In Memoriam
D. WILLIAM HUME
EDWIN J. BUTLER
1926 – 2016
Chairman of the Board of Directors
1991 – 2013
1926 – 2015
Director
1987 – 2011
Shareholder Letter
KING OF PRUSSIA
During the fourth quarter of 2015, a Loan Production
Office was established in the King of Prussia market in
Montgomery County. This region provides us with the
ability to serve major markets located within 30 min-
utes of this office such as Philadelphia, West Chester and
Lansdale. An experienced commercial lender and sup-
port staff are currently in place and we expect to add
two additional lenders during 2016.
Wealth Management
In addition, we expanded and rebranded our Trust &
Investment and Brokerage Divisions under one um-
brella, the Peoples Security Wealth Management Group.
Bradley S. Grubb was hired as President of the Wealth
Management Group to oversee the consolidation and
growth of all areas. The bank also transitioned to a new
broker/dealer to expand and offer more comprehensive
products and services. At the same time, we acquired
the Asset Management and Retirement Plan Services of
Scranton based Edward J. Gilmartin, Gilmartin Associ-
ates, who offer investment services for 401(k) Defined-
Benefit and Profit Sharing Plans for over 300 businesses.
Unfortunately, we were saddened to hear of the
passing of two of our retired board members. Ed-
win J. Butler passed away
in May of 2015. His
banking career spanned over 40 years both as a bank
officer and member of our Board of Directors.
D. William Hume, retired Chairman of the Board and
retired bank officer, passed away in January of 2016.
Mr. Hume’s banking career spanned 60 years. Both men
served our company well.
We would like to take this opportunity to thank our
Board of Directors for their leadership and guidance, our
shareholders for the confidence they have placed in our
company, and our employees––our accomplishments
would not have been possible without their dedication
and hard work.
Sincerely yours,
Craig W. Best
President & CEO
William E. Aubrey II
Chairman of the Board
Craig W. Best
President & CEO
William E. Aubrey II
Chairman of the Board
DEAR SHAREHOLDERS,
During the past year, our company made significant
progress in the execution of two core strategies:
1.) market expansion and 2.) build out of our Wealth
Management Services.
Financial performance continued to be strong,
net income for the period ending December 31,
2015 was $17.7 million or $2.36 per share. Total
assets, loans and deposits totaled $1.8 billion, $1.3
billion and $1.5 billion respectively. Loans increased
$131 million or 10.8% and deposits increased $30.3
million or 2.1%.
We continue to work on initiatives to improve our
long-term performance through expansion into new
markets and position our company for greater profit-
ability in the future.
Market Expansion
LEHIGH VALLEY
During 2015 our Lehigh Valley Loan Production Office,
which opened in 2014, transitioned to a full-service
branch location in one of Eastern Pennsylvania’s fastest
growing markets to better serve the banking needs of
both Retail and Commercial customers. Neal D. Koplin,
President of this region, and his team have done an ex-
ceptional job of developing new business in this market.
KINGSTON
We also began renovating our new Kingston Office dur-
ing 2015. This new state-of-the art office is located in
the heart of the community at the previous site of the
Kingston Post Office. The Post Office consolidated and
continues to share space with us in our building. This of-
fice is expected to open early in the second quarter of
2016, and we look forward to meeting the needs of both
Retail and Commercial customers in this market.
2
PEOPLES FINANCIAL SERVICES CORP.
Board of Directors & Executive Officers
The Board of Peoples Financial Services Corp. is a distinguished group of community leaders and
professionals. Their combined abundance of business and professional expertise helps us to fulfill
our company’s core values that are integral to our success and growth.
FRONT ROW:
BACK ROW:
Joseph T. Wright, Jr., Esq
Attorney at Law | Partner
Wright Reihner PC
Craig W. Best
President & CEO
Peoples Financial Services Corp.
Peoples Security Bank
and Trust Company
William E. Aubrey II
Chairman
President & CEO
Gertrude Hawk Chocolates
Joseph G. Cesare, M.D.
President
Scranton Orthopedic Specialists
EXECUTIVE OFFICERS
James G. Keisling
Treasurer
Northeast Architectural Products, Inc.
Robert W. Naismith, Ph.D.
Chairman
JuJaMa, Inc.
P. Frank Kozik
Chief Executive Officer
Scranton Craftsmen, Inc.
Richard S. Lochen, Jr.
Certified Public Accountant/Partner
Lochen & Chase PC
Emily S. Perry
Retired Insurance Account Executive
Community Volunteer
James B. Nicholas
President
D.G. Nicholas Co.
Ronald G. Kukuchka
President
Ace Robbins, Inc.
Earle A. Wootton
Chairman & CEO | Director
Community Foundation
of the Endless Mountains, Inc.
President & CEO
Mountain Resource Partners, Inc.
George H. Stover, Jr.
Real Estate Appraiser
Steven L. Weinberger
President
G. Weinberger Company
Craig W. Best
President & CEO
Scott A. Seasock
Chief Financial Officer
Thomas P. Tulaney
Corporate
Chief Lending Officer
Joseph M. Ferretti
Commercial
Chief Lending Officer
Michael L. Jake
Chief Risk Officer
Debra E. Dissinger
Chief Operations Officer
Lynn M. Peters Thiel
Chief Retail Officer
Neal D. Koplin
Lehigh Valley Region
President
Bradley S. Grubb
Peoples Security
Wealth Management
President
Financial Highlights
4
PEOPLES FINANCIAL SERVICES CORP.PEOPLES FINANCIAL SERVICES CORP. PICTURED ABOVE: Edward J. Gilmartin, Managing Director of Retirement Plan Services
and Margo Opsasnick, Chief Executive Officer, Delta Medix, PC
PEOPLES SECURITY EXPANDS WEALTH MANAGEMENT GROUP
During 2015 the bank expanded and rebrand-
Defined-Benefit and Profit Sharing Plans for
ed its Wealth Management program bringing
over 300 businesses. Edward J. Gilmartin has
our Trust & Investment and Brokerage Divi-
joined the Wealth Management Group as
sions under one umbrella, the Peoples Security
Managing Director of Retirement Plan Ser-
Wealth Management Group. Bradley S. Grubb,
vices. Mr. Gilmartin will continue to focus on
President of the Wealth Management Group, is
servicing existing clients as well as expanding
leading the expansion, rebranding and growth
retirement services to privately held business-
of the Group.
es and corporations throughout Northeastern
In addition, the bank joined the Institution
Pennsylvania.
Services Platform of leading retail investment
Looking to the future, we expect to in-
advisory firm and independent broker/dealer,
crease the number of Advisors currently in
LPL Financial LLC, a wholly-owned subsidiary
place as we expand our Wealth Management
of LPL Financial Holdings, Inc.
program to include comprehensive offerings
Also, as part of the expansion, the bank
of Brokerage, Financial Advisory, Wealth Man-
acquired the Asset Management and Retire-
agement, Retirement Planning, Insurance and
ment Plan Services of Scranton based Edward
Trust Services for clients ranging from mass-
J. Gilmartin, Gilmartin Associates who cur-
affluent retail clients to high-net-worth indi-
rently provides investment services for 401(k)
viduals and families, as well as institutions.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Insurance
products offered through LPL Financial or its licensed affiliates. The investment products sold through LPL Financial are not insured
Peoples Security Bank & Trust Company deposits and are not FDIC insured. These products are not obligations of the Peoples
Security Bank & Trust Company and are not endorsed, recommended or guaranteed by Peoples Security Bank & Trust Company
or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss
of principal is possible. Peoples Security Bank & Trust and Peoples Security Wealth Management Group are not registered broker/
dealers and are not affiliated with LPL Financial.
5
PEOPLES FINANCIAL SERVICES CORP.
Craig W. Best, President & CEO Peoples Security Bank
& Trust Company & Neal D. Koplin, Lehigh Valley/King
of Prussia Region President greeted guests at an
Open House held to introduce the community
to our new full-service branch.
Also joining in the festivities were employees of the Lehigh Valley Office.
PICTURED ABOVE (L TO R): Colleen M. Duser, Mortgage Originator | Kevin D. Benner, VP, Retail Business Development Officer | Leigh A. Selden, VP, Commercial Services Officer
Kim Headdings, Universal Banker | Neal D. Koplin, EVP, Lehigh Valley/King of Prussia Region President | Casey A. Greenfield, AVP, Branch Manager
Laura Miller, Executive Assistant | Gregory K. Rarick, Commercial Loan Portfolio Manager | Jeffrey A. Drobins, VP, Commercial Lending Officer
GROWTH IN THE LEHIGH VALLEY MARKET
Peoples Security Bank & Trust Company
location in this quickly expanding market al-
expanded its footprint into the Lehigh Valley
lows us to better serve the needs of both retail
market in 2014 by opening a Business Loan
and business customers in Bethlehem and the
Center in Bethlehem. Throughout 2015, this of-
surrounding communities.
fice experienced strong growth and ended the
On June 24, 2015, the Bethlehem Office
year with $23.7 million in deposits and $94.7
held an Open House event for 200 invited
million in loans.
guests at their location at 2355 City Line Road,
Due to the warm welcome of the business
Bethlehem. The Peoples Security Bank team
community and increasing success of this new
provided tours of the bank to their guests,
location, we expanded our presence in the area
and light fare was offered under a tent where
by transitioning this office into a full-service
guests enjoyed the music of the always popular
branch in June of 2015. Having a retail branch
David Leonhardt.
6
PEOPLES FINANCIAL SERVICES CORP.PEOPLES FINANCIAL SERVICES CORP.
Office Locations
Hop Bottom
126 Main St
Hop Bottom, PA
18824
(570) 289-4124
Montrose
695 Grow Ave
Montrose, PA
18801
(570) 278-4100
Susquehanna
215 Erie Blvd
Susquehanna, PA
18847
(570) 853-4901
WAYNE
COUNTY | PA
Gouldsboro
534 Main St
Gouldsboro, PA
18424
(570) 842-6473
WYOMING
COUNTY | PA
Meshoppen
3487 State Route 6
Meshoppen, PA
18630
(570) 833-5171
Nicholson
42–48 State St
Nicholson, PA
18446
(570) 942-2265
Tunkhannock
83 East Tioga St
Tunkhannock, PA
18657
(570) 836-2135
BROOME
COUNTY | NY
Conklin
1026 Conklin Rd
Conklin, NY
13748
(607) 722-2114
Westside
Binghamton
273 Main St
Binghamton, NY
13905
(607) 729-3832
LACKAWANNA
COUNTY | PA
Abington
1100 Northern Blvd
S Abington Twp, PA
18411
(570) 587-4898
Central City Scranton
150 N Washington Ave
Scranton, PA
18503
(570) 955-1700
East Scranton
968 Prescott Ave
Scranton, PA
18510
(570) 342-9101
Glenburn
494 N Gravel Pond Rd
Clarks Summit, PA
18411
(570) 585-5130
Green Ridge
1901 Sanderson Ave
Scranton, PA
18509
(570) 346-4695
Minooka
420 Davis St
Scranton, PA
18505
(570) 955-1883
Moscow
141 N Main St
Moscow, PA
18444
(570) 842-7626
Old Forge
216 South Main St
Old Forge, PA
18518
(570) 451-7200
Peckville
540 Main St
Peckville, PA
18452
(570) 383-2154
South Scranton
526 Cedar Ave
Scranton, PA
18505
(570) 343-1151
LEHIGH
COUNTY | PA
Bethlehem
2355 City Line Rd
Bethlehem, PA
18017
(610) 691-1202
LUZERNE
COUNTY | PA
Duryea
304 Main St
Duryea, PA
18642
(570) 457-1120
MONROE
COUNTY | PA
Mount Pocono
1322 Pocono Blvd
Mount Pocono, PA
18344
(570) 839-8732
MONTGOMERY
COUNTY | PA
King of Prussia
Loan Center
(610) 337-2836
SUSQUEHANNA
COUNTY | PA
Hallstead
25109 State Rt 11
Hallstead, PA
18822
(570) 879-2195
Off-site ATMs
COMMONWEALTH
MEDICAL COLLEGE
525 Pine Street
Scranton, PA
HILTON SCRANTON
& CONFERENCE CENTER
100 Adams Avenue
Scranton, PA
LACKAWANNA COLLEGE
501 Vine Street
Scranton, PA
MEADOW AVENUE
Meadow Avenue
& Hemlock Street
Scranton, PA
Radisson Lackawanna
Station Hotel
700 Lackawanna Avenue
Scranton, PA
Saint Mary’s Villa
Nursing Home
516 Saint Mary’s Villa Road
Elmhurst Township, PA
PEOPLES FINANCIAL SERVICES CORP. Corporate Information
Peoples Security Bank
and Trust Company
Corporate Headquarters
150 North Washington Avenue
Scranton, PA 18503
(570) 346-7741
(888) 868-3858
psbt.com
Investor Relations Officer
Marie L. Luciani
(570) 346-7741 x2352
(888) 868-3858 x2352
Stock Information
The common stock of
Peoples Financial Services Corp.
is listed on the NASDAQ
Stock Market under
the ticker symbol PFIS.
Stock Transfer
and Registrar Agent
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(718) 921-8124
(800) 937-5449
Form 10-K Annual Report
A copy of our form 10-K for the
year ended December 31, 2015
is included herein. Copies of the
company’s Annual Report to the
Securities and Exchange
Commission on Form 10-K,
quarterly reports on Form
10-Q and news releases may
be obtained without charge
upon request to:
Marie L. Luciani
Investor Relations Officer
150 North Washington Avenue
Scranton, PA 18503
Annual Meeting
Saturday, May 14, 2016, 9:00am
Shadowbrook Inn and Resort
201 Resort Lane
Tunkhannock, PA 18657
(570) 836-2151
Dividend Calendar
Dividends on Peoples Financial
Services Corp. common stock
are customarily payable on or
about the 15th of March, June,
September and December.
Dividend Reinvestment Plan
American Stock Transfer &
Trust Company, LLC administers
a Dividend Reinvestment Plan
and Stock Purchase Plan.
Additional information may be
obtained on American Stock
Transfer & Trust Company’s
website: amstock.com.
Direct Deposit of Dividends
As a shareholder of Peoples
Financial Services Corp.,
you may have your dividend
payments deposited directly
into a personal checking,
savings, or other account.
Direct deposit of your dividend
eliminates the chance of your
dividend check being lost or
stolen and is credited to your
account on the same day that
the dividend is paid. To begin
direct deposit of your dividend,
please contact Marie L. Luciani,
Investor Relations Officer, at the
Corporate Headquarters address.
Independent Auditors
BDO USA, LLP
945 East Park Drive
Suite 103
Harrisburg, PA 17111
(717) 233-8800
General Counsel
Jerry Weinberger, Esq.
Nogi, Appleton, Weinberger
& Wren, P.C.
415 Wyoming Avenue
Scranton, PA 18510
(570) 963-8880
8
P E O P L E S F I N A N C I A L S E R V I C E S C O R P.
SEC Counsel
Pepper Hamilton, LLP
3000 Two Logan Square
Eighteenth & Arch Streets
Philadelphia, PA 19103
(215) 981-4000
Trust Counsel
James W. Reid, Esq.
Oliver, Price & Rhodes
1212 South Abington Road
Clarks Summit, PA 18411
(570) 585-1200
Market Makers
Boenning & Scattergood, Inc.
4 Tower Bridge
200 Barr Harbor Drive
Suite 300
W Conshohocken, PA 19428
(610) 862-5368
Griffin Financial Group, LLC
440 Monticello Avenue
Suite 1824
Norfolk, VA 23510
(757) 955-8444
Keefe Bruyette & Woods (KBW)
The Equitable Building
787 7th Avenue
New York, NY 10019
(212) 887-8996
Products and Services
Detailed information on our
products and services offered
by Peoples Security Bank
can be obtained by visiting
psbt.com or by calling
(888) 868-3858
or (570) 346-7741
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
For the transition period from to
Commission file number: 001-36388
Peoples Financial Services Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania
State or other jurisdiction of
incorporation or organization
23-2391852
(I.R.S. Employer
Identification No.)
150 North Washington Avenue,
Scranton, PA 18503
(Address of principal executive offices) (Zip Code)
(570) 346-7741
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $2.00 par value
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2015 was approximately
$298,767,337 (based on the closing sales price of the registrant’s common stock on that date).
The number of shares of the registrant’s common stock outstanding as of February 29, 2016 was 7,402,439
Portions of the registrant’s definitive proxy statement to be filed in connection with solicitation of proxies for its 2016 annual meeting of
shareholders, within 120 days of the end of registrant’s fiscal year, is incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Page
Number
1
16
27
27
27
27
27
30
31
69
70
121
121
124
124
124
124
124
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Peoples Financial Services Corp.
Form 10K
For the Year Ended December 31, 2015
TABLE OF CONTENTS
PART I
Business
Risk Factors
Item 1.
Item 1A.
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A.
Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
-i-
Cautionary Note Regarding Forward-Looking Statements.
This Annual Report on Form 10-K 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.
The ability of Peoples Financial Services Corp. to predict results or the actual effect of future plans or strategies is
inherently uncertain. Important factors that could cause actual results of Peoples Financial Services Corp. to differ
materially from those in the forward-looking statements include, but are not limited to: the ability to achieve the intended
benefits of the merger with Penseco Financial Services Corporation; changes in interest rates; economic conditions,
particularly in the Peoples Financial Services Corp. 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 the Peoples Financial Services Corp. market area;
changes in relevant accounting principles and guidelines; and inability of third party service providers to perform.
Additional factors that may affect our results are discussed in Item 1A to this Annual Report on Form 10-K titled “Risk
Factors”.
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, Peoples Financial Services Corp.
does not undertake, and specifically disclaims 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.
-ii-
Part I
Item 1.
Business.
General
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, including
its subsidiary, Peoples Advisors, LLC. On November 30, 2013, Penseco Financial Services Corporation, a financial
holding company incorporated under the laws of Pennsylvania, referred to as “Penseco,” merged with and into Peoples
Financial Services Corp., with Peoples Financial Services Corp. being the surviving corporation, pursuant to an
Agreement and Plan of Merger dated June 28, 2013. Such transaction is sometimes referred to in this annual report as the
“Penseco merger” and such agreement as the “Penseco merger agreement.” In connection with the Penseco merger, on
December 1, 2013, Penseco’s former banking subsidiary, Penn Security Bank and Trust Company, merged with and into
Peoples Neighborhood Bank, and the resulting institution adopted the name, “Peoples Security Bank and Trust
Company.”
Unless the context indicates otherwise, all references in this annual report to the “Peoples,” “we,” “us” and “our” refer to
Peoples Financial Services Corp., its direct and indirect subsidiaries and its and their respective predecessors. Peoples
Security Bank and Trust Company is sometimes referred to as “Peoples Bank.”
Peoples Bank is a state-chartered bank and trust company under the jurisdiction of the Pennsylvania Department of
Banking and Securities and the Federal Deposit Insurance Corporation, or “FDIC.” Peoples Bank’s twenty-four
community banking offices, all similar with respect to economic characteristics, share a majority of the following
aggregation criteria: products and services; operating processes; customer bases; delivery systems; and regulatory
oversight. Accordingly, they are aggregated into a single operating segment.
Peoples Advisors, LLC, provides investment advisory services through a third party to individuals and small businesses.
Peoples Advisors, LLC did not meet the quantitative thresholds for required segment disclosure.
Market Areas
Our principal market area consists of Lackawanna, Lehigh, Luzerne, Monroe, Susquehanna, Wayne and Wyoming
Counties in Pennsylvania and Broome County in New York. In addition, parts of Bradford County in Pennsylvania that
borders Susquehanna and Wyoming Counties are also considered part of the market area.
Specifically, our market area is situated between:
Binghamton, Broome County, New York, located to the north; and
Bethlehem, Lehigh County, Pennsylvania, to the south.
Susquehanna County could best be described as a bedroom county with a high percentage of its residents commuting to
work in Broome County, New York, or Lackawanna County, Pennsylvania. The southern part of Susquehanna County
tends to gravitate south for both employment and shopping, while the northern part of the county goes north to Broome
County, New York. The western part of Susquehanna County gravitates south and west to and through Wyoming
County. Approximately half of our offices are located in and around Scranton, the largest city in Lackawanna County
with the remaining offices located in counties that would be considered sparsely populated, as they are made up of many
small towns and villages. Peoples entered into the Lehigh County market during the fourth quarter of 2014. This market
has a greater population than the other counties served with Bethlehem being the second largest city within Lehigh
County.
-1-
Most recently, the production of natural gas from the Marcellus Shale formation located in the heart of our market area
has begun to provide economic benefits to the communities served and as a result to us. Natural gas producers have
already invested billions of dollars in Pennsylvania in lease and land acquisition, new well drilling, infrastructure
development and community partnerships, with an even greater investment expected in the future. The growth of our
deposits, and to a lesser extent, loan portfolio, has been influenced by natural gas drilling activities.
Products and Services
Our primary products are loans to small- and medium-sized businesses. Other lending products include one-to-four
family residential mortgages and consumer loans. We fund our loans, primarily, by offering open time deposits to
commercial enterprises and individuals. Other deposit products include certificates of deposits and various demand
deposit accounts.
Lending Activities
We provide a full range of retail and commercial lending products designed to meet the borrowing needs of consumers
and small- and medium-sized businesses in our market areas. A significant amount of our loans are to customers located
within our market area. We have no foreign loans or highly leveraged transaction loans, as defined by the Federal
Reserve Board. Although we participate in loans originated by other banks, we have originated the majority of loans in
our portfolio.
Our retail lending products include the following types of loans, among others: residential real estate; automobiles;
manufactured housing; personal; student; home equity, and credit card. Our commercial lending products include the
following types of loans, among others: commercial real estate; working capital; equipment and other commercial needs;
construction; Small Business Administration, and agricultural and mineral rights. The terms offered on a loan vary
depending primarily on the type of loan and credit-worthiness of the borrower.
Payment risk is a function of the economic climate in which our lending activities are conducted. Economic downturns
in the economy generally or in a particular sector could cause cash flow problems for customers and make loan payments
more difficult. We attempt to minimize this risk by not being exposed to loan concentrations of a single customer or a
group of customers, the loss of any one or more of whom would have a materially adverse effect on its financial
condition. One element of interest rate risk arises from our fixed rate loans in an environment of changing interest rates.
We attempt to mitigate this risk by making adjustable rate commercial loans and by limiting repricing terms to five years
or less for customers requiring fixed rate loans. Our lending activity also exposes us to risks that any collateral we take as
security is not adequate. We attempt to manage collateral risk by avoiding loan concentrations to particular borrowers,
by perfecting liens on collateral and by obtaining appraisals on property prior to extending loans. We attempt to mitigate
our exposure to these and other types of risks by stratifying authorization requirements by loan size and complexity.
We generate interest income from our loan and securities portfolios. Other income is generated primarily from merchant
transaction fees, trust fees and service charges on deposit accounts. Our primary costs are interest paid on deposits and
borrowings and general operating expenses. We provide a variety of commercial and retail banking services to business,
non-profits, governmental, municipal agencies and professional customers, as well as retail customers, on a personalized
basis. Our primary lending products are real estate, commercial and consumer loans. We also offer ATM access, credit
cards, active investment accounts, trust department services and other various lending, depository and related financial
services. Our primary deposit products are savings and demand deposit accounts and certificates of deposit.
We are not dependent upon a single customer, or a few customers, the loss of one or more of which would have a
material adverse effect on our operations. In the ordinary course of our business, our operations and earnings are not
materially affected by seasonal changes or by Federal, state or local environmental laws or regulations.
We offer a variety of loans including commercial, residential and consumer loans as described above. The consumer
portfolio includes automobile loans, educational loans and lines of credit.
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We intend to continue to evaluate commercial real estate, commercial business and governmental lending opportunities,
including small business lending. We continue to proactively monitor and manage existing credit relationships.
We have not engaged in sub-prime residential mortgage lending, which is defined as mortgage loans advanced to
borrowers who do not qualify for market interest rates because of problems with their credit history. We focus our
lending efforts within our market area.
One-to-Four Family Residential Loans. We offer two types of residential mortgage loans: fixed-rate loans, with terms of
up to 30 years, and adjustable-rate loans, with interest rates and payments that adjust annually after an initial fixed period
of one, three or five years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal
to a percentage above the appropriate U.S. Treasury Security Index. Our adjustable-rate single-family residential real
estate loans generally have caps on increases or decreases in the interest rate at any adjustment date, and a maximum
adjustment limit over the life of the loan. Although we offer adjustable-rate loans with initial rates below the fully
indexed rate, loans tied to the one-year constant maturity treasury are underwritten using methods approved by the
Federal Home Loan Mortgage Corporation, which require borrowers to be qualified at a rate equal to 200 basis points
above the discounted loan rate under certain conditions.
Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered
for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans, among other
factors. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own
pricing criteria and competitive market conditions.
Most of our residential loans are underwritten to standards established by the secondary market. We also offer VA and
FHA loans via a third party lending source.
While one-to-four family residential real estate loans are normally originated with up to 30-year terms, such loans
typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either
upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans. We do not offer loans with negative amortization or interest only
loans.
We offer home equity loans and lines of credit, typically with a maximum combined loan-to-value ratio of 80%. Home
equity loans generally have fixed-rates of interest and are originated with terms of up to 15 years. Home equity lines of
credit generally have variable rates and are indexed to the prime rate. Home equity lines of credit generally have draw
periods with 20 year repayment periods.
We generally do not make high loan-to-value loans (defined as loans with a loan-to-value ratio in excess of 80%)
without private mortgage insurance. The maximum loan-to-value ratio we generally permit is 95% with private mortgage
insurance. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser.
We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood
insurance is required for loans on properties located in a flood zone.
Commercial Real Estate Loans. We offer commercial real estate loans secured by real estate primarily with adjustable
rates. We originate a variety of commercial real estate loans generally for terms up to 25 years and payments based on an
amortization schedule of up to 25 years. These loans are typically based on either the Federal Home Loan Bank
borrowing rate or our own pricing criteria and adjust every three to five years. Commercial real estate loans also are
originated for the acquisition and development of land, including development for residential use. Conditions of
acquisition and development loans originated generally limit the number of model homes and homes built on
speculation, and draws are scheduled against executed agreements of sale. Commercial real estate loans for the
acquisition and development of land are typically based upon the prime rate. Commercial real estate loans for developed
real estate and for real estate acquisition and development are originated generally with loan-to-value ratios up to 75%,
while loans for the acquisition of land are originated with a maximum loan to value ratio of 65%.
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Commercial Loans. We offer commercial business loans to professionals, sole proprietorships and small businesses in
our market area. We offer installment loans for capital improvements, equipment acquisition and long-term working
capital. These loans are typically priced at short term fixed rates or variable rates based on the prime rate. These loans
are secured by business assets other than real estate, such as business equipment and inventory, and, generally, are
backed by personal guarantees of the owner or owners of the business. We originate lines of credit to finance the
working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the
business can borrow funds for planned equipment purchases.
When making commercial business loans, we consider the consolidated financial statements of the borrower and any
guarantors, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the
borrower, the projected cash flows of the business and guarantor, the viability of the industry in which the customer
operates and the value of the collateral.
Consumer Loans. We offer a variety of consumer loans, including lines of credit, automobile loans and loans secured by
savings accounts and certificates of deposit. We also offer unsecured loans.
We offer loans secured by new and used automobiles, primarily indirectly through dealerships. These loans have fixed
interest rates and generally have terms up to six years. We offer automobile loans with loan-to-value ratios of up to
100% of the purchase price of the vehicle depending upon the credit history of the borrower and other factors.
We offer consumer loans secured by savings accounts and certificates of deposit held by us based upon the deposit rates
plus a margin with terms up to five years. We offer such loans up to 100% of the principal balance of the certificate of
deposit or balance in the savings account. We also offer unsecured loans and lines of credit with terms up to five years.
Our unsecured loans and lines of credit bear a substantially higher interest rate than our secured loans and lines of credit.
The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts
and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is
a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the
proposed loan amount.
We have adhered and continue to adhere to credit policies, both prior to and during the recent economic downturn, which
management believes are sound. Our loan policies require verification of information provided by loan applicants as well
as an assessment of their ability to repay for all loans. At no time have we made loans similar to those commonly
referred to as “no doc” or “stated income” loans.
While the vast majority of the loans in our loan portfolio are secured by collateral, we have made and will continue to
make loans on an unsecured basis. Unsecured commercial loans are only granted to those borrowers exhibiting
historically strong cash flow and capacity with seasoned management. Unsecured consumer loans are made for relatively
short terms and to borrowers with strong credit histories.
We consider requests to modify, restructure or otherwise change the terms of loans on an individual basis as
circumstances and/or reasons for such changes may vary. All such changes in terms must be authorized by the
appropriate approval body. Also, our credit policy prohibits the modification of loans or the extension of additional
credit to borrowers who are not current on their payments. Exceptions are approved only where our position in the credit
relationship is expected to be enhanced by such action.
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase
in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate
loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The
marketability of collateral also may be adversely affected in a high interest rate environment. In addition, although
adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment limits on residential mortgage loans. We attempt
to negotiate floors on most adjustable rate commercial loans. The commercial adjustable rate loans generally provide a
fixed rate re-negotiation at the end of the initial fixed rate period. If we and the borrower are unable to agree on a new
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fixed rate then the rate converts to a floating rate obligation. In addition, some commercial loans adjust to a
predetermined index plus a spread at the end of the initial fixed rate period, for a like period of time. To a lesser degree,
we have entered into transactions with collars generally for periods of five years or less.
Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger balances and involve a
greater degree of risk than one-to-four family residential mortgage loans. Of primary concern in commercial real estate
lending is the borrower’s and any guarantor’s creditworthiness and the feasibility and cash flow potential of the financed
project. Additional considerations include: location, market and geographic concentrations, loan to value, strength of
guarantors and quality of tenants. Payments on loans secured by income properties often depend on successful operation
and management of the properties. As a result, repayment of such loans may be subject to a greater extent than
residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on
income properties, we require borrowers and loan guarantors, if any, to provide annual consolidated financial statements
on commercial real estate loans and rent rolls where applicable. In reaching a decision on whether to make a commercial
real estate loan, we consider and review a cash flow analysis of the borrower and guarantor, when applicable, and
considers the net operating income of the property, the borrower’s expertise, credit history and profitability and the value
of the underlying property. We have generally required that the properties securing these real estate loans have debt
service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.2 times. An environmental
report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have
been impacted by adjoining properties that handled hazardous materials.
Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s
ability to make repayment from his or her employment or other income, and which are secured by real property, the
value of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made
on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the
availability of funds for the repayment of commercial business loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and
may fluctuate in value.
Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the
borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to
be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state insolvency laws, may limit the amount that can
be recovered on such loans.
Loan Originations. Loan originations come from a number of sources. The primary sources of loan originations are
existing customers, walk-in traffic, advertising and referrals from customers. We also purchase participations in loans
from local financial institutions to supplement our lending portfolio. Loan participations are subject to the same credit
analysis and loan approvals as the loans we originate. We are permitted to review all of the documentation relating to
any loan in which we participate. However, in a purchased participation loan, we do not service the loan and are subject
to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and
instituting foreclosure proceedings.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting
standards and loan origination procedures established by our board of directors and management. The board of directors
has granted loan approval authority to certain officers or groups of officers up to prescribed limits, based on the officer’s
experience.
Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities
generally is limited, by regulation, to 15% of the capital accounts of Peoples Bank. Capital accounts include the
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aggregate of capital, surplus, undivided profits, capital securities and reserve for loan losses. At December 31, 2015, our
regulatory limit on loans to one borrower was $28.9 million.
Deposit Activities
Our primary source of funds is the cash flow provided by our financing activities, mainly deposit gathering. Other
sources of funds are provided by investing activities, including principal and interest payments on loans and investment
securities, and operating activities, primarily net income. We offer a variety of deposit accounts with a range of interest
rates and terms, including, among others: money market accounts; NOW accounts; savings accounts; certificates of
deposit; individual retirement accounts, and demand deposit accounts. These deposits are primarily obtained from areas
surrounding our branch offices. We rely primarily on marketing, product innovation, technology, service and long-
standing relationships with customers to attract and retain these deposits. Other deposit related services include: remote
deposit capture; automatic clearing house transactions; cash management services; automated teller machines; point of
sale transactions; safe deposit boxes; night depository services; direct deposit, and official check services.
Trust, Wealth Management and Brokerage and Services
Through our trust department, we offer a broad range of fiduciary and investment services. Our trust and investment
services include:
investment management
IRA trustee services
estate administration
living trusts
trustee under will
guardianships
life insurance trusts
custodial services / IRA custodial services
corporate trusts, and
pension and profit sharing plans.
We provide a comprehensive array of wealth management products and services through Peoples Advisors, LLC to
individuals, small businesses and nonprofit entities. These products and services include the following, among others:
investment portfolio management; estate planning; annuities; business succession planning; insurances; education
funding strategies, and tax planning.
We have a third party marketing agreement with a broker-dealer that allows us to offer a full range of securities,
brokerage services and annuity sales to our customers. Our investor services division is located in our headquarters
building and the services are offered throughout the entire branch system. Through this relationship, our clients have
access to a wide array of financial and wealth management strategies, including services such as professional money
management, retirement and education planning, and investment products including stocks, bonds, mutual funds,
annuities and insurance products.
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Merchant Services
We offer credit card processing and a variety of other products and services to our merchant customers, including:
small business checking accounts
merchant money market account
online banking
telephone banking
business credit cards
merchant line of credit
business profitability and peer analysis, and
financial checkup.
Competition
We compete primarily with commercial banks, thrift institutions and credit unions, many of which are substantially
larger in terms of assets and available resources. Certain of these institutions have significantly higher lending limits than
we do, and may provide various services for their customers that we presently do not. In addition, we experience
competition for deposits from mutual funds and security brokers, while consumer discount, mortgage and insurance
companies compete for various types of loans. Credit unions, finance companies and mortgage companies enjoy certain
competitive advantages over us, as they are not subject to the same regulatory restrictions and taxations as commercial
banks. Principal methods of competing for bank products, permitted nonbanking services and financial activities include
price, nature of product, quality of service and convenience of location.
In our market area, interest rates on deposits, especially time deposits, and interest rates and fees charged to customers on
loans are very competitive. In the current economic environment there is increased competition in view of weaker loan
demand.
We believe that our most significant competitive advantage originates from our business philosophy which 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.
In addition, our success has been, and will continue to be, a result of our emphasis on community involvement and
customer relationships. With consolidation continuing in the financial industry, and particularly in our market area,
smaller community banks like us are gaining opportunities and market share as larger institutions reduce their emphasis
on or exit the markets.
Seasonality
Generally, our operations are not seasonal in nature. Our business activities, however, have been somewhat influenced
by the recent increase in activities related to natural gas drilling in our market area, which are to some extent seasonal in
nature.
Supervision and Regulation
We are extensively regulated under federal and state laws. Generally, these laws and regulations are intended to protect
consumers, not shareholders. The following is a summary description of certain provisions of law that affect the
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regulation of bank holding companies and banks. This discussion is qualified in its entirety by reference to applicable
laws and regulations. Changes in law and regulation may have a material effect on our business and prospects.
Peoples is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is
subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System, referred to
as the “Federal Reserve Board” or the “FRB.” We are required to file annual and quarterly reports with the FRB and to
provide the FRB with such additional information as the FRB may require. The FRB also conducts examinations of
Peoples.
With certain limited exceptions, we are required to obtain prior approval from the FRB before acquiring direct or indirect
ownership or control of more than 5% of any voting securities or substantially all of the assets of a bank or bank holding
company, or before merging or consolidating with another bank holding company. Additionally, with certain exceptions,
any person or entity proposing to acquire control through direct or indirect ownership of 25% or more of our voting
securities is required to give 60 days’ written notice of the acquisition to the FRB, which may prohibit the transaction,
and to publish notice to the public.
Peoples Bank is regulated by the Pennsylvania Department of Banking and Securities (the “Department of Banking”)
and the FDIC. The Department of Banking may prohibit an institution over which it has supervisory authority from
engaging in activities or investments that the agency believes constitute unsafe or unsound banking practices. Federal
banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct
activities that violate law, regulation or a regulatory agreement or which are deemed to constitute unsafe or unsound
practices.
Enforcement actions may include:
the appointment of a conservator or receiver;
the issuance of a cease and desist order;
the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors,
officers, employees and institution affiliated parties;
the issuance of directives to increase capital;
the issuance of formal and informal agreements and orders;
the removal of or restrictions on directors, officers, employees and institution-affiliated parties; and
the enforcement of any such mechanisms through restraining orders or any other court actions.
We are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any
related interests of such persons which generally require that such credit extensions be made on substantially the same
terms as are available to third persons dealing with us, and not involving more than the normal risk of repayment. Other
laws tie the maximum amount that may be loaned to any one customer and its related interests to our capital levels.
Limitations on Dividends and Other Payments
Our ability to pay dividends is largely dependent upon the receipt of dividends from Peoples Bank. Both federal and state
laws impose restrictions on our ability and the ability of Peoples Bank to pay dividends. Under such restrictions, Peoples
Bank may only declare and pay dividends out of accumulated net earnings, including accumulated net earnings acquired
as a result of a merger within seven years. Further, Peoples Bank may not declare or pay any dividends unless Peoples
Bank’s surplus would not be reduced by the payment of the dividend. Pennsylvania law requires that each year Peoples
Bank set aside as surplus, a sum equal to not less than 10 percent of its net earnings to maintain the surplus funds equal
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100 percent of our capital stock. In addition to these specific restrictions, bank regulatory agencies, in general, also have
the ability to prohibit proposed dividends by a financial institution that would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice.
Permitted Non-Banking Activities
Generally, a bank holding company may not engage in any activities other than banking, managing, or controlling its
bank and other authorized subsidiaries, and providing service to those subsidiaries. With prior approval of the FRB, we
may acquire more than 5% of the assets or outstanding shares of a company engaging in non-bank activities determined
by the FRB to be closely related to the business of banking or of managing or controlling banks. The FRB provides
expedited procedures for expansion into approved categories of non-bank activities.
Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions on extensions
of credit to the bank holding company or its subsidiaries, and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit our ability to obtain funds from Peoples Bank for our cash needs,
including funds for the payment of dividends, interest and operating expenses. Further, subject to certain exceptions, a
bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of services.
Under FRB policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks
and to make capital injections into a troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. A required
capital injection may be called for at a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably
anticipated to be incurred by, the FDIC in connection with the default of or assistance provided to, a commonly
controlled FDIC-insured depository institution. Accordingly, in the event that any insured subsidiary of a bank holding
company causes a loss to the FDIC, other insured subsidiaries of a bank holding company could be required to
compensate the FDIC by reimbursing it for the estimated amount of such loss. Such cross guarantee liabilities generally
are superior in priority to the obligation of the depository institutions to its shareholders due solely to their status as
shareholders and obligations to other affiliates.
Pennsylvania Law
As a Pennsylvania incorporated bank holding company, Peoples is subject to various restrictions on its activities as set
forth in Pennsylvania law. This is in addition to those restrictions set forth in federal law. Under Pennsylvania law, a
bank holding company that desires to acquire a bank or bank holding company that has its principal place of business in
Pennsylvania must obtain permission from the Department of Banking.
Financial Institution Reform, Recovery, and Enforcement Act (“FIRREA”)
FIRREA was enacted into law in order to address the financial condition of the Federal Savings and Loan Insurance
Corporation, to restructure the regulation of the thrift industry, and to enhance the supervisory and enforcement powers
of the federal bank and thrift regulatory agencies. As the primary federal regulator of Peoples Bank, the FDIC, in
conjunction with the Department of Banking, is responsible for its supervision. When dealing with capital requirements,
those regulatory bodies have the flexibility to impose supervisory agreements on institutions that fail to comply with
regulatory requirements. The imposition of a capital plan, termination of deposit insurance, and removal or temporary
suspension of an officer, director or other institution-affiliated person may cause enforcement actions.
There are three levels of civil penalties under FIRREA.
The first tier provides for civil penalties of up to $5,500 per day for any violation of law or regulation.
The second tier provides for civil penalties of up to $27,500 per day if more than a minimal loss or a
pattern is involved.
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Finally, civil penalties of up to the lesser of $1.1 million or 1% of total assets per day may be assessed for
knowingly or recklessly causing a substantial loss to an institution or taking action that results in a
substantial pecuniary gain or other benefit.
Criminal penalties are increased to $1.1 million per violation and may be up to $5.5 million for continuing violations or
for the actual amount of gain or loss. These penalties may be combined with prison sentences of up to five years. These
penalties are subject to adjustment in accordance with inflation adjustment procedures prescribed under applicable law.
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
FDICIA provides for, among other things:
publicly available annual financial condition and management reports for financial institutions, including
audits by independent accountants;
the establishment of uniform accounting standards by federal banking agencies;
the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based
on capitalization levels, with more scrutiny and restrictions placed on depository institutions with lower
levels of capital;
additional grounds for the appointment of a conservator or receiver; and
restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly
exceed minimum capital requirements.
A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with
respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of
the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the
following capital categories:
“well capitalized”;
“adequately capitalized”;
“under capitalized”;
“significantly undercapitalized”; and
“critically undercapitalized”.
Peoples Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action at
December 31, 2015, based on the most recent notification from the FDIC. An institution may be deemed by the
regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other
things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.
Beginning January 1, 2015, all insured depository institutions must incorporate the revised regulatory capital
requirements (see Supervision and Regulatory — Regulatory Capital Changes) into the prompt corrective action
framework, including the new common equity tier 1 capital asset ratio and a higher tier 1 risk-based capital ratio.
FDICIA generally prohibits a depository institution from making any capital distributions including payment of a cash
dividend or paying any management fees to its holding company, if the depository institution would thereafter be
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undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit
capital restoration plans. If a depository fails to submit an acceptable plan, it is treated as if it is “significantly
undercapitalized”. Significantly undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator; generally within 90 days of the date such
institution is determined to be critically undercapitalized.
FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against
institutions that fail to comply with capital or other standards. Such actions may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the
circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Under FDICIA, each federal banking agency is required to prescribe, by regulation, non-capital safety and soundness
standards for institutions under its authority. The federal banking agencies, including the FDIC, have adopted standards
covering:
internal controls;
information systems and internal audit systems;
loan documentation;
credit underwriting;
interest rate exposure;
asset growth; and
compensation fees and benefits.
Any institution that fails to meet these standards may be required to develop an acceptable plan, specifying the steps that
the institutions will take to meet the standards. Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Peoples believes that it meets substantially all the standards that have been adopted. FDICIA also
imposed new capital standards on insured depository institutions. Before establishing new branch offices, Peoples Bank
must meet certain minimum capital stock and surplus requirements and must obtain State approval.
Risk-Based Capital Requirements
The federal banking regulators have adopted certain risk-based capital guidelines to assist in assessing capital adequacy
of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such
as letters of credit, and recourse agreements, which are recorded as off-balance sheet items. Under these guidelines,
nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain US Treasury
securities, to 100% for assets with relatively high credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted
assets. The regulators measure risk-adjusted assets, which include off-balance-sheet items, against both total qualifying
capital, Common Equity Tier 1 capital, and Tier 1 capital.
“Common Equity Tier 1 Capital” includes common equity and minority interest in equity accounts of consolidated
subsidiaries, less goodwill and other intangibles, subject to certain exceptions, and retained earnings.
“Tier 1”, or core capital, includes common equity, non-cumulative preferred stock and minority interest in equity
accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions.
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“Tier 2”, or supplementary capital, includes, among other things, limited life preferred stock, hybrid capital instruments,
mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less restricted deductions. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and
changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1,
2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1,
2014. The final rules call for the following capital requirements:
• A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%.
• A minimum ratio of tier 1 capital to risk-weighted assets of 6%.
• A minimum ratio of total capital to risk-weighted assets of 8%.
• A minimum leverage ratio of 4%.
In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets
applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios
and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary
bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking
organizations began on January 1, 2016.
Under the proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking
organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to
include these additional components of AOCI in regulatory capital and instead use the existing treatment under the
general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election was
required to be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes
subject to the final rule. On January 30, 2015, Peoples Board of Directors adopted a resolution to “opt-out” of the
inclusion of the components of AOCI in regulatory capital.
The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and
cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking
organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that
were mutual holding companies as of May 19, 2010.
Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which
is based on external credit ratings, with the simplified supervisory formula approach in order to determine the
appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up
approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent
risk weight.
Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter
limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk
weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other
changes in risk weights and credit conversion factors.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions
including:
•
•
limitations on its ability to pay dividends;
the issuance by the applicable regulatory authority of a capital directive to increase capital, and in the case of
depository institutions, the termination of deposit insurance by the FDIC, as well as to the measures described
under FDICIA as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes
of capital adequacy. Such a change could affect the ability of Peoples Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to Peoples.
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At December 31, 2015, Peoples met its capital requirements with a ratio of common equity tier 1 capital to risk-weighted
assets of 13.11%; its ratio of tier 1 capital to risk-weighted assets of 13.11%; its ratio of total capital to risk-weighted
assets of 14.05%; and its leverage ratio of 10.48%
Interest Rate Risk
Regulatory agencies include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate
risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk
management includes a measurement of board of directors and senior management oversight, and a determination of
whether a banking organization’s procedures for comprehensive risk management are appropriate to the circumstances of
the specific banking organization. We utilize internal interest rate risk models to measure and monitor interest rate risk.
In addition, we employ an independent consultant to provide a quarterly assessment of our interest rate risk. Finally,
regulatory agencies, as part of the scope of their periodic examinations, evaluate our interest rate risk.
Community Reinvestment Act (“CRA”)
The Community Reinvestment Act of 1977 is designed to create a system for bank regulatory agencies to evaluate a
depository institution’s record in meeting the credit needs of its community. The CRA regulations were completely
revised as of July 1, 1995, to establish performance-based standards for use in examining for compliance. Peoples Bank
had its last CRA compliance examination in 2013 and received a “satisfactory” rating.
USA Patriot Act of 2001
The Patriot Act contains anti-money laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or
money laundering.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Dodd-Frank is intended
to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created the
Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators
authority to take control of and liquidate financial firms. Dodd-Frank additionally created an independent federal
regulator to administer federal consumer protection laws. Dodd-Frank has and is expected to continue to have a
significant impact on our business operations as its provisions take effect. It is expected that, as various implementing
rules and regulations continue to be released, they will increase our operating and compliance costs and could increase
our interest expense. Among the provisions that affect us or are likely to affect us are the following:
Holding Company Capital Requirements
Dodd-Frank requires the FRB to apply consolidated capital requirements to bank holding companies that are no less
stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be
excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank holding company with
less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital
requirements so that the required amount of capital increases in times of economic expansion, consistent with safety and
soundness.
Deposit Insurance
Dodd-Frank permanently increases the maximum deposit insurance amount for banks, savings institutions and credit
unions to $250,000 per depositor. Dodd-Frank also broadens the base for FDIC insurance assessments. Assessments are
now based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank
requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits
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by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve
ratio reaches 1.50% of insured deposits. In lieu of the dividend payments, the FDIC has adopted progressively lower
assessment rate schedules that become effective when the reserve ratio exceeds 2.0% and 2.5%. exceeds certain
thresholds. Further, Dodd-Frank eliminated the federal statutory prohibition against the payment of interest on business
checking accounts.
Corporate Governance
Dodd-Frank requires publicly-traded companies to give stockholders a non-binding vote on executive compensation at
least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every
six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and
acquisitions unless previously voted on by stockholders. Additionally, Dodd-Frank directs the federal banking regulators
to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding
companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also
gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation
matters.
Prohibition Against Charter Conversions of Troubled Institutions
Dodd-Frank prohibits a depository institution from converting from a state to a federal charter, or vice versa, while it is
the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with
respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion
to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The
notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy
of the conversion application with its current federal regulator, which must notify the resulting federal regulator of any
ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to
all supervisory and investigative information relating thereto.
Interstate Branching
Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank
chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host
state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are able to enter new
markets more freely.
Limits on Interstate Acquisitions and Mergers
Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition–the acquisition of a bank
outside its home state–unless the bank holding company is both well capitalized and well managed. Furthermore, a bank
may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution
will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and
adequately managed.
Limits on Interchange Fees
Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to
establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets
over $10 billion and to enforce a statutory requirement that such fees be reasonable and proportional to the actual cost of
a transaction to the issuer. The Federal Reserve issued its final rule, Regulation II, effective October 1, 2011. Consistent
with Dodd-Frank, issuers with less than $10 billion in assets, like us, are exempt from debit card interchange fee
standards.
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Consumer Financial Protection Bureau
Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory
and enforcement powers under various federal consumer financial protection laws, including the Equal Credit
Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt
Collection Act, Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The
CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or
more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and
supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair,
deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the
CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of
the borrower’s ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they
receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt
consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain
circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
Ability to Repay and Qualified Mortgage Rule
Pursuant to the Dodd Frank Act, the Consumer Financial Protection Bureau issued a final rule on January 10, 2013,
which became effective January 10, 2014, amending Regulation Z as implemented by the Truth in Lending Act,
requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented
information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its
terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative
requires the mortgage lender to consider the following eight underwriting factors when making the credit decision:
current or reasonably expected income or assets;
current employment status;
the monthly payment on the covered transaction;
the monthly payment on any simultaneous loan;
the monthly payment for mortgage-related obligations;
current debt obligations, alimony, and child support;
the monthly debt-to-income ratio or residual income; and
credit history.
Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the
creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan
without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be
a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which
meet these criteria will be considered qualified mortgages, and as a result generally protect lenders from fines or
litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a
rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-
priced” (e.g. prime loans) are given a safe harbor of compliance. The final rule, as issued, is not expected to have a
material impact on our lending activities or our results of operations or financial condition.
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TILA/RESPA Integrated Disclosures (TRID)
On October 3, 2015, the CFPB implemented a final rule combining the mortgage disclosures consumers previously
received under TILA and RESPA. For more than 30 years, the TILA and RESPA mortgage disclosures had been
administered separately by, respectively, the Federal Reserve Board and the U.S. Department of Housing and Urban
Development. The final rule requires lenders to provide applicants with the new Loan Estimate and Closing Disclosure
and generally applies to most closed-end consumer mortgage loans for which the creditor or mortgage broker receives an
application on or after October 3, 2015.
Future Legislation
Proposed legislation is introduced in almost every legislative session that would dramatically affect the regulation of the
banking industry. We cannot predict if any such legislation will be adopted nor if adopted how it would affect our
business. Past history has demonstrated that new legislation or changes to existing laws or regulations usually results in
greater compliance burden and therefore generally increases the cost of doing business.
Employees
As of December 31, 2015, we had 348 full-time-equivalent employees. We are not parties to any collective bargaining
agreements and we consider our employee relations to be good.
Availability of Securities Filings
We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Exchange
Act. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at
Station Place, 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that
contains reports, proxy and information statements, and other information regarding issuers, including us, that file
electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.
In addition, we maintain an Internet website at www.psbt.com. We make available free of charge through the “Investor
Relations” link on our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Item 1A.
Risk Factors.
In addition to the other information set forth in this report, one should carefully consider the factors discussed below,
which could materially affect our business, financial condition or future results. The risks described below are not the
only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be
insignificant also may materially adversely affect our business, financial condition and/or operating results.
Risks Relating to Peoples and Its Business
We are subject to credit risk in connection with our lending activities, and our financial condition and results of
operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers.
Lending money is a significant part of the banking business and interest income on our loan portfolio is the principle
component of our revenue. Our financial condition and results of operations are affected by the ability of our borrowers
to repay their loans, and in a timely manner. Borrowers, however, do not always repay their loans. The risk of non-
payment is assessed through our underwriting and loan review procedures based on several factors including credit risks
of a particular borrower, changes in economic conditions, the duration of the loan and in the case of a collateralized loan,
uncertainties as to the future value of the collateral and other factors. Despite our efforts, we do and will experience loan
and lease losses, and our financial condition and results of operations will be adversely affected. Our loans which were
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between 30 and 89 days delinquent totaled $7.7 million on December 31, 2015. Our non-performing assets were
approximately $12.5 million on December 31, 2015, including $2.4 million of loans acquired as part of the merger net of
the remaining credit adjustment of $2.2 million. Our allowance for loan and lease losses was approximately $13.0
million on December 31, 2015.
Our emphasis on the Northeastern Pennsylvania and Southern New York market area exposes us to a risk of loss
associated with the region.
At December 31, 2015, $306.2 million or 22.8%, of our loan portfolio consisted of residential mortgage loans and
$567.3 million or 42.3%, of our loan portfolio consisted of commercial real estate loans. A significant majority of these
loans are made to borrowers or secured by properties located in Northeastern Pennsylvania and Broome County, New
York. As a result of this concentration, a sustained downturn in the regional economy could significantly increase non-
performing loans, which would hurt our net income. Future declines in real estate values in the region could also cause
some of our mortgage and commercial real estate loans to be inadequately collateralized, which would expose us to a
greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
We make commercial and industrial, construction, and commercial real estate loans, which present greater risks than
other types of loans.
As of December 31, 2015, approximately 69.6% of our loan portfolio consisted of commercial and industrial,
construction, and commercial real estate loans. These types of loans are generally viewed as having more risk of default
than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real
estate loans and consumer loans. Because our loan portfolio contains a significant number of commercial and industrial,
construction, and commercial real estate loans some of which have large balances, the deterioration of one or a few of
these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result
in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge-offs,
all of which could have a material adverse effect on our financial condition and results of operations.
The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial
real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration. Banking
regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger
commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal
controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real
estate lending. In addition, commercial real estate lenders have made greater provisions for loan and lease losses as a
result of commercial real estate lending exposures. Additional losses or regulatory requirements related to our
commercial real estate loan concentration could materially adversely affect our business, financial condition and results
of operations.
Our allowance for loan and lease losses may not be adequate to absorb actual loan and lease losses, and we may be
required to make further provisions for loan and lease losses and charge off additional loans in the future, which
could materially and adversely affect our business.
We attempt to maintain an allowance for loan and lease losses, established through a provision for loan and lease losses
accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio. If our allowance for loan
and lease losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.
The determination of the allowance for loan and lease losses involves a high degree of subjectivity and judgment and
requires us to make significant estimates of current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification
of additional problem loans and other factors, both within and outside of our control, may require us to increase our
allowance for loan and lease losses. Increases in non-performing loans have a significant impact on our allowance for
loan and lease losses. Our allowance for loan and lease losses may not be adequate to absorb actual loan and lease losses.
If conditions in our regional real estate markets continue, we could continue to experience increased delinquencies and
credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to-
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four family residential mortgage loans. Moreover, we expect that the current economy will negatively impact our market
areas and that we could experience higher delinquencies and credit losses. As a result, we will continue to make
provisions for loan and lease losses and to charge off additional loans in the future, which could materially adversely
affect our financial conditions and results of operations.
In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our
allowance for loan and lease losses and may require us to increase the provision for loan and lease losses, to recognize
further loan charge-offs, or to take other actions, based on judgments that differ from those of our management. If loan
charge-offs in future periods exceed the allowance for loan and lease losses, we will need to increase our allowance for
loan lease losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan
and lease losses. Any increases in our allowance for loan and lease losses will result in a decrease in net income and
capital, and may have a material adverse effect on our financial condition, and results of operations and cash flows.
Changes in interest rates could adversely impact our financial condition and results of operations.
Our ability to generate net income substantially depends upon our net interest income, which is the difference between
the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense
paid on interest-bearing liabilities, such as deposits and borrowings. Certain assets and liabilities react differently to
changes in market interest rates. Further, interest rates on some types of assets and liabilities may fluctuate prior to
changes in broader market interest rates, while rates on other types of assets may lag behind. Additionally, some assets
such as adjustable-rate mortgages have features, and rate caps, which restrict changes in their interest rates.
Factors such as inflation, recession, unemployment, money supply, global disorder, terrorist activity, instability in
domestic and foreign financial markets, and other factors beyond our control, may affect interest rates. Changes in
market interest rates will also affect the level of voluntary prepayments on loans and the receipt of payments on
mortgage-backed securities, resulting in the receipt of proceeds that may have to be reinvested at a lower rate than the
loan or mortgage-backed security being prepaid. Although we pursue an asset-liability management strategy designed to
manage our risk from changes in market interest rates, changes in interest rates can still have a material adverse effect on
our profitability.
Changes in interest rates could affect our investment values and impact comprehensive income and stockholders’
equity.
At December 31, 2015, we had approximately $284.9 million of securities available-for-sale. These securities are carried
at fair value on our consolidated balance sheets. Unrealized gains or losses on these securities, that is, the difference
between the fair value and the amortized cost of these securities, are reflected in stockholders’ equity, net of deferred
taxes. As of December 31, 2015, our available-for-sale securities had an unrealized gain, net of taxes, of $3.0 million.
The fair value of our available-for-sale securities is subject to interest rate change, which would not affect recorded
earnings, but would increase or decrease comprehensive income and stockholders’ equity.
Our results of operations may be materially and adversely affected by other-than-temporary impairment charges
relating to our investment portfolio.
Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable
pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or
unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future
periods. Investments are evaluated periodically to determine whether a decline in their value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The term “other than temporary” indicates that
the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support
fair values equal to, or greater than, the carrying value of the investment.
Once a decline in value is determined to be other than temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized. If an impairment charge is significant enough, it could affect our ability
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to pay dividends, which could materially adversely affect us and our ability to pay dividends to shareholders. Significant
impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as
“well-capitalized” for regulatory purposes.
The requirement to record certain assets and liabilities at fair value may adversely affect our financial results.
We report certain assets, including available-for-sale investment securities, at fair value. Generally, for assets that are
reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair
value. Because we record these assets at their estimated fair value, we may incur losses even if the asset in question
presents minimal credit risk. The level of interest rates can impact the estimated fair value of investment securities.
Disruptions in the capital markets may require us to recognize other-than-temporary impairments in future periods with
respect to investment securities in our portfolio. The amount and timing of any impairment recognized will depend on
the severity and duration of the decline in fair value of our investment securities and our estimation of the anticipated
recovery period.
Changes in the value of goodwill and intangible assets could reduce our earnings.
We account for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill
not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step
approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification
of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and
subjectivity in the assumptions used. As of December 31, 2015, the market value of our shares exceeded the recorded
book value. Changes in the local and national economy, the federal and state legislative and regulatory environments for
financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant
world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of
publicly traded financial institutions and could result in an impairment charge at a future date.
Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain
industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.
Over the past few years, foreclosure time lines have increased due to, among other reasons, delays associated with the
significant increase in the number of foreclosure cases as a result of the economic downturn, federal and state legal and
regulatory actions, including additional consumer protection initiatives related to the foreclosure process and voluntary
and, in some cases, mandatory programs intended to permit or require lenders to consider loan modifications or other
alternatives to foreclosure. Further increases in the foreclosure time-line may have an adverse effect on collateral values
and our ability to minimize our losses.
Difficult market conditions have adversely affected our industry.
We are operating in a challenging economic environment, including generally uncertain national and local conditions.
Additional concerns from some of the countries in the European Union and elsewhere have also strained the financial
markets both abroad and domestically. Although there has been some improvement in the overall global macroeconomic
conditions in 2015, financial institutions continue to be affected by conditions in the real estate market and the
constrained financial markets. In recent years, declines in the housing market, increases in unemployment and under-
employment have negatively impacted the credit performance of loans and resulted in significant write-downs of asset
values by financial institutions. Reflecting concern over economic conditions, many lenders and institutional investors
have reduced or ceased providing funding to borrowers. A worsening of economic conditions may impact our results of
operations and financial condition. In particular, we may face the following risks in connection with these events:
Loan delinquencies could increase further;
Problem assets and foreclosures could increase further;
Demand for our products and services could decline;
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Collateral for loans made by us, especially real estate, could decline further in value, in turn reducing a
customer’s borrowing power, and reducing the value of assets and collateral associated with our loans; and
Investments in mortgage-backed securities could decline in value as a result of performance of the
underlying loans or the diminution of the value of the underlying real estate collateral pressing the
government sponsored agencies to honor its guarantees to principal and interest.
Our operations are concentrated in northeastern Pennsylvania and southern New York. As a result of this geographic
concentration, our financial results may correlate to the economic conditions in these areas. Deterioration in economic
conditions in this market area, particularly in the industries on which this geographic area depend, or a general decline in
economic conditions may adversely affect the quality of our loan portfolio (including the level of non-performing assets,
charge offs and provision expense) and demand for our products and services, and, accordingly, our results of operations.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. We compete actively with other northeastern
Pennsylvania and southern New York financial institutions, many larger than us, as well as with financial and non-
financial institutions headquartered elsewhere. Commercial banks, savings banks, savings and loan associations, credit
unions, and money market funds actively compete for deposits and loans. Such institutions, as well as consumer finance,
insurance companies and brokerage firms, may be considered competitors with respect to one or more services they
render. Many of the institutions with which we compete have substantially greater resources and lending limits and may
offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully
compete in our market area.
A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates
paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. Our
interest-earning assets include outstanding loans extended to our customers and securities held in our investment
portfolio. We fund assets using deposits and other borrowings. Our goal has been to maintain noninterest-bearing
deposits in the range of 15.0% to 30.0% of total deposits and, as of December 31, 2015, approximately 22.0% of our
deposits were noninterest bearing.
Increased needs for disbursement of funds on loans and deposits can affect our liquidity.
We manage our liquidity with an objective of maintaining a balance between sources and uses of funds in such a way
that the cash requirements of customers for loans and deposit withdrawals are met in the most economical manner. If we
do not properly manage our liquidity, our business, financial condition, results of operations and cash flows may be
materially and adversely affected.
Our future pension plan costs and contributions could be unfavorably impacted by the factors that are used in the
actuarial calculations.
As part of the Penseco merger, we assumed Penseco’s legacy non-contributory defined benefit pension plan, which was
frozen by Penseco in 2008. The costs for this legacy pension plan are dependent upon a number of factors, such as the
rates of return on plan assets, discount rates, the level of interest rates used to measure the required minimum funding
levels of the plans, future government regulation and required or voluntary contributions made to the plans. Without
sustained growth in the pension investments over time to increase the value of our plan assets and depending upon the
other factors impacting our costs as listed above, we could be required to fund the plan with higher amounts of cash than
are anticipated by our actuaries. Such increased funding obligations could have a material impact on our liquidity by
reducing our cash flows.
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Our holding company is dependent for liquidity on payments from Peoples Bank, which payments are subject to
restrictions.
We depend on dividends, distributions and other payments from Peoples Bank to fund dividend payments to our
shareholders, if any, and to fund all payments on obligations of our holding company. Peoples Bank is subject to laws
that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from Peoples Bank to
us. Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments
on our obligations or dividend payments, if any. In addition, our right to participate in a distribution of assets upon a
subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Holders of our
common stock are entitled to receive dividends if and when declared from time to time by our board of directors in its
sole discretion out of funds legally available for that purpose.
We need to continually attract and retain qualified personnel for our operations.
Our ability to provide high-quality customer service and to operate efficiently and profitably is dependent on our ability
to attract and retain qualified individuals for key positions within the organization. We rely heavily on our executive
officers and employees. The loss of certain executive officers or employees could have an adverse effect on us because,
as a community bank, the executive officers and employees typically have more responsibility than would be typical at a
larger financial institution with more employees. In addition, due to our size as a community bank, we have fewer
management-level and other personnel who are in position to succeed to and assume the responsibilities of certain
existing executive officers and employees. If we expand geographically or expand to provide non-banking services,
current management may not have the necessary experience for successful operation in these new areas. There is no
guarantee that management would be able to meet these new challenges or that we would be able to retain new directors
or personnel with the appropriate background and expertise.
Our financial performance may suffer if our information technology is unable to keep pace with growth or industry
developments.
Effective and competitive delivery of our products and services is increasingly dependent upon information technology
resources and processes, both those provided internally as well as those provided through third party vendors. In addition
to better serving customers, the effective use of technology increases efficiency and enables us to reduce costs. Our
future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide
products and services to enhance customer convenience, as well as to create additional efficiencies in our operations.
Many of our competitors have greater resources to invest in technological improvements. Additionally, as technology in
the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for us.
There can be no assurance that we will be able to effectively implement new technology-driven products and services,
which could reduce our ability to compete effectively.
A failure in or a breach of our information systems or infrastructure, including as a result of cyber-attacks, could
disrupt our business, damage our reputation, and could have a material adverse effect on our business, financial
condition and results of operations.
In the ordinary course of our business activities, including the ongoing maintenance of deposits, loan and other account
relationships for our customers, receiving instructions and effecting transactions for those customers and other users of
our products and services, we regularly collect, process, transmit and store significant amounts of confidential
information regarding our customers, employees and others. In addition to confidential information regarding our
customers, employees and others, we, and in some cases a third party, compile, process, transmit and store proprietary,
non-public information concerning our business, operations, plans and strategies.
Information security risks have significantly increased in recent years in part because of the proliferation of new
technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the
increased sophistication and activities of organized crime, hackers, terrorists and other external parties. We rely on
digital technologies, computer and email systems, software, and networks to conduct secure processing, transmission and
storage of confidential information. In addition, to access our products and services, our customers may use personal
-21-
smart phones, tablet PCs and other mobile devices that are beyond our control systems. Our technologies, systems,
networks and our customers’ devices have been subject to, and are likely to continue to be the target of, cyber-attacks,
computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized
use, loss or destruction of our or our customers’ confidential information, or otherwise disrupt our or our customers’ or
other third parties’ business operations.
In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information,
hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, that are
designed to disrupt key business services, such as customer-facing web sites. We are not able to anticipate or implement
effective preventive measures against all security breaches of these types, especially because the techniques used change
frequently and because attacks can originate from a wide variety of sources.
Although we use a variety of physical, procedural and technological safeguards to protect confidential information from
mishandling, misuse or loss, these safeguards cannot provide assurance that mishandling, misuse or loss of the
information will not occur, and that if mishandling, misuse or loss of the information did occur, those events will be
promptly detected and addressed. A failure in or breach of our operational or information security system, or those of a
third-party service provider, as a result of cyber-attacks or information security breaches could have a material adverse
effect on our business, damage our reputation, increase our costs and/or cause significant losses. As information security
risks and cyber threats continue to evolve, we may be required to expend substantial resources to further enhance our
information security measures and/or to investigate and remediate any information security vulnerabilities.
If information security is breached, despite the controls we and our third-party vendors have instituted, information can
be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could
materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings. In addition, our
reputation could be damaged which could result in loss of customers, greater difficulty in attracting new customers, or an
adverse effect on the value of our common stock.
Our disclosure controls and procedures and our internal control over financial reporting may not achieve their
intended objectives.
We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the
rules and forms of the Securities and Exchange Commission. We also maintain a system of internal control over
financial reporting. These controls may not achieve their intended objectives. Control processes that involve human
diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting,
are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by
collusion or improper management override. Because of such limitations, there are risks that material misstatements due
to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. If our
controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and
market for our common stock, and could subject us to regulatory scrutiny.
We are exposed to environmental liabilities with respect to real estate.
We currently operate 24 branch offices, and own additional real estate. In addition, a significant portion of our loan
portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure,
or otherwise acquire real estate, and in doing so could become subject to environmental liabilities with respect to these
properties. We may become responsible to a governmental agency or third parties for property damage, personal injury,
investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be
required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated
with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner
of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the property. Although we have policies and procedures to perform
an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential
environmental hazards. If we were to become subject to significant environmental liabilities, it could materially and
adversely affect us.
-22-
The soundness of other financial services institutions may adversely affect our credit risk.
We rely on other financial services institutions through trading, clearing, counterparty, and other relationships. We
maintain limits and monitor concentration levels of our counterparties as specified in our internal policies. Our reliance
on other financial services institutions exposes us to credit risk in the event of default by these institutions or
counterparties. These losses could adversely affect our results of operations and financial condition.
Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their
services or fail to comply with banking laws and regulations.
We depend to a significant extent on relationships with third party service providers. Specifically, we utilize third party
core banking services and receive credit card and debit card services, branch capture services, Internet banking services
and services complementary to our banking products from various third party service providers. If these third party
service providers experience difficulties or terminate their services and we are unable to replace them with other service
providers, our operations could be interrupted. It may be difficult for us to replace some of our third party vendors,
particularly vendors providing our core banking, credit card and debit card services, in a timely manner if they were
unwilling or unable to provide us with these services in the future for any reason. If an interruption were to continue for a
significant period of time, it could have a material adverse effect on our business, financial condition or results of
operations. Even if we are able to replace them, it may be at higher cost to us, which could have a material adverse effect
on our business, financial condition or results of operations. In addition, if a third party provider fails to provide the
services we require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or
suffers a cyber-attack or other security breach, our business could suffer economic and reputational harm that could have
a material adverse effect on our business, financial condition or results of operations.
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing
regulatory requirements and attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships
with other third parties. These types of third party relationships are subject to increasingly demanding regulatory
requirements and attention by our bank regulators. Recent regulation requires us to enhance our due diligence, ongoing
monitoring and control over our third party vendors and other ongoing third party business relationships. We expect that
our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in
the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we
have not exercised adequate oversight and control over our third party vendors or other ongoing third party business
relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions,
including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer
remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
Risks Related to Our Common Stock
Our ability to pay dividends or repurchase shares is subject to limitations.
The Penseco merger agreement 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 Peoples and Peoples Bank remain “well-capitalized” in accordance with applicable
regulatory guidelines.
Our ability to pay dividends on our stock depends upon our receipt of dividends from Peoples Bank and its subsidiaries.
As a state-chartered bank, Peoples Bank is subject to regulatory restrictions on the payment and amounts of dividends
under the Pennsylvania Banking Code.
Further, Peoples Bank’s ability to pay dividends is also subject to its profitability, financial condition, capital
expenditures and other cash flow requirements. There is no assurance that Peoples Bank will be able to pay the dividends
contemplated by the Penseco merger agreement or other dividends. Our failure to pay dividends could have a material
adverse effect on the market price of our common stock.
-23-
A significant percentage of our common stock is held by our directors and executive officers, which could enable
insiders to prevent a merger or other transaction that may provide stockholders a premium for their shares.
At February 29, 2016, our directors and executive officers beneficially owned approximately 9.0% of our common stock.
If these individuals were to act together, they could have a significant influence over the outcome of any shareholder
vote.
Proxy contests and shareholder litigation may adversely affect our results of operations.
We have received a shareholder proposal which will be included in our proxy statement for our 2016 annual meeting of
shareholders. The shareholders who submitted the proposal are plaintiffs in litigation against Peoples Bank and certain
current and former officers. The litigation, which we believe is not material to us, related to a loan transaction made in
the ordinary course of business by Peoples Bank. Any future proxy contests or shareholder litigation could cause us to
use resources, both in expense and in the time and attention of our management, which could otherwise be used in
operating our business. Accordingly, our results of operations may be adversely effected.
Risks Related to Potential Future Transactions
Future acquisitions by us could dilute existing shareholders’ ownership of Peoples and may cause us to become more
susceptible to adverse economic events.
We may issue shares of our common stock in connection with future acquisitions and other investments, which would
dilute existing shareholders’ ownership interests in Peoples. While there is no assurance that these transactions will
occur, or that they will occur on terms favorable to us, future business acquisitions could be material to us, and the
degree of success achieved in acquiring and integrating these businesses could have a material effect on the value of our
common stock. In addition, these acquisitions could require us to expend substantial cash or other liquid assets or to
incur debt, which could cause us to become more susceptible to economic downturns and competitive pressures.
Our governing documents, Pennsylvania law, and current policies of our board of directors contain provisions which
may reduce the likelihood of a change in control transaction that may otherwise be available and attractive to
shareholders.
Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or
expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by our board of
directors. In particular, the articles of incorporation and bylaws: classify our board of directors into three groups, so that
shareholders elect only approximately one-third of the board each year; require our shareholders to give us advance
notice to nominate candidates for election to the board of directors or to make shareholder proposals at a shareholders’
meeting; and require the affirmative vote of the holders of at least 75% of our common stock to approve amendments to
our bylaws or to approve certain business combinations that have not received the support of two-thirds of our board of
directors. These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals
and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals
desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of our
board of directors. Moreover, these provisions could diminish the opportunities for shareholders to participate in certain
tender offers, including tender offers at prices above the then-current market value of our common stock, and may also
inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.
In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control
of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that
shareholders might receive if we are sold. For example, Pennsylvania law may restrict a third party’s ability to obtain
control of Peoples and may prevent shareholders from receiving a premium for their shares of our common stock.
Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our articles of
incorporation.
-24-
Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not
provide the requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related
businesses from time to time that we expect may further our business strategy. Any possible acquisition will be subject
to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or
at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than
expected performance or higher than expected costs, difficulties related to integration, diversion of management’s
attention from other business activities, changes in relationships with customers, and the potential loss of key employees.
In addition, we may not be successful in identifying acquisition candidates, integrating acquired institutions, or
preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be
highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance
that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed,
that we will be successful in integrating acquired businesses into operations. Our ability to grow may be limited if we
choose not to pursue or are unable to successfully make acquisitions in the future.
Risks Related to Government Regulation
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by certain state and federal agencies including the
Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Pennsylvania
Department of Banking and Securities. Such regulation and supervision govern the activities in which we may engage
and are intended primarily to ensure the safety and soundness of financial institutions. Regulatory authorities have
extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on
operations, the classification of assets and determination of the level of the allowance for loan losses. Any change in
such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action,
may have a material impact on us and our operations. There also are several federal and state statutes which regulate the
obligation and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for
attachment of liability resulting from our own actions, we may be held liable under certain circumstances for the actions
of our borrowers, or third parties, when such actions result in environmental problems on properties that collateralize
loans held by us. Further, the liability has the potential to far exceed the original amount of a loan.
We will be subject to more stringent capital and liquidity requirements in the future, which may adversely affect our
net income and future growth.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and
changes required by the Dodd-Frank Act. U.S. implementation of Basel III will lead to significantly higher capital
requirements and more restrictive leverage and liquidity ratios than those currently in place.
Future increases in minimum capital requirements could adversely affect our net income. Furthermore, our failure to
comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us
which could restrict our future growth or operations.
The Dodd-Frank Act, among other things, created the Consumer Financial Protection Bureau and has resulted and
will result in new regulations that are expected to increase our costs of operations.
On July 21, 2010, the Dodd-Frank Act became law. This law continues to have a significant impact on the bank
regulatory structure and the lending, deposit, investment, trading and operating activities of financial institutions and
their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new
implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are
given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and
much of the impact of the Dodd-Frank Act may not be known for many years.
-25-
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce
consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range
of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement
authority over all banks and savings institutions with more than $10 billion in assets. Banks with $10 billion or less in
assets, like us, will continue to be examined for compliance with the consumer laws by their primary bank regulators.
Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at
the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state
and federal laws and regulations.
It is difficult to quantify at this time what specific impact the Dodd-Frank Act and the implementing rules and
regulations will have on community banks.
Increases in FDIC insurance premiums may adversely affect our earnings.
Our deposits are insured by the FDIC up to legal limits and, accordingly, we are subject to FDIC deposit insurance
assessments. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund
depleted during the financial crisis, the FDIC has increased assessment rates of insured institutions. Under the Dodd-
Frank Act, the FDIC must undertake several initiatives that will result in higher deposit insurance fees being paid to the
FDIC. For example, an FDIC final rule issued on February 7, 2011 revises the assessment system applicable to large
banks and implements the use of assets as the base for deposit insurance assessments instead of domestic deposits. We
are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. These
announced increases and any future increases or required prepayments of FDIC insurance premiums or special
assessments may adversely impact our earnings.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how
we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning
security breach notification, and we could be negatively impacted by these laws. For example, our business is subject to
the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic
personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures
to customers about our information collection, sharing and security practices and afford customers the right to “opt out”
of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires we develop,
implement and maintain a written comprehensive information security program containing safeguards appropriate based
on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we
process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states
have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory
or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and
regulators in the United States are increasingly adopting or revising privacy, information security and data protection
laws that potentially could have a significant impact on our current and planned privacy, data protection and information
security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information,
and some of our current or planned business activities. This could also increase our costs of compliance and business
operations and could reduce income from certain business initiatives. This includes increased privacy-related
enforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level, such as with
regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those regarding
security breach notification) affecting customer or employee data to which we are subject could result in higher
compliance and technology costs and could restrict our ability to provide certain products and services, which could have
a material adverse effect on our business, financial conditions or results of operations. Our failure to comply with
privacy, data protection and information security laws could result in potentially significant regulatory or governmental
investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse
effect on our business, financial condition or results of operations.
-26-
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Our corporate headquarters is located at 150 N. Washington Avenue, Scranton, Pennsylvania, which houses our finance
and planning, trust, merchant services, commercial lending, marketing, human resources and investor services divisions,
as well as our executive offices. Our operations division is located at 82 Franklin Avenue, Hallstead, Pennsylvania.
We operate 24 full-service community banking offices located within the Lackawanna, Lehigh, Luzerne, Monroe,
Susquehanna, Wayne and Wyoming Counties of Northeastern Pennsylvania and Broome County of New York. Two
offices are leased and the balance are owned by Peoples Bank. We have received regulatory approval for a new office in
Kingston, Pennsylvania, which is expected to be operational during 2016.
We lease several remote ATM locations throughout Northeastern Pennsylvania and Southern New York. All branches
and ATM locations are equipped with closed circuit television monitoring.
We consider our properties to be suitable and adequate for our current and immediate future purposes.
Item 3.
Legal Proceedings.
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, as to
which we are a party or of which any of our property is subject.
Item 4. Mine Safety Disclosures.
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
As of February 29, 2016, there were approximately 3,373 holders of our common stock, $2.00 par value, including
individual participants in security position listings. Our common stock trades on The Nasdaq Stock Market under the
symbol “PFIS.”
Peoples has paid cash dividends since its incorporation in 1986. Our 2013 Penseco merger agreement states that, unless
80% 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 Peoples and Peoples Bank
remain “well-capitalized” in accordance with applicable regulatory guidelines. The payment of future dividends must
necessarily depend upon earnings, financial position, appropriate restrictions under applicable laws and other factors
relevant at the time our board of directors considers any declaration of dividends. For information on dividend
restrictions on the Company and Peoples Bank, refer to the consolidated financial statements and notes to these
statements filed at Item 8 to this report and incorporated in their entirety by reference under this Item 5.
-27-
The high and low closing sale prices and dividends per share of the Company’s common stock for the four quarters of
2015 and 2014 are summarized in the following table:
2015
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
High
Dividends
Declared
Dividends
Declared
$ 39.35 $ 49.26 $ 0.31 $ 37.85 $ 42.26 $ 0.31
0.31
0.31
$ 34.43 $ 41.96 $ 0.31 $ 44.17 $ 52.52 $ 0.31
53.05
52.52
42.50
45.99
36.89
34.56
43.76
41.60
0.31
0.31
High
Low
The following table presents information with respect to purchases 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 three months ended December 31, 2015:
Month Ending
October 31, 2015
November 30, 2015
December 31, 2015
Total Number of Maximum Number
Shares Purchased of Shares that may
as Part of Publicly yet be Purchased
Total Number of Average Price
Announced
Shares Purchased Paid Per Share Programs(1)
Under the
Programs(1)
92,827 $
3,466
12,210 $
37.89
38.96
38.81
92,827
3,466
12,210
246,124
242,658
230,448
(1) On January 31, 2014, our board of directors adopted a common stock repurchase plan whereby we were authorized
to repurchase up to 370,000 shares of our outstanding common stock through open market purchases. This plan was
reauthorized and effectively continued during 2015, resulting in our repurchase and retirement of 137,752 shares for
$5.2 million during the year. On February 2, 2016, our board of directors again effectively continued the plan by
authorizing the repurchase of up to 225,000 shares of our outstanding common stock through open market
purchases.
-28-
The following line graph compares the cumulative total stockholder return on the Company’s common stock, based on
the market price change and assumes reinvestment of dividends, with the cumulative total return of the index for The
NASDAQ Bank Stocks and the index for the Russell 2000 Stocks during the five-year period ended December 31, 2015.
The stockholder return shown on the graph and table below is not necessarily indicative of future performance.
Comparison of Five-Year Cumulative Total Returns
Performance Graph of
PEOPLES FINANCIAL SERVICES CORP
12/31/2010
100.00
100.00
100.00
12/31/2011
109.40
89.50
95.82
Period Ending
12/31/2012 12/31/2013
155.82
150.55
154.78
121.69
106.23
111.49
12/31/2014 12/31/2015
165.56
171.92
155.18
209.25
157.95
162.35
Index
Peoples Financial Services Corp.
NASDAQ Bank
Russell 2000
Source : SNL Financial LC,
Charlottesville, VA
©2015
-29-
Item 6.
Selected Financial Data.
Consolidated Selected Financial Data
(Dollars in thousands, except per share data)
Year Ended December 31
Condensed statements of financial performance:
Interest income
Interest expense
$
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income tax expense
Net income
Condensed statements of financial position:
Investment securities
Net loans
Other assets
Total assets
Deposits
Short-term borrowings
Long-term debt
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
2015
2014
2013
2012
2011
63,041
6,037
57,004
3,700
53,304
15,719
46,779
22,244
4,521
17,723
$
$
63,956
6,642
57,314
3,524
53,790
15,251
45,933
23,108
5,459
17,649
$
$
37,370
4,169
33,201
2,361
30,840
11,762
36,396
6,206
485
5,721
$
$
297,044
1,327,890
194,124
$ 1,819,058
$ 1,455,810
38,325
60,354
15,801
248,768
$ 1,819,058
$
354,251
1,199,556
187,862
$ 1,741,669
$ 1,425,558
19,557
33,140
16,635
246,779
$ 1,741,669
$
317,010
1,167,966
203,245
$ 1,688,221
$ 1,379,507
22,052
36,743
11,127
238,792
$ 1,688,221
$
$
$
$
$
$
37,591
5,362
32,229
924
31,305
11,441
29,099
13,647
3,058
10,589
177,293
616,580
124,169
918,042
721,948
8,019
45,397
10,232
132,446
918,042
$
$
$
$
$
$
39,707
7,339
32,368
2,381
29,987
12,619
29,041
13,565
3,034
10,531
191,208
624,811
109,513
925,532
720,518
9,981
58,220
9,480
127,333
925,532
Per share data:
Net income
Cash dividends declared
Stockholders’ equity
Cash dividends declared as a percentage of net income
Average common shares outstanding
$
$
Selected ratios (based on average balances):
Net income as a percentage of total assets
Net income as a percentage of stockholders’ equity
Stockholders’ equity as a percentage of total assets
Tier I capital as a percentage of adjusted total assets
Net interest income as a percentage of earning assets
Loans, net, as a percentage of deposits
Selected ratios and data (based on period end
balances):
$
2.36
1.24
33.57
$
52.54 %
$
2.34
1.24
32.69
$
53.03 %
$
1.21
1.23
31.62
$
96.33 %
$
2.37
1.23
29.65
$
51.98 %
2.36
1.23
28.51
52.26 %
7,516,451
7,548,825
4,733,059
4,467,261
4,467,261
1.02 %
7.13
14.26
10.80
3.81
87.55 %
1.03 %
7.29
14.12
10.76
3.86
84.13 %
0.58 %
4.01
14.43
10.12
3.91
87.72 %
1.14 %
8.07
14.18
11.50
4.08
88.69 %
1.13 %
8.45
13.37
10.82
4.04
87.04 %
Tier I capital as a percentage of risk-weighted assets
Total capital as a percentage of risk-weighted assets
Allowance for loan losses as a percentage of loans, net
Nonperforming loans as a percentage of loans, net
13.52 %
14.47
0.97
0.86 %
14.75 %
15.61
0.85
0.85 %
13.62 %
14.29
0.74
1.60 %
16.80 %
17.96
1.11
0.50 %
15.77 %
16.87
1.06
0.68 %
Note: Average balances were calculated using average daily balances. Average balances for loans include nonaccrual
loans. Tax-equivalent adjustments were calculated using the prevailing statutory tax rate of 35.0% for the years 2015 and
2014 and 34.0% for the years 2013, 2012 and 2011.
-30-
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis 2015 versus 2014
(Dollars in thousands, except per share data)
Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the
Consolidated Financial Statements and Management’s Discussion and Analysis 2014 versus 2013 contained in this
Annual Report on Form 10-K.
Forward-Looking Discussion:
In addition to the historical information contained in this document, the discussion presented may contain and, from time
to time, may make, certain statements that constitute forward-looking statements. Words such as “expects,”
“anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,”
“should,” “would” and “could” are intended to identify such forward-looking statements. These statements are not
historical facts, but instead represent the current expectations, plans or forecasts of Peoples Financial Services Corp. and
its subsidiaries regarding its future operating results, financial position, asset quality, credit reserves, credit losses, capital
levels, dividends, liquidity, service charges, cost savings, effective tax rate, impact of changes in fair value of financial
assets and liabilities, impact of new accounting and regulatory guidance, legal proceedings and other matters relating to
us and the securities that we may offer from time to time. These statements are not guarantees of future results or
performance and involve certain risks, uncertainties and assumptions that are difficult to predict, change over time and
are often beyond our control. Actual outcomes and results may differ materially from those expressed in, or implied by,
forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the uncertainties and risks
discussed in the “Risk Factors” in Part I, Item 1A of this Annual Report, among others, and in any of our subsequent
Securities and Exchange Commission (“SEC”) filings. Forward-looking statements speak only as of the date they are
made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or
events that arise after the date the forward-looking statement was made. 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 have been reclassified to conform with the
current year’s presentation.
Critical Accounting Policies:
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP
requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported
amounts of revenues and expenses during those reporting periods.
For a discussion of the recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards
Board (“FASB”) refer to Note 1 entitled “Summary of significant accounting policies — Recent accounting standards,”
in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the
consolidated financial statements if a different amount within a range of estimates were used or if estimates changed
from period to period. Readers of this report should understand that estimates are made considering facts and
circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from
when those estimates were made. Significant estimates that are particularly susceptible to material change within the
near term relate to the determination of allowance for loan losses, determination of other-than-temporary impairment of
investment securities, fair value of financial instruments, the valuation of real estate acquired in connection with
foreclosures or satisfaction of loans, the valuation of deferred tax assets, the valuation of acquired assets and liabilities
assumed in business combinations, and the impairment of goodwill. Actual amounts could differ from those estimates.
-31-
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to
individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the
balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic
conditions.
The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated
element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for loss
contingencies on those loans collectively evaluated. The unallocated element, if any, is used to cover inherent losses that
exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our
impairment evaluation methodology due to limitations in the process.
We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance as necessary
through normal operations. This ongoing evaluation reduces potential differences between estimates and actual observed
losses. The determination of the level of the allowance for loan losses is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available. Accordingly, management cannot ensure
that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required, resulting in an adverse impact on operating results.
In determining the requirement to record an other-than-temporary impairment on securities owned by us, four main
characteristics are considered including: (i) the length of time and the extent to which the fair value has been less than
amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) whether the market decline was
affected by macroeconomic conditions and (iv) whether the Company has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an
other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on information
available to us at a point in time.
Fair values of financial instruments, in cases where quoted market prices are not available, are based on estimates using
present value or other valuation techniques which are subject to change.
Real estate acquired in connection with foreclosures or in satisfaction of loans is adjusted to fair value based upon
current estimates derived through independent appraisals less cost to sell. However, proceeds realized from sales may
ultimately be higher or lower than those estimates.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences by applying
enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available
evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
The acquired assets and liabilities assumed in business combinations are measured at fair value as of the acquisition date.
In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate
cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of
interest, which required the utilization of significant estimates and judgment in accounting for the acquisition.
Goodwill is evaluated at least annually for impairment or more frequently if conditions indicate potential impairment
exist. Any impairment losses arising from such testing are reported in the income statement in the current period as a
separate line item within operations.
For a further discussion of our critical accounting policies, refer to Note 1 entitled, “Summary of significant accounting
policies,” in the Notes to Consolidated Financial Statements to this Annual Report. This note lists the significant
accounting policies used by us in the development and presentation of the consolidated financial statements. This
MD&A, the Notes to Consolidated Financial Statements and other financial statement disclosures identify and address
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key variables and other qualitative and quantitative factors that are necessary for the understanding and evaluation of our
financial position, results of operations and cash flows.
Operating Environment:
The United States economy continued to expand moderately in 2015, as the gross domestic product (“GDP”), the value
of all goods and services produced in the Nation, remained at an annual rate of 2.4 percent, compared to 2014. For the
majority of 2015 the Federal Reserve Board’s Federal Open Market Committee (“FOMC”) kept the target federal funds
rate at a range of 0% to .25%. At their December 2015 meeting, the FOMC raised interest rates for the first time since
December 2008, when they unanimously voted to set the new target federal funds rate at a range of .25% to .50%, a 25
basis point increase. The FOMC stated at this meeting that they expect economic conditions will evolve in a manner that
will warrant only gradual increase in the federal funds rate and that the actual path of the federal funds rate will depend
on the economic outlook as informed by incoming data. The FOMC continues to acknowledge the state of low inflation,
indicating that it plans to carefully monitor actual and expected progress toward its 2% inflation objective. The FOMC
also announced it is maintaining its policy of reinvesting principal payments from its holdings of agency debt and
mortgage-backed securities, and of rolling over maturing Treasury securities at auction, anticipating it will do so until
normalization of the federal funds rate is well underway.
Inflationary concerns continue to be relatively tame, as the consumer price index (“CPI”) at 0.7 percent for 2015
continued to be below the FOMC’s benchmark of 2.0 percent. The CPI was 0.8 percent in 2014. Moreover, the core
personal consumption expenditure price index, which ignores food and energy, averaged 2.1 percent in 2015.
Employment conditions improved in 2015. The civilian labor force increased 1.7 million, while the number of people
employed increased 2.5 million in 2015. As a result, the annual unemployment rate for the U.S. fell to 5.3 percent in
2015 from 6.2 percent in 2014. All sectors of employment, with the exception of the government sector, reported
employment gains from the end of 2014.
National, Pennsylvania, New York and our market area’s non-seasonally-adjusted annual unemployment rates in 2015
and 2014, are summarized as follows:
United States
New York
Pennsylvania
Broome County
Lackawanna County
Lehigh County
Luzerne County
Monroe County
Susquehanna County
Wayne County
Wyoming County
2015
2014
5.3 % 6.2 %
5.3
5.1
6.0
5.6
5.3
6.2
6.4
5.4
5.5
5.9 % 6.7 %
6.3
5.9
6.6
6.6
6.0
7.2
7.4
5.8
6.3
Employment conditions in 2015 improved for the Commonwealth of Pennsylvania as evidenced by a reduction in the
unemployment rate to 5.1 percent in 2015 from 5.9 percent in 2014. Similarly, the unemployment rate for New York
State dropped to 5.3 percent in 2015, from 6.3 percent in 2014. With respect to the markets we serve, the unemployment
rate decreased in all of the eight counties in which we have branches or ATM locations. The lowest unemployment rate
in 2015, for all of the counties we serve, was Lehigh County at 5.3 percent. The marked improvements in unemployment
rates could impact the rate of economic growth and may cause market interest rates to rise in the near term.
With respect to the banking industry, net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks
in 2015 totaled $164.2 billion, an increase of $10.6 billion or 6.9 percent from 2014. Approximately 63.6 percent of all
institutions reported higher net income in 2015, while only 4.6 percent reported net losses. This is the lowest annual
proportion of unprofitable institutions for the industry since 2004. Loan loss provisions of $37.0 billion in 2015 were
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$7.3 billion or 24.6 percent more than banks set aside in 2014. This is the first time in the last six years that loan loss
provisions have been higher than the preceding year, and the total allocation for 2015 was the largest amount since 2012.
Net interest income increased for the second year in a row, by $9.4 billion or 2.2 percent. Noninterest income was $5.5
billion or 2.2 percent above the level of 2014, as servicing fee income increased by $1.5 billion or 16.8 percent. Realized
gains on sales of loans were $1.4 billion or 7.7 percent higher than a year ago. Total noninterest expense decreased $5.5
billion or 1.3 percent comparing 2015 and 2014. The average return on average assets for 2015 was 1.04 percent, up
from 1.02 percent in 2014.
The United States economy continued on an upward path in 2015. This could affect interest rates which may adversely
impact bank earnings as net interest margins compress from the inability of management to keep fund costs low.
Continuous expense control, sound balance sheet management and lower loan loss provisions could offset some of the
negative impact of the reduction in net interest margins.
Review of Financial Position:
Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full
range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company (“Peoples
Bank”), including its subsidiary, Peoples Advisors, LLC (collectively, the “Company” or “Peoples”). On November 30,
2013, Penseco Financial Services Corporation, a financial holding company incorporated under the laws of Pennsylvania
(“Penseco”), merged with and into Peoples Financial Services Corp., with Peoples Financial Services Corp. being the
surviving corporation (the “Merger”), pursuant to an Agreement and Plan of Merger dated June 28, 2013 (the “Merger
Agreement”). In connection with the Merger, on December 1, 2013, Penseco’s former banking subsidiary, Penn Security
Bank and Trust Company, merged with and into Peoples Neighborhood Bank (the “Bank Merger”), and the resulting
institution adopted the name, “Peoples Security Bank and Trust Company.” The Company services its retail and
commercial customers through twenty-four full-service community banking offices located within the Lackawanna,
Lehigh, Luzerne, Monroe, Susquehanna, Wayne and Wyoming Counties of Northeastern Pennsylvania and Broome
County of New York.
Peoples Bank is a state-chartered bank and trust company under the jurisdiction of the Pennsylvania Department of
Banking and Securities and the Federal Deposit Insurance Corporation. Peoples Bank’s primary product is loans to
small- and medium-sized businesses. Other lending products include one-to-four family residential mortgages and
consumer loans. Peoples Bank primarily funds its loans by offering open time deposits to commercial enterprises and
individuals. Other deposit product offerings include certificates of deposits and various demand deposit accounts.
Peoples Advisors, LLC, a member-managed limited liability company, provides investment advisory services through a
third party to individuals and small businesses.
Peoples Advisors, LLC did not meet the quantitative threshold for required segment disclosure in conformity with
accounting principles generally accepted in the United States of America (“GAAP”). Peoples Bank’s twenty-four
community banking offices, all similar with respect to economic characteristics, share a majority of the following
aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and
(v) regulatory oversight. Accordingly, they were aggregated into a single operating segment.
The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the
Northeastern Pennsylvania market, many of which are substantially larger in terms of assets and capital. In addition,
mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance
companies compete for various types of loans and leases. Principal methods of competing for banking and permitted
nonbanking services include price, nature of product, quality of service and convenience of location.
The Company and Peoples Bank are subject to regulations of certain federal and state regulatory agencies and undergo
periodic examinations.
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The aforementioned merger between the Company and Penseco was considered a “merger of equals” and is accounted
for as a reverse merger using the acquisition method of accounting. As a result of the reverse merger, Peoples is the legal
acquirer and Penseco is the accounting acquirer. In a reverse merger the historical consolidated financial statements are
those of the accounting acquirer, Penseco and, consequently, comparisons may not be particularly meaningful. The
results for the year ended December 31, 2013, include the operating results of Penseco for the entire year and the
operating results of Peoples since November 30, 2013. The merger with Penseco had a significant impact on the results
of operations for the year ended December 31, 2013.
Readers of this Management Discussion and Analysis are encouraged to refer to the note entitled “Merger accounting,”
in the Notes to the Consolidated Financial Statements to more fully understand the impact that the merger had on the
Company’s financial position and results of operations.
Total assets, loans and deposits were $1.8 billion, $1.3 billion and $1.5 billion, respectively, at December 31, 2015. Total
assets, loans and deposits grew 4.4 percent, 10.8 percent and 2.1 percent, respectively, compared to 2014 year-end
balances.
The loan portfolio consisted of $933.0 million of business loans, including commercial and commercial real estate loans,
and $407.8 million in retail loans, including residential mortgage and consumer loans at December 31, 2015. Total
investment securities were $297.0 million at December 31, 2015, including $284.9 million of investment securities
classified as available-for sale and $12.1 million classified as held-to-maturity. Total deposits consisted of $321.0
million in noninterest-bearing deposits and $1.1 billion in interest-bearing deposits at December 31, 2015.
Stockholders’ equity equaled $248.8 million, or $33.57 per share, at December 31, 2015, and $246.8 million, or $32.69
per share, at December 31, 2014. Dividends declared for the 2015 amounted to $1.24 per share representing 52.5 percent
of net income.
Nonperforming assets equaled $12.5 million or 0.93 percent of loans, net and foreclosed assets at December 31, 2015, up
from $10.9 million or 0.90 percent at December 31, 2014. The allowance for loan losses equaled $13.0 million or 0.97
percent of loans, net, at December 31, 2015, compared to $10.3 million or 0.85 percent at year-end 2014. Loans charged-
off, net of recoveries equaled $1.1 million or 0.08 percent of average loans in 2015, compared to $1.8 million or 0.15
percent of average loans in 2014.
Investment Portfolio:
Primarily, our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a
reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging
requirements and reduce income taxes. At December 31, 2015, our portfolio consisted primarily of short-term U.S.
Treasury and Government agency securities, which provide a source of liquidity and intermediate-term, tax-exempt state
and municipal obligations, which mitigate our tax burden.
Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability.
The greatest risk element affecting our portfolio is market risk or interest rate risk (“IRR”). Understanding IRR, along
with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.
Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that
increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the
investment portfolio could subject us to liquidity strains and reduced earnings if we are unable or unwilling to sell these
investments at a loss. Moreover, the inability to liquidate these assets could require us to seek alternative funding, which
may further reduce profitability and expose us to greater risk in the future. In addition, since the majority of our
investment portfolio is designated as available-for-sale and carried at estimated fair value, with net unrealized gains and
losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our
capital position.
-35-
For the majority of 2015 the FOMC kept the target federal funds rate at a range of 0% to .25%. At their December 2015
meeting, the FOMC raised interest rates for the first time since December 2008, when they unanimously voted to
increase the federal funds rate 25 basis points. The FOMC stated at this meeting that they expect economic conditions
will evolve in a manner that will warrant only gradual increase in the federal funds rate and that the actual path of the
federal funds rate will depend on the economic outlook as informed by incoming data. Our investment portfolio consists
primarily of fixed-rate bonds. As a result, changes in the velocity and magnitude of future FOMC actions can
significantly influence the fair value of our portfolio. Specifically, the parts of the yield curve most closely related to our
investments include the 2-year and 10-year U.S. Treasury securities. The yield on the 2-year U.S. Treasury note affects
the values of our U.S. Treasury and Government agency securities, whereas the 10-year U.S. Treasury note influences
the value of tax-exempt state and municipal obligations. The yield on the 2-year U.S. Treasury ranged from a low of 44
basis points to a high of 109 basis points during 2015 before ending the year at 1.06 percent. The yield on the 10-year
U.S. Treasury ranged from a low of 168 basis points to a high of 250 basis points while ending 2015 at 2.27 percent.
Since bond prices move inversely to yields, we experienced a decline in the aggregate fair value of our investment
portfolio when comparing December 31, 2015 to December 31, 2014 due to higher rates at year end 2015. The net
unrealized holding gains included in our available-for-sale investment portfolio was $4.6 million at December 31, 2015
compared to $6.3 million at December 31, 2014. We reported net unrealized holding gains, included as a separate
component of stockholders’ equity of $3.0 million, net of income taxes of $1.6 million, at December 31, 2015, and $4.1
million, net of income taxes of $2.2 million, at December 31, 2014. An increase in interest rates could negatively impact
the market value of our investments and our capital position. In order to monitor the potential effects a rise in interest
rates could have on the value of our investments, we perform stress test modeling on the portfolio. Stress tests conducted
on our portfolio at December 31, 2015, indicated that should general market rates increase by 100, 200 and 300 basis
points, we would anticipate declines of 3.1 percent, 6.3 percent and 9.5 percent in the market value of our portfolio.
The carrying values of the major classifications of investment securities and their respective percentages of total
investment securities for the past three years are summarized as follows:
Distribution of investment securities
December 31,
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Corporate debt securities
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored
enterprises
Common equity securities
Total
Amount
$
9,999
69,060
2015
2014
2013
%
Amount
%
Amount
%
3.37 % $ 48,550 13.70 %
23.25
96,245
27.17
$ 113,045
35.66 %
16,545
131,789
5.57
44.36
17,407
100,271
4.91
28.31
16,698
105,453
4,387
5.27
33.26
1.38
31,652
10.66
37,576
10.61
20,550
6.48
37,999
12.79
54,202
15.30
55,780
1,097
17.60
0.35
$ 297,044 100.00 % $ 354,251 100.00 % $ 317,010 100.00 %
Investment securities decreased $57.3 million, to $297.0 million at December 31, 2015, from $354.3 million at
December 31, 2014. At December 31, 2015, the investment portfolio consisted of $284.9 million of investment securities
classified as available-for-sale and $12.1 million classified as held-to-maturity. Loan demand accelerated in the second
half of 2015 which resulted in using a portion of the investment cash flow to fund loans. Excess cash flow from
investment payments and repayments was directed back into the investment portfolio in the first half of 2015. Security
purchases totaled $90.4 million in 2015, with the majority of the purchases consisting of short-term U.S. Treasury
securities and intermediate- term tax-exempt municipal securities. Investment purchases in 2014 amounted to $102.3
million.
Repayments of investment securities totaled $60.8 million in 2015 and $49.7 million in 2014. We received proceeds of
$82.0 million from the sale of investment securities in 2015 and $15.4 million in 2014. Net gains recognized on the sale
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of investment securities available-for-sale totaled $1,189 in 2015 and $861 in 2014. The 2015 sales consisted of $80.2
million of short-term U.S. Treasury securities and $1.8 million of tax-exempt municipal securities. We continually
analyze the investment portfolio with respect to its exposure to various risk elements. As a result of such analysis, we
sold the tax-exempt municipal securities due to credit risk concerns.
The composition of our investment portfolio changed during 2015 as a result of the aforementioned transactions. Short-
term bullet U.S. Treasury and U.S. Government agency and U.S. Government-sponsored enterprise securities comprised
26.6 percent of our total portfolio at year-end 2015 compared to 40.9 percent at the end of 2014. Tax-exempt municipal
obligations increased as a percentage of the total portfolio to 44.4 percent at year-end 2015 from 28.3 percent at the end
of 2014. The weighted average life and the effective duration of the investment portfolio were relatively constant at 2.9
years and 3.1 years at December 31, 2015 and 2014.
There were no other-than-temporary impairments (“OTTI”) recognized for the years ended December 31, 2015, 2014
and 2013. For additional information related to OTTI refer to Note 4 entitled “Investment securities” in the Notes to
Consolidated Financial Statements to this Annual Report.
Investment securities averaged $311.2 million and equaled 19.7 percent of average earning assets in 2015, compared to
$338.5 million and equaled 21.7 percent of average earning assets in 2014. The tax-equivalent yield on the investment
portfolio increased four basis points to 2.71 percent in 2015 from 2.67 percent in 2014.
At December 31, 2015 and 2014, there were no securities of any individual issuer, except for U.S. Government agency
mortgage-backed securities, that exceeded 10.0 percent of stockholders’ equity.
The maturity distribution based on the carrying value and weighted-average, tax-equivalent yield of the investment
portfolio at December 31, 2015, is summarized as follows. The weighted-average yield, based on amortized cost, has
been computed for tax-exempt state and municipals on a tax-equivalent basis using the prevailing federal statutory tax
rate of 35.0 percent. The distributions are based on contractual maturity. Expected maturities may differ from contractual
maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity distribution of investment securities
After one but
Within one year
Amount Yield Amount
within five years
After five but
within ten years
After ten years
Total
Yield Amount Yield Amount Yield Amount
9,999 1.69 %
44,503 1.25
$ 2,378 2.94 %
$
Yield
9,999 1.69 %
69,060
1.10
3,495 2.78
38,313 2.62
9,935 4.21
37,250 3.29
$ 3,115 4.19 %
50,731 6.36
16,545
131,789
3.90
4.27
16,014 1.69
14,033 1.32
1,605 1.48
31,652
1.52
37,999
$ 27,767 1.08 % $ 121,836 1.88 % $ 87,532 2.83 % $ 59,909 5.77 % $ 297,044
23,936 2.40
4,458 1.74
9,512 2.03
93 1.41
2.23
2.87 %
December 31, 2015
U.S. Treasury securities
$
U.S. Government-sponsored enterprises $ 22,179 0.59 %
State and municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored
enterprises
5,495 3.04
Total
Loan Portfolio:
Economic factors and how they affect loan demand are of extreme importance to us and the overall banking industry, as
lending is a primary business activity. Loans are the most significant component of earning assets and they generate the
greatest amount of revenue for us. Similar to the investment portfolio, there are risks inherent in the loan portfolio that
must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and
fluctuations in demand. Changes in economic conditions and interest rates affect these risks which influence loan
demand, the composition of the loan portfolio and profitability of the lending function.
-37-
The composition of the loan portfolio at year-end for the past five years is summarized as follows:
Distribution of loan portfolio
2015
2014
2013
2012
2011
December 31,
Commercial
Real estate:
Commercial
Residential
Consumer
Loans, net
Amount
$
%
Amount
%
Amount
%
Amount
%
Amount
%
365,767 27.28 % $
319,590 26.41 % $
350,680 29.80 % $ 91,724 14.71 % $ 88,188 13.96 %
567,277
306,218
101,603
42.30
22.84
7.58
493,481
322,454
74,369
40.79
26.65
6.15
413,058
322,062
90,817
35.11
27.37
7.72
217,496
261,912
52,398
34.88
42.01
8.40
208,875
281,643
52,816
33.08
44.60
8.36
1,340,865 100.00 % 1,209,894 100.00 % 1,176,617 100.00 % 623,530 100.00 % 631,522 100.00 %
Less: allowance for
loan loss
Net loans
12,975
$ 1,327,890
10,338
$ 1,199,556
8,651
$ 1,167,966
6,950
$ 616,580
6,711
$ 624,811
Loans, net increased $131.0 million or 10.8 percent in 2015 to $1.3 billion at December 31, 2015. Business loans,
including commercial loans and commercial real estate loans, were $933.0 million or 69.6 percent of loans, net at
December 31, 2015, and $813.1 million or 67.2 percent at year-end 2014. Residential mortgages and consumer loans
totaled $407.8 million or 30.4 percent of loans, net at year-end 2015 and $396.8 million or 32.8 percent at year-end 2014.
Loan growth remained strong in the first quarter of 2015, however decreased slightly during the second quarter which
was impacted by several large payoffs. Despite the decrease in the second quarter, loans, net grew at an annualized
growth rate of 3.6 percent during the first half of 2015. However, loan growth accelerated in the final two quarters of
2015 as loans, net increased $109.3 million or 17.9 percent on an annualized basis. More than half of the increase in
loans in 2015 was attributable to the continued growth fostered by our entrance into the Lehigh Valley market during the
fourth quarter of 2014 by establishing a community banking office with a dedicated team of commercial and retail
lenders. The remainder of such growth was generated from improved demand for business lending in existing markets.
Based on the customer service oriented philosophy of our organization along with the commitment of these employees,
we expect to be as well received in this new market as we are in our existing markets.
Loans averaged $1.3 billion in 2015, compared to $1.2 billion in 2014. Taxable loans averaged $1.2 billion, while tax-
exempt loans averaged $75.0 million in 2015. Due to improving loan demand, the loan portfolio continues to play a
prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 79.6 percent in 2015,
an increase from 76.0 percent in 2014.
The prime rate remained at 3.25 percent for the majority of 2015, increasing to 3.50 percent in December at the
conclusion of the FOMC meeting. The tax-equivalent yield on our loan portfolio decreased 28 basis points to 4.59
percent in 2015 from 4.87 percent in 2014. Included in loan interest income in 2015 was credit fair value accretion of
$665.5 thousand which increased the tax-equivalent net interest margin by 4 basis points. Comparatively, loan accretion
included in loan interest income in 2014 totaled $2.1 million which increased the tax-equivalent net interest margin by
14 basis points. The effect of low market rates on our loan portfolio’s yield can be evidenced by evaluating quarterly
loan yields, which continued to decline during the first three quarters of 2015 before stabilizing in the fourth quarter.
During 2015, the tax-equivalent yield fell by 18 basis points from 4.70 in the first quarter of 2015 to 4.52 percent in the
third quarter. Loan yields remained stable at 4.52 percent in the fourth quarter as the increase in the prime rate positively
benefited loan yields. Despite stabilizing during the last quarter of 2015, the yield on the loan portfolio may continue to
decline as repayments on higher yielding loans are replaced with new originations at lower yields. Moreover, increased
competition will continue to prompt more aggressive pricing for fixed rate intermediate term loans, and thus lower yields
further.
-38-
The maturity distribution and sensitivity information of the loan portfolio by major classification at December 31, 2015,
is summarized as follows:
Maturity distribution and interest sensitivity of loan portfolio
Within one After one but
December 31, 2015
Maturity schedule:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Predetermined interest rates
Floating or adjustable interest rates
Total
year
within five years
After five
years
Total
$ 119,751 $
131,642 $ 114,374 $
365,767
117,159
79,137
37,987
$ 354,034 $
268,970
165,080
52,935
567,277
181,148
306,218
62,001
101,603
10,681
618,627 $ 368,204 $ 1,340,865
$ 135,027 $
219,007
$ 354,034 $
490,726
245,001 $ 110,698 $
373,626
850,139
618,627 $ 368,204 $ 1,340,865
257,506
As previously mentioned, there are numerous risks inherent in the loan portfolio. We manage the portfolio by employing
sound credit policies and utilizing various modeling techniques in order to limit the effects of such risks. In addition, we
utilize private mortgage insurance (“PMI”) and guaranteed Small Business Administration and Federal Home Loan Bank
of Pittsburgh (“FHLB-Pgh”) loan programs to mitigate credit risk in the loan portfolio.
In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate
sensitivity of the loan portfolio. For 2015, market interest rates remained at historically low levels. Given the potential
for rates to rise in the future, we continued to place emphasis on originating short term fixed-rate and adjustable-rate
loans. Fixed-rate loans represented 36.6 percent of the loan portfolio at December 31, 2015, compared to floating or
adjustable-rate loans at 63.4 percent. Approximately 47.1 percent of the loan portfolio is expected to reprice within the
next 12 months.
Additionally, our secondary market mortgage banking program provides us with an additional source of liquidity and a
means to limit our exposure to IRR. Through this program, we are able to competitively price conforming one-to-four
family residential mortgage loans without taking on IRR which would result from retaining these long-term, low fixed-
rate loans on our books. The loans originated are subsequently sold in the secondary market, with the sales price locked
in at the time of commitment, thereby greatly reducing our exposure to IRR.
Loan concentrations are considered to exist when the total amount of loans to any one borrower, or a multiple number of
borrowers engaged in similar business activities or having similar characteristics, exceeds 25.0 percent of loans
outstanding in any one category. We provide deposit and loan products and other financial services to individual and
corporate customers in our eight-county market area. There are no significant concentrations of credit risk from any
individual counterparty or groups of counterparties, except for geographic concentrations.
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, and may
involve, to varying degrees, elements of credit risk and IRR in excess of the amount recognized in the consolidated
financial statements.
Credit risk is the principal risk associated with these instruments. Our involvement and exposure to credit loss in the
event that the instruments are fully drawn upon and the customer defaults is represented by the contractual amounts of
these instruments. In order to control credit risk associated with entering into commitments and issuing letters of credit,
we employ the same credit quality and collateral policies in making commitments that we use in other lending activities.
-39-
We evaluate each customer’s creditworthiness on a case-by-case basis, and if deemed necessary, obtain collateral. The
amount and nature of the collateral obtained is based on our credit evaluation.
The contractual amounts of off-balance sheet commitments at year-end for the past three years are summarized as
follows:
Distribution of off-balance sheet commitments
December 31
Commitments to extend credit
Unused portions of lines of credit
Commercial letters of credit
Total
2014
2015
2013
$ 257,011 $ 187,351 $ 221,138
52,257
29,914
$ 329,822 $ 266,570 $ 303,309
48,610
30,609
52,794
20,017
We record a valuation allowance for off-balance sheet credit losses, if deemed necessary, separately as a liability. The
valuation allowance amounted to $47 and $58 at December 31, 2015 and 2014. We do not anticipate that losses, if any,
that may occur as a result of funding off-balance sheet commitments, would have a material adverse effect on our
operating results or financial position.
Asset Quality:
We are committed to developing and maintaining sound, quality assets through our credit risk management policies and
procedures. Credit risk is the risk to earnings or capital which arises from a borrower’s failure to meet the terms of their
loan agreement. We manage credit risk by diversifying the loan portfolio and applying policies and procedures designed
to foster sound lending practices. These policies include certain standards that assist lenders in making judgments
regarding the character, capacity, cash flow, capital structure and collateral of the borrower.
With regard to managing our exposure to credit risk in light of general devaluations in real estate values, we have
established maximum loan-to-value ratios for commercial mortgage loans not to exceed 75.0 percent of the lower of cost
or appraised value. With regard to residential mortgages, customers with loan-to-value ratios between 80.0 percent and
100.0 percent are generally required to obtain PMI. The 80.0 percent loan-to-value threshold provides a cushion in the
event the property is devalued. PMI is used to protect us from loss in the event loan-to-value ratios exceed 80.0 percent
and the customer defaults on the loan. Appraisals are performed by an independent appraiser engaged by us, not the
customer, who is either state certified or state licensed depending upon collateral type and loan amount.
With respect to lending procedures, lenders must determine the borrower’s ability to repay the credit based on prevailing
and expected market conditions prior to requesting approval for the loan. The Board of Directors establishes and
reviews, at least annually, the lending authority for all loan officers and branch managers. Credits beyond the scope of
the loan officers and branch managers are forwarded to the Loan Committee. This Committee, comprised of senior
management, attempts to assure the quality of the loan portfolio through careful analysis of credit applications,
adherence to credit policies and the examination of outstanding loans and delinquencies. These procedures assist in the
early detection and timely follow-up of problem loans.
Credit risk is also managed by monthly internal reviews of our loan portfolio by the asset quality committee. These
reviews aid us in identifying deteriorating financial conditions of borrowers, allowing us to assist customers in
remedying these situations.
Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual
loans, troubled debt restructured loans and accruing loans past due 90 days or more. For a discussion of our policy
regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the notes entitled,
“Summary of significant accounting policies — Nonperforming assets,” and “Loans, net and allowance for loan losses”
in the Notes to Consolidated Financial Statements to this Annual Report.
-40-
Information concerning nonperforming assets for the past five years is summarized as follows. The table includes credits
classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability
to comply with present loan repayment terms.
Distribution of nonperforming assets
December 31
Nonaccrual loans:
Commercial
Real estate:
Commercial
Residential
Consumer
Total nonaccrual loans
Troubled debt restructured loans:
Commercial
Real estate:
Commercial
Residential
Consumer
2015
2014
2013
2012
2011
$ 1,632
$ 1,322
$ 2,035
$
304
$
477
1,680
4,424
148
7,884
1,275
3,047
122
5,766
9,172
3,569
90
14,866
145
1,800
31
2,280
591
2,006
92
3,166
2,487
351
368
2,325
536
2,457
476
Total troubled debt restructured loans
2,861
2,933
2,487
351
368
Accruing loans past due 90 days or more:
Commercial
Real estate:
Commercial
Residential
Consumer
Total accruing loans past due 90 days or more
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Nonperforming loans as a percentage of loans, net
Nonperforming assets as a percentage of loans, net and
foreclosed assets
6
525
238
763
11,508
957
$ 12,465
136
1,062
425
1,623
10,322
561
$ 10,883
200
678
571
1,455
18,808
648
$ 19,456
243
214
457
3,088
656
$ 3,744
11
641
122
774
4,308
1,571
$ 5,879
0.86 %
0.85 %
1.60 %
0.50 %
0.68 %
0.93 %
0.90 %
1.65 %
0.60 %
0.93 %
We experienced a modest decrease in our asset quality as evidenced by an increase in nonperforming assets of $1.6
million or 14.5 percent to $12.5 million or 0.93 percent of loans, net of unearned income, and foreclosed assets at
December 31, 2015, from $10.9 million or 0.90 percent of loans, net of unearned income, and foreclosed assets at the
end of 2014. The increase resulted from a $2.1 million increase in nonaccrual loans, coupled with a $396 rise in
foreclosed assets and offset partially by a decrease of $860 in accruing loans past due 90 days or more. For a further
discussion of assets classified as nonperforming assets, refer to the note entitled, “Loans, net and the allowance for loan
losses,” in the Notes to Consolidated Financial Statements to this Annual Report.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to
individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the
balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic
conditions. We employ the FFIEC Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of
the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of
FASB Accounting Standards Codification (“ASC”) 310 for loans specifically identified to be individually evaluated for
-41-
impairment and the requirements of FASB ASC 450, 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, our loan review division identifies those loans to be individually evaluated for impairment and those to be
collectively evaluated for impairment utilizing a standard criteria. Internal loan review grades are assigned quarterly to
loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions
and events, however, we consistently utilize the same grading system each quarter. 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 to assure directional consistency of the allowance for loan loss account. Regulators, in
reviewing the loan portfolio as part of the scope of a regulatory examination, may require us to increase our allowance
for loan losses or take other actions that would require increases to our allowance for loan losses.
For a further discussion of our accounting policies for determining the amount of the allowance and a description of the
systematic analysis and procedural discipline applied, refer to the note entitled, “Summary of significant accounting
policies — Allowance for loan losses,” in the Notes to Consolidated Financial Statements to this Annual Report.
A reconciliation of the allowance for loan losses and an illustration of charge-offs and recoveries by major loan category
for the past five years are summarized as follows:
Reconciliation of allowance for loan losses
December 31
2015
2014
2013
$ 10,338
$ 8,651
$ 6,950
$ 6,711
2012
2011
$ 6,500
Allowance for loan losses at beginning of period
Loans charged-off:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Loans recovered:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Net loans charged-off
Provision for loan losses
Allowance for loan losses at end of period
Ratios:
Net loans charged-off as a percentage of average loans
246
601
5
78
100
325
523
333
1,427
500
804
386
2,291
15
508
313
841
33
431
275
817
663
1,275
262
2,300
77
9
1
1
3
144
26
117
364
1,063
3,700
$ 12,975
292
38
115
454
1,837
3,524
$ 10,338
20
111
49
181
660
2,361
$ 8,651
6
67
58
132
685
924
$ 6,950
18
58
51
130
2,170
2,381
$ 6,711
outstanding
0.08 %
0.15 %
0.10 %
0.11 %
0.35 %
Allowance for loan losses as a percentage of period end
loans
0.97 %
0.85 %
0.74 %
1.11 %
1.06 %
The allowance for loan losses increased $2.7 million to $13.0 million at December 31, 2015, from $10.3 million at the
end of 2014. The increase resulted from a provision for loan losses of $3.7 million exceeding net loans charged-off of
$1.0 million. The allowance for loan losses, as a percentage of loans, net of unearned income, was 0.97 percent at the
-42-
end of 2015, compared to 0.85 percent at the end of 2014. The reduction in this ratio compared to that of years prior to
the merger date, was a result of applying the accounting guidance for loans that we acquired in connection with the
merger which provides that there is no carryover of the related allowance for credit losses attributable to those loans.
However, the guidance does require a credit quality adjustment be established as of the merger date. For a further
discussion of the credit quality adjustment for loans acquired in the merger, refer to the Notes to the Consolidated
Financial Statements to this Annual Report.
Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if
all or part of the outstanding balance should be charged against the allowance for loan losses account. Any subsequent
recoveries are credited to the allowance account. Net loans charged-off decreased $774 to $1,063 in 2015 from $1,837 in
2014. Net charge-offs, as a percentage of average loans outstanding, equaled 0.08 percent in 2015 and 0.15 percent in
2014.
Allocation of the allowance for loan losses
The allocation of the allowance for loan losses for the past five years is summarized as follows:
December 31
Allocated
allowance:
Specific:
Commercial
Real Estate:
2015
2014
2013
2012
2011
Amount
%
Amount
%
Amount %
Amount %
Amount %
$
759
0.16 % $ 1,240
0.33 % $ 1,500
0.61 % $
351
0.10 % $
443
0.13 %
Commercial
Residential
Consumer
Total specific
233
1,138
117
2,247
0.40
0.37
0.01
0.94
912
769
38
2,959
0.53
0.34
0.01
1.21
300
224
2,024
1.01
0.32
0.01
1.95
550
325
1,226
0.35
0.39
0.01
0.85
215
658
0.09
0.32
0.02
0.56
Formula:
Commercial
Real Estate:
Commercial
Residential
Consumer
Total formula
Total
allocated
allowance
2,283
27.12
1,081
26.08
508
29.19
448
14.60
350
13.83
4,012
2,944
1,466
10,705
41.90
22.47
7.57
99.06
2,125
2,921
1,252
7,379
40.26
26.31
6.14
98.79
2,094
2,911
1,114
6,627
34.10
27.05
7.71
98.05
1,754
2,656
866
5,724
34.53
41.62
8.40
99.15
2,294
2,640
769
6,053
32.98
44.28
8.35
99.44
12,952 100.00 % 10,338 100.00 % 8,651 100.00 % 6,950 100.00 % 6,711 100.00 %
Unallocated
allowance
Total
23
$ 12,975
$ 10,338
$ 8,651
$ 6,950
$ 6,711
The allocated element of the allowance for loan losses account increased $2,614 to $12,952 at December 31, 2015,
compared to $10,338 at December 31, 2014.The specific portion of the allowance for loan losses decreased while the
formula portions of the allowance for loan losses increased from the end of 2014. The specific portion of the allowance
for impairment of loans individually evaluated under FASB ASC 310 decreased $712 to $2,247 at December 31, 2015,
from $2,959 at December 31, 2014. However, the formula portion of the allowance for loans collectively evaluated for
impairment under FASB ASC 450, increased $3,326 to $10,705 at December 31, 2015, from $7,379 at December 31,
2014. The decrease in the specific portion of the allowance was a result of a decrease in the amount of impaired loans
designated with a related allowance to $5,473 at December 31, 2015 from $6,525 at year-end 2014. The increase in the
formula portion was due to higher loan volume and the relatively unchanged overall loss factor.
The unallocated element equaled $23 or 0.2 percent of the total allowance for loan losses at December 31, 2015. As is
inherent with all estimates, the allowance for loan losses methodology is subject to a certain level of imprecision as it
provides reasonable, but not absolute, assurance that the allowance will be able to absorb probable losses, in their
entirety, as of the financial statement date. Factors, among others, including judgments made in identifying those loans
-43-
considered impaired, appraisals of collateral values and measurements of certain qualitative factors, all cause this
imprecision and support the establishment of the unallocated element.
The coverage ratio, the allowance for loan losses account, as a percentage of nonperforming loans, is an industry ratio
used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The
coverage ratio was 112.8 percent at December 31, 2015 and 100.2 percent at December 31, 2014. We believe that our
allowance was adequate to absorb probable credit losses at December 31, 2015.
Deposits:
Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet
the needs of our individual and commercial customers. Total deposits grew $30.3 million or 2.1 percent to $1.5 billion at
the end of 2015. Noninterest-bearing deposits grew $7.5 million or 2.4% while interest-bearing deposits increased $22.8
million or 2.1% in 2015. Noninterest-bearing deposits represented 22.0 percent of total deposits while interest-bearing
deposits accounted for 78.0 percent of total deposits at December 31, 2015. Comparatively, noninterest-bearing deposits
and interest-bearing deposits represented 22.0 percent and 78.0 percent of total deposits at year end 2014. With regard to
noninterest-bearing deposits, personal checking accounts increased $10.1 million or 6.4 percent, while commercial
checking accounts declined $2.6 million or 1.7 percent. The increase in noninterest-bearing deposits is essential in
attempting to keep our overall cost of funds low given the pressure on our net interest margin from the continuation of
the low interest rate environment.
With regard to interest-bearing deposits, interest-bearing transaction accounts, which include money market accounts,
NOW accounts, and savings accounts, increased $18.5 million in 2015. Commercial interest-bearing transaction
accounts increased $12.6 million, while personal interest-bearing transaction accounts increased $5.9 million. The
increase in personal accounts was primarily due to increases in NOW and money market accounts of $9.0 million, offset
by a decrease in savings accounts of $3.1 million. The strong growth in these account types over the previous years
slowed in 2015 due to a reduction of customers’ lease payments and royalties from gas companies for drilling rights to
their properties. Total time deposits increased 4.3 million to $272.0 million at December 31, 2015 from $267.7 million at
December 31, 2014. The increase was primarily due to a promotional premium rate offered on a time deposit with a
maturity slightly over one year.
The average amount of, and the rate paid on, the major classifications of deposits for the past three years are summarized
as follows:
Deposit distribution
Year ended December 31
Interest-bearing:
Money market accounts
NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Total interest-bearing
Noninterest-bearing
Total deposits
2015
2014
2013
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
197,129
273,792
396,606
172,830
90,030
1,130,387
303,647
$ 1,434,034
211,441
0.32 % $
233,289
0.37
378,272
0.20
207,866
1.06
0.76
88,897
0.44 % 1,119,765
291,685
$ 1,411,450
0.38 % $ 175,675
116,242
0.35
150,083
0.27
97,826
0.98
0.85
87,277
0.49 % 627,103
158,790
$ 785,893
0.25 %
0.23
0.11
0.97
1.22
0.46 %
Total deposits averaged $1.4 billion in 2015 and 2014, increasing $22.6 million or 1.6 percent comparing 2015 to 2014.
Average noninterest-bearing deposits increased $12.0 million, while average interest-bearing accounts grew
$10.6 million. Average interest-bearing transaction deposits, including money market, NOW and savings accounts,
increased $44.5 million while average total time deposits decreased $33.9 million comparing 2015 and 2014.
-44-
Our cost of interest-bearing deposits decreased 5 basis points to 0.44 percent in 2015 from 0.49 percent in 2014.
Specifically, the cost of interest-bearing transaction accounts decreased 4 basis points to 0.28 percent while the cost of
time deposits increased 2 basis points to 0.96 percent comparing 2015 and 2014. Interest-bearing transaction deposit
costs decreased as a result of reducing the rate offered on certificate saving accounts and tiered money market accounts.
The increase to the cost of time deposits was due to the introduction of a premium rate time deposit special during the
second half of 2015.
Volatile deposits, time deposits $100 or more, averaged $90.0 million in 2015, an increase of $1.1 million or 1.3 percent
from $88.9 million in 2014. Our average cost of these funds decreased 9 basis points to 0.76 percent in 2015, from
0.85 percent in 2014. This type of funding is susceptible to withdrawal by the depositor as they are particularly price
sensitive and are therefore not considered to be a strong source of liquidity.
Maturities of time deposits $100 or more for the past three years are summarized as follows:
Maturity distribution of time deposits $100 or more
December 31
Within three months
After three months but within six months
After six months but within twelve months
After twelve months
Total
2014
2015
2013
$ 9,568 $ 16,097 $ 24,350
19,202
9,815
18,969
17,712
35,840
32,228
$ 88,083 $ 75,852 $ 98,361
14,172
34,805
29,538
We recorded a core deposit intangible related to a value ascribed to demand, interest checking, money market and saving
accounts as well as a fair value adjustment for time deposits assumed in applying the purchase accounting guidance for
the merger. For a further discussion of the fair value adjustments related to deposits assumed in the merger, refer to the
Notes to the Consolidated Financial Statements to this Annual Report.
In addition to deposit gathering, we have in place a secondary source of liquidity to fund operations through exercising
existing credit arrangements with the FHLB-Pgh. We relied on this type of funding more extensively in 2015 than in
2014 due to the strong loan growth experienced in the second half of the year. For a further discussion of our borrowings
and their terms, refer to the notes entitled, “Short-term borrowings” and “Long-term debt,” in the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report.
Market Risk Sensitivity:
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 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 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. 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.
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.
Despite the FOMC taking action in the final month of 2015 by increasing the federal funds target rate 25 basis points,
interest rates continue to be at exceptional low levels. The timing and the magnitude of future monetary policy actions
that will impact the current exceptionally low interest rate environment are uncertain. Given these conditions, IRR and
the ability to effectively manage it, are extremely critical to both bank management and regulators. The FFIEC through
-45-
its advisory guidance reiterates the importance of effective corporate governance, policies and procedures, risk
measuring and monitoring systems, stress testing and internal controls related to the IRR exposure of depository
institutions. According to the advisory, the bank regulators believe that the current financial market and economic
conditions present significant risk management challenges to all financial institutions. Although the bank regulators
recognize that some degree of IRR is inherent in banking, they expect institutions to have sound risk management
practices in place to measure, monitor and control IRR exposure. The advisory states that the adequacy and effectiveness
of an institution’s IRR management process and the level of IRR exposure are critical factors in the bank regulators’
evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Material weaknesses in risk
management processes or high levels of IRR exposure relative to capital will require corrective action. We believe our
risk management practices with regard to IRR were suitable and adequate given the level of IRR exposure at
December 31, 2015.
The Asset/Liability Committee (“ALCO”), comprised of members of our Board of Directors, senior management and
other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and
market interest rate trends, as well as competitive pressures, and utilizes several computerized modeling techniques to
reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have
on our rate sensitive assets (“RSA”), rate sensitive liabilities (“RSL”) and overall operating results and financial position.
With respect to evaluating our exposure to IRR on earnings, we utilize a gap analysis model that considers repricing
frequencies of RSA and RSL. 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 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 interest rate sensitivity gap position, illustrating RSA and RSL at their related carrying values, is summarized as
follows. The distributions in the table are based on a combination of maturities, call provisions, repricing frequencies and
prepayment patterns. Adjustable-rate assets and liabilities are distributed based on the repricing frequency of the
instrument. Mortgage instruments are distributed in accordance with estimated cash flows, assuming there is no change
in the current interest rate environment.
-46-
Interest rate sensitivity
December 31, 2015
Rate-sensitive assets:
Interest-bearing deposits in other banks
Investment securities
Loans, net
Total rate-sensitive assets
Rate-sensitive liabilities:
Money market accounts
NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Short-term borrowings
Long-term debt
Due after
Due within
three months twelve months
three months
but within
Due after
one year
but within
five years
Due after
five years
Total
$
4,451
12,792 $
401,655
$ 418,898 $
$ 197,258
78,583
29,280 $
9,568
38,325
9,887
$
248
4,699
297,044
48,122
229,932
1,340,865
278,054 $ 751,272 $ 194,384 $ 1,642,608
190,670 $ 45,460
148,924
560,354
$
$
$ 200,421
386,593
197,258
279,004
386,593
183,894
88,083
38,325
60,354
123,042 $ 728,844 $ 18,724 $ 1,233,511
72,817 $
24,892
72,404
48,977
9,393
4,646
44,121
4,685
1,661
Total rate-sensitive liabilities
$ 362,901 $
Rate-sensitivity gap:
Period
Cumulative
RSA/RSL ratio:
Period
Cumulative
$
$
55,997 $
55,997 $
155,012 $ 22,428 $ 175,660
211,009 $ 233,437 $ 409,097
1.15
1.15
2.26
1.43
1.03
1.19
10.38
1.33
1.33
At December 31, 2015 and 2014, we had cumulative one-year RSA/RSL ratios of 1.43 and 1.56. As previously
mentioned, this indicated that if interest rates increase, our earnings would likely be favorably impacted. Given current
improvement in economic conditions and the recent action of the FOMC to raise short-term rates 25 basis points and
their consideration to continue to raise short-term rates in the 2016, the focus of ALCO has been to maintain the positive
gap position in order to safeguard future earning from the potential risk of rising interest rates. However, ALCO recently
took steps to reduce the magnitude of our positive gap position and guard against rates unchanged through the
origination of five- to seven-year fixed rate loans along with the additions of short-term promotional certificate of
deposits and overnight borrowings. ALCO will continue to focus efforts on strategies in 2016 in an attempt to maintain
a positive gap position between RSA and RSL. However, these forward-looking statements are qualified in the
aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.
The change in our cumulative one-year ratio from the previous year-end resulted from a $46.2 million or 10.5 percent
increase in RSL coupled with a $9.5 million or 1.4 percent increase in RSA maturing or repricing within one year. The
increase in RSL resulted primarily from a $19.2 million increase in total time deposits maturing or repricing within this
time frame, an increase in short-term borrowing of $18.8 million and an increase of $8.8 million in interest-bearing
transaction accounts. The majority of the growth in money market and NOW accounts resulted from an increase in the
deposit balances of local school districts and certain commercial customer. Due to the somewhat cyclical nature
associated with these deposits, we classified money market and NOW accounts in the “due within twelve months”
category.
With respect to the increase in RSA maturing or repricing within a twelve month time horizon, loans, net increased $21.3
million while investment securities partially offset the increases by declining $6.5 million. Although short-term interest
rates began to increase during 2015, long-term interest rates fell causing a flattening in the yield curve. In an effort to
mitigate IRR in the investment portfolio and provide a source of liquidity, we chose to invest in fixed-rate, short-term
U.S. Government-sponsored agency securities. The increase in loans, net of unearned income, resulted from an increase
in commercial lending, which primarily involves loans with adjustable-rate terms that reprice in the near term.
-47-
Static gap analysis, although a credible 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 and variations occur
daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a
table. For example, the conservative nature of our Asset/Liability Management Policy assigns personal NOW accounts to
the “Due after three months but within twelve months” repricing interval. In reality, these accounts may reprice less
frequently and in different magnitudes than changes in general market interest rate levels.
We utilize a simulation model to address the failure of the static gap model to address the dynamic changes in the
balance sheet composition or prevailing interest rates and to enhance our asset/liability management. This 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 December 31,
2015, would increase slightly at 1.5 percent from model results using current interest rates.
We will continue to monitor our IRR position in 2016 and employ deposit and loan pricing strategies and direct the
reinvestment of loan and investment payments and prepayments in order to maintain a favorable 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 our asset/liability management program.
Liquidity:
Liquidity management is essential to our continuing operations as it gives us the ability to meet our financial obligations
as they come due, as well as to take advantage of new business opportunities as they arise. Our 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.
Our liquidity position is impacted by several factors which include, among others, loan origination volumes, loan and
investment maturity structure and cash flows, demand for core deposits and certificate of deposit maturity structure and
retention. We manage these liquidity risks daily, thus enabling us to effectively monitor fluctuations in our position and
to adapt our position according to market influence and balance sheet trends. We also forecast future liquidity needs and
develop strategies to ensure adequate liquidity at all times.
Historically, core deposits have been our 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. As a final source of liquidity, we
have available borrowing arrangements with various financial intermediaries, including the FHLB-Pgh. At December 31,
2015, our maximum borrowing capacity with the FHLB-Pgh was $529.1 million of which $98.6 million was outstanding
in borrowings. We believe our liquidity is adequate to meet both present and future financial obligations and
commitments on a timely basis.
-48-
We maintain a Contingency Funding Plan to address liquidity in the event of a funding crisis. Examples of some of the
causes of a liquidity crisis include, among others, natural disasters, war, events causing reputational harm and severe and
prolonged asset quality problems. The Plan recognizes the need to provide alternative funding sources in times of crisis
that go beyond our core deposit base. As a result, we have created a funding program that ensures the availability of
various alternative wholesale funding sources that can be used whenever appropriate. Identified alternative funding
sources include:
FHLB-Pgh liquidity contingency line of credit;
Federal Reserve Bank discount window;
Internet certificates of deposit;
Brokered deposits;
Institutional Deposit Corporation deposits;
Repurchase agreements; and
Federal funds purchased.
We have increased our borrowing capacity at the Federal Reserve by establishing a Borrower-in-Custody of Collateral
arrangement that enables us to pledge certain loans, not being used as collateral at the FHLB-Pgh, as collateral for
borrowings at the Federal Reserve. At December 31, 2015 our borrowing capacity at the Federal Reserve related to this
program was $152.5 million and there were no amounts outstanding.
Based on our liquidity position at December 31, 2015, we do not anticipate the need to utilize any of these sources in the
near term.
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 illustrate our reliance on noncore funds to fund our investments and loans maturing after
2015. At December 31, 2015, our noncore funds consisted of time deposits in denominations of $100 or more,
repurchase agreements, short-term borrowings and long-term debt. Large denomination time deposits are particularly not
considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly
volatile. At December 31, 2015, our net noncore funding dependence ratio, the difference between noncore funds and
short-term investments to long-term assets, was 11.3 percent. Our net short-term noncore funding dependence ratio,
noncore funds maturing within one year, less short-term investments to long-term assets equaled 4.1 percent.
Comparatively, our ratios equaled 8.5 percent and 3.0 percent at the end of 2014, which indicated an increase in our
reliance on noncore funds. Moreover, our Basis Liquidity Surplus ratio, defined as liquid assets less short-term
potentially volatile liabilities as a percentage of total assets, declined to 1.6 percent at December 31, 2015, from 4.8
percent at December 31, 2014. We believe that by supplying adequate volumes of short-term investments and
implementing competitive pricing strategies on deposits, we can ensure adequate liquidity to support future growth.
The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing
and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of collection,
noninterest-bearing and interest-bearing deposits with other banks and federal funds sold. Cash and cash equivalents
increased $1.5 million for the year ended December 31, 2015. Conversely, for the year ended December 31, 2014, cash
and cash equivalents decreased $19.9 million. During 2015, cash provided by operating and financing activities was
partially offset by cash used in investing activities.
Operating activities provided net cash of $28.2 million in 2015 and $21.9 million in 2014. Net income, adjusted for the
effects of noncash expenses such as depreciation, amortization and accretion of tangible and intangible assets and
investment securities, and the provision for loan losses, is the primary source of funds from operations.
-49-
Net cash provided by financing activities equaled $62.5 million in 2015. Net cash provided by financing activities was
$31.5 million in 2014. Deposit gathering, which is our predominant financing activity, increased in both 2015 and 2014.
Deposit gathering provided a net cash inflow in 2015 of $30.9 million and $47.1 million in 2014. Proceeds from long-
term debt of $30.0 million and a net increase in short-term borrowings of $18.8 million also lead to the net cash provided
by financing activities in 2015. Partially offsetting the cash provided by deposit gathering in 2015 was a $5.2 million
decrease for the retirement of common stock, a $2.7 million repayment of long-term debt and cash dividends paid of $9.3
million.
Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash used in
investing activities totaled $89.2 million in 2015. Net cash used in investing activities was $73.3 million in 2014. Net
cash used in lending activities was $132.8 million in 2015, an increase from $34.7 million in 2014. Activities related to
our investment portfolio provided net cash of $52.4 million in 2015 and used net cash of $37.2 million in 2014.
We anticipate our liquidity position to be stable in 2016. Based on the acceleration of loan demand in existing markets in
the second half of 2015 and our results from our recent entrance into the Lehigh Valley market through establishing a
community banking office with a dedicated team of commercial and retail lenders, we are expecting loan demand to
continue to be strong throughout 2016. We expect to fund such demand through deposit gathering, payments and
prepayments on loans and investments and advances from the FHLB. However, we anticipate a slowdown in deposit
receipts from royalties related to the natural gas drilling industry. Moreover, if economic conditions were to weaken it
may result in increased interest in bank deposits, as consumers continue to save rather than spend. However, we cannot
predict the economic climate or the savings habits of consumers. Should economic conditions continue to improve,
deposit gathering may be negatively impacted as depositors seek alternative investments in the market. Regardless of
economic conditions and stock market fluctuations, we believe that through constant monitoring and adherence to our
liquidity plan, we will have the means to provide adequate cash to fund our normal operations in 2016.
Capital Adequacy:
We believe a strong capital position is essential to our continued growth and profitability. We strive to maintain a
relatively high level of capital to provide our depositors and stockholders with a margin of safety. In addition, a strong
capital base allows us to take advantage of profitable opportunities, support future growth and provide protection against
any unforeseen losses.
Our ALCO continually reviews our capital position. As part of its review, the ALCO considers: (i) the current and
expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines;
(ii) potential changes in the market value of our securities due to interest rates changes and effect on capital;
(iii) projected organic and inorganic asset growth; (iv) the anticipated level of net earnings and capital position, taking
into account the projected asset/liability position and exposure to changes in interest rates; (v) significant deteriorations
in asset quality; and (vi) the source and timing of additional funds to fulfill future capital requirements.
Based on the recent regulatory emphasis placed on banks to assure capital adequacy, our Board of Directors annually
reviews and approves a Capital Plan. Among other specific objectives, this comprehensive plan: (i) attempts to ensure
that we and Peoples Bank remain well capitalized under the regulatory framework for prompt corrective action;
(ii) evaluates our capital adequacy exposure through a comprehensive risk assessment; (iii) incorporates periodic stress
testing in accordance with the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”);
(iv) establishes event triggers and action plans to ensure capital adequacy; and (v) identifies realistic and readily
available alternative sources for augmenting capital if higher capital levels are required.
Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts.
These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary
supervisory actions for noncompliance. Our and Peoples Bank’s risk-based capital ratios are strong and have consistently
exceeded the minimum regulatory capital ratios of 6.0 percent and 8.0 percent required for adequately capitalized
institutions. Our ratio of Tier 1 capital to risk-weighted assets and off-balance sheet items was 13.5 percent at
December 31, 2015, and 14.8 percent at December 31, 2014. Our Total capital ratio was 14.5 percent at December 31,
2015 and 15.6 percent at December 31, 2014. In addition, a new ratio effective January 1, 2015, requires the Company
-50-
and Peoples Bank maintain a minimum common equity Tier 1 capital to risk-weighted assets of 4.5 percent. Our and
Peoples Bank’s common equity Tier I capital to risk-weighted assets ratios were 13.5 percent and 13.1 percent at
December 31, 2015. Our Leverage ratio, which equaled 10.8 percent at both December 31, 2015, and December 31,
2014, exceeded the minimum of 4.0 percent for capital adequacy purposes. Peoples Bank reported Tier 1 capital, Total
capital and Leverage ratios of 13.1 percent, 14.1 percent and 10.5 percent at December 31, 2015, and 14.3 percent,
15.2 percent and 10.4 percent at December 31, 2014. Based on the most recent notification from the FDIC, Peoples Bank
was categorized as well capitalized at December 31, 2015 and 2014. There are no conditions or events since this
notification that we believe have changed Peoples Bank’s category. For a further discussion of these risk-based capital
standards and supervisory actions for noncompliance, refer to the note entitled, “Regulatory matters,” in the Notes to
Consolidated Financial Statements to this Annual Report.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and
changes required by the Dodd-Frank Act. The phase-in period for community banking organizations such as ours began
January 1, 2015. For a further discussion of the incorporation of the revised regulatory requirements into the prompt
corrective action framework, refer to the section entitled, “Supervision and Regulatory - Regulatory Capital Changes,” in
Part I of this Annual Report.
Stockholders’ equity was $248.8 million or $33.57 per share at December 31, 2015, and $246.8 million or $32.69 per
share at December 31, 2014. Stockholders’ equity grew $2.0 million in 2015 as net income was partially offset by an
increase in accumulated other comprehensive loss, dividends and the retirement of common shares.
We declared dividends of $1.24 per share in 2015 and in 2014. The dividend payout ratio, dividends declared as a
percent of net income, equaled 52.5 percent in 2015 and 53.0 percent in 2014. Our board of directors intends to continue
paying cash dividends in the future. The Penseco merger agreement 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 Peoples and Peoples Bank remain “well-capitalized”
in accordance with applicable regulatory guidelines. Our ability to declare and pay dividends in the future, however, is
based on our operating results, financial and economic conditions, capital and growth objectives, appropriate dividend
restrictions and other relevant factors. We rely on dividends received from our subsidiary, Peoples Bank, for payment of
dividends to stockholders. Peoples Bank’s ability to pay dividends is subject to federal and state regulations. For a
further discussion on our ability to declare and pay dividends in the future and dividend restrictions, refer to the note
entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report.
On January 31, 2014, our board of directors adopted a common stock repurchase plan whereby we were authorized to
repurchase up to 370,000 shares of our outstanding common stock through open market purchases. This plan was
reauthorized and effectively continued during 2015, resulting in our repurchase and retirement of 137,752 shares for $5.2
million during the year. On February 2, 2016, our board of directors again effectively continued the plan by authorizing
the repurchase of up to 225,000 shares of our outstanding common stock through open market purchases.
Review of Financial Performance:
Net income was $17.7 million or $2.36 per share in 2015 and $17.6 million or $2.34 per share in 2014. The results for
2015 include net gains on sale of investment securities of $1.2 million compared to $0.9 million during 2014. Moreover
as a result of our 2013 Penseco merger, our financial performance was impacted in 2014 by recognizing acquisition
related expenses totaling $1.7 million. Return on average assets (“ROAA”) and return on average equity (“ROAE”) were
1.02 percent and 7.13 percent for the year ended December 31, 2015. ROAA was 1.03 percent and ROAE was 7.29
percent for the year ended December 31, 2014.
Tax-equivalent net interest income was $60.1 million in 2015 and $60.3 million in 2014. Our net interest margin equaled
3.81 percent in 2015 and 3.86 percent in 2014. Noninterest income totaled $15.7 million in 2015 and $15.3 million in
2014. Noninterest expense was $46.8 million for the year ended December 31, 2015 compared to $45.9 million for the
year ended December 31, 2014. Our productivity is measured by the operating efficiency ratio, defined as noninterest
-51-
expense less amortization of intangible assets divided by the total of tax-equivalent net interest income and noninterest
income. Our operating efficiency ratio was 60.1 percent in 2015.
Net Interest Income:
Net interest income is the fundamental source of earnings for commercial banks. Moreover, 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 and 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 interest rates; and
The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the
difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities,
illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a
percentage of average 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
pretax 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 in this analysis on a tax-equivalent basis using the prevailing
federal statutory tax rate.
Similar to all banks, we consider the maintenance of an adequate net interest margin to be of primary concern. The
current economic environment has been very challenging for the banking industry. In addition to market rates and
competition, nonperforming asset levels are of particular concern for the banking industry and may place additional
pressure on net interest margins. Nonperforming assets may stabilize or decrease given the improvements in the
economy, particularly the labor markets. No assurance can be given as to how general market conditions will change or
how such changes will affect net interest income. Therefore, we believe through prudent deposit and loan pricing
practices, careful investing, and constant monitoring of nonperforming assets, our net interest margin will remain strong.
We analyze interest income and interest expense by segregating rate and volume components of earning assets and
interest-bearing liabilities. The impact changes in the interest rates earned and paid on assets and liabilities, along with
changes in the volumes of earning assets and interest-bearing liabilities, have on net interest income are summarized as
follows. The net change or mix component, attributable to the combined impact of rate and volume changes within
earning assets and interest-bearing liabilities’ categories, has been allocated proportionately to the change due to rate and
the change due to volume.
-52-
Net interest income changes due to rate and volume
2015 vs 2014
Increase (decrease)
attributable to
Rate
Volume
Total
2014 vs 2013
Increase (decrease)
attributable to
Rate
Volume
Total
Interest income:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
Total interest income
Interest expense:
Money market accounts
NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
$
$
(312) $ (3,205) $ 2,893 $ 23,214 $
132
(203)
335
949
(754)
176
11
(60)
(807)
(135)
(364)
17
6
(3,884)
(619)
540
(6)
(66)
3,077
2,115
1,055
(48)
68
27,353
(183) $ 23,397
807
142
122
(734)
48
(605)
1,993
1,789
(96)
68
27,958
101
(157)
360
182
434
(219)
1,081
(212)
20
(72)
20
(18)
(72)
(109)
(605)
1,944
(202) $ (3,536) $ 3,334 $ 24,880 $ (1,134) $ 26,014
365
557
856
1,093
(316)
37
(119)
2,473
264
197
422
12
(336)
17
(47)
529
(51)
147
47
(362)
10
(6)
(42)
(257)
(106)
35
(266)
150
(82)
(12)
(67)
(348)
For the year ended December 31, tax-equivalent net interest income was $60.1 million in 2015 and $60.3 million in
2014. There was a positive volume variance that was more than offset by a negative rate variance. The growth in average
earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income of
$3.3 million. A reduction in our net interest margin resulted in a decrease in net interest income of $3.5 million.
Average earning assets increased $14.2 million to $1,576.8 million in 2015 from $1,562.6 million in 2014 and accounted
for a $3,077 increase in interest income. Average loans, net increased $68.1 million, which caused interest income to
increase $3,228. Average taxable investments decreased $38.3 million comparing 2015 and 2014, which resulted in
decreased interest income of $619 while average tax-exempt investments increased $11.1 million which resulted in an
increase to interest income of $540.
Average interest-bearing liabilities rose $7.9 million to $1,177.5 million in 2015 from $1,169.6 million in 2014. Despite
the growth, the mix of lower cost deposits resulted in a net decrease in interest expense of $257. Large denomination
time deposits averaged $1.1 million more in 2015 and caused interest expense to increase $10. A decrease of
$35.0 million in average time deposits less than $100 reduced interest expense by $362. In addition, interest-bearing
transaction accounts, including money market, NOW and savings accounts grew $44.5 million, which in aggregate
caused a $143 increase in interest expense. Short-term borrowings averaged $1.4 million less and decreased interest
expense $6 while long-term debt averaged $1.3 million less and reduced interest expense by $42 comparing 2015 and
2014.
An unfavorable rate variance occurred as the decrease in the tax-equivalent yield on earning assets more than offset the
reduction in the cost of funds. As a result, tax-equivalent net interest income decreased $3,536 comparing 2015 and
2014. The tax-equivalent yield on earning assets decreased 9 basis points to 4.19 percent in 2015 from 4.28 percent in
2014, resulting in a reduction in interest income of $3,884. While the tax-equivalent yield on the investment portfolio
increased 4 basis points to 2.71 percent in 2015 from 2.67 percent in 2014, interest income decreased $499 due to
changes in the mix of investments. The tax-equivalent yield on the loan portfolio decreased 28 basis points to
4.59 percent in 2015 from 4.87 percent in 2014 and resulted in a reduction in interest income of $3,408. The impact that
-53-
lower reinvestment rates had on the tax-equivalent yield on the loan portfolio was partially mitigated by the recognition
of loan fair value accretion resulting in an increase in the tax-equivalent net interest margin of 4 basis points in 2015.
The unfavorable rate variance caused by changes in the earning asset yields was partially offset by a decrease of $348 in
interest expense, which primarily resulted from a decrease of 6 basis points in fund costs to 0.51 percent in 2015 from
0.57 percent in 2014. We experienced decreases in the rates paid on all major categories of interest-bearing liabilities
with the exception of NOW accounts and time deposits of less than $100. Specifically, the cost of money market and
savings accounts decreased 6 basis points and 7 basis points comparing 2015 and 2014. These decreases resulted in a
decrease in interest expense of $372. The cost of NOW accounts increased 2 basis points which resulted in an increase of
$35 in interest expense. With regard to time deposits, the average rate paid for time deposits less than $100 increased 8
basis points while time deposits $100 or more decreased 9 basis points, which together resulted in a $68 increase in
interest expense. The average rate paid on short-term borrowings decreased 9 basis points for 2015 when compared to
2014, causing a $12 decrease in interest expense. Interest expense was reduced $67 from a 20 basis point decline in the
average rate paid on long-term debt.
-54-
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 35.0 percent in 2015 and 2014 and 34.0 percent in 2013.
Summary of net interest income
Assets:
Earning assets:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
Total earning assets
Less: allowance for loan losses
Other assets
Total assets
2015
Average
Average
Balance
Interest Income/ Interest
Expense
Rate
Average
Balance
2014
Average
Interest Income/ Interest
Expense
Rate
$ 1,180,610 $
74,956
54,004
3,617
4.57 % $ 1,119,277 $
4.83
68,155
54,316
3,485
4.85 %
5.11
201,663
109,575
6,049
3,915
1,576,768
11,392
179,173
$ 1,744,549
3,242
5,208
49
10
66,130
239,945
1.61
98,523
4.75
7,047
0.81
0.26
29,666
4.19 % 1,562,613
9,397
161,066
$ 1,714,282
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts
NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Short-term borrowings
Long-term debt
$
197,129
273,792
396,606
172,830
90,030
13,480
33,644
Total interest-bearing
liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liabilities and
1,177,511
303,647
14,695
248,696
639
1,003
800
1,830
681
53
1,031
6,037
0.32 % $
0.37
0.20
1.06
0.76
0.39
3.06
211,441
233,289
378,272
207,866
88,897
14,871
34,959
0.51 % 1,169,595
291,685
11,021
241,981
stockholders’ equity
$ 1,744,549
$ 1,714,282
Net interest income/spread
Net interest margin
$
60,093
3.68 %
3.81 %
$
60,295
3.71 %
3.86 %
Tax-equivalent adjustments:
Loans
Investments
Total adjustments
$
$
1,266
1,823
3,089
$
$
1,220
1,761
2,981
Note: Average balances were calculated using average daily balances. Interest income on loans includes fees of $1,177
in 2015, $1,332 in 2014 and $1,125 in 2013.
-55-
3,996
5,032
38
70
66,937
1.67
5.11
0.54
0.24
4.28 %
796
821
1,019
2,042
753
71
1,140
0.38 %
0.35
0.27
0.98
0.85
0.48
3.26
6,642
0.57 %
Assets:
Earning assets:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
Total earning assets
Less: allowance for loan losses
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts
NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income/spread
Net interest margin
Tax-equivalent adjustments:
Loans
Investments
Total adjustments
Provision for Loan Losses:
2013
Average
Balance
Average
Interest Income/ Interest
Rate
Expense
$ 637,153 $
52,259
31,102
2,536
4.88 %
4.85
1,881
3,977
86
2
39,584
1.57
6.11
0.27
0.22
4.36 %
431
264
163
949
1,069
34
1,259
4,169
0.25 %
0.23
0.11
0.97
1.22
0.33
3.39
0.62 %
119,866
65,073
31,659
902
906,912
7,311
89,513
$ 989,114
$ 175,675
116,242
150,083
97,826
87,277
10,158
37,151
674,412
158,790
13,159
142,753
$ 989,114
$
35,415
3.74 %
3.91 %
$
$
862
1,352
2,214
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, volume 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 an appropriate level. The
provision for loan losses equaled $3,700 in 2015 and $3,524 in 2014. The primary cause for the increase in the
provision was an increase in the volume of loans originated. Commercial, commercial real estate and consumer loans
experienced increases in the qualitative factor related to changes in the volume of these loans. Partially offsetting
these increases were decreases in the qualitative factors for commercial and commercial real estate related to loan
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review. Additionally, the qualitative factor for residential real estate related to loan balances decreased. Based on our
most recent evaluation at December 31, 2015, we believe that the allowance was adequate to absorb any known or
potential losses in our portfolio.
Noninterest Income:
Our noninterest income increased $468 or 3.1 percent to $15.7 million in 2015 from $15.3 million in 2014. Net gains on
sale of investment securities were $1.2 million in 2015 compared to $861 in 2014 an increase of $328 or 38.1 percent as
we took advantage of the significant improvement in the value of our U.S. Treasury securities brought on by the reduction in
market yields. Revenue received from merchant services increased $306 or 8.6 percent to $3,855 in 2015 from $3,549 in
2014 due to an increase in the number of merchants serviced whom transact higher volumes. Wealth management
income increased $93 or 12.4 percent comparing 2015 to 2014 as a comprehensive plan to accelerate growth began to be
implemented.in 2015. Mortgage banking income increased $224 or 34.6 percent in 2015 compared to 2014 due to
higher volumes driven by the continued low interest rate environment. Revenue received from service charges, fees and
commissions decreased $239 or 3.7 percent comparing 2015 and 2014 due to lower overdraft and deposit fees.
Commissions and fees on fiduciary activities decreased $233 or 10.7 percent comparing 2015 and 2014 due to a decrease
in executor fees. Income from investment in life insurance decreased $11 or 1.4 percent to $767 in 2015 from $778 in
2014 due to slightly higher mortality factors.
In 2015, we hired a seasoned professional with significant experience to manage our trust and wealth management
divisions in order to increase the volume of assets under management and the amount of noninterest income. This
individual has a comprehensive plan to accelerate growth in the near term through employing a network of
representatives and affiliated companies.
Noninterest Expense:
In general, our noninterest expense is categorized into three main groups, including employee-related expense,
occupancy and equipment expense 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
marketing, other taxes, stationery and supplies, contractual services, insurance, including FDIC assessment and loan
collection costs. Several of these costs and expenses are variable while the remainder is fixed. We utilize budgets and
other related strategies in an effort to control the variable expenses.
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The major components of noninterest expense for the past three years are summarized as follows:
Noninterest expense
Year ended December 31
Salaries and employee benefits expense:
Salaries and payroll taxes
Employee benefits
Salaries and employee benefits expense
Occupancy and equipment expenses:
Occupancy expense
Equipment expense
Occupancy and equipment expenses
Other expenses:
Merchant transaction expense
FDIC insurance and assessments
Professional fees and outside services
Other taxes
Stationery and supplies
Advertising
Amortization of intangible assets
Acquisition related expenses
Other
Other expenses
Total noninterest expense
2015
2014
2013
$ 18,116 $ 16,358 $ 13,276
2,707
15,983
4,294
20,652
3,417
21,533
5,551
3,553
9,104
5,572
2,530
8,102
3,354
634
3,988
2,643
997
2,211
973
744
736
1,195
2,490
2,236
400
1,310
2,104
2,345
1,268
1,037
359
774
350
450
326
1,334
4,609
1,725
4,519
5,968
16,425
17,179
$ 46,779 $ 45,933 $ 36,396
6,643
16,142
Noninterest expense was $46.8 million for the year ended December 31, 2015 compared to $45.9 million for the year
ended December 31, 2014.
Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 46.0 percent
of the total non interest expense. Salaries and employee benefits expense increased $881 thousand or 4.3 percent to $21.5
million in 2015 from $20.7 million in 2014. Salaries and payroll taxes increased $1,758 or 10.7 percent, while employee
benefits expense decreased $877 or 20.4 percent. Severances paid out to eliminate certain duplicated positions along with
the addition of salaries and benefit costs to add staffing in wealth management, Lehigh Valley and the credit area more
than offset the cost savings associated with certain downsizing initiatives.
Occupancy and equipment expense increased $1.0 million or 12.4 percent to $9.1 million in 2015 from $8.1 million in
2014. Specifically, building-related costs were relatively unchanged while equipment-related costs increased $1.0
million. The increase in equipment-related expenses was driven by technology related expenditures with the Company’s
core processor and other technology based providers to enhance the delivery of electronic banking alternatives and
improve other product offerings. We anticipate that occupancy expenses will increase modestly in 2016 due to costs
associated with the anticipated opening of our community banking office in Kingston, Pennsylvania. These costs will be
partially offset by the closure of our community banking office on Front Street in the city of Binghamton, New York.
Other expenses, which consist of merchant transaction expense, FDIC insurance and assessments, professional fees and
outside services, other taxes, stationary and supplies, advertising, amortization of intangible assets, acquisition related
expenses and all other expenses were $16.1 million in 2015 and $17.2 million in 2014. Merchant transaction expenses
increased $407 or 18.2 percent to $2,643 in 2015 compared to $2,236 in 2014 due to an increase in the volume of
transactions processed and the number of merchant accounts serviced. This is consistent with the increase in income
generated from merchant services. All other expenses, including FDIC insurance and assessments, professional fees and
outside services, other taxes, stationery and supplies, advertising and amortization of intangible assets, acquisition related
and other expenses totaled $13,499 in 2015, a decrease of $1,444 or 9.7 percent, compared to $14,943 in 2014. There
were no acquisition related expenses in 2015 compared to $1,725 in 2014.
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Income Taxes:
Our income tax expense was $4.5 million in 2015 and $5.5 million in 2014. The decrease resulted from a higher amount
of tax-exempt interest revenue as a percentage of total interest revenue in 2015 compared to 2014. We utilize loans and
investments of tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable
by the federal government. Our effective tax rate decreased to 20.3 percent in 2015, compared to 23.6 percent in 2014.
The decrease in the effective tax rate in 2015 was also influenced by the recognition of investment tax credits related to
our limited partnership investments in elderly and low- to moderate-income residential housing programs which allow us
to mitigate our tax burden. By utilizing these credits, we reduced our income tax expense by $1.1 million in 2015. This
represents a $676 increase from the tax credits of $439 recognized in 2014. We anticipate investment tax credits from
these investments of $1.1 million in 2016. Over the next nine years, we will recognize aggregate tax credits from our
investments in these projects of $8.9 million.
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Management’s Discussion and Analysis 2014 versus 2013
(Dollars in thousands, except per share data)
Operating Environment:
The United States economy continued to expand moderately in 2014, as the gross domestic product (“GDP”), the value
of all goods and services produced in the Nation, increased at an annual rate of 2.4 percent, compared to 2.2 percent in
2013. The Federal Open Market Committee (“FOMC”) maintained the federal funds target range of 0 to 25 basis points
throughout 2014 and further signaled that they intend to keep short-term rates at extraordinarily low levels through at
least late 2015. Despite experiencing an improvement in 2014, many areas of the economy remain weaker compared to
historical standards. Given these circumstances, the FOMC decided that this extraordinary monetary policy stance was
necessary to support the recovery. During the recent testimony of the Chair of the FOMC before the Senate Banking
Committee, she discussed the FOMC’s plans for raising interest rates. After years of accommodative monetary policy,
she said that current economic conditions do not warrant an increase to interest rates for at least the next couple of
FOMC meetings.
Inflationary concerns continue to be relatively tame, as the consumer price index (“CPI”) at 0.8 percent for 2014
continued to be below the FOMC’s benchmark of 2.0 percent. The CPI was 1.3 percent in 2013. Moreover, the core
personal consumption expenditure price index, which ignores food and energy, averaged 1.6 percent in 2014.
Employment conditions improved in 2014. The civilian labor force increased 1.1 million, while the number of people
employed increased 2.8 million in 2014. As a result, the annual unemployment rate for the U.S. fell to 6.2 percent in
2014 from 7.4 percent in 2013. All sectors of employment, with the exception of the government sector, reported
employment gains from the end of 2013
National, Pennsylvania, New York and our market area’s non-seasonally-adjusted annual unemployment rates in 2014
and 2013, are summarized as follows:
United States
New York
Pennsylvania
Broome County
Lackawanna County
Lehigh County
Luzerne County
Monroe County
Susquehanna County
Wayne County
Wyoming County
2014
2013
6.2 %
6.4
5.6
6.7
6.6
5.8
7.1
7.1
5.0
5.6
6.8 %
7.4 %
8.3
8.0
8.0
7.9
7.8
9.5
9.4
7.0
7.2
9.4 %
Employment conditions in 2014 improved for the Commonwealth of Pennsylvania as evidenced by a reduction in the
unemployment rate to 5.6 percent in 2014 from 8.0 percent in 2013. Similarly, the unemployment rate for New York
State dropped to 6.4 percent in 2014, from 8.3 percent in 2013. With respect to the markets we serve, the unemployment
rate decreased in all of the eight counties in which we have branches or ATM locations. Wyoming County experienced
the most significant improvement declining to 6.8 percent in 2014 from 9.4 percent in 2013. The lowest unemployment
rate in 2014, for all of the counties we serve, was Susquehanna County at 5.0 percent as a result of increased activity
related to the extraction of natural gas. The marked improvements in unemployment rates could impact the rate of
economic growth and may cause interest rates to rise in the near term.
With respect to the banking industry, net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks
in 2014 totaled $153.6 billion, a decrease of $1.1 billion or 0.7 percent from 2013. This is the first year that earnings
have not risen in the last five years. Approximately 63.9 percent of all institutions reported higher net income in 2014,
while only 6.1 percent reported net losses. This is the lowest annual proportion of unprofitable institutions for the
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industry since 2004. Loan loss provisions of $29.7 billion in 2014 were $2.7 billion or 8.4 percent less than banks set
aside in 2013. This is the fifth year in a row that loan loss provisions have been lower, and the total allocation for 2014
was the smallest amount since 2006. Net interest income increased for the first time in four years, by $5.5 billion or 1.3
percent, as interest expense fell more rapidly than interest income. Noninterest income was $5.5 billion or 2.2 percent
below the level of 2013, as servicing fee income declined by $8.9 billion or 49.6 percent. Realized gains on securities
were $1.3 billion or 8.4 percent lower than a year ago. Total noninterest expense increased $5.2 billion or 1.2 percent
comparing 2014 and 2013. The average return on average assets for 2014 was 1.02 percent, down from an eight year
high of 1.07 percent set in 2013.
The United States economy is on a more self-sustaining path as we move into 2015. This could affect interest rates
which may adversely impact bank earnings as net interest margins compress from the inability of management to keep
fund costs low. Continuous expense control, sound balance sheet management and lower loan loss provisions could
offset some of the negative impact of the reduction in net interest margins.
Review of Financial Position:
Total assets, loans and deposits were $1.7 billion, $1.2 billion and $1.4 billion, respectively, at December 31, 2014. Total
assets, loans and deposits grew 3.2 percent, 2.8 percent and 3.3 percent, respectively, compared to 2013 year-end
balances.
The loan portfolio consisted of $813.1 million of business loans, including commercial and commercial real estate loans,
and $396.8 million in retail loans, including residential mortgage and consumer loans at December 31, 2014. Total
investment securities were $354.3 million at December 31, 2014, including $339.6 million of investment securities
classified as available-for sale and $14.7 million classified as held-to-maturity. Total deposits consisted of $313.5
million in noninterest-bearing deposits and $1.1 billion in interest-bearing deposits at December 31, 2014.
Stockholders’ equity equaled $246.8 million, or $32.69 per share, at December 31, 2014, and $238.8 million, or $31.62
per share, at December 31, 2013. Dividends declared for the 2014 amounted to $1.24 per share representing 53.0 percent
of net income.
Nonperforming assets equaled $10.9 million or 0.90 percent of loans, net and foreclosed assets at December 31, 2014, an
improvement from $19.5 million or 1.65 percent at December 31, 2013. The allowance for loan losses equaled $10.3
million or 0.85 percent of loans, net, at December 31, 2014, compared to $8.7 million or 0.74 percent at year-end 2013.
Loans charged-off, net of recoveries equaled $1.8 million or 0.15 percent of average loans in 2014, compared to $660.0
thousand or 0.10 percent of average loans in 2013.
Investment Portfolio:
Primarily, our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a
reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging
requirements and reduce income taxes. At December 31, 2014, our portfolio consisted primarily of short-term U.S.
Treasury and Government agency securities, which provide a source of liquidity and intermediate-term, tax-exempt state
and municipal obligations, which mitigate our tax burden.
Investment securities increased $37.3 million, to $354.3 million at December 31, 2014, from $317.0 million at
December 31, 2013. At December 31, 2014, the investment portfolio consisted of $339.6 million of investment securities
classified as available-for-sale and $14.7 million classified as held-to-maturity. Loan demand was sluggish throughout
most of 2014 until the fourth quarter of 2014, when loans grew $30.0 million. As a result, excess deposited funds not
used to fund loans were directed into the investment portfolio. Security purchases totaled $102.3 million in 2014, with
the majority of the purchases consisting of short-term U.S. Treasury and U.S. Government agency and U.S. Government-
sponsored enterprise mortgage-backed securities for the purpose of supporting future loan demand and as a result of the
reduction in long-term yields. Investment purchases in 2013 amounted to $22.1 million.
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Repayments of investment securities totaled $49.7 million in 2014 and $29.6 million in 2013. We received proceeds of
$15.4 million from the sale of investment securities in 2014 and $4.6 million in 2013. Net gains recognized on the sale of
investment securities available-for-sale totaled $861 in 2014 and $163 in 2013. The 2014 sales consisted of $4.4 million
of corporate bonds, $9.9 million of U.S. Government-sponsored enterprise adjustable rate mortgage-backed securities
and $1.1 million of common equity securities. We continually analyze the investment portfolio with respect to its
exposure to various risk elements. As a result of such analysis, we sold the corporate bonds and common equity
securities due to credit risk while the adjustable rate securities were sold due to interest rate risk.
Investment securities averaged $338.5 million and equaled 21.7 percent of average earning assets in 2014, compared to
$185.0 million and equaled 20.4 percent of average earning assets in 2013. The tax-equivalent yield on the investment
portfolio decreased 50 basis points to 2.67 percent in 2014 from 3.17 percent in 2013.
Loan Portfolio:
Loans, net increased $33.3 million or 2.8 percent in 2014 to $1.2 billion at December 31, 2014. Business loans, including
commercial loans and commercial real estate loans, were $813.1 million or 67.2 percent of loans, net at December 31,
2014, and $763.7 million or 64.9 percent at year-end 2013. Residential mortgages and consumer loans totaled $396.8
million or 32.8 percent of loans, net at year-end 2014 and $412.9 million or 35.1 percent at year-end 2013. Loan demand
was stagnant until the end of the third quarter of 2014, increasing at an annualized growth rate of less than 1.0 percent.
However, we experienced strong loan demand in the final quarter of 2014 as loans, net increased $30.0 million or 10.1%
on an annualized basis. Approximately half of the increase was attributable to growth fostered by our entrance into the
Lehigh Valley market in the fourth quarter by establishing a community banking office with a dedicated team of
commercial and retail lenders. The remainder of such growth was generated from improved demand for business lending
in existing markets. Fixed-rate loans represented 33.5 percent of the loan portfolio at December 31, 2014, compared to
floating or adjustable-rate loans at 66.5 percent.
Loans averaged $1.2 billion in 2014, compared to $689.4 million in 2013. Taxable loans averaged $1.1 billion, while
tax-exempt loans averaged $68.2 million at December 31, 2014. Due to improving loan demand, the loan portfolio
continues to play a prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled
76.0 percent in 2014 and 2013.
Asset Quality:
More effective special asset management and repayments over the past year has led to prompt resolution of troubled
loans and liquidation of foreclosed properties. As a result, we experienced a marked improvement in our asset quality as
evidenced by a significant decrease in nonperforming assets of $8.5 million or 44.1 percent to $10.9 million or
0.90 percent of loans, net of unearned income, and foreclosed assets at December 31, 2014, from $19.5 million or 1.65
percent of loans, net of unearned income, and foreclosed assets at the end of 2013. The improvement resulted from a
$9.1 million decrease in nonaccrual loans, coupled with a $87 decline in foreclosed assets and offset partially by
increases of $168 in accruing loans past due 90 days or more and $446 in troubled debt restructured loans.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to
individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the
balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic
conditions. We employ the FFIEC Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of
the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of
FASB Accounting Standards Codification (“ASC”) 310 for loans specifically identified to be individually evaluated for
impairment and the requirements of FASB ASC 450, for large groups of smaller-balance homogeneous loans to be
collectively evaluated for impairment.
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The allowance for loan losses increased $1.6 million to $10.3 million at December 31, 2014, from $8.7 million at the end
of 2013. The increase resulted from a provision for loan losses of $3.5 million exceeding net loans charged-off of $1.9
million. The allowance for loan losses, as a percentage of loans, net of unearned income, was 0.85 percent at the end of
2014, compared to 0.74 percent at the end of 2013.
Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if
all or part of the outstanding balance should be charged against the allowance for loan losses account. Any subsequent
recoveries are credited to the allowance account. Net loans charged-off increased $1,177 to $1,837 in 2014 from $660 in
2013. Net charge-offs, as a percentage of average loans outstanding, equaled 0.15 percent in 2014 and 0.10 percent in
2013.
The allocated element of the allowance for loan losses account increased $1,687 to $10,338 at December 31, 2014,
compared to $8,651 at December 31, 2013. Both the specific and formula portions of the allowance for loan losses
increased from the end of 2013. The specific portion of the allowance for impairment of loans individually evaluated
under FASB ASC 310, increased $935 to $2,959 at December 31, 2014, from $2,024 at December 31, 2013. In addition,
the formula portion of the allowance for loans collectively evaluated for impairment under FASB ASC 450, increased
$752 to $7,379 at December 31, 2014, from $6,627 at December 31, 2013. The increase in the specific portion of the
allowance was a result of an increase in the amount of impaired loans designated with a related allowance to $6,525 at
December 31, 2014 from $4,378 at year-end 2013. The total loss factor for collectively evaluated loans increased from
year-end 2013 due to an increase in both the historical loss factor along with increases in certain qualitative factors. The
increase in the historical factor was a function of the increase in net charge-offs. Commercial and commercial real estate
loans experienced increases in qualitative factors related to changes in the volume and concentrations of these loans.
Increases in qualitative factors for residential mortgage and consumers loans were related to changes in the volume and
severity of classified loans, including past due, nonaccrual, troubled debt restructures and other loan modifications;
changes in the levels of, and trends in, charge-offs and recoveries; and changes in national, regional, local and industry
economic conditions, including the effects of such changes on the value of underlying collateral for collateral-dependent
loans.
The coverage ratio, the allowance for loan losses account, as a percentage of nonperforming loans, is an industry ratio
used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The
coverage ratio was 95.0 percent at December 31, 2014 and 46.0 percent at December 31, 2013.
Deposits:
Total deposits grew $46.1 million or 3.4 percent to $1.4 billion at the end of 2014. Noninterest-bearing deposits grew
$33.6 million or 12.0% while interest-bearing deposits increased $12.5 million or 1.1% in 2014. Noninterest-bearing
deposits represented 22.0 percent of total deposits while interest-bearing deposits accounted for 88.0 percent of total
deposits at December 31, 2014. Comparatively, noninterest-bearing deposits and interest-bearing deposits represented
20.2 percent and 79.8 percent of total deposits at year end 2013. With regard to noninterest-bearing deposits, commercial
checking accounts increased $16.6 million or 11.6 percent, while personal checking accounts grew $16.9 million or 12.3
percent.
With regard to interest-bearing deposits, interest-bearing transaction accounts, which include money market accounts,
NOW accounts, and savings accounts, increased $47.7 million in 2014. Commercial interest-bearing transaction
accounts decreased $5.8 million, while personal interest-bearing transaction accounts increased $53.5 million. The
increase in personal accounts was primarily due to increases in certificates of savings accounts of $25.3 million along
with an increase in NOW accounts of $22.2 million. We continued to experience strong growth in these account types, as
customers continued to receive lease payments and royalties from gas companies for drilling rights to their properties
and are opting to retain funds readily available given the low interest rate environment. Total time deposits decreased
$35.2 million to $267.7 million at December 31, 2014 from $302.9 million at December 31, 2013. The decrease was
primarily due to reductions in time deposits with maturities of one year or shorter.
Total deposits averaged $1.4 billion in 2014, an increase of $625.6 million or 79.6 percent, compared to $785.9 million
in 2013. The significant increases in the 2014 versus 2013 year-over-year comparison resulted primarily from the
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application of purchase accounting whereby those financial statement components of the legal acquirer for periods prior
to the merger were excluded from Peoples 2013 financial statements. Average noninterest-bearing deposits increased
$132.9 million, while average interest-bearing accounts grew $492.7 million. Average interest-bearing transaction
deposits, including money market, NOW and savings accounts, increased $381.0 million while average total time
deposits decreased $111.7 million comparing 2014 and 2013.
Our cost of interest-bearing deposits increased 3 basis points to 0.49 percent in 2014 from 0.46 percent in 2013.
Specifically, the cost of interest-bearing transaction accounts increased 13 basis points to 0.32 percent while the cost of
time deposits decreased 15 basis points to 0.94 percent comparing 2014 and 2013.
Volatile deposits, time deposits $100 or more, were $75.9 million at December 31, 2014 compared to $98.4 million at
the end of 2013. Large denomination time deposits averaged $88.9 million in 2014, an increase of $1.6 million or
1.8 percent from $87.3 million in 2013. Our average cost of these funds decreased 37 basis points to 0.85 percent in
2014, from 1.22 percent in 2013.
Market Risk Sensitivity:
With respect to evaluating our exposure to IRR on earnings, we utilize a gap analysis model that considers repricing
frequencies of RSA and RSL. 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 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.
At December 31, 2014 and 2013, we had cumulative one-year RSA/RSL ratios of 1.56 and 1.34. As previously
mentioned, this indicated that if interest rates increase, our earnings would likely be favorably impacted. Given current
improvement in economic conditions and the recent announcement of the FOMC that it will consider raising short-term
rates in the latter part of 2015, the focus of ALCO has been to maintain the positive gap position in order to safeguard
future earning from the potential risk of rising interest rates. However, ALCO recently took steps to reduce the
magnitude of our positive gap position and guard against rates unchanged through the origination of five- to seven-year
fixed rate loans and utilizing any excess funds not used for lending through purchasing six- to eight-year tax-exempt
state and municipal obligations.
The change in our cumulative one-year ratio from the previous year-end resulted from a $67.4 million or 13.3 percent
decrease in RSL coupled with a $7.7 million or 1.1 percent increase in RSA maturing or repricing within one year. The
increase in RSL resulted primarily from a $33.3 million decrease in total time deposits maturing or repricing within this
time frame, coupled with a decrease of $30.8 million in interest-bearing transaction accounts. The majority of the growth
in money market and NOW accounts resulted from an increase in the deposit balances of local school districts and
certain commercial customer. Due to the somewhat cyclical nature associated with these deposits, we classified money
market and NOW accounts in the "due within twelve months" category.
With respect to the increase in RSA maturing or repricing within a twelve month time horizon, investment securities
increased $10.7 million and loans, net of unearned income, rose $7.9 million. Although short-term interest rates began to
increase during 2014, long-term interest rates fell causing a flattening in the yield curve. In an effort to mitigate IRR in
the investment portfolio and provide a source of liquidity, we chose to invest in fixed-rate, short-term U.S. Government-
sponsored agency securities. The increase in loans, net of unearned income, resulted from an increase in commercial
lending, which primarily involves loans with adjustable-rate terms that reprice in the near term. Partially offsetting these
increases were reductions of $3.1 million in interest-bearing deposits in other banks and $9.5 million in federal funds
sold.
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Liquidity:
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 illustrate our reliance on noncore funds to fund our investments and loans maturing after
2014. At December 31, 2014, our noncore funds consisted of time deposits in denominations of $100 or more,
repurchase agreements, short-term borrowings and long-term debt. Large denomination time deposits are particularly not
considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly
volatile. At December 31, 2014, our net noncore funding dependence ratio, the difference between noncore funds and
short-term investments to long-term assets, was 8.5 percent. Our net short-term noncore funding dependence ratio,
noncore funds maturing within one year, less short-term investments to long-term assets equaled 3.0 percent.
Comparatively, our ratios equaled 10.0 percent and 4.1 percent at the end of 2013, which indicated a decrease in our
reliance on noncore funds. Moreover, our Basis Liquidity Surplus ratio, defined as liquid assets less short-term
potentially volatile liabilities as a percentage of total assets, improved slightly to 4.8 percent at December 31, 2014, from
4.7 percent at December 31, 2013.
The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing
and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of collection,
noninterest-bearing and interest-bearing deposits with other banks and federal funds sold. Cash and cash equivalents
decreased $19.9 million for the year ended December 31, 2014. Conversely, for the year ended December 31, 2013, cash
and cash equivalents increased $3.5 million. During 2014, cash provided by operating and financing activities were more
than offset by cash used in investing activities.
Operating activities provided net cash of $21.9 million in 2014 and $13.1 million in 2013. Net income, adjusted for the
effects of noncash expenses such as depreciation, amortization (accretion) of tangible and intangible assets and
investment securities, and the provision for loan losses is the primary source of funds from operations.
Net cash provided by financing activities equaled $31.5 million in 2014. Net cash provided by financing activities was
$8.6 million in 2013. Deposit gathering, which is our predominant financing activity, increased in both 2014 and 2013.
Deposit gathering provided a net cash inflow in 2014 of $47.1 million and $28.9 million in 2013. Partially offsetting the
cash provided by deposit gathering in 2014 was a $2.5 million net decrease in short-term borrowings, and a $3.5 million
repayment of long-term debt and cash dividends paid of $9.4 million.
Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash used in
investing activities totaled $73.3 million in 2014. Net cash used in investing activities was $18.2 million in 2013. Net
cash used in lending activities was $34.7 million in 2014, a decrease from $50.7 million in 2013. Activities related to our
investment portfolio used net cash of $37.2 million in 2014 and provided net cash of $12.1 million in 2013.
Capital Adequacy:
Our and Peoples Bank’s risk-based capital ratios are strong and have consistently exceeded the minimum regulatory
capital ratios of 4.0 percent and 8.0 percent required for adequately capitalized institutions. Our ratio of Tier 1 capital to
risk-weighted assets and off-balance sheet items was 14.8 percent at December 31, 2014, and 13.6 percent at
December 31, 2013. Our Total capital ratio was 15.6 percent at December 31, 2014 and 14.3 percent at December 31,
2013. Similarly, our Leverage ratio, which equaled 10.8 percent at December 31, 2014, and 10.1 percent at
December 31, 2013, exceeded the minimum of 4.0 percent for capital adequacy purposes. Peoples Bank reported Tier 1
capital, Total capital and Leverage ratios of 14.3 percent, 15.2 percent and 10.4 percent at December 31, 2014, and
13.1 percent, 13.8 percent and 9.8 percent at December 31, 2013.
Stockholders’ equity was $246.8 million or $32.69 per share at December 31, 2014, and $238.8 million or $31.62 per
share at December 31, 2013. Stockholders’ equity grew $8.0 million in 2014 as net income was partially offset by an
increase in accumulated other comprehensive loss, dividends and the retirement of common shares held as treasury
stock. We declared dividends of $1.24 per share in 2014 and $1.23 per share in 2013. The dividend payout ratio,
dividends declared as a percent of net income, equaled 53.0 percent in 2014 and 96.3 percent in 2013.
-65-
Review of Financial Performance:
Net income was $17.6 million or $2.34 per share in 2014 and $5.7 million or $1.21 per share in 2013. The significant
increases in the 2014 versus 2013 year-over-year income statement components primarily resulted from the application
of purchase accounting whereby those components of the legal acquirer for periods prior to the merger were excluded
from Peoples 2013 income statement. Moreover as a result of the merger, our financial performance was impacted by
recognizing acquisition related expenses totaling $1.7 million in 2014 and $4.6 million in 2013. Return on average assets
(“ROAA”) and return on average equity (“ROAE”) were 1.03 percent and 7.29 percent for the year ended December 31,
2014. ROAA was 0.58 percent and ROAE was 4.01 percent for the year ended December 31, 2013.
Tax-equivalent net interest income was $60.3 million in 2014 and $35.4 million in 2013. Our net interest margin equaled
3.86 percent in 2014 and 3.91 percent in 2013. Noninterest income totaled $15.3 million in 2014 and $11.8 million in
2013. Noninterest expense was $45.9 million for the year ended December 31, 2014 compared to $36.4 million for the
year ended December 31, 2013. Our productivity is measured by the operating efficiency ratio, defined as noninterest
expense less amortization of intangible assets divided by the total of net interest income and noninterest income. Our
operating efficiency ratio was 61.5 percent in 2014.
Net Interest Income:
For the year ended December 31, tax-equivalent net interest income was $60.3 million in 2014 and $35.4 million in
2013. There was a positive volume variance offset partially by a negative rate variance. The growth in average earning
assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income of $26.0
million. A reduction in our net interest margin resulted in a decrease in net interest income of $1.1 million.
Average earning assets increased $655.7 million to $1,562.6 million in 2014 from $906.9 million in 2013 and accounted
for a $27,958 increase in interest income. Average loans, net increased $498.0 million, which caused interest income to
increase $24,204. Average taxable investments increased $120.1 million comparing 2014 and 2013, which resulted in
increased interest income of $1,993 while average tax-exempt investments increased $33.5 million which resulted in an
increase to interest income of $1,789.
Average interest-bearing liabilities rose $495.2 million to $1,169.6 million in 2014 from $674.4 million in 2013. The
growth resulted in a net increase in interest expense of $1,944. Large denomination time deposits averaged $1.6 million
more in 2014 and caused interest expense to increase $20. An increase of $110.0 million in average time deposits less
than $100 added $1,081 to interest expense. In addition, interest-bearing transaction accounts, including money market,
NOW and savings accounts grew $381.0 million, which in aggregate caused a $895 increase in interest expense. Short-
term borrowings averaged $4.7 million more and increased interest expense $20 while long-term debt averaged $2.2
million less and reduced interest expense by $72 comparing 2014 and 2013.
An unfavorable rate variance occurred as the decrease in the tax-equivalent yield on earning assets more than offset the
reduction in the cost of funds. As a result, tax-equivalent net interest income decreased $1,134 comparing 2014 and
2013. The tax-equivalent yield on earning assets decreased 8 basis points to 4.28 percent in 2014 from 4.36 percent in
2013, resulting in a reduction in interest income of $605. The tax-equivalent yield on the investment portfolio decreased
50 basis points to 2.67 percent in 2014 from 3.17 percent in 2013 and caused a reduction in interest income of $612.
Similarly, the tax-equivalent yield on the loan portfolio decreased 1basis point to 4.87 percent in 2014 from 4.88 percent
in 2013 and resulted in a reduction in interest income of $41. The decline in the yield on the investment portfolio was a
reflection of lower reinvestment rates available in the market due to the prolonged low interest rate environment. The
impact that lower reinvestment rates had on the tax-equivalent yield on the loan portfolio was mitigated by the
recognition of loan fair value accretion resulting in an increase in the tax-equivalent net interest margin of 14 basis points
in 2014.
The unfavorable rate variance caused by changes in the earning asset yields was impacted further by an increase of $529
in interest expense, which primarily resulted from an increase in the cost of interest-bearing transaction accounts,
including money market, NOW and savings accounts. We experienced increases in the rates paid on all major categories
of interest-bearing liabilities with the exception of time deposits $100 or more and long-term debt. Specifically, the cost
-66-
of money market, NOW and savings accounts increased 13 basis points, 12 basis points and 16 basis points comparing
2014 and 2013. These increases resulted in an increase in interest expense of $883. With regard to time deposits, the
average rate paid for time deposits less than $100 increased 1 basis point while time deposits $100 or more decreased 37
basis points, which together resulted in a $324 decrease in interest expense. The average rate paid on short-term
borrowings increased 15 basis points for 2014 when compared to 2013, causing a $17 increase in interest expense.
Interest expense was reduced $47 from a 13 basis point decline in the average rate paid on long-term debt.
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 an appropriate level. The provision for loan
losses equaled $3,524 in 2014 and $2,361 in 2013.
Noninterest Income:
Our noninterest income increased $3.5 million or 29.7 percent to $15.3 million in 2014 from $11.8 million in 2013. In
general, increases in year-to-date 2014 noninterest income primarily resulted from the application of purchase
accounting guidance. Revenue received from service charges, fees and commissions increased $2.4 million or 58.5
percent comparing 2014 and 2013. Commissions and fees on fiduciary activities increased $444 or 25.6 percent while
wealth management income increased $247 or 48.9 percent comparing 2014 and 2013. Mortgage banking income
increased $285 or 78.5 percent in 2014 compared to 2013. Merchant services income decreased $387 or 9.8 percent to
$3,549 in 2014 from $3,936 in 2013 as a result of a decrease in the volume of transactions processed and the number of
merchant accounts serviced. Income from investment in life insurance decreased $190 or 19.6 percent to $778 in 2014
from $968 in 2013 due to the inclusion of mortality factors netted against income in the current period compared to a
gross income figure in the prior period.
Noninterest Expense:
Noninterest expense was $45.9 million for the year ended December 31, 2014 compared to $36.4 million for the year
ended December 31, 2013. The increase in year-to-date 2014 noninterest expense primarily resulting from the
application of purchase accounting guidance was partially offset by the recognition of merger related cost savings as a
result of achieving operational synergies in the second half of 2014.
Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 45.0 percent
of the total. Salaries and employee benefits expense increased $4.7 million or 29.2 percent to $20.7 million in 2014 from
$16.0 million in 2013. Salaries and payroll taxes increased $3,082 or 23.2 percent, while employee benefits expense
increased $1,587 or 58.6 percent. The reduction in 2013 salaries and benefits expense caused by applying purchase
accounting, whereby 11 months of Peoples Neighborhood Bank was excluded from those expenses, was partially offset
by increases in salaries and benefits from the recent expansion into the Lehigh Valley market and not being able to take
advantage of associated costs saves until such time when the conversion was completed.
Occupancy and equipment expense increased $4.1 million or 103.2 percent to $8.1 million in 2014 from $4.0 million in
2013. Specifically, building-related costs increased $2.2 million while equipment-related costs increased $1.9 million.
The increase in occupancy expense resulted from incurring additional maintenance and leasing expenses associated with
our facilities. The timing of the conversion of the core system required us to maintain two systems for part of 2014 and
caused an increase in the equipment expense.
Other expenses, which consist of merchant transaction expense, FDIC insurance and assessments, professional fees and
outside services, other taxes, stationary and supplies, advertising, amortization of intangible assets, acquisition related
-67-
expenses and all other expenses were $17.2 million in 2014 and $16.4 million in 2013. Merchant transaction expenses
decreased $254 or 10.2 percent to $2,236 in 2014 compared to $2,490 in 2013 due to a decrease in the volume of
transactions processed and the number of merchant accounts serviced. This is consistent with the decrease in income
generated from merchant services. Other expenses increased $1,450 or 32.1 percent to $5,969 in 2014 from $4,519 in
2013. All other expenses, including FDIC insurance and assessments, professional fees and outside services, other taxes,
stationery and supplies, advertising and amortization of intangible assets totaled $7,249 in 2014, an increase of $2,442 or
50.8 percent, compared to $4,807 in 2013. We recognized $1,725 of acquisition related expenses in 2014 compared to
$4,609 in 2013.
Income Taxes:
Our income tax expense was $5.5 million in 2014 and $485 in 2013. The increase resulted from higher net income,
coupled with a lower amount of tax-exempt interest revenue as a percentage of total interest revenue in 2014. We utilize
loans and investments of tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is
not taxable by the federal government. Our effective tax rate increased to 23.6 percent in 2014, compared to 7.8 percent
in 2013. The effective tax rate in 2013 is relatively low due to the fact that tax-exempt income represents a relatively
high percentage of income before income taxes. The effect of tax-exempt income was partially offset by nondeductible
merger related expenses in 2013.
-68-
Item 7A.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 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.
For the majority of 2015 the Federal Reserve Board’s Federal Open Market Committee (“FOMC”) kept the target federal
funds rate at a range of 0% to .25%. At their December 2015 meeting, the FOMC raised interest rates for the first time
since December 2008, when they unanimously voted to set the new target federal funds rate at a range of .25% to .50% a
25 basis point increase. The FOMC stated at this meeting that they expect economic conditions will evolve in a manner
that will warrant only gradual increase in the federal funds rate and that the actual path of the federal funds rate will
depend on the economic outlook as informed by incoming data.
The projected impact of instantaneous changes in interest rates on our net interest income and economic value of equity
at December 31, 2015, based on our simulation model, is summarized as follows:
Changes in Interest Rates (basis points)
December 31, 2015
% Change in
Net Interest Income Economic Value of Equity
Metric
Policy Metric
+400
+300
+200
+100
Static
-100
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 December 31, 2015, would increase slightly at 1.5 percent from model results using current interest
rates. Additional disclosures about market risk are included in Part II, Item 7 of this Annual Report, under the heading
“Market Risk Sensitivity,” and are incorporated into this Item 7A by reference.
4.6 (20.0)
3.9
2.7
1.5
5.0
5.3
4.4
3.1
(20.0)
(10.0)
(10.0)
(11.6)
(10.0)
(3.4)
(15.0)
Policy
(45.0)
(35.0)
(25.0)
(15.0)
-69-
Item 8.
Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Peoples Financial Services Corp.
Scranton, Pennsylvania
We have audited the accompanying consolidated balance sheets of Peoples Financial Services Corp. and
subsidiaries (the “Corporation”) as of December 31, 2015 and 2014 and the related consolidated statements of
income and comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2015. These financial statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Peoples Financial Services Corp. and subsidiaries at December 31, 2015 and 2014, and the
results of their operations and their cash flows for the each of the three years in the period ended December 31,
2015, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Peoples Financial Services Corp. and subsidiaries’ internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11,
2016 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 11, 2016
-70-
2015
2014
$
28,218 $
4,699
24,656
6,770
284,935
12,109
297,044
1,340,865
12,975
1,327,890
28,157
5,796
63,370
5,397
58,487
1,819,058 $
$
$
320,978 $
1,134,832
1,455,810
38,325
60,354
560
15,241
1,570,290
14,821
135,371
100,701
(2,125)
248,768
1,819,058 $
339,586
14,665
354,251
3,486
1,209,894
10,338
1,199,556
25,433
5,580
63,370
5,501
53,066
1,741,669
313,498
1,112,060
1,425,558
19,557
33,140
574
16,061
1,494,890
15,097
140,214
92,297
(829)
246,779
1,741,669
Peoples Financial Services Corp.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
December 31
Assets:
Cash and due from banks
Interest-bearing deposits in other banks
Federal funds sold
Investment securities:
Available-for-sale
Held-to-maturity: Fair value 2015, $12,606; 2014, $15,215
Total investment securities
Loans held for sale
Loans, net
Less: allowance for loan losses
Net loans
Premises and equipment, net
Accrued interest receivable
Goodwill
Intangible assets
Other assets
Total assets
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and
outstanding: 2015, 7,410,606 shares; 2014, 7,548,358 shares
Capital surplus
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See notes to consolidated financial statements.
-71-
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
Year Ended December 31
Interest income:
Interest and fees on loans:
Taxable
Tax-exempt
Interest and dividends on investment securities:
Taxable
Tax-exempt
Dividends
Interest on interest-bearing deposits in other banks
Interest on federal funds sold
Total interest income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges, fees and commissions
Merchant services income
Commission and fees on fiduciary activities
Wealth management income
Mortgage banking income
Life insurance investment income
Net gain on sale of investment securities available-for-sale
Total noninterest income
Noninterest expense:
Salaries and employee benefits expense
Net occupancy and equipment expense
Merchant services expense
Amortization of intangible assets
Acquisition related expense
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale
Reclassification adjustment for net gain on sales included in net income
Change in benefit plan liabilities
Other comprehensive income (loss)
Income tax expense (benefit) related to other comprehensive loss
Other comprehensive income (loss), net of income taxes
Comprehensive income
Per share data:
Net income:
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
Dividends declared
See notes to consolidated financial statements
-72-
2015
2014
2013
$
54,004
2,351
$
54,316
2,265
$
31,102
1,674
3,207
3,385
35
49
10
63,041
4,953
53
1,031
6,037
57,004
3,700
53,304
6,245
3,855
1,946
845
872
767
1,189
15,719
21,533
9,104
2,643
1,195
12,304
46,779
22,244
4,521
17,723
(510)
(1,189)
(296)
(1,995)
(699)
(1,296)
16,427
$
3,946
3,271
50
38
70
63,956
5,431
71
1,140
6,642
57,314
3,524
53,790
6,484
3,549
2,179
752
648
778
861
15,251
20,652
8,102
2,236
1,334
1,725
11,884
45,933
23,108
5,459
17,649
4,343
(861)
(3,684)
(202)
(71)
(131)
17,518
$
1,793
2,625
88
86
2
37,370
2,876
34
1,259
4,169
33,201
2,361
30,840
4,092
3,936
1,735
505
363
968
163
11,762
15,983
3,988
2,490
326
4,609
9,000
36,396
6,206
485
5,721
(3,882)
(163)
3,642
(403)
5
(408)
5,313
2.36
2.36
$
$
2.34
2.34
$
$
1.21
1.21
$
$
$
7,516,451
7,516,451
1.24
$
7,548,825
7,561,982
1.24
$
4,733,059
4,733,059
1.23
$
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Accumulated
Other
Common
Stock
$ 8,935 $ 40,003 $ 83,798 $
Capital
Surplus
Retained
Earnings Income/(Loss) Stock
Comprehensive Treasury
For the Three Years Ended December 31, 2015
Balance, January 1, 2013
Net income
Other comprehensive loss, net of income taxes
Dividends declared: $1.23 per share
Stock based compensation
Retirement of treasury stock
Fair value of consideration exchanged
Balance, December 31, 2013
Net income
Other comprehensive loss, net of income taxes
Dividends declared: $1.24 per share
Stock based compensation
Share retirement: 3,386 shares
Reissuance under option plan: 600 Shares
Repurchase and retirement: 1,800 shares
Settlement of stock options
Retirement of treasury stock
Balance, December 31, 2014
Net income
Other comprehensive loss, net of income taxes
Dividends declared: $1.24 per share
Stock based compensation
Share retirement: 137,752 shares
Balance, December 31, 2015
5,721
(5,511)
84,008
17,649
(9,360)
(28)
6,707
15,614
25
(384)
106,465
146,109
(7)
70
(102)
10
(510)
15,097
(83)
(5,790)
140,214
92,297
17,723
(9,319)
(829)
(1,296)
69
(4,912)
$ 14,821 $ 135,371 $ 100,701 $
(276)
(2,125) $
(290) $
(408)
Total
$ 132,446
5,721
(408)
(5,511)
25
412
(6,653)
(6,241)
(698)
(131)
11
(70)
6,300
106,519
238,792
17,649
(131)
(9,360)
70
(109)
21
(70)
(83)
246,779
17,723
(1,296)
(9,319)
69
(5,188)
$ 248,768
See notes to consolidated financial statements
-73-
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
Year Ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2015
2014
2013
$
17,723
$
17,649
$
5,721
Depreciation of premises and equipment
Amortization of deferred loan costs
Amortization of intangibles
Net accretion of purchase accounting adjustments on tangible assets
Amortization of loss on investment tax credits
Provision for loan losses
Net gain on sale of other real estate owned
Net loss on disposal of equipment
Loans originated for sale
Proceeds from sale of loans originated for sale
Net gain on sale of loans originated for sale
Net amortization of investment securities
Net gain on sale of investment securities
Life insurance investment income
Deferred income tax expense (benefit)
Stock based compensation
Net change in:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale
Proceeds from repayments of investment securities:
Available-for-sale
Held-to-maturity
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Net (purchase) redemption of restricted equity securities
Net increase in lending activities
Investment in low income housing investment tax credits
Purchases of premises and equipment
Proceeds from the sale of premises and equipment
Proceeds from investment in life insurance
Proceeds from sale of other real estate owned
Net cash received from acquisition
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Proceeds from long-term debt
Repayment of long-term debt
Net increase (decrease) in short-term borrowings
Retirement of common stock
Settlement of stock options
Reissuance of treasury stock
Purchase of treasury stock
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
-74-
1,595
603
1,195
(942)
635
3,700
(132)
87
(25,246)
29,604
(872)
4,278
(1,189)
(767)
(841)
69
(216)
(213)
(14)
(820)
28,237
1,671
289
1,334
(2,271)
248
3,524
(70)
63
(11,376)
10,295
(648)
4,292
(861)
(778)
1,146
70
286
(4,860)
(149)
2,074
21,928
924
326
(722)
140
2,361
91
438
737
(163)
(968)
(1,143)
25
621
4,086
(466)
1,048
13,056
81,983
15,389
4,573
58,318
2,520
47,149
2,576
(90,402)
(102,304)
(1,716)
(132,840)
(3,050)
(4,521)
14
415
(34,735)
(1,366)
(1,174)
25
484
750
(89,210)
(73,275)
24,221
5,405
(15,262)
(6,873)
110
(50,746)
(3,351)
(614)
1,226
761
22,392
(18,158)
30,936
30,000
(2,733)
18,768
(5,188)
(9,319)
62,464
1,491
31,426
32,917
$
$
47,107
28,949
(3,548)
(2,495)
(109)
(83)
21
(70)
(9,360)
31,463
(19,884)
51,310
31,426
(11,166)
(3,704)
(5,511)
8,568
3,466
47,844
51,310
$
Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
Year Ended December 31,
Supplemental disclosures:
Cash paid during the period for:
Interest
Income taxes
Noncash items:
Transfers of loans to other real estate
Retirement of treasury shares
Acquisition:
Fair value of assets acquired:
Investment securities available-for-sale
Restricted equity securities
Loans, net
Accrued interest receivable
Premises and equipment
Core deposit and other intangible assets
Other assets
Fair value of liabilities assumed:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Other liabilities
See notes to consolidated financial statements
2015
2014
2013
$
$
6,788
4,200
$
6,791
5,000
869
$
593
6,300
$
$
4,635
2,700
273
$
306
$
1,261
(101)
(1,182)
(101)
(1,334)
$
(977)
$
(174)
$
684
$
1,056
53
55
$
737
$
1,111
$ 156,435
997
504,002
3,625
11,737
6,323
18,647
$ 701,766
$ 628,304
17,737
2,516
473
5,976
$ 655,006
-75-
Peoples Financial Services Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Summary of significant accounting policies:
Nature of operations:
Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full
range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company (“Peoples
Bank”), including its subsidiary, Peoples Advisors, LLC (collectively, the “Company” or “Peoples”). On November 30,
2013, Penseco Financial Services Corporation, a financial holding company incorporated under the laws of Pennsylvania
(“Penseco”), merged with and into Peoples Financial Services Corp., with Peoples Financial Services Corp. being the
surviving corporation (the “Merger”), pursuant to an Agreement and Plan of Merger dated June 28, 2013 (the “Merger
Agreement”). In connection with the Merger, on December 1, 2013, Penseco’s former banking subsidiary, Penn Security
Bank and Trust Company, merged with and into Peoples Neighborhood Bank (the “Bank Merger”), and the resulting
institution adopted the name Peoples Security Bank and Trust Company. The Company services its retail and
commercial customers through twenty-four full-service community banking offices located within the Lackawanna,
Lehigh, Luzerne, Monroe, Susquehanna, Wayne and Wyoming Counties of Northeastern Pennsylvania and Broome
County of New York.
Peoples Bank is a state-chartered bank and trust company under the jurisdiction of the Pennsylvania Department of
Banking and Securities and the Federal Deposit Insurance Corporation. Peoples Bank’s primary product is loans to
small- and medium-sized businesses. Other lending products include one-to-four family residential mortgages and
consumer loans. Peoples Bank primarily funds its loans by offering open time deposits to commercial enterprises and
individuals. Other deposit product offerings include certificates of deposits and various demand deposit accounts.
Peoples Advisors, LLC, a member-managed limited liability company, provides investment advisory services through a
third party to individuals and small businesses.
Peoples Advisors, LLC did not meet the quantitative thresholds for required segment disclosure in conformity with
accounting principles generally accepted in the United States of America (“GAAP”). Peoples Bank’s twenty-four
community banking offices, all similar with respect to economic characteristics, share a majority of the following
aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and
(v) regulatory oversight. Accordingly, they were aggregated into a single operating segment.
The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the
Northeastern Pennsylvania market, many of which are substantially larger in terms of assets and capital. In addition,
mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance
companies compete for various types of loans and leases. Principal methods of competing for banking and permitted
nonbanking services include price, nature of product, quality of service and convenience of location.
The Company and Peoples Bank are subject to regulations of certain federal and state regulatory agencies and undergo
periodic examinations.
Basis of presentation:
Under the acquisition method of accounting, in a business combination effected through an exchange of equity interests,
consideration of the facts and circumstances surrounding a business combination that generally involve the relative
ownership and control of the entity by each of the parties subsequent to the merger must be made in determining the
acquirer for financial reporting purposes. Based on a review of these factors, the aforementioned merger between the
Company and Penseco was accounted for as a reverse acquisition whereby Penseco was treated as the acquirer for
accounting and reporting purposes.
-76-
The consolidated financial statements of the Company have been prepared in conformity with GAAP, Regulation S-X
and reporting practices applied in the banking industry. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company also presents herein condensed parent company only financial information
regarding Peoples Financial Services Corp. (“Parent Company”). Prior period amounts are reclassified when necessary to
conform with the current year’s presentation. Such reclassifications had no effect on financial position or results of
operations.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31,
2015, for items that should potentially be recognized or disclosed in these consolidated financial statements. The
evaluation was conducted through the date these consolidated financial statements were issued.
Estimates:
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, impairment of goodwill and fair value of assets acquired and
liabilities assumed in business combinations. Actual results could differ from those estimates.
Investment securities:
Investments securities are classified and accounted for as either held-to-maturity, available-for-sale, or trading account
securities based on management’s intent at the time of acquisition. Management is required to reassess the
appropriateness of such classifications at each reporting date. The Company classifies debt securities as held-to maturity
when management has the positive intent and ability to hold such securities to maturity. Held-to-maturity securities are
stated at cost, adjusted for amortization of premium and accretion of discount. Investment securities are designated as
available-for-sale when they are to be held for indefinite periods of time as management intends to use such securities to
implement asset/liability strategies or to sell them in response to changes in interest rates, prepayment risk, liquidity
requirements, or other circumstances identified by management. Available-for-sale securities are reported at fair value,
with unrealized gains and losses, net of income taxes, excluded from earnings and reported in a separate component of
stockholders’ equity. All marketable equity securities are accounted for at fair value. Estimated fair values for investment
securities are based on quoted market prices from a national pricing service. Realized gains and losses are computed
using the specific identification method and are included in noninterest income. Premiums are amortized and discounts
are accreted using the interest method over the contractual lives of investment securities. Investment securities that are
bought and held principally for the purpose of selling them in the near term, in order to generate profits from market
appreciation, are classified as trading account securities. Trading account securities are carried at market value. Interest
on trading account securities is included in interest income. Profits or losses on trading account securities are included in
noninterest income. Transfers of securities between categories are recorded at fair value at the date of the transfer, with
the accounting treatment of unrealized gains or losses determined by the category into which the security is transferred.
Management evaluates each investment security to determine if a decline in fair value below its amortized cost is an
other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market concerns
warrant an evaluation. Factors considered in determining whether an other-than-temporary impairment was incurred
include: (i) the length of time and the extent to which the fair value has been less than amortized cost; (ii) the financial
condition and near-term prospects of the issuer; (iii) whether a decline in fair value is attributable to adverse conditions
specifically related to the security or specific conditions in an industry or geographic area; (iv) the credit-worthiness of
the issuer of the security; (v) whether dividend or interest payments have been reduced or have not been made; (vi) an
adverse change in the remaining expected cash flows from the security such that the Company will not recover the
amortized cost of the security; (vii) whether management intends to sell the security; and (viii) if it is more likely than
not that management will be required to sell the security before recovery. If a decline is judged to be other-than-
temporary, the individual security is written-down to fair value with the credit related component of the write-down
-77-
included in earnings and the non-credit related component included in other comprehensive income or loss. The
assessment of whether an other-than-temporary impairment exists involves a high degree of subjectivity and judgment
and is based on information available to management at a point in time.
Loans held for sale:
Loans held for sale consist of one-to-four family residential mortgages originated and intended for sale in the secondary
market. The loans are carried in aggregate at the lower of cost or estimated market value, based upon current delivery
prices in the secondary mortgage market. Net unrealized losses are recognized through a valuation allowance by
corresponding charges to income. Gains or losses on the sale of these loans are recognized in noninterest income at the
time of sale using the specific identification method. Loan origination fees, net of certain direct loan origination costs,
are included in net gains or losses upon the sale of the related mortgage loan. All loans are sold without recourse.
Loans, net:
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated
at their outstanding unpaid principal balances, net of deferred fees or costs. Interest income is accrued on the principal
amount outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the
contractual life of the related loan as an adjustment to yield using the effective interest method. Premiums and discounts
on purchased loans are amortized as adjustments to interest income using the effective interest method. Delinquency fees
are recognized in income when chargeable, assuming collectability is reasonably assured.
Transfers of financial assets, which include loan participation sales, are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (i) the assets have been
isolated from the Company; (ii) the transferee obtains the right, free of conditions that constrain it from taking advantage
of that right, to pledge or exchange the transferred assets and (iii) the Company does not maintain effective control over
the transferred assets through an agreement to repurchase them before their maturity.
The loan portfolio is segmented into commercial and retail loans. Commercial loans consist of commercial and
commercial real estate loans. Retail loans consist of residential real estate and other consumer loans.
The Company makes commercial loans for real estate development and other business purposes required by the customer
base. The Company’s credit policies determine advance rates against the different forms of collateral that can be pledged
against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral
values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates
may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets
financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of
loans generally comes from the cash flow of the business or the ongoing conversion of assets. Commercial real estate
loans include long-term loans financing commercial properties. Repayment of these loans are dependent upon either the
ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans
typically require a loan to value of not greater than 75% and vary in terms. Commercial and commercial real estate loans
generally have higher credit risk compared to residential mortgage loans and consumer loans, as they typically involve
larger loan balances concentrated with single borrowers or groups of borrowers. In addition, the payment expectations on
loans secured by income-producing properties typically depend on the successful operations of the related business and
thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one-to-
four family residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s and any
guarantor’s creditworthiness and the feasibility and cash flow potential of the financed project. Additional considerations
include: location, market and geographic concentrations, loan to value, strength of guarantors and quality of tenants.
Payments on loans secured by income properties often depend on successful operation and management of the
properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to
adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require
borrowers and loan guarantors, if any, to provide annual consolidated financial statements on commercial real estate
-78-
loans and rent rolls where applicable. In reaching a decision on whether to make a commercial real estate loan, we
consider and review a cash flow analysis of the borrower and guarantor, when applicable, and considers the net operating
income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property.
We have generally required that the properties securing these real estate loans have debt service coverage ratios , the
ratio of earnings before debt service to debt service, of at least 1.2 times. An environmental report is obtained when the
possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining
properties that handled hazardous materials.
Commercial loans are generally made on the basis of the borrower’s ability to make repayment from his or her
employment or other income, and which are secured by real property, the value of which tends to be more easily
ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability
to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment
of commercial business loans may depend substantially on the success of the business itself. Further, any collateral
securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Residential mortgages, including home equity loans, are secured by the borrower’s residential real estate in either a first
or second lien position. Residential mortgages have varying loan rates depending on the financial condition of the
borrower and the loan to value ratio. Residential mortgages may have amortizations up to 30 years.
Consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are
secured. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer
loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the
borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to
be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state insolvency laws, may limit the amount that can
be recovered on such loans.
Off-balance sheet financial instruments:
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of
commitments to extend credit, unused portions of lines of credit and standby letters of credit. These financial instruments
are recorded in the consolidated financial statements when they are funded. Fees on commercial letters of credit and on
unused available lines of credit are recorded as service charges, fees and commissions and are included in noninterest
income when earned. The Company records an allowance for off-balance sheet credit losses, if deemed necessary,
separately as a liability.
Nonperforming assets:
Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans include
nonaccrual loans, troubled debt restructured loans and accruing loans past due 90 days or more. Past due status is based
on contractual terms of the loan. Generally, a loan is classified as nonaccrual when it is determined that the collection of
all or a portion of interest or principal is doubtful or when a default of interest or principal has existed for 90 days or
more, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, interest
accruals discontinue and uncollected accrued interest is reversed against income in the current period. Interest collections
after a loan has been placed on nonaccrual status are credited to a suspense account until either the loan is returned to
performing status or charged-off. The interest accumulated in the suspense account is credited to income over the
remaining life of the loan using the effective yield method if the nonaccrual loan is returned to performing status.
However, if the nonaccrual loan is charged-off, the accumulated interest is applied as a reduction to principal at the time
the loan is charged-off. A nonaccrual loan is returned to performing status when the loan is current as to principal and
interest and has performed according to the contractual terms for a minimum of six months.
-79-
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 can 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.
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service
their debt such as current financial information, historical payment experience, credit documentation, public information,
and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them
within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
Pass — A loan to borrowers with acceptable credit quality and risk that is not adversely classified as
Substandard, Doubtful, Loss nor designated as Special Mention.
Special Mention — A loan that has potential weaknesses that deserves management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan
or in the institution’s credit position at some future date. Special Mention loans are not adversely classified
since they do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — A loan that is inadequately protected by the current sound worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that
the bank will sustain some loss if the deficiencies are not corrected.
Doubtful — A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard
with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable and improbable.
Loss — A loan classified as Loss is considered uncollectible and of such little value that its continuance as
bankable loans is not warranted. This classification does not mean that the loan has absolutely no recovery
or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset
even though partial recovery may be effected in the future.
Other real estate owned is comprised of properties acquired through foreclosure proceedings or in-substance
foreclosures. A loan is classified as in-substance foreclosure when the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings take place. Other real estate owned is included in other assets and
recorded at fair value less cost to sell at the time of acquisition, establishing a new cost basis. Any excess of the loan
balance over the recorded value is charged to the allowance for loan losses. Subsequent declines in the recorded values
-80-
of the properties prior to their disposal and costs to maintain the assets are included in other expenses. Any gain or loss
realized upon disposal of other real estate owned is included in noninterest expense.
Allowance for loan losses:
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance
sheet date. The allowance for loan losses account is maintained through a provision for loan losses charged to earnings.
Loans, or portions of loans, determined to be confirmed losses are charged against the allowance account and subsequent
recoveries, if any, are credited to the account. A loss is considered confirmed when information available at the financial
statement date indicates the loan, or a portion thereof, is uncollectible. Nonaccrual, troubled debt restructured and loans
deemed impaired at the time of acquisition are reviewed monthly to determine if carrying value reductions are warranted
or if these classifications should be changed. Consumer loans are considered losses and charged-off when they are 120
days past due.
Management evaluates the adequacy of the allowance for loan losses account quarterly. This assessment is based on past
charge-off experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability
to repay, the estimated value of underlying collateral, composition of the loan portfolio, current economic conditions and
other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to
significant revision as more information becomes available. Regulators, in reviewing the loan portfolio as part of the
scope of a regulatory examination, may require the Company to increase its allowance for loan losses or take other
actions that would require the Company to increase its allowance for loan losses.
The allowance for loan losses is maintained at a level believed to be adequate to absorb probable credit losses related to
specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the
balance sheet date. The allowance for loan losses consists of an allocated element and an unallocated element. The
allocated element consists of a specific allowance for impaired loans individually evaluated under Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, “Receivables,” and a formula portion for
loss contingencies on those loans collectively evaluated under FASB ASC 450, “Contingencies.”
A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to
the contractual terms means that both the contractual interest and principal payments of a loan will be collected as
scheduled in the loan agreement. Factors considered by management in determining impairment include payment status,
ability to pay and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the
delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Company recognizes interest income on impaired loans, including the recording of cash receipts, for nonaccrual,
restructured loans or accruing loans depending on the status of the impaired loan. Loans considered impaired under
FASB ASC 310 are measured for impairment 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. If 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, is less than the recorded investment in the loan, a specific allowance for the loan will be
established.
The formula portion of the allowance for loan losses relates to large pools of smaller-balance homogeneous loans and
those identified loans considered not individually impaired having similar characteristics as these loan pools. Loss
contingencies for each of the major loan pools are determined by applying a total loss factor to the current balance
outstanding for each individual pool. The total loss factor is comprised of a historical loss factor using a loss migration
method plus qualitative factors, which adjusts the historical loss factor for changes in trends, conditions and other
relevant factors that may affect repayment of the loans in these pools as of the evaluation date. Loss migration involves
determining the percentage of each pool that is expected to ultimately result in loss based on historical loss experience.
Historical loss factors are based on the ratio of net loans charged-off to loans, net, for each of the major groups of loans
-81-
evaluated and measured for impairment under FASB ASC 450. The historical loss factor for each pool is a weighted
average of the Company’s historical net charge-off ratio for the most recent rolling twelve quarters. Management adjusts
these historical loss factors by qualitative factors that represents a number of environmental risks that may cause
estimated credit losses associated with the current portfolio to differ from historical loss experience. These
environmental risks include: (i) changes in lending policies and procedures including underwriting standards and
collection, charge-off and recovery practices; (ii) changes in the composition and volume of the portfolio; (iii) changes in
national, local and industry conditions, including the effects of such changes on the value of underlying collateral for
collateral-dependent loans; (iv) changes in the volume and severity of classified loans, including past due, nonaccrual,
troubled debt restructures and other loan modifications; (v) changes in the levels of, and trends in, charge-offs and
recoveries; (vi) the existence and effect of any concentrations of credit and changes in the level of such concentrations;
(vii) changes in the experience, ability and depth of lending management and other relevant staff; (viii) changes in the
quality of the loan review system and the degree of oversight by the board of directors; and (ix) the effect of external
factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current
loan portfolio. Each environmental risk factor is assigned a value to reflect improving, stable or declining conditions
based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to
the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for
loan loss calculation.
The unallocated element is used to cover inherent losses that exist as of the evaluation date, but which have not been
identified as part of the allocated allowance using the above impairment evaluation methodology due to limitations in the
process. One such limitation is the imprecision of accurately estimating the impact current economic conditions will
have on historical loss rates. Variations in the magnitude of impact may cause estimated credit losses associated with the
current portfolio to differ from historical loss experience, resulting in an allowance that is higher or lower than the
anticipated level. Management establishes the unallocated element of the allowance by considering a number of
environmental risks similar to the ones used for determining the qualitative factors. Management continually monitors
trends in historical and qualitative factors, including trends in the volume, composition and credit quality of the portfolio.
The reasonableness of the unallocated element is evaluated through monitoring trends in its level to determine if changes
from period to period are directionally consistent with changes in the loan portfolio.
Management believes the level of the allowance for loan losses was adequate to absorb probable credit losses as of
December 31, 2015.
Premises and equipment, net:
Land is stated at cost. Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation
and amortization. The cost of routine maintenance and repairs is expensed as incurred. The cost of major replacements,
renewals and betterments is capitalized. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in noninterest
income. Depreciation and amortization are computed principally using the straight-line method based on the following
estimated useful lives of the related assets, or in the case of leasehold improvements, to the expected terms of the leases,
if shorter:
Premises and leasehold improvements
Furniture, fixtures and equipment
7 – 40 years
3 – 10 years
Business combinations, goodwill and other intangible assets, net:
The Company accounts for its acquisitions using the purchase accounting method. Purchase accounting requires the total
purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain
intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value
of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking,
money market and savings deposits acquired in business combinations accounted for under the purchase method. Core
deposit intangibles and other identified intangibles with finite useful lives are amortized using the sum of the year’s
digits over their estimated useful lives of up to ten years.
-82-
Loans that the Company acquires in connection with acquisitions are recorded at fair value with no carryover of the
related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and
interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and
is recognized into interest income over the remaining life of the loan. The difference between contractually required
payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable
discount. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the
loan. Subsequent decreases to the expected cash flows will require the Company to evaluate the need for an additional
allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding
amount of the nonaccretable discount which the Company will then reclassify as accretable discount that will be
recognized into interest income over the remaining life of the loan. Acquired loans that met the criteria for nonaccrual of
interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is
contractually delinquent. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and
may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such
loans would be first applied to the nonaccretable difference portion of the fair value adjustment.
Goodwill and other intangible assets are tested for impairment annually or when circumstances arise indicating
impairment may have occurred. In making this assessment that impairment has occurred, management considers a
number of factors including, but not limited to, operating results, business plans, economic projections, anticipated future
cash flows, and current market data. There are inherent uncertainties related to these factors and management’s judgment
in applying them to the analysis of impairment. Changes in economic and operating conditions, as well as other factors,
could result in impairment in future periods. Any impairment losses arising from such testing would be reported in the
Consolidated Statements of Income and Comprehensive Income as a separate line item within operations. There were no
impairment losses recognized as a result of periodic impairment testing in each of the three-years ended December 31,
2015.
Mortgage servicing rights:
Mortgage servicing rights are recognized as a separate asset when acquired through sales of loan originations. The
Company determines a mortgage servicing right by allocating the total costs incurred between the loan sold and the
servicing right, based on their relative fair values at the date of the sale. Mortgage servicing rights are included in other
assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net
servicing income of the underlying mortgage loans. In addition, mortgage servicing rights are evaluated for impairment
at each reporting date based on the fair value of those rights. For purposes of measuring impairment, the rights are
stratified by loan type, term and interest rate. The amount of impairment recognized, through a valuation allowance, is
the amount by which the mortgage servicing rights for a stratum exceed their fair value.
Restricted equity securities:
As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Company is required to purchase and hold
stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be
redeemed by the FHLB or to another member institution, and all redemptions of FHLB stock must be at par. As a result
of these restrictions, FHLB stock is unlike other investment securities as there is no trading market for FHLB stock and
the transfer price is determined by FHLB membership rules and not by market participants. The carrying value of
restricted stock is included in other assets.
Bank owned life insurance:
The Company invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses.
BOLI involves the purchasing of life insurance by Peoples Bank on certain of its employees. The Company is the owner
and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying
policies and is included in other assets. Income from increases in cash surrender value of the policies is included in
noninterest income.
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Pension and post-retirement benefit plans:
The Company sponsors various pension plans covering substantially all employees. The Company also provides post-
retirement benefit plans other than pensions, consisting principally of life insurance benefits, to eligible retirees. The
liabilities and annual income or expense of the Company’s pension and other post-retirement benefit plans are
determined using methodologies that involve several actuarial assumptions, the most significant of which are the
discount rate and the long-term rate of asset return, based on the market-related value of assets. The fair values of plan
assets are determined based on prevailing market prices or estimated fair value for investments with no available quoted
prices.
Statements of Cash Flows:
The Consolidated Statements of Cash Flows are presented using the indirect method. For purposes of cash flow, cash
and cash equivalents include cash on hand, cash items in the process of collection, noninterest-bearing and interest-
bearing deposits in other banks and federal funds sold.
Fair value of financial instruments:
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.
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The following methods and assumptions were used by the Company to construct the summary table in Note 13
containing the 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 marketable equity securities are based on quoted market prices from active
exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.
Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary
mortgage market.
Net loans: For adjustable-rate loans that reprice frequently and with no significant credit risk, fair values are based on
carrying values. The fair values of other nonimpaired loans are estimated using discounted cash flow analysis, using
interest rates currently offered 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.
In conjunction with the Merger, the loans purchased were recorded at their acquisition date fair value. In order to record
the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was
made to adjust for the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates
of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit
quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on distressed
loans represents the portion of the loan balance that has been deemed uncollectible based on the management’s
expectations of future cash flows for each respective loan.
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.
The fair value assigned to the core deposit intangible asset represents the future economic benefit of the potential cost
savings from acquiring core deposits in the Merger compared to the cost of obtaining alternative funding such as
brokered deposits from market sources. Management utilized an income valuation approach to present value the
estimated future cash savings in order to determine the fair value of the intangible asset.
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.
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Off-balance sheet financial instruments:
The majority of commitments to extend credit, unused portions of lines of credit 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. The fair value of off-balance sheet financial instruments was not material at
December 31, 2015 and December 31, 2014.
Advertising:
The Company follows the policy of charging marketing and advertising costs to expense as incurred. Advertising
expense for the years ended December 31, 2015, 2014 and 2013 was $736, $450 and $350, respectively.
Income taxes:
The Company accounts for income taxes in accordance with the income tax accounting guidance set forth in FASB ASC
Topic 740, “Income Taxes”. ASC Topic 740 sets out a consistent framework to determine the appropriate level of tax
reserves to maintain for uncertain tax positions.
Deferred income taxes are provided on the balance sheet method whereby deferred tax assets are recognized for
deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the effective date. A tax position is recognized as a benefit only if it is more likely than
not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that has a likelihood of being realized on examination of more
than 50 percent. For tax positions not meeting the more likely than not threshold, no tax benefit is recorded. Under the
more likely than not threshold guidelines, the Company believes no significant uncertain tax positions exist, either
individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. The Company had
no material unrecognized tax benefits or accrued interest and penalties for any year in the three-year period ended
December 31, 2015.
As applicable, the Company recognizes accrued interest and penalties assessed as a result of a taxing authority
examination through income tax expense. The Company files consolidated income tax returns in the United States of
America and various states’ jurisdictions. With limited exception, the Company is no longer subject to federal and state
income tax examinations by taxing authorities for years before 2012.
Other comprehensive income (loss):
The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated
Statements of Income and Comprehensive Income. The accumulated other comprehensive loss included in the
Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale and the
unfunded benefit plan amounts which include prior service costs and unrealized net losses.
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. Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
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Year Ended December 31
Net Income (Numerator)
Average common shares
outstanding (Denominator)
Earnings per share
2015
Basic
17,723 $
$
Diluted
17,723 $
2014
Basic
17,649 $
Diluted
Basic
Diluted
17,649 $
5,721 $
5,721
2013
7,516,451
7,516,451
7,548,825
7,561,982
4,733,059
$
2.36 $
2.36 $
2.34 $
2.34 $
1.21 $
4,733,059
1.21
Stock-based compensation:
The Company recognizes all share-based payments to employees in the consolidated statement of operations based on
their fair values. The fair value of such equity instruments is recognized as an expense in the historical consolidated
financial statements as services are performed. The Company uses the Black-Scholes Model to estimate the fair value of
each option on the date of grant. The Black-Scholes Model estimates the fair value of employee stock options using a
pricing model which takes into consideration the exercise price of the option, the expected life of the option, the current
market price and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the
expected life of the option. The Company typically grants stock options to employees with an exercise price equal to the
fair value of the shares at the date of grant. The fair value of restricted stock is equivalent to the fair value on the date of
grant and is amortized over the vesting period.
As of December 31, 2015 and 2014, all stock options were fully vested and there are no unrecognized compensation
costs related to stock options. The Company has not granted stock options after 2005.
Recent accounting standards:
In January 2016, the FASB issued Accounting Standards Update ("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 does not expect the adoption of this ASU to have a significant impact on its financial
condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee'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. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement for a lessess. From the lessor's
perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be
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 is effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. 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
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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 is currently evaluating
the impact of the pending adoption of the new standard on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17 which eliminates the guidance in Topic 740, “Income Taxes:
Balance Sheet Classification of Deferred Taxes.” This requires an entity to separate deferred tax liabilities and assets
between current and noncurrent in a classified balance sheet. The amendments require that all deferred tax liabilities and
assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and
presented as a single noncurrent amount in a classified balance sheet. Prior U.S. GAAP required that in a classified
balance sheet, deferred tax liabilities and assets be separated into a current and noncurrent amount on the basis of the
classification of the related asset or liability. If deferred tax liabilities and assets did not relate to a specific asset or
liability, such as a carryforward, they were classified according to the expected reversal date of the temporary difference.
ASU 2015-17 becomes effective for all public business entities for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2016. The effective date for all other entities is fiscal years beginning after
December 15, 2017, and for interim period within fiscal years beginning after December 15, 2018. Early adoption is
permitted as of the beginning of any interim or annual reporting period, and may be adopted prospectively or
retrospectively. The adoption of ASU 2015-17 is not expected to have a material effect on the operating results or
financial position of the Company.
2. Merger accounting:
On June 28, 2013, the Company and Penseco announced the execution of an agreement of merger, providing for the
merger of Penseco with and into the Company. This merger became effective prior to the start of business on
December 1, 2013. Pursuant to the terms of the merger agreement, the merger was effected by the issuance of shares of
Peoples stock to Penseco shareholders. Each share of Penseco common stock was converted into the right to receive
1.3636 shares of Peoples common stock, with cash in lieu of fractional shares. The Merger provided an expanded
geographic footprint for the Company and increased the size of the balance sheet wherein the combined companies can
realize economies of scale and other operating efficiencies.
The Merger has been accounted for as a reverse merger using the acquisition method of accounting. For accounting
purposes, Penseco is considered to have acquired Peoples in this transaction with the surviving legal entity operating
under Peoples articles of incorporation. Immediately following the holding company merger, Penn Security Bank and
Trust Company, merged with and into Peoples Neighborhood Bank, the wholly-owned subsidiary of Peoples, under the
name Peoples Security Bank and Trust Company. Peoples Bank is, therefore, the wholly owned subsidiary of Peoples
and operates under the prior Peoples Neighborhood Bank charter.
To determine the accounting treatment of the Merger, management utilized the following facts in concluding that the
transaction would be treated as a reverse merger, with Penseco as the accounting acquirer:
The role of Chief Executive Officer of the post-combination entity has been assumed by the executive
officer of Penseco;
Upon the effective date of the Merger, the Peoples Board of Directors consists of fourteen members, of
which six of the members have been appointed from the historical Peoples Board of Directors with the
remaining eight directors having been appointed from the Penseco Board of Directors;
After the closing of the Merger and as a result of the fixed share exchange ratio of 1.3636 shares of Peoples
common stock for each Penseco common share, the former Penseco shareholders, as a group, held
approximately 59.1 percent of the outstanding shares of Peoples stock;
Penseco contributed greater than fifty percent of the total assets and tangible equity to the combined entity.
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As a result of accounting for the Merger as a reverse acquisition, People’s assets and liabilities have been incorporated
into Penseco’s historical balance sheet based on the fair values of the net assets acquired as of the closing date,
November 30, 2013. Prior to the Merger the balance sheets, statements of income and comprehensive income, and
statements of cash flows reflect only the operations of Penseco. Following the Merger, the statements of operations
reflect the operations of both Penseco and Peoples. The number of shares issued and outstanding, additional paid-in
capital and all references to share quantities of the Company in these notes have been retroactively adjusted to reflect the
equivalent number of shares issued by the Company in the Merger.
In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquired entity. Rather, the
accounting acquiree issues its equity shares to the owners of the accounting acquirer. Accordingly, the acquisition-date
fair value of the consideration transferred by Penseco for its interest in Peoples is based on the number of equity interests
Penseco would have to issue, measured on the transaction closing date, to give the owners of Peoples the same
percentage equity interest in the combined Peoples entity that results from the reverse acquisition. The Company has
utilized the closing price of Peoples’s common stock on November 29, 2013, the last trading day prior to the merger, of
$34.50 per share to determine the acquisition date fair value of the consideration transferred. Immediately prior to the
merger, Peoples owned 9,928 shares of Penseco which were retired on the acquisition date. The table below illustrates
the calculation of the consideration effectively transferred.
Penseco shares outstanding at November 30, 2013(A)
Exchange ratio
Peoples shares issued to Penseco shareholders(B)
Peoples shares outstanding at November 30, 2013
Total Peoples shares outstanding at November 30, 2013
Penseco % ownership
Peoples % ownership
Theoretical Penseco share to be issued as consideration
Penseco shares outstanding at November 30, 2013(A)
Ownership % held by Penseco shareholders
Theoretical Penseco shares after consideration paid
Ownership % by legacy Peoples shareholders
Theoretical Penseco shares issued as consideration
Fair value of Penseco shares at November 30, 2013
($34.50 multiplied by 1.3636)
Fair value of theoretical Penseco shares
Cash paid for fractional shares
3,275,217
1.3636
4,465,538
3,087,406
7,552,944
59.12 %
40.88 %
3,275,217
59.12 %
5,539,653
40.88 %
2,264,436
$
47.04
$ 106,519
17
$ 106,536
(A) Excludes 9,928 shares of Penseco common shares owned by Peoples which were retired.
(B) Excludes payment for fractional shares.
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The acquired assets and assumed liabilities were measured at fair value as of the acquisition date. In many cases,
determining the fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows
expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which
required the utilization of significant estimates and judgment in accounting for the acquisition. As of November 30,
2013, goodwill totaled $36,972, which is equal to the excess of the consideration transferred over the fair value of the
identifiable net assets acquired in connection with the Merger. Goodwill recorded in the Merger resulted from the
expected synergies of the combined operations of the newly merged entities as well as intangibles that do not qualify for
separate recognition such as the acquired workforce. There was no tax deductible goodwill in the transaction. FASB
ASC 805 does allow for adjustments to goodwill for a period of up to one year following the acquisition date should new
information come to light that reflects circumstances that existed at the acquisition date. Goodwill was not adjusted in
2014.
Total Purchase Price
Net Assets Acquired:
$ 106,536
Cash and due from banks
Federal funds sold
Investment securities available-for-sale
Restricted equity securities
Loans, net
Accrued interest receivable
Premises and equipment
Core deposit and other intangible assets
Other assets
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Other liabilities
Net assets acquired
Treasury stock acquired
Goodwill resulting from merger
$
6,982
15,410
156,435
997
504,002
3,625
11,737
6,323
18,647
(628,304)
(17,737)
(2,516)
(473)
(5,976)
69,152
412
$ 36,972
The estimated fair values of cash and due from banks, federal funds sold, other assets and other liabilities approximate
their stated value.
The estimated fair values of the investment securities available for sale were calculated primarily using level 2 inputs.
The prices for these instruments are obtained through an independent pricing service and are derived from market
quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed
the data and assumptions used in pricing the securities to ensure the highest level of significant inputs are derived from
market observable data.
Land and buildings, included in premises and equipment, net, and real estate acquired through foreclosure, included in
other assets, were primarily valued based on appraised collateral values.
The most significant fair value determination related to the valuation of acquired loans. Management measured loan fair
values based on loan file reviews including borrower financial statements or tax returns, appraised collateral values,
expected cash flows and historical loss factors. The business combination resulted in the acquisition of loans with and
without evidence of credit quality deterioration.
Peoples Bank’s loans without evidence of credit deterioration were assembled into groupings by characteristics such as
loan type, term, collateral and rate and fair valued by discounting both expected principal and interest cash flows using
an observable discount rate for similar instruments that a market participant would consider in determining fair value.
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The discount rate utilized was the average of market rates for similar loans obtained from various external data sources.
Additionally, consideration was given to management’s best estimates of default rates and payment speeds in projecting
the expected cash flows. A general credit risk fair value adjustment was calculated using a two part general credit fair
value analysis: (1) expected lifetime losses, using an average of historical losses of the Company, Penseco and peer
banks; and (2) an estimated fair value adjustment for qualitative factors related to general economic conditions and the
risk related to lack of familiarity with the originator’s underwriting process. At acquisition, Peoples Bank’s loan
portfolio without evidence of credit deterioration was recorded at a current fair value of $496,650.
Peoples’ loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually
required cash flows due to concerns about credit quality. Such loans were fair valued by discounting the expected cash
flows at acquisition by an observable discount rate for similar instruments that a market participant would consider in
determining fair value. The difference between contractually required payments at the acquisition date and cash flows
expected to be collected was recorded as a nonaccretable difference.
The following is a summary of the acquired nonimpaired and impaired loans from the merger with Peoples:
Contractually required principal and interest at acquisition
Contractual cash flows not expected to be collected (nonaccretable
discount)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable discount)
Fair value of acquired loans
Acquired
Nonimpaired
Loans
Acquired
Impaired
Loans
$ 501,423 $ 19,353
501,423
(4,773)
$ 496,650 $
(10,873)
8,480
(1,128)
7,352
The Company recorded a core deposit intangible asset related to a value ascribed to demand, interest checking, money
market and savings account, referred to as core deposits, acquired as part of the acquisition. The value assigned to the
acquired core deposits represents the future economic benefit of the potential cost savings from acquiring the core
deposits, net of operating expenses and including ancillary fee income, compared to the cost of obtaining alternative
funds from available market sources. Management used estimates including the expected attrition rates of depository
accounts, future interest rate levels, and the cost of servicing various depository products. The Company also recorded a
trade name intangible asset using relief from royalty method. The value assigned to the trade name represents the present
value of the potential cost savings of paying a royalty for the use of a trade name. Both the core deposit intangible and
trade name intangible are being amortized over an estimated useful life of 10 years.
Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon
acquisition. The fair value of time deposits was calculated as the present value of the certificates’ expected contractual
payments discounted by market rates for similar time deposits.
The Company recorded the fair value of borrowings based on prepayment amounts obtained from the Federal Home
Loan Bank.
In connection with the acquisition, Peoples incurred merger-related expenses in regards to personnel, professional fees,
occupancy and equipment and other costs of integrating and conforming acquired operations. Those expenses consisted
largely of costs related to professional and consulting services, employment severance and early retirement charges,
termination of Penseco’s core system contractual agreement and conversion of systems and/or integration of operations,
initial communication expenses, printing and filing costs of completing the transaction and investment banking charges.
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A summary of merger related costs included in the consolidated statements of income for the years ended December 31,
2014 and 2013 is summarized as follows:
December 31,
Accounting
Legal and consulting
Salaries and benefits
Equipment disposition and contract termination
System conversion/deconversion costs
Other
Total
$
2014
258 $
85
459
440
278
205
2013
65
1,011
1,851
709
956
17
$ 1,725 $ 4,609
There were no merger related costs incurred for the year ended December 31, 2015.
Pro Forma Condensed Combined Financial Information:
The following table presents unaudited pro forma information as if the merger between Peoples and Penseco had been
completed on January 1, 2012. The pro forma information does not necessarily reflect the results of operations that
would have occurred had the Company merged with Penseco at the beginning of 2012. Supplemental pro forma earnings
for 2013 were adjusted to exclude $4,609 of merger related costs incurred for the year ended December 31, 2013. The
expected future amortizations of the various fair value adjustments were included beginning in 2012. Cost savings are
not reflected in the unaudited pro forma amounts for the periods presented. The pro forma financial information does not
include the impact of possible business model changes, nor does it consider any potential impacts of current market
conditions on revenues, expense efficiencies, or other factors.
Years ended December 31,
Net interest income after loan loss provision
Noninterest income
Noninterest expense
Net income
Net income per share
16,080
52,295
2013
2012
$ 52,734 $ 52,917
16,287
49,827
$ 16,519 $ 19,377
2.55
$
2.19 $
The amounts of net interest income after loan loss provision, noninterest income, noninterest expense and net loss
attributable to Peoples since the acquisition date included in the consolidated statement of income for the year ended
December 31, 2013 were $2,248, $363, $3,115, and $(261), respectively.
3. Cash and due from banks:
The Federal Reserve Act, as amended, imposes reserve requirements on all depository institutions. The Company’s
required reserve balances were $19,128 and $15,728 at December 31, 2015 and 2014, respectively.
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4. Investment securities:
The amortized cost and fair value of investment securities aggregated by investment category at December 31, 2015 and
2014 are summarized as follows:
December 31, 2015
Available-for-sale:
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
Held-to-maturity:
Tax-exempt state and municipals
Mortgage-backed securities:
Gross
Gross
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
10,030
68,831
$
291
$
31 $
62
9,999
69,060
15,842
121,099
735
3,915
32
90
16,545
124,924
31,612
32,928
$ 280,342 $
73
119
5,133 $
31,568
117
208
32,839
540 $ 284,935
$
6,865 $
186 $
16 $
7,035
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
84
5,160
$
12,109 $
1
326
513 $
85
5,486
12,606
16 $
December 31, 2014
Available-for-sale:
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
Held-to-maturity:
Tax-exempt state and municipals
Mortgage-backed securities:
Gross
Gross
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
48,393 $
95,990
157
337 $
943
4,971
16,490
87,954
37,511
46,956
$ 333,294 $
132
277
6,817 $
167
37,476
47,007
226
525 $ 339,586
$
82
26
24
48,550
96,245
17,407
92,901
$
7,370 $
105 $
38 $
7,437
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
100
7,195
14,665 $
2
481
588 $
102
7,676
15,215
38 $
The Company had net unrealized gains of $2,985, net of deferred income taxes of $1,608 at December 31, 2015, and
$4,090, net of deferred income taxes of $2,202, at December 31, 2014. Proceeds from the sale of investment securities
available-for-sale amounted to $81,983 in 2015, $15,389 in 2014, and $4,573 in 2013. Gross gains of $1,189, $919, and
$163 were realized on the sale of securities in 2015, 2014, and 2013, respectively. There were no gross losses in 2015 or
2013. Gross losses of $58 were realized on the sale of securities in 2014. The income tax provision applicable to net
realized gains amounted to $416, $301, and $55 in 2015, 2014, 2013, respectively.
-93-
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-
for-sale at December 31, 2015, is summarized as follows:
December 31, 2015
Within one year
After one but within five years
After five but within ten years
After ten years
Mortgage-backed securities
Total
Fair
Value
$ 27,675
96,309
49,563
46,981
220,528
64,407
$ 284,935
The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at
December 31, 2015, is summarized as follows:
December 31, 2015
Within one year
After one but within five years
After five but within ten years
After ten years
Mortgage-backed securities
Total
Amortized
Cost
Fair
Value
$
$
6,865
6,865
5,244
7,035
7,035
5,571
$ 12,109 $ 12,606
Securities with a carrying value of $180,478 and $216,192 at December 31, 2015 and 2014, respectively, were pledged
to secure public deposits and repurchase agreements 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 December 31, 2015 and 2014, 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.
The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not
been recognized at December 31, 2015 and 2014, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position, are summarized as follows:
December 31, 2015
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
Less Than 12 Months
Unrealized
Losses
12 Months or More
Fair
Value
Fair
Value
$ 9,999 $
34,159
31 $
62
Total
Unrealized
Losses
Unrealized
Losses
$
Fair
Value
$
9,999 $
34,159
21,341
87
532
1,952
32
19
532
23,293
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
15,114
17,647
$ 98,260 $
56
104
340 $ 13,991 $
5,477
6,030
61
104
20,591
23,677
216 $ 112,251 $
-94-
31
62
32
106
117
208
556
26
62
167
226
563
December 31, 2014
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
Less Than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$ 21,228
$
33 $ 7,954 $
49 $ 29,182 $
82
4,702
23
544
2,423
26
39
544
7,125
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
20,148
22,870
$ 68,948
167
226
449 $ 10,921 $
$
20,148
22,870
114 $ 79,869 $
The Company had 88 investment securities, consisting of 38 tax-exempt state and municipal obligations, one U.S.
Treasury security, one taxable state and municipal obligation, twelve U.S. Government-sponsored enterprise securities
and 36 mortgage-backed securities that were in unrealized loss positions at December 31, 2015. Of these securities,
seven mortgage-backed securities, four tax-exempt state and municipal securities and one taxable state and municipal
obligation 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 December 31, 2015.
The Company had 52 investment securities, consisting of 16 tax-exempt state and municipal obligations, one taxable
state and municipal obligation, nine U.S. Government-sponsored enterprise securities, and 26 mortgage-backed securities
that were in unrealized loss positions at December 31, 2014. Of these securities, two U.S. Government-sponsored
enterprise securities, four tax-exempt state and municipal securities and one taxable state and municipal obligation were
in continuous unrealized loss positions for twelve months or more. There was no OTTI recognized for each of the years
in the three-year period ended December 31, 2015.
5. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at December 31, 2015 and
2014 are summarized as follows. Net deferred loan costs were $690 and $651 in 2015 and 2014, respectively.
December 31
Commercial
Real estate:
Commercial
Residential
Consumer
Total
2014
2015
$ 365,767 $ 319,590
567,277
306,218
101,603
493,481
322,454
74,369
$ 1,340,865 $ 1,209,894
Loans outstanding to directors, executive officers, principal stockholders or to their affiliates totaled $10,187 and
$11,913 at December 31, 2015 and 2014, respectively. Advances and repayments during 2015 totaled $20,236 and
$21,962 respectively. There were no related party loans that were classified as nonaccrual, past due, or restructured or
considered a potential credit risk at December 31, 2015 and 2014.
At December 31, 2015, the majority of the Company’s loans were at least partially secured by real estate in Northeastern
Pennsylvania. Therefore, a primary concentration of credit risk is directly related to the real estate market in this area.
Changes in the general economy, local economy or in the real estate market could affect the ultimate collectability of this
-95-
portion of the loan portfolio. Management does not believe there are any other significant concentrations of credit risk
that could affect the loan portfolio.
The changes in the allowance for loan losses account by major classification of loan for the year ended December 31,
2015, 2014, and 2013 were as follows:
December 31, 2015
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance: loans acquired
Real estate
Commercial Commercial Residential Consumer
Unallocated
Total
$
$
2,321 $
(246)
77
890
3,042 $
3,037 $
(325)
144
1,389
4,245 $
3,690 $
(523)
26
889
4,082 $
1,290 $
(333)
117
509
1,583 $
$
23
23 $
759
126
1,138
117
10,338
(1,427)
364
3,700
12,975
2,140
2,283
4,012
2,944
1,466
23
10,728
with deteriorated credit quality $
$
107 $
$
$
107
Loans receivable:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance: loans acquired
$ 365,767 $ 567,277 $ 306,218 $ 101,603 $
$ 1,340,865
1,196
4,006
4,917
148
10,267
363,620
561,903
301,252
101,455
1,328,230
with deteriorated credit quality $
951 $
1,368 $
49 $
$
$
2,368
December 31, 2014
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance: loans acquired
Commercial Commercial Residential
Consumer Unallocated
Total
Real estate
$
$
2,008 $
(601)
9
905
2,321 $
2,394 $
(500)
292
851
3,037 $
3,135 $ 1,114 $
(804)
38
1,321
3,690 $ 1,290 $
(386)
115
447
$
$
8,651
(2,291)
454
3,524
10,338
1,072
805
767
38
1,081
2,125
2,921
1,252
2,682
7,379
with deteriorated credit quality $
168 $
107 $
2
$
$
277
Loans receivable:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance: loans acquired
$ 319,590 $ 493,481 $ 322,454 $ 74,369 $
$ 1,209,894
2,595
5,084
4,001
127
11,807
315,642
487,024
318,395
74,242
1,195,303
with deteriorated credit quality $
1,353 $
1,373 $
58 $
$
$
2,784
-96-
December 31, 2013
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance: loans
acquired with deteriorated
credit quality
Loans receivable:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance: loans
acquired with deteriorated
credit quality
Commercial Commercial Residential Consumer Unallocated
Total
Real estate
$
$
799 $
(5)
1
1,213
2,008 $
2,304 $
(15)
20
85
2,394 $
2,981 $
(508)
111
551
3,135 $
866 $
(313)
49
512
1,114 $
$
$
1,500
300
224
508
2,094
2,911
1,114
6,950
(841)
181
2,361
8,651
2,024
6,627
$
$
$
$
$
$
$ 350,680 $ 413,058 $ 322,062 $ 90,817 $
$ 1,176,617
4,504
7,711
3,321
90
15,626
343,502
401,168
318,274
90,727
1,153,671
$
2,674 $
4,179 $
467 $
$
$
7,320
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 December 31,
2015 and 2014:
$
Pass
357,894 $
Special
Mention
Substandard
Doubtful
3,566 $
4,307 $
Total
$
538,130
296,587
101,486
1,294,097 $
10,150
983
14,699 $
18,997
8,648
117
32,069 $
December 31, 2015
Commercial
Real estate:
Commercial
Residential
Consumer
December 31, 2014
Commercial
Real estate:
Commercial
Residential
Consumer
Total
$
$
Pass
306,066 $
Special
Mention
Substandard
Doubtful
6,135 $
7,389 $
$
472,270
312,086
74,250
1,164,672 $
9,858
2,123
13
18,129 $
11,353
8,245
106
27,093 $
$
-97-
$
Total
365,767
567,277
306,218
101,603
1,340,865
$
Total
319,590
493,481
322,454
74,369
1,209,894
Information concerning nonaccrual loans by major loan classification at December 31, 2015 and 2014 is summarized as
follows:
December 31
Commercial
Real estate:
Commercial
Residential
Consumer
Total
2015
2014
$ 1,632 $ 1,322
3,859
4,732
148
3,732
3,523
122
$ 10,371 $ 8,699
The major classification of loans by past due status at December 31, 2015 and 2014 are summarized as follows:
December 31, 2015
Commercial
Real estate:
Commercial
Residential
Consumer
30-59 Days 60-89 Days
Past Due
$
126 $
Past Due
Greater
than 90
Days
Total Past
Due
$ 1,632 $ 1,758 $
Current
364,009 $
Total Loans
365,767
Loans > 90
Days and
Accruing
1,364
3,891
705
165
1,067
353
3,859
5,257
386
5,388
10,215
1,444
561,889
296,003
100,159
567,277
306,218 $
101,603
Total
$ 6,086 $ 1,585 $ 11,134 $ 18,805 $ 1,322,060 $ 1,340,865 $
525
238
763
December 31, 2014
Commercial
Real estate:
Commercial
Residential
Consumer
Total
30-59 Days 60-89 Days
Past Due
$
898 $
Past Due
Greater
than 90
Days
Total Past
Due
117 $ 1,322 $ 2,337 $
Current
317,253 $
Total Loans
319,590
Loans > 90
Days and
Accruing
2,100
3,154
848
136
6,856
1,062
8,978
425
1,642
$ 7,000 $ 2,491 $ 10,322 $ 19,813 $ 1,190,081 $ 1,209,894 $ 1,623
493,481 $
322,454
74,369
486,625
313,476
72,727
888
1,239
247
3,868
4,585
547
-98-
The following tables summarize information concerning impaired loans as of and for the years ended December 31,
2015, 2014 and 2013 by major loan classification:
For the Year Ended
December 31, 2015
With no related allowance:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
With an allowance recorded:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Commercial
Real estate:
Commercial
Residential
Consumer
Total
December 31, 2014
With no related allowance:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
With an allowance recorded:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Recorded
Investment Balance Allowance Investment Recognized
Related
Average
Recorded
Interest
Income
Unpaid
Principal
$
1,352 $ 2,720
$
1,848 $
87
2,731
3,048
31
7,162
3,408
3,231
31
9,390
2,394
2,664
17
6,923
795
795 $
759
1,680
2,643
1,918
117
5,473
2,147
5,374
4,966
148
2,643
1,918
117
5,473
3,515
233
1,138
117
2,247
759
6,051
5,149
148
233
1,138
117
4,155
1,776
126
7,737
3,528
6,549
4,440
143
95
4
186
40
86
30
156
127
181
34
$ 12,635 $ 14,863 $ 2,247 $ 14,660 $
342
Recorded
Investment Balance Allowance Investment Recognized
Related
Unpaid
Principal
For the Year Ended
Interest
Income
Average
Recorded
$
2,379 $ 4,084
$
2,669
$
141
2,932
2,672
83
8,066
3,690
2,857
83
10,714
7,944
2,731
94
13,438
120
4
265
1,569
1,569 $ 1,240
1,787 $
58
3,525
1,387
44
6,525
3,948
6,457
4,059
127
3,525
1,387
44
6,525
5,653
7,215
4,244
127
912
769
38
2,959
1,240
2,293
590
10
4,680
4,456
912
769
38
10,237
3,321
104
$ 14,591 $ 17,239 $ 2,959 $ 18,118 $
28
10
1
97
199
148
14
1
362
-99-
December 31, 2013
With no related allowance:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
With an allowance recorded:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Recorded
Investment Balance Allowance Investment Recognized
Related
Unpaid
Principal
For the Year Ended
Average
Recorded
Interest
Income
$
4,978 $ 9,474
$
5,824
10,496
3,004
90
18,568
13,352
3,437
90
26,353
10,095
2,614
95
18,628
2,200
2,200 $ 1,500
2,182 $
95
1,394
784
1,394
784
300
224
4,378
7,178
4,378
11,674
2,024
1,500
1,409
672
4,263
8,006
11,890
3,788
90
14,746
4,221
90
300
224
—
11,504
3,286
95
76
13
184
95
76
13
$ 22,946 $ 30,731 $ 2,024 $ 22,891 $
184
There were no amounts of interest income recognized using the cash-basis method on impaired loans for the years ended
December 31, 2015, 2014 and 2013.
As a part of the Merger, an adjustment was made to reflect the elimination of the allowance for loan losses related to the
Peoples Bank loan portfolio, as required by purchase accounting standards. As a result, the acquired loan portfolio was
evaluated based on risk characteristics and other credit and market criteria to determine a credit quality adjustment to the
fair value of the loan acquired. The acquired loan balance was reduced by the aggregate amount of the credit quality
adjustment in determining the fair value of the loans. The credit quality adjustment does not account for acquired loans
deemed to be impaired in accordance with Accounting Standard Codification 310-30-30, previously known as Statement
of Position (SOP) 03-3, “Accounting for Certain Loans Acquired in a Transfer.” These impaired loans are accounted for
in the credit adjustment on distressed loans, which represents the portion of the loan balance that has been deemed
uncollectible based on the management’s expectations of future cash flows for each respective loan. Based on
management’s evaluation of the acquired loan portfolio, 29 loans were deemed impaired resulting in a credit adjustment
on distressed loans of $6,892. As of December 31, 2015, there were a total of thirteen loans remaining with a credit
adjustment of $2,228.
At December 31, 2015, the Company had total impaired loans of $12,635. The impaired loan balance includes $2,368 of
impaired loans acquired as part of the merger net of a remaining fair value adjustment of $2,228. Management performed
an evaluation of expected future cash flows, including the anticipated cash flow from the sale of collateral, and compared
that to the carrying amount of the impaired loans. Based on these evaluations, the Company has determined that an
additional reserve of $107 was required against the acquired impaired loans at December 31, 2015.
-100-
The changes in the accretible yield and nonaccretible difference of acquired loans accounted for under ASC310-30 for
the years ended December 31, 2015, 2014 and 2013, were as follows:
Year ended December 31
Beginning Balance, January 1
Additions
Accretion
Charge-offs
Payments
Ending Balance, December 31
2015
2014
Accretible Nonaccretible Accretible Nonaccretible Accretible Nonaccretible
$
2,588 $ 895 $
60 $
2013
6,892
$
$
6,892
934
(39)
(60)
$
(360)
2,228
$
(280)
(398)
(157)
60
$
(2,703)
(1,601)
2,588
$
$
895
$
6,892
Included in the commercial loan and commercial real estate categories are troubled debt restructurings that were
classified as impaired. Trouble debt restructurings totaled $2,861, $2,933 and $2,487 at December 31, 2015, 2014 and
2013, respectively.
There were nine loans modified in 2015, three loans modified in 2014 and no loans modified in 2013 that resulted in
troubled debt restructurings. The following tables summarize the loans whose terms have been modified resulting in
troubled debt restructurings during the year ended December 31, 2015 and 2014.
December 31, 2015
Commercial
Commercial real estate
Residential mortgage
Total
December 31, 2014
Commercial real estate
Residential mortgage
Total
Number
of Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Recorded Investment Investment
1 $
1
7
9 $
98 $
58
501
657 $
98
58 $
501
657 $
54
484
538
Number
of Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Recorded Investment Investment
2,500 $ 2,457
476
2,979 $ 2,933
479
4,408 $
479
4,887 $
1 $
2
3 $
There were two payment defaults within 12 months of their modification on loans considered troubled debt
restructurings for the year ended December 31, 2015 totaling $166 and no defaults for the years ended December 31,
2014 and 2013.
The amount of loans in the formal process of foreclosure totaled $564 at December 31, 2015.
6. Off-balance sheet financial instruments:
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit, unused portions of
lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, unused portions of lines of credit and standby letters of credit is represented by the
contractual amounts of those instruments. The Company follows the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. We record a valuation allowance for off-balance
-101-
sheet credit losses, if deemed necessary, separately as a liability. An allowance of $47 and $58 was recorded as of
December 31, 2015 and 2014, respectively.
The contractual amounts of off-balance sheet commitments at December 31, 2015 and 2014 are summarized as follows:
December 31
Commitments to extend credit
Unused portions of lines of credit
Standby letters of credit
2015
2014
$ 257,011 $ 187,351
48,610
30,609
$ 329,822 $ 266,570
52,794
20,017
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s
credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or
commercial real estate, accounts receivable, inventory and equipment.
Unused portions of lines of credit, including home equity and overdraft protection agreements, are commitments for
possible future extensions of credit to existing customers. Unused portions of home equity lines are collateralized and
generally have fixed expiration dates. Overdraft protection agreements are uncollateralized and usually do not carry
specific maturity dates. Unused portions of lines of credit ultimately may not be drawn upon to the total extent to which
the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. Generally, all standby letters of credit expire within twelve months. The credit risk involved in
issuing standby letters of credit is essentially the same as that involved in extending other loan commitments. The
Company requires collateral supporting these standby letters of credit as deemed necessary. Collateral supporting
standby letters of credit amounted to $20,211 at December 31, 2015 and $27,666 at December 31, 2014. The carrying
value of the liability for the Company’s obligations under guarantees for standby letters of credit was not material at
December 31, 2015 and 2014.
7. Premises and equipment, net:
Premises and equipment at December 31, 2015 and 2014 are summarized as follows:
December 31
Land
Premises and leasehold improvements
Furniture, fixtures and equipment
Less: accumulated depreciation
2014
2015
$ 5,419 $ 5,309
30,046
9,470
44,825
19,392
$ 28,157 $ 25,433
33,177
10,026
48,622
20,465
Depreciation and amortization included to noninterest expense amounted to $1,595, $1,671, and $924 in 2015, 2014 and
2013, respectively.
-102-
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2015, pertaining to banking premises
and equipment, future minimum annual rent commitments under various operating leases are summarized as follows:
2016
2017
2018
2019
2020
Thereafter
$
312
233
184
167
131
358
$ 1,385
The leases contain options to extend for periods from one to ten years. The cost of such options is not included in the
annual rental commitments. Rent expense for the years ended December 31, 2015, 2014 and 2013 amounted to $397,
$343 and $216, respectively.
8. Intangible assets, net:
The gross carrying amount of core deposit intangible assets totaled $8,146 at December 31, 2015 and 2014. The gross
carrying amount of trade name intangible assets totaled $203 at December 31, 2015 and 2014. The gross carrying
amount of the intangible asset related to the acquisition of an asset management and retirement plan services company
acquired in 2015 totaled $1,091 at December 31, 2015 The accumulated amortization on core deposit intangible assets
was $3,957 and $2,808 at December 31, 2015 and 2014, respectively. The accumulated amortization on trade name
intangible assets was $73 and $40 at December 31, 2015 and 2014, respectively. The accumulated amortization on the
asset management and retirement plan services intangible asset was $13 at December 31, 2015. Amortization expense
amounted to $1,195, $1,334 and $326 in 2015, 2014 and 2013, respectively.
The estimated amortization expense on intangible assets in years subsequent to December 31, 2015, is as follows:
2016
2017
2018
2019
2020
Thereafter
9. Other assets:
$ 1,186
1,034
882
730
606
959
$
The major components of other assets at December 31, 2015 and 2014 are summarized as follows:
December 31
Other real estate owned
Investment in residential housing program
Mortgage servicing rights
Bank owned life insurance
Restricted equity securities
Other assets
Total
$
2015
957 $
2014
561
4,329
676
29,983
3,687
13,830
$ 58,487 $ 53,066
6,744
465
30,782
5,403
14,136
The Company originates one-to-four family residential mortgage loans for sale in the secondary market with servicing
rights retained. Mortgage loans serviced for other are not included in the accompanying Consolidated Balance Sheets.
The unpaid principal balances of mortgage loans serviced for others were $168,198 at December 31, 2015 and $163,822
at December 31, 2014.
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10. Deposits:
The major components of interest-bearing and noninterest-bearing deposits at December 31, 2015 and 2014 are
summarized as follows:
December 31
Interest-bearing deposits:
Money market accounts
Now accounts
Savings accounts
Time deposits less than $250
Time deposits $250 or more
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
2015
2014
$
197,258 $
279,004
386,593
237,176
34,801
1,134,832
320,978
197,442
254,924
391,952
238,964
28,778
1,112,060
313,498
$ 1,455,810 $ 1,425,558
The aggregate amounts of maturities for all time deposits at December 31, 2015, are summarized as follows:
2016
2017
2018
2019
2020
Thereafter
$ 160,229
33,396
28,834
13,853
21,626
14,039
$ 271,977
The aggregate amount of deposits reclassified as loans was $187 at December 31, 2015, and $463 at December 31, 2014.
Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation for credit
losses. During 2015 and 2014, no deposits were received on terms other than those available in the normal course of
business.
11. Short-term borrowings:
Securities sold under agreements to repurchase and FHLB advances generally represent overnight or less than 30-day
borrowings. Short-term borrowings consisted of the following at December 31, 2015 and 2014:
At and for the year ended December 31, 2015
Weighted
Average
Rate for
the Year
Maximum
Month-End
Average
Balance
Balance
Weighted
Average
Rate at End
of the Year
Ending
Balance
Repurchase agreements
FHLB advances
$
22
$
$
38,325
38,325 $
13,458 $
13,480 $
54,425
54,425
1.11 %
0.39
0.39 %
0.43 %
0.43 %
-104-
At and for the year ended December 31, 2014
Weighted
Average
Rate for
the Year
Maximum
Month-End
Average
Balance
Balance
Weighted
Average
Rate at End
of the Year
Ending
Balance
Repurchase agreements
FHLB advances
$
$
682 $
18,875
19,557 $
12,729 $
2,142
14,871 $
22,840
18,875
41,715
0.53 %
0.25
0.48 %
0.38 %
0.28
0.28 %
Peoples Bank 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 December 31, 2015, Peoples Bank’s maximum borrowing
capacity was $529,088 of which $98,679 was outstanding in borrowings. 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. This rate resets each day.
Securities sold under repurchase agreements are retained under Peoples Bank’s control at its safekeeping agent. The
Bank may be required to provide additional collateral based on the fair value of the underlying securities.
12. Long-term debt:
Long-term debt consisting of advances from the FHLB at December 31, 2015 and 2014 are as follows:
Due
March 2015
March 2015
November 2015
February 2016
February 2016
February 2017
September 2017
April 2018
December 2018
December 2019
December 2019
December 2019
June 2020
December 2020
March 2023
Interest Rate
Adjustable
Fixed
3.44 %
3.48
4.67
4.86
4.86
4.99
2.36
3.83
1.27
1.98 %
1.78 %
1.62
1.74
1.84
4.69 %
2015
$
2014
133
40
257
166
166
918
6,500
377
$
23
23
510
6,500
269
10,000
3,000
6,300
10,000
5,000
5,000
13,729
15,283
$ 60,354 $ 33,140
3,000
6,300
Maturities of long-term debt, by contractual maturity, in years subsequent to December 31, 2015 are as follows:
2016
2017
2018
2019
2020
Thereafter
$ 2,220
8,400
11,828
21,174
11,963
4,769
$ 60,354
None of the advances from the FHLB are convertible. Long-term debt consist of $51,054 at fixed rates and $9,300 at
adjustable rates which reset quarterly based on three-month Libor plus 1.21% to plus 1.57%.
-105-
13. Fair value of financial instruments:
Assets and liabilities measured at fair value on a recurring basis at December 31, 2015 and 2014 are summarized as
follows:
Fair Value Measurement Using
Significant
Significant
Quoted Prices in
Active Markets for Other Observable Unobservable
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
December 31, 2015
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and Municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
Amount
$
9,999 $
69,060
16,545
124,924
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
31,568
32,839
$ 284,935 $
9,999
$
$
69,060
16,545
124,924
31,568
32,839
9,999 $
274,936 $
December 31, 2014
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and Municipals:
Taxable
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
Fair Value Measurement Using
Significant
Quoted Prices in
Significant
Active Markets for Other Observable Unobservable
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Amount
$ 48,550 $
96,245
17,407
92,901
37,476
47,007
$ 339,586 $
48,550
$
$
96,245
17,407
92,901
37,476
47,007
48,550 $
291,036 $
Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2015 and 2014 are summarized as
follows:
December 31, 2015
Impaired loans
Other real estate owned
Fair Value Measurement Using
Quoted Prices in
Significant
Active Markets for Other Observable Unobservable
Significant
Amount
$ 4,944
$
878
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
$
$
4,944
878
-106-
December 31, 2014
Impaired loans
Other real estate owned
Fair Value Measurement Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other Significant
Unobservable
Inputs
(Level 3)
Observable
Inputs
(Level 2)
$
$
4,414
218
Amount
$ 4,414
$
218
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
December 31, 2015
Impaired loans
Other real estate owned
December 31, 2014
Impaired loans
Other real estate owned
Valuation Techniques
Fair Value
Estimate
$ 4,944 Appraisal of collateral Appraisal adjustments 3.3% to 97.0% (61.7)%
3.0% to 6.0% (5.4)%
878 Appraisal of collateral Appraisal adjustments 20.0% to 77.3% (30.3)%
3.0% to 6.0% (5.0)%
Range
(Weighted Average)
Liquidation expenses
Liquidation expenses
Unobservable Input
$
Quantitative Information about Level 3 Fair Value Measurements
Valuation Techniques
Fair Value
Estimate
$ 4,414 Appraisal of collateral Appraisal adjustments 2.6% to 61.1% (24.5)%
3.0% to 6.0% (5.5)%
218 Appraisal of collateral Appraisal adjustments 19.7% to 47.8% (30.5)%
3.0% to 6.0% (5.0)%
Range
(Weighted Average)
Liquidation expenses
Liquidation expenses
Unobservable Input
$
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include
various Level 3 Inputs which are not identifiable.
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation
expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a
percent of the appraisal.
-107-
The carrying and fair values of the Company’s financial instruments at December 31, 2015 and 2014 and their placement
within the fair value hierarchy are as follows:
December 31, 2015
Financial assets:
Cash and cash equivalents
Investment securities:
Available-for-sale
Held-to-maturity
Loans held for sale
Net loans
Accrued interest receivable
Mortgage servicing rights
Restricted equity securities
Total
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Total
December 31, 2014
Financial assets:
Cash and cash equivalents
Investment securities:
Available-for-sale
Held-to-maturity
Loans held for sale
Net loans
Accrued interest receivable
Mortgage servicing rights
Restricted equity securities
Total
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Total
Fair Value Hierarchy
Quoted
Prices in
Active
Markets for
Identical
Assets
(level 1)
Significant
Other
Observable
Inputs
(level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
Fair
Value
$
32,917 $
32,917 $
32,917
284,935
12,109
284,935 $
12,606
9,999 $
274,936
12,606
1,327,890
5,796
465
5,403
1,669,515 $
1,330,900
5,796
1,543
5,403
1,674,100
$
1,330,900
5,796
1,543
5,403
$
$
1,455,810 $
38,325
60,354
560
$
1,555,049 $
1,455,979
38,325
61,412
560
1,556,276
1,455,979
38,325
61,412
560
$
Fair Value Hierarchy
Quoted
Prices in
Active
Markets for
Identical
Assets
(level 1)
Significant
Other
Observable
Inputs
(level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
Fair
Value
$
31,426 $
31,426 $
31,426
339,586
14,665
3,486
1,199,556
5,580
676
3,687
1,598,662 $
339,586 $
15,215
3,492
1,210,369
5,580
1,466
3,687
1,610,821
48,550 $
291,036
15,215
3,492
$
1,210,369
5,580
1,466
3,687
$
$
1,425,558 $
19,557
33,140
574
$
1,478,829 $
1,427,081
19,557
34,772
574
$
1,427,081
19,557
34,772
574
1,481,984
-108-
14. Stock plans:
The Company has a stock plan (“Stock Plan”) covering non-employee directors and the 2008 long-term incentive plan
(“2008 Plan”) for certain officers and key employees. The plans are administered by a committee of the Board of
Directors. There were no SARS outstanding after December 31, 2014. The activity for 25,227 stock appreciation rights
(“SAR”) and 5,600 options under the Stock Plan for each of the years in the two-year period ended December 31, 2014,
is summarized as follows:
December 31
Outstanding, beginning of year
Associated with merger
Granted
Settled
Forfeited
Outstanding, end of year
Exercisable, end of year
2014
Weighted
Average
2013
Weighted
Average
Price
Awards
Price
Awards
30,827 $ 30.37 25,227 $ 29.66
30.93
8,900
(30,827) $ 30.37
26.38
(3,150)
27.50
(150)
30,827
30.37
30,827 $ 30.37
The Company granted 13,636 SAR to an executive on January 3, 2006 at a strike price of $31.53 per share. The rights
were fully vested as of January 2, 2011 and were settled in cash when exercised in 2014. The assumptions in calculating
the vesting rights fair value used an expected volatility of 26.83%, expected annual dividend yield of 2.42%, a risk-free
interest rate of 0.90%, and an expected term of 1.75 years. The Company granted 11,591 SAR to an executive on
February 29, 2008 at a strike price of $27.50 per share. The rights vested on a straight-line basis over a five year period
and were settled in cash when exercised in 2014. The grant date fair value was computed assuming expected volatility of
22.21%, expected annual dividend yield of 4.00%, a risk-free interest rate of 3.53%, and an expected term of 7.50 years.
The Company calculated the value of the vested rights using the Black-Scholes method and recorded an expense of $395
in 2014 and $34 in 2013. In addition, the Company settled an additional 5,600 in options under the Stock Plan during
2014 for $83.
The 2008 Plan allows for named executive officers to be granted equity award, 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 to awards granted under the 2008 Plan, including, without limitation, the authority to:
Designate the individuals eligible to receive awards under the 2008 Plan.
Determine the size, type and date of grant for individual awards, provided that awards approved by the
Committee are not effective unless and until ratified by the board of directors.
Interpret the 2008 Plan and award agreements issued with respect to individual participants.
Persons eligible to receive awards under the 2008 Plan 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.
There are 129,207 shares of the Company’s common stock available for grant as awards pursuant to the 2008 Plan.
The 2008 Plan authorizes grants of stock options, stock appreciation rights, dividend equivalents, performance awards,
restricted stock and restricted stock units. There were restricted stock grants awarded with a total cost of $50 during the
years ended December 31, 2013. No restricted stock grants were awarded in 2015 and 2014.
-109-
The activity related to restricted stock for each of the years ended December 31, 2015, 2014 and 2013 was as follows:
Year Ended December 31
Nonvested, January 1
Granted shares
Vested shares
Forfeited shares
Nonvested, December 31
2014
2015
2013
14,309 17,245 15,425
1,820
2,936
14,309 14,309 17,245
The Company expenses the fair value of all-share based compensation over the requisite service period of five years
commencing at grant date. The fair value of restricted stock is expensed on a straight-line basis. Restricted stock granted
to officers cliff vest after five years. The Company classifies share-based compensation for employees within “salaries
and employee benefits expense” on the Consolidated Statements of Income and Comprehensive Income.
The Company recognized $69, $70 and $25 of compensation expense for stock awards granted in the years ended
December 31, 2014 and 2013, respectively. As of December 31, 2015, the Company had $108 of unrecognized
compensation expense associated with restricted stock awards.
15. Employee benefit plans:
The Company had separate Employee Stock Ownership Plans (“ESOP”) and Retirement Profit Sharing 401(k) Plans for
Penn Security Bank and Trust and Peoples Neighborhood Bank prior to 2014. The plans were merged at year end 2014
into the Peoples Security Bank and Trust Employee Stock Ownership Plan and the Peoples Security Bank and Trust
Retirement Profit Sharing Plan. The Company also maintains Supplemental Executive Retirement Plans (“SERP”), an
Employees’ Pension Plan, which is currently frozen, and a Postretirement Plan Life Insurance plan which was curtailed
in 2013.
Under the Peoples Security Bank and Trust Company ESOP, amounts voted by the Company’s Board of Directors are
paid into the ESOP and each employee is credited with a share in proportion to their annual compensation. All
contributions to the ESOP are invested in or will be invested primarily in Company stock. Distribution of a participant’s
ESOP account occurs upon retirement, death or termination in accordance with the plan provisions.
Under the Peoples Security Bank and Trust Company Retirement Profit Sharing Plan, amounts approved by the Board of
Directors have been paid into a fund and each employee was credited with a share in proportion to their annual
compensation. Upon retirement, death or termination, each employee is paid the total amount of their credits in the fund
in one of a number of optional ways in accordance with the plan provisions. Eligible employees may elect deferrals of up
to the maximum amounts permitted by law.
At December 31, 2013, the Penn Security Bank and Trust Company ESOP held 104,964 shares of the Company’s stock,
all of which were allocated to specific participant accounts. These shares were treated the same for dividend purposes
and earnings per share calculations as are any other outstanding shares of the Company’s stock. The Company
contributed $218 to the ESOP plan during the year ended December 31, 2013.
The Penn Security Bank and Trust Company Retirement Profit Sharing Plan’s contributions included a Safe Harbor
contribution of $310 during the year ended December 31, 2013 and a discretionary match of $234 during the year ended
December 31, 2013, equal to one-half of employee deferrals, up to a maximum match of 3%.
Peoples Neighborhood Bank had an Employee Stock Ownership and Profit-Sharing Plan (“Plan”) with 401(k)
provisions. The Plan was for the benefit of all employees who met the eligibility requirements set forth in the Plan. The
amount of contributions to the Plan, including 401(k) matching contributions, was at the discretion of the Board of
Directors. Company contributions to the employee stock ownership plan were allocated to participant accounts based on
their percentage of total compensation for the Plan year. At December 31, 2013, 263,559 shares of the Company’s
common stock were held in the Plan. In the event a terminated Plan participant desired to sell his or her shares of the
Company’s stock, or for certain employees who elected to diversify their account balances, the Company was required to
-110-
purchase the shares from the participant at their fair market value. There was no expense associated with the plan during
2015 and 2014.
The Company contributed $144 and $294 to the Peoples Security Bank and Trust Company Employee Stock Ownership
Plan in 2015 and 2014. In addition, the Company contribution of $778 and $872 to the Peoples Security Bank and Trust
Company Retirement Profit Sharing Plan in 2015 and 2014, comprised of a Safe Harbor contribution of $430 and $464
and a discretionary match of $348 and $408.
Peoples Security Bank and Trust Company established a Supplemental Executive Defined Contribution Plan to replace
401(k) plan benefits lost due to compensation limits imposed on qualified plans by Federal tax law. The annual benefit is
a maximum of 6% of the executive compensation in excess of Federal limits. The total liability associated with this plan
was $63 and $48 at December 31, 2015 and 2014, respectively. The expense associated with the plan was $15, $5 and $7
for 2015, 2014 and 2013 respectively.
The Company has SERPs for the benefit of certain officers of the Company. At December 31, 2015 and 2014, other
liabilities include $ 1,244 and $ 1,167 accrued under the Plans. Compensation expense includes approximately $88, $80,
and $164 relating to these SERPS for the years ended December 31, 2015, 2014 and 2013, respectively.
Under the Penn Security Bank and Trust Company Employees’ Pension Plan, currently under curtailment, amounts
computed on an actuarial basis were being paid by the Company into a trust fund. The plan provided for fixed benefits
payable for life upon retirement at the age of 65, based on length of service and compensation levels as defined in the
plan. As of June 22, 2008 no further benefits are being accrued in this plan. Plan assets of the trust fund are invested and
administered by the Trust Department of Peoples Security Bank and Trust Company.
The Postretirement Life Insurance Plan was an unfunded, non-vesting defined benefit plan for employees of Penn
Security Bank and Trust Company hired after July 1, 1995; which provided postretirement life insurance benefit of
$50,000 at retirement, then decreasing to $5,000 at age 75. Employees hired prior to July 1, 1995 were entitled to three
times their salary at retirement. During 2013 the company entered into an agreement with an insurance company to
transfer all risk and obligation for benefits payable as to the current retiree group in exchange for a one time fixed
payment, additionally the company eliminated retiree life insurance for current employees.
Information related to the pension and postretirement life insurance plans is as follows:
December 31
Change in benefit obligation:
Benefit obligation, beginning
Interest cost
Change in experience loss (gain)
Change in assumptions loss (gain)
Benefits paid
Benefit obligation, ending
Change in plan assets:
Fair value of plan assets, beginning
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, ending
$
Funded status at end of year
$
Pension Benefits
2015
2014
17,869 $
696
(41)
(367)
(777)
17,380
12,839
29
240
(777)
12,331
(5,049) $
14,211
678
(250)
3,944
(714)
17,869
12,417
895
241
(714)
12,839
(5,030)
The Society of Actuaries released new mortality tables in 2015 and 2014 which the Company utilized in its pension plan
remeasurements at December 31, 2015 and 2014. The change in mortality assumption resulted in a decrease to the
pension plan’s accumulated benefit obligation of $352 in 2015 and an increase of $2,138 in 2014.
-111-
Amounts recognized in the balance sheet are as follows:
December 31
Pension Benefits
2015
2014
Liabilities
Amounts recognized in the accumulated other comprehensive loss consist of:
Net actuarial gain
Deferred taxes
$
5,049 $
5,030
(7,863)
2,752
(7,567)
2,648
Net amount recognized
$
(5,111) $
(4,919)
The accumulated benefit obligation for the defined benefit pension plan was $17,380 and $17,869 at December 31, 2015
and 2014, respectively.
Components of net periodic pension expense (income) and other amounts recognized in other comprehensive income are
as follows:
Years Ended December 31,
Net periodic pension expense (income):
Interest cost
Expected return on plan assets
Amortization of unrecognized net loss
Net periodic pension expense (income):
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss):
Net loss (gain)
Deferred tax
Total recognized in other comprehensive income
$
2015
Pension Benefits
2014
696 $
(931)
198
(37)
678 $
(910)
92
(140)
296
(104)
192
3,684
(1,289)
2,395
2013
646
(825)
180
1
(2,369)
805
(1,564)
Total recognized in net period pension cost and other
comprehensive income
$
155 $
2,255 $
(1,563)
Year Ended December 31,
Components of net periodic pension cost:
Service cost
Interest cost
Amortization of unrecognized net gain
Net periodic other benefit cost
Changes in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)
Deferred tax
Total recognized in other comprehensive income
$
$
Postretirement Life
Insurance Benefits
2015 2014
2013
$
$
$
35
111
96
242
(1,273)
620
(653)
(411)
Total recognized in net period pension cost and other comprehensive income
$
$
$
The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive
loss into net periodic benefit cost over the next fiscal year is $219.
-112-
Weighted-average assumptions used to determine benefit obligations and related expenses were as follows:
December 31,
Discount rate:
Obligation
Expense
Expected long-term return on plan assets
Pension Benefits
2014
2015
4.00 %
4.00
7.50 %
4.00 %
5.00
7.50 %
2013
5.00 %
4.25
7.50 %
The expected long-term return on plan assets was determined using average historical returns of the Company’s plan
assets.
The Company’s pension plan weighted-average asset allocations at December 31, 2015 and 2014, by asset category are
as follows:
December 31,
Asset Category:
Cash and cash equivalents
Equity securities
Corporate bonds
U.S. Government securities
2015
2014
5.9 %
57.0
23.0
14.1
100.0 %
2.4 %
59.3
14.9
23.4
100.0 %
Fair Value Measurement of pension plan assets at December 31, 2015 and 2014 is as follows:
December 31, 2015
Cash
Equity securities:
U.S. large cap
International
Fixed income securities:
U.S. Treasuries
U.S. Government agencies
Corporate bonds
Total
December 31, 2014
Cash
Equity securities:
U.S. large cap
International
Fixed income securities:
U.S. Treasuries
U.S. Government agencies
Corporate bonds
Total
Quoted Prices in
Active Markets
Total
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
$
781 $
781
$
6,772
225
6,772
225
760
971
2,822
12,331 $
$
$
7,778 $
760
971
2,822
4,533 $
Quoted Prices in
Active Markets
Total
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
$
308 $
308
$
7,369
241
7,369
241
1,073
1,931
1,917
12,839 $
$
$
7,918 $
1,073
1,931
1,917
4,921 $
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The Company investment policies and strategies with respect to the pension plan include: (i) the Trust and Investment
Division’s equity philosophy is Large-Cap Core with a value bias. We invest in individual high-grade common stocks
that are selected from our approved list; (ii) diversification is maintained by having no more than 20% in any industry
sector and no individual equity representing more than 10% of the portfolio; and (iii) the fixed income style is
conservative but also responsive to the various needs of our individual clients. Fixed income securities consist of U.S.
Government Agencies or corporate bonds rated “A” or better. The Company targets the following allocation percentages:
(i) cash equivalents 10%; (ii) fixed income 40% ; and (iii) equities 50%.
There is no Company stock included in equity securities at December 31, 2015 or 2014. The Company has not
determined the amount of the expected contribution to the Employees’ Pension Plan for 2016.
The following benefit payments are expected to be paid in the next five years and in the aggregate for the five years
thereafter:
2016
2017
2018
2019
2020
Thereafter
16. Income taxes:
Pension Benefits
791
$
801
840
836
878
4,776
$
The current and deferred amounts of the provision for income taxes expense (benefit) for each of the years ended
December 31, 2015, 2014 and 2013 are summarized as follows:
Year Ended December 31
Current
Deferred
$
$
2015
5,362 $
(841)
4,521 $
2014
4,313 $
1,146
5,459 $
2013
1,628
(1,143)
485
The components of the net deferred tax asset at December 31, 2015 and 2014 are summarized as follows:
December 31
Deferred tax assets:
Allowance for loan losses
Defined benefit plan
Deferred compensation
Capital loss carry forward
Other
Total
Deferred tax liabilities:
$
Premises and equipment, net
Merger related accounting
Investment securities available-for-sale
Other
Total
Net deferred tax asset
$
2015
2014
4,541 $
2,752
595
244
440
8,572
771
2,379
1,607
530
5,287
3,285 $
3,618
2,648
529
244
259
7,298
912
2,131
2,202
324
5,569
1,729
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Management believes that future taxable income will be sufficient to utilize deferred tax assets. Core earnings of the
Company have remained strong and will continue to support the recognition of the deferred tax asset based on future
growth projections.
A reconciliation between the amount of the effective income tax expense and the income tax expense that would have
been provided at the federal statutory rate of 35.0 percent for the years ended December 31, 2015 and 2014 and 34.0
percent for the year ended December 31, 2013 and is summarized as follows:
Year Ended December 31
2015
2014
2013
Federal income tax at statutory rate
Tax exempt interest
Bank owned life insurance income
Disallowed merger costs
Residential housing program tax credits
Other, net
Total
$
$
7,785 $
(2,008)
(268)
(1,115)
127
4,521 $
8,088 $
(1,938)
(272)
(439)
20
5,459 $
2,110
(1,428)
(329)
266
(134)
485
17. Parent Company financial statements:
CONDENSED BALANCE SHEETS
December 31
Assets:
Cash and cash equivalents
Investment in bank subsidiary
Due from subsidiaries
Total assets
Liabilities and Stockholders’ Equity:
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
2015
2014
$
$
$
$
4,119 $
242,765
2,063
248,947 $
179 $
248,768
248,947 $
4,183
240,225
2,619
247,027
248
246,779
247,027
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31
Income:
Dividends from subsidiaries
Other income
Total income
Expense:
Other expenses
Total expenses
Income before taxes and undistributed income
Income tax expense (benefit)
Income before undistributed income of subsidiaries
Equity in undistributed net income (loss) of subsidiaries
Net income
Comprehensive Income
$
$
$
-115-
2015
2014
2013
9,319 $
40
9,359
243
243
9,116
(70)
9,186
8,537
17,723 $
16,427 $
9,360 $
430
9,790
251
251
9,539
9,539
8,110
17,649 $
17,518 $
8,350
169
8,519
76
76
8,443
33
8,410
(2,689)
5,721
5,313
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
Cash flows from operating activities:
Net income
Adjustments:
2015
2014
2013
$
17,723 $
17,649 $
5,721
Net realized gains on sales of securities
Undistributed net income of subsidiaries
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Stock based compensation
Deferred income tax expense
Increase in due from subsidiaries
Net cash provided by operating
activities
Cash flows from investing activities:
Proceeds from sale of available-for-sale
securities
Net cash provided by investing
activities
Cash flows from financing activities:
Redemption of common stock
Retirement of stock options
Reissuance of treasury stock
Purchase of treasury stock
Cash dividends paid
Net cash used in financing activities
(Decrease) increase in cash
Cash at beginning of year
Cash at end of year
18. Regulatory matters:
$
(8,537)
5,257
(69)
69
(375)
(8,110)
1,182
(511)
70
14,443
9,905
722
722
(109)
(83)
21
(70)
(9,360)
(9,601)
1,026
3,157
4,183 $
(5,188)
(9,319)
(14,507)
(64)
4,183
4,119 $
(103)
2,689
(1,733)
641
25
1
(1,611)
5,630
253
253
(5,511)
(5,511)
372
2,785
3,157
Dividends are paid by the Company from its assets, which are mainly provided by dividends from Peoples Bank. Under
the Pennsylvania Business Corporation Law of 1988, as amended, the Company may not pay a dividend if, after
payment, either the Company could not pay its debts as they become due in the usual course of business, or the
Company’s total assets would be less than its total liabilities. The determination of total assets and liabilities may be
based upon: (i) financial statements prepared on the basis of GAAP; (ii) financial statements that are prepared on the
basis of other accounting practices and principles that are reasonable under the circumstances; or (iii) a fair valuation or
other method that is reasonable under the circumstances. In addition, the Federal Reserve Board has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal
Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which
expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent
that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings
retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal
Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial
problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board
may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified
as “undercapitalized.”
In addition, under the Pennsylvania Banking Code of 1965, as amended, Peoples Bank may only declare and pay
dividends out of accumulated net earnings, including accumulated net earnings acquired as a result of a merger within
seven years. Further, Peoples Bank may not declare or pay any dividend unless Peoples Bank’s surplus would not be
reduced by the payment of the dividend. Pennsylvania law requires that each year Peoples Bank set aside as surplus, a
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sum equal to not less than 10 percent of its net earnings to maintain the surplus funds equal 100 percent of our capital
stock. Under federal law and FDIC regulations, an insured bank may not pay dividends if doing so would make it
undercapitalized within the meaning of the prompt corrective action law or if in default of its deposit insurance fund
assessment.
Although subject to the aforementioned regulatory restrictions, the Company’s consolidated retained earnings at
December 31, 2015 and 2014 were not restricted under any borrowing agreement as to payment of dividends or
reacquisition of common stock.
The Company has paid cash dividends since its formation as a bank holding company in 1986. It is the present intention
of the Board of Directors to continue this dividend payment policy, however, further dividends must necessarily depend
upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of
Directors considers payment of dividends. The Penseco merger agreement contemplates that, unless 80 percent of our
Board of Directors determines otherwise, the Company 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 the Company and Peoples
Bank remain “well-capitalized” in accordance with applicable regulatory guidelines.
The amount of funds available for transfer from Peoples Bank to the Company in the form of loans and other extensions
of credit is also limited. Under Federal Regulation, transfers to any one affiliate are limited to 10.0 percent of capital and
surplus. At December 31, 2015, the maximum amount available for transfer from Peoples Bank to the Company in the
form of loans amounted to $19,234. At December 31, 2015 and 2014, there were no loans outstanding, nor were any
advances made during 2015 and 2014.
The Company and Peoples Bank are subject to certain regulatory capital requirements administered by the federal
banking agencies, which are defined in Section 38 of the Federal Deposit Insurance Corporation Improvement Act of
1991 (“FDICIA”). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Peoples
Bank’s consolidated financial statements. In the event an institution is deemed to be undercapitalized by such standards,
FDICIA prescribes an increasing amount of regulatory intervention, including the required institution of a capital
restoration plan and restrictions on the growth of assets, branches or lines of business. Further restrictions are applied to
the significantly or critically undercapitalized institutions including restrictions on interest payable on accounts,
dismissal of management and appointment of a receiver. For well capitalized institutions, FDICIA provides authority for
regulatory intervention when the institution is deemed to be engaging in unsafe and unsound practices or receives a less
than satisfactory examination report rating. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Peoples Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding
companies.
New risk-based capital rules became effective January 1, 2015 requiring that banks and holding companies maintain a
"capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio." The minimum capital ratio is
equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer will be
phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for
2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital
conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
Peoples Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action at
December 31, 2015 and 2014, based on the most recent notification from the Federal Deposit Insurance Corporation. To
be categorized as well capitalized, Peoples Bank must maintain certain minimum Tier I risk-based, total risk-based and
Tier I Leverage ratios as set forth in the following tables. The Tier I Leverage ratio is defined as Tier I capital to total
average assets less intangible assets. There are no conditions or events since the most recent notification that
management believes have changed Peoples Bank’s category.
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The Company and Peoples Bank’s actual capital ratios at December 31, 2015 and 2014, and the minimum ratios required
for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows:
Actual
Minimum For Capital
Adequacy Purposes
Minimum to be Well
Capitalized under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
185,365
179,362
13.52 % $
13.11
61,675
61,583
4.50 %
$
4.50
88,954
6.50 %
185,365
179,362
13.52
13.11
82,233
82,111
198,340
192,337
14.47
14.05
109,644
109,481
6.00
6.00
8.00
8.00
109,481
8.00
136,852
10.00
December 31, 2015
Common equity Tier
1 capital to risk-
weighted assets:
Consolidated
Peoples Bank
Tier 1 capital to risk-
weighted assets:
Consolidated
Peoples Bank
Total capital to risk-
weighted assets:
Consolidated
Peoples Bank
Tier 1 capital to
average assets:
Consolidated
Peoples Bank
$
185,365
179,362
10.80
10.48 % $
68,638
68,474
4.00
4.00 % $
85,592
5.00 %
.
December 31, 2014
Tier 1 capital to risk-
weighted assets:
Consolidated
Peoples Bank
Total capital to risk-
weighted assets:
Consolidated
Peoples Bank
Tier 1 capital to
average assets:
Actual
Minimum For Capital
Adequacy Purposes
Minimum to be Well
Capitalized under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
178,061
171,984
14.75 % $
14.28
48,276
48,165
4.00 %
$
4.00
72,247
6.00 %
188,457
182,380
15.61
15.15
96,552
96,330
8.00
8.00
120,412
10.00
Consolidated
Peoples Bank
178,061
171,984
$
10.76
10.42 % $
66,168
65,993
4.00
4.00 % $
82,492
5.00 %
19. Contingencies:
Neither the Company nor any of its property is subject to any material legal proceedings. Management, after consultation
with legal counsel, does not anticipate that the ultimate liability, if any, arising out of pending and threatened lawsuits
will have a material effect on the operating results or financial position of the Company.
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20. Comprehensive Income:
The components of accumulated other comprehensive income included in stockholders’ equity at December 31, 2015
and 2014 are as follows:
December 31
Net unrealized gain on investment securities available-for-sale
Income tax expense (benefit)
Net of income taxes
Benefit plan adjustments
Income tax expense (benefit)
Net of income taxes
Accumulated other comprehensive loss
$
$
2015
4,593 $
1,607
2,986
(7,863)
(2,752)
(5,111)
(2,125) $
2014
6,292
2,202
4,090
(7,567)
(2,648)
(4,919)
(829)
Other comprehensive income (loss) and related tax effects for the years ended December 31, 2015, 2014 and 2013 are as
follows:
Year Ended December 31,
Unrealized gain (loss) on investment securities available-for-sale
Net gain on the sale of investment securities available-for-sale(1)
Benefit plans:
Amortization of actuarial loss (gain)(2)
Actuarial (loss) gain
Net change in benefit plan liabilities
Other comprehensive income (loss) gain before taxes
Income tax expense (benefit)
Other comprehensive income (loss)
2015
(510) $
$
(1,189)
2014
4,343 $
(861)
2013
(3,882)
(163)
198
(494)
(296)
(1,995)
(699)
(1,296) $
92
(3,776)
(3,684)
(202)
(71)
(131) $
276
3,366
3,642
(403)
5
(408)
$
(1) Represents amounts reclassified out of accumulated comprehensive income and included in gains on sale of
investment securities on the consolidated statements of income.
(2) Represents amounts reclassified out of accumulated comprehensive income and included in the computation of net
periodic pension expense. Refer to Note 15 included in these consolidated financial statements.
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21. Summary of quarterly financial information (unaudited):
Quarter Ended
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per share data:
Net income
Cash dividends declared
Average common shares outstanding
Quarter Ended
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Per share data:
Net income (loss)
Cash dividends declared
Average common shares outstanding
March 31
$
2015
June 30
Sept. 30
Dec. 31
15,638 $
1,448
14,190
750
13,440
3,626
11,511
5,555
1,124
4,431 $
15,598 $
1,485
14,113
900
13,213
4,015
11,706
5,522
1,113
4,409 $
16,177
1,569
14,608
1,300
13,308
3,769
12,468
4,609
770
3,839
15,628 $
1,535
14,093
750
13,343
4,309
11,094
6,558
1,514
5,044 $
0.67 $
0.31 $
0.59 $
0.31 $
7,548,358 7,546,198
7,536,824
0.58 $
0.31 $
0.52
0.31
7,435,440
March 31
$
16,432 $
2014
June 30
Sept. 30
15,482 $
1,727
13,755
1,201
12,554
3,778
12,239
4,093
762
3,331 $
16,192 $
1,642
14,550
666
13,884
4,380
11,084
7,180
1,944
5,236 $
Dec. 31
15,850
1,586
14,264
800
13,464
3,533
11,323
5,674
1,290
4,384
1,687
14,745
857
13,888
3,560
11,287
6,161
1,463
4,698 $
$
$
$
$
$
$
0.62 $
0.31 $
0.44 $
0.31 $
0.70 $
0.31 $
0.58
0.31
7,548,358
7,550,253
7,548,358
7,548,358
-120-
Item 9.
None.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Internal Controls
At December 31, 2015, the end of the period covered by this Annual Report on Form 10-K, the Chief Executive Officer
(“CEO”) and Chief Financial Officer (“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 CEO and CFO
concluded that the disclosure controls and procedures, at December 31, 2015, 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
reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the
CEO and CFO to allow timely decisions regarding required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for the preparation and fair presentation of the accompanying consolidated balance sheets of Peoples
Financial Services Corp. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related
consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each
of the years in the three-year period ended December 31, 2015, in accordance with accounting principles generally
accepted in the United States. This responsibility includes: establishing, implementing and maintaining adequate internal
controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates
that are reasonable under the circumstances. We are also responsible for compliance with the laws and regulations
relating to safety and soundness that are designated by the Federal Deposit Insurance Corporation, Board of Governors
of the Federal Reserve System and the Pennsylvania Department of Banking.
Our internal controls are designed to provide reasonable assurance that assets are safeguarded and transactions are
initiated, executed, recorded and reported in accordance with our intentions and authorizations and to comply with
applicable laws and regulations. The internal control system includes an organizational structure that provides
appropriate delegation of authority and segregation of duties, established policies and procedures and comprehensive
internal audit and loan review programs. To enhance the reliability of internal controls, we recruit and train highly
qualified personnel and maintain sound risk management practices. The internal control system is maintained through a
monitoring process that includes a program of internal audits.
Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal control
over financial reporting at the end of each fiscal year and report, based on that assessment, whether the Company’s
internal control over financial reporting is effective. Our assessment includes controls over initiating, recording,
processing and reconciling account balances, classes of transactions and disclosure and related assertions included in the
financial statements. Our assessment also includes controls related to the initiation and processing of non-routine and
non-systematic transactions, to the selection and application of appropriate accounting policies and to the prevention,
identification and detection of fraud.
There are inherent limitations in any internal control system, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation.
Furthermore, due to changes in conditions, the effectiveness of internal controls may vary over time. Our internal auditor
reviews, evaluates and makes recommendations on policies and procedures, which serves as an integral, but independent,
component of our internal control.
Our financial reporting and internal controls are under the general oversight of our board of directors, acting through its
audit committee. The audit committee is composed entirely of independent directors. The independent registered public
accounting firm and the internal auditor have direct and unrestricted access to the audit committee at all times. The audit
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committee meets periodically with us, the internal auditor and the independent registered public accounting firm to
determine that each is fulfilling its responsibilities and to support actions to identify, measure and control risks and
augment internal controls.
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control
over financial reporting for the Company. Our management, including our CEO and CFO, assessed the effectiveness of
our internal controls over financial reporting as of December 31, 2015 using the criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
These criteria are in the areas of control environment, risk assessment, control activities, information and
communication, and monitoring. Our management’s assessment included extensive documenting, evaluating and testing
the design and operating effectiveness of our internal control over financial reporting.
Based on its assessment, management believes that our internal control over financial reporting was effective as of
December 31, 2015.
BDO USA, LLP, the independent registered public accounting firm that audited our consolidated financial statements in
accordance with standards of the Public Company Accounting Oversight Board (United States), has issued an attestation
report on the effectiveness of our internal control over financial reporting as of December 31, 2015. The report, which
expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2015, is included in this Item 9A under the heading “Report of Independent Registered Public Accounting
Firm”.
/s/ Craig W. Best
Craig W. Best
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Scott A. Seasock
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 11, 2016
-122-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Peoples Financial Services Corp.
Scranton, Pennsylvania
We have audited Peoples Financial Services Corp. and subsidiaries’ (the “Corporation”) internal control over financial
reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
“Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the
Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Peoples Financial Services Corp. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Peoples Financial Services Corp. and subsidiaries as of December 31, 2015
and 2014, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity
and cash flows for each of three years in the period ended December 31, 2015 and our report dated March 11, 2016
expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 11, 2016
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Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended
December 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We incorporate the information required by this Item 10 by reference to the definitive proxy statement for our 2016
annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation.
We incorporate the information required by this Item 11 by reference to the definitive proxy statement for our 2016
annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We incorporate the information required by this Item 12 by reference to the definitive proxy statement for our 2016
annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We incorporate the information required by this Item 13 by reference to the definitive proxy statement for our 2016
annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
Item 14. Principal Accounting Fees and Services.
We incorporate the information required by this Item 14 by reference to the definitive proxy statement for our 2016
annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
All consolidated financial statements and financial statement schedules required to be filed by Form 10-K or by
Regulation S-X that are applicable to us have been presented in the consolidated financial statements and notes thereto in
Part II, Item 8, or elsewhere in this annual report, where appropriate. The listing of exhibits is set forth on the Exhibit
Index beginning on page E-1 and is incorporated in this Item 15 by reference.
-124-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
/s/ Craig W. Best
Craig W. Best
President and Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Scott A. Seasock
Scott A. Seasock
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints each of Craig W. Best and Scott A. Seasock as his or her attorney-in-fact, with the full power of substitution,
for him or her in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ William E. Aubrey II
William E. Aubrey II
/s/ Craig W. Best
Craig W. Best
/s/ Scott A. Seasock
Scott A. Seasock
/s/ Joseph G. Cesare
Joseph G. Cesare
/s/ James G. Keisling
James G. Keisling
Director and Chairman of the Board
March 11, 2016
Director, President and
Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Director
Director
-125-
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
Date
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
March 11, 2016
Name
/s/ P. Frank Kozik
P. Frank Kozik
/s/ Ronald G. Kukuchka
Ronald G. Kukuchka
/s/ Richard S. Lochen, Jr.
Richard S. Lochen, Jr.
/s/ Robert Naismith
Robert Naismith
/s/ James B. Nicholas
James B. Nicholas
/s/ Emily Perry
Emily Perry
/s/ George H. Stover, Jr.
George H. Stover, Jr.
/s/ Steven L. Weinberger
Steven L. Weinberger
/s/ Earle A. Wootton
Earle A. Wootton
/s/ Joseph T. Wright, Jr.
Joseph T. Wright, Jr.
Title
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
-126-
EXHIBIT INDEX
Exhibit No.
2.1
Description of Exhibit
Agreement and Plan of Merger between Peoples Financial Services Corp. and Penseco Financial
Services Corporation dated as of June 28, 2013 (incorporated by reference to Annex A to
registrant’s prospectus, dated October 10, 2013, filed on October 10, 2013 pursuant to Rule 424(b)
under the Securities Act in connection with registrant’s registration statement on Form S-4
originally filed August 13, 2013, as amended (File No. 333-190587)) Registrant agrees to furnish
copies of Schedules to the Securities and Exchange Commission upon request.
Amendment No. 1 to Agreement and Plan of Merger between Peoples Financial Services Corp. and
Penseco Financial Services Corporation dated as of September 17, 2013 (incorporated by reference
to Annex A to registrant’s prospectus, dated October 10, 2013, filed on October 10, 2013 pursuant
to Rule 424(b) under the Securities Act in connection with registrant’s registration statement on
Form S-4 originally filed August 13, 2013, as amended (File No. 333-190587))
Peoples Financial Services Corp. Articles of Incorporation, as amended (incorporated by reference
to Exhibit 3.1 to the registrant’s Form 10-K filed with the Commission on March 17, 2014).
Amended and Restated Bylaws of Peoples Financial Services Corp. (incorporated by reference to
Exhibit 3.1 to the registrant’s Form 8-K filed with the Commission on December 2, 2013)
The Registrant will furnish to the SEC upon request copies of the instruments defining the rights of
the Federal Home Loan Bank of Pittsburgh with respect to the Registrant’s long-term debt.
Penseco Financial Services Corporation 2008 Long Term Incentive Plan (incorporated by reference
to Annex A of Penseco’s proxy statement on Schedule 14A filed with the SEC on March 17,
2008)*
Form of Restricted Stock or Restricted Stock Unit Award Agreement (incorporated by reference to
Exhibit 10.2 to Penseco’s registration statement on Form S-8 (File No. 333-166886) filed with the
SEC on May 17, 2010)*
Form of Stock Option and/or Appreciation Right Award Agreement (incorporated by reference to
Exhibit 10.3 to Penseco’s registration statement on Form S-8 (File No. 333-166886) filed with the
SEC on May 17, 2010)*
Form of Performance Award Agreement (incorporated by reference to Exhibit 10.4 to Penseco’s
registration statement on Form S-8 (File No. 333-166886) filed with the SEC on May 17, 2010)*
Peoples Neighborhood Bank Amended and Restated Employee Stock Ownership Plan
(incorporated by reference to Exhibit 10.1 to the registrant’s Form 10-Q filed with the Commission
on August 14, 1998)*
Penn Security Bank & Trust Company Employee Stock Ownership Plan, amended and restated as
of January 1, 2010 (incorporated by reference to Exhibit 10.8 to Penseco’s annual report on
Form 10-K filed with the SEC on March 14, 2011)*
Peoples Neighborhood Bank’s Executive Cash Bonus Plan (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to registrant’s registration statement on Form S-4 (File
No. 333-190587) filed with the SEC on September 20, 2013)*
Penn Security Bank & Trust Company Executive Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 to the Penseco’s annual report on Form 10-K filed with the SEC on
March 14, 2011)*
Employment Agreement, dated January 3, 2011, among Penseco Financial Services Corporation,
Penn Security Bank & Trust, and Craig W. Best (incorporated by reference to Exhibit 10.1 of
Penseco’s current report on Form 8-K filed with the SEC on January 7, 2011)*
First Amendment to Employment Agreement dated December 31, 2015, by and among Peoples
Financial Services Corp., Peoples Security Bank and Trust Company and Craig W. Best
(incorporated by reference to Exhibit 10.1 of Penseco’s current report on Form 8-K filed with the
SEC on January 6, 2016)*
Amended and Restated Deferred Compensation Plan #2, dated April 22, 2014, by and between
Peoples Security Bank and Trust Company and Craig W. Best (incorporated by reference to
Exhibit 10.1 to the registrant’s Form 8-K filed with the Commission on April 28, 2014)*
2.2
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
E-1
Exhibit No.
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
21.1
24.1
31.1
31.2
32.1
Description of Exhibit
First Amendment to Amended and Restated Deferred Compensation Plan #2, dated August 29,
2015, by and between Peoples Security Bank and Trust Company and Craig Best (incorporated by
reference to Exhibit 10.1 to the registrant’s Form 8-K filed with the Commission on September 3,
2015)*
Penn Security Bank & Trust Company Excess Benefit Plan, amended and restated December 31,
2008 (incorporated by reference to Exhibit 10.9 to the Penseco’s annual report on Form 10-K filed
with the SEC on March 14, 2011)*
Employment Agreement with Scott A. Seasock (incorporated by reference to Exhibit 10.16 to the
registrant’s Form 8-K filed with the Commission on January 18, 2011)*
Supplemental Executive Retirement Plan by and between Scott A. Seasock and Peoples Bank,
dated May 8, 2012 (incorporated by reference to Exhibit 10.21 to the registrant’s Form 8-K filed
with the Commission on May 11, 2012)*
Termination Agreement with Debra E. Dissinger (incorporated by reference to Exhibit 10.4 to the
registrant’s Form 10-25G filed with the Commission on March 4, 1998)*
Supplemental Executive Retirement Plan with Debra E. Dissinger (incorporated by reference to
Exhibit 10.6 to the registrant’s Form 10-K filed with the Commission on March 15, 2005)*
Amendment to Supplemental Executive Retirement Plan with Debra E. Dissinger (incorporated by
reference to Exhibit 10.9 to the registrant’s Form 10-K filed with the Commission on March 15,
2006)*
Employment Agreement dated as of December 1, 2013, by and among Peoples, Peoples Bank and
Joseph M. Ferretti (incorporated by reference to Exhibit 10.2 to the registrant’s current report on
Form 8-K filed with the SEC on December 2, 2013)*
Supplemental Executive Retirement Plan Agreement, dated April 22, 2014, by and among Peoples
Security Bank and Trust Company, Peoples Financial Services Corp. and Joseph M. Ferretti
(incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K filed with the Commission
on April 28, 2014)*
Employment Agreement, dated May 30, 2012, among Penseco Financial Services Corporation,
Penn Security Bank and Trust Company, and Thomas P. Tulaney (incorporated by reference to
Exhibit 10.1 of the Registrant’s quarterly report on Form 10-Q filed with the SEC on August 9,
2012)*
Supplemental Executive Retirement Plan Agreement, dated May 31, 2012, by and among Penn
Security Bank and Trust Company, Penseco Financial Services Corporation, and Thomas P.
Tulaney (incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on
Form 10-Q filed with the SEC on August 9, 2012)*
Employment Agreement, dated as of August 27, 2014, by and between Peoples Bank and Neal D.
Koplin (incorporated by reference to Exhibit 10.32 to the registrant’s Form 10-K filed with the
Commission on March 16, 2015)*
Employment Agreement dated as of February 4, 2015 between Peoples Security Bank and Trust
Company and Bradley S. Grubb (incorporated by reference to Exhibit 10.1 to the Registrant’s
quarterly report on Form 10-Q filed with the SEC on May 8, 2015)*
Supplemental Director Retirement Plan for all Non-employee Directors (incorporated by reference
to Exhibit 10.7 to the registrant’s Form 10-K filed with the Commission on March 15, 2005) *
Amendment to Supplemental Director Retirement Plan for all Non-employee Directors
(incorporated by reference to Exhibit 10.10 to the registrant’s Form 10-K filed with the
Commission on March 15, 2006)*
Life Insurance Plan for all Non-employee Directors (incorporated by reference to Exhibit 10.21 to
the registrant’s Form 10-K filed with the Commission on March 15, 2012)*
List of Subsidiaries
Power of Attorney (Included as part of signature page)
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer of Registrant
Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer of Registrant
Section 1350 Certifications of the Principal Executive Officer and Principal Financial Officer of
Registrant
E-2
Exhibit No.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
Description of Exhibit
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
- Management contract or compensatory plan or arrangement
E-3