mission | vision | core values
MISSION
To succeed, we must be constantly aware of the roles played by
our stakeholders—our shareholders, our customers, our communities,
and our employees.
We will work together to:
• EXCEED customers’ expectations as we proactively help them
achieve their goals
• CREATE a dynamic environment that promotes life-long learning
and personal growth of employees
• HELP to make our communities better places to live and work
by being an important contributor of time, talent and resources
VISION
To become the premier financial services company in Northeastern
Pennsylvania as measured by quality, earnings and growth.
CORE VALUES
We believe that operating with a core set of values will be integral
to the success of Peoples Security Bank.
• INTEGRITY—it is our foundation, the basis of everything we do.
We strive to be professional, honest, trustworthy, confidential,
and respectful at all times
• EXCELLENCE—to do things better, exceeding expectations
• TEAMWORK—working together for a common good, engaging
our customers, coworkers, and partners
• EFFICIENT—we will strive to manage our expenses
FINANCIAL HIGHLIGHTS
PEOPLES FINANCIAL SERVICES CORP. | CONSOLIDATED SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Year Ended December 31
2018
2017
2016
2015
2014
Condensed statements of financial performance:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after the provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income tax expense
Net income
Condensed statements of financial position:
Investments securities
Net loans
Other assets
Total Assets
Deposits
Short-term borrowings
Long-term debt
Other liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Per share data:
Net income
Cash dividends declared
Stockholders' equity
Cash dividends 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 (based on period end balances):
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
$84,661
13,322
71,339
4,200
67,139
13,659
52,487
28,311
3,391
$24,920
$278,334
1,801,887
208,772
$2,288,993
$1,875,022
86,500
37,906
10,951
278,614
$2,288,993
$3.37
1.31
$37.66
38.87%
7,397,797
1.12%
9.21
12.14
10.03
3.59
99.55%
11.95%
13.10
1.17
0.53%
$74,242
8,698
65,544
4,800
60,744
17,186
51,293
26,637
8,180
$18,457
$281,822
1,674,105
213,104
$2,169,031
$1,719,018
123,675
49,734
11,628
264,976
$2,169,031
$2.50
1.26
$35.82
50.40%
7,395,837
0.90%
7.02
12.77
9.94
3.69
96.50%
11.85%
12.95
1.12
0.67%
$68,984
7,251
61,733
5,000
56,733
15,888
48,030
24,591
5,008
$19,583
$269,927
1,517,004
212,511
$1,999,442
$1,588,757
82,700
58,134
13,233
256,618
$1,999,442
$2.65
1.24
$34.71
46.79%
7,396,716
1.02%
7.64
13.36
10.16
3.77
95.81%
12.49%
13.51
1.04
0.90%
$63,041
6,037
57,004
3,700
53,304
15,719
46,779
22,244
4,521
$17,723
$297,044
1,327,890
194,124
$1,819,058
$1,455,810
38,325
60,354
15,801
248,768
$1,819,058
$2.36
1.24
$33.57
52.54%
7,516,451
1.02%
7.13
14.26
10.80
3.81
87.55%
13.52%
14.47
0.97
0.86%
$63,956
6,642
57,314
3,524
53,790
15,251
45,933
23,108
5,459
$17,649
$354,251
1,199,556
187,862
$1,741,669
$1,425,558
19,557
33,140
16,635
246,779
$1,741,669
$2.34
1.24
$32.69
53.03%
7,548,825
1.03%
7.29
14.12
10.76
3.86
84.13%
14.75%
15.61
0.85
0.85%
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 21.0 percent for 2018 and 35.0 percent for the years 2017, 2016, 2015, and 2014.
DEAR SHAREHOLDERS,
Last year we wrote to you about the optimistic
outlook the banking industry was feeling about
2018. At that time, the strong economy, tax
reform, the possibility of significant regulatory
reform and rising market interest rates provided
much promise for the banking industry’s perfor-
mance in 2018.
Craig W. Best
President & CEO
William E. Aubrey II
Chairman of the Board
The optimism felt at the beginning of 2018 was met with disappointment by year-end.
Tax reform and the reduction of the federal tax rate from 35% to 21% helped produce record
earnings for the banking industry. However, regulatory reform was slow in coming and although
some positive changes were created, the anticipated sweeping reform never materialized.
Market rates did rise but only on the short-end. Long-term rates remained flat and caused the
yield curve to flatten and at various times during the year, invert. The flattened yield curve put
pressure on banks’ net interest margins.
By the fourth quarter, the Federal Reserve’s corrective actions to slow inflation along with
the global economic slowdown and the uncertainty of the outcome of trade talks with China,
caused the economy to slow down. All these factors help contribute to the KBW NASDAQ Bank
Stock Index to decline almost 20%.
Financial Results
This past year, your company produced record earnings of $24.9 million or $3.37 per diluted
share. This was an increase of $6.4 million or $0.87 per diluted share over our 2017 earnings of
$18.5 million or $2.50 per diluted share. Our 2017 earnings were negatively impacted by a write
down of our deferred tax assets brought on by the 2017 Tax Reform Act. Our 2018 earnings
were greatly enhanced by the 2017 Tax Reform Act which reduced the federal income tax rate
from 35% to 21%.
Even without the positive impact of the tax reform, our pre-tax earnings increased $1.7
million or 6.3% over 2017 earnings. This year over year increase in pre-tax earnings was primarily
driven by growth in our net interest income after provision of $6.4 million or 10.5%. The improve-
ment of our net interest income was primarily a result of an increase in earning assets of $125.6
million or 6.4% increase from year-end 2017.
Our asset growth for 2018 was primarily driven by a $130.2 million or 7.7% increase in
total loans. Total deposits increased $156.0 million or 9.1% in 2018 with core deposits increas-
ing $106.0 million or 6.2%. Non-interest income declined $3.5 million or 20.5% in 2018 due
in part to a $2.3 million gain the company received in 2017 from the sale of our merchant
services business. Non-interest expenses increased $1.2 million or 2.3% in 2018 due primarily
to increases in our salaries and facilities that supported our continued expansion into the Lehigh
and the Greater Delaware Valleys.
Market Expansion
In 2018, we continued making significant investments in our market expansion strategies. In the
first quarter of 2018, we added two seasoned commercial lenders; one joined our team in King
of Prussia and the other joined our team in Bethlehem. In 2018, we added 3 additional credit
professionals to our credit team in our regional headquarters in Bethlehem. In the third quarter
of 2018, we added an additional small business lender in our King of Prussia Office and opened
a Loan Production Office in the Blue Mountain region of Schuylkill County.
Neal Koplin, our Regional President for our southern market, and his team continue to
build market share and expand our brand in one of the fastest growing markets in Pennsylvania.
Today, due to the efforts of Neal and his team, we have over 20% of our entire franchise in the
Lehigh and Greater Delaware Valleys.
Supporting Our Communities
Your company and our employees continue to be one of the largest charitable contributors to
Northeastern Pennsylvania. Our employees gave hundreds of hours of their time volunteering
for local non-profit organizations. This year your company and our employees achieved a record
level of contribution to the United Way organizations throughout our footprint. Our United
Way Campaign is led by Darlene Pehanick, our Human Resource Officer, Payroll and Benefits
Manager. Through her efforts and through the generosity of our employees, Peoples has con-
tributed over $350,000 to the United Way over the last ten years.
Our company also is a significant supporter of area high schools, universities, student
scholarships and financial literacy through our education improvement tax credit contributions.
This program is internally led by Joan Rotondaro and managed through the Commonwealth
Charitable Foundation. Over the last five years, we have contributed over $4.4 million to schools
and students in our area. We have also provided the EverFi Financial Literacy Programs to high
schools and students throughout our market. These programs help educate students on how
to manage their finances.
We strongly encourage you to read the financial section of this Annual Report for a more
detailed analysis of our results.
On behalf of our Directors, Officers and Employees, sincere appreciation is expressed to
our stockholders and customers for their continued support. The progress outlined herein is
the result of the dedicated and effective effort on the part of our Board of Directors, Officers
and Employees. We extend to our stockholders, customers and employees the gratitude of the
Board of Directors for your support and confidence.
Craig W. Best
President & CEO
William E. Aubrey II
Chairman of the Board
LEADERSHIP
BOARD OF DIRECTORS
William E. Aubrey II
Chairman
President & CEO
Gertrude Hawk Chocolates
Craig W. Best
President & CEO
Peoples Financial Services Corp.
Peoples Security Bank & Trust
Joseph G. Cesare, M.D.
Retired Orthopedic Surgeon
Former President
Scranton Orthopedic Specialists
James G. Keisling
Treasurer
Northeast Architectural
Products, Inc.
Ronald G. Kukuchka
President
Ace Robbins, Inc.
Richard S. Lochen, Jr.
Certified Public Accountant
Partner | Lochen & Chase PC
Robert W. Naismith, Ph.D.
Chairman
JuJaMa, Inc.
James B. Nicholas
President
D.G. Nicholas Co.
George H. Stover, Jr.
Real Estate Appraiser
Steven L. Weinberger
President
G. Weinberger Company
Joseph T. Wright, Jr., Esq
Attorney at Law | Partner
Wright & Reihner PC
EXECUTIVE
MANAGEMENT
Craig W. Best
President & CEO
Thomas P. Tulaney
Senior Executive Vice President
Chief Operating Officer
John R. Anderson III
Executive Vice President
Chief Financial Officer
Debra E. Adams
Executive Vice President
Chief Operations Officer
Secretary
Joseph M. Ferretti
Executive Vice President
Senior Lending Officer
Michael L. Jake
Executive Vice President
Chief Risk Officer
Timothy H. Kirtley
Executive Vice President
Chief Credit Officer
Neal D. Koplin
Executive Vice President
Lehigh Valley Region
President
Lynn M. Peters Thiel
Executive Vice President
Chief Retail Officer
OUR LOCATIONS
BROOME COUNTY | NY
Binghamton West Side
273 Main St, Binghamton, NY 13905
(607) 729-3832
Conklin
1026 Conklin Rd, Conklin, NY 13748
(607) 722-2114
LUZERNE COUNTY | PA
Duryea
304 Main St, Duryea, PA 18642
(570) 457-1120
Kingston
435 Wyoming Ave, Kingston, PA 18704
(570) 288-0128
LACKAWANNA COUNTY | PA
MONROE COUNTY | PA
Abington
1100 Northern Blvd, S Abington Twp, PA 18411
(570) 587-4898
Mount Pocono
1322 Pocono Blvd, Mount Pocono, PA 18344
(570) 839-8732
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 S 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
Airport Rd
2355 City Line Rd, Bethlehem, PA 18017
(610) 691-1202
Tilghman St
3920 W Tilghman St, Allentown, PA 18104
(610) 398-9680
MONTGOMERY COUNTY | PA
King of Prussia
610 Freedom Business Center Dr
Suite 105, King of Prussia, PA 19406
(610) 205-1880
NORTHAMPTON COUNTY | PA
Emrick Blvd
2151 Emrick Blvd, Bethlehem, PA 18020
(610) 317-4690
SCHUYLKILL COUNTY | PA
Blue Mountain
Business Lending Center
705 W Market St, Suite 8
Orwigsburg, PA 17961
(570) 968-4720
SUSQUEHANNA COUNTY | PA
Hallstead
25109 State Rt 11, Hallstead, PA 18822
(570) 879-2195
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
8178 State Rt 6, Meshoppen, PA 18630
(570) 833-5171
Nicholson
42–48 State St, Nicholson, PA 18446
(570) 942-2265
Tunkhannock
83 E Tioga St, Tunkhannock, PA 18657
(570) 836-2135
OFF-SITE ATMs
Geisinger Commonwealth
School of Medicine
525 Pine Street, 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 SECURITY BANK IS PROUD
TO SUPPORT LOCAL EDUCATION
During 2018, Peoples Security Bank & Trust donated over one million dollars as part of the Ed-
ucational Improvement Tax Credit (EITC) Program. The donations are administered through
Commonwealth Charitable Management and are primarily used to award scholarships and
grants to numerous schools, colleges and organizations within the bank’s primary market
area. During 2018, over 650 scholarships were issued to thirty (30) Pre-K and K-12 schools and
career technology schools. Grants were also awarded to nearly 30 organizations and school
districts in order to support Educational Improvement Projects. Additionally, Peoples Security
Bank funds the program costs of the EverFi Financial Literacy Program that is currently offered
to 20 local high schools.
PSBT WELLNESS PROGRAM
In 2018, Peoples Security Bank & Trust launched a wellness program
designed to aim all employees and their spouses toward total health
awareness. The voluntary program is offered through the Geisinger
Health Plan and managed by Adam P. Blannard, M.S. ACSM/NPAS-PAPHS
– Adam is indirectly employed as our Wellness Specialist. He maintains
an office at our corporate headquarters and works personally with all
employees on a regular basis.
This wellness program encourages all participants to complete a
personal health assessment, receive an annual physical and participate in
tobacco cessation coaching. Additional features of this program include:
company-wide fitness and weight-loss challenges, biometric screenings,
and health awareness seminars. In the first year, this program had a 77%
employee participation rate – 66% of those who fully participated qualified
for the health coverage incentive. As a result of the outstanding participa-
tion, we were honored to receive the 2018 Healthy Workplace Award
at the Greater Wilkes-Barre Chamber of Commerce Annual Dinner on
November 13, 2018. We are very pleased with our success, and we hope
to see increased participation and awareness screenings and better overall
health for our employees and their families during 2019.
MONTROSE NEWLY RENOVATED
STATE-OF-THE-ART OFFICE
On Monday, November 19, 2018 our newly renovated Montrose office located at 695 Grow
Avenue opened for business. These renovations have improved our visibility and presence
dramatically, allowing us to better serve our customers as well as provide an aesthetic
addition to our local community.
The new branch is spacious and bright with 2,500 square feet of upgraded features
including: semi-automatic handicap entry for easy access and a spacious open lobby
with expanded teller line, featuring an impressive full-length stock ticker overhead. Other
upgrades include floor-to-ceiling tinted windows for added security, a state-of-the-art
security system and private office space for our Branch Manager, Customer Service Officer,
Customer Service Representatives, Business Development Officer & Wealth Consultant.
Exterior improvements include a wraparound canopy providing easy access to the front
entrance while covering the ATM and Night Depository for protection from the elements.
Additionally, we have improved the traffic flow patterns, paved all points of entry, parking
and drive-up areas and beautified the exterior with surrounding landscape improvements.
For added convenience, we installed a digital LED message board featuring product infor-
mation, time and temperature.
Craig Best, President & CEO commented, “The Montrose area has been exceedingly
supportive of our company. The surrounding area has recently experienced tremendous
growth and we are excited to be part of this transition. We are fortunate to be a part of this
community and look forward to serving the needs of our customers and the community
from our new facility”.
CORPORATE INFORMATION
INDEPENDENT AUDITORS
Baker Tilly Virchow Krause, LLP
7535 Windsor Drive, Suite 300 | Allentown, PA 18195-1014
(610) 336-8180
GENERAL COUNSEL
Jerry Weinberger, Esq. | Jerry Weinberger P.C.
345 Wyoming Avenue | Suite 200 | Scranton, PA 18503
(570) 963-8880
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
West 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
Sandler O’Neill + Partners, L.P.
1251 Avenue of the Americas | 6th Floor | New York, NY 10020
(800) 635-6851
PRODUCTS AND SERVICES
Detailed information on our products and services offered
by Peoples Security Bank & Trust can be obtained by visiting
psbt.com or by calling (888) 868-3858 or (570) 346-7741.
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, 2018
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 18, 2019, 9:00am
Hilton Scranton & Conference Center
100 Adams Avenue | Scranton, PA 18503 | (570) 343-3000
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: astfinancial.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.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:2)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:3)TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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 (cid:3) No (cid:2)
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 (cid:3) No (cid:2)
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 (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 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 (cid:2) No (cid:3)
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. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
(cid:3)
Large accelerated filer
(cid:3)
Non-accelerated filer
Emerging growth company (cid:3)(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)(cid:4)
Accelerated filer
Smaller reporting company
(cid:2)
(cid:3)(cid:4)
(cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:3) No (cid:2)
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2018 was approximately $347,903,519 (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 28, 2019 was 7,399,054.
Portions of the registrant’s definitive proxy statement to be filed in connection with solicitation of proxies for its 2019 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
Peoples Financial Services Corp.
Form 10K
For the Year Ended December 31, 2018
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.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
SIGNATURES
-i-
Page
Number
1
14
24
24
24
24
24
27
28
64
65
121
121
123
123
123
123
123
123
123
123
127
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: 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; the ability to achieve the intended benefits of, or other risks associated with, business combinations; changes in
relevant accounting principles and guidelines; inability of third party service providers to perform; and the ability to
prevent, detect and respond to cyberattacks. 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.
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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.
Unless the context indicates otherwise, all references in this annual report to the “Peoples,” “Company,” “we,” “us” and
“our” refer to Peoples Financial Services Corp. and its subsidiaries. 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-seven
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.
Market Areas
Our principal market area consists of Bucks, Lackawanna, Lehigh, Luzerne, Monroe, Montgomery, Northampton,
Susquehanna, Wayne and Wyoming Counties in Pennsylvania and Broome County in New York. In addition, parts of
Bradford and Schuylkill Counties in Pennsylvania are also considered part of the market area.
Specifically, our market area is situated between:
(cid:2) Binghamton, Broome County, New York, located to the north; and
(cid:2) King of Prussia, Montgomery County, Pennsylvania, to the south.
Approximately half of our offices are located in and around Scranton, the largest city in Lackawanna County. Peoples
entered into the Lehigh County market during the fourth quarter of 2014 with the opening of a community banking
office. This market has a greater population than the other counties served, with Bethlehem being the second largest city
within Lehigh County. During 2017, the Company added two additional branch offices, one in Allentown, Lehigh
County and one in Bethlehem, Northampton County to continue our strategic expansion initiative.
In 2015, the Company entered the King of Prussia market, which includes parts of Bucks and Montgomery counties of
Pennsylvania, with the establishment of a loan production office and a team of experienced lenders. During the fourth
quarter of 2016, a retail branch office was established, replacing the loan production office, and staffed by personal
bankers and our experienced lenders. Montgomery and Bucks counties are two of the wealthiest counties in
Pennsylvania. Significant types of employment industries include pharmaceuticals, health care, electronics, computer
services, insurance, industrial machinery, retailing, schools and meat processing. The annual unemployment rates for
2018 were 3.4% in Montgomery County and 3.7% in Bucks County, lower than Pennsylvania’s state unemployment rate
of 4.3% and the federal unemployment rate of 3.9%, according to the Bureau of Labor Statistics.
The Marcellus Shale formation located in the heart of our northern market area has provided economic benefits to the
communities served and as a result to us. Natural gas producers have invested billions of dollars in Pennsylvania in lease
and land acquisition, new well drilling, infrastructure development and community partnerships. The growth of our
deposits, and to a lesser extent, loan portfolio, has been influenced by natural gas drilling activities.
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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 deposits to commercial
enterprises and individuals. Our 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 and home equity. 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 compliance with 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.
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
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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 floors on 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%.
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
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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, 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 loans, an increased monthly loan 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 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
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real estate loan, we consider and review a cash flow analysis of the borrower and guarantor, when applicable, and
consider 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
aggregate of capital, surplus, undivided profits, capital securities and reserve for loan losses. At December 31, 2018, our
regulatory limit on loans to one borrower was $35.5 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.
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Trust, Wealth Management and Brokerage Services
Through our trust department, we offer a broad range of fiduciary and investment services. Our trust and investment
services include:
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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 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; retirement plan services; 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 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.
Merchant Services
We offer credit card processing and a variety of other products and services to our merchant customers, through a
marketing and sales agreement with an industry leader in payment processing services. Services include:
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small business checking accounts
(cid:2) merchant money market account
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online banking
telephone banking
business credit cards
(cid:2) merchant line of credit
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financial checkup.
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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, we expect continued competition from these financial institutions in the foreseeable future. With the
continued acceptance of internet banking by our customers and consumers generally, competition for deposits has
increased from institutions operating outside of our market area as well as from insurance companies.
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,
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.
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
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.
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Enforcement actions may include:
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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.
Other laws restrict or prohibit transactions between Peoples Bank and its affiliates.
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 below 100% of our capital stock. 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 if
surplus does not equal at least 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.
A bank holding company is required 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.
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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, with the amount of the penalty varying based on the action
penalized.
Civil money penalties can be $2.0 million per violation and may be up to $9.8 million for continuing violations or for the
actual amount of gain or loss. 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:
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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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
“well capitalized”;
“adequately capitalized”;
“under capitalized”;
“significantly undercapitalized”; and
“critically undercapitalized”.
Peoples Bank was “well capitalized” based on its actual capital position at December 31, 2018. However, 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.
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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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.
(cid:2)
(cid:2)
(cid:2)
“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.
“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.
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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:
(cid:2) A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%.
(cid:2) A minimum ratio of tier 1 capital to risk-weighted assets of 6%.
(cid:2) A minimum ratio of total capital to risk-weighted assets of 8%.
(cid:2) 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. Full phase-in occurs on January 1, 2019.
Accumulated other comprehensive income (AOCI) is included in a banking organization’s common equity tier 1 capital.
The rules, however, allowed community banks to make a one-time election not to include components of AOCI in
regulatory capital and instead exclude most AOCI components from regulatory capital. Peoples Bank made that one-time
election to “opt-out” of the inclusion of components of AOCI in regulatory capital.
The rules 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.
The 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.
Mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those
applicable to other assets under the capital rules.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions
including:
(cid:2)
(cid:2)
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.
At December 31, 2018, Peoples met its capital requirements with a ratio of common equity tier 1 capital to risk-weighted
assets of 11.64%; its ratio of tier 1 capital to risk-weighted assets of 11.64%; its ratio of total capital to risk-weighted
assets of 12.80%; and its leverage ratio of 9.78%.
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 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.
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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 establish performance-
based standards for use in examining for compliance. Peoples Bank had its last CRA compliance examination in 2016
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. Further, Dodd-Frank eliminated the federal statutory prohibition against the payment of interest on business
checking accounts. Assessments for institutions such as Peoples Bank (assets of less than $10 billion), as of July 1, 2018,
are based on initial assessment rates that are adjusted by combining supervisory ratings with financial ratios to determine
a total assessment rate. For most institutions, assessment rates are based on weighted-average supervisory ratings of
banking operation components and six financial ratios. The financial ratios are: the leverage ratio; loans past due 30-89
days/gross assets; nonperforming assets/gross assets; net loan charge-offs/gross assets; net income before taxes/risk-
weighted assets; and the adjusted brokered deposit ratio. In addition, an institution's assessment rate may be lowered if
the institution holds long-term unsecured debt and raised if it holds long-term unsecured debt that is issued by another
depository institution.
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 of $1.0 billion or more, 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.
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.
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 of $10 billion or more and to enforce a statutory requirement that such fees be
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reasonable and proportional to the actual cost of a transaction to the issuer. Issuers with less than $10 billion in assets,
like us, are exempt from debit card interchange fee standards.
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. 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. Mortgage lenders are required 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, at a minimum, the following
eight underwriting factors when making the credit decision:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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.
TILA/RESPA Integrated Disclosures (TRID)
The CFPB implemented rules combining the mortgage disclosures consumers previously received under TILA and
RESPA.
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 change 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, 2018, we had 390 full-time-equivalent employees. We are not parties to any collective bargaining
agreements and we consider our employee relations to be good.
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Availability of Securities Filings
We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Exchange
Act. 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 principal
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
between 30 and 89 days delinquent on December 31, 2018 totaled $8.2 million. Our non-performing assets were
approximately $10.0 million on December 31, 2018. Our allowance for loan and lease losses was approximately $21.4
million on December 31, 2018.
Our emphasis on the Eastern Pennsylvania and the Southern Tier of New York market area exposes us to a risk of
loss associated with the region.
At December 31, 2018, $299.9 million or 16.4%, of our loan portfolio consisted of residential mortgage loans and
$907.8 million or 49.8%, of our loan portfolio consisted of commercial real estate loans. A majority of these loans are
made to borrowers or secured by properties located in Eastern 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, 2018, approximately 76.9% 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
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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. 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 decline, we could experience increased delinquencies and credit losses,
particularly with respect to real estate construction and land acquisition and development loans and one-to-four family
residential mortgage loans. Moreover, if the current economic growth slows, the negative impact to our market areas
could result in 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. Provisions 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.
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Changes in interest rates could affect our investment values and impact comprehensive income and stockholders’
equity.
At December 31, 2018, we had approximately $269.7 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, 2018, our available-for-sale securities had an unrealized loss, net of taxes, of $2.6 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
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, 2018, the market value of our shares exceeded the recorded
book value, therefore goodwill is considered not impaired and no further testing is required. 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.
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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 timelines 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 timeline 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 2018, 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:
(cid:2) Loan delinquencies could increase further;
(cid:2) Problem assets and foreclosures could increase further;
(cid:2) Demand for our products and services could decline;
(cid:2) 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
(cid:2)
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 Eastern Pennsylvania and the Southern Tier of New York. As a result of this
geographic concentration, our financial results may correlate to the economic conditions in our specific local market.
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 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.
-17-
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.
We maintain a non-contributory defined benefit pension plan, which was frozen 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.
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.
-18-
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
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’ or third parties’ 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 systems, or those of a
third-party service provider, as a result of cyber-attacks or information security breaches or otherwise 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.
-19-
We are exposed to environmental liabilities with respect to real estate.
We currently operate 27 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.
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 applicable 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 on our business, financial condition or results of
operations.
-20-
Risks Related to Our Common Stock
Our ability to pay dividends or repurchase shares is subject to limitations.
Our ability to pay dividends on or repurchase shares of our stock depends upon our receipt of dividends from Peoples
Bank. Additionally, our ability to pay dividends is limited by Pennsylvania corporate law and by federal banking
regulations. Under Pennsylvania law, we may not pay a dividend if, after payment, we could not pay our debts as they
become due in the usual course of business or our total assets would be less than our total liabilities. 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.
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 dividends. Our failure to pay dividends could have a material adverse effect on the
market price of our common stock.
Proxy contests and shareholder litigation may adversely affect our results of operations.
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.
-21-
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.
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
FDIC, the Board of Governors of the Federal Reserve System and the Pennsylvania Department of Banking. 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 may be subject to more stringent capital and liquidity requirements in the future, which may adversely affect our
net income and future growth.
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.
-22-
The Dodd-Frank Act created the 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.
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. Should our supervisory rating be lowered or our unsecured debt increase, we may be required to pay an
increased assessment. More generally, should the designated reserve ratio of the FDIC Deposit Insurance Fund be raised
or the fund suffer losses, we may be required to pay an increased assessment. An increase in the assessment we pay 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, increased insurance cost and damage to our reputation, which could
have a material adverse effect on our business, financial condition or results of operations.
-23-
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, commercial lending, 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 27 full-service community banking offices located within the Lackawanna, Lehigh, Luzerne, Monroe,
Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New
York. Seven offices are leased and the balance are owned by Peoples Bank. Additionally, we operate a Limited Purpose
Banking Office (“LPO”) located in and serving Schuylkill County, Pennsylvania.
We lease several remote ATM locations throughout our market area. 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 28, 2019, there were approximately 3,530 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. 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 Part I, Item 1 “Supervision and Regulation – Limitations on Dividends and Other
Payments” to this report and 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.
-24-
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, 2018:
Month Ending
October 31, 2018
November 30, 2018
December 31, 2018
Total Number of Maximum Number
Shares Purchased of Shares that may
as Part of Publicly yet be Purchased
Total Number of Average Price
Shares Purchased Paid Per Share
Announced
Programs
Under the
Programs
$
$
$
225,000
225,000
225,000
On April 28, 2017 and February 1, 2019, our board of directors reauthorized a common stock repurchase plan whereby
we are authorized to repurchase up to 225,000 shares of our outstanding common stock through open market purchases.
-25-
The following graph and table show the cumulative total return on the common stock of the Company over the last five
years, compared with the cumulative total return of a broad stock market index (the Russell 2000 Index or “Russell
2000”), and the SNL Bank and Thrift Index. The cumulative total return on the stock or the index equals the total
increase in value since December 31, 2013, assuming reinvestment of all dividends paid into the stock or the index. The
graph and table were prepared assuming that $100 was invested on December 31, 2013, in the common stock and the
securities included in the indexes.
Comparison of Five-Year Cumulative Total Returns
Performance Graph of
PEOPLES FINANCIAL SERVICES CORP
Period Ending
Index
Peoples Financial Services Corp.
Russell 2000 Index
SNL Bank and Thrift Index
Source: S& P Global Market Intelligence
©2018
12/31/2013
12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018
100.00 134.29 106.25 140.29 138.15 134.56
124.09
140.45
100.00
100.00
121.63
143.78
100.26
113.89
104.89
111.63
139.44
169.07
-26-
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
2018
2017
2016
2015
2014
84,661
13,322
71,339
4,200
67,139
13,659
52,487
28,311
3,391
24,920
$
$
74,242
8,698
65,544
4,800
60,744
17,186
51,293
26,637
8,180
18,457
$
$
68,984
7,251
61,733
5,000
56,733
15,888
48,030
24,591
5,008
19,583
$
$
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
$
$
278,334
1,801,887
208,092
$ 2,288,313
$ 1,875,022
86,500
37,906
10,271
278,614
$ 2,288,313
281,822
$
1,674,105
213,104
$ 2,169,031
$ 1,719,018
123,675
49,734
11,628
264,976
$ 2,169,031
269,927
$
1,517,004
212,511
$ 1,999,442
$ 1,588,757
82,700
58,134
13,233
256,618
$ 1,999,442
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
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):
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
$
3.37
1.31
37.66
$
38.87 %
$
2.50
1.26
35.82
$
50.40 %
$
2.65
1.24
34.71
$
46.79 %
$
2.36
1.24
33.57
$
52.54 %
2.34
1.24
32.69
53.03 %
7,397,797
7,395,837
7,396,716
7,516,451
7,548,825
1.12 %
9.21
12.14
10.03
3.59
99.55 %
0.90 %
7.02
12.77
9.94
3.69
96.50 %
1.02 %
7.64
13.36
10.16
3.77
95.81 %
1.02 %
7.13
14.26
10.80
3.81
87.55 %
1.03 %
7.29
14.12
10.76
3.86
84.13 %
11.95 %
13.10
1.17
0.53 %
11.85 %
12.95
1.12
0.67 %
12.49 %
13.51
1.04
0.90 %
13.52 %
14.47
0.97
0.86 %
14.75 %
15.61
0.85
0.85 %
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 21.0% for 2018 and 35.0%
for the years 2017, 2016, 2015 and 2014.
-27-
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis 2018 versus 2017
(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 2017 versus 2016 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 “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, and the impairment of goodwill. Actual amounts
could differ from those estimates.
-28-
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 among other things.
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.
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. Note 1 lists the significant accounting
policies used by us in the development and presentation of the consolidated financial statements. This discussion and
analysis, the Notes to Consolidated Financial Statements and other financial statement disclosures identify and address
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 show signs of expansion in 2018, as the gross domestic product (“GDP”), the
value of all goods and services produced in the Nation, came in at an annual rate of 2.6 percent (estimated) in the fourth
quarter. This comes after a third quarter reading of 3.4 percent in real GDP. The economy grew at a solid 2.9 percent for
all of 2018, just short of the 3.0 percent predicted by the Trump administration after the Tax Cut and Jobs Act. GDP
-29-
came in at a rate of 2.2 percent in 2017 by comparison. The Federal Reserve Board’s Federal Open Market Committee
(“FOMC”) increased the federal funds rate four times in 2018 ending the year at a range of 2.25% to 2.50%. In raising
the key target range for the federal funds rate, the FOMC noted that risks to the economic outlook appear roughly
balanced but that the FOMC will continue to monitor global economic and financial developments and assess their
implications for the economic outlook. The median forecast is for a federal funds rate of 2.9 percent by year-end 2019,
implying that there will be two additional rate hikes in 2019.
Inflation slowed somewhat in 2018, as the consumer price index (“CPI”) registered 1.9 percent for 2018, just under the
FOMC’s benchmark of 2.0 percent for the first time since August 2017. The CPI was 2.1 percent in 2017. Core personal
consumption expenditure price index, which ignores food and energy, averaged 2.2 percent in 2018.
On a national level, employment conditions improved in 2018. The civilian labor force increased 2.6 million, while the
number of people employed increased 2.9 million in 2018. As a result, the annual unemployment rate for the U.S. fell in
2018 when compared to 2017. All sectors of employment, reported employment gains from the end of 2017.
National, Pennsylvania, New York and our market area’s non-seasonally-adjusted annual unemployment rates in 2018
and 2017, are summarized as follows:
United States
New York (statewide)
Pennsylvania (statewide)
Broome County
Bucks County
Lackawanna County
Lehigh County
Luzerne County
Monroe County
Montgomery County
Northampton County
Schuylkill County
Susquehanna County
Wayne County
Wyoming County
2018
2017
3.9 %
4.2
4.3
5.1
3.7
4.5
4.6
5.4
5.4
3.4
4.4
5.3
4.0
4.7
4.4 %
4.4 %
4.7
4.9
5.6
4.2
5.1
5.0
5.9
5.9
3.9
4.9
5.9
4.7
5.1
5.3 %
Employment conditions improved for both the Commonwealth of Pennsylvania and New York State in 2018 as
evidenced by a decrease in their respective unemployment rates. With respect to the markets we serve, the
unemployment rate decreased in all of the counties in which we have branches or ATM locations. The lowest
unemployment rate in 2018, for all of the counties we serve, was Montgomery County at 3.4 percent.
With respect to the banking industry, net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks
in 2018 totaled $236.7 billion, an increase of $53.6 billion or 29.3 percent from 2017. Approximately 79.7 percent of all
institutions reported higher net income in 2018, while only 3.2 percent reported net losses, down from last year’s
reported 5.4 percent unprofitable institutions. Loan loss provisions of $50.0 billion in 2018 were $1.1 billion or
2.2 percent less than banks set aside in 2017. Net interest income increased for the fifth year in a row, by $42.2 billion or
8.5 percent. Noninterest income was $10.9 billion or 4.3 percent above the level of 2017. Realized gains on sales of
investments were $328.0 million or 84.6 percent less than a year ago. Total noninterest expense increased $16.8 billion
or 3.8 percent comparing 2018 and 2017. The return on average assets for 2018 was 1.35 percent compared to 0.97
percent in 2017.
The United States economy continued its strong performance in 2018. This could affect future interest rates which may
adversely impact bank earnings as net interest margins compress from the inability of management to keep funding 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.
-30-
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”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through
twenty-seven full-service community banking offices located within the Lackawanna, Lehigh, Luzerne, Monroe,
Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New
York and one limited purpose banking office located in Schuylkill County Pennsylvania.
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.
The Company faces competition primarily from commercial banks, thrift institutions and credit unions within its
Pennsylvania and New York 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 by such agencies.
Total assets, loans and deposits were $2.3 billion, $1.8 billion and $1.9 billion, respectively, at December 31, 2018. Total
assets, loans and deposits grew 5.5 percent, 7.7 percent and 9.1 percent, respectively, compared to 2017 year-end
balances.
The loan portfolio consisted of $1.4 billion of business loans, including commercial and commercial real estate loans,
and $421.3 million in retail loans, including residential mortgage and consumer loans at December 31, 2018. Total
investment securities were $278.3 million at December 31, 2018, including $269.7 million of investment securities
classified as available-for sale and $8.4 million classified as held-to-maturity. Total deposits consisted of $410.3 million
in noninterest-bearing deposits and $1.5 billion in interest-bearing deposits at December 31, 2018.
Stockholders’ equity equaled $278.6 million, or $37.66 per share, at December 31, 2018, and $265.0 million, or $35.82
per share, at December 31, 2017. Our equity to asset ratio was 12.18 percent and 12.22 percent at those respective period
ends. Dividends declared for the 2018 amounted to $1.31 per share representing 38.9 percent of net income.
Nonperforming assets equaled $10.0 million or 0.55 percent of loans, net and foreclosed assets at December 31, 2018,
down from $11.6 million or 0.68 percent at December 31, 2017. The allowance for loan losses equaled $21.4 million or
1.17 percent of loans, net, at December 31, 2018, compared to $19.0 million or 1.12 percent at year-end 2017. Loans
charged-off, net of recoveries equaled $1.8 million or 0.10 percent of average loans in 2018, compared to $1.8 million or
0.11 percent of average loans in 2017.
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, 2018, 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.
-31-
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.
During 2018 the FOMC raised the target federal funds rate four times. At their December 2018 meeting, the FOMC decided
to raise the target range for the federal funds rate to 2.25% to 2.50%. The FOMC judges that some further gradual increases
in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor
market conditions, and inflation near the Committee’s two percent objective over the medium term. The Committee judges
that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial
developments and assess their implications for the economic outlook. 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 192 basis points to a high of 298 basis
points during 2018 before ending the year at 2.48 percent. The yield on the 10-year U.S. Treasury ranged from a low of
244 basis points to a high of 324 basis points while ending 2018 at 2.69 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,
2018 to December 31, 2017 due to higher rates at year end 2018. The net unrealized holding losses included in our
available-for-sale investment portfolio were $3.3 million at December 31, 2018 compared to a loss of $1.2 million at
December 31, 2017. We reported net unrealized holding loss, included as a separate component of stockholders’ equity
of $2.6 million, net of income taxes of $683 thousand, at December 31, 2018, and $977 thousand, net of income taxes of
$260 thousand, at December 31, 2017. 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, 2018, indicated that should general market rates increase by 100, 200 and 300 basis points, we would
anticipate declines of 2.6 percent, 5.3 percent and 7.9 percent in the market value of our portfolio.
-32-
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
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored
enterprises
Commercial Mortgage-backed securities:
U.S. Government-sponsored
enterprises
Common equity securities
Total
2018
2017
2016
Amount
$ 25,592
%
92,818
Amount
%
Amount
%
9.20 % $ 19,814
33.35
93,648
7.03 %
33.23
7,438
$ 80,913
2.76
29.98 %
13,853
92,809
4.98
33.34
15,047
110,692
5.34
39.28
15,225
119,462
5.64
44.25
12,671
4.55
14,488
5.14
21,110
7.82
34,261
12.31
21,892
7.77
25,779
9.55
6,039
291
2.17
0.10
6,195
46
2.20
0.01
$ 278,334 100.00 % $ 281,822 100.00 % $ 269,927 100.00 %
Investment securities decreased $3.5 million, to $278.3 million at December 31, 2018, from $281.8 million at
December 31, 2017. At December 31, 2018, the investment portfolio consisted of $269.7 million of investment securities
classified as available-for-sale and $8.4 million classified as held-to-maturity. Strong loan demand during 2018 resulted
in using a portion of the investment cash flow to fund higher yielding loans. Excess cash flow from investment
repayments was directed back into the investment portfolio primarily during the second and third quarters of 2018.
Security purchases totaled $33.0 million in 2018, with purchases consisting of short-term U.S. Treasury securities,
longer term tax-exempt securities and mortgage-backed securities. Investment purchases in 2017 amounted to $73.5
million.
Repayments of investment securities totaled $32.0 million in 2018 and $57.0 million in 2017. There were no sales of
investment securities during 2018 or 2017. We continually analyze the investment portfolio with respect to its exposure
to various risk elements.
The composition of our investment portfolio changed during 2018 as a result of the aforementioned transactions. Short-
term bullet U.S. Treasury and U.S. Government-sponsored enterprise securities comprised 42.5 percent of our total
portfolio at year-end 2018 compared to 40.3 percent at the end of 2017. Tax-exempt municipal obligations declined as a
percentage of the total portfolio to 33.3 percent at year-end 2018 from 39.3 percent at the end of 2017 due to maturities
and calls. The weighted average life of the investment portfolio shortened to 3.5 years at December 31, 2018 from 4.2
years at year end 2017, while the effective duration of the investment portfolio decreased slightly to 2.6 years at
December 31, 2018 from 3.0 years at December 31, 2017.
There were no other-than-temporary impairments (“OTTI”) recognized for the years ended December 31, 2018, 2017
and 2016. 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 $281.7 million and equaled 13.8 percent of average earning assets in 2018, compared to
$272.4 million and equaled 14.6 percent of average earning assets in 2017. The tax-equivalent yield on the investment
portfolio decreased twenty-four basis points to 2.60 percent in 2018 from 2.84 percent in 2017. The decrease in the tax-
equivalent yield is due primarily to the reduction in the statutory federal corporate tax rate in 2018 to 21% from 35% in
2017.
At December 31, 2018 and 2017, 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.
-33-
The maturity distribution based on the carrying value and weighted-average, tax-equivalent yield of the investment
portfolio at December 31, 2018, 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 21.0 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
Within one year
within five years
After one but
After five but
within ten years
Amount
After ten years
Total
Amount
Yield Amount Yield Amount Yield
$ 1,995 2.04 % $ 23,597 1.78 %
Yield Amount Yield
$ 25,592 1.91 %
10,965
1.36
81,853
1.62
92,818
1.59
757
19,654
3.48
4.05
5,265
42,091
4.00
2.09
$
7,831
9,943
4.40 %
4.23
$ 21,121
3.91 %
13,853
92,809
4.20
3.15
121
0.87
5,242
2.17
2,479
2.40
4,829
3.41
12,671
2.67
43
1.34
7,622
2.52
6,722
2.29
19,874
2.98
34,261
2.74
December 31, 2018
U.S. Treasury securities
U.S. Government-sponsored
enterprises
State and municipals:
Taxable
Tax-exempt
Residential Mortgage-backed
securities:
U.S. Government agencies
U.S. Government-sponsored
enterprises
Commercial Mortgage-backed
securities:
U.S. Government-sponsored
enterprises
Total
$ 33,535
3.02 % $ 165,670
Loan Portfolio:
6,039
1.91 % $ 33,014
2.29
3.37 % $ 45,824
6,039
3.45 % $ 278,043
2.29
2.47 %
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.
The composition of the loan portfolio at year-end for the past five years is summarized as follows:
Distribution of loan portfolio
2018
2017
2016
2015
2014
December 31, Amount
Commercial
Real estate:
$
%
Amount
%
Amount
%
Amount
%
Amount
%
494,134 27.10 % $
476,199 28.12 % $
408,814 26.67 % $
365,767 27.28 % $
319,590 26.41 %
Commercial
Residential
Consumer
907,803
299,876
121,453
49.79
16.45
6.66
786,210
287,935
142,721
46.44
17.01
8.43
700,144
289,781
134,226
45.67
18.90
8.76
567,277
306,218
101,603
42.30
22.84
7.58
493,481
322,454
74,369
40.79
26.65
6.15
Loans, net
1,823,266 100.00 % 1,693,065 100.00 % 1,532,965 100.00 % 1,340,865 100.00 % 1,209,894 100.00 %
Less:
allowance for
loan loss
Net loans
21,379
$ 1,801,887
18,960
$ 1,674,105
15,961
$ 1,517,004
12,975
$ 1,327,890
10,338
$ 1,199,556
Loans, net increased $130.2 million or 7.7 percent in 2018 to $1.8 billion at December 31, 2018. Business loans,
including commercial loans and commercial real estate loans, were $1.4 billion or 76.9 percent of loans, net at
December 31, 2018, and $1.3 billion or 74.6 percent at year-end 2017. Residential mortgages and consumer loans totaled
$421.3 million or 23.1 percent of loans, net at year-end 2018 and $430.7 million or 25.4 percent at year-end 2017. Loan
growth remained strong throughout 2018. Loans, net grew at an annual rate of 7.7 percent in 2018 despite the sale of our
$2.4 million credit card loan portfolio and a portion of our student loan portfolio totaling $5.3 million. The increase in
loans in 2018 was primarily attributable to the continued growth fostered by our entrance into the Lehigh Valley market
-34-
during the fourth quarter of 2014 by establishing a community banking office with a dedicated team of commercial and
retail lenders. Our company has expanded our presence in the greater Lehigh Valley with the addition of two community
banking offices, the most recent during the third quarter of 2017, complemented with additional lending teams to
continue the growth. Additional growth was attained through our entrance into the King of Prussia market initially by
establishing a loan production office and then by opening a retail branch in the fourth quarter of 2016. 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 continue to be well
received in these new markets as we are in our existing markets.
Loans averaged $1.8 billion in 2018, compared to $1.6 billion in 2017. Taxable loans averaged $1.6 billion, while tax-
exempt loans averaged $126.1 million in 2018. Due to improving loan demand, the loan portfolio continues to play the
prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 86.1 percent in 2018,
an increase from 85.4 percent in 2017.
The tax-equivalent yield on our loan portfolio increased 12 basis points to 4.51 percent in 2018 from 4.39 percent in
2017 due to higher yields on new loan originations and the repricing higher of floating and adjustable rate loans due to
the increase in market rates. In 2018, we increased our prime lending rate four times in response to the FOMC raising its
targeted federal funds rate. Our prime rate ended the year at 5.50%. The higher prime rate helped mitigate the loan yield
compression. The effect of the increases in the prime rate on stabilizing our loan portfolio’s yield can be evidenced by
evaluating quarterly loan yields, which ranged from 4.38 percent in the first quarter to 4.66 percent in the fourth quarter.
The yield on the loan portfolio may continue to improve as repayments on loans are replaced with new originations at
current market rates and floating and adjustable rate loans reprice higher. However, competition will continue to prompt
more aggressive pricing for high quality fixed rate intermediate term loans, thus mitigating some of the upward
momentum in loan yields.
The maturity distribution and sensitivity information of the loan portfolio by major classification at December 31, 2018,
is summarized as follows:
Maturity distribution and interest sensitivity of loan portfolio
Within one After one but
December 31, 2018
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
$ 153,851 $
174,739 $ 165,544 $
494,134
182,116
72,353
55,419
$ 463,739 $
479,506
137,415
63,061
907,803
246,181
299,876
90,108
121,453
2,973
854,721 $ 504,806 $ 1,823,266
$ 187,624 $
276,115
$ 463,739 $
768,896
399,133 $ 182,139 $
455,588
1,054,370
854,721 $ 504,806 $ 1,823,266
322,667
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 2018, market interest rates continued to increase from 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 42.2 percent of the loan portfolio at December 31, 2018, compared to
floating or adjustable-rate loans at 57.8 percent. Approximately 42.7 percent of the loan portfolio is expected to reprice
within the next 12 months.
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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 capital
outstanding in any one category. We provide deposit and loan products and other financial services to individual and
corporate customers in our current market area. There are no significant concentrations of credit risk from any individual
counterparty or groups of counterparties, except for geographic concentrations.
Off- Balance Sheet Arrangements:
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.
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
2016
2018
2017
$ 294,122 $ 324,984 $ 235,878
57,784
31,051
$ 379,187 $ 404,615 $ 324,713
51,790
33,275
56,244
23,387
We record a valuation allowance for off-balance sheet credit losses, if deemed necessary, separately as a liability. The
valuation allowance amounted to $56 and $61 at December 31, 2018 and 2017. 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.
Contractual Obligations and Commitments:
In the ordinary course of operations, we enter into various financial obligations, including contractual obligations that
may require future cash payments. As a financial services provider, we routinely enter into commitments to extend
credit, including loan commitments, standby and commercial letters of credit. Such commitments are subject to the same
credit policies and approval process accorded to loans made by the Bank. See Note 5 of the consolidated financial
statements for additional information.
The following table summarizes our contractual obligations and other commitments to make future payments as of
December 31, 2018. Payments for deposits and borrowings do not include interest. Payments related to leases are based
on actual payments specified in the underlying contracts. Commitments to extend credit and standby letters of credit are
-36-
presented at contractual amounts; however, since many of these commitments are expected to expire unused or only
partially used based upon our historical experience, the total amounts of these commitments do not necessarily reflect
future cash requirements.
December 31, 2018
Over One Year Over Three Years
Total
One Year or
Less
Through
Three Years
Through
Five Years
Over Five Years
$ 336,242
86,500
37,906
7,545
$ 468,193
$ 154,506
86,500
21,174
532
$ 262,712
$ 345,912
33,275
$ 379,187
$ 289,672
33,275
$ 322,947
$
136,783
$
32,333
$
12,620
14,021
1,041
151,845
$
2,711
948
35,992
4,450
$
4,450
$
$
$
$
5,024
17,644
51,790
51,790
$
$
$
(In Thousands)
Contractual Obligations:
Time Deposits
Short-term borrowings
FHLB Advances
Operating Leases
Total
Other commitments:
Commitments to extend credit
Standby letters of credit
Total
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 obligations. 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 80.0 percent of the appraised
value. With regard to residential mortgages, customers with loan-to-value ratios in excess of 80.0 percent are generally
required to obtain Private Mortgage Insurance (PMI). 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 and our credit underwriters must determine the borrower’s ability to repay
their loans 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 certain Senior Officers, loan underwriters
and branch personnel. Credit approvals beyond the scope of these individual authority levels are forwarded to a Loan
Committee. This Committee, comprised of certain members of senior management, review credits to monitor 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 individual credit relationships in our loan portfolio by credit
administration and the asset quality committee. These reviews aid us in identifying deteriorating financial conditions of
borrowers and allows us the opportunity 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,
-37-
“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 which are incorporated in this item by reference.
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
Total troubled debt restructured loans
Accruing loans past due 90 days or more:
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
2018
2017
2016
2015
2014
$
776
$
860
$
934
$ 1,632
$ 1,322
2,328
2,574
212
5,890
3,454
2,994
177
7,485
7,016
2,961
155
11,066
1,680
4,424
148
7,884
1,275
3,047
122
5,766
1,438
1,577
1,150
719
622
2,779
836
661
3,074
141
618
1,909
2,325
536
2,861
2,457
476
2,933
73
850
923
9,592
376
$ 9,968
548
186
734
11,293
284
$ 11,577
558
286
844
13,819
393
$ 14,212
525
238
763
11,508
957
$ 12,465
136
1,062
425
1,623
10,322
561
$ 10,883
0.53 %
0.67 %
0.90 %
0.86 %
0.85 %
0.55 %
0.68 %
0.93 %
0.93 %
0.90 %
We experienced continued improvement in our asset quality as evidenced by a decrease in nonperforming assets of $1.6
million or 13.9 percent to $10.0 million or 0.55 percent of loans, net of unearned income, and foreclosed assets at
December 31, 2018, from $11.6 million or 0.68 percent of loans, net of unearned income, and foreclosed assets at the
end of 2017. The decrease resulted from a $1.6 million decrease in nonaccrual loans and a decrease in trouble debt
restructured loans of $0.3 million offset by an increase of $0.2 million in accruing loans past due 90 days or more and a
small increase in foreclosed assets of $0.1 million. For a further discussion of assets classified as nonperforming assets
and potential problem loans, 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
impairment and the requirements of FASB ASC 450, for large groups of smaller-balance homogeneous loans to be
collectively evaluated for impairment.
-38-
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 credit administration department identifies those loans to be individually evaluated for impairment and those
to be collectively evaluated for impairment utilizing a standard criteria. We consistently use loss experience from the
latest twelve quarters in determining the historical loss factor for each pool collectively evaluated for impairment.
Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values
based on current conditions 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
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 outstanding
Allowance for loan losses as a percentage of period
end loans
2018
$ 18,960
2017
$ 15,961
2016
$ 12,975
2015
$ 10,338
2014
$ 8,651
154
173
776
246
601
1,250
405
545
2,354
706
533
737
2,149
858
339
495
2,468
325
523
333
1,427
500
804
386
2,291
137
20
86
77
9
136
98
202
573
1,781
4,200
$ 21,379
124
44
160
348
1,801
4,800
$ 18,960
122
69
177
454
2,014
5,000
$ 15,961
144
26
117
364
1,063
3,700
$ 12,975
292
38
115
454
1,837
3,524
$ 10,338
0.10 %
0.11 %
0.14 %
0.08 %
0.15 %
1.17 %
1.12 %
1.04 %
0.97 %
0.85 %
The allowance for loan losses increased $2.4 million to $21.4 million at December 31, 2018, from $19.0 million at the
end of 2017. The increase resulted from a provision for loan losses of $4.2 million less net loans charged-off of $1.8
million. There was one large commercial real estate credit charged-off in the second quarter of 2018 totaling $1.1
million. The allowance for loan losses, as a percentage of loans, net of unearned income, was 1.17 percent at the end of
2018, compared to 1.12 percent at the end of 2017..
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 $20 to $1,781 in 2018 from $1,801 in
2017. Net charge-offs, as a percentage of average loans outstanding, equaled 0.10 percent in 2018 and 0.11 percent in
2017.
-39-
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:
2018
2017
2016
2015
2014
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$
50
0.12 % $
159
0.15 % $
225
0.18 % $
759
0.16 % $ 1,240
0.33 %
Commercial
Residential
Consumer
Total
specific
Formula:
Commercial
Real Estate:
403
666
60
0.17
0.23
0.01
263
336
8
0.25
0.22
0.01
1,197
520
0.47
0.23
233
1,138
117
0.40
0.37
0.01
912
769
38
0.53
0.34
0.01
1,179
0.53
766
0.63
1,942
0.88
2,247
0.94
2,959
1.21
5,466
26.98
4,893
27.98
3,574
26.49
2,283
27.12
1,081
26.08
Commercial
Residential
Consumer
10,333
3,226
1,175
49.62
16.22
6.65
7,285
4,644
1,372
46.19
16.78
8.42
4,650
4,187
1,608
45.21
18.67
8.75
4,012
2,944
1,466
41.90
22.47
7.57
2,125
2,921
1,252
40.26
26.31
6.14
20,200
99.47
18,194
99.37
14,019
99.12
10,705
99.06
7,379
98.79
21,379 100.00 % 18,960 100.00 % 15,961 100.00 % 12,952 100.00 % 10,338 100.00 %
Total
formula
Total
allocated
allowance
Unallocated
allowance
Total
$ 21,379
$ 18,960
$ 15,961
23
$ 12,975
$ 10,338
The allocated element of the allowance for loan losses account increased $2,419 to $21,379 at December 31, 2018,
compared to $18,960 at December 31, 2017. The specific portion of the allowance for impairment of loans individually
evaluated under FASB ASC 310 increased $413 to $1,179 at December 31, 2018, from $766 at December 31, 2017 and
the formula portion of the allowance for loans collectively evaluated for impairment under FASB ASC 450, increased
$2,006 to $20,200 at December 31, 2018, from $18,194 at December 31, 2017. The increase in the specific portion of the
allowance was a result of an increase in loans with collateral impairment. The increase in the formula portion was due to
a significant increase in volume, as the overall loss factor remained relatively unchanged.
There was no unallocated element of the total allowance for loan losses at December 31, 2018. 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 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 222.9 percent at December 31, 2018 and 167.9 percent at December 31, 2017. We believe that our
allowance was adequate to absorb probable credit losses at December 31, 2018.
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 $156.0 million or 9.1 percent to $1.9 billion
at the end of 2018. The growth in deposits included the addition of $50.0 million in callable brokered certificates of
deposit. Noninterest-bearing deposits grew $29.5 million or 7.8% while interest-bearing deposits increased $126.5
million or 9.5% in 2018. Noninterest-bearing deposits represented 21.9 percent of total deposits while interest-bearing
-40-
deposits accounted for 78.1 percent of total deposits at December 31, 2018. Comparatively, noninterest-bearing deposits
and interest-bearing deposits represented 22.1 percent and 77.9 percent of total deposits at year end 2017. With regard to
noninterest-bearing deposits, personal checking accounts increased $13.2 million or 7.0 percent, while commercial
checking accounts increased $16.3 million or 8.5 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 increase in short-
term market rates due to the FOMC increasing the targeted federal funds rate four times during 2018.
With regard to interest-bearing deposits, interest-bearing transaction accounts, which include money market accounts
and NOW accounts, and savings accounts, increased $72.5 million in 2018. Commercial interest-bearing transaction
accounts increased $71.5 million, while personal interest-bearing transaction accounts increased $10.6 million. Savings
accounts decreased $9.7 million during 2018 as price sensitive depositors shifted balances to more attractive premium
rates being offered by our competitors. The strong growth in the commercial account types was due to continuing our
strategic initiative to grow our public fund deposits, our continued penetration in our expansion markets and an increase
in IOLTA accounts at yearend. Total time deposits increased $54.0 million to $336.3 million at December 31, 2018 from
$282.3 million at December 31, 2017. The increase was primarily due to the addition of $50.0 million of callable
brokered certificates of deposit.
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
Total interest-bearing
Noninterest-bearing
Total deposits
2018
2017
2016
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
296,331
388,334
389,557
291,499
1,365,721
395,287
$ 1,761,008
262,292
0.86 % $
345,383
0.60
398,104
0.13
1.36
282,617
0.68 % 1,288,396
361,386
$ 1,649,782
219,265
0.55 % $
305,156
0.45
391,631
0.13
1.05
273,691
0.50 % 1,189,743
330,295
$ 1,520,038
0.39 %
0.40
0.18
0.98
0.46 %
Total deposits averaged $1.8 billion in 2018 and $1.6 billion in 2017, increasing $111.2 million or 6.7 percent comparing
2018 to 2017. Average noninterest-bearing deposits increased $33.9 million, while average interest-bearing accounts
grew $77.3 million. Average interest-bearing transaction deposits, including money market and NOW, and savings
accounts, increased $68.4 million while average total time deposits increased $8.9 million when comparing 2018 and
2017.
Our cost of interest-bearing deposits increased 18 basis points to 0.68 percent in 2018 from 0.50 percent in 2017.
Specifically, the cost of interest-bearing transaction and savings accounts increased 15 basis points to 0.50 percent while
the cost of time deposits increased 31basis points to 1.36 percent comparing 2018 and 2017. The increases to the cost of
interest-bearing transaction deposits and to the cost of time deposits was the result of the increase in short-term market
rates resulting from the FOMC’s action to raise the targeted federal funds rate four times during 2018 ending at a range
of 2.25% to 2.50%. We increased rates to retain our core deposit relationships in reaction to premium rates being offered
by our competitors. Additionally and to a lesser extent, the increase in costs was due to the introduction of premium rate
deposit specials at our newest branch office in Kingston and our new branch offices in the Lehigh Valley.
Volatile deposits, time deposits $100 or more, averaged $147.1 million in 2018, an increase of $21.8 million or
17.4 percent from $125.2 million in 2017. Our average cost of these funds increased 52 basis points to 1.53 percent in
2018, from 1.01 percent in 2017. 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.
-41-
Maturities of time deposits $100 or more, which entirely consist of certificates of deposits, 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
2016
2018
2017
$ 27,659 $ 26,009 $ 25,503
25,356
45,385
55,733
$ 223,042 $ 156,891 $ 151,977
21,546
48,904
124,933
24,569
49,852
56,461
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 2018 than in
2017 due to the strong loan growth experienced during 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.
The FOMC has raised rates from historically low levels and during 2018 raised the federal funds target rate 100 basis
points to a targeted range of 2.25 to 2.50 percent. The timing and the magnitude of future monetary policy actions that
will impact the current 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 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, 2018.
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.
-42-
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.
Interest rate sensitivity
December 31, 2018
Rate-sensitive assets:
Interest-bearing deposits in other banks
Investment securities
Loans, net
Loans held for sale
$
47
16,529 $
494,504
Total rate-sensitive assets
$ 511,080 $
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
$ 328,949
186,866
11,889 $
27,659
86,500
9,770
Total rate-sensitive liabilities
$ 651,633 $
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
283,345
41,863 $
47
278,334
1,823,266
749
325,208 $ 1,014,046 $ 252,062 $ 2,102,396
185,493 $ 34,449
216,864
828,553
749
$
$
44,508
70,450
11,445
126,403 $
$
50,029 $
234,548
378,157
328,949
421,414
378,157
113,200
223,042
86,500
37,906
798,408 $ 12,724 $ 1,589,168
6,774
5,950
118,983
16,691
—
Rate-sensitivity gap:
Period
Cumulative
RSA/RSL ratio:
Period
Cumulative
$ (140,553) $
$ (140,553) $
198,805 $
58,252 $
215,638 $ 239,338
273,890 $ 513,228
0.78
0.78
2.57
1.07
1.27
1.17
19.81
1.32
1.32
At December 31, 2018 and 2017, we had cumulative one-year RSA/RSL ratios of 1.07. 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 and their consideration to continue to
raise short-term rates in the 2019, the focus of ALCO has been to maintain the positive gap position in order to safeguard
future earnings from the potential risk of rising interest rates. During 2018 ALCO took steps to reduce the magnitude of
our positive gap position and guard against rates unchanged or down through the origination of five year fixed rate loans
and purchase of an interest rate floor. ALCO will continue to focus efforts on strategies in 2019 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 $18.2 million or 2.4 percent
increase in RSL coupled with a $23.6 million or 2.9 percent increase in RSA maturing or repricing within one year. The
increase in RSL resulted primarily from a $71.9 million increase in interest-bearing transaction accounts offset by a
-43-
$16.5 million decrease in time deposits and $37.2 million decrease in short-term borrowings. The majority of the growth
in money market and NOW accounts resulted from an increase in the deposit balances of local school districts and
commercial customers. 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 $0.6
million while investment securities increased $24.1 million. Short-term interest rates increased faster than longer-term
rates during 2018 causing the yield curve to flatten. 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 and intermediate-term U.S. Treasury securities and U.S.
Government-sponsored mortgage-backed securities and, to a lesser extent, longer-term municipal 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.
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,
2019, would increase slightly at 0.4 percent from model results using current interest rates.
We will continue to monitor our IRR position in 2019 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:
(cid:2) Funding new and existing loan commitments;
(cid:2) Payment of deposits on demand or at their contractual maturity;
(cid:2) Repayment of borrowings as they mature;
(cid:2) Payment of lease obligations; and
(cid:2) 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
-44-
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,
2018, our maximum borrowing capacity with the FHLB-Pgh was $700.2 million of which $124.4 million was
outstanding in borrowings and $172.0 million outstanding in the form of irrevocable standby letters of credit. We believe
our liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.
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:
(cid:2) FHLB-Pgh liquidity contingency line of credit;
(cid:2) Federal Reserve Bank discount window;
(cid:2)
Internet certificates of deposit;
(cid:2) Brokered deposits;
(cid:2)
Institutional Deposit Corporation deposits;
(cid:2) Repurchase agreements; and
(cid:2) 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, 2018 our borrowing capacity at the Federal Reserve related to this
program was $206.1 million and there were no amounts outstanding.
Based on our liquidity position at December 31, 2018, 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
2018. At December 31, 2018, 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, 2018, our net noncore funding dependence ratio, the difference between noncore funds and
short-term investments to long-term assets, was 15.0 percent. Our net short-term noncore funding dependence ratio,
noncore funds maturing within one year, less short-term investments to long-term assets equaled 6.3 percent.
Comparatively, our ratios equaled 16.1 percent and 11.1 percent at the end of 2017, which indicated a decrease in our
reliance on noncore funds. Moreover, our Basic Liquidity Surplus ratio, defined as liquid assets less short-term
potentially volatile liabilities as a percentage of total assets, increased to 4.1 percent at December 31, 2018, from 3.7
percent at December 31, 2017. 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.
-45-
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 $4.9 million for the year ended December 31, 2018. For the year ended December 31, 2017, cash and cash
equivalents decreased $2.5 million. During 2018, cash provided by operating and financing activities were more than
offset by cash used in investing activities.
Operating activities provided net cash of $32.6 million in 2018 and $28.6 million in 2017. 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.
Net cash provided by financing activities equaled $97.3 million in 2018. Net cash provided by financing activities was
$153.5 million in 2017. Deposit gathering, which is our predominant financing activity, increased in both 2018 and
2017. Deposit gathering provided a net cash inflow in 2018 of $156.0 million and $130.3 million in 2017. Short-term
borrowings decreased net cash by $37.2 million in 2018 while a net increase in short-term borrowings of $41.0 million
contributed to the net cash provided by financing activities in 2017. Deposit gathering in 2018 was also partially offset
by $11.8 million repayments of long-term debt as well as cash dividends paid of $9.7 million. In 2017, deposit gathering
was partially offset by a $8.4 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 $134.8 million in 2018. Net cash used in investing activities was $184.6 million in 2017. Net
cash used in lending activities was $141.3 million in 2018, a decrease from $163.2 million in 2017. Activities related to
our investment portfolio used net cash of $0.7 million in 2018 and $16.4 million in 2017.
We anticipate our liquidity position to be stable in 2019. Based on our expansion in the Lehigh Valley market and
expansion into King of Prussia and Schuylkill County, we are expecting loan demand to continue to be strong throughout
2019. We expect to fund such demand through deposit gathering, payments and prepayments on loans and investments
and advances from the FHLB. Additionally, 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 2019.
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.
-46-
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 required for adequately capitalized institutions. Our ratio of Tier 1
capital to risk-weighted assets and off-balance sheet items was 12.0 percent at December 31, 2018, and 11.9 percent at
December 31, 2017. Our Total capital ratio was 13.1 percent at December 31, 2018 and 13.0 percent at December 31,
2017. In addition, a new ratio effective January 1, 2015, requires the Company and Peoples Bank to 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 12.0 percent and 11.6 percent at December 31, 2018 and 11.9 percent and 11.5
percent at December 31, 2017. Our Leverage ratio, which equaled 10.0 percent at December 31, 2018 and 9.9 percent at
December 31, 2017, exceeded the minimum of 4.0 percent for capital adequacy purposes. Peoples Bank reported Tier 1
capital, Total capital and Leverage ratios of 11.6 percent, 12.8 percent and 9.8 percent at December 31, 2018, and 11.5
percent, 12.6 percent and 9.7 percent at December 31, 2017. Based on the most recent notification from the FDIC,
Peoples Bank was categorized as well capitalized at December 31, 2018. 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 $278.6 million or $37.66 per share at December 31, 2018, and $265.0 million or $35.82 per
share at December 31, 2017. Stockholders’ equity grew $13.6 million in 2018 as net income was partially offset by an
increase in accumulated other comprehensive loss and the payment of dividends.
We declared dividends of $1.31 per share in 2018, $1.26 per share in 2017, and $1.24 per share in 2016. The dividend
payout ratio, dividends declared as a percent of net income, equaled 38.9 percent in 2018, 50.4 percent in 2017 and 46.8
percent in 2016. Our board of directors intends to continue paying cash dividends in the future. Our ability to declare and
pay dividends in the future 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 2016, resulting in our repurchase and retirement of 16,463 shares for $604
thousand during the year. On April 28, 2017 and February 1, 2019, 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. There were no additional purchases of our outstanding common stock during 2018 or 2017.
Review of Financial Performance:
Net income was $24.9 million or $3.37 per share in 2018 and $18.5 million or $2.50 per share in 2017. The increase in
earnings in 2018 is the result of higher net interest income of $5.8 million due to growth of our earning assets coupled
with a $4.8 million reduction in income taxes due to the lower corporate tax rate. The results for 2017 include a $2.3
million net gain on the sale of our merchant services business and a $2.6 million one-time charge to the federal income
tax provision related to the revaluation of our net deferred tax asset. Return on average assets (“ROAA”) and return on
average equity (“ROAE”) were 1.12 percent and 9.21 percent for the year ended December 31, 2018. ROAA was 0.90
percent and ROAE was 7.02 percent for the year ended December 31, 2017.
-47-
Tax-equivalent net interest income was $73.0 million in 2018 and $68.9 million in 2017. Our net interest margin equaled
3.59 percent in 2018 and 3.69 percent in 2017. Noninterest income totaled $13.7 million in 2018 and $17.2 million in
2017. Noninterest expense was $52.5 million for the year ended December 31, 2018 compared to $51.3 million for the
year ended December 31, 2017. Our productivity is measured by the operating efficiency ratio, defined as noninterest
expense less amortization of intangible assets divided by the total of tax-equivalent net interest income and noninterest
income. Our operating efficiency ratio was 59.5 percent in 2018 and 58.4 percent in 2017.
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:
(cid:2) Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;
(cid:2) Changes in general market interest rates; and
(cid:2) 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.
-48-
Net interest income changes due to rate and volume
2018 vs 2017
Increase (decrease)
attributable to
Rate
2017 vs 2016
Increase (decrease)
attributable to
Rate
Total
Volume
Total
Volume
Interest income:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
$ 9,406 $ 2,735 $ 6,671 $ 5,044 $
(225)
(770)
545
203
(651) $ 5,695
262
(59)
884
(1,294)
3
502
(929)
3
382
(365)
566
(677)
(44)
304
(127)
(23)
262
(550)
(21)
Total interest income
8,774
1,541
7,233
5,092
(556)
5,648
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
1,121
783
(16)
21
988
1,837
(110)
4,624
190
169
11
(52)
129
62
(91)
418
$ 4,150 $ (1,839) $ 5,989 $ 3,645 $ (1,585) $ 5,230
915
573
(5)
167
738
921
71
3,380
390
172
(201)
47
165
437
19
1,029
206
210
(11)
(146)
250
916
(181)
1,244
580
341
(190)
(5)
294
499
(72)
1,447
Tax-equivalent net interest income was $73.0 million in 2018 and $68.9 million in 2017. There was a positive volume
variance that was partially offset by a negative rate variance. The growth in average earning assets exceeded that of
interest-bearing liabilities, and resulted in additional tax-equivalent net interest income of $6.0 million. A rate variance
resulted in a decrease in net interest income of $1.8 million.
Average earning assets increased $170.4 million to $2,035.3 million in 2018 from $1,864.9 million in 2017 and
accounted for a $7,233 increase in interest income. Average loans, net increased $161.2 million, which caused interest
income to increase $7,216. Average taxable investments increased $18.5 million comparing 2018 and 2017, which
resulted in increased interest income of $382 while average tax-exempt investments decreased $9.3 million, which
resulted in a decrease to interest income of $365.
Average interest-bearing liabilities rose $127.2 million to $1,547.7 million in 2018 from $1,420.6 million in 2017
resulting in a net increase in interest expense of $1,244. Large denomination time deposits averaged $21.8 million more
in 2018 and caused interest expense to increase $250. A decrease of $13.0 million in average time deposits less than
$100 reduced interest expense by $146. In addition, interest-bearing transaction accounts, including money market,
NOW and savings accounts grew $68.4 million, which in aggregate caused a $405 increase in interest expense. Short-
term borrowings averaged $57.0 million more and increased interest expense $916 while long-term debt averaged $7.2
million less and decreased interest expense by $181 comparing 2018 and 2017.
An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets increased eight basis points while
there was a 25 basis point increase in the cost of funds. As a result, tax-equivalent net interest income decreased $1,839
comparing 2018 and 2017. The tax-equivalent yield on earning assets was 4.24 percent in 2018 compared to 4.16 percent
in 2017 resulting in an increase in interest income of $1,541. With the tax-equivalent yield on the investment portfolio
decreasing 24 basis points to 2.60 percent in 2018 from 2.84 percent in 2017, interest income decreased $427. The tax-
equivalent yield on the loan portfolio increased 12 basis points to 4.51 percent in 2018 from 4.39 percent in 2017 and
resulted in an increase interest income of $1,965.
An unfavorable rate variance was experienced in the cost of funds. We experienced increases in the rates paid on all
major categories of interest-bearing liabilities with the exception of savings accounts. Specifically, the cost of money
-49-
market and NOW accounts increased 31 basis points and 15 basis points comparing 2018 and 2017. These increases
resulted in an increase in interest expense of $1,488. The cost of savings accounts remained level at 13 basis points and
had no significant change in interest expense. With regard to time deposits, the average rate paid for time deposits less
than $100 increased 11 basis points while time deposits $100 or more increased 52 basis points, which together resulted
in a $905 increase in interest expense. The average rate paid on short-term borrowings increased 88 basis points in 2018
when compared to 2017, causing a $921 increase in interest expense. Interest expense increased $71 from a 13 basis
point increase in the average rate paid on long-term debt.
The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or
rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include
available-for-sale securities at amortized cost. Income on investment securities and loans is adjusted to a tax-equivalent
basis using the prevailing federal statutory tax rate of 21.0 percent in 2018 and 35.0 percent in 2017 and 2016.
-50-
Summary of net interest income
Assets:
Earning assets:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
Total interest earning
assets
Less: allowance for loan losses
Other assets
Total assets
2018
Average
Average
Balance
Interest Income/ Interest
Rate
Expense
Average
Balance
2017
Average
Interest Income/ Interest
Expense
Rate
$ 1,627,062 $
126,088
74,352
4,641
4.57 % $ 1,479,387 $
3.68
112,594
64,946
4,866
4.39 %
4.32
180,182
101,475
478
4,014
3,318
8
2.23
3.27
1.67
161,643
110,788
500
3,130
4,612
5
1.94
4.16
1.00
2,035,285
20,013
213,617
$ 2,228,889
86,333
4.24 % 1,864,912
17,673
212,845
$ 2,060,084
77,559
4.16 %
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
$
296,331
388,334
389,557
144,445
147,054
133,834
48,189
Total interest-bearing
liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
1,547,744
395,287
15,202
270,656
Total liabilities and
stockholders’ equity
Net interest income/spread
Net interest margin
$ 2,228,889
Tax-equivalent adjustments:
Loans
Investments
Total adjustments
1,434
1,549
503
1,698
1,265
901
1,348
0.55 %
0.45
0.13
1.08
1.01
1.17
2.44
8,698
0.61 %
2,555
2,332
487
1,719
2,253
2,738
1,238
0.86 % $
0.60
0.13
1.19
1.53
2.05
2.57
262,292
345,383
398,104
157,397
125,220
76,846
55,342
13,322
0.86 % 1,420,584
361,386
15,064
263,050
$ 2,060,084
$
73,011
3.38 %
3.59 %
$
68,861
3.55 %
3.69 %
$
$
975
697
1,672
$
$
1,703
1,614
3,317
Note: Average balances were calculated using average daily balances. Interest income on loans includes fees of $1,528
in 2018, $1,469 in 2017 and $1,085 in 2016.
-51-
Assets:
Earning assets:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
Total interest 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:
2016
Average
Average
Balance
Interest Income/ Interest
Rate
Expense
$ 1,349,797 $
106,544
59,902
4,663
4.44 %
4.38
147,329
123,942
1,432
2,564
5,289
49
1.74
4.27
3.42
72,467
4.19 %
854
1,208
693
1,703
971
402
1,420
7,251
0.39 %
0.40
0.18
1.05
0.87
0.60
2.40
0.55 %
1,729,044
14,781
204,222
$ 1,918,485
$
219,265
305,156
391,631
162,286
111,405
67,553
59,066
1,316,362
330,295
15,469
256,359
$ 1,918,485
$
65,216
3.64 %
3.77 %
$
$
1,632
1,851
3,483
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 $4,200 in 2018 and $4,800 in 2017. A lower provision for loan losses is the product
of improving asset quality throughout 2018 as well as a change in the historical loss factors used in the calculation.
Based on our most recent evaluation at December 31, 2018, we believe that the allowance was adequate to absorb any
known or potential losses in our portfolio.
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Noninterest Income:
Our noninterest income decreased $3,527 or 20.5 percent to $13.7 million in 2018 from $17.2 million in 2017. We
realized a $291 net gain on the sale of our credit card portfolio in 2018 while the 2017 results include a $2.3 million net
gain on the sale of our merchant services business. Revenue received from service charges, fees and commissions
increased $334 or 4.6 percent comparing 2018 and 2017, due in part to death benefit proceeds on a bank owned life
insurance (BOLI) policy totaling $368, a higher dividend on our FHLB-Pgh stock of $277 due to an increase in rate and
higher volume, and increased interchange revenue from debit card transactions of $158, partially offset by lower revenue
related to swap transactions of $610 as the number and amount of transactions in 2018 was lower than during
2017. Merchant services revenue decreased $1.7 million in 2018 when compared to 2017 due to the sale of the business
during the second quarter of 2017. Commissions and fees on fiduciary activities decreased $21 or 1.0 percent comparing
2018 and 2017 due to a decrease in executor fees. Wealth management income increased $36 or 2.6 percent comparing
2018 to 2017 due to growth. Mortgage banking income decreased $157 or 20.0 percent in 2018 compared to 2017 as the
volume of loans originated for sale declined. Income from investment in life insurance decreased $12 or 1.6 percent to
$757 in 2018 from $769 in 2017.
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.
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
Donations
Other
Other expenses
Total noninterest expense
2018
2017
2016
$ 23,557 $ 22,271 $ 18,655
3,779
22,434
4,399
26,670
4,850
28,407
6,236
4,661
10,897
5,632
4,343
9,975
5,284
4,138
9,422
9
1,093
2,414
619
773
720
881
1,339
5,335
13,183
2,993
1,101
2,128
767
736
972
1,186
1,006
5,285
16,174
$ 52,487 $ 51,293 $ 48,030
1,808
826
2,277
691
749
942
1,034
1,188
5,133
14,648
Noninterest expense was $52.5 million for the year ended December 31, 2018 compared to $51.3 million for the year
ended December 31, 2017.
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Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 54.1 percent
of the total noninterest expense. Salaries and employee benefits expense increased $1,737 or 6.5 percent to $28.4 million
in 2018 from $26.7 million in 2017. Salaries and payroll taxes increased $1,286 or 5.8 percent, while employee benefits
expense increased $451 or 10.3 percent. Annual performance-based salary adjustments as well as costs associated with
our further expansion in the Lehigh Valley during 2018, including a full operational year at our newest branch office on
Tilghman Street in West Allentown and the addition of seasoned lending and support personnel in the region provided
the majority of the increase.
Occupancy and equipment expense increased $922 or 9.2 percent to $10.9 million in 2018 from $10.0 million in 2017.
Specifically, building-related costs increased $604 or 10.7 percent while equipment-related costs increased $318 or 7.3
percent. The increases in occupancy and equipment-related expenses were driven by costs associated with a full
operational year at our new community banking office on Tilghman Street in West Allentown, PA. In general, as we
expand and increase our market area, occupancy related expenses, including technology costs associated with the
maintenance and operations of new infrastructure within these markets increases.
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 and all other expenses
were $13.2 million in 2018 and $14.6 million in 2017. Merchant transaction expenses decreased $1,799 to $9 in 2018
compared to $1,808 in 2017 due to the sale of our merchant business in the second quarter of 2017. All other expenses,
including FDIC insurance and assessments, professional fees and outside services, other taxes, stationery and supplies,
advertising, amortization of intangible assets and other expenses totaled $13,174 in 2018, an increase of $334 or 2.6
percent, compared to $12,840 in 2017.
Income Taxes:
Our income tax expense was $3.4 million in 2018 and $8.2 million in 2017. On December 22, 2017, President Donald
Trump signed into law H.R. 1, also known as the Tax Cuts and Jobs Act, which among other things reduced the federal
corporate income tax rate to 21% effective January 1, 2018. As a result, and in accordance with accounting principles
generally accepted in the United States of America (“GAAP”), we concluded that deferred tax assets, net had to be
revalued. Our deferred tax assets, net represents expected corporate tax benefits anticipated to be realized in the future.
The reduction in the federal corporate income tax rate reduced these anticipated future benefits. The revaluation of the
our deferred tax assets, net at December 31, 2017 resulted in a reduction of these net assets and a corresponding increase
in income tax expense of $2.6 million or $0.35 per share, which was recorded in the fourth quarter of 2017. This one-
time charge was not replicated in 2018 and the decrease in income tax expense for 2018 was the direct result of the
lowering of the statutory tax rate from 35% in prior years to 21% for 2018. Further, 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. Without regard to the one-time deferred tax adjustment, our effective tax rate decreased to 12.0 percent in
2018, compared to 20.9 percent in 2017.
The effective tax rate in 2018 and 2017 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 both 2018 and
2017. We anticipate investment tax credits from these investments to be $1.1 million again in 2019. Over the next seven
years, we will recognize aggregate tax credits from our investments in these projects of $5.6 million.
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Management’s Discussion and Analysis 2017 versus 2016
(Dollars in thousands, except per share data)
Operating Environment:
The United States economy continued to show signs of expansion in 2017, as the gross domestic product (“GDP”), the
value of all goods and services produced in the Nation, came in at an annual rate of 2.5 percent (estimated) in the fourth
quarter. This comes on the heels of a third quarter reading of 3.2 percent in real GDP. The economy grew at 1.6 percent
for all of 2016, the worst performance since 2011, after growing at a rate of 2.6 percent in 2015. The Federal Reserve
Board’s Federal Open Market Committee (“FOMC”) increased the federal funds rate three times in 2017 ending the year
at a range of 1.25% to 1.50%. In raising the key target range for the federal funds rate, the FOMC noted strong labor
markets and below target inflation. FOMC officials expect inflation to stabilize around their 2.0 percent objective over
the “medium term”. The median forecast is for a federal funds rate of 2.125 percent by year-end 2018, implying that
there will be three additional rate hikes in 2018.
Inflation picked up somewhat in 2017, as the consumer price index (“CPI”) registered 2.1 percent for 2017, just eclipsing
the FOMC’s benchmark of 2.0 percent. The CPI was 2.1 percent in 2016 as well. Core personal consumption
expenditure price index, which ignores food and energy, averaged 1.8 percent in 2017.
On a national level, employment conditions improved in 2017. The civilian labor force increased 1.4 million, while the
number of people employed increased 1.8 million in 2017. As a result, the annual unemployment rate for the U.S. fell in
2017 when compared to 2016. All sectors of employment, with the exception of the private sector, reported employment
gains from the end of 2016.
National, Pennsylvania, New York and our market area’s non-seasonally-adjusted annual unemployment rates in 2017
and 2016, are summarized as follows:
United States
New York
Pennsylvania
Broome County
Bucks County
Lackawanna County
Lehigh County
Luzerne County
Monroe County
Montgomery County
Northampton County
Susquehanna County
Wayne County
Wyoming County
2017
2016
4.4 % 4.9 %
4.6
4.9
5.5
4.2
5.1
5.1
5.9
5.9
3.8
4.9
4.7
5.1
5.2 % 6.2 %
4.8
5.4
5.4
4.6
5.7
5.4
6.4
6.3
4.2
5.2
5.7
5.9
Employment conditions improved for both the Commonwealth of Pennsylvania and New York State in 2017 as
evidenced by a decrease in their respective unemployment rates. With respect to the markets we serve, the
unemployment rate decreased in all but one of the counties in which we have branches or ATM locations. The lowest
unemployment rate in 2017, for all of the counties we serve, was Montgomery County at 3.8 percent.
With respect to the banking industry, net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks
in 2017 totaled $164.8 billion, a decrease of $6.0 billion or 3.5 percent from 2016. Approximately 56.2 percent of all
institutions reported higher net income in 2016, while only 5.4 percent reported net losses, a slight uptick from last
year’s reported 4.2 percent unprofitable institutions. Loan loss provisions of $51.1 billion in 2017 were $3.0 billion or
6.2 percent more than banks set aside in 2016. This is the third consecutive year that loan loss provisions have been
higher than the preceding year. Net interest income increased for the fourth year in a row, by $37.7 billion or 8.2 percent.
Noninterest income was $1.8 billion or 0.7 percent above the level of 2016. Realized gains on sales of investments were
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$1.7 billion or 43.8 percent less than a year ago. Total noninterest expense increased $19.5 billion or 4.6 percent
comparing 2017 and 2016. The return on average assets for 2017 was 0.97 percent compared to 1.04 percent in 2016.
The United States economy continued to improve in 2017. This could affect future interest rates which may adversely
impact bank earnings as net interest margins compress from the inability of management to keep funding 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 $2.2 billion, $1.7 billion and $1.7 billion, respectively, at December 31, 2017. Total
assets, loans and deposits grew 8.5 percent, 10.4 percent and 8.2 percent, respectively, compared to 2016 year-end
balances.
The loan portfolio consisted of $1.3 billion of business loans, including commercial and commercial real estate loans,
and $430.7 million in retail loans, including residential mortgage and consumer loans at December 31, 2017. Total
investment securities were $281.8 million at December 31, 2017, including $272.5 million of investment securities
classified as available-for sale and $9.3 million classified as held-to-maturity. Total deposits consisted of $380.7 million
in noninterest-bearing deposits and $1.3 billion in interest-bearing deposits at December 31, 2017.
Stockholders’ equity equaled $265.0 million, or $35.82 per share, at December 31, 2017, and $256.6 million, or $34.71
per share, at December 31, 2016. Our equity to asset ratio was 12.21 percent and 12.83 percent at those respective period
ends. Dividends declared for the 2017 amounted to $1.26 per share representing 50.4 percent of net income.
Nonperforming assets equaled $11.6 million or 0.68 percent of loans, net and foreclosed assets at December 31, 2017,
down from $14.2 million or 0.93 percent at December 31, 2016. The allowance for loan losses equaled $19.0 million or
1.12 percent of loans, net, at December 31, 2017, compared to $16.0 million or 1.04 percent at year-end 2016. Loans
charged-off, net of recoveries equaled $1.8 million or 0.11 percent of average loans in 2017, compared to $2.0 million or
0.14 percent of average loans in 2016.
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, 2017, 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 $11.9 million, to $281.8 million at December 31, 2017, from $269.9 million at
December 31, 2016. At December 31, 2017, the investment portfolio consisted of $272.5 million of investment securities
classified as available-for-sale and $9.3 million classified as held-to-maturity. Strong loan demand during 2017 resulted
in using a portion of the investment cash flow to fund loans. Excess cash flow from investment repayments was directed
back into the investment portfolio primarily during the third and fourth quarters of 2017. Security purchases totaled
$73.5 million in 2017, with purchases consisting of short-term U.S. Treasury securities, intermediate- term U.S.
government sponsored enterprises securities, longer term tax-exempt securities and mortgage-backed securities.
Investment purchases in 2016 amounted to $62.0 million.
Repayments of investment securities totaled $57.0 million in 2017 and $54.7 million in 2016. There were no sales of
investment securities during 2017. Proceeds from the sale of investment securities available-for-sale in 2016 totaled
$27.4 million with net gains recognized on the sale totaling $623 thousand. The 2016 sales consisted of $17.1 million of
short-term U.S. Government-sponsored enterprises securities and $10.3 million of short-term U.S. Treasury securities.
We continually analyze the investment portfolio with respect to its exposure to various risk elements.
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Investment securities averaged $272.4 million and equaled 14.6 percent of average earning assets in 2017, compared to
$271.3 million and equaled 15.7 percent of average earning assets in 2016. The tax-equivalent yield on the investment
portfolio decreased five basis points to 2.84 percent in 2017 from 2.89 percent in 2016.
Loan Portfolio:
Loans, net increased $160.1 million or 10.4 percent in 2017 to $1.7 billion at December 31, 2017. Business loans,
including commercial loans and commercial real estate loans, were $1.3 billion or 74.6 percent of loans, net at
December 31, 2017, and $1.1 billion or 72.3 percent at year-end 2016. Residential mortgages and consumer loans totaled
$430.7 million or 25.4 percent of loans, net at year-end 2017 and $424.0 million or 27.7 percent at year-end 2016. Loan
growth remained strong throughout 2017. Loans, net grew at an annual rate of 10.4 percent in 2017. The increase in
loans in 2017 was primarily 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. Our Company has expanded our presence in the greater Lehigh Valley with the addition of two community
banking offices, complemented with additional lending teams to continue the growth. Additional growth was attained
through our entrance into the King of Prussia market initially by establishing a loan production office and then by
opening a retail branch in the fourth quarter of 2016. 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 $1.6 billion in 2017, compared to $1.5 billion in 2016. Taxable loans averaged $1.5 billion, while tax-
exempt loans averaged $112.6 million in 2017. 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 85.4 percent in 2017,
an increase from 84.2 percent in 2016.
Asset Quality:
We experienced improvements in our asset quality as evidenced by a decrease in nonperforming assets of $2.6 million or
18.5 percent to $11.6 million or 0.68 percent of loans, net of unearned income, and foreclosed assets at December 31,
2017, from $14.2 million or 0.93 percent of loans, net of unearned income, and foreclosed assets at the end of 2016. The
decrease resulted from a $3.6 million decrease in nonaccrual loans and a decrease in foreclosed assets of $0.1 million
offset by an increase of $1.1 million in troubled debt restructured loans. For a further discussion of assets classified as
nonperforming assets and potential problem loans, 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
impairment and the requirements of FASB ASC 450, for large groups of smaller-balance homogeneous loans to be
collectively evaluated for impairment.
The allowance for loan losses increased $3.0 million to $19.0 million at December 31, 2017, from $16.0 million at the
end of 2016. The increase resulted from a provision for loan losses of $4.8 million less net loans charged-off of $1.8
million. The allowance for loan losses, as a percentage of loans, net of unearned income, was 1.12 percent at the end of
2017, compared to 1.04 percent at the end of 2016.
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 $231 to $1,801 in 2017 from $2,014 in
2016. Net charge-offs, as a percentage of average loans outstanding, equaled 0.11 percent in 2017 and 0.14 percent in
2016.
-57-
The allocated element of the allowance for loan losses account increased $2,999 to $18,960 at December 31, 2017,
compared to $15,961 at December 31, 2016. The specific portion of the allowance for impairment of loans individually
evaluated under FASB ASC 310 decreased $1,176 to $766 at December 31, 2017, from $1,942 at December 31, 2016.
However, the formula portion of the allowance for loans collectively evaluated for impairment under FASB ASC 450,
increased $4,175 to $18,194 at December 31, 2017, from $14,019 at December 31, 2016. 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. The increase in the formula portion was due to a significant increase in volume, as the overall loss factor
remained relatively unchanged.
There was no unallocated element of the total allowance for loan losses at December 31, 2017. 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 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 167.9 percent at December 31, 2017 and 115.5 percent at December 31, 2016. We believe that our
allowance was adequate to absorb probable credit losses at December 31, 2017.
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 $130.3 million or 8.2 percent to $1.7 billion
at the end of 2017. Noninterest-bearing deposits grew $27.0 million or 7.6% while interest-bearing deposits increased
$103.3 million or 8.4% in 2017. Noninterest-bearing deposits represented 22.1 percent of total deposits while interest-
bearing deposits accounted for 77.9 percent of total deposits at December 31, 2017. Comparatively, noninterest-bearing
deposits and interest-bearing deposits represented 22.3 percent and 77.7 percent of total deposits at year end 2016. With
regard to noninterest-bearing deposits, personal checking accounts increased $9.6 million or 5.4 percent, while
commercial checking accounts increased $17.4 million or 10.0 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
increase in short-term market rates during 2017 due to the FOMC increasing the targeted federal funds rate.
With regard to interest-bearing deposits, interest-bearing transaction accounts, which include money market accounts
and NOW accounts, and savings accounts, increased $106.7 million in 2017. Commercial interest-bearing transaction
accounts increased $65.8 million, while personal interest-bearing transaction accounts increased $47.1 million. Savings
accounts decreased $6.2 million during 2017 due primarily to depositors shifting funds into higher yielding deposit
accounts. The strong growth in the commercial account types was due to continuing our strategic initiative to grow our
public fund deposits and our continued penetration in our expansion markets. Total time deposits decreased $3.4 million
to $282.3 million at December 31, 2017 from $285.7 million at December 31, 2016. The decrease was primarily due to
price sensitive depositors being attracted to premium rates being offered by our competitors.
Total deposits averaged $1.6 billion in 2017 and $1.5 billion in 2016, increasing $129.7 million or 8.5 percent comparing
2017 to 2016. Average noninterest-bearing deposits increased $31.1 million, while average interest-bearing accounts
grew $98.6 million. Average interest-bearing transaction deposits, including money market and NOW, and savings
accounts, increased $89.7 million while average total time deposits increased $8.9 million when comparing 2017 and
2016.
Our cost of interest-bearing deposits increased 4 basis points to 0.50 percent in 2017 from 0.46 percent in 2016.
Specifically, the cost of interest-bearing transaction and savings accounts increased 5 basis points to 0.35 percent while
the cost of time deposits increased 7 basis points to 1.05 percent comparing 2017 and 2016. The increases to the cost of
interest-bearing transaction deposits and to the cost of time deposits was due to the introduction of premium rate deposit
specials at our branch office in Kingston and our new branch offices in the Lehigh Valley in 2017. Additionally, the
FOMC actions to increase the targeted federal funds rate three times in 2017, has resulted in higher deposit rates.
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Volatile deposits, time deposits $100 or more, averaged $125.2 million in 2017, an increase of $13.8 million or
12.4 percent from $111.4 million in 2016. Our average cost of these funds increased 14 basis points to 1.01 percent in
2017, from 0.87 percent in 2016. 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.
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, 2017 and 2016, we had cumulative one-year RSA/RSL ratios of 1.07 and 1.28. 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 and their consideration
to continue to raise short-term rates in the 2018, the focus of ALCO has been to maintain the positive gap position in
order to safeguard future earnings from the potential risk of rising interest rates. During 2017 ALCO took steps to reduce
the magnitude of our positive gap position and guard against rates unchanged through the origination of five year fixed
rate loans and purchase of intermediate-term investment securities. ALCO will continue to focus efforts on strategies in
2018 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 $136.8 million or 22.0 percent
increase in RSL coupled with a $17.4 million or 2.2 percent increase in RSA maturing or repricing within one year. The
increase in RSL resulted primarily from a $75.4 million increase in interest-bearing transaction accounts and an increase
in short-term borrowings of $41.0 million. The majority of the growth in money market and NOW accounts resulted
from an increase in the deposit balances of local school districts and commercial customers. 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 $43.4
million while investment securities decreased $27.0 million. Short-term interest rates increased faster than longer-term
rates during 2017 causing the yield curve to flatten. 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 and intermediate-term U.S. Government-sponsored
agency securities and, to a lesser extent, longer-term municipal 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.
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
2017. At December 31, 2017, 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, 2017, our net noncore funding dependence ratio, the difference between noncore funds and
short-term investments to long-term assets, was 16.1 percent. Our net short-term noncore funding dependence ratio,
noncore funds maturing within one year, less short-term investments to long-term assets equaled 11.1 percent.
Comparatively, our ratios equaled 14.4 percent and 6.5 percent at the end of 2016, which indicated an increase in our
reliance on noncore funds. Moreover, our Basic Liquidity Surplus ratio, defined as liquid assets less short-term
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potentially volatile liabilities as a percentage of total assets, declined to 3.7 percent at December 31, 2017, from 4.2
percent at December 31, 2016. 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
decreased $2.5 million for the year ended December 31, 2017. For the year ended December 31, 2016, cash and cash
equivalents increased $7.0 million. During 2017, cash provided by operating and financing activities was partially offset
by cash used in investing activities.
Operating activities provided net cash of $28.6 million in 2017 and $28.1 million in 2016. 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.
Net cash provided by financing activities equaled $153.5 million in 2017. Net cash provided by financing activities was
$165.3 million in 2016. Deposit gathering, which is our predominant financing activity, increased in both 2017 and
2016. Deposit gathering provided a net cash inflow in 2017 of $130.3 million and $132.9 million in 2016. Short-term
borrowings increased $41.0 million in 2017 while a net increase in short-term borrowings of $44.4 million led to the net
cash provided by financing activities in 2016. Deposit gathering in 2017 was partially offset by $8.4 million repayments
of long-term debt as well as cash dividends paid of $9.3 million. In 2016, deposit gathering was partially offset by a $2.2
million repayment of long-term debt and cash dividends paid of $9.2 million.
Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash used in
investing activities totaled $184.6 million in 2017. Net cash used in investing activities was $186.4 million in 2016. Net
cash used in lending activities was $163.2 million in 2017, a decrease from $195.4 million in 2016. Activities related to
our investment portfolio used net cash of $16.4 million in 2017 and provided net cash of $20.1 million in 2016.
Capital Adequacy:
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 required for adequately capitalized institutions. Our ratio of Tier 1
capital to risk-weighted assets and off-balance sheet items was 11.9 percent at December 31, 2017, and 12.5 percent at
December 31, 2016. Our Total capital ratio was 13.0 percent at December 31, 2017 and 13.5 percent at December 31,
2016. In addition, a new ratio effective January 1, 2015, requires the Company 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 11.9 percent and 11.5 percent at December 31, 2017 and 12.5 percent and 12.1
percent at December 31, 2016. Our Leverage ratio, which equaled 9.9 percent at December 31, 2017 and 10.2 percent at
December 31, 2016, exceeded the minimum of 4.0 percent for capital adequacy purposes. Peoples Bank reported Tier 1
capital, Total capital and Leverage ratios of 11.5 percent, 12.6 percent and 9.7 percent at December 31, 2017, and 12.1
percent, 13.2 percent and 9.9 percent at December 31, 2016. Based on the most recent notification from the FDIC,
Peoples Bank was categorized as well capitalized at December 31, 2017 and 2016. 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.
Stockholders’ equity was $265.0 million or $35.82 per share at December 31, 2017, and $256.6 million or $34.71 per
share at December 31, 2016. Stockholders’ equity grew $8.4 million in 2017 as net income was partially offset by an
increase in accumulated other comprehensive loss and dividends.
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Review of Financial Performance:
Net income was $18.5 million or $2.50 per share in 2017 and $19.6 million or $2.65 per share in 2016. The results for
2017 include a $2.3 million net gain on the sale of our merchant services business and a $2.6 million one time charge to
the federal income tax provision related to the revaluation of our net deferred tax asset, while the 2016 results include net
gains of $0.6 million on the sale of investment securities. Return on average assets (“ROAA”) and return on average
equity (“ROAE”) were 0.90 percent and 7.02 percent for the year ended December 31, 2017. ROAA was 1.02 percent
and ROAE was 7.64 percent for the year ended December 31, 2016.
Tax-equivalent net interest income was $68.9 million in 2017 and $65.2 million in 2016. Our net interest margin equaled
3.69 percent in 2017 and 3.77 percent in 2016. Noninterest income totaled $17.2 million in 2017 and $15.9 million in
2016. Noninterest expense was $51.3 million for the year ended December 31, 2017 compared to $48.0 million for the
year ended December 31, 2016. Our productivity is measured by the operating efficiency ratio, defined as noninterest
expense less amortization of intangible assets divided by the total of tax-equivalent net interest income and noninterest
income. Our operating efficiency ratio was 58.4 percent in 2017.
Net Interest Income:
For the year ended December 31, tax-equivalent net interest income was $68.9 million in 2017 and $65.2 million in
2016. There was a positive volume variance that was partially offset by a negative rate variance. The growth in average
earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income of
$5.2 million. A rate variance resulted in a decrease in net interest income of $1.6 million.
Average earning assets increased $135.9 million to $1,864.9 million in 2017 from $1,729.0 million in 2016 and
accounted for a $5,648 increase in interest income. Average loans, net increased $135.6 million, which caused interest
income to increase $5,957. Average taxable investments increased $14.3 million comparing 2017 and 2016, which
resulted in increased interest income of $262 while average tax-exempt investments decreased $13.2 million, which
resulted in a decrease to interest income of $550.
Average interest-bearing liabilities rose $104.2 million to $1,420.6 million in 2017 from $1,316.4 million in 2016
resulting in a net increase in interest expense of $418. Large denomination time deposits averaged $13.8 million more in
2017 and caused interest expense to increase $129. A decrease of $4.9 million in average time deposits less than $100
reduced interest expense by $52. In addition, interest-bearing transaction accounts, including money market, NOW and
savings accounts grew $89.7 million, which in aggregate caused a $370 increase in interest expense. Short-term
borrowings averaged $9.3 million more and increased interest expense $62 while long-term debt averaged $3.7 million
less and decreased interest expense by $91 comparing 2017 and 2016.
An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets decreased three basis points while
there was a six basis point increase in the cost of funds. As a result, tax-equivalent net interest income decreased $1,585
comparing 2017 and 2016. The tax-equivalent yield on earning assets was 4.16 percent in 2017 compared to 4.19 percent
in 2016 resulting in a reduction in interest income of $556. While the tax-equivalent yield on the investment portfolio
decreased five basis points to 2.84 percent in 2017 from 2.89 percent in 2016, interest income increased $177 due to
changes in the mix of investments. The tax-equivalent yield on the loan portfolio decreased four basis points to 4.39 percent
in 2017 from 4.43 percent in 2016 and resulted in a reduction in interest income of $710.
Unfavorable rate variances were experienced in earning asset yields as well as the cost of funds. We experienced
increases in the rates paid on all major categories of interest-bearing liabilities with the exception of savings accounts.
Specifically, the cost of money market and NOW accounts increased 16 basis points and 5 basis points comparing 2017
and 2016. These increases resulted in an increase in interest expense of $562. The cost of savings accounts decreased
five basis points, which resulted in a decrease of $201 in interest expense. With regard to time deposits, the average rate
paid for time deposits less than $100 increased three basis points while time deposits $100 or more increased 14 basis
points, which together resulted in a $212 increase in interest expense. The average rate paid on short-term borrowings
increased 57 basis points in 2017 when compared to 2016, causing a $437 increase in interest expense. Interest expense
increased $19 from a four basis point increase in the average rate paid on long-term debt.
-61-
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, 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 $4,800 in 2017 and $5,000 in 2016. A lower provision for loan losses is the product
of improving asset quality throughout 2017. Consumer loans experienced an increase in the qualitative factors for
asset quality while commercial loans experienced an increase in the qualitative factor for concentration levels. Based
on our most recent evaluation at December 31, 2017, we believe that the allowance was adequate to absorb any
known or potential losses in our portfolio.
Noninterest Income:
Our noninterest income increased $1,298 or 8.2 percent to $17.2 million in 2017 from $15.9 million in 2016. We
realized a $2.3 million net gain on the sale of our merchant services business in 2017 while the 2016 results include net
gains of $0.6 million on the sale of investment securities. Revenue received from service charges, fees and commissions
increased $1,228 or 20.1 percent comparing 2017 and 2016, due in part to fees generated on interest rate swap
transactions which we began entering into during the third quarter of 2017. Swap transactions resulted in the recognition
of net fee income of $749 thousand. These interest rate swaps allowed the bank to retain large commercial credit
relationships. Commissions and fees on fiduciary activities increased $81 or 4.1 percent comparing 2017 and 2016 due to
an increase in executor fees. Wealth management income increased $113 or 8.7 percent comparing 2017 to 2016 as the
plan to accelerate growth continued throughout 2017. Offsetting the increase were lower revenues received from
merchant services of $1,656 due to the sale of our merchant services business in the second quarter of 2017. Mortgage
banking income decreased $101 or 11.4 percent in 2017 compared to 2016 due to the leveling off of volumes which were
driven by the increase in market rates. Income from investment in life insurance decreased $22 or 2.8 percent to $769 in
2017 from $791 in 2016.
Noninterest Expense:
Noninterest expense was $51.3 million for the year ended December 31, 2017 compared to $48.0 million for the year
ended December 31, 2016.
Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 52.0 percent
of the total noninterest expense. Salaries and employee benefits expense increased $4,236 or 18.9 percent to $26.7
million in 2017 from $22.4 million in 2016. Salaries and payroll taxes increased $3,616 or 19.4 percent, while employee
benefits expense increased $620 or 16.4 percent. Severances paid out in the first half of 2016 along with the addition of
salaries and benefit costs associated with our further expansion in the Lehigh Valley with the opening of two new
community banking offices during 2017 and a full year at our King of Prussia branch office provided the majority of the
increase.
Occupancy and equipment expense increased $553 or 5.9 percent to $10.0 million in 2017 from $9.4 million in 2016.
Specifically, building-related costs increased $348 or 6.6 percent while equipment-related costs increased $205 or 5.0
percent. The increases in occupancy and equipment-related expenses were driven by costs associated with the opening of
our new community banking offices on Tilghman Street in West Allentown, PA and Emrick Boulevard in Bethlehem,
PA.
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 and all other expenses
were $14.6 million in 2017 and $16.2 million in 2016. Merchant transaction expenses decreased $1,185 or 40.0 percent to
$1,808 due to the sale of our merchant business in the second quarter of 2017. All other expenses, including FDIC insurance
and assessments, professional fees and outside services, other taxes, stationery and supplies, advertising and amortization
of intangible assets and other expenses totaled $12,840 in 2017, a decrease of $341 or 2.6 percent, compared to $13,181
in 2016.
-62-
Income Taxes:
Our income tax expense was $8.2 million in 2017 and $5.0 million in 2016. On December 22, 2017, President Donald
Trump signed into law H.R. 1, also known as the Tax Cuts and Jobs Act, which among other things reduced the federal
corporate income tax rate to 21% effective January 1, 2018. As a result, and in accordance with accounting principles
generally accepted in the United States of America (“GAAP”), we concluded that deferred tax assets, net had to be
revalued. Our deferred tax assets, net represents expected corporate tax benefits anticipated to be realized in the future.
The reduction in the federal corporate income tax rate reduces these anticipated future benefits. The revaluation of the
our deferred tax assets, net at December 31, 2017 resulted in a reduction of these net assets and a corresponding increase
in income tax expense of $2.6 million or $0.35 per share, which was recorded in the fourth quarter of 2017. The
remainder of the increase resulted from higher before tax income in 2017 compared to 2016. 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. Without regard to the one-time deferred tax adjustment, our effective tax rate increased
slightly to 20.9 percent in 2017, compared to 20.4 percent in 2016.
The effective tax rate in 2017 and 2016 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 both 2017 and
2016. We anticipate investment tax credits from these investments to be $1.1 million in 2018 as well. Over the next
seven years, we will recognize aggregate tax credits from our investments in these projects of $6.7 million.
-63-
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 derivative and non-derivative financial instruments, none of which are entered into for trading purposes.
During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our
exposure to IRR can be explained as the potential for change in reported earnings and/or the market value of net worth.
Variations in interest rates affect the underlying economic value of assets, liabilities and off-balance sheet items. These
changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest
rates. The effects of the changes in these present values reflect the change in our underlying economic value, and provide
a basis for the expected change in future earnings related to interest rates. Interest rate changes affect earnings by
changing net interest income and the level of other interest-sensitive income and operating expenses. IRR is inherent in
the role of banks as financial intermediaries.
A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most
likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in
their activities.
During 2018, the Federal Reserve Board’s Federal Open Market Committee (“FOMC”) continued to gradually increase
the target federal funds rate. The FOMC continues to expect that, with gradual adjustments in the stance of monetary
policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. At their
December 2018 meeting, the FOMC raised interest rates for the fourth time in 2018 voting to set the new target federal
funds rate at a range of 2.25% to 2.50%. The FOMC judges that risks to the economic outlook are roughly balanced but
will continue to monitor global economic and financial developments and assess their implications for the economic
outlook. The FOMC noted determination of the timing and size of future adjustments to the target range for the federal
funds rate will be its assessment of the realized and expected economic conditions relative to its employment and
inflation objectives.
The projected impact of instantaneous changes in interest rates on our net interest income and economic value of equity
at December 31, 2018, based on our simulation model, is summarized as follows:
Changes in Interest Rates (basis points)
+400
+300
+200
+100
Static
(100)
December 31, 2018
% Change in
Net Interest Income Economic Value of Equity
Metric Policy Metric
Policy
0.1
0.3
0.4
0.4
(20.0)
(20.0)
(10.0)
(10.0)
1.1
1.3
1.1
1.4
(40.0)
(30.0)
(20.0)
(10.0)
(1.4)
(10.0)
(5.4)
(10.0)
Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given
instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the
12 months ending December 31, 2018, would increase slightly at 0.4 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.
The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate
("SOFR") replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by
the end of 2021. The Company has material contracts that are indexed to USD-LIBOR. Industry organizations are
currently working on the transition plan. The Company is currently monitoring this activity and evaluating the risks
involved.
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Item 8. Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Peoples Financial Services Corp. and Subsidiaries
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Peoples Financial Services Corp. and Subsidiaries (the
"Company") as of December 31, 2018 and 2017, and the related consolidated statements of income and comprehensive
income, changes in stockholders’ equity, and cash flows, for the years then ended, and the related notes (collectively
referred to as the "consolidated financial statements"). We also have audited the Company’s internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework: (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, 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 Company's consolidated financial statements and an opinion on the Company’s internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained
in all material respects.
-65-
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting 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 audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Baker Tilly Virchow Krause, LLP
We have served as the Company’s auditor since 2017.
Wilkes-Barre, Pennsylvania
March 15, 2019
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Peoples Financial Services Corp.
Scranton, Pennsylvania
We have audited the accompanying consolidated statements of income and comprehensive income, changes in
stockholders’ equity, and cash flows of Peoples Financial Services Corp. and subsidiaries (the “Company”) for the year
ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements 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 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 audit provides
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of
operations and cash flows of Peoples Financial Services Corp. and subsidiaries for the year ended December 31, 2016, in
conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 16, 2017
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Peoples Financial Services Corp.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
December 31
Assets:
Cash and due from banks:
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and due from banks
Investment securities:
Available-for-sale
Equity investments carried at fair value
Held-to-maturity: Fair value December 31, 2018, $8,380; December
31, 2017, $9,547
Total investment securities
Loans, net
Less: allowance for loan losses
Net loans
Loans held for sale
Premises and equipment, net
Accrued interest receivable
Goodwill
Intangible assets, net
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
2018
2017
$
$
32,569 $
47
32,616
269,682
291
8,361
278,334
1,823,266
21,379
1,801,887
749
38,889
7,115
63,370
2,296
63,737
2,288,993 $
$
410,260 $
1,464,762
1,875,022
86,500
37,906
1,195
9,756
2,010,379
36,336
1,152
37,488
272,502
46
9,274
281,822
1,693,065
18,960
1,674,105
106
37,557
6,936
63,370
3,178
64,469
2,169,031
380,729
1,338,289
1,719,018
123,675
49,734
497
11,131
1,904,055
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and
outstanding 7,399,054 shares at December 31, 2018 and 7,396,505 at
December 31, 2017
Capital surplus
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See notes to consolidated financial statements.
14,798
135,310
136,582
(8,076)
278,614
2,288,993 $
14,793
135,043
121,353
(6,213)
264,976
2,169,031
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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
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 gains on investment securities
Net gain on sale of credit card loans
Net gain on sale of merchant services business
Total noninterest income
Noninterest expense:
Salaries and employee benefits expense
Net occupancy and equipment expense
Merchant services expense
Amortization of intangible assets
Professional fees and outside services
FDIC insurance and assessments
Donations
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Other comprehensive (loss) income:
Unrealized loss on investment securities available-for-sale
Reclassification adjustment for net gain on sales included in net income
Change in benefit plan liabilities
Change in derivative value
Other comprehensive loss
Income tax benefit
Other comprehensive 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
2018
2017
2016
$
74,352
3,666
$
64,946
3,163
$
3,799
2,621
72
151
84,661
9,346
2,738
1,238
13,322
71,339
4,200
67,139
7,678
809
2,036
1,447
627
757
14
291
13,659
28,407
10,897
9
881
2,414
1,093
1,339
7,447
52,487
28,311
3,391
24,920
2,949
2,999
52
133
74,242
6,450
900
1,348
8,698
65,544
4,800
60,744
7,344
2,543
2,057
1,411
784
769
2,278
17,186
26,670
9,975
1,808
1,034
2,277
826
1,188
7,515
51,293
26,637
8,180
18,457
(2,014)
(1,790)
(591)
246
(2,359)
(496)
(1,863)
23,648
$
318
(1,472)
(515)
(957)
17,500
$
59,902
3,031
2,515
3,438
48
50
68,984
5,429
402
1,420
7,251
61,733
5,000
56,733
6,116
4,199
1,976
1,298
885
791
623
15,888
22,434
9,422
2,993
1,186
2,128
1,101
1,006
7,760
48,030
24,591
5,008
19,583
(3,417)
(623)
917
(3,123)
(1,093)
(2,030)
17,553
3.37
3.37
$
$
2.50
2.50
$
$
2.65
2.65
7,397,797
7,397,797
1.31
7,395,837
7,395,837
1.26
7,396,716
7,396,716
1.24
$
$
$
$
$
$
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Peoples Financial Services Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Accumulated
Other
Common
Stock
$ 14,821 $ 135,371 $ 100,701 $
Retained
Earnings
Capital
Surplus
Comprehensive Treasury
Loss
(2,125) $
Stock
For the Three Years Ended December 31, 2018
Balance, January 1, 2016
Net income
Other comprehensive loss, net of income taxes
Dividends declared: $1.24 per share
Stock based compensation
Share retirement: 16,463 shares
Balance, December 31, 2016
Net income
Other comprehensive loss, net of income taxes
Reclassification related to adoption of ASU
2018-02
Dividends declared: $1.26 per share
Stock based compensation
Common stock grants awarded, net of unearned
compensation of $32: 2,362 shares
Balance, December 31, 2017
Net income
Other comprehensive loss, net of income taxes
Reclassification related to adoption of ASU
2016-01
Dividends declared: $1.31 per share
Stock based compensation
Common stock grants awarded, net of unearned
compensation of $92: 2,548 shares
Balance, December 31, 2018
See notes to consolidated financial statements
19,583
(9,170)
111,114
18,457
1,101
(9,319)
121,353
24,920
2
(9,693)
(33)
14,788
71
(571)
134,871
177
5
14,793
(5)
135,043
272
5
(5)
(2,030)
(4,155)
(957)
(1,101)
(6,213)
(1,861)
(2)
Total
$ 248,768
19,583
(2,030)
(9,170)
71
(604)
256,618
18,457
(957)
(9,319)
177
264,976
24,920
(1,861)
(9,693)
272
$ 14,798 $ 135,310 $ 136,582 $
(8,076) $
$ 278,614
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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:
2018
2017
2016
$
24,920 $
18,457 $
19,583
Depreciation of premises and equipment
Amortization of deferred loan costs
Amortization of intangibles
Amortization of low income housing partnerships
Provision for loan losses
Net unrealized gain on equity investment securities
Net gain on sale of other real estate owned
Gain on life insurance proceeds
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 available-for-sale
Net gain on sale of credit card loans held for sale
Net gain on sale of merchant services business
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
Net redemption of restricted equity securities
Proceeds from sale of student loan portfolio
Proceeds from sale of credit card loan portfolio
Net increase in lending activities
Investment in low income housing partnerships
Purchases of premises and equipment
Proceeds from the sale of premises and equipment
Proceeds from investment in life insurance
Proceeds from the sale of merchant services business
Proceeds from sale of other real estate owned
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Repayment of long-term debt
Net (decrease) increase in short-term borrowings
Retirement of common 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 period
Cash and cash equivalents at end of period
$
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2,333
525
881
465
4,200
(14)
(21)
(368)
(13,194)
12,650
(99)
2,206
(291)
(757)
(681)
272
(179)
816
698
(1,736)
32,626
1,950
907
1,034
470
4,800
1,661
786
1,186
477
5,000
(11)
137
(21,036)
21,149
(219)
2,764
(26,708)
27,593
(885)
3,635
(623)
(2,278)
(769)
1,665
177
(708)
2,023
35
(1,817)
28,593
(791)
(1,442)
71
(432)
1,373
(98)
(2,470)
28,053
27,408
53,128
1,561
31,093
898
55,800
1,222
(73,471)
(1,511)
(62,022)
(1,648)
(32,709)
1,100
5,103
2,698
(141,277)
(4,069)
404
672
(163,236)
(6,247)
1,281
(134,806)
2,300
580
(184,563)
156,004
(11,828)
(37,175)
130,261
(8,400)
40,975
(9,693)
97,308
(4,872)
37,488
32,616 $
(9,319)
153,517
(2,453)
39,941
37,488 $
(195,408)
(2,045)
(6,764)
(1,500)
933
(186,357)
132,947
(2,220)
44,375
(604)
(9,170)
165,328
7,024
32,917
39,941
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:
2018
2017
2016
$ 12,624 $
2,650
8,663 $
5,900
7,349
5,900
Transfers of loans to other real estate
$
1,432 $
460 $
757
See notes to consolidated financial statements
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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”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through
twenty-seven full-service community banking offices located within Bucks, Lackawanna, Lehigh, Luzerne, Monroe,
Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New
York and one limited purpose banking office located in Schuylkill County, Pennsylvania.
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 deposits to commercial enterprises and individuals.
Deposit product offerings include checking accounts, savings accounts, money market accounts and certificates of
deposits.
The Company faces competition primarily from commercial banks, thrift institutions and credit unions within its 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:
The consolidated financial statements of the Company have been prepared in conformity with accounting principles
generally accepted in the United States of America (“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,
2018, 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
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other-than-temporary impairment losses on securities and impairment of goodwill. 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 with unrealized gains and losses
reported in earnings. 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 on callable debt securities are amortized to the earliest call date from the maturity date.
Premiums on non-callable securities are amortized and discounts are accreted using the interest method over the
expected life of the security. 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
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.
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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 at the time when they are paid by customer.
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, commercial
real estate, municipal and other related tax free 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 establish advance rates against the different forms of collateral that can be pledged
against various commercial loans. Typically, the majority of loans will be underwritten 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.
Generally, assets financed through commercial loans are used for the operations of the business. Repayment for these
types of loans generally comes from the cash flow of the business or the ongoing conversion of assets. Commercial real
estate loans include construction, mini-perm, or longer term loans financing commercial properties. Repayment of these
loans are generally dependent upon either the ongoing business cash flow from an owner occupied property or the
lease/rental income or sale of a non-owner occupied property. Commercial real estate loans typically require a loan to
value of not greater than 80% 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 concentration risks, 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 higher level of risk than residential real estate loans,
which could be caused by unfavorable conditions in the real estate market or the economy. To effectively monitor loans
on income properties, the Company requires borrowers and loan guarantors, if any, to provide annual 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, the Company considers and reviews a cash flow analysis of the borrower and guarantor,
when applicable. In addition, the Company evaluates business cash flows, if applicable, net operating income of the
property, the borrower’s expertise, credit history and the value of the underlying property. The Company has generally
required that the properties securing these real estate loans have debt service coverage ratios, which is net cash flow
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.
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Commercial loans are generally made on the basis of a business entity or individual borrower’s ability to make
repayment from business cash flows or individual borrowers’ employment and other income. Commercial business loans
tend to have a slightly higher risk than commercial real estate loans because collateral usually consists of business assets
versus real estate. Further, any collateral securing such loans may depreciate over time and could be difficult to appraise
and liquidate. As a result, repayment of commercial business loans may depend substantially on the success of the
business itself.
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, loan to value ratio and term. Residential mortgages may have amortizations up to 30 years.
Consumer loans include installment loans, car loans, and overdraft lines of credit. These loans are both secured and
unsecured. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of
consumer loans that are unsecured. 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 interest and fees on loans and are included in interest income when paid.
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.
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:
(cid:2) Rate Modification — A modification in which the interest rate is changed to a below market rate.
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(cid:2) Term Modification — A modification in which the maturity date, timing of payments or frequency of
payments is changed.
(cid:2)
Interest Only Modification — A modification in which the loan is converted to interest only payments for a
period of time.
(cid:2) Payment Modification — A modification in which the dollar amount of the payment is changed, other than
an interest only modification described above.
(cid:2) 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:
(cid:2) 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.
(cid:2) 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.
(cid:2) 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.
(cid:2) 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.
(cid:2) 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
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
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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 and a formula portion for
loss contingencies on those loans collectively evaluated.
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 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.
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
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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 inherent in
the loan portfolio as of December 31, 2018.
Revenue from Contracts with Customers:
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification
Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the
contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate
the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company
satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that
results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment
securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the
nature of its contracts with customers and determined that further disaggregation of revenue from contracts with
customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not
necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services
are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. The
following is a discussion of revenues within the scope of the new guidance:
(cid:2)
Service charges, fees and commissions . Service charges, fees and commissions on deposit accounts include
fees for banking services provided, overdrafts and non-sufficient funds. Revenue is generally recognized in
accordance with published deposit account agreements for retail accounts or contractual agreements for
commercial accounts. Our deposit services also include our ATM and debit card interchange revenue that is
presented gross of the associated costs. Interchange revenue is generated by our deposit customers’ usage and
volume of activity. Interchange rates are not controlled by the Company, which effectively acts as processor
that collects and remits payments associated with customer debit card transactions.
(cid:2) Commission and fees on fiduciary activities. Commission and fees on fiduciary activities includes fees and
commissions from investment management, administrative and advisory services primarily for individuals, and
to a lesser extent, partnerships and corporations. Revenue is recognized on an accrual basis at the time the
services are performed and when we have a right to invoice and are based on either the market value of the
assets managed or the services provided.
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(cid:2) Wealth management income. Wealth management income includes fees and commissions charged when we
arrange for another party to transfer brokerage services to a customer. The fees and commissions under this
agent relationship are based upon stated fee schedules based upon the type of transaction, volume, and value of
the services provided.
(cid:2) Other noninterest income . Other noninterest income includes, among other things, merchant services income.
Merchant services revenue is derived from a third party vendor that processes credit card transactions on behalf
of our merchant customers. Merchant services revenue is primarily comprised of residual fee income based on
the referred merchant’s processing volumes and/or margin.
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
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.
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,
2018.
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.
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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 on certain 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. The policies
can be liquidated, if necessary, with associated tax costs. However, the Company intends to hold these policies and,
accordingly, the Company has not provided for income taxes of the earnings from the increase in cash surrender value.
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:
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.
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a
hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary
to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value
of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value
hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of
the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of
the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended
to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply
hedge accounting.
The Company has elected to measure the credit risk of its derivative financial instruments that are subject to master
netting agreements on a net basis by counterparty portfolio.
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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.
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:
(cid:2) 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.
(cid:2) 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.
(cid:2) 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.
The following methods and assumptions were used by the Company to construct the summary table in Note 12
containing the fair values and related carrying amounts of financial instruments measured at 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 and quoted market
prices.
Impaired loans: Fair values for impaired loans are estimated using discounted cash flow analysis determined by the
loan review function or underlying collateral values, where applicable.
Interest rate swaps and floors: Values of these instruments are obtained through an independent pricing source
utilizing information which may include market observed quotations for swaps, Libor rates, forward rates and rate
volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-
performance of the counterparty.
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Advertising:
The Company follows the policy of charging marketing and advertising costs to expense as incurred. Advertising
expense for the years ended December 31, 2018, 2017 and 2016 was $720, $942 and $972, respectively.
Income taxes:
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, 2018.
On December 22, 2017, President Donald Trump signed into law H.R. 1, also known as the Tax Cuts and Jobs Act,
which among other things reduced the federal corporate income tax rate to 21% effective January 1, 2018. As a result,
and in accordance with GAAP, the Company remeasured its net deferred tax assets using the 21% rate. The revaluation
of the Company’s net deferred tax assets at December 31, 2017 resulted in a reduction of these net assets and a
corresponding increase in income tax expense of $2.6 million or $0.35 per share, which was recorded in the fourth
quarter of 2017.
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 2015.
Other comprehensive loss:
The components of other comprehensive 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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For the Year Ended December 31
Net Income
Average common shares
outstanding
Earnings per share
2018
Basic
24,920 $
$
Diluted
24,920 $
2017
Basic
18,457 $
Diluted
18,457 $
Basic
19,583 $
Diluted
19,583
2016
7,397,797
7,397,797
7,395,837
7,395,837
7,396,716
$
3.37 $
3.37 $
2.50 $
2.50 $
2.65 $
7,396,716
2.65
Stock-based compensation:
The Company recognizes all share-based payments to employees in the consolidated statements of income and
comprehensive income based on their fair values. The fair value of such equity instruments is recognized as an expense
in the consolidated financial statements as services are performed. The Company has granted stock awards to employees
at a 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.
Recent accounting standards:
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods
or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was
effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s
consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from
interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope
of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09,
including but not limited to service charges on deposit accounts, commissions from fiduciary activities, wealth
management, other noninterest income and gains/losses on the sale of other real estate owned, did not change significantly
from current practice. The standard permits the use of either the full retrospective or modified retrospective transition
method. The Company elected to use the modified retrospective transition method which requires application of ASU
2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be
retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.
In January 2016, the FASB issued 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
was effective for the Company on January 1, 2018. Implementation of this guidance had no material impact on the
consolidated financial statements of the Company in 2018.
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 are classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's
perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease is
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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 amendments in this ASU are effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2018. The Company elected to adopt this
pronouncement using the optional transition method under ASU 2018-11 as of January 1, 2019 and estimates that the
adoption will result in recognition of right-of-use assets and lease liabilities for operating leases of approximately $5,500
on its consolidated balance sheets, with no expected adjustment to stockholders’ equity and no material impact to its
consolidated statements of income and comprehensive income.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” This ASU will have a significant impact on the Company’s calculation and accounting
for its Allowance for Loan Losses as well as credit losses related to investment securities available-for-sale. A summary
of significant provisions of this ASU is as follows:
(cid:2) The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be
presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial
asset(s), and that the income statement include the measurement of credit losses for newly recognized financial
assets as well as changes in expected losses on previously recognized financial assets. The provisions of this
ASU require measurement of expected credit losses based on relevant information including past events,
historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of
the asset. The provisions of this ASU differ from current GAAP in that current GAAP generally delays
recognition of the full amount of credit losses until the loss is probable of occurring.
(cid:2) The amendments in the ASU retain many of the disclosure requirements related to credit quality in
current GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss
methodology. In addition, the ASU requires that disclosure of credit quality indicators in relation to the
amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.
(cid:2) This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather
than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair
value is below amortized cost. For purchased investment securities available-for-sale with a more-than-
insignificant amount of credit deterioration since origination, the ASU requires an allowance be determined in a
manner similar to other investment securities available-for-sale; however, the initial allowance would be added
to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and
interest income recognized at the effective rate excluding the discount embedded in the purchase price related to
estimated credit losses at acquisition.
(cid:2) This ASU will be effective for the Company for interim and annual periods beginning in the first quarter of
2020. Earlier adoption is permitted beginning in the first quarter of 2019. The Company will record the effect of
implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of
the reporting period in which Topic 326 is effective.
Management created a formal committee to oversee the implementation of the amendments consisting of key
stakeholders from credit, finance, risk and information technology. We have chosen a third-party software platform
provider and are reviewing and testing the different credit loss estimation methodologies and collecting data to be able to
comply with the standard. In addition to our allowance for loan losses, we will also record an allowance for credit losses
on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be
impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and
forecasts at that time. We are evaluating the impact of the ASU on our consolidated financial statements
In March of 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs: Premium
Amortization on Purchased Callable Debt Securities.” ASU 2017-08 addresses the amortization method for all callable
bonds purchased at a premium to par. Under the revised guidance, entities will be required to amortize premiums on
callable bonds to the earliest call date. ASU 2017-08 is effective in 2019 although early adoption is permitted. The
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Company elected to early adopt ASU 2017-08 in the first quarter of 2017. The adoption of this guidance did not have a
material impact on the Company’s financial statements.
In February 2018, the FASB issued ASU 2018-02, ”Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income”, which permits, but does not require, entities to reclassify tax effects stranded in accumulated
other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that
elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other
comprehensive income. The Company elected early adoption and adopted this standard update in 2017. The Company’s
stranded tax effects were related to valuation of the net deferred tax asset attributable to items of accumulated other
comprehensive income (loss), which are unrealized gains (losses) on available-for-sale securities and unfunded defined
benefit plan obligations. Adoption resulted in a reclassification between two categories of stockholders’ equity in 2017,
with an increase of $1,101 in retained earnings and a decrease in accumulated other comprehensive loss for the same
amount.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): “Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement” modifies the disclosure requirements on fair
value measurements in Topic 820, Fair Value Measurement, based on the FASB Concepts Statement, “Conceptual
Framework for Financial Reporting – Chapter 8: Notes to Financial Statements”. In accordance with the Concepts
Statement, this ASU removes, modifies and adds select disclosure requirements under Topic 820 after consideration of
costs and benefits. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019 for public entities, with early adoption permitted. The adoption of this guidance on January 1,
2020 is not expected to have a material effect on the Company’s consolidated financial statements.
In August 2017, the Financial Accounting Standards Board issued ASU 2017-12, “Derivatives and Hedging: Targeted
Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s
financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for
public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an
interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will
recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement
of financial position as of the date of adoption. The Company has early adopted the standard in 2018 with no impact to its
financial position upon transition.
2. 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 $2,768 and $22,651 at December 31, 2018 and 2017, respectively.
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3. Investment securities:
The amortized cost and fair value of investment securities aggregated by investment category at December 31, 2018 and
2017 are summarized as follows:
Total
$ 272,933 $
757 $
December 31, 2018
Available-for-sale:
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises
Held-to-maturity:
Tax-exempt state and municipals
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
December 31, 2017
Available-for-sale:
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Taxable
Tax-exempt
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises
Gross
Gross
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
25,948 $
94,999
9 $
2
365 $
2,183
25,592
92,818
13,544
86,361
12,663
33,149
6,269
309
338
50
49
745
84
401
13,853
85,954
12,629
32,797
230
6,039
4,008 $ 269,682
$
6,855 $
12 $
43 $
6,824
42
1,464
8,361 $
$
55
67 $
5
48 $
42
1,514
8,380
Gross
Gross
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
20,042
95,358 $
$
228 $
30
1,740
19,814
93,648
14,559
103,199
488
1,136
14,517
19,752
6,315
2
10
15,047
103,833
14,434
19,531
502
85
231
120
6,195
2,906 $ 272,502
Total
$ 273,742 $
1,666 $
Held-to-maturity:
Tax-exempt state and municipals
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Total
$
6,859 $
152 $
13 $
6,998
54
2,361
9,274 $
$
138
290 $
4
17 $
54
2,495
9,547
The Company had net unrealized losses on available-for-sale securities of $2,568, net of deferred income taxes of $683
at December 31, 2018, and net unrealized losses on available-for-sale securities of $977, net of deferred income taxes of
$260, at December 31, 2017. There were no investment securities sales in 2018 and 2017. Proceeds from the sale of
investment securities available-for-sale amounted to $27,408 in 2016.
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Our equity securities portfolio consists of stock of two other financial institutions. At December 31, 2018 and December
31, 2017, we had $291 thousand and $46 thousand, respectively, in equity securities recorded at fair value. Prior to
January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate
component of Accumulated Other Comprehensive Income (“AOCI”), net of tax. At December 31, 2017, net unrealized
gains of $3 thousand had been recognized in AOCI. On January 1, 2018, these unrealized gains, net of income tax were
reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net
income. At December 31, 2018, the fair value of our equity portfolio exceeded the cost basis by $14. The following is a
summary of unrealized and realized gains and losses recognized in net income on equity securities during 2018.
Year Ended December 31,
Net gains recognized during the period on equity securities
Less: Net gains and (losses) recognized during the period on equity securities sold during the
period
Unrealized gains recognized during the reporting period on equity securities still held at the
reporting date
2018
$
14
$
14
There were no realized gains or losses on sold investment securities in 2018 or 2017. Gross realized gains totaled $623 in
2016. There were no gross losses in 2016.
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, 2018, is summarized as follows:
December 31, 2018
Within one year
After one but within five years
After five but within ten years
After ten years
Mortgage-backed securities
Total
$ 38,925
152,806
15,900
10,586
218,217
51,465
$ 269,682
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations
with or without call or prepayment penalties.
The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at
December 31, 2018, is summarized as follows:
December 31, 2018
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
$ 6,855 $ 6,824
6,824
1,556
$ 8,361 $ 8,380
6,855
1,506
Securities with a carrying value of $161,647 and $163,936 at December 31, 2018 and 2017, respectively, were pledged
to secure public deposits and certain other deposits as required or permitted by law.
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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, 2018 and 2017, 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, 2018 and 2017, 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, 2018
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
Less Than 12 Months
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Fair
Value
$ 1,995 $
2,037
Total
Fair
Value
363 $ 21,666 $
Unrealized
Losses
365
2,183
2,182
91,766
2 $ 19,671 $
1
89,729
Tax-exempt
9,022
74
52,352
714
61,374
788
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored
enterprises
Commercial Mortgage-backed securities:
U.S. Government-sponsored
enterprises
Total
December 31, 2017
U.S. Treasury securities
U.S. Government-sponsored enterprises
State and municipals:
7,800
84
7,800
84
12,851
55
13,881
351
26,732
406
$ 25,905
$
230
230
132 $ 189,472 $ 3,924 $ 215,377 $ 4,056
6,039
6,039
Less Than 12 Months
12 Months or More
Total
Fair
Value
$ 17,350 $
39,096
Unrealized
Losses
Fair
Value
170 $ 2,464 $
445
51,365
Unrealized
Losses
Fair
Unrealized
Losses
Value
58 $ 19,814 $
1,295
90,461
228
1,740
Tax-exempt
54,788
454
3,808
61
58,596
515
Residential Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Commercial Mortgage-backed securities:
9,484
12,537
39
103
3,968
6,504
46
132
13,452
19,041
85
235
U.S. Government-sponsored enterprises
Total
6,195
120
$ 139,450 $ 1,331 $ 68,109 $ 1,592 $ 207,559 $ 2,923
6,195
120
The Company had 187 investment securities, consisting of 104 tax-exempt state and municipal obligations, 8 U.S.
Treasury securities, 37 U.S. Government-sponsored enterprise securities and 38 mortgage-backed securities that were in
unrealized loss positions at December 31, 2018. Of these securities, 7 U.S. Treasury securities, 35 U.S. Government–
sponsored enterprise securities, 33 mortgage-backed securities and 88 tax-exempt state and municipal securities were in
a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on
the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost
of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market
rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events
or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does
not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before
recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to
be OTTI at December 31, 2018.
-89-
There was no OTTI recognized for each of the years in the three-year period ended December 31, 2018.
Other assets include the Company’s investment in Visa Class B stock. The Company’s ownership includes shares
acquired at no cost related to the Company’s prior ownership in Visa's network while Visa operated as a cooperative.
The Company holds 44,982 shares of Visa Class B stock which, following resolution of Visa litigation, will be converted
to Visa Class A shares (the conversion rate as of December 31, 2018 is 1.6298 shares of Class A stock for each share of
Class B stock) for a total of 73,312 shares of Visa Class A stock.
There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class
B. Due to the lack of orderly trades and public information of such trades, Visa Class B stock has no readily
determinable fair value.
4. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at December 31, 2018 and
2017 are summarized as follows. Net deferred loan costs included in loan balances were $744 and $575 in 2018 and
2017, respectively.
Commercial
Real estate:
Commercial
Residential
Consumer
Total
December 31, 2018
$
494,134
December 31, 2017
476,199
$
907,803
299,876
121,453
1,823,266
$
786,210
287,935
142,721
1,693,065
$
Loans outstanding to directors, executive officers, principal stockholders or to their affiliates totaled $14,701 and
$15,169 at December 31, 2018 and 2017, respectively. Advances and repayments during 2018 totaled $1,657 and $1,947
respectively. There were no related party loans that were classified as nonaccrual, past due, or restructured at
December 31, 2018 and 2017.
Deposits from related parties amounted to $16.2 million at December 31, 2018 and $10.0 million at December 31, 2017.
At December 31, 2018, the majority of the Company’s loans were at least partially secured by real estate in the eastern
Pennsylvania and southern tier New York counties. Therefore, a primary concentration of credit risk is directly related
to the real estate market in these regions. Changes in the general economy, local economy or in the real estate market
could affect the ultimate collectability of this portion of the loan portfolio. Management does not believe there are any
other significant concentrations of credit risk that could affect the loan portfolio.
-90-
The changes in the allowance for loan losses account by major classification of loan for the year ended December 31,
2018, 2017, and 2016 were as follows:
December 31, 2018
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans receivable:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Commercial Commercial Residential Consumer
Unallocated
Total
Real estate
$
$
5,513 $
(154)
137
20
5,516 $
8,944 $
(1,250)
136
2,906
10,736 $
3,111 $
(405)
98
1,088
3,892 $
1,392 $
(545)
202
186
1,235 $
50
403
666
60
$
$
18,960
(2,354)
573
4,200
21,379
1,179
$
5,466 $
10,333 $
3,226 $
1,175
$
20,200
$ 494,134 $ 907,803 $ 299,876 $ 121,453 $
$ 1,823,266
2,237
3,121
4,071
212
9,641
$ 491,897 $ 904,682 $ 295,805 $ 121,241 $
$ 1,813,625
December 31, 2017
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans receivable:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Commercial Commercial Residential Consumer Unallocated
Total
Real estate
$
$
4,452 $
(173)
20
1,214
5,513 $
7,548 $
(706)
124
1,978
8,944 $
2,961 $
(533)
44
639
3,111 $
1,000 $
(737)
160
969
1,392 $
$
$
15,961
(2,149)
348
4,800
18,960
159
263
336
8
766
$
5,354 $
8,681 $
2,775 $
1,384
$
18,194
$ 476,199 $ 786,210 $ 287,935 $ 142,721 $
$ 1,693,065
2,463
4,289
3,793
177
10,722
$ 473,736 $ 781,921 $ 284,142 $ 142,544 $
$ 1,682,343
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December 31, 2016
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans receivable:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Commercial Commercial Residential Consumer Unallocated
Total
Real estate
$
$
4,113 $
(776)
86
1,029
4,452 $
4,751 $
(858)
122
3,533
7,548 $
3,174 $
(339)
69
57
2,961 $
937 $
(495)
177
381
1,000 $
225
1,197
520
$
$
12,975
(2,468)
454
5,000
15,961
1,942
$
4,227 $
6,351 $
2,441 $
1,000 $
$
14,019
$ 408,814 $ 700,144 $ 289,781 $ 134,226 $
$ 1,532,965
2,687
7,157
3,580
155
13,579
$ 406,127 $ 692,987 $ 286,201 $ 134,071 $
$ 1,519,386
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,
2018 and 2017:
December 31, 2018
Commercial
Real estate:
Commercial
Residential
Consumer
Total
December 31, 2017
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Pass
491,531 $
$
Special
Mention Substandard Doubtful
869 $
1,734 $
$
Total
494,134
886,849
295,758
121,229
8,934
357
12,020
3,761
224
$ 1,795,367 $ 10,160 $ 17,739 $
907,803
299,876
121,453
$ 1,823,266
Special
Mention Substandard Doubtful
Pass
472,185 $ 1,958 $
$
2,056 $
$
Total
476,199
764,320
282,484
142,507
13,015
18
8,875
5,433
214
$ 1,661,496 $ 14,991 $ 16,578 $
786,210
287,935
142,721
$ 1,693,065
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Information concerning nonaccrual loans by major loan classification at December 31, 2018 and 2017 is summarized as
follows:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
2018
2017
$
776
$
860
2,663
2,580
212
6,231
$
3,821
2,994
177
7,852
$
The major classification of loans by past due status at December 31, 2018 and 2017 are summarized as follows:
December 31, 2018
Commercial
Real estate:
Commercial
Residential
Consumer
Total
December 31, 2017
Commercial
Real estate:
Commercial
Residential
Consumer
Total
30-59 Days
Past Due
973
$
60-89 Days
Past Due
79
$
Greater
than 90
Days
776
$
Total Past
Due
$ 1,828
Current
492,306
$
Total Loans
494,134
$
Loans > 90
Days and
Accruing
1,889
2,486
756
6,104
$
218
1,545
292
2,134
$
2,736
3,430
212
$ 7,154
4,843
7,461
1,260
$ 15,392
902,960
292,415
120,193
$ 1,807,874
907,803
299,876
121,453
$ 1,823,266
$
73
850
$
923
30-59 Days
Past Due
124
$
60-89 Days
Past Due
216
$
Greater
than 90
Days
860
$
Total Past
Due
$ 1,200
Current
474,999
$
Total Loans
476,199
$
Loans > 90
Days and
Accruing
1,722
1,134
1,101
4,081
$
194
1,551
364
2,325
$
3,821
3,543
363
$ 8,587
5,737
6,228
1,828
$ 14,993
780,473
281,707
140,893
$ 1,678,072
786,210
287,935
142,721
$ 1,693,065
$
$
549
186
735
-93-
The following tables summarize information concerning impaired loans as of and for the years ended December 31,
2018, 2017 and 2016 by major loan classification:
For the Year Ended
December 31, 2018
With no related allowance:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
With an allowance recorded:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Total impaired loans
Commercial
Real estate:
Commercial
Residential
Consumer
Total
December 31, 2017
With no related allowance:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
With an allowance recorded:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Total impaired loans
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Recorded
Investment Balance Allowance Investment Recognized
Related
Average
Recorded
Interest
Income
Unpaid
Principal
$
1,562 $ 1,900
$
1,318 $
67
1,969
1,970
152
5,653
2,299
2,658
160
7,017
2,822
2,193
135
6,468
675
675
50
1,006
1,152
2,101
60
3,988
1,323
2,328
60
4,386
403
666
60
1,179
1,676
1,585
21
4,288
2,237
2,575
50
2,324
3,121
4,071
212
3,622
4,986
220
403
666
60
4,498
3,778
156
28
22
117
30
18
22
70
97
46
44
$
9,641 $ 11,403 $ 1,179 $ 10,756 $
187
Recorded
Investment Balance Allowance Investment Recognized
Related
Unpaid
Principal
For the Year Ended
Interest
Income
Average
Recorded
$
1,279 $ 1,439
$
1,668 $
43
2,888
2,196
169
6,532
3,190
2,672
181
7,482
2,985
2,227
173
7,053
1,184
1,218
159
991
1,401
1,597
8
4,190
1,496
1,759
8
4,481
263
336
8
766
2,202
1,335
20
4,548
2,463
2,657
159
2,659
4,289
3,793
177
4,686
4,431
189
263
336
8
5,187
3,562
193
24
21
88
50
18
23
91
93
42
44
$ 10,722 $ 11,963 $
766 $ 11,601 $
179
-94-
December 31, 2016
With no related allowance:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
With an allowance recorded:
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Total impaired loans
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Recorded
Investment Balance Allowance Investment Recognized
Related
Unpaid
Principal
For the Year Ended
Average
Recorded
Interest
Income
$
2,404 $ 3,213
$
1,461 $
2,364
2,205
155
7,128
3,018
2,388
155
8,774
4,300
2,133
147
8,041
283
283 $
225
859
4,793
1,375
4,793
1,376
1,197
520
6,451
6,452
1,942
2,366
1,185
50
4,460
2,687
3,496
225
2,320
7,157
3,580
155
7,811
3,764
155
1,197
520
6,666
3,318
197
48
71
35
154
2
7
9
48
73
42
$ 13,579 $ 15,226 $ 1,942 $ 12,501 $
163
There were no amounts of interest income recognized using the cash-basis method on impaired loans for the years ended
December 31, 2018, 2017 and 2016.
Included in the commercial loan, commercial real estate and residential real estate categories are troubled debt
restructurings that were classified as impaired. Trouble debt restructurings totaled $2,779 and $3,074 at December 31,
2018 and 2017 respectively.
There was one loan modified in 2018, six loans modified in 2017 and three loans modified in 2016 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, 2018 and 2017 and 2016.
-95-
December 31, 2018
Commercial real estate
Total
December 31, 2017
Commercial
Commercial real estate
Residential mortgage
Total
December 31, 2016
Commercial
Commercial real estate
Residential mortgage
Total
Number
of Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Recorded Investment Investment
340
340
340 $
340 $
340 $
340 $
Number
of Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Recorded Investment Investment
864
700
64
1,670 $ 1,628
885 $
721
64
885 $
721
64
1,670 $
Number
of Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Recorded Investment Investment
1,150 $ 1,150
1,500 $
1 $
1 $
2 $
3
1
6 $
1 $
2
3 $
216
1,716 $
216
207
1,366 $ 1,357
There were no payment defaults within 12 months of its modification on loans considered troubled debt restructurings
for the years ended December 31, 2018 and December 31, 2017 and one payment default for the year ended December
31, 2016 totaling $43.
The amount of residential loans in the formal process of foreclosure totaled $1,823 at December 31, 2018 and $1,684 at
December 31, 2017.
5. 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. The Company records a valuation allowance for off-
balance sheet credit losses, if deemed necessary, separately as a liability. The allowance is not significant.
The contractual amounts of off-balance sheet commitments at December 31, 2018 and 2017 are summarized as follows:
December 31
Commitments to extend credit
Unused portions of lines of credit
Standby letters of credit
2018
2017
$ 294,122 $ 324,984
56,244
23,387
$ 379,187 $ 404,615
51,790
33,275
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
-96-
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 $22,415 at December 31, 2018 and $14,049 at December 31, 2017. The carrying
value of the liability for the Company’s obligations under guarantees for standby letters of credit was not material at
December 31, 2018 and 2017.
6. Premises and equipment, net:
Premises and equipment at December 31, 2018 and 2017 are summarized as follows:
December 31
Land
Premises and leasehold improvements
Furniture, fixtures and equipment
Less: accumulated depreciation
2018
2017
$ 5,535 $ 5,875
42,472
13,249
61,596
24,039
$ 38,889 $ 37,557
44,813
14,812
65,160
26,271
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2018, pertaining to banking premises
and equipment, future minimum annual rent commitments under various operating leases are summarized as follows:
2019
2020
2021
2022
2023
Thereafter
$
532
527
514
516
432
5,024
$ 7,545
The leases contain options to extend for periods from one to ten years which if reasonably certain to exercised, the cost
of such options is included in the annual rental commitments. Rent expense for the years ended December 31, 2018,
2017 and 2016 amounted to $492, $407 and $416, respectively.
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7. Intangible assets, net:
The gross carrying amount of core deposit intangible assets totaled $8,146 at December 31, 2018 and 2017. The gross
carrying amount of trade name intangible assets totaled $203 at December 31, 2018 and 2017. 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, 2018 and 2017. The accumulated amortization on core deposit
intangible assets was $6,515 and $5,810 at December 31, 2018 and 2017, respectively. The accumulated amortization on
trade name intangible assets was $149 and $128 at December 31, 2018 and 2017, respectively. The accumulated
amortization on the asset management and retirement plan services intangible asset was $480 and $324 at December 31,
2018 and 2017, respectively.
The estimated amortization expense on intangible assets in years subsequent to December 31, 2018, is as follows:
2019
2020
2021
2022
2023
Total
$
730
606
491
363
106
$ 2,296
8. Other assets:
The major components of other assets at December 31, 2018 and 2017 are summarized as follows:
Other real estate owned
Investment in low income housing partnership
Mortgage servicing rights
Bank owned life insurance
Restricted equity securities
Net deferred tax asset
Other assets
Total
December 31, 2018 December 31, 2017
284
376 $
$
7,842
728
33,836
8,562
3,906
9,311
64,469
7,377
718
34,288
7,462
5,081
8,435
63,737 $
$
The Company originates one-to-four family residential mortgage loans for sale in the secondary market with servicing
rights retained. Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets.
The unpaid principal balances of mortgage loans serviced for others were $165,610 at December 31, 2018 and $174,017
at December 31, 2017.
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9. Deposits:
The major components of interest-bearing and noninterest-bearing deposits at December 31, 2018 and 2017 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
2018
2017
$
328,949
421,414
378,157
250,456
85,786
1,464,762
410,260
$ 1,875,022
$
278,494
389,734
387,827
220,812
61,422
1,338,289
380,729
$ 1,719,018
The aggregate amounts of maturities for all time deposits at December 31, 2018, are summarized as follows:
2019
2020
2021
2022
2023
Thereafter
$ 154,506
52,824
83,959
12,895
19,438
12,620
$ 336,242
The aggregate amount of deposits reclassified as loans was $343 at December 31, 2018, and $298 at December 31, 2017.
Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation for credit
losses.
10. Short-term borrowings:
Short-term borrowings consisted of FHLB advances representing overnight or less than 30-day borrowings at
December 31, 2018, 2017 and 2016:
At and for the year ended December 31, 2018
FHLB advances
FHLB advances
FHLB advances
Average
Balance
Maximum
Month-End
Balance
86,500 $
133,834 $
189,275
Ending
Balance
$
Weighted
Average
Rate for
the Year
Weighted
Average
Rate at End
of the Year
2.05 %
2.62 %
At and for the year ended December 31, 2017
Ending
Balance
$ 123,675 $
Average
Balance
76,846 $
123,675
Maximum
Month-End
Balance
Weighted
Average
Rate for
the Year
Weighted
Average
Rate at End
of the Year
1.17 %
1.54 %
At and for the year ended December 31, 2016
Average
Balance
Maximum
Month-End
Balance
Ending
Balance
$
82,700 $
67,553 $
86,300
-99-
Weighted
Average
Rate for
the Year
Weighted
Average
Rate at End
of the Year
0.60 %
0.74 %
The Company has an agreement with the FHLB which allows for borrowings up to its maximum borrowing capacity
based on a percentage of qualifying collateral assets. At December 31, 2018, the maximum borrowing capacity was
$700,169 of which $124,406 was outstanding in borrowings and $171,970 was used to issue standby letters of credit to
collateralize public fund deposits. Advances with the FHLB are secured under terms of a blanket collateral agreement by
a pledge of FHLB stock and certain other qualifying collateral, such as investments and mortgage-backed securities and
mortgage loans. Interest accrues daily on the FHLB advances based on rates of the FHLB discount notes. This rate resets
each day.
The Company also has unsecured line of credit agreements with two correspondent banks, where the total line amount
was $18,000 at December 31, 2018 and 2017. There were no amounts outstanding on either line of credit at December
31, 2018 or 2017. Interest on these borrowings accrues daily based on the daily federal funds rate.
11. Long-term debt:
Long-term debt consisting of advances from the FHLB at December 31, 2018 and 2017 are as follows:
Due
April 2018
December 2018
December 2019
December 2019
December 2019
June 2020
December 2020
March 2023
Interest Rate
Adjustable
Fixed
3.83 %
1.27
4.28 %
4.01
1.62
1.74
1.84
4.69
2018
2017
$
3,000
6,300
40
10,000
3,000
6,300
10,000 10,000
5,000
5,000 5,000
8,606 10,394
$ 37,906 $ 49,734
5,000
Maturities of long-term debt, by contractual maturity, in years subsequent to December 31, 2018 are as follows:
2019
2020
2021
2022
2023
$ 21,174
11,963
2,058
2,156
555
$ 37,906
None of the advances from the FHLB are convertible. At December 31, 2018, long-term debt consist of $28,606 at fixed
rates and $9,300 at adjustable rates which reset quarterly based on three-month Libor plus 1.21% to plus 1.57%. There
were no new long-term advances entered into with the FHLB during 2018 or 2017.
-100-
12. Fair value of financial instruments:
Assets and liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017 are summarized as
follows:
Fair Value Measurement Using
Significant
Quoted Prices in
Significant
Active Markets for Other Observable Unobservable
December 31, 2018
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
Common equity securities
Interest rate floor - other assets
Interest rate swap-other assets
Interest rate swap-other liabilities
Total
December 31, 2017
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
Common equity securities
Interest rate swap-other assets
Interest rate swap-other liabilities
Total
Amount
$ 25,592 $
92,818
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
25,592
$
$
92,818
13,853
85,954
12,629
38,836
291
553
108
(138)
291
$ 270,496 $
25,883 $
13,853
85,954
12,629
38,836
553
108
(138)
244,613 $
Fair Value Measurement Using
Significant
Quoted Prices in
Significant
Active Markets for Other Observable Unobservable
Amount
$ 19,814 $
93,648
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
19,814
$
$
93,648
15,047
103,833
14,434
25,726
46
655
(733)
46
$ 272,470 $
19,860 $
15,047
103,833
14,434
25,726
655
(733)
252,610 $
Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2018 and 2017 are summarized as
follows:
December 31, 2018
Impaired loans
Other real estate owned
Fair Value Measurement Using
Quoted Prices in
Significant
Active Markets for Other Observable Unobservable
Significant
Amount
$ 2,809
$
234
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
$
$
2,809
234
-101-
December 31, 2017
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)
$
$
3,424
216
Amount
$ 3,424
$
216
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, 2018
Impaired loans
Other real estate owned
December 31, 2017
Impaired loans
Other real estate owned
Fair Value
Estimate Valuation Techniques
$ 2,809 Appraisal of collateral Appraisal adjustments 7.1% to 97.0% (61.8)%
3.0% to 6.0% (4.4)%
234 Appraisal of collateral Appraisal adjustments 26.0% to 73.3% (38.9)%
3.0% to 6.0% (5.0)%
Range
(Weighted Average)
Liquidation expenses
Liquidation expenses
Unobservable Input
$
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate Valuation Techniques
$ 3,424 Appraisal of collateral Appraisal adjustments 4.0% to 97.0% (67.2)%
3.0% to 6.0% (4.9)%
216 Appraisal of collateral Appraisal adjustments 25.0% to 41.3% (30.7)%
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.
-102-
The carrying and fair values of the Company’s financial instruments at December 31, 2018 and 2017 and their placement
within the fair value hierarchy are as follows:
Fair Value Hierarchy
December 31, 2018
Financial assets:
Cash and cash equivalents
Investment securities:
Available-for-sale
Common equity securities
Held-to-maturity
Loans held for sale
Net loans
Accrued interest receivable
Mortgage servicing rights
Restricted equity securities
Interest rate floor
Interest rate swaps
Total
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Interest rate swaps
Total
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
$
32,616 $
32,616 $ 32,616
269,682
291
8,361
749
1,801,887
7,115
718
7,462
553
108
269,682
291
8,380
749
1,762,449
7,115
1,710
7,462
553
108
$ 2,129,542 $ 2,091,115
$ 1,875,022 $ 1,874,520
86,500
38,071
1,195
138
$ 2,000,761 $ 2,000,424
86,500
37,906
1,195
138
25,592 $
291
244,090
8,380
749
$ 1,762,449
7,115
1,710
7,462
553
108
$ 1,874,520
86,500
38,071
1,195
138
-103-
December 31, 2017
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
Interest rate swaps
Total
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Interest rate swaps
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
$
37,488 $
37,488 $ 37,488
272,548
9,274
106
1,674,105
6,936
728
8,562
655
272,548
9,547
106
1,645,292
6,936
1,638
8,562
655
$ 2,010,402 $ 1,982,772
$ 1,719,018 $ 1,666,284
123,675
50,147
497
733
$ 1,893,657 $ 1,841,336
123,675
49,734
497
733
19,860 $
252,688
9,547
106
$ 1,645,292
6,936
1,638
8,562
655
$ 1,666,284
123,675
50,147
497
733
13. Derivatives and hedging activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company
principally manages its exposures to a wide variety of business and operational risks through management of its core
business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by
managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.
Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business
activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are
determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the
amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s
assets.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its
exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as part
of its interest rate risk management strategy. Interest rate floors designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-
front premium.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is
recorded in Accumulated Other Comprehensive Loss and subsequently reclassified into interest income in the same
period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge
components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and
-104-
rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in
accumulated other comprehensive loss related to derivatives will be reclassified to interest income as interest payments
are received on the Company’s variable-rate assets. During 2019, the Company estimates that an additional $64 will be
reclassified as a reduction to interest income.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain
customers, which the Company implemented during the third quarter of 2017. The Company executes interest rate
swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate
swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such
that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated
with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer
swaps and the offsetting swaps are recognized directly in earnings. As of December 31, 2018, the Company had 12
interest rate swaps with an aggregate notional amount of $62,071 related to this program.
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification
on the Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017.
Asset Derivatives
Asset Derivatives
Liability Derivatives
As of December 31, 2018
Notional Balance Sheet
Amount
Location
Fair Value
As of December 31, 2017 (1) As of December 31, 2018
Balance Sheet
Location
Balance Sheet
Location
Fair Value
Fair Value
Liability Derivatives
As of December 31, 2017 (2)
Balance Sheet
Location
Fair Value
Derivatives designated as
hedging instruments
Interest Rate Floor
25,000
Other Assets
$
553
Total derivatives designated as
hedging instruments
$
553
Derivatives not designated as
hedging instruments
Interest Rate Swaps
Total derivatives not
designated as hedging
instruments
62,071
Other Assets
$
108 Other Assets
$
655 Other Liabilities $
138 Other Liabilities $
733
$
108
$
655
$
138
$
733
(1) Assets amount does not include accrued interest receivable of $28
(2) Liabilities amount does not include accrued interest payable of $28
-105-
Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss
The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive
Loss as of December 31, 2018 and December 31, 2017.
Amount of
Amount of
Loss
Amount of
Gain
Reclassified
from Accumulated
OCI Included OCI Excluded Other Comprehensive from Accumulated OCI into Income
Component Component
Gain
Recognized in Recognized in Recognized in
OCI on
Derivative
Amount of
Loss
Reclassified
Location of
Gain or (Loss)
Recognized from
Accumulated
Amount of
Gain
Amount of
Loss
Reclassified
from Accumulated
OCI into Income
Income into
Income
OCI into Income Included Component Excluded Component
2018
2018
243
243
109
109
134 Interest Income
134
(3)
(3)
13
13
(16)
(16)
Derivatives in
Hedging
Relationships
Derivatives in Cash Flow
Hedging Relationships
Interest Rate Floor (*)
Total
* Amounts disclosed are gross and not net of taxes.
Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of
Income and Comprehensive Income as of December 31, 2018 and December 31, 2017.
Location and Amount of Gain or (Loss) Recognized in
Income on Fair Value and Cash Flow Hedging
Relationships
2018
Interest Income
2017
Interest Income
Total amounts of income and expense line items presented in the statement of financial
performance in which the effects of fair value or cash flow hedges are recorded
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into
income
Amount of gain or (loss) reclassified from accumulated other comprehensive income into
income - included component
Amount of gain or (loss) reclassified from accumulated other comprehensive income into
income - excluded component
Effect of Other Derivative Instruments on the Income Statement
(3)
(3)
13
(16)
The tables below present the effect of the Company’s other derivative financial instruments on the Consolidated
Statements of Income and Comprehensive Income for the years ended December 31, 2018 and 2017.
Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss)
Recognized in Income on
Derivative
Amount of Gain
Recognized in
Income
Amount of Loss
Recognized in
Income
Twelve Months Ended Twelve Months Ended
December 31, 2018 December 31, 2017
Interest Rate Swaps
Other non-interest income $
49 $
(79)
Fee Income
Other income / (expense) $
53 $
792
-106-
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives
as of December 31, 2018 and December 31, 2017. The net amounts of derivative assets or liabilities can be reconciled to
the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and
liabilities are presented on the Consolidated Balance Sheets.
Offsetting of Derivative Assets
as of December 31, 2018
Gross
Amounts of
Recognized
Assets
Gross Amounts Net Amounts
Offset in the
Statement of
Financial
Position
of Assets
presented in the
Statement of
Financial Position
Gross Amounts Not Offset in the Statement of Financial Position
Financial
Instruments
Cash Collateral
Received
Net
Amount
Derivatives
$
661 $
$
661 $
$
661
Offsetting of Derivative Liabilities
as of December 31, 2018
Gross
Amounts of
Recognized
Assets
Gross Amounts Net Amounts
Offset in the
Statement of
Financial
Position
of Assets
presented in the
Statement of
Financial Position
Gross Amounts Not Offset in the Statement of Financial Position
Financial
Instruments
Cash Collateral
Received
Net
Amount
Derivatives
$
138 $
$
138 $
$
138
Offsetting of Derivative Assets
as of December 31, 2017
Gross
Amounts of
Recognized
Assets
Gross Amounts Net Amounts
Offset in the
Statement of
Financial
Position
of Assets
presented in the
Statement of
Financial Position
Gross Amounts Not Offset in the Statement of Financial Position
Financial
Instruments
Cash Collateral
Received
Net
Amount
Derivatives
$
655 $
$
655 $
$
655
Offsetting of Derivative Liabilities
as of December 31, 2017
Gross
Amounts of
Recognized
Assets
Gross Amounts Net Amounts
Offset in the
Statement of
Financial
Position
of Assets
presented in the
Statement of
Financial Position
Gross Amounts Not Offset in the Statement of Financial Position
Financial
Instruments
Cash Collateral
Received
Net
Amount
Derivatives
$
733 $
$
733 $
$
733
Credit-risk-related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company
defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by
the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the
Company fails to maintain its status as a well capitalized institution, then the counterparty could terminate the derivative
positions and the Company would be required to settle its obligations under the agreements.
The Company has agreements with certain of its derivative counterparties that contain provisions that require the
Company’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the
-107-
Company’s credit rating is reduced below investment grade then a termination event shall be deemed to have occurred
and the non-affected counterparty shall have the right but not obligation to terminate all affected transactions under the
agreement.
As of December 31, 2018 the termination value of derivatives in a net liability position, which includes accrued interest
but excludes any adjustment for nonperformance risk, related to these agreements was $29. The Company has minimum
collateral posting thresholds with certain of its derivative counterparties under these agreements. The Company was in
compliance with the terms of the above noted agreements at December 31, 2018.
14. Stock plans:
The 2008 long-term incentive plan (“2008 Plan”) allowed for eligible participants to be granted equity awards. No
awards may be made under the 2008 Plan after January 15, 2018.
In May 2017, the Company’s stockholders approved the 2017 equity incentive plan (“2017 Plan”). The 2017 Plan allows
for eligible participants to be granted equity awards. Under the 2017 Plan the Compensation Committee of the Board of
Directors has the authority to, among other things:
(cid:2) Select the persons to be granted awards under the 2017 Plan.
(cid:2) Determine the type, size and term of awards.
(cid:2) Determine whether such performance objectives and conditions have been met.
(cid:2) Accelerate the vesting or excercisability of an award.
Persons eligible to receive awards under the 2008 Plan and 2017 Plan include directors, officers, employees, consultants
and other service providers of the Company and its subsidiaries.
As of December 31, 2018, 86,994 shares of the Company’s common stock were available for grant as awards pursuant to
the 2017 Plan. The 2008 Plan expired in January 2018 but will remain in effect in accordance with its terms to govern
outstanding awards under that plan. If any outstanding awards under the 2017 Plan are forfeited by the holder or
canceled by the Company, the underlying shares would be available for regrant to others.
The 2017 Plan authorizes grants of stock options, stock appreciation rights, cash awards, performance awards, restricted
stock and restricted stock units. In 2018, the Company awarded 2,548 shares of non-performance-based restricted stock
and 8,920 performance-based restricted stock units under the 2017 Plan. In 2017, the Company awarded 2,362 shares of
non-performance-based restricted stock and 8,266 performance-based restricted stock units under the 2008 Plan. A total
of 10,542 restricted stock awards granted under the 2008 Plan vested in 2017. In 2018, 114 shares of non-performance-
based restricted stock granted under the 2017 Plan vested along with 2,493 shares of non-performance-based restricted
stock granted under the 2008 Plan.
The non-performance restricted stock grants made in 2018 and 2017 vest equally over three years from the grant date.
Grants of restricted stock made in prior periods cliff vest after five years. The performance-based restricted stock units
vest three years after the grant date and include conditions based on the Company’s three year cumulative diluted
earnings per share and three-year average return on equity that determines the number of restricted stock units that may
vest.
-108-
The activity related to restricted stock for each of the years ended December 31, 2018, 2017 and 2016 was as follows:
Year Ended December 31
Nonvested, January 1
Granted shares
Vested shares
Forfeited shares
Nonvested, December 31
2018
2017
12,448 12,362 14,309
2016
11,468 10,628
10,542
2,607
1,947
21,309 12,448 12,362
The Company expenses the fair value of all-share based compensation over the requisite service period commencing at
grant date. The fair value of restricted stock is expensed on a straight-line basis. The Company periodically assesses the
probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly.
Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance
criteria. The Company classifies share-based compensation for employees within “salaries and employee benefits
expense” on the Consolidated Statements of Income and Comprehensive Income.
In 2018, the Company recognized $272 for awards granted under the 2017 Plan. In 2017, the Company recognized $21
for awards granted under the 2017 Plan and $156 for awards granted under the 2008 Plan. The Company recognized $71
of compensation expense for the year ended December 31, 2016 for awards granted under the 2008 Plan. As of
December 31, 2018, the Company had $525 of unrecognized compensation expense associated with restricted stock
awards. The remaining cost is expected to be recognized over a weighted average vesting period of 1.7 years.
15. Employee benefit plans:
The Company sponsors a separate Employee Stock Ownership Plan (“ESOP”) and Retirement Profit Sharing
401(k) Plan. The Company also maintains Supplemental Executive Retirement Plans (“SERP”), and an Employees’
Pension Plan, which is currently frozen.
Under the ESOP, amounts voted by the Company’s Board of Directors are paid into the ESOP and each participant is
credited with an amount 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 Retirement Profit Sharing Plan, amounts approved by the Board of Directors have been paid into a fund and
each participant was credited with an amount in proportion to their annual compensation. Upon retirement, death or
termination, each participant 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 participants may elect deferrals of up to the maximum amounts permitted
by law.
The Company contributed $197, $185 and $156 to the ESOP in 2018, 2017 and 2016. In addition, the Company
contribution of $1,047, $923 and $786 to the Retirement Profit Sharing Plan in 2018, 2017 and 2016, was comprised of a
safe harbor contribution of $578, $509 and $446 and a discretionary match of $469, $414 and $340.
The Company established a SERP Plan to replace certain 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 $116 and $96 at December 31, 2018 and 2017,
respectively. The expense associated with the plan was $20, $20 and $13 for 2018, 2017 and 2016 respectively.
The Company has SERPs for the benefit of certain officers. At December 31, 2018 and 2017, other liabilities include
$1,845 and $1,594 accrued under the Plans. Compensation expense includes approximately $335, $314, and $254
relating to these SERPs for the years ended December 31, 2018, 2017 and 2016, respectively.
-109-
Under the 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 the
Company.
Information related to the Employees’ Pension Plan is as follows:
$
December 31
Change in benefit obligation:
Benefit obligation, beginning
Interest cost
Change in experience gain
Change in actuarial 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
2018
2017
16,935 $
623
135
(546)
(809)
16,338
13,264
(236)
2,700
(809)
14,919
(1,419) $
16,703
650
(13)
395
(800)
16,935
12,644
1,420
(800)
13,264
(3,671)
The Society of Actuaries released new mortality tables in 2018 and 2017 which the Company utilized in its pension plan
remeasurements at December 31, 2018 and 2017. The change in mortality assumption resulted in a decrease to the
benefit obligation of $546 in 2018 and an increase of $395 in 2017.
Amounts recognized in the consolidated balance sheets are as follows:
December 31
Pension Benefits
2018
2017
Liabilities
Amounts recognized in the accumulated other comprehensive loss consist of:
Net actuarial gain
Deferred taxes
$
1,419 $
3,671
(7,218)
1,516
(6,628)
1,392
Net amount recognized
$
(5,702) $
(5,236)
The accumulated benefit obligation for the defined benefit pension plan was $16,338 and $16,935 at December 31, 2018
and 2017, respectively.
-110-
Components of net periodic pension income and other amounts recognized in other comprehensive loss are as follows:
Years Ended December 31,
Net periodic pension income:
Interest cost
Expected return on plan assets
Amortization of unrecognized net loss
Net periodic pension 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 loss
Total recognized in net period pension
cost and other comprehensive loss
2018
Pension Benefits
2017
2016
$
623 $
(960)
194
(143)
(590)
124
(466)
650 $
(915)
195
(70)
318
(67)
251
$
(609) $
181 $
665
(893)
209
(19)
917
(321)
596
577
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 $223.
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
2018
2017
2016
3.75 %
4.00
7.50 %
4.00 %
3.75
7.50 %
4.00 %
4.00
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, 2018 and 2017, by asset category are
as follows:
December 31,
Asset Category:
Cash and cash equivalents
Equity securities
Corporate bonds
U.S. Government securities
2018
2017
5.0 %
56.2
23.6
15.2
100.0 %
4.1 %
57.4
27.6
10.9
100.0 %
-111-
Fair value measurement of pension plan assets at December 31, 2018 and 2017 is as follows:
December 31, 2018
Cash
Equity securities:
U.S. large cap
International
Fixed income securities:
U.S. Treasuries
U.S. Government agencies
Corporate bonds
Total
December 31, 2017
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)
$
743 $
743
$
7,687
694
7,687
694
192
2,085
3,518
14,919 $
$
$
9,124 $
192
2,085
3,518
5,795 $
Quoted Prices in
Active Markets
Total
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
$
539 $
539
$
7,269
350
7,269
350
198
1,247
3,661
13,264 $
$
$
8,158 $
198
1,247
3,661
5,106 $
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, 2018 or 2017. The Company has not
determined the amount of the expected contribution to the Employees’ Pension Plan for 2019.
The following benefit payments are expected to be paid in the next five years and in the aggregate for the five years
thereafter:
2019
2020
2021
2022
2023
Thereafter
Pension Benefits
843
$
857
858
896
912
5,028
-112-
16. Income taxes:
The current and deferred amounts of the provision for income taxes expense (benefit) for each of the years ended
December 31, 2018, 2017 and 2016 are summarized as follows:
Year Ended December 31
Current
Deferred
Total
2018
2017
2016
$
$
4,072 $
(681)
3,391 $
6,515 $
1,665
8,180 $
6,450
(1,442)
5,008
The components of the net deferred tax asset at December 31, 2018 and 2017 are summarized as follows:
$
December 31
Deferred tax assets:
Allowance for loan losses
Defined benefit plan
Deferred compensation
Deferred loan fees
Investment securities available-for-sale
Other
Total
Deferred tax liabilities:
Premises and equipment, net
Merger related accounting
Deferred loan costs
Investment securities available-for-sale
Other
Total
Net deferred tax asset
$
2018
2017
4,490 $
1,516
593
470
683
116
7,868
985
1,083
626
93
2,787
5,081 $
3,981
1,392
499
264
260
106
6,502
815
1,243
531
7
2,596
3,906
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 21.0 percent for the year ended December 31, 2018, and 35.0 percent for the
years ended December 31, 2017 and 2016 is summarized as follows:
Year Ended December 31
2018
2017
2016
Federal income tax at statutory rate
Effect of federal income tax rate changes (Note 1)
Tax exempt interest
Life insurance investment income
Residential housing program tax credits
Other, net
$
Total
$
5,945 $
(1,320)
(236)
(1,094)
96
3,391 $
9,323 $
2,623
(2,157)
(269)
(1,095)
(245)
8,180 $
8,607
(2,264)
(277)
(1,128)
70
5,008
-113-
17. Parent Company financial statements:
CONDENSED BALANCE SHEETS
December 31
Assets:
Cash and cash equivalents
Equity securities
Investment in bank subsidiary
Due from subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
2018
2017
$
$
$
$
3,736 $
291
272,617
1,974
35
278,653 $
39 $
278,614
278,653 $
3,932
46
259,147
1,900
265,025
49
264,976
265,025
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31
Income:
Dividends from subsidiaries
Other income
Unrealized holding gains on equity securities
$
Total income
Expense:
Other expenses
Total expenses
Income before taxes and undistributed income
Income tax benefit
Income before undistributed income of
subsidiaries
Equity in undistributed net income of subsidiaries
Net income
Comprehensive Income
$
$
2018
2017
2016
9,691 $
72
13
9,776
214
214
9,562
(27)
9,589
15,331
24,920 $
23,523 $
9,319 $
52
9,371
205
205
9,166
(54)
9,220
9,237
18,457 $
17,500 $
9,170
46
9,216
259
259
8,957
(75)
9,032
10,551
19,583
17,553
-114-
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
Cash flows from operating activities:
Net income
Adjustments:
2018
2017
2016
$
24,920 $
18,457 $
19,583
Net gains on investment securities
Undistributed net income of
subsidiaries
(Decrease) increase in other assets
Decrease in other liabilities
Stock based compensation
Net cash provided by operating
activities
Cash flows from investing activities:
Purchase of equity securities
Cash flows used in financing activities:
Redemption of common stock
Stock awards
Cash dividends paid
Net cash used in financing
activities
Decrease in cash
Cash at beginning of year
Cash at end of year
18. Regulatory matters:
$
(14)
(15,331)
(111)
(10)
272
9,726
(234)
5
(9,693)
(9,688)
(196)
3,932
3,736 $
(9,237)
(3)
(53)
177
9,341
(43)
5
(9,319)
(9,314)
(16)
3,948
3,932 $
(10,551)
577
(77)
71
9,603
(604)
(9,170)
(9,774)
(171)
4,119
3,948
Dividends are paid by the Parent 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, or 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 below 100 percent of our capital stock. 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 if surplus does not equal at least 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.
-115-
Although subject to the aforementioned regulatory restrictions, the Company’s consolidated retained earnings at
December 31, 2018 and 2017 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 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, 2018, the maximum amount available for transfer from Peoples Bank to the Company in the
form of loans amounted to $23,778. At December 31, 2018 and 2017, there were no loans outstanding, nor were any
advances made during 2018 and 2017.
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.
Risk-based capital rules require 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 was 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 met the capital requirement for the “well capitalized” category under the regulatory framework for prompt
corrective action at December 31, 2018. 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. Regulators may assign Peoples
Bank to a lower capitalization category based on factors other than capital.
-116-
The Company and Peoples Bank’s actual capital ratios at December 31, 2018 and 2017, 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
December 31, 2018
Common equity
Tier 1 capital to
risk-weighted
assets:
Consolidated $
Peoples Bank
221,024
215,027
11.95 % $
11.64
83,241
83,144
4.50 %
$
4.50
120,097
6.50 %
Tier 1 capital to
risk-weighted
assets:
Consolidated
Peoples Bank
Total capital to risk-
weighted assets:
221,024
215,027
11.95
11.64
110,988
110,859
Consolidated
Peoples Bank
242,403
236,406
13.10
12.80
147,984
147,811
Tier 1 capital to
average assets:
6.00
6.00
8.00
8.00
147,811
8.00
184,764
10.00
Consolidated
Peoples Bank
221,024
215,027
10.03
9.78 %
88,119
87,969
4.00
4.00 %
109,962
5.00 %
Actual
Minimum For Capital
Adequacy Purposes
Minimum to be Well
Capitalized under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2017
Common equity
Tier 1 capital to
risk-weighted
assets:
Consolidated $
Peoples Bank
205,222
199,450
11.85 % $
11.53
77,930
77,843
4.50 %
$
4.50
112,440
6.50 %
Tier 1 capital to
risk-weighted
assets:
Consolidated
Peoples Bank
Total capital to risk-
weighted assets:
205,222
199,450
11.85
11.53
103,906
103,791
Consolidated
Peoples Bank
224,182
218,410
12.95
12.63
138,542
138,388
Tier 1 capital to
average assets:
6.00
6.00
8.00
8.00
138,388
8.00
172,985
10.00
Consolidated
Peoples Bank
205,222
199,450
9.94
9.68 %
82,564
82,406
4.00
4.00 %
103,008
5.00 %
-117-
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.
20. Accumulated Other Comprehensive Loss:
The components of accumulated other comprehensive loss included in stockholders’ equity at December 31, 2018 and
2017 are as follows:
Net unrealized loss on investment securities available-for-sale
Income tax
Net of income taxes
Benefit plan adjustments
Income tax
Net of income taxes
Derivative adjustments
Income tax
Net of income taxes
December 31, 2018 December 31, 2017
(1,237)
$
(260)
(977)
(6,628)
(1,392)
(5,236)
(3,251) $
(683)
(2,568)
(7,218)
(1,516)
(5,702)
246
52
194
(8,076) $
Accumulated other comprehensive loss
$
(6,213)
Other comprehensive loss and related tax effects for the years ended December 31, 2018, 2017 and 2016 are as follows:
Year Ended December 31,
Unrealized loss on investment securities available-for-sale
Net gain on the sale of investment securities available-for-sale
Benefit plans:
2018
(2,014) $
2017
(1,790) $
$
Amortization of actuarial loss (2)
Actuarial gain (loss)
Net change in benefit plan liabilities
Net change in derivatives
Other comprehensive loss before taxes
Income tax
Other comprehensive loss
194
(785)
(591)
246
(2,359)
(496)
(1,863) $
$
2016
(3,417)
(623)
208
709
917
195
123
318
(1,472)
(515)
(957) $
(3,123)
(1,093)
(2,030)
(1) Represents amounts reclassified out of accumulated comprehensive loss and included in gains on sale of
investment securities on the consolidated statements of income and comprehensive income.
(2) Represents amounts reclassified out of accumulated comprehensive loss and included in the computation of net
periodic pension expense. Refer to Note 15 included in these consolidated financial statements.
-118-
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 before income taxes
Income tax expense
Net income
Per share data:
Net income
Cash dividends declared
Average common shares outstanding
March 31
$
2018
June 30
Sept. 30
Dec. 31
20,766 $
3,115
17,651
1,050
16,601
3,663
13,496
6,768
811
5,957 $
21,419 $
3,466
17,953
1,050
16,903
3,253
12,537
7,619
902
6,717 $
22,482
3,934
18,548
1,050
17,498
3,171
13,373
7,296
904
6,392
19,994 $
2,807
17,187
1,050
16,137
3,572
13,081
6,628
774
5,854 $
0.79 $
0.32 $
0.81 $
0.33 $
0.91 $
0.33 $
0.86
0.33
7,399,054
7,396,505
7,396,533
7,399,054
March 31
$
2017
June 30
Sept. 30
Dec. 31
18,261 $
2,126
16,135
1,200
14,935
6,379
14,002
7,312
1,653
5,659 $
18,831 $
2,175
16,656
1,200
15,456
3,661
12,480
6,637
1,287
5,350 $
19,351
2,441
16,910
1,200
15,710
3,364
12,455
6,619
3,971
2,648
17,799 $
1,956
15,843
1,200
14,643
3,782
12,356
6,069
1,269
4,800 $
$
$
$
$
$
$
0.65 $
0.31 $
0.77 $
0.31 $
0.72 $
0.32 $
0.36
0.32
7,396,505
7,394,143
7,396,163
7,396,505
-119-
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, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, 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 and Securities.
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.
-120-
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
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, 2018 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, 2018.
Baker Tilly Virchow Krause, LLP, the Company’s independent registered public accounting firm that audited our
consolidated financial statements as of and for the year ended December 31, 2018 has issued an audit report on the
Company’s internal control over financial reporting as of December 31, 2018. That report is included in Item 8 of this
Annual Report on Form 10-K.
/s/ Craig W. Best
Craig W. Best
President and Chief Executive Officer
(Principal Executive Officer)
/s/ John R. Anderson III
John R. Anderson III
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 15, 2019
-121-
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, 2018, 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 2019
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 2019
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 2019
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 2019
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 2019
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.
Item 16. Form 10-K Summary.
We have elected to omit the optional summary of information included in this Form 10-K.
-122-
EXHIBIT INDEX
Exhibit No.
2.1
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
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.
Peoples Financial Services Corp. Long-Term Incentive Plan, formerly known as the Penseco Financial
Services Corporation 2008 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 of
registrant’s registration statement on Form S-8 (File No. 333-216321) filed with the SEC on
February 28, 2017)*
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 Security Bank and Trust Company Employee Stock Ownership Plan, amended and restated as
of January 1, 2015 (incorporated by reference to Exhibit 10.1 to registrant’s quarterly report on
Form 10-Q filed with the SEC on May 5, 2017)*
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 annual report of Penseco Financial Services Corp. 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 the current
report of Penseco Financial Services Corp. 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 the current report of Penseco Financial Services Corp. 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)*
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)*
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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
23.1
23.2
Description of Exhibit
Penn Security Bank & Trust Company Excess Benefit Plan, amended and restated December 31, 2008
(incorporated by reference to Exhibit 10.9 to the annual report of Penseco Financial Services Corp. on
Form 10-K filed with the SEC on March 14, 2011)*
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)*
Supplemental Executive Retirement Plan Agreement, dated April 24, 2017, by and among Peoples
Security Bank and Trust Company, Peoples Financial Services Corp. and Neal D. Koplin (incorporated
by reference to Exhibit 10.1 to registrant’s current report on Form 8-K filed with the Commission on
April 25, 2017.)*
Form of Supplemental Director Retirement Plan Agreement for 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) *
Form of Amendment to Supplemental Director Retirement Plan Agreement for 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)*
Supplemental Executive Retirement Plan Agreement, effective February 1, 2016, by and among
Peoples Security Bank and Trust Company, Peoples Financial Services Corp. and Michael L. Jake
(incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q filed with
the Commission on August 5, 2016)*
Employment Agreement dated as of September 30, 2016 between Peoples Security Bank and Trust
Company and Timothy H. Kirtley (incorporated by reference to Exhibit 10.1 to the registrant’s
quarterly report on Form 10-Q filed with the Commission on November 7, 2016)*
First Amendment to Employment Agreement dated as of December 5, 2017, by and between Peoples
Security Bank and Trust Company and Timothy H. Kirtley(incorporated by reference to Exhibit 10.28
to the registrant’s annual report on Form 10-K filed with the Commission on March 14, 2018*
List of Subsidiaries
Consent of Baker Tilly Virchow Krause, LLP
Consent of BDO USA, LLP
-124-
Exhibit No.
24.1
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
Description of Exhibit
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
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
-125-
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/ John R. Anderson III
John R. Anderson III
Executive Vice President
(Chief 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 John R. Anderson III as his attorney-in-fact, with the full power of substitution, for
him 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/ John R. Anderson III
John R. Anderson III
/s/ Joseph G. Cesare
Joseph G. Cesare
Director and Chairman of the Board
March 15, 2019
Director, President and
Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer
and Principal Accounting Officer)
March 15, 2019
March 15, 2019
Director
March 15, 2019
-126-
Date
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
Name
/s/ James G. Keisling
James G. Keisling
/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/ George H. Stover, Jr.
George H. Stover, Jr.
/s/ Steven L. Weinberger
Steven L. Weinberger
/s/ Joseph T. Wright, Jr.
Joseph T. Wright, Jr.
Title
Director
Director
Director
Director
Director
Director
Director
Director
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P EOP L E S F IN A NCI A L SE R V IC E S C ORP.
150 North Washington Avenue | Scranton | PA | 18503
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