nine months ended September 30, 2019 and 2018, the Company awarded 2,020 sharesgranted awards of non-performance-based restricted stock bringing the total of nonvested restricted stock awards to 14,382 shares, and 7,071 performance-based restricted stock units under the 2008 Plan. Also in 2017, the Company awarded 342 shares of non-performance based restricted stock and 1,196 performance based restricted stock units under the 2017 Plan. In 2016, the Company did not make anyPlan,with an aggregate of 17,345 shares and 11,468 shares underlying such awards, under the 2008 Plan.respectively.
The non-performance restricted stock grants made in 20172019 and 2018 vest equally over three years from the grant date. Grants of restricted stock made in prior periods cliff vest after five years. The performance-based restricted stock units vest three years after the grant date and include conditions based on the Company’s three year cumulative diluted earnings per share and three-year average return on 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. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.period. The Company classifies share-based compensation for employees within “salaries and employee benefits expense” on the Consolidated Statementsconsolidated statements of Incomeincome and Comprehensive Income.comprehensive income.
The Company recognized compensation expense of $41$157 and $89$397 for the three and nine months ended September 30, 2019 for awards granted under the 2017 and did not recognize anyPlan. The Company recognized compensation expense of $52 and $95 for the three and nine months ended September 30, 20162018 for awards granted under the 2017 Plan and $31 and $93 for awards granted under the 2008 Plan. As of September 30, 2017,2019, the Company had $338$938 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of 2.5just under 1.4 years.
27
9. Derivatives and hedging activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risksrisk 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. The Company’s existing interest rate derivatives result from a service provided to certain qualifying customersliabilities and therefore, are not usedthe use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage interest rate riskexposures that arise from business activities that result in the Company’s assetsreceipt or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Fair Valuespayment of Derivative Instruments onfuture known and uncertain cash amounts, the Balance Sheet
The table below presents the fair value of thewhich 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.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as wellpart of its interest rate risk management strategy. Interest rate floors designated as their classificationcash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the Balance Sheet as of September 30, 2017.contract in exchange for an up-front premium.
30
TableFor derivatives designated and that qualify as cash flow hedges of Contents
Peoples Financial Services Corp.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollarsinterest rate risk, the gain or loss on the derivative is recorded in thousands, except shareAccumulated Other Comprehensive Loss and per share data)subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During 2019, the Company estimates that an additional $64 will be reclassified as a reduction to interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Asset Derivatives |
| Asset Derivatives |
| Liability Derivatives |
| Liability Derivatives | ||||||||||||
|
| As of September 30, 2017 |
| As of September 30, 2016 |
| As of September 30, 2017 |
| As of September 30, 2016 | ||||||||||||
|
| Balance Sheet |
|
|
|
| Balance Sheet |
|
|
|
| Balance Sheet |
|
|
|
| Balance Sheet |
|
|
|
|
| Location |
| Fair Value |
| Location |
| Fair Value |
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products |
| Other Assets |
| $ | 548 |
| Other Assets |
| $ |
|
| Other Liabilities |
| $ | 603 |
| Other Liabilities |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
| $ | 548 |
|
|
| $ |
|
|
|
| $ | 603 |
|
|
| $ |
|
Non-designated Hedges
None of the Company’s derivatives are designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers, which the Company implemented during the third quarter of 2017.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 September 30, 2017,2019, the Company had 122 interest rate swapswaps with an aggregate notional amount of $34,000$126,574 related to this program.
28
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 September 30, 2019 and December 31, 2018.
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| Asset Derivatives |
| Asset Derivatives |
| Liability Derivatives |
| Liability Derivatives | ||||||||||||
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|
| As of September 30, 2019 |
| As of December 31, 2018 (1) |
| As of September 30, 2019 |
| As of December 31, 2018 (2) | ||||||||||||
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| Notional |
| Balance Sheet |
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| Balance Sheet |
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| Balance Sheet |
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| Balance Sheet |
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| Amount |
| Location |
| Fair Value |
| Location |
| Fair Value |
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
Derivatives designated as hedging instruments |
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Interest Rate Floor | $ | 25,000 |
| Other Assets |
| $ | 1,170 |
|
|
| $ | 553 |
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Total derivatives designated as hedging instruments |
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| $ | 1,170 |
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| $ | 553 |
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Derivatives not designated as hedging instruments |
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Interest Rate Swaps | $ | 126,574 |
| Other Assets |
| $ | 6,065 |
| Other Assets |
| $ | 108 |
| Other Liabilities |
| $ | 6,085 |
| Other Liabilities |
| $ | 138 |
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Total derivatives not designated as hedging instruments |
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| $ | 6,065 |
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| $ | 108 |
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| $ | 6,085 |
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| $ | 138 |
(1) | Assets amount does not include accrued interest receivable of $13. |
(2) | Liabilities amount does not include accrued interest payable of $13. |
Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss
The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Loss as of September 30, 2019. There was no cash flow hedge as of September 30, 2018.
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| Location of |
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| Amount of |
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| Amount of |
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| Amount of |
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| Amount of |
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| Amount of |
| Gain or (Loss) |
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| Amount of |
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| Gain |
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| Loss |
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| Loss |
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| Gain |
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| Gain |
| Recognized from |
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| Loss |
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| Reclassified |
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| Reclassified |
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| Recognized in |
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| Recognized in |
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| Recognized in |
| Accumulated |
|
| Reclassified |
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| 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 |
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| September 30, 2019 |
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| Income |
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| September 30, 2019 |
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Derivatives in Cash Flow Hedging Relationships |
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Interest Rate Floor (*) | $ | 138 |
| $ | 186 |
| $ | (48) |
| Interest Income |
| $ | (16) |
| $ |
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| $ | (16) |
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| Location of |
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| Amount of |
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| Amount of |
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| Amount of |
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| Amount of |
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| Amount of |
| Gain or (Loss) |
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| Amount of |
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| Gain |
|
| Loss |
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| Loss |
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| Gain |
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| Gain |
| Recognized from |
|
| Loss |
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| Reclassified |
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| Reclassified |
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| 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 |
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| September 30, 2019 |
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| Income |
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| September 30, 2019 |
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Derivatives in Cash Flow Hedging Relationships |
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Interest Rate Floor (*) | $ | 611 |
| $ | 1,013 |
| $ | (402) |
| Interest Income |
| $ | (48) |
| $ |
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| $ | (48) |
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* | Amounts disclosed are gross and not net of taxes. |
29
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 nine months ended September 30, 2019 and September 30, 2018.
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| Location and Amount of Gain or (Loss) Recognized in | ||
|
| Income on Fair Value and Cash Flow Hedging | ||
|
| Relationships | ||
|
| 2019 |
| 2018 |
|
| Interest Income |
| Interest Income |
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 | $ | (48) |
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The effects of fair value and cash flow hedging: |
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Gain or (loss) on cash flow hedging relationships |
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Interest contracts |
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Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | $ | (48) |
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Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component |
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Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component | $ | (48) |
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Effect of Derivative Instruments on the Consolidated Statements of Income Statement
and Comprehensive Income
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income Statementand Comprehensive Income for the three and nine months ended September 30, 2017.2019 and 2018.
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| Amount of Loss |
| Amount of Loss |
| Amount of Gain |
| Amount of Gain | ||||
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| Recognized in |
| Recognized in |
| Recognized in |
| Recognized in | ||||
|
| Location of Gain or (Loss) |
| Income |
| Income |
| Income |
| Income | ||||
|
| Recognized in Income on |
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||
Derivatives Not Designated as Hedging Instruments |
| Derivative |
| September 30, 2019 |
| September 30, 2019 |
| September 30, 2018 |
| September 30, 2018 | ||||
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Interest Rate Swaps |
| Other non-interest income |
| $ | 355 |
| $ | 9 |
| $ | 18 |
| $ | 103 |
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Fee Income |
| Other income / (expense) |
| $ |
|
| $ | 1,136 |
| $ |
|
| $ | 53 |
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2019 and December 31, 2018. The net amounts of derivative assets or liabilities can be reconciled to
30
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| Amount of Gain or |
| Amount of Gain or | ||
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| (Loss) Recognized in |
| (Loss) Recognized in | ||
|
| Location of Gain or (Loss) |
| Income on Derivative |
| Income on Derivative | ||
|
| Recognized in Income on |
| Three Months Ended |
| Nine Months Ended | ||
Derivatives Not Designated as Hedging Instruments |
| Derivative |
| September 30, 2017 |
| September 30, 2017 | ||
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Interest Rate Products |
| Other non-interest income |
| $ | (55) |
| $ | (55) |
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Total |
|
|
| $ | (55) |
| $ | (55) |
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.
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Offsetting of Derivative Assets |
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as of September 30, 2019 |
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| Gross Amounts Not Offset in the Balance Sheet |
|
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| ||||||
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| Gross |
|
|
| Net Amounts |
|
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| |||
|
| Amounts of |
| Gross Amounts |
| of Assets |
|
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|
| |||
|
| Recognized |
| Offset in the |
| presented in the |
| Financial |
| Cash Collateral |
| Net | ||||||
|
| Assets |
| Balance Sheet |
| Balance Sheet |
| Instruments |
| Received |
| Amount | ||||||
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Derivatives |
| $ | 7,235 |
| $ |
|
| $ | 7,235 |
| $ |
|
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| $ | 7,235 |
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Offsetting of Derivative Liabilities |
|
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as of September 30, 2019 |
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| Gross Amounts Not Offset in the Balance Sheet |
|
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| ||||||
|
| 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 | ||||||
|
|
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|
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|
Derivatives |
| $ | 6,085 |
| $ |
|
| $ | 6,085 |
| $ |
|
|
|
|
| $ | 6,085 |
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Offsetting of Derivative Assets |
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as of December 31, 2018 |
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| Gross Amounts Not Offset in the Balance Sheet |
|
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| ||||||
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| Gross |
|
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| Net Amounts |
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| |||
|
| Amounts of |
| Gross Amounts |
| of Assets |
|
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|
|
| |||
|
| Recognized |
| Offset in the |
| presented in the |
| Financial |
| Cash Collateral |
| Net | ||||||
|
| Assets |
| Balance Sheet |
| Balance Sheet |
| Instruments |
| Received |
| Amount | ||||||
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|
Derivatives |
| $ | 661 |
| $ |
|
| $ | 661 |
| $ |
|
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|
| $ | 661 |
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Offsetting of Derivative Liabilities |
|
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as of December 31, 2018 |
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| Gross Amounts Not Offset in the Balance Sheet |
|
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| ||||||
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| Gross |
|
|
| Net Amounts |
|
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| |||
|
| 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 | ||||||
|
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Derivatives |
| $ | 138 |
| $ |
|
| $ | 138 |
| $ |
|
|
|
|
| $ | 138 |
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.
The Company has agreements with certain of its derivative counterparties that contain provisions that require the Company’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating is reduced below investment grade then a termination event shall be deemed to have occurred and the non-affected counterparty shall have the right but not obligation to terminate all affected transactions under the agreement.
31
As of September 30, 20172019, 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 $55.$20. As of December 31, 2018, 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 $29. The Company has minimum
31
collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $760$5,120 against its obligations under these agreements.agreements as of September 30, 2019, compared to having no posted collateral with a counterparty at December 31, 2018. If the Company had breached any of these provisions at September 30, 2017, it could have been required to settle its obligations under the agreements at the termination value.
10. Borrowings
Short-term borrowings consists of FHLB advances representing overnight borrowings. The table below outlines short-term borrowings at September 30, 2019 and December 31, 2018:
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| At and for the nine months ended September 30, 2019 |
| |||||||||||
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|
|
| Weighted |
| Weighted |
|
|
|
|
|
|
|
|
| Maximum |
| Average |
| Average |
| |
|
| Ending |
| Average |
| Month-End |
| Rate for |
| Rate at |
| |||
|
| Balance |
| Balance |
| Balance |
| the nine months ended September 30, 2019 |
| September 30,2019 |
| |||
FHLB advances |
| $ |
|
| $ | 74,036 |
| $ | 133,725 |
| 2.69 | % |
| % |
|
|
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|
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|
|
| At and for the year ended December 31, 2018 |
| |||||||||||
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| Weighted |
| Weighted |
|
|
|
|
|
|
|
|
| Maximum |
| Average |
| Average |
| |
|
| Ending |
| Average |
| Month-End |
| Rate for |
| Rate at End |
| |||
|
| Balance |
| Balance |
| Balance |
| the Year |
| of the Year |
| |||
FHLB advances |
| $ | 86,500 |
| $ | 133,834 |
| $ | 189,275 |
| 2.05 | % | 2.62 | % |
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 September 30, 2019, the maximum borrowing capacity was $719,470 of which $52,509 was outstanding in borrowings. At December 31, 2018, the maximum borrowing capacity was $700,169 of which $124,406 was outstanding in borrowings. Short-term borrowings were used to fund our loan growth during the first six months of 2019 as deposit balances were relatively unchanged from year end. However, growth in deposit balances during the third quarter of 2019 has allowed us to pay down the short-term borrowings to zero at September 30, 2019. 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 short-term borrowing rate resets each day.
Long-term debt consisting of advances from the FHLB at September 30, 2019 and December 31, 2018 are as follows:
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|
|
| Interest Rate |
|
|
|
|
|
|
| ||
Due |
| Fixed |
| Adjustable |
|
| September 30, 2019 |
|
| December 31, 2018 |
|
December 2019 |
|
|
| 3.71 | % | $ | 3,000 |
|
| 3,000 |
|
December 2019 |
|
|
| 3.37 |
|
| 6,300 |
|
| 6,300 |
|
December 2019 |
| 1.62 | % |
|
|
| 10,000 |
|
| 10,000 |
|
June 2020 |
| 1.74 |
|
|
|
| 5,000 |
|
| 5,000 |
|
June 2020 |
| 2.22 |
|
|
|
| 6,000 |
|
|
|
|
December 2020 |
| 1.84 |
|
|
|
| 5,000 |
|
| 5,000 |
|
June 2021 |
| 1.99 |
|
|
|
| 10,000 |
|
|
|
|
March 2023 |
| 4.69 |
|
|
|
| 7,209 |
|
| 8,606 |
|
|
|
|
|
|
| $ | 52,509 |
| $ | 37,906 |
|
32
Maturities of long-term debt, by contractual maturity, for the remainder of 2019 and subsequent years are as follows:
|
|
|
|
|
2019 |
| $ | 19,777 |
|
2020 |
|
| 17,963 |
|
2021 |
|
| 12,058 |
|
2022 |
|
| 2,156 |
|
2023 |
|
| 555 |
|
|
| $ | 52,509 |
|
None of the advances from the FHLB are convertible. At September 30, 2019, long-term debt consist of $43,209 at fixed rates and $9,300 at adjustable rates which reset quarterly based on three-month LIBOR plus 1.21% to plus 1.57%. New long-term advances totaling $16,000 were entered into with the FHLB during the second quarter of 2019. The advances were qualified under the FHLB’s ‘Community Lending Program’ which offers rates lower than their stated rates when the advances are used for community development.
11. Income taxes
The effective tax rate of the Company was 12.2% and 11.6% for the three and nine months ended September 30, 2019 compared to 11.8% for the three and nine months ended September 30, 2018. The three and nine months ended September 30, 2019 include before tax investment tax credits and other credits of $394 and $1,172 compared to before tax investment tax credits $276 and $819 for those same periods last year.
3233
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and 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, 2016.2018.
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 direct and indirect 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: 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; our ability to achieve the intended benefits of, or other risks associated with, business combinations; 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, 2016,2018, 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 theour operating results or financial position of the Company.position.
Critical Accounting Policies:
Disclosure of our significant accounting policies areis included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016.2018. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result
Operating Environment:
In October 2019, the Federal Open Market Committee (“FOMC��) voted to decrease the target range for federal funds to 1.50% to 1.75%, marking the third cut in materially different results under different assumptions and conditions. We believe thatthe overnight rate in the most critical accounting policies uponrecent monetary easing cycle, which our financial conditionbegan in July 2019 after maintaining the target range for federal funds at 2.25% to 2.50% since their last 25 basis point rate increase in December 2018. Overall inflation remains near the committee’s long-term desired 2 percent level for items other than food and resultsenergy. The consumer price index (“CPI”) registered 2.4% for the 12 months ended September 30, 2019. This is up from 2.1% for the 12 months ended June 30, 2019 and from 2.0% for the 12 months ended March 31, 2019. Gross domestic product (“GDP”), the value of operation depend,all goods and which involve the most complex subjective decisions or assessments, are included in Note 1 to the consolidated financial statementsservices produced in the Company's Annual Report on Form 10-Knation, came in with an initial third quarter 2019 reading of a 1.9% annualized rate, above all forecasts for the fiscal year ended December 31, 2016, and all amendments thereto, as filed with the Securities and Exchange Commission.
quarter which came in at a
3334
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
Operating Environment:
The Federal Open Market Committee (“FOMC”) increased the overnightconsensus rate 25 basis points during the first quarter of 2017 and another 25 basis points in1.6% but below the second quarter of 2017. In doing so,2019 which registered 2.0%. Strong consumer spending has continued in the FOMC cited improvement in labor markets and the a move toward the committee’s long-term desired 2 percent level of inflation. The initial reading of third quarter 2017 gross domestic product (“GDP”), the value of all goods and services produced in the Nation, came2019 coming in at an annualized rate of 3.0%,2.9% although this is down from the final second quarter of 2017 estimate2019 which came in at an annualized rate of 3.1% but up significantly from the final reading of 0.7% in the first quarter of 2017.4.6%. The consumer price index (“CPI”) increased for the 12 months ended September 30, 2017 at 2.2% from 1.6% for the 12 months ended June 30, 2017. The core personal consumption expenditure price index, which ignores food and energy, averaged 1.7% for both the 12 months ended September 30, 2017 and June 30, 2017.weak global economy as well as trade concerns continue to weigh on overall economic growth.
Review of Financial Position:
Total assets increased $92,794,$83,706, or 6.2%4.9% annualized, to $2,092,236$2,372,699 at September 30, 2017,2019, from $1,999,442$2,288,993 at December 31, 2016 due primarily to loan growth.2018. Loans, net increased to $1,632,515$1,881,090 at September 30, 2017,2019, compared to $1,532,965$1,823,266 at December 31, 2016,2018, an increase of $99,550$57,824 or 8.7%4.2% annualized. The increase in loans, net during 20172019 has been funded primarily by borrowings during the first half of the year and more recently by deposit growth. Totalinflows. Deposits increased by $126,263 or 9.0% annualized with the majority of growth occurring in the third quarter of 2019 due in part to seasonal inflows of public deposits. Interest-bearing deposits increased $99,098 or 8.3% as interest-bearing deposits increased $80,638 and$95,941 while noninterest-bearing deposits increased $18,460. Investment securities decreased $1,225 or 0.6% annualized in 2017.$30,322. Total stockholders’ equity increased $9,678$17,553 or at an annual rate of 5.0%6.3%, from $256,618$278,614 at year-end 20162018 to $266,296$296,167 at September 30, 2017. Compared to June 30, 2017, total assets increased $27,478 or 1.3% while loans, net increased $35,153 or 2.2% and deposits increased $48,422 or 3.0%.2019. For the nine months ended September 30, 2017,2019, total assets averaged $2,035,883,$2,324,996, an increase of $136,977$106,363 from $1,898,906$2,218,633 for the same period of 2016.2018.
Investment Portfolio:
The majority of the investment portfolio is heldclassified 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 $259,138$268,823 at September 30, 2017,2019, a slight decrease of $272,$859, or 0.1%0.3% from $259,410$269,682 at December 31, 2016.2018. The majoritydecrease was due to the sale of $9,654 of short-term, low yielding municipal securities with the proceeds used to paydown borrowings and reinvest into higher yielding, longer term securities and scheduled maturities and calls of agency and municipal bonds. An increase in the market value of the investment cashflow from maturing bonds and principal payments on mortgage-backed securities was re-invested back into the investment portfolio. The Company has not incrementally grown the investmentavailable-for-sale portfolio due to the flattening yield curve, however it continually monitorsa decline in market rates forand new purchases from investment opportunities.cashflow and deposit inflows partially offset the decrease. Investment securities held-to-maturity totaled $9,564$7,808 at September 30, 2017,2019, a decrease of $953$553 or 9.1%6.6% from $10,517$8,361 at December 31, 20162018 due to payments received fromon mortgage backed holdings.securities.
For the nine months ended September 30, 2017,2019, the investment portfolio averaged $269,897,$273,083, a decrease of $2,627$9,258 or 1.0%3.3% compared to $272,524$282,341 for the same period last year. Average tax-exempt municipal bonds have decreased $21,119 or 20.6% to $81,227 for the nine months ended Septemebr 30, 2019 from $102,346 during the comparable period of 2018. The tax-equivalent yield on the investment portfolio decreased 611 basis points to 2.85%2.49% for the nine months ended September 30, 2017,2019, from 2.91%2.60% for the comparable period of 2016.2018. The decrease in the yield is resultingdue to lower reinvestment rates for cash flow from investment cashflows being replaced into the low rate environment. The tax-equivalent yield on the investment portfolio decreased 4 basis points to 2.81% in the third quarter of 2017 compared to 2.85% in the second quarter of 2017.matured and called higher yielding municipal bonds.
Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss)loss component of stockholders’ equity. We reported net unrealized gains, included as a separate component of stockholders’ equity of $1,059,$1,530, net of deferred income taxes of $571,$407, at September 30, 2017,2019, and $360,net unrealized losses of $2,568, net of deferred income taxes of $193,$683, at December 31, 2016.2018.
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.
Loan Portfolio:
The Company’s execution and continued investment of its market expansion in the Lehigh Valley and King of Prussia markets of Pennsylvania has been the main contributor to the loanLoan growth during the nine months ended September 30, 2017.third quarter of 2019 accelerated when compared to the second quarter increasing $22,291. Loans, net increased to $1,632,515$1,881,090 at September 30, 20172019 from $1,532,965$1,823,266 at December 31, 2016,2018, an increase of $57,824 or 4.2% annualized. The growth was primarily from commercial real estate loans and to a lesser extent from commercial and industrial loans. Partially offsetting the increases were reductions to consumer loans, primarily dealer indirect auto loans, and a slight decline to the residential real estate portfolio. Commercial real estate loans increased $68,455 or 10.1% annualized, to $976,258 at September 30, 2019 compared to $907,803 at December 31, 2018 due to increased activity in both our core and expansion markets. Commercial and industrial loans increased $3,851 or 1.0% annualized, to $497,985 at September 30, 2019 compared to $494,134 at December 31, 2018 due to growth in loans to small businesses, as we focus on developing total banking relationships with this market segment, offset by a number of large loan payoffs in the current period. Our growth in commercial and commercial real estate loans is due in part to the
3435
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
$99,550 or 8.7% annualized. The growth reflected increasessuccess in commercial loans, commercial real estate loansexecuting our strategic market expansion initiative in the Lehigh Valley, Greater Delaware Valley and consumer loans, while residential real estate loans remained relatively unchanged. Commercial loans increased $40,650, or 13.3% annualized, to $449,464 at September 30, 2017 compared to $408,814 at December 31, 2016. Commercial real estate loans increased $51,366 or 9.8% annualized, to $751,510 at September 30, 2017 compared to $700,144 at December 31, 2016. most recently in the Central Pennsylvania region.
Consumer loans increased $7,733,decreased $13,815, or 7.7%15.2% on an annualized basis, to $141,959$107,638 at September 30, 20172019 compared to $134,226$121,453 at December 31, 2016.2018. The primary contributor to the growthdecrease in consumer loans was our indirect automobile lending portfolio which increased $9,699,primarily due to increased consumer demand for automobiles.payoffs outpacing dealer indirect auto loan origination volumes. Lower origination volumes have resulted from the Bank’s change to the structure of its loan pricing which began during 2018.
Residential real estate loans decreased $199,$667, or 0.9%0.3% on an annualized basis, to $289,582$299,209 at September 30, 20172019 compared to $289,781$299,876 at December 31, 2016.2018. The slight decrease is due to lower first lien residential mortgage loans as a higher percentage of new fixed rate originations were sold into the secondary market to mitigate interest rate risk in the current low rate environment in lieu of being retained in our loan portfolio. Growth in our home equity line of credit portfolio duehas remained flat during 2019 while the residential real estate loans decreased in part to increased demand partially offset the decline.sale of $1,038 of non-performing mortgage loans during the first quarter.
For the nine months ended September 30, 2017,2019, loans, net averaged $1,570,268,$1,853,811, an increase of $132,688$110,803 or 9.2%6.4% compared to $1,437,580$1,743,008 for the same period of 2016.2018. The tax-equivalent yield on the loan portfolio was 4.39%4.75% for the nine months ended September 30, 2017,2019, a 631 basis point decreaseincrease from the comparable period last year. The tax-equivalentincrease in yield onis due to higher market rates and floating and adjustable rate loans repricing higher due to the loan portfolio increasedFOMC’s actions to 4.42% forincrease the Federal Funds rate 100 basis points during 2018. During the third quarter of 2017 as compared2019, the FOMC has lowered the Federal Funds rate 50 basis points which resulted in a 4 basis point decrease when comparing the third quarter to 4.36% for the second quarter of 2017 and 4.39% for the third quarter of 2016.2019.
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 financial statements.
Unused commitments at September 30, 2017,2019, totaled $406,393,$411,142, consisting of $383,878$368,045 in unfunded commitments of existing loan facilities and $22,515$43,097 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, 20162018 totaled $324,713,$379,187, consisting of $293,662$345,912 in unfunded commitments of existing loans and $31,051$33,275 in standby letters of credit.
Asset Quality:
National, Pennsylvania, New York and market area unemployment rates at September 30, 2017 and 2016, are summarized as follows:
|
|
|
|
|
|
|
| 2017 |
| 2016 |
|
United States |
| 4.4 | % | 4.9 | % |
New York (statewide) |
| 4.6 |
| 4.9 |
|
Pennsylvania (statewide) |
| 5.1 |
| 5.6 |
|
Broome County |
| 5.6 |
| 5.5 |
|
Bucks County |
| 4.4 |
| 4.8 |
|
Lackawanna County |
| 5.4 |
| 5.9 |
|
Lehigh County |
| 5.3 |
| 5.5 |
|
Luzerne County |
| 6.2 |
| 6.6 |
|
Monroe County |
| 6.2 |
| 6.5 |
|
Montgomery County |
| 4.0 |
| 4.3 |
|
Northampton County |
| 5.2 |
| 5.4 |
|
Susquehanna County |
| 5.1 |
| 5.9 |
|
Wayne County |
| 5.5 |
| 6.0 |
|
Wyoming County |
| 5.6 | % | 6.5 | % |
3536
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 September 30, 2019 and 2018, are summarized as follows:
|
|
|
|
|
|
|
| 2019 |
| 2018 |
|
United States |
| 3.7 | % | 3.9 | % |
New York (statewide) |
| 4.0 |
| 4.3 |
|
Pennsylvania (statewide) |
| 4.0 |
| 4.5 |
|
Broome County |
| 4.6 |
| 5.2 |
|
Bucks County |
| 3.6 |
| 3.9 |
|
Lackawanna County |
| 4.6 |
| 4.8 |
|
Lebanon County |
| 3.6 |
| 3.9 |
|
Lehigh County |
| 4.2 |
| 4.8 |
|
Luzerne County |
| 5.3 |
| 5.6 |
|
Monroe County |
| 4.9 |
| 5.5 |
|
Montgomery County |
| 3.3 |
| 3.6 |
|
Northampton County |
| 4.2 |
| 4.6 |
|
Schuylkill County |
| 5.0 |
| 5.4 |
|
Susquehanna County |
| 4.0 |
| 4.2 |
|
Wayne County |
| 4.4 |
| 4.9 |
|
Wyoming County |
| 4.5 | % | 4.6 | % |
37
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
The employment conditions improved for the Nation,nation, Pennsylvania, and New York and Pennsylvania, and improved in all but one of the eleventhirteen counties representing our market areas in Pennsylvania and New York from one year ago. Unemployment rates remained elevated however, relativehave fallen to historical levels within manymulti year lows.
Distribution of our market areas. Additionally, the labor force participation rate, as measured on a national level, remains low at 63.1% as compared to pre-financial crisis levels.nonperforming assets
|
|
|
|
|
|
|
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
|
Nonaccrual loans: |
|
|
|
|
|
|
|
Commercial |
| $ | 3,343 |
| $ | 776 |
|
Real estate: |
|
|
|
|
|
|
|
Commercial |
|
| 3,246 |
|
| 2,328 |
|
Residential |
|
| 1,543 |
|
| 2,574 |
|
Consumer |
|
| 262 |
|
| 212 |
|
Total nonaccrual loans |
|
| 8,394 |
|
| 5,890 |
|
Troubled debt restructured loans: |
|
|
|
|
|
|
|
Commercial |
|
| 1,355 |
|
| 1,438 |
|
Real estate: |
|
|
|
|
|
|
|
Commercial |
|
| 303 |
|
| 719 |
|
Residential |
|
| 604 |
|
| 622 |
|
Total troubled debt restructured loans |
|
| 2,262 |
|
| 2,779 |
|
Accruing loans past due 90 days or more: |
|
|
|
|
|
|
|
Commercial |
|
| 53 |
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
Commercial |
|
| 54 |
|
| 73 |
|
Residential |
|
| 279 |
|
| 850 |
|
Total accruing loans past due 90 days or more |
|
| 386 |
|
| 923 |
|
Total nonperforming loans |
|
| 11,042 |
|
| 9,592 |
|
Foreclosed assets |
|
| 485 |
|
| 376 |
|
Total nonperforming assets |
| $ | 11,527 |
| $ | 9,968 |
|
Nonperforming loans as a percentage of loans, net |
|
| 0.59 | % |
| 0.53 | % |
Nonperforming assets as a percentage of loans, net and foreclosed assets |
|
| 0.61 | % |
| 0.55 | % |
We experienced improvementa decline in our our asset quality as nonperforming assets decreased forduring the first nine months ended September 30, 2017 by $631 or 4.4% to $13,581 at September 30, 2017, from $14,212 at December 31, 2016. We experienced decreases in nonaccrual and restructured loans and foreclosed assets which was partially offsetof 2019 as evidenced by an increase to accruing loans past due 90 daysof $1,559 in nonperforming assets. Nonperforming assets totaled $11,527 or more. As a percentage0.61% of loans, net and foreclosed assets nonperforming assets equaled 0.83% at September 30, 20172019, from $9,968 or 0.55% of loans, net and 0.93%foreclosed assets at December 31, 2016.2018. An increase in nonaccrual loans and foreclosed assets was partially offset by a decrease in restructured loans and accruing loans past due ninety days or more.
Loans on nonaccrual status decreased $2,387increased $2,504 to $8,721$8,394 at September 30, 20172019 from $11,108$5,890 at December 31, 2016.2018. The majority of the decreaseincrease from year end was due to aan increase of $2,567 in commercial and industrial loans resulting from the placement of one credit relationship on nonaccrual totaling $4,718 during the first quarter. At September 30, 2019, the value of the collateral is sufficient to support the debt of this credit. Commercial real estate loans on nonaccrual increased $918 from yearend 2018 due to one credit relationship added in the third quarter; an agreement of sale for the property has been received. A decrease of $2,783 in nonaccrual residential real estate loans due to a sale of a pool of non-performing loans during the first quarter partially offset the increase in commercial real estate loans. Restructured loans decreased $517 to $2,262 at September 30, 2019 from $2,779 at December 31, 2018 due in part to a default and subsequent charge off of two commercial real estate loans which was due toduring the successful work-outsecond quarter and collection activities related to two large credit relationships. Increases in nonaccrualthe payment-in-full of one other commercial and industrial loans of $329, residential real estate loansloan totaling $332 during the third quarter of $28 and consumer loans of $39 partially offset the decrease.2019. Foreclosed assets increased $109 to $485 at September 30, 2019 from $376 at December 31, 2018. Other real estate owned decreased $35 to $358comprised seven properties at both September 30, 2017 from $393 at December 31, 2016, as eight properties were sold during the period with eight additional loans transferred to other real estate. At September 30, 20172019 and December 31, 2016 there were eight properties comprising other real estate owned.2018, respectively.
38
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
Generally, maintaining a high loan to deposit ratio is our primary goal in order to maximizedrive profitability. However, this objective is superseded by our attempts to ensure that asset quality remains strong. We continuecontinued 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 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 Financial Accounting Standards Board (“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 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 allowance for loan losses increased $2,870$1,013 to $18,831$22,392, or 1.19% of loans, net at September 30, 2017,2019, from $15,961$21,379, or 1.17% of loans, net at the end of 2016.2018. For the nine months ended September 30, 2017,2019, net charge-offs were $730$1,087 or 0.06%0.08% of average loans outstanding, a $133$610 decrease compared to $863$1,697 or 0.08%0.13% of average loans outstanding in the same period of 2016.2018. The decrease in the current period is due to the charge off of one large commercial real estate loan during the year ago period totaling $1,154.
Deposits:
We attract the majority of our deposits from within our eleven county market area that stretches from Bucks and Montgomery CountiesCounty 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. For the nine months ended September 30, 2017,2019, total deposits increased $126,263 or 9.0% annualized, to $1,687,855$2,001,285 from $1,588,757$1,875,022 at December 31, 2016.2018. The growth in deposits occurred primarily in the third quarter of 2019 due to seasonal inflows of municipal deposits and growth in commercial balances. Interest-bearing deposits increased $80,638$30,322 and noninterest-bearing deposits increased $18,460.$95,941. Interest-bearing transaction accounts,
36
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
including NOW and money market accounts increased $85,584,$31,619, or 20.6%4.2% annualized, to $640,912$781,982 at September 30, 2017,2019, from $555,328$750,363 at December 31, 2016. Increases2018, savings accounts decreased $5,405, or 1.9% annualized to $372,752 as of September 30, 2019 from $378,157 at December 31, 2018 and time deposits less than $250 increased $14,968, or 8.0% annualized, to $265,424 at September 30, 2019, from $250,456 at December 31, 2018. Time deposits $250 or more increased $54,760, or 85.3% annualized to $140,546 at September 30, 2019 from $85,786 at year end 2018 due in NOW and money market account balances is duepart to growth in the company’s public fund deposit base and growth in its expansion markets. Time deposits less than $100 decreased $7,475, or 6.1% annualized, to $156,675 at September 30, 2017, from $164,150 at December 31, 2016. Decreases in savings accounts of $3,970 and increases in time deposits $100 or more of $6,499 were recorded in the nine months ended September 30, 2017.short-term municipal accounts.
For the nine months ended September 30, 2017 interest-bearing deposits averaged $1,271,584$1,472,466 in 20172019 compared to $1,176,631$1,338,689 in 2016.2018, an increase of $133,777, or 10.0%. The cost of interest-bearing deposits was 0.49%1.01% in 20172019 compared to 0.45%0.61% for the same period last year. For the first nine months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.60%1.14% in 2017 compared to 0.55%2019 and 0.81% in 2016.2018. The higher cost iscosts are due primarily to higher short-term market rates, the result of the FOMC’s action to increase the overnight borrowing rate 50100 basis points during the nine months ended Spetember 30, 2017. The cost2018.
39
Table of interest-bearing liabilities increased 1 basis point when comparing the secondContents
Peoples Financial Services Corp.
Management’s Discussion and third quarters of 2017.Analysis
(Dollars in thousands, except per share data)
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)FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB.
Total short-termOverall, total borrowings at September 30, 2017,2019, totaled $71,900$52,509 compared to $82,700$124,406 at December 31, 2016,2018, a decrease of $10,800.$71,897. Deposit growth primarily during the third quarter of 2019 resulted in the paydown of overnight short-term borrowings. There were no short-term borrowings outstanding at September 30, 2019 compared to $86,500 at December 31, 2018. Long-term debt was $50,199$52,509 at September 30, 2017,2019, compared to $58,134$37,906 at year end 2016.2018. The decrease inincrease to long-term borrowings was the result of terming out and fixing $16,000 of the variable rate short-term borrowings was a function of strong deposit growth funding our loan demand, whereasat lower rates under the decline in long-term debt was a product of monthly contractual amortized payments and the maturity of a term borrowingFHLB’s ‘Community Lending Program’ during the nine months ended September 30, 2017.second quarter of 2019.
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 “IRR”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.
As a result of economic uncertainty, and a prolonged era of historically low market rates and the recent increases and decreases to short-term market rates, 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 the Boardour board of Directorsdirectors 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 Boardboard of Directors,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
37
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
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 1.65%1.32% at September 30, 2017.2019. Given the lengthlatest action by the FOMC to lower the targeted federal funds rate 50 basis points during the third quarter of time that market2019, after increasing rates have been at historical lows100 basis points during 2018, and the potential for rates to increasedecrease in the future, the focus of ALCO has been to create a positivebalanced static gap position. With regard to RSA, we predominantly offer medium- term,medium-term, fixed-rate loans as well as adjustable rate
40
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
loans. With respect to RSL, we offer longerare offering short term promotional certificates of deposit in an attempt to increasedecrease duration. The current position at September 30, 2017,2019, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to increasedecrease as market rates increase.decrease. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion”“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 table 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 a table.
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 September 30, 2017,2019, 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.limits during the first year of simulation. We will continue to monitor our IRR throughout 20172019 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. |
38
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
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.
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. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.
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 September 30, 2017.2019. Our noncore funds at September 30, 2017,2019, 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
41
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
because they are very interest rate sensitive and are considered to be highly volatile. At September 30, 2017,2019, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 13.6%13.8%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 6.5%9.0%. Comparatively, our overall noncore dependence ratio at year-end 20162018 was 14.4%15.0% and our net short-term noncore funding dependence ratio was 6.5%6.3%, indicating that our reliance on noncore funds has decreased.decreased in the near term but increased overall.
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, decreased $7,035increased $18,667 during the nine months ended September 30, 2017.2019. Cash and cash equivalents decreased $1,003increased $3,107 for the same period last year. For the nine months ended September 30, 2017,2019, net cash inflows of $22,720$27,283 from operating activities and $73,411$46,199 from financing activities were more thanpartially offset by net cash outflows of $103,166$54,815 from investing activities. For the same period of 2016,2018, net cash inflows of $20,663$24,360 from operating activities and $137,823$76,096 from financing activities were more thanpartially offset by net cash outflows of $159,489$97,349 from investing activities.
Operating activities provided net cash of $22,720$27,283 for the nine months ended September 30, 2017,2019, and $20,663$24,360 for the corresponding nine months of 2016.2018. 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 $103,166$54,815 for the nine months ended September 30, 2017,2019, compared to using $159,489net cash of $97,349 for the same period of 2016.2018. In 2017,2019 and 2018, an increase in lending activities was the primary factor causing the net cash outflow from investing activities. In 2016, lending also led to the decrease in cash from investing activities and was only partially offset by proceeds received from investment securities.
Financing activities provided net cash of $73,411$46,199 for the nine months ended September 30, 2017,2019, and $137,823provided net cash of $76,096 for the corresponding nine months of 2016.2018. Deposit gathering is our predominant financing activity. In the event that loan growth should exceed the growth in deposits, short-term and long-term borrowings provide additional funding. Deposits increasedprovided cash of $126,263 for the nine months ended September 30, 2017 and 2016. The increase in deposits totaled $99,098 in the nine months ended September 30, 2017.2019. Comparatively, deposits increased $110,000$108,846 for the same period of 2016.2018. We continuedcontinue to attractseek deposits from customers in new markets and customers as well as existing customers, including municipalities and school districts. Another source of financing is our short term borrowings. Short term borrowings decreased $10,800$86,500 in the nine months ended September 30, 20172019 compared to an increasedecrease of $36,975$24,225 for the comparable period in 2018 as deposit growth outpaced the growth in loans. Long term borrowings increased $14,603, net of repayments for the nine months ended September 30, 2019, compared to a decrease of $1,273 for the same nine months period in 2016 due to higher loan growth.2018. With favorable borrowing rates we locked $16,000 in longer term funding at the FHLB.
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.
39
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
Capital:
Stockholders’ equity totaled $266,296$296,167 or $36.00$40.08 per share at September 30, 2017,2019, compared to $256,618$278,614 or $34.71$37.66 per share at December 31, 2016.2018. Net income of $15,809$20,704 for the nine months ended September 30, 20172019 was the primary factor leading to the improved capital position. Stockholders’ equity was also affected by cash dividends declared of $6,952,$7,546, stock based compensation of $122,$397, and other comprehensive income of $4,619 resulting from market value fluctuations in the investment portfolio and changes to the fair value of $699.derivatives.
Dividends declared equaled $0.94 per share through nine months of 2017 and $0.93$1.02 per share through the nine months ended September 30, 2019 and $0.98 per share for the same period of 2016.2018. The dividend payout ratio was 43.9%36.4% for the nine months ended September 30, 20172019 and 46.3%39.2% for the same period of 2016. The merger agreement pursuant to which we merged with Penseco in 2013 contemplates that, unless 80 percent of our board of directors determines otherwise, we will pay a quarterly cash dividend in an amount no less than $0.31 per share through 2018, provided that sufficient funds are legally available, and that we remain “well-capitalized” in accordance with applicable regulatory guidelines.2018. It is the intention of our board of directors to continue to pay cash dividends in the future. However, these decisions are affected by operating results, financial and economic decisions, capital and growth objectives, appropriate dividend restrictions and other relevant factors.
42
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
In July 2013, the Board of Governors of the FRB approvedfederal banking agencies issued final rules to implement the Basel III interim final rule (“Basel III”) which is intended to strengthen the quality and increase the required level of regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for a more stable and resilientcommunity banking system.organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The changes include:final rules call for the following capital requirements: (i) a new regulatoryminimum ratio of common equity tier 1 capital measure, Common Equity Tier 1 (“CET1”), which is limited to capital elementsrisk-weighted assets of the highest quality;4.5%; (ii) a new definition and increaseminimum ratio of tier 1 capital which is now comprised of CET1 and Additional Tier 1; (iii) changes in calculation of someto risk-weighted assets and off-balance sheet exposure;of 6%; (iii) a minimum ratio of total capital to risk-weighted assets of 8%; and (iv) a capital conservation buffer that will limit capital distributions, stock redemptions, and certain discretionary bonus payments if the institution does not maintain capital in excessminimum leverage ratio of the minimum capital requirements. These new capital rules took effect for our Bank on January 1, 2015 and reporting began with the quarter ended June 30, 2015. Under4%. In addition, the final capital rules that became effective on Januaryestablish a common equity tier 1 2015, there was a requirement for a CET1 capital conservation buffer of 2.5% of risk-weighted assets which is in additionapplicable to all banking organizations. If a banking organization fails to hold capital above the other minimum risk-based capital standards inratios and the rule. Institutions that do not maintain this required capital conservation buffer, it will becomebe subject to progressively more stringent limitationscertain restrictions on the percentage of earnings that can be paid out in dividends or used for stock repurchasescapital distributions and on the payment of discretionary bonuses to senior executive management.bonus payments. The capital conservation buffer requirement is beingfor all banking organizations was phased in over three years beginning on Janury 1, 2016, and was fully phased in 2016.on January 1, 2019.
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 September 30, 2017,2019, the Bank’s Tier 1 capital to total average assets was 9.74%10.05% as compared to 9.88%9.78% at December 31, 2016.2018. The Bank’s Tier 1 capital to risk weighted asset ratio was 11.60%11.85% and the total capital to risk weighted asset ratio was 12.73%13.00% at September 30, 2017.2019. These ratios were 12.14%11.64% and 13.16%12.80% at December 31, 2016.2018. The Bank’s common equity Tier 1 to risk weighted asset ratio was 11.60%11.85% at September 30, 20172019 compared to 12.14%11.64% at December 31, 2016.2018. The Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards at September 30, 2017. Additionally, as of September 30, 2017, the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.2019.
Review of Financial Performance:
Net income for the third quarter of 2017three months ended September 30, 2019 equaled $5,350$7,148 or $0.72$0.97 per share compared to $5,118$6,717 or $0.69$0.91 per share for the third quartercomparable period of 2016.2018. The increase in earnings for the current period is the product of higher net interest income of $1,283 due to growth in our average earning assets of $116.1 million since the year ago period, a lower provision for loan losses of $350 and an increase in non-interest income of $429 due primarily to revenue from commercial loan interest rate swap transactions. These increases were partially offset by higher non-interest expenses of $1,542 related to annual merit increases and costs in support of our market expansion initiative. Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.03%1.21% for the third quarter of 2017 and 1.05%2019 compared to 1.19% for the same period in 2016.of 2018. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 8.00%9.65% for the third quarter of 20172019 compared to 7.95%9.81% for the third quarter of 2016. comparable period in 2018.
Net income through the first nine months in 2017of 2019 equaled $15,809$20,704 or $2.14$2.80 per share compared to $14,855$18,528 or $2.01$2.50 per share for the same period of 2016.2018. The increase in earnings in the current period is the result of higher net interest income of $3,470 due to growth of our earning assets coupled with a reduction to the provision for loan losses expense of $1,050, partially offset by an increase in non-interest expenses of $2,884. Our ROA and ROE were 1.04%1.19% and 8.09%9.63% through nine months in 20172019 compared to 1.04%1.12% and 7.76%9.21% for the same period of 2016. There were no gains on sale of investment securities for the nine months ended September 30, 2017 while there were gains of $623 for the same period in 2016. In the second quarter of 2017, we entered into and executed a merchant asset purchase agreement with a third party to sell and transfer our merchant business. This sale resulted in a gain of $2,278.
40
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
There was no comparable gain in the corresponding period of 2016. In conjunction with the sale, we also executed a marketing and sales agreement to share in the future revenue generated from the sold merchant portfolio, and from new merchant referrals. The sale represents the entirety of our merchant services business and we will no longer originate any proprietary merchant services relationships, nor did we receive an ownership interest in the unrelated purchaser of that business.2018.
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 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. |
43
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
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 comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 35.0%21.0% in 20172019 and 2016.2018.
For the three months ended September 30, tax-equivalent net interest income increased $900$1,259 to $17,479$19,627 in 20172019 from $16,579$18,368 in 2016.2018. The net interest spread decreased to 3.58%3.32% for the three months ended September 30, 20172019 from 3.63%3.36% for the three months ended September 30, 2016.2018 as the average rate paid on interest bearing liabilities increased 21 basis points while the earning asset yield increased 17 basis points. The tax-equivalent net interest margin decreasedincreased to 3.73%3.61% for the third quarter of 20172019 from 3.76%3.57% for the comparable period of 2016. The tax-equivalent net interest margin for the second quarter of 2017 was 3.68%.2018.
For the three months ended September 30, tax-equivalent interest income on earning assets increased $1,250,$2,189, to $19,654$24,023 in 20172019 as compared to $18,404$21,834 in 2016.2018. The overall yield on earning assets, on a fully tax-equivalent basis, increased 217 basis points for the three months ended September 30, 20172019 to 4.19%4.42% as compared to 4.17%4.25% for the three months ended September 30, 2016.2018. The increase in the yield on earning assets resulted from a 323 basis point increase in loan yields, 4.42%4.74% for the third quarter of 20172019 compared to 4.39%4.51% for the same period last year. Loan yields increased due to higher rates on new loan originations during 2018, coupled with adjustable rate loans repricing into a higher rate environment due to the Federal Open Market Committee (“FOMC”) actions to increase the effective federal funds rate 100 basis points in 2018. However, the FOMC during the third quarter of 2019 has cut the federal funds rate 50 basis points which will put downward pressure on loan yields. The overall yield earned on investments decreased 1323 basis points in the third quarter of 2019 to 2.39% from 2.62% for the third quarter of 2017 to 2.81%2018 as investment cashflow from 2.94% for the third quarter of 2016.high yielding matured and pre-refunded municipal bonds are being deployed into lower yielding bonds. Average investment balances were slightly higher$12,940 lower when comparing the current and year ago quarter.
Total interest expense increased $350,$930 to $2,175$4,396 for the three months ended September 30, 20172019 from $1,825$3,466 for the three months ended September 30, 2016. An unfavorable volume variance caused the increase.2018. An increase in the average volumebalance of interest bearing liabilities of $76,435 coupled$41,800 combined with a 721 basis point increase in the cost of funds comparing the three months ended September 30, 20172019 and 20162018 caused the increase. Average short-term borrowings decreased $131,599 to $12,563 for the quarter ended September 30, 2019 compared to $144,162 for the corresponding year ago period as growth in deposits resulted in a reduction to short-term borrowings. Average time deposits $100 or more increased $109,493 and money market accounts increased $69,115. The increase in interest expense for the three months ended September 30, 2019 was primarily due to higher deposit and borrowing costs which were impacted directly by the actions of the FOMC to increase the targeted federal funds rate 100 basis points during 2018. The benefit of lower interest bearing liability costs will lag the aforementioned action of the FOMC to cut rates during the third quarter of 2019.
For the nine months ended September 30, tax-equivalent net interest income increased $2,505$3,498 to $51,109$57,528 in 20172019 from $48,604$54,030 in 2016.2018. The net interest spread decreased to 3.57%3.31% for the nine months ended September 30, 20172019 from 3.66%3.38% for the nine months ended September 30, 2016.2018. The tax-equivalent net interest margin for the nine months ended September 30 was 3.71%3.60% in 20172019 compared to 3.79%3.57% in 2016.2018.
For the nine months ended September 30, 2017,2019, tax-equivalent interest income increased $3,452,$7,614, to $57,366$71,032 compared to $53,914$63,418 for the nine months ended September 30, 2016.2018. A volume variance in interest income of $4,381$3,562 attributable primarily to an increase in the average balance of earning assets was partially offset byloans coupled with a $929 unfavorable$4,052 favorable rate variance due primarily to a decreasean increase in the yield on loans. Specifically,loans for the increase was primarily duenine months ended September 30, 2019 from the same period in 2018 caused the increase. The overall yield on earning assets, on a fully tax-equivalent basis, increased for the nine months ended September 30, 2019 to a $132,688 increase in4.45% as compared to 4.19% for the nine months ended September 30, 2018.
Total interest expense increased $4,116 to $13,504 for the nine months ended September 30, 2019 from $9,388 for the nine months ended September 30, 2018. The average balance of interest bearing liabilities increased to $1,590,671 for the nine months ended September 30, 2019, as compared to $1,541,346 for the nine months ended September 30, 2018.
4144
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
An unfavorable rate variance in each of the categories of interest-bearing liabilities totaled $4,602 and was the primary reason for the increase in interest expense. Unfavorable rate variances were greatest as it related to money market accounts, time depositis of $100 or more, and short-term borrowings. Offsetting the rate variance was a favorable volume variance of $486 due to lower average loansshort-term borrowings, partially offset by higher time deposits of $100 or more. All other deposit categories experienced a mix of volume variances that only slightly offset the decrease. The cost of funds increased to 1.14% for the nine months ended September 30, 2017 from the same period in 2016. The overall yield on earning assets, on a fully tax-equivalent basis, decreased for the nine months ended September 30, 2017 to 4.17%2019 as compared to 4.21% for the nine months ended September 30, 2016. This was a result of increased market competition for new loans.
Total interest expense increased $947 to $6,257 for the nine months ended September 30, 2017 from $5,310 for the nine months ended September 30, 2016. A volume variance caused interest expenses to increase $298. The average volume of interest bearing liabilities increased to $1,403,250 for the nine months ended September 30, 2017, as compared to $1,301,253 for the nine months ended September 30, 2016. Adding to the volume variance, a rate variance of $649 resulted in the increased interest expense through nine months in 2017. The cost of funds increased to 0.60% for the nine months ended September 30, 2017 as compared to 0.55%0.81% for the same period in 2016.2018, the result of higher short-term market rates resulting from the FOMC’s actions of raising the targeted federal funds rate during 2018 and increased market demand for premium deposit rates.
45
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 35%21%.
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| 135,580 |
|
| 1,348 |
| 3.94 |
|
| 123,199 |
|
| 1,162 |
| 3.74 |
|
Total loans |
|
| 1,865,321 |
|
| 22,288 |
| 4.74 |
|
| 1,755,211 |
|
| 19,960 |
| 4.51 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 200,444 |
|
| 1,111 |
| 2.20 |
|
| 184,623 |
|
| 1,062 |
| 2.28 |
|
Tax-exempt |
|
| 70,381 |
|
| 520 |
| 2.93 |
|
| 99,142 |
|
| 811 |
| 3.25 |
|
Total investments |
|
| 270,825 |
|
| 1,631 |
| 2.39 |
|
| 283,765 |
|
| 1,873 |
| 2.62 |
|
Interest-bearing deposits |
|
| 5,006 |
|
| 27 |
| 2.14 |
|
| 377 |
|
| 1 |
| 1.05 |
|
Federal funds sold |
|
| 14,267 |
|
| 77 |
| 2.14 |
|
|
|
|
|
|
|
|
|
Total earning assets |
|
| 2,155,419 |
|
| 24,023 |
| 4.42 | % |
| 2,039,353 |
|
| 21,834 |
| 4.25 | % |
Less: allowance for loan losses |
|
| 22,248 |
|
|
|
|
|
|
| 19,944 |
|
|
|
|
|
|
Other assets |
|
| 215,289 |
|
|
|
|
|
|
| 218,173 |
|
|
|
|
|
|
Total assets |
| $ | 2,348,460 |
| $ | 24,023 |
|
|
| $ | 2,237,582 |
| $ | 21,834 |
|
|
|
Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
| $ | 362,178 |
| $ | 1,269 |
| 1.39 | % | $ | 293,063 |
| $ | 650 |
| 0.88 | % |
NOW accounts |
|
| 385,903 |
|
| 721 |
| 0.74 |
|
| 382,401 |
|
| 580 |
| 0.60 |
|
Savings accounts |
|
| 379,784 |
|
| 128 |
| 0.13 |
|
| 389,775 |
|
| 122 |
| 0.12 |
|
Time deposits less than $100 |
|
| 138,470 |
|
| 514 |
| 1.47 |
|
| 141,251 |
|
| 426 |
| 1.20 |
|
Time deposits $100 or more |
|
| 254,712 |
|
| 1,334 |
| 2.08 |
|
| 145,219 |
|
| 564 |
| 1.54 |
|
Short-term borrowings |
|
| 12,563 |
|
| 83 |
| 2.62 |
|
| 144,162 |
|
| 809 |
| 2.23 |
|
Long-term debt |
|
| 52,731 |
|
| 347 |
| 2.61 |
|
| 48,670 |
|
| 315 |
| 2.57 |
|
Total interest-bearing liabilities |
|
| 1,586,341 |
|
| 4,396 |
| 1.10 |
|
| 1,544,541 |
|
| 3,466 |
| 0.89 |
|
Noninterest-bearing deposits |
|
| 445,238 |
|
|
|
|
|
|
| 405,671 |
|
|
|
|
|
|
Other liabilities |
|
| 22,900 |
|
|
|
|
|
|
| 15,609 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 293,981 |
|
|
|
|
|
|
| 271,761 |
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 2,348,460 |
|
| 4,396 |
|
|
| $ | 2,237,582 |
|
| 3,466 |
|
|
|
Net interest income/spread |
|
|
|
| $ | 19,627 |
| 3.32 | % |
|
|
| $ | 18,368 |
| 3.36 | % |
Net interest margin |
|
|
|
|
|
|
| 3.61 | % |
|
|
|
|
|
| 3.57 | % |
Tax-equivalent adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
| $ | 282 |
|
|
|
|
|
| $ | 243 |
|
|
|
Investments |
|
|
|
|
| 109 |
|
|
|
|
|
|
| 172 |
|
|
|
Total adjustments |
|
|
|
| $ | 391 |
|
|
|
|
|
| $ | 415 |
|
|
|
4246
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||||||||||||
|
| September 2017 |
| September 2016 |
| ||||||||||||
|
| Average |
| Interest Income/ |
| Yield/ |
| Average |
| Interest Income/ |
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
| $ | 1,482,215 |
| $ | 16,535 |
| 4.43 | % | $ | 1,385,801 |
| $ | 15,294 |
| 4.39 | % |
Tax-exempt |
|
| 114,455 |
|
| 1,250 |
| 4.33 |
|
| 108,104 |
|
| 1,185 |
| 4.36 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 157,104 |
|
| 766 |
| 1.93 |
|
| 136,645 |
|
| 598 |
| 1.74 |
|
Tax-exempt |
|
| 106,865 |
|
| 1,102 |
| 4.09 |
|
| 123,177 |
|
| 1,325 |
| 4.28 |
|
Interest-bearing deposits |
|
| 272 |
|
| 1 |
| 1.46 |
|
| 412 |
|
| 2 |
| 1.93 |
|
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
| 1,860,911 |
|
| 19,654 |
| 4.19 | % |
| 1,754,139 |
|
| 18,404 |
| 4.17 | % |
Less: allowance for loan losses |
|
| 18,180 |
|
|
|
|
|
|
| 15,168 |
|
|
|
|
|
|
Other assets |
|
| 213,953 |
|
|
|
|
|
|
| 203,425 |
|
|
|
|
|
|
Total assets |
| $ | 2,056,684 |
| $ | 19,654 |
|
|
| $ | 1,942,396 |
| $ | 18,404 |
|
|
|
Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
| $ | 273,482 |
| $ | 397 |
| 0.58 | % | $ | 225,214 |
| $ | 225 |
| 0.40 | % |
NOW accounts |
|
| 342,516 |
|
| 375 |
| 0.43 |
|
| 302,026 |
|
| 299 |
| 0.39 |
|
Savings accounts |
|
| 399,639 |
|
| 127 |
| 0.13 |
|
| 394,538 |
|
| 177 |
| 0.18 |
|
Time deposits less than $100 |
|
| 156,012 |
|
| 420 |
| 1.07 |
|
| 160,872 |
|
| 409 |
| 1.01 |
|
Time deposits $100 or more |
|
| 128,012 |
|
| 335 |
| 1.04 |
|
| 112,996 |
|
| 246 |
| 0.87 |
|
Short-term borrowings |
|
| 54,084 |
|
| 177 |
| 1.30 |
|
| 78,974 |
|
| 116 |
| 0.58 |
|
Long-term debt |
|
| 56,270 |
|
| 344 |
| 2.43 |
|
| 58,960 |
|
| 353 |
| 2.38 |
|
Total interest-bearing liabilities |
|
| 1,410,015 |
|
| 2,175 |
| 0.61 |
|
| 1,333,580 |
|
| 1,825 |
| 0.54 |
|
Noninterest-bearing deposits |
|
| 366,610 |
|
|
|
|
|
|
| 337,337 |
|
|
|
|
|
|
Other liabilities |
|
| 14,820 |
|
|
|
|
|
|
| 15,349 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 265,239 |
|
|
|
|
|
|
| 256,130 |
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 2,056,684 |
|
| 2,175 |
|
|
| $ | 1,942,396 |
|
| 1,825 |
|
|
|
Net interest income/spread |
|
|
|
| $ | 17,479 |
| 3.58 | % |
|
|
| $ | 16,579 |
| 3.63 | % |
Net interest margin |
|
|
|
|
|
|
| 3.73 | % |
|
|
|
|
|
| 3.76 | % |
Tax-equivalent adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
| $ | 437 |
|
|
|
|
|
| $ | 415 |
|
|
|
Investments |
|
|
|
|
| 386 |
|
|
|
|
|
|
| 464 |
|
|
|
Total adjustments |
|
|
|
| $ | 823 |
|
|
|
|
|
| $ | 879 |
|
|
|
43
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended |
|
| Nine months ended |
| ||||||||||||||||||||||||||||
|
| September 2017 |
| September 2016 |
|
| September 30, 2019 |
| September 30, 2018 |
| ||||||||||||||||||||||||
|
| Average |
| Interest Income/ |
| Yield/ |
| Average |
| Interest Income/ |
| Yield/ |
|
| Average |
| Interest Income/ |
| Yield/ |
| Average |
| Interest Income/ |
| Yield/ |
| ||||||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
|
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
| $ | 1,458,840 |
| $ | 48,021 |
| 4.40 | % | $ | 1,330,166 |
| $ | 44,400 |
| 4.46 | % |
| $ | 1,713,173 |
| $ | 61,684 |
| 4.81 | % | $ | 1,619,409 |
| $ | 54,546 |
| 4.50 | % |
Tax-exempt |
|
| 111,428 |
|
| 3,591 |
| 4.31 |
|
| 107,414 |
|
| 3,540 |
| 4.40 |
|
|
| 140,638 |
|
| 4,144 |
| 3.94 |
|
| 123,599 |
|
| 3,367 |
| 3.64 |
|
Total loans |
|
| 1,853,811 |
|
| 65,828 |
| 4.75 |
|
| 1,743,008 |
|
| 57,913 |
| 4.44 |
| |||||||||||||||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 158,837 |
|
| 2,271 |
| 1.91 |
|
| 146,734 |
|
| 1,911 |
| 1.74 |
|
|
| 191,856 |
|
| 3,187 |
| 2.22 |
|
| 179,995 |
|
| 2,967 |
| 2.20 |
|
Tax-exempt |
|
| 111,060 |
|
| 3,480 |
| 4.19 |
|
| 125,790 |
|
| 4,017 |
| 4.27 |
|
|
| 81,227 |
|
| 1,890 |
| 3.11 |
|
| 102,346 |
|
| 2,533 |
| 3.31 |
|
Total investments |
|
| 273,083 |
|
| 5,077 |
| 2.49 |
|
| 282,341 |
|
| 5,500 |
| 2.60 |
| |||||||||||||||||
Interest-bearing deposits |
|
| 309 |
|
| 3 |
| 1.30 |
|
| 1,808 |
|
| 46 |
| 3.40 |
|
|
| 2,877 |
|
| 50 |
| 2.32 |
|
| 441 |
|
| 5 |
| 1.52 |
|
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,808 |
|
| 77 |
| 2.14 |
|
|
|
|
|
|
|
|
|
Total earning assets |
|
| 1,840,474 |
|
| 57,366 |
| 4.17 | % |
| 1,711,912 |
|
| 53,914 |
| 4.21 | % |
|
| 2,134,579 |
|
| 71,032 |
| 4.45 | % |
| 2,025,790 |
|
| 63,418 |
| 4.19 | % |
Less: allowance for loan losses |
|
| 17,309 |
|
|
|
|
|
|
| 14,381 |
|
|
|
|
|
|
|
| 22,087 |
|
|
|
|
|
|
| 19,755 |
|
|
|
|
|
|
Other assets |
|
| 212,718 |
|
|
|
|
|
|
| 201,375 |
|
|
|
|
|
|
|
| 212,504 |
|
|
|
|
|
|
| 212,598 |
|
|
|
|
|
|
Total assets |
| $ | 2,035,883 |
| $ | 57,366 |
|
|
| $ | 1,898,906 |
| $ | 53,914 |
|
|
|
| $ | 2,324,996 |
| $ | 71,032 |
|
|
| $ | 2,218,633 |
| $ | 63,418 |
|
|
|
Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
| $ | 256,632 |
| $ | 1,003 |
| 0.52 | % | $ | 215,747 |
| $ | 605 |
| 0.37 | % |
| $ | 339,771 |
| $ | 3,358 |
| 1.32 | % | $ | 290,126 |
| $ | 1,676 |
| 0.77 | % |
NOW accounts |
|
| 331,653 |
|
| 1,057 |
| 0.43 |
|
| 295,906 |
|
| 843 |
| 0.38 |
|
|
| 386,720 |
|
| 2,130 |
| 0.74 |
|
| 375,534 |
|
| 1,524 |
| 0.54 |
|
Savings accounts |
|
| 400,585 |
|
| 380 |
| 0.13 |
|
| 391,830 |
|
| 525 |
| 0.18 |
|
|
| 382,805 |
|
| 371 |
| 0.13 |
|
| 391,613 |
|
| 366 |
| 0.12 |
|
Time deposits less than $100 |
|
| 158,230 |
|
| 1,265 |
| 1.07 |
|
| 163,395 |
|
| 1,283 |
| 1.05 |
|
|
| 137,376 |
|
| 1,477 |
| 1.44 |
|
| 145,517 |
|
| 1,275 |
| 1.17 |
|
Time deposits $100 or more |
|
| 124,484 |
|
| 912 |
| 0.98 |
|
| 109,753 |
|
| 705 |
| 0.86 |
|
|
| 225,794 |
|
| 3,754 |
| 2.22 |
|
| 135,899 |
|
| 1,294 |
| 1.27 |
|
Short-term borrowings |
|
| 74,506 |
|
| 599 |
| 1.07 |
|
| 65,117 |
|
| 282 |
| 0.58 |
|
|
| 74,036 |
|
| 1,491 |
| 2.69 |
|
| 153,669 |
|
| 2,317 |
| 2.02 |
|
Long-term debt |
|
| 57,160 |
|
| 1,041 |
| 2.43 |
|
| 59,505 |
|
| 1,067 |
| 2.40 |
|
|
| 44,169 |
|
| 923 |
| 2.79 |
|
| 48,988 |
|
| 936 |
| 2.55 |
|
Total interest-bearing liabilities |
|
| 1,403,250 |
|
| 6,257 |
| 0.60 |
|
| 1,301,253 |
|
| 5,310 |
| 0.55 |
|
|
| 1,590,671 |
|
| 13,504 |
| 1.14 |
|
| 1,541,346 |
|
| 9,388 |
| 0.81 |
|
Noninterest-bearing deposits |
|
| 356,560 |
|
|
|
|
|
|
| 326,434 |
|
|
|
|
|
|
|
| 426,395 |
|
|
|
|
|
|
| 392,523 |
|
|
|
|
|
|
Other liabilities |
|
| 14,666 |
|
|
|
|
|
|
| 15,420 |
|
|
|
|
|
|
|
| 20,575 |
|
|
|
|
|
|
| 15,678 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 261,407 |
|
|
|
|
|
|
| 255,799 |
|
|
|
|
|
|
|
| 287,355 |
|
|
|
|
|
|
| 269,086 |
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 2,035,883 |
|
| 6,257 |
|
|
| $ | 1,898,906 |
|
| 5,310 |
|
|
|
| $ | 2,324,996 |
|
| 13,504 |
|
|
| $ | 2,218,633 |
|
| 9,388 |
|
|
|
Net interest income/spread |
|
|
|
| $ | 51,109 |
| 3.57 | % |
|
|
| $ | 48,604 |
| 3.66 | % |
|
|
|
| $ | 57,528 |
| 3.31 | % |
|
|
| $ | 54,030 |
| 3.38 | % |
Net interest margin |
|
|
|
|
|
|
| 3.71 | % |
|
|
|
|
|
| 3.79 | % |
|
|
|
|
|
|
| 3.60 | % |
|
|
|
|
|
| 3.57 | % |
Tax-equivalent adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
| $ | 1,257 |
|
|
|
|
|
| $ | 1,239 |
|
|
|
|
|
|
| $ | 870 |
|
|
|
|
|
| $ | 707 |
|
|
|
Investments |
|
|
|
|
| 1,218 |
|
|
|
|
|
|
| 1,406 |
|
|
|
|
|
|
|
| 397 |
|
|
|
|
|
|
| 532 |
|
|
|
Total adjustments |
|
|
|
| $ | 2,475 |
|
|
|
|
|
| $ | 2,645 |
|
|
|
|
|
|
| $ | 1,267 |
|
|
|
|
|
| $ | 1,239 |
|
|
|
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 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 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 September 30, 2017.
2019.
4447
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
For
The provision for loan losses totaled $2,100 for the three and nine months ended September 30, 20172019 and 2016,$3,150 for the nine months ended September 30, 2018. For the three months ended September 30, the provision for loan losses totaled $1,200was $700 in 2019 and $3,600.$1,050 in 2018. The decrease in the current period is due to lower than projected loan growth.
Noninterest Income:
Noninterest income for the third quarter decreased $364three months ended September 30, 2019 increased $429 or 9.0%13.2% to $3,661$3,682 in 20172019 from $4,025$3,253 in 2016. 2018. The increase is due primarily to an increase in service charges, fees, and commissions of $278 or 14.8% due to an increase in fee income on our commercial loan interest rate swap transactions. Merchant revenue increased $54 from the previous period due to higher volume and an increase in rates paid by merchants. Wealth management revenue increased $90 in the current period when compared to the prior year due to increased volume in both our brokerage and retirement plan services departments.
For the nine months ended September 30, 2017,2019, noninterest income totaled $13,822,$11,250, an increase of $1,793$762 or 14.9%7.3% from $12,029$10,488 for the comparable period of 2016. Service charges, fees and commissions2018. Fee income generated by commercial loan interest rate swap transactions increased $897, or 20.0%$989 in the current period due to $5,410 through nine months in 2017 from $4,513 for the same period in 2016.higher volume. Included in service charges, fees and commissions wasin the current period is a net feerecovery of $496 recognized in September of 2017 related to an interest rate swap transaction we entered into with$216 on a largepurchased impaired commercial credit, customer. Income generated fromthe balance of which had previously been charged-off to a specific credit mark set-up at time of acquisition under purchase accounting. In the year ago period, service charges, fees and commissions and feesincluded an accrual for death benefit proceeds on fiduciary activitiesa bank owned life insurance (BOLI) policy totaling $365, with no comparable amount in the current period. Additionally in the year ago period, we recognized a gain on the sale of our credit card portfolio of $291. Merchant services income increased $47$150 to $1,542$837 for the nine months ended September 30, 2017 in comparison to $1,4952019 from $687 for the same period last year due in 2016 duepart to additional executorhigher incentive fees generated in 2017.and increased rates. Income generated from our wealth management division increased $102, or 10.4% to $1,081$94 through the first nine months in 2017 comparedof 2019 due primarily to $979 over that same period in 2016 due to the build out ofincreased activity within our wealth management division in 2017. Merchantretirement plan services income decreased $851, or 26.5% to $2,358 for the nine months ended September 30, 2017 from $3,209 for the same period last year due to the sale of our merchant services business in the second quarter of 2017. Mortgagedepartment, while mortgage banking income decreased $40slightly to $576 through$457 for the first nine months in 2017of 2019 compared to $616$472 for the comparable period in 2016 as the volume of loans originated for sale declined. Life insurance investment income decreased $17 to $577 for the nine months ended September 30, 2017 from $594 for the same period in 2016. There were no gains from the sale of investment securities available-for-sale for the nine months ended September 30, 2017 compared to $623 for the same period in 2016. As previously mentioned, the nine months ended September 30, 2017 included a gain from the sale of our merchant business in the amount of $2,278. The nine month period ending September 30, 2016 did not have a comparable transaction.
For the three months ended September 30, the decrease was due primarily to lower merchant services income of $1,092, the result of the sale of our merchant business during the second quarter of 2017. Mortgage banking income and life insurance income also declined. Higher service charges, fees and commission of $614 due primarily to the interest rate swap executed in the current period, and higher wealth management income of $143 due to our build-out of the division partially offset the decreases.
2018.
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, 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 assessments,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.
For the third quarter, noninterest expense increased $463$1,542 or 3.9%12.3% to $12,480$14,079 in 20172019 from $12,017$12,537 in 2016.2018. For the nine months ended September 30, noninterest expense increased $3,090$2,884 or 8.6%7.4% to $38,838$41,998 in 20172019 from $35,748$39,114 in 2016.2018. Personnel costs increased 18.9%16.0%, net occupancy and equipment costs increased 4.7%11.8%, merchantand all other expense categories which include, professional fees and outside services, expense decreased 20.9%FDIC insurance and assessments, donations and other miscellaneous expenses increased by 2.3%5.7% comparing year-to-date 2017the three months ended September 30, 2019 and 2016.2018. During the nine months ended September 30, 2019, higher personnel costs of $2,397 or 11.3%, and net occupancy and equipment costs of $592 or 7.2% were the primary reasons for the increase in total non-interest expense.
Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled $6,550$8,056 for the third quarter of 2017,2019, an increase of $1,084$1,110 or 19.8%16.0% when compared to the third quarter of 2016.2018. Salaries and employee benefits expense totaled $19,851$23,688 for the nine months ending September 30, 2017,2019, an increase of $3,149$2,397 or 18.9%11.3% when compared to $21,291 for the same period of 2016.2018. Annual merit increases and additional resources related to our continued strategic market expansion initiative contributed to the increase. Additional resourcesstaffing in the form of commercial lenders and credit professionals have been put in place to support our market expansion in the Lehigh Valley and King of Prussia was the primary reason for the increase. Merit increases and higher health insurance costs also contributed to the increases in the three and nine month periods.
4548
Peoples Financial Services Corp.
Management’s Discussion and Analysis
(Dollars in thousands, except share and per share data)
Prussia markets. Additionally, during the second quarter of 2019 we opened our newest branch office located on Norman Drive in Lebanon, Pennsylvania.
The Company
We experienced a $167$316 or 7.2%11.8% increase in net occupancy and equipment expense comparing $2,483 for the third quarter of 20172019 at $2,997 and $2,316 for the third quarter of 2016. We experienced2018 at $2,681. The nine months ended September 30, 2019 resulted in a $329$592 or 4.7%7.2% increase to $8,807 in net occupancy and equipment expense comparing $7,327 for the nine months ended September 30, 2017 and $6,998compared to $8,215 for the same period in 2016. The addition2018. Additional depreciation expense related to the transformation of two of our legacy branch offices, investment in our expansion market during 2017 increasedglobal information technology systems, and investment into our branch network and resulted in higher expendituresnewest markets was the primary reason for occupancy and equipment related projects when compared to the year ago period.increase. In general, as we expand and increase our presence in new markets, thedepreciation expenses and technology costs associated with the maintenanceimplementation and upkeepmaintenance of new infrastructure within those markets increases.
Merchant services expense decreased $857 to $33 for the three months ended September 30, 2017 from $890 for the same period in 2016. Merchant services expense decreased $474 or 20.9% to $1,796 for the nine months ended September 30, 2017 from $2,270 for the same period in 2016. The decreases in both the three and nine months periods relates directly to the sale of our merchant services business at the end of the second quarter of 2017. The merchant asset sales agreement we entered into and executed transferred our merchant business and substantially reduced the related costs.
For the third quarter, all other expense categories increased $116 or 4.0% to $3,026 from $2,910 comparing 2019 to 2018. Legal and professional expenses increased $107 or 3.5%$56 due to $3,155 from $3,048 comparing 2017 to 2016. For the three months ended September 30, 2017, account processing costs associated with fees related to loan originations were higher by $134.workouts. For the nine months ended September 30, all other expenses increased $200expense categories decreased $105 or 2.3%2.6% to $9,079$9,503 in 20172019 compared to $8,879$9,608 in 2016. Consulting and advisory expenses were higher by $225 due to costs2018. Amortization expense related to intangible assets declined $113, FDIC assessments decreased $215, or 25.9% when comparing the sale of the merchant business and costs incurred for loan reviews by an outside third party. Accounting and auditing expenses were higher by $151 during the current nine months ended September 30, 20172019 to the same period in 2018, Professional fees and outside services were lower due to our transitioninsurance proceeds in the amount of $181 received as settlement to alegal costs previously incurred. Donations increased $66, or 6.5% through nine months in 2019 when compared to the same period in 2018 as support for civic organizations and charitable entities grows as we enter new external auditing firm.markets.
Income Taxes:
We recorded income tax expense of $1,287$991 or 19.4%12.2% of pre-tax income, and $1,390$2,709 or 21.4%11.6% of pre-tax income for the three and nine months ended September 30, 2017 and 2016. We2019, respectively. In the year ago period, we recorded income tax expense of $4,209$902 or 21.0%11.8% of pre-tax income, and $2,487 or 11.8% of pre-tax income for thethose same periods. The three and nine months ended September 30, 2017 and $3,785 or 20.3% of pre-tax income for the comparable period in 2016. The nine months ended September 30, 2017 includes2019 include before tax investment tax credits of $819and other credits totaling $394 and $1,172 compared to $1,128 for that same period last year. Additionally, a higher proportion of tax-exempt interest income to before tax income was recognized during the year ago period.investment tax credits $276 and $819 for those same periods last year.
4649
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. The 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 9 to the Unaudited 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-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 September 30, 2019 and December 31, 2018, 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 60-month period. In addition to measuring the change in net interest income as compared to an unchanged interest
50
Peoples Financial Services Corp.
rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.
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.
The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at September 30, 2017,2019, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:
|
|
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|
|
|
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|
|
|
|
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|
|
| September 30, 2017 |
|
| September 30, 2019 |
| ||||||||||||
|
| % 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 |
| 3.2 |
| (20.0) |
| 6.3 |
| (40.0) |
|
| 0.0 |
| (20.0) |
| 7.4 |
| (40.0) |
|
+300 |
| 2.6 |
| (20.0) |
| 5.3 |
| (30.0) |
|
| 0.2 |
| (20.0) |
| 6.6 |
| (30.0) |
|
+200 |
| 1.9 |
| (10.0) |
| 3.8 |
| (20.0) |
|
| 0.2 |
| (10.0) |
| 5.2 |
| (20.0) |
|
+100 |
| 1.2 |
| (10.0) |
| 3.1 |
| (10.0) |
|
| 0.1 |
| (10.0) |
| 4.0 |
| (10.0) |
|
Static |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-100 |
| (5.4) |
| (10.0) |
| (10.5) |
| (10.0) |
| |||||||||
(100) |
| (1.8) |
| (10.0) |
| (9.6) |
| (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 September 30, 2017,2020, would increase 1.2 percentbe relatively unchanged from model results using current interest rates. Additional disclosures about market risk are included in Part I, Item 2 of this quarterly report and Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016,2018, 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. There were no material changes in our market risk from December 31, 2016.2018.
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 material contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. The Company is currently monitoring this activity and evaluating the risks involved.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
At September 30, 2017,2019, the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officerthe Chief Executive Officer (“PEO”CEO”) and principal financial officerChief Financial Officer (“PFO”CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, the PEOCEO and PFOCFO concluded that the disclosure controls and procedures, at September 30, 2017,2019, 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, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide
47
Peoples Financial Services Corp.
reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the PEOCEO and PFOCFO to allow timely decisions regarding required disclosure.
51
Peoples Financial Services Corp.
(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.
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 periodnine-months ended September 30, 20172019 and through the date of this quarterly report on Form 10-Q and no such legal proceedings known to be contemplated by governmental authorities.10-Q.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.On February 1, 2019, our board of directors reauthorized a common stock repurchase plan whereby we are authorized to repurchase up to 225,000 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 September 30, 2019.
|
|
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|
|
|
|
|
|
|
|
|
| Total Number of |
| Maximum Number |
|
|
|
|
|
|
|
| Shares Purchased |
| of Shares that may |
|
|
|
|
|
|
|
| as Part of Publicly |
| yet be Purchased |
|
|
| Total Number of |
| Average Price |
| Announced |
| Under the |
| |
Month Ending |
| Shares Purchased |
| Paid Per Share |
| Programs |
| Programs |
| |
July 31, 2019 |
|
|
| $ |
|
|
|
| 221,170 |
|
August 31, 2019 |
| 7,418 |
| $ | 43.97 |
|
|
| 213,752 |
|
September 30, 2019 |
| 2,900 |
| $ | 44.60 |
|
|
| 210,852 |
|
|
|
|
|
|
|
|
|
|
|
|
Item 3. Defaults upon Senior Securities.
None.
52
Peoples Financial Services Corp.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
|
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|
Item Number |
| Description |
| Page |
10.1 |
|
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| |
|
|
|
|
|
31.1 |
|
| 52 | |
|
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|
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|
31.2 |
|
| 53 | |
|
|
|
|
|
32 |
|
| 54 | |
|
|
|
|
|
101 |
| The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended September 30, 2019, formatted in 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. |
|
|
48
Peoples Financial Services Corp.
Item Number |
| Description |
| Page |
|
|
|
|
|
31.1 |
| Principal Executive Officer Certification Pursuant to Rule 13a‑14 (a) /15d‑14 (a). |
| 50 |
|
|
|
|
|
31.2 |
| Principal Financial Officer Certification Pursuant to Rule 13a‑14 (a) /15d‑14 (a). |
| 51 |
|
|
|
|
|
32 |
| Principal Executive Officer and Principal Financial Officer Certifications Pursuant to Section 1350. |
| 52 |
|
|
|
|
|
101 |
| The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10‑Q for the period ended September 30, 2017, formatted in 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 unaudited Consolidated Financial Statements. |
|
|
49
Peoples Financial Services Corp.
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: November 7, | /s/ Craig W. Best |
| Craig W. Best |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
|
|
Date: November 7, | /s/ John R. Anderson, III |
| John R. Anderson, III |
|
|
| ( |
5053