Peoples Financial Services (PFIS) 8-K Peoples Financial Services Corp. Reports Earnings

NEWS RELEASE

TO BUSINESS EDITOR:

PEOPLES FINANCIAL SERVICES CORP. REPORTS EARNINGS

Hallstead, PA, July 13 – Peoples Financial Services Corp. (OTCBB:PFIS) today reported earnings for the six months ended June 30, 2012, of $4,704 thousand or $1.51 per share, an increase of $546 thousand or 13.1%, compared to $4,158 thousand or $1.32 per share for the same period last year. Earnings for the second quarter 2012 totaled $2,284 thousand or $0.73 per share, a decrease of $75 thousand or 3.2%, compared to $2,359 thousand or $0.75 per share for the second quarter of 2011. Included in income in the second quarter of 2011 was a $1,583 thousand nonrecurring gain on the sale of a commercial property held as other real estate owned.

Return on average assets was 1.46% for the second quarter and 1.51% for the first half of 2012, compared to 1.63% and 1.47% for the respective periods of 2011. Return on average stockholders’ equity was 15.36% and 16.02%, respectively, for the second quarter and year-to-date 2012, compared to 18.56% and 16.74% for the same periods of 2011.

“Higher net interest income was the primary factor contributing to the increase in comparable first half earnings,” stated Alan W. Dakey, President and Chief Executive Officer. “We also experienced strong growth in revenue generated by our mortgage banking sector and our loan portfolio grew significantly in the commercial sector. In 2012, we continue to focus on improving our noninterest revenue sources as well as maintaining a favorable net interest margin,” concluded Dakey.

HIGHLIGHTS

• Earnings per share increased $0.19 comparing 2012 and 2011.

• Net interest income for the first six months improved 7.2% over the prior year.

• Year-to-year average loan growth approximated 11.8%.

• Deposits grew $43.8 million in the first half of 2012.

• Nonperforming assets decreased 6.1% comparing June 30, 2012 and 2011.

INCOME STATEMENT REVIEW

     Tax-equivalent net interest income for the six months ended June 30, improved $722 thousand or 6.3% to $12,154 thousand in 2012 from $11,432 thousand in 2011. A $437 thousand increase in tax-equivalent interest revenue was supplemented by a decrease in interest expense of $285 thousand. Growth in average earning assets of $57.6 million offset partially by a 39 basis point decrease in the tax-equivalent yield on earning assets were the primary factors contributing to the increase in interest revenue. Specifically, the tax-equivalent yield on the loan portfolio decreased 26 basis points to 5.45% for the first half of 2012 from 5.71% for the same period of 2011. In addition, average loans increased $48.4 million or 11.8% comparing the six months ended June 30, 2012 and 2011.  The tax-equivalent yield on the investment portfolio decreased 130 basis points to 3.40% in 2012 from 4.70% in 2011. Average investments increased $21.5 million or 18.8% in 2012. Partially offsetting the negative effects of the yield decrease and aiding the positive effects of earning asset growth was a decrease of 21 basis points in the cost of funds, which was the primary factor leading to the decreased interest expense. The tax-equivalent net interest margin for the six months ended June 30, decreased 18 basis points to 4.10% in 2012 from 4.28% in 2011. The net interest margin for the second quarter of 2012 was 4.09%, compared to 4.10% the previous quarter.

     The provision for loan losses was $1,035 thousand for the six months ended June 30, 2012, and $1,225 thousand for the same six months of 2011.  The provision for loan losses was $390 thousand for the second quarter of 2012 compared to $804 thousand for the same period last year.

     Noninterest income totaled $2,573 thousand for the six months ended June 30, 2012, a decrease of $879 thousand or 25.5% from $3,452 thousand for the same six months of last year.  Mortgage banking income increased 157.5% to $376 thousand in 2012 from $146 thousand in 2011.  For the second quarter, noninterest income decreased $1,293 thousand to $1,337 thousand in 2012, from $2,630 thousand in 2011. As previously mentioned, the second quarter of 2011 included a $1,583 thousand gain on the sale of a other real estate owned property.

     Noninterest expense for the six months ended June 30, decreased $253 thousand or 3.4% to $7,212 thousand in 2012 from $7,465 thousand in 2011. Employee-related costs rose $405 thousand or 13.2% as a result of increases in staffing, higher health insurance costs and normal merit increases. Additional equipment-related costs resulted in a $168 thousand or 12.2% increase in net occupancy and equipment expense. The main contributor to the $826 thousand or 27.4% decrease in other expenses was a $509 thousand prepayment penalty on the extinguishment of a $5.0 million long-term debt with the Federal Home Loan Bank which occurred in the second quarter of 2011. For the second quarter, noninterest expense totaled $3,898 thousand in 2012, a decrease of $172 thousand or 4.2% from $4,070 thousand in 2011.

1

BALANCE SHEET REVIEW

     Total assets equaled $638.7 million at June 30, 2012, an increase of $52.1 million compared to $586.6 million at June 30, 2011. Strong loan demand resulted in an increase of $30.4 million or 7.1% in loans, net of unearned income, to $457.1 million at the close of the second quarter of 2012 from $426.7 million one year earlier. There were $13.1 million in federal funds sold as of the end of the second quarter of 2012 compared to $9.4 million at the same point in 2011 as deposit growth ramped up in the second quarter of 2012. Investment securities available-for-sale amounted to $128.6 million at June 30, 2012, and $114.1 million at June 30, 2011. Despite strong competition for deposits within our market area, total deposits increased $67.5 million comparing the first half of 2012 and 2011.

     Stockholders’ equity equaled $63.9 million or $20.48 per share at June 30, 2012, and $56.3 million or $17.90 per share at June 30, 2011. Included in stockholders’ equity was accumulated other comprehensive income related entirely to net unrealized holding gains on available-for-sale investment securities of $4,559 thousand at June 30, 2012, compared to accumulated other comprehensive income of $2,040 thousand at the end of the same period of 2011. Dividends declared for the first six months were $0.42 per share in 2012 and $0.40 per share in 2011.

     Nonperforming assets equaled $9.8 million or 2.14% of loans, net of unearned income and foreclosed assets at June 30, 2012, compared to $10.4 million or 2.45% one year earlier. The improvement in asset quality resulted from a decrease in nonaccrual loans partially offset by an increase in foreclosed assets and accruing loans past due 90 days or more. The provision for loan losses decreased 15.5% comparing the first half of 2012 and 2011 corresponding with the decrease in nonperforming assets in 2012.

     The allowance for loan losses equaled $5.9 million or 1.29% of loans, net of unearned income, at June 30, 2012, compared to $5.6 million or 1.22% at March 31, 2012, and $5.3 million or 1.20% at December 31, 2011. The allowance for loan losses covered 60.3% of nonperforming assets at the end of the second quarter of 2012, compared to 56.7% at the end of the first quarter and 50.2% at year-end 2011. Loans charged-off, net of recoveries, for the six months ended June 30, equaled $468 thousand or 0.21% of average loans outstanding in 2012 compared to $172 thousand or 0.04% of average loans outstanding in 2011.

     Peoples Financial Services Corporation is the parent company of Peoples Neighborhood Bank (the “Bank”), an independent community bank serving Lackawanna, Wyoming and Susquehanna Counties in Pennsylvania and Broome County in New York through eleven offices. Each office, interdependent with the community, offers a comprehensive array of financial products and services to individuals, businesses, not-for-profit organizations and government entities. In addition, customers can take advantage of PNB Online Banking services by accessing the Company's website at http://www.peoplesnatbank.com. Peoples Wealth Management, a division of the Bank’s subsidiary Peoples Advisors LLC, provides investment advisory services to the general public. The Company's business philosophy includes offering direct access to senior management and other officers and providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures and consistently applied credit policies.

2

Summary Data
Peoples Financial Services Corp.
Five Quarter Trend
(In thousands, except per share data)
	June 30			March 31			Dec 31			Sept 30			June 30
	2012			2012			2011			2011			2011
Key performance data:
Per share data:
Net income	$	0.73		$	0.78		$	0.57		$	0.60		$	0.75
Cash dividends declared	$	0.21		$	0.21		$	0.20		$	0.20		$	0.20
Book value	$	20.48		$	19.61		$	19.11		$	18.86		$	17.90
Tangible book value	$	20.29		$	19.41		$	18.89		$	18.59		$	17.62
Market value:
High	$	30.00		$	29.00		$	28.25		$	28.25		$	27.50
Low	$	28.00		$	27.50		$	27.05		$	26.90		$	25.50
Closing	$	29.00		$	28.00		$	28.25		$	27.55		$	27.05
Market capitalization	$	90,432		$	87,327		$	88,108		$	86,205		$	85,036
Common shares outstanding		3,118,356			3,118,806			3,118,856			3,129,056			3,143,656
Selected ratios:
Return on average stockholders' equity		15.36	%		16.70	%		12.54	%		13.62	%		18.56	%
Return on average assets		1.46	%		1.56	%		1.17	%		1.24	%		1.63	%
Stockholders' equity to total assets		10.00	%		9.68	%		9.59	%		9.72	%		9.59	%
Efficiency ratio		55.20	%		48.08	%		60.61	%		58.09	%		50.98	%
Nonperforming assets to loans, net, and foreclosed assets		2.14	%		2.14	%		2.39	%		2.45	%		2.45	%
Net charge-offs to average loans, net		0.05	%		0.36	%		0.06	%		0.28	%		0.01	%
Allowance for loan losses to loans, net		1.29	%		1.22	%		1.20	%		1.20	%		1.21	%
Earning assets yield (FTE)		4.96	%		4.97	%		5.00	%		5.08	%		5.27	%
Cost of funds		1.10	%		1.10	%		1.14	%		1.27	%		1.31	%
Net interest spread (FTE)		3.86	%		3.87	%		3.86	%		3.81	%		3.96	%
Net interest margin (FTE)		4.09	%		4.10	%		4.09	%		4.07	%		4.20	%

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Peoples Financial Services Corp.
Consolidated Statements of Income
(In thousands, except per share data)
Six Months Ended	June 30			June 30
	2012			2011
Interest income:
Interest and fees on loans:
Taxable	$	11,197		$	10,549
Tax-exempt		812			703
Interest and dividends on investment securities available-for-sale:
Taxable		1,239			1,299
Tax-exempt		687			886
Dividends		15			17
Interest on interest-bearing balances with banks		5			5
Interest on federal funds sold					13
Total interest income		13,955			13,472
Interest expense:
Interest on deposits		2,119			2,176
Interest on short-term borrowings		111			162
Interest on long-term debt		343			520
Total interest expense		2,573			2,858
Net interest income		11,382			10,614
Provision for loan losses		1,035			1,225
Net interest income after provision for loan losses		10,347			9,389
Noninterest income:
Service charges, fees, commissions and others		1,540			1,420
Wealth management income		281			375
Mortgage banking income		376			146
Net gains on sale of investment securities available-for-sale		383			12
Other than temporary investment securities impairment					(84	)
Net gains (losses) on sale of other real estate		(7	)		1,583
Total noninterest income		2,573			3,452
Noninterest expense:
Salaries and employee benefits expense		3,479			3,074
Net occupancy and equipment expense		1,543			1,375
Other expenses		2,190			3,016
Total noninterest expense		7,212			7,465
Income before income taxes		5,708			5,376
Provision for income tax expense		1,004			1,218
Net income	$	4,704		$	4,158
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities available-for-sale	$	1,768		$	4,283
Reclassification adjustment for gains included in net income		(383	)		(12	)
Reclassification adjustment for other than temporary impairment charges					84
Income tax expense (benefit) related to other comprehensive income		471			1,481
Other comprehensive income (loss), net of income taxes		914			2,874
Comprehensive income	$	5,618		$	7,032
Per share data:
Net income	$	1.51		$	1.32
Cash dividends declared	$	0.42		$	0.40
Average common shares outstanding		3,118,269			3,144,386

4

Peoples Financial Services Corp.
Consolidated Statements of Income
(In thousands, except per share data)
Three months ended	June 30			March 31			Dec 31			Sept 30			June 30
	2012			2012			2011			2011			2011
Interest income:
Interest and fees on loans:
Taxable	$	5,682		$	5,515		$	5,585		$	5,505		$	5,413
Tax-exempt		393			419			328			331			346
Interest and dividends on investment securities available-for-sale:
Taxable		603			636			672			639			633
Tax-exempt		328			359			377			397			411
Dividends		8			7			7			9			8
Interest on interest-bearing balances with banks		1			4			4			3			3
Interest on federal funds sold								8			13			11
Total interest income		7,015			6,940			6,981			6,897			6,825
Interest expense:
Interest on deposits		1,071			1,048			1,079			1,168			1,132
Interest on short-term borrowings		49			62			72			76			76
Interest on long-term debt		170			173			178			208			263
Total interest expense		1,290			1,283			1,329			1,452			1,471
Net interest income		5,725			5,657			5,652			5,445			5,354
Provision for loan losses		390			645			300			269			804
Net interest income after provision for loan losses		5,335			5,012			5,352			5,176			4,550
Noninterest income:
Service charges, fees, commissions and others		797			743			799			736			711
Wealth management income		138			143			140			142			236
Mortgage banking income		302			74			168			32			98
Net gains on sale of investment securities available-for-sale		99			284			(12	)		25			2
Other than temporary investment securities impairment											(3	)
Net gains (losses) on sale of other real estate		1			(8	)		(2	)		90			1,583
Total noninterest income		1,337			1,236			1,093			1,022			2,630
Noninterest expense:
Salaries and employee benefits expense		1,749			1,730			1,713			1,648			1,628
Net occupancy and equipment expense		753			790			766			738			699
Other expenses		1,396			794			1,609			1,371			1,743
Total noninterest expense		3,898			3,314			4,088			3,757			4,070
Income before income taxes		2,774			2,934			2,357			2,441			3,110
Provision for income tax expense		490			514			557			582			751
Net income	$	2,284		$	2,420		$	1,800		$	1,859		$	2,359
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities available-for-sale	$	1,791		$	(23	)	$	(466	)	$	2,908		$	3,183
Reclassification adjustment for losses (gains) included in net income		(99	)		(284	)		12			(25	)		(2	)
Reclassification adjustment for other than temporary impairment charges											3
Income tax expense  (benefit) related to other comprehensive income		575			(104	)		(154	)		981			1,082
Other comprehensive income (loss), net of income taxes		1,117			(203	)		(300	)		1,905			2,099
Comprehensive income	$	3,401		$	2,217		$	1,500		$	3,764		$	4,458
Per share data:
Net income	$	0.73		$	0.78		$	0.57		$	0.60		$	0.75
Cash dividends declared	$	0.21		$	0.21		$	0.20		$	0.20		$	0.20
Average common shares outstanding		3,118,429			3,118,109			3,123,569			3,134,591			3,146,584

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Peoples Financial Services Corp.
Details of Net Interest and Net Interest Margin
(In thousands, fully taxable equivalent basis)
Three months ended	June 30			March 31			Dec 31			Sept 30			June 30
	2012			2012			2011			2011			2011
Net interest income:
Interest income
Loans, net:
Taxable	$	5,682		$	5,515		$	5,585		$	5,505		$	5,413
Tax-exempt		595			635			497			502			524
Total loans, net		6,277			6,150			6,082			6,007			5,937
Investments:
Taxable		611			643			679			648			641
Tax-exempt		497			544			571			601			623
Total investments		1,108			1,187			1,250			1,249			1,264
Interest-bearing balances with banks		1			4			4			3			3
Federal funds sold								8			13			11
Total interest income		7,386			7,341			7,344			7,271			7,215
Interest expense:
Deposits		1,071			1,048			1,079			1,168			1,132
Short-term borrowings		49			62			72			76			76
Long-term debt		170			173			178			208			263
Total interest expense		1,290			1,283			1,329			1,452			1,471
Net interest income	$	6,096		$	6,058		$	6,015		$	5,819		$	5,744
Loans, net:
Taxable		5.43	%		5.39	%		5.51	%		5.59	%		5.71	%
Tax-exempt		5.65	%		5.96	%		5.83	%		5.74	%		5.73	%
Total loans, net		5.45	%		5.45	%		5.53	%		5.61	%		5.71	%
Investments:
Taxable		2.49	%		2.53	%		2.71	%		3.20	%		3.75	%
Tax-exempt		5.94	%		5.98	%		5.93	%		5.94	%		6.03	%
Total investments		3.37	%		3.43	%		3.61	%		4.12	%		4.61	%
Interest-bearing balances with banks		0.37	%		1.50	%		1.28	%		0.86	%		0.88	%
Federal funds sold								0.40	%		0.25	%		0.22	%
Total earning assets		4.96	%		4.97	%		5.00	%		5.08	%		5.27	%
Interest expense:
Deposits		1.03	%		1.05	%		1.07	%		1.17	%		1.17	%
Short-term borrowings		0.61	%		0.51	%		0.68	%		0.81	%		0.89	%
Long-term debt		3.67	%		3.69	%		3.69	%		3.79	%		3.92	%
Total interest-bearing liabilities		1.10	%		1.10	%		1.14	%		1.27	%		1.31	%
Net interest spread		3.86	%		3.87	%		3.86	%		3.81	%		3.96	%
Net interest margin		4.09	%		4.10	%		4.09	%		4.07	%		4.20	%

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Peoples Financial Services Corp.
Consolidated Balance Sheets
(In thousands, except per share data)
	June 30		March 31		Dec 31		Sept 30		June 30
At period end	2012		2012		2011		2011		2011
Assets:
Cash and due from banks	$	8,084	$	8,563	$	9,488	$	9,787	$	12,736
Interest-bearing balances with banks		1,175		1,075		1,071		1,007		1,007
Federal funds sold		13,130						17,174		9,357
Investment securities available-for-sale		128,596		132,882		139,899		128,956		114,096
Loans held for sale		2,242		2,724		569		1,206		92
Loans, net		457,054		459,223		445,103		427,249		426,655
Less: allowance for loan losses		5,916		5,589		5,349		5,119		5,153
Net loans		451,138		453,634		439,754		422,130		421,502
Premises and equipment, net		8,716		8,235		7,916		8,039		8,171
Accrued interest receivable		2,903		3,472		3,448		3,240		3,272
Other assets		22,730		21,164		19,259		15,616		16,347
Total assets	$	638,714	$	631,749	$	621,404	$	607,155	$	586,580
Liabilities:
Deposits:
Noninterest-bearing	$	96,692	$	97,353	$	92,985	$	84,572	$	78,216
Interest-bearing		441,419		404,779		401,298		401,588		392,353
Total deposits		538,111		502,132		494,283		486,160		470,569
Short-term borrowings		13,233		45,375		43,791		38,892		36,352
Long-term debt		18,533		18,731		18,927		21,620		21,862
Accrued interest payable		248		244		284		282		307
Other liabilities		4,713		4,106		4,506		1,178		1,220
Total liabilities		574,838		570,588		561,791		548,132		530,310
Stockholders' equity:
Common stock, par value $2.00 authorized
12,500,000, shares issued 3,341,251;		6,683		6,683		6,683		6,683		6,683
Capital surplus		3,155		3,147		3,141		3,141		3,122
Retained earnings		54,738		53,108		51,342		50,173		48,938
Accumulated other comprehensive income (loss)		4,559		3,442		3,645		3,945		2,040
Less: Treasury stock, at cost, shares held 222,895; 222,445;		5,259		5,219		5,198		4,919		4,513
222,395; 212,195; 197,595
Total stockholders' equity		63,876		61,161		59,613		59,023		56,270
Total liabilities and stockholders' equity	$	638,714	$	631,749	$	621,404	$	607,155	$	586,580

7

Peoples Financial Services Corp.
Consolidated Balance Sheets
(In thousands, except per share data)
	June 30		March 31		Dec 31		Sept 30		June 30
Average quarterly balances	2012		2012		2011		2011		2011
Assets:
Loans, net:
Taxable	$	421,204	$	411,306	$	402,315	$	390,478	$	380,528
Tax-exempt		42,392		42,852		33,812		34,711		36,685
Total loans, net		463,596		454,158		436,127		425,189		417,213
Investments:
Taxable		98,659		102,375		99,252		80,221		68,614
Tax-exempt		33,624		36,608		38,217		40,105		41,434
Total investments		132,283		138,983		137,469		120,326		110,048
Interest-bearing balances with banks		1,078		1,074		1,236		1,386		1,364
Federal funds sold		1,936				8,010		20,693		20,504
Total earning assets		598,893		594,215		582,842		567,594		549,129
Other assets		31,073		27,943		27,950		28,378		32,970
Total assets	$	629,966	$	622,158	$	610,792	$	595,972	$	582,099
Liabilities and stockholders' equity:
Deposits:
Interest-bearing	$	419,987	$	399,755	$	400,678	$	395,354	$	387,655
Noninterest-bearing		94,920		92,492		87,573		83,458		78,959
Total deposits		514,907		492,247		488,251		478,812		466,614
Short-term borrowings		32,446		48,582		42,290		37,231		34,373
Long-term debt		18,641		18,837		19,140		21,749		26,935
Other liabilities		4,175		4,223		4,176		4,014		3,192
Total liabilities		570,169		563,889		553,857		541,806		531,114
Stockholders' equity		59,797		58,269		56,935		54,166		50,985
Total liabilities and stockholders' equity	$	629,966	$	622,158	$	610,792	$	595,972	$	582,099

8

Peoples Financial Services Corp.
Asset Quality Data
(In thousands)
	June 30		March 31		Dec 31		Sept 30		June 30
At quarter end	2012		2012		2011		2011		2011
Nonperforming assets:
Nonaccrual/restructured loans	$	7,177	$	7,473	$	9,597	$	9,651	$	10,002
Accruing loans past due 90 days or more		737		691		660		429		443
Foreclosed assets		1,889		1,692		399		399
Total nonperforming assets	$	9,803	$	9,856	$	10,656	$	10,479	$	10,445
Three months ended
Allowance for loan losses:
Beginning balance	$	5,589	$	5,349	$	5,119	$	5,153	$	4,356
Charge-offs		84		421		83		317		23
Recoveries		21		16		13		14		16
Provision for loan losses		390		645		300		269		804
Ending balance	$	5,916	$	5,589	$	5,349	$	5,119	$	5,153
SOURCE Peoples Financial Services Corp.
/Contact: MEDIA/INVESTORS, Scott A. Seasock, 570.879.2175 or scotts@peoplesnatbank.com
Co: Peoples Financial Services Corp.
St:   Pennsylvania
In:   Fin
Except for the historical information contained, herein, the matters discussed in this press release are forward-looking statements that involve risks and uncertainties in the banking industry and overall economy. Such risks and uncertainties are detailed in the Company's Securities and Exchange Commission reports, including the Annual Report on Form 10-K and quarterly reports on Form 10-Q.

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