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EX-32 - CEO AND CFO SARBANES-OXLEY ACT CERTIFICATIONS - PEOPLES FINANCIAL SERVICES CORP.ex32.htm
EX-31 - CEO AND CFO CERTIFICATIONS - PEOPLES FINANCIAL SERVICES CORP.ex31.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

Form 10-Q

(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2011 or
(  ) Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from
0-23863
 (Commission File Number)
 
PEOPLES FINANCIAL SERVICES CORP.
(Exact name of registrant as specified in its charter)

Pennsylvania
23-2391852
(State of incorporation)
(IRS Employer ID Number)
   
82 Franklin Avenue, Hallstead, PA
18822
(Address of principal executive offices)
(Zip code)
   
(570) 879-2175
(Registrant’s telephone number, including area code)

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 X No____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files.  Yes X  No ____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  __
Accelerated filer  X
Non-accelerated filer __
Smaller reporting company __
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.  Yes ____ No X
 
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
 
Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 3,134,456 at July 29, 2011.
 
 
 
Page 1 of 48
Exhibit index on page 44


 
 

 
 


PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q

For the Quarter Ended June 30, 2011

Contents
Page No.
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
   
 
Consolidated Balance Sheets at
3
 
June 30, 2011 and December 31, 2010
   
 
Consolidated Statements of Income and Comprehensive Income
4
 
for the Three and Six Months Ended June 30, 2011 and 2010
   
 
Consolidated Statements of Changes in Stockholders’ Equity
5
 
for the Six Months Ended June 30, 2011 and 2010
   
 
Consolidated Statements of Cash Flows
6
 
for the Six Months Ended June 30, 2011 and 2010
   
 
Notes to Consolidated Financial Statements
7
   
Item 2.
Management’s Discussion and Analysis of
26
 
Financial Condition and Results of Operations
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
39
   
Item 4.
Controls and Procedures
40
   
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
41
Item 1A.
Risk Factors
41
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
41
Item 3.
Defaults upon Senior Securities
41
Item 4.
Removed and Reserved
41
Item 5.
Other Information
42
Item 6.
Exhibits
42
     
 
Signatures
43
   


 
2

 
PEOPLES FINANCIAL SERVICES CORP.


CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
             
ASSETS:
 
June 30, 2011
   
December 31, 2010
 
Cash and due from banks
  $ 12,736     $ 6,731  
Interest-bearing balances with banks
    1,007       107  
Federal funds sold
    9,357       11,003  
Investment securities available-for-sale
    114,096       121,772  
Loans held for sale
    92       30  
Loans, net
    426,655       390,772  
Less:  allowance for loan losses
    5,153       4,100  
Net loans
    421,502       386,672  
Premises and equipment, net
    8,171       8,238  
Accrued interest receivable
    3,272       3,003  
Other assets
    16,347       21,031  
Total assets
  $ 586,580     $ 558,587  
                 
LIABILITIES:
               
Deposits:
               
Noninterest-bearing
  $ 78,216     $ 73,663  
Interest-bearing
    392,353       365,071  
Total deposits
    470,569       438,734  
Short-term borrowings
    36,352       38,724  
Long-term debt
    21,862       27,336  
Accrued interest payable
    307       311  
Other liabilities
    1,220       2,966  
Total liabilities
    530,310       508,071  
                 
STOCKHOLDERS' EQUITY:
               
Common stock, par value $2.00, authorized 12,500,000 shares, issued 3,341,251 shares
    6,672       6,683  
Capital surplus
    3,122       3,118  
Retained earnings
    48,938       46,048  
Accumulated other comprehensive income (loss)
    2,040       (834 )
Less:  Treasury stock, at cost, held: June 30, 2011, 197,595 shares; December 31, 2010, 199,520 shares
    4,502       4,499  
Total stockholders' equity
    56,270       50,516  
Total liabilities and stockholders’ equity
  $ 586,580     $ 558,587  








See Notes to Consolidated Financial Statements

 
3

 
PEOPLES FINANCIAL SERVICES CORP.


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
INTEREST INCOME:
                       
    Interest and fees on loans:
                       
Taxable
  $ 5,413     $ 4,952     $ 10,549     $ 9,669  
Tax-exempt
    346       274       703       544  
Interest and dividends on investment securities available-for-sale:
                               
Taxable
    633       745       1,299       1,496  
Tax-exempt
    411       488       886       982  
Dividends
    8       13       17       26  
Interest on interest-bearing balances with banks
    3       1       5       2  
Interest on federal funds sold
    11       8       13       12  
Total interest income
    6,825       6,481       13,472       12,731  
INTEREST EXPENSE:
                               
Interest on deposits
    1,132       1,221       2,176       2,473  
Interest on short-term borrowings
    76       101       162       172  
Interest on long-term debt
    263       393       520       785  
Total interest expense
    1,471       1,715       2,858       3,430  
Net interest income
    5,354       4,766       10,614       9,301  
Provision for loan losses
    804       682       1,225       1,577  
Net interest income after provision for loan losses
    4,550       4,084       9,389       7,724  
NONINTEREST INCOME:
                               
Service charges, fees and commissions
    711       1,017       1,420       1,970  
Wealth management income
    236       99       375       159  
Mortgage banking income
    98       63       146       140  
Net gains on sale of investment securities available-for-sale
    2       179       12       201  
Other than temporary investment equity securities impairment
                    (84 )        
Net gains (loss) on sale of other real estate
    1,583       (47 )     1,583       (47 )
Total noninterest income
    2,630       1,311       3,452       2,423  
N NONINTEREST EXPENSE:
                               
Salaries and employee benefits expense
    1,628       1,395       3,074       2,706  
Net occupancy and equipment expense
    699       614       1,375       1,236  
Other expenses
    1,743       1,501       3,016       2,605  
Total noninterest expense
    4,070       3,510       7,465       6,547  
Income before income taxes
    3,110       1,885       5,376       3,600  
Provision for income tax expense
    751       361       1,218       558  
Net income
    2,359       1,524       4,158       3,042  
    OTHER COMPREHENSIVE INCOME:
                               
Unrealized gains on investment securities available-for-sale
    3,183       2,418       4,283       3,590  
Reclassification adjustment for gains included in net income
    (2 )     (179 )     (12 )     (201 )
Reclassification adjustment for other than temporary impairment
                    84          
Income taxes related to other comprehensive income
    1,082       761       1,481       1,152  
Other comprehensive income, net of income taxes
    2,099       1,478       2,874       2,237  
Comprehensive income
  $ 4,458     $ 3,002     $ 7,032     $ 5,279  
P  PER SHARE DATA:
                               
Earnings (basic)
  $ 0.75     $ 0.49     $ 1.32     $ 0.97  
    Earnings (dilutive)   $ 0.75     $ 0.48     $ 1.32     $   0.97  
Cash dividends declared
  $ 0.20     $ 0.20     $ 0.40     $ 0.39  

See Notes to Consolidated Financial Statements

 
4

 
PEOPLES FINANCIAL SERVICES CORP.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)

   
Common Stock
   
Capital Surplus
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Treasury Stock
   
Total
 
Balance, December 31, 2010
  $ 6,683     $ 3,118     $ 46,048     $ (834 )   $ (4,499 )   $ 50,516  
Net income
                    4,158                       4,158  
Other comprehensive income, net of income taxes
                            2,874               2,874  
Dividends declared:  $0.40 per share
                    (1,268 )                     (1,268 )
Treasury stock purchased:  5,500 shares
    (11 )                             (138 )     (149 )
Treasury stock issued:  7,425  shares
            4                       135       139  
Balance, June 30, 2011
  $ 6,672     $ 3,122     $ 48,938     $ 2,040     $ (4,502 )   $ 56,270  
                                                 
Balance, December 31, 2009
  $ 6,683     $ 3,098     $ 42,043     $ (2,258 )   $ (4,596 )   $ 44,970  
Net income
                    3,042                       3,042  
Other comprehensive income, net of income taxes
                            2,237               2,237  
Dividends declared:  $0.39 per share
                    (1,223 )                     (1,223 )
Treasury stock issued:  4,900 shares
            18                       85       103  
Balance, June 30, 2010
  $ 6,683     $ 3,116     $ 43,862     $ (21 )   $ (4,511 )   $ 49,129  























See Notes to Consolidated Financial Statements

 
5

 
PEOPLES FINANCIAL SERVICES CORP.


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands, except per share data)
   
        Six Months Ended
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
June 30, 2011
   
June 30, 2010
 
Net income
  $ 4,158     $ 3,042  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    424       344  
Amortization of intangibles
    183       129  
Provision for loan losses
    1,225       1,577  
(Gain) loss on sale of other real estate
    (1,583 )     47  
Net amortization of investment securities available-for-sale
    188       90  
Amortization of deferred loan costs
    108       109  
Gains on sales of investment securities available-for-sale
    (12 )     (201 )
Other than temporary security impairment
    84          
Net gains on sale of loans
    (146 )     (140 )
Net earnings on investment in life insurance
    (185 )     (164 )
Gain from investment in life insurance
            (320 )
Net change in:
               
Loans held for sale
    84       (142 )
Accrued interest receivable
    (269 )     (189 )
Other assets
    1,561       145  
Accrued interest payable
    (4 )     (64 )
Other liabilities
    (1,746 )     859  
Net cash provided by operating activities
    4,070       5,122  
C CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of investment securities available-for-sale
    15,259       55,253  
Proceeds from repayments on investment securities available-for-sale
    767       10,293  
Purchases of investment securities available-for-sale
    (4,255 )     (52,444 )
Net decrease in investments in restricted stock
    257          
Net increase in loans
    (33,163 )     (34,259 )
Purchases of premises and equipment
    (357 )     (951 )
Proceeds from investment in life insurance
            549  
Purchases of investment in life insurance
    (2,000 )        
Proceeds from sale of other real estate
    1,970       2,014  
Net cash used in investing activities
    (21,522 )     (19,545 )
    CASH FLOWS FROM FINANCING ACTIVITIES
               
Cash dividends paid
    (1,268 )     (1,223 )
Net increase in deposits
    31,835       24,511  
Repayment of long-term debt
    (5,474 )     (451 )
Net increase (decrease) in short-term borrowings
    (2,372 )     13,696  
Purchases of treasury stock
    (149 )        
Issuance of treasury stock
    139       103  
Net cash provided by financing activities
    22,711       36,636  
Net increase in cash and cash equivalents
    5,259       22,213  
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    17,841       18,915  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 23,100     $ 41,128  
SUPPLEMENTAL DISCLOSURES
               
Cash paid during the period for:
               
Interest
  $ 2,862     $ 3,494  
Income taxes
    1,250       (656 )
Noncash items:
               
Transfers from loans to foreclosed real estate
            177  
                 

See Notes to Consolidated Financial Statements

 
6

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of  Peoples Financial Services Corp, and subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform with the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The operating results and financial position of the Company for the three and six months ended and as of June 30, 2011, are not necessarily indicative of the results of operations and financial position that may be expected in the future.

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2010.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2011 through the date these consolidated financial statements were issued.






 
7

 
PEOPLES FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

2.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

Three months ended
 
Net Income
   
Average Common Shares Outstanding
   
EPS
 
June 30, 2011:
                 
Basic EPS
  $ 2,359       3,146,611     $ 0.75  
Diluted EPS
  $ 2,359       3,147,904     $ 0.75  
                         
June 30, 2010:
                       
Basic EPS
  $ 1,524       3,139,631     $ 0.49  
Diluted EPS
  $ 1,524       3,142,586     $ 0.48  

Six months ended
                 
June 30, 2011:
                 
Basic EPS
  $ 4,158       3,144,386     $ 1.32  
Diluted EPS
  $ 4,158       3,146,366     $ 1.32  
                         
June 30, 2010:
                       
Basic EPS
  $ 3,042       3,137,939     $ 0.97  
Diluted EPS
  $ 3,042       3,140,132     $ 0.97  

Stock options for 9,113 and 9,970 shares of common stock were not considered in computing diluted earnings per share for the three and six months ended June 30, 2011 and 2010, respectively, because they were anti-dilutive.

 
8

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

3.  INVESTMENT SECURITIES AVAILABLE-FOR-SALE

At June 30, 2011 and December 31, 2010, the amortized cost and fair values of securities available-for-sale are as follows:
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
June 30, 2011
                       
U.S. Government agencies and sponsored enterprises
  $ 32,815     $ 1,852     $ 31     $ 34,636  
State and Municipals:
                               
Taxable
    18,624       620       67       19,177  
Tax-exempt
    41,435       816       468       41,783  
Corporate debt securities
    4,464       362       347       4,479  
Mortgage-backed securities-residential
    12,456       181       25       12,612  
Equity securities:
                               
Preferred
    54       172               226  
Common
    1,157       114       88       1,183  
Total
  $ 111,005     $ 4,117     $ 1,026     $ 114,096  
                                 
December 31, 2010
                               
U.S. Government agencies and sponsored enterprises
  $ 38,133     $ 1,094     $ 109     $ 39,118  
State and Municipals:
                               
Taxable
    18,634       127       387       18,374  
Tax-exempt
    51,789       146       1,626       50,309  
Corporate debt securities
    4,467       208       655       4,020  
Mortgage-backed securities-residential
    8,682       85       97       8,670  
Equity securities:
                               
Preferred
    54                       54  
Common
    1,277       114       164       1,227  
Total
  $ 123,036     $ 1,774     $ 3,038     $ 121,772  


 
9

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

3.  INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Continued)

The amortized cost and fair value of debt securities as of June 30, 2011, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without any penalties.

   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 480     $ 483  
Due after one year through five years
    10,615       11,024  
Due after five years through ten years
    35,254       36,808  
Due after ten years
    50,989       51,760  
      97,338       100,075  
                 
Mortgage-backed securities-residential
    12,456       12,612  
Total
  $ 109,794     $ 112,687  

Securities with a carrying value of $83,397 and $84,281 at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and repurchase agreements as required or permitted by law.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010:

June 30, 2011:
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
U.S. Government agencies and sponsored enterprises
  $ 1,171     $ 31                 $ 1,171     $ 31  
State and Municipals:
                                           
Taxable
    977       23     $ 450     $ 44       1,427       67  
Tax-Exempt
    1,348       29       2,881       439       4,229       468  
Corporate debt securities
                    2,665       347       2,665       347  
Mortgage-backed securities-residential
    3,323       25                       3,323       25  
Common equity securities
                    366       88       366       88  
    $ 6,819     $ 108     $ 6,362     $ 918     $ 13,181     $ 1,026  


 
10

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

3.  INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Continued)

December 31, 2010:
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
U.S. Government agencies and sponsored enterprises
  $ 4,414     $ 109                 $ 4,414     $ 109  
State and Municipals:
                                           
Taxable
    12,576       324     $ 430     $ 63       13,006       387  
Tax-Exempt
    33,643       977       2,645       649       36,288       1,626  
Corporate debt securities
                    2,358       655       2,358       655  
Mortgage-backed securities-residential
    3,562       97                       3,562       97  
Common equity securities
                    374       164       374       164  
    $ 54,195     $ 1,507     $ 5,807     $ 1,531     $ 60,002     $ 3,038  

At June 30, 2011, the securities portfolio contained one (less than 12 months) agency security with an unrealized loss of $31, 12 (four less than 12 months, eight greater than 12 months) state and municipal obligations with unrealized  losses totaling $535, two (both greater than 12 months) corporate debt securities with unrealized losses of $347, two (both less than 12 months) mortgage-backed securities with unrealized losses of $25, and six (all greater than 12 months) common equity securities with unrealized losses of $88.  Management does not consider the unrealized losses, as a result of changes in interest rates, to be other-than-temporary impairment (“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 issuer 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 June 30, 2011.

In comparison, at December 31, 2010, the Company had four (all less than 12 months) U.S. Government Agency securities with unrealized losses of $109, 90 (82 less than 12 months, eight greater than 12 months) state and municipal obligations with unrealized losses of $2,013, four ( all less than 12 months)  mortgage-backed securities with unrealized losses of $97, two (both greater than 12 months) corporate debt securities with unrealized losses of $655, and six ( all greater than 12 months) common equity securities with unrealized losses of $164.

 
11

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

3.  INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Continued)

An other than temporary impairment of $84 was recognized for the six-months ended June 30, 2011.  The impairment was the result of writing down a common equity security.  The write-down was determined based on public market prices.  In reaching the determination to record the impairment, management reviewed the facts and circumstances available surrounding the security, including the duration and amount of the unrealized loss, the financial condition of the issuer and the prospects for a change in market value within a reasonable period of time.  Based on its assessment, management determined that the impairment was other-than-temporary and that a charge to operating results was appropriate for the security.  The charge was recognized based entirely on the assessment of the credit quality deterioration of the underlying company.

None of the corporate debt securities are private label trust preferred issuances.  Rather, this portfolio contains corporate bond issuances in large, national financial institutions.

The common equity securities consist of equity investments in stocks of financial institutions.  The Company does not invest in bank stocks with the intent to turn them over for a profit in the near term.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  All of the investment securities classified as available-for-sale are evaluated for OTTI under the rules for accounting for certain investments in debt and equity securities.

In determining OTTI under the rules for accounting for certain debt and equity securities, management considers many factors, 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 OTTI decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time.  An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

 
12

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

3.  INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Continued)

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses or in other comprehensive income, depending on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If the Company intends to sell the security or more likely than not it will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be separated into (i) the amount representing the credit loss and (ii) the amount related to all other factors. The amount of the total OTTI related to the credit loss shall be recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes.  As described previously, the Company recognized an OTTI of $84 for the six months ended June 30, 2011.

4.  LOANS, NET AND ALLOWANCE FOR LOAN LOSSES

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2011 and December 31, 2010 are summarized as follows. Net deferred loan costs were $540 at June 30, 2011, and $523 at December 31, 2010.

   
June 30, 2011
   
December 31, 2010
 
Commercial
  $ 144,911     $ 112,526  
Real estate:
               
Commercial
    141,932       136,910  
Residential
    118,886       119,424  
Consumer
    20,926       21,912  
Total
  $ 426,655     $ 390,772  



 
13

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

4.  LOANS, NET AND ALLOWANCE FOR LOAN LOSSES (Continued)

The changes in the allowance for loan losses account by major classification of loan for the three months and six months ended June 30, 2011 was as follows:

                                     
June 30, 2011
 
Commercial
   
Commercial real estate
   
Residential real estate
   
Consumer
   
Unallocated
   
Total
 
Beginning Balance, April 1, 2011
  $ 1,695     $ 1,468     $ 732     $ 284     $ 177     $ 4,356  
Charge-offs
                            23               23  
Recoveries
            1       1       14               16  
Provisions
    410       116       1       14       263       804  
Ending balance
  $ 2,105     $ 1,585     $ 734     $ 289     $ 440     $ 5,153  
                                                 
Beginning Balance, January 1. 2011
  $ 1,696     $ 1,384     $ 726     $ 243     $ 51     $ 4,100  
Charge-offs
    58       56       8       77               199  
Recoveries
            2       1       24               27  
Provisions
    467       255       15       99       389       1,225  
Ending balance
  $ 2,105     $ 1,585     $ 734     $ 289     $ 440     $ 5,153  
Ending balance: individually evaluated for impairment
  $ 1,136     $ 52             $ 9             $ 1,197  
Ending balance: collectively evaluated for impairment
  $ 969     $ 1,533     $ 734     $ 280             $ 3,516  
Loans receivable:
                                               
Ending balance
  $ 144,911     $ 141,932     $ 118,886     $ 20,926             $ 426,655  
Ending balance: individually evaluated  for impairment
  $ 8,949     $ 6,152     $ 1,076     $ 21             $ 16,198  
Ending balance: collectively evaluated for impairment
  $ 135,962     $ 135,780     $ 117,810     $ 20,905             $ 410,457  
December 31, 2010
                                               
Allowance for loan losses:
                                               
Ending balance
  $ 1,696     $ 1,384     $ 726     $ 243     $ 51     $ 4,100  
Ending balance: individually evaluated for impairment
  $ 663     $ 122     $ 9     $ 31             $ 825  
Ending balance: collectively evaluated for impairment
  $ 1,033     $ 1,262     $ 717     $ 212     $ 51     $ 3,275  
Loans receivable:
                                               
Ending balance
  $ 112,526     $ 136,910     $ 119,424     $ 21,912             $ 390,772  
Ending balance: individually evaluated for impairment
  $ 5,916     $ 8,923     $ 674     $ 47             $ 15,560  
Ending balance: collectively evaluated for impairment
  $ 106,610     $ 127,987     $ 118,750     $ 21,865             $ 375,212  

 
14

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

4.  LOANS, NET AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system:

June 30, 2011:
   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial
  $ 130,293     $ 5,669     $ 2,689     $ 6,260     $ 144,911  
Real estate:
                                       
Commercial
    135,154       626       5,155       997       141,932  
Residential
    117,810               11       1,065       118,886  
Consumer
    20,896       9       21               20,926  
Total
  $ 404,153     $ 6,304     $ 7,876     $ 8,322     $ 426,655  

December 31, 2010:
   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial
  $ 105,869     $ 986     $ 181     $ 5,490     $ 112,526  
Real estate:
                                       
Commercial
    118,972       8,836       8,731       371       136,910  
Residential
    118,794                       630       119,424  
Consumer
    21,890                       22       21,912  
Total
  $ 365,525     $ 9,822     $ 8,912     $ 6,513     $ 390,772  

The following table presents nonaccrual loans by classes of the loan portfolio:

   
June 30, 2011
   
December 31, 2010
 
Commercial
  $ 6,260     $ 5,490  
Real estate:
               
Commercial
    997       371  
Residential
    1,065       630  
Consumer
            22  
Total
  $ 8,322     $ 6,513  


 
15

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

4.  LOANS, NET AND ALLOWANCE FOR LOAN LOSSES (Continued)

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status:

June 30, 2011:
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater than
90 Days
   
Total Past Due
   
Current
   
Total Loans Receivables
   
Loans Receivable > 90 Days and Accruing
 
Commercial
  $ 364       117     $ 1,566     $ 2,047     $ 142,864     $ 144,911     $ 29  
Real estate:
                                                       
Commercial
    953       312       997       2,262       139,670       141,932          
Residential
    905       551       1,076       2,532       116,354       118,886       11  
Consumer
    337       76       403       816       20,110       20,926       403  
Total
  $ 2,559     $ 1,056     $ 4,042     $ 7,657     $ 418,998     $ 426,655     $ 443  

December 31, 2010:
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater than
90 Days
   
Total Past Due
   
Current
   
Total Loans Receivables
   
Loans Receivable > 90 Days and Accruing
 
Commercial
  $ 192     $ 81     $ 754     $ 1,027     $ 111,499     $ 112,526     $ 123  
Real estate:
                                                       
Commercial
    1,431               1,049       2,480       134,430       136,910          
Residential
    1,260       358       626       2,244       117,180       119,424          
Consumer
    293       133       291       717       21,195       21,912       269  
Total
  $ 3,176     $ 572     $ 2,720     $ 6,468     $ 384,304     $ 390,772     $ 392  


 
16

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

4.  LOANS, NET AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables summarize information in regards to impaired loans for the six months ended June 30, 2011, and for the year ended December 31, 2010, by loan portfolio class:

June 30, 2011:

                     
This Quarter
   
Year to Date
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                                         
Commercial
  $ 4,996     $ 4,996           $ 5,796     $ 65     $ 6,276     $ 170  
Real estate:
                                                     
Commercial
    4,096       4,096             4,137       63       4,010       99  
Residential
    1,076       1,076             1,024               925          
Consumer
    12       12             12       1       13     $ 1  
Total
    10,180       10,180             10,969       129       11,224       270  
                                                       
With an allowance recorded:
                                                     
Commercial
    3,953       3,953     $ 1,136       3,036       13       2,535       21  
Real estate:
                                                       
Commercial
    2,056       2,056       52       2,061       33       2,144       66  
Residential
                                                       
Consumer
    9       9       9       9               9          
Total
    6,018       6,018       1,197       5,106       46       4,688       87  
                                                         
Commercial
    8,949       8,949       1,136       8,832       78       8,811       191  
Real estate:
                                                       
Commercial
    6,152       6,152       52       6,198       96       6,154       165  
Residential
    1,076       1,076               1,024               925          
Consumer
    21       21       9       21       1       22       1  
Total
  $ 16,198     $ 16,198     $ 1,197     $ 16,075     $ 175     $ 15,912     $ 357  


 
17

 
PEOPLES FINANCIAL SERVICES CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

4.  LOANS, NET AND ALLOWANCE FOR LOAN LOSSES (Continued)

December 31, 2010:
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                             
Commercial
  $ 304     $ 304           $ 264     $ 12  
Real estate:
                                     
Commercial
    6,263       6,263             6,394       392  
Residential
    383       383             384       2  
Consumer
    16       16             20       2  
Total
    6,966       6,966             7,062       408  
                                       
With an allowance recorded:
                                     
Commercial
    5,612       5,612     $ 663       5,629       165  
Real estate:
                                       
Commercial
    2,660       2,660       122       2,714       166  
Residential
    291       291       9       292       5  
Consumer
    31       31       31       31          
Total
    8,594       8,594       825       8,666       336  
                                         </