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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2022

or

Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from

001-36388

(Commission File Number)

PEOPLES FINANCIAL SERVICES CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2391852

(State of

incorporation)

(IRS Employer

ID Number)

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:

    

Trading Symbol

    

Name of each exchange on which registered:

Common stock, $2.00 par value

PFIS

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes      No  

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 7,170,660 at August l, 2022.

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended June 30, 2022

Contents

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

Financial Statements

Consolidated Balance Sheets at June 30, 2022 (Unaudited) and December 31, 2021 (Unaudited)

3

Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2022 and 2021 (Unaudited)

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, and June 30, 2022 and 2021 (Unaudited)

5

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2022 and 2021 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

55

Item 4.

Controls and Procedures

56

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults upon Senior Securities

57

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

58

Signatures

59

2

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Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

    

June 30, 2022

    

December 31, 2021

 

Assets:

Cash and cash equivalents

Cash and due from banks

$

39,693

$

30,415

Interest-bearing deposits in other banks

8,040

7,093

Federal funds sold

 

 

242,425

Total cash and cash equivalents

47,733

279,933

 

Investment securities:

Available-for-sale

 

513,911

 

517,321

Equity investments carried at fair value

121

140

Held-to-maturity: Fair value June 30, 2022, $84,076; December 31, 2021, $70,446

 

94,446

 

71,213

Total investment securities

 

608,478

 

588,674

Loans

 

2,565,579

 

2,329,173

Less: allowance for loan losses

 

29,374

 

28,383

Net loans

 

2,536,205

 

2,300,790

Loans held for sale

681

408

Premises and equipment, net

 

53,094

 

51,502

Accrued interest receivable

 

9,303

 

8,528

Goodwill

 

63,370

 

63,370

Intangible assets, net

 

276

 

468

Bank owned life insurance

47,968

42,754

Other assets

 

54,431

 

33,056

Total assets

$

3,421,539

$

3,369,483

Liabilities:

Deposits:

Noninterest-bearing

$

747,558

$

737,756

Interest-bearing

 

2,163,725

 

2,225,641

Total deposits

 

2,911,283

 

2,963,397

Short-term borrowings

 

129,170

 

Long-term debt

 

1,646

 

2,711

Subordinated debentures

33,000

33,000

Accrued interest payable

 

1,269

 

408

Other liabilities

 

33,274

 

29,841

Total liabilities

 

3,109,642

 

3,029,357

Stockholders’ equity:

Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,179,037 shares at June 30, 2022 and 7,169,372 shares at December 31, 2021

 

14,346

 

14,341

Capital surplus

 

126,986

 

127,549

Retained earnings

 

217,139

 

203,750

Accumulated other comprehensive loss

 

(46,574)

 

(5,514)

Total stockholders’ equity

 

311,897

 

340,126

Total liabilities and stockholders’ equity

$

3,421,539

$

3,369,483

See notes to unaudited consolidated financial statements

3

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in thousands, except per share data)

Three Months Ended

Six Months Ended

June 30, 

    

2022

    

2021

    

2022

    

2021

 

Interest income:

Interest and fees on loans:

Taxable

$

22,009

$

20,029

$

42,862

$

40,929

Tax-exempt

 

1,218

 

965

 

2,379

 

1,835

Interest and dividends on investment securities:

Taxable

 

2,108

 

1,276

 

4,080

 

2,519

Tax-exempt

 

515

 

411

 

1,025

 

801

Dividends

 

2

 

25

 

2

 

48

Interest on interest-bearing deposits in other banks

 

18

 

2

 

20

 

4

Interest on federal funds sold

 

22

 

55

95

104

Total interest income

 

25,892

 

22,763

 

50,463

 

46,240

Interest expense:

Interest on deposits

 

1,597

 

1,941

 

3,065

 

4,033

Interest on short-term borrowings

 

122

 

6

 

122

 

77

Interest on long-term debt

 

23

 

82

 

51

 

185

Interest on subordinated debt

443

444

887

887

Total interest expense

 

2,185

 

2,473

 

4,125

 

5,182

Net interest income

 

23,707

 

20,290

 

46,338

 

41,058

Provision (credit) for loan losses

 

950

 

100

 

1,250

 

(400)

Net interest income after provision (credit) for loan losses

 

22,757

 

20,190

 

45,088

 

41,458

Noninterest income:

Service charges, fees, commissions and other

 

1,761

 

1,625

 

3,453

 

2,809

Merchant services income

 

562

 

508

 

676

 

601

Commission and fees on fiduciary activities

 

551

 

553

 

1,106

 

1,086

Wealth management income

 

374

 

417

 

725

 

775

Mortgage banking income

 

128

 

208

 

272

 

520

Increase in cash surrender value of life insurance

 

244

 

225

 

462

 

444

Interest rate swap revenue

284

(132)

627

665

Net (loss) gain on equity investment securities

(23)

 

(17)

 

(19)

 

4

Total noninterest income

 

3,881

 

3,387

 

7,302

 

6,904

Salaries and employee benefits expense

 

7,851

 

7,250

 

15,891

 

13,820

Net occupancy and equipment expense

 

3,950

 

3,047

 

7,775

 

6,314

Amortization of intangible assets

 

97

 

125

 

193

 

250

Net gain on sale of other real estate owned

 

(20)

(29)

 

(478)

(75)

Professional fees and outside services

766

569

1,236

1,016

FDIC insurance and assessments

319

271

645

531

Donations

331

379

665

718

Other expenses

 

2,199

 

1,846

 

3,855

 

3,513

Total noninterest expense

 

15,493

 

13,458

 

29,782

 

26,087

Income before income taxes

 

11,145

 

10,119

 

22,608

 

22,275

Income tax expense

 

1,792

 

1,588

 

3,625

 

4,266

Net income

 

9,353

 

8,531

 

18,983

 

18,009

Other comprehensive (loss) gain:

Unrealized (loss) gain on investment securities available-for-sale

 

(18,669)

 

2,470

 

(51,281)

 

(5,279)

Change in derivative fair value

(201)

(135)

(694)

106

Other comprehensive (loss) income

 

(18,870)

2,335

(51,975)

(5,173)

Income tax (benefit) expense

 

(3,963)

 

490

 

(10,915)

 

(1,087)

Other comprehensive (loss) income, net of income taxes

 

(14,907)

 

1,845

 

(41,060)

 

(4,086)

Comprehensive (loss) income

$

(5,554)

$

10,376

$

(22,077)

$

13,923

Per share data:

Net income:

Basic

$

1.30

$

1.18

$

2.65

$

2.50

Diluted

$

1.30

$

1.18

$

2.63

$

2.49

Average common shares outstanding:

Basic

 

7,171,909

 

7,204,261

 

7,172,181

 

7,207,588

Diluted

 

7,215,365

 

7,239,325

 

7,215,890

 

7,242,652

Dividends declared

$

0.39

$

0.37

$

0.78

$

0.74

See notes to unaudited consolidated financial statements

4

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

    

    

    

    

Accumulated

 

Other

 

Common

Capital

Retained

Comprehensive

 

    

Stock  

    

Surplus  

    

Earnings  

    

Loss

    

Total

 

Balance, January 1, 2022

$

14,341

$

127,549

$

203,750

$

(5,514)

$

340,126

Net income

 

9,630

9,630

Other comprehensive loss, net of income taxes

(26,153)

(26,153)

Dividends declared: $0.39 per share

 

(2,796)

(2,796)

Stock based compensation

(28)

(28)

Restricted stock issued: 12,332 shares, (unearned income $210k)

24

(24)

Share retirement: 6,714 shares

(13)

(305)

(318)

Balance, March 31, 2022

$

14,352

$

127,192

$

210,584

$

(31,667)

$

320,461

Net income

9,353

9,353

Other comprehensive loss, net of income taxes

(14,907)

(14,907)

Dividends declared: $0.39 per share

(2,798)

(2,798)

Stock based compensation

116

116

Restricted stock issued: 4,071 shares, (unearned income $210k)

8

(8)

Share retirement: 6,853 shares

(14)

(314)

(328)

Balance, June 30, 2022

$

14,346

$

126,986

$

217,139

$

(46,574)

$

311,897

    

    

    

    

Accumulated

 

Other

 

Common

Capital

Retained

Comprehensive

 

    

Stock  

    

Surplus  

    

Earnings  

    

Income (Loss)

    

Total

 

Balance, January 1, 2021

$

14,431

$

129,274

$

171,023

$

2,149

$

316,877

Net income

 

9,478

9,478

Other comprehensive loss, net of income taxes

 

(5,931)

(5,931)

Dividends declared: $0.37 per share

 

(2,665)

(2,665)

Stock based compensation

 

89

89

Restricted stock issued: 9,192 shares, (unearned income $182k)

18

(18)

Share retirement: 13,101 shares

(26)

(491)

(517)

Balance, March 31, 2021

$

14,423

$

128,854

$

177,836

$

(3,782)

$

317,331

Net income

 

8,531

8,531

Other comprehensive income, net of income taxes

 

1,845

1,845

Dividends declared: $0.37 per share

 

(2,665)

(2,665)

Stock based compensation

 

177

177

Share retirement: 7,828 shares

(16)

(312)

(328)

Balance, June 30, 2021

$

14,407

$

128,719

$

183,702

$

(1,937)

$

324,891

See notes to unaudited consolidated financial statements

5

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,

    

2022

    

2021

    

Cash flows from operating activities:

Net income

$

18,983

$

18,009

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of premises and equipment

 

994

 

1,352

Amortization of right-of-use lease asset

294

204

Amortization (accretion) of deferred loan fees, net

 

965

(2,614)

Amortization of intangibles

 

193

 

250

Amortization of low income housing partnerships

241

240

Provision (credit) for loan losses

 

1,250

 

(400)

Net unrealized loss (gain) on equity investment securities

19

(4)

Net gain on sale of other real estate owned

 

(478)

 

(75)

Loans originated for sale

 

(3,454)

(11,398)

Proceeds from sale of loans originated for sale

 

3,200

10,863

Net gain on sale of loans originated for sale

 

(19)

(173)

Net amortization of investment securities

 

799

 

551

Increase in cash surrender value of life insurance

 

(462)

 

(444)

Deferred income tax expense

 

 

620

Stock based compensation

 

88

 

266

Net change in:

Accrued interest receivable

 

(777)

 

411

Other assets

 

(2,045)

 

(1,137)

Accrued interest payable

 

861

 

(267)

Other liabilities

 

(1,914)

 

(3,253)

Net cash provided by operating activities

 

18,738

 

13,001

Cash flows from investing activities:

Proceeds from repayments of investment securities:

Available-for-sale

 

20,816

 

19,496

Held-to-maturity

 

2,546

 

119

Purchases of investment securities:

Available-for-sale

 

(69,392)

 

(65,862)

Held-to-maturity

(25,872)

 

Net (purchase) redemption of restricted equity securities

 

(4,492)

 

2,272

Net increase in loans

 

(237,630)

 

(56,492)

Purchases of premises and equipment

 

(2,880)

 

(816)

Investment in bank owned life insurance

(5,881)

Proceeds from bank owned life insurance

1,129

Proceeds from sale of other real estate owned

 

967

 

680

Net cash used in investing activities

 

(320,689)

 

(100,603)

Cash flows from financing activities:

Net (decrease) increase in deposits

 

(52,114)

 

174,653

Repayment of long-term debt

 

(1,065)

 

(11,017)

Net increase (decrease) in short-term borrowings

 

129,170

 

(50,000)

Retirement of common stock

 

(646)

(845)

Cash dividends paid

 

(5,594)

 

(5,330)

Net cash provided by financing activities

 

69,751

 

107,461

Net (decrease) increase in cash and cash equivalents

 

(232,200)

 

19,859

Cash and cash equivalents at beginning of period

 

279,933

 

228,192

Cash and cash equivalents at end of period

$

47,733

$

248,051

6

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,

    

2022

    

2021

    

Supplemental disclosures:

Cash paid during the period for:

Interest

$

3,264

$

5,449

Income taxes

 

5,285

 

2,500

Noncash items:

Transfers of loans to other real estate

$

57

See notes to unaudited consolidated financial statements

7

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(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 (“the Bank”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within Allegheny, Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna and Wyoming Counties of Pennsylvania, Middlesex County of New Jersey and Broome County of New York.

Basis of presentation:

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the three and six months ended and as of June 30, 2022, are not necessarily indicative of the results of consolidated operations and financial position that may be expected in the future.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of deferred tax assets, and impairment of goodwill. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2021.

Third Quarter Dividend Declaration

On July 29, 2022, the Board of Directors declared a third quarter dividend of $0.40 per share. The dividend is payable on September 15, 2022 to shareholders of record as of August 31, 2022.

Recent accounting standards:

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by the Company as of the required effective dates. The following should be read in conjunction with "Note 1 Summary of significant accounting policies" of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.

Unless otherwise discussed, management believes the impact of any recently issued standards, including those issued but not yet effective, will not have a material impact on the Company’s consolidated financial statements.

8

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Recently Issued But Not Yet Effective Accounting Pronouncements

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Company has formed a committee and engaged outside vendors to implement a platform to utilize the alternative loss estimation methodologies in determining the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company is required to adopt this guidance effective January 1, 2023.

ASU No. 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  This ASU eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty.  This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan.  Additionally, the ASU requires disclosure of current period gross writeoffs by year of origination for financing receivables.  The Company is required to adopt this guidance effective January 1, 2023. The Company does not believe adoption of this ASU will have a material impact on its financial results and will add the required disclosures for gross chargeoffs in its financial statements upon adoption of the new standard.

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate.

Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue.

The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.

2. 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, benefit plan adjustments and adjustments to derivative fair values.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The components of accumulated other comprehensive loss included in stockholders’ equity at June 30, 2022 and December 31, 2021 are as follows:

    

June 30, 2022

    

December 31, 2021

 

Net unrealized loss on investment securities available-for-sale

$

(53,072)

$

(1,791)

Income tax benefit

 

(11,145)

 

(376)

Net of income taxes

 

(41,927)

 

(1,415)

Benefit plan adjustments

 

(5,868)

 

(5,868)

Income tax benefit

 

(1,232)

 

(1,232)

Net of income taxes

 

(4,636)

 

(4,636)

Derivative adjustments

 

(14)

 

680

Income tax (benefit) expense

 

(3)

 

143

Net of income taxes

 

(11)

 

537

Accumulated other comprehensive loss

$

(46,574)

$

(5,514)

3. Earnings per share:

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three and six months ended June 30, 2022 and 2021:

2022

2021

For the Three Months Ended June 30, 

    

Basic  

    

Diluted  

    

Basic  

    

Diluted  

 

Net income

    

$

9,353

    

$

9,353

    

$

8,531

    

$

8,531

    

Average common shares outstanding

 

7,171,909

 

7,215,365

 

7,204,261

 

7,239,325

Earnings per share

$

1.30

$

1.30

$

1.18

$

1.18

2022

2021

For the Six Months Ended June 30, 

Basic  

Diluted  

Basic  

Diluted  

Net income

    

$

18,983

    

$

18,983

    

$

18,009

$

18,009

    

Average common shares outstanding

 

7,172,181

 

7,215,890

 

7,207,588

 

7,242,652

Earnings per share

$

2.65

$

2.63

$

2.50

$

2.49

10

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at June 30, 2022 and December 31, 2021 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

 

June 30, 2022

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

U.S. Treasury securities

$

252,706

$

24

$

16,272

$

236,458

U.S. government-sponsored enterprises

23,616

2

453

23,165

State and municipals:

Taxable

 

69,950

49

10,027

 

59,972

Tax-exempt

 

100,547

 

80

11,355

 

89,272

Residential mortgage-backed securities:

U.S. government agencies

 

1,290

 

14

 

1,276

U.S. government-sponsored enterprises

 

102,500

 

 

14,544

 

87,956

Commercial mortgage-backed securities:

U.S. government-sponsored enterprises

 

12,374

 

 

272

 

12,102

Corporate debt securities

4,000

290

3,710

Total

$

566,983

$

155

$

53,227

$

513,911

Held-to-maturity:

Tax-exempt state and municipals

$

11,257

$

10

$

978

$

10,289

Residential mortgage-backed securities:

U.S. government agencies

 

18,168

 

1,894

 

16,274

U.S. government-sponsored enterprises

 

65,021

 

7,508

 

57,513

Total

$

94,446

$

10

$

10,380

$

84,076

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

Fair

 

December 31, 2021

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

U.S. Treasury securities

$

193,849

$

107

$

2,382

$

191,574

U.S. government-sponsored enterprises

33,435

343

 

33,778

State and municipals:

 

Taxable

 

69,066

 

994

1,082

 

68,978

Tax-exempt

 

96,412

 

2,452

 

614

 

98,250

Residential mortgage-backed securities:

U.S. government agencies

 

1,790

 

53

 

 

1,843

U.S. government-sponsored enterprises

 

109,018

 

939

 

2,925

 

107,032

Commercial mortgage-backed securities:

U.S. government-sponsored enterprises

12,542

406

12,948

Corporate debt securities

3,000

82

2,918

Total

$

519,112

$

5,294

$

7,085

$

517,321

Held-to-maturity:

Tax-exempt state and municipals

$

11,476

$

126

$

56

$

11,546

Residential mortgage-backed securities:

U.S. government agencies

18,802

 

392

 

18,410

U.S. government-sponsored enterprises

 

40,935

 

3

448

 

40,490

Total

$

71,213

$

129

$

896

$

70,446

11

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Restricted Investment In Stock

Restricted investment in stock includes Federal Home Loan Bank (“FHLB”) stock with a carrying cost of $8,495 and $4,003 at June 30, 2022 and December 31, 2021, respectively, and Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 at June 30, 2022 and December 31, 2021, respectively, which are included in other assets in the consolidated balance sheets. FHLB and ACBB stock was issued as a requirement to facilitate participation in borrowing and other banking services. The investment in FHLB stock may fluctuate, as it is based on the member bank’s use of FHLB’s services.

These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) quarterly. As of June 30, 2022, there was no OTTI associated with these investments.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2022, is summarized as follows:

Fair

 

June 30, 2022

    

Value

 

Within one year

$

29,255

After one but within five years

 

205,194

After five but within ten years

 

83,195

After ten years

 

92,422

 

410,066

Mortgage-backed and other amortizing securities

 

103,845

Total

$

513,911

 The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2022, is summarized as follows:

Amortized

Fair

 

June 30, 2022

    

Cost 

    

Value  

 

Within one year

$

$

After one but within five years

After five but within ten years

8,092

7,429

After ten years

3,165

2,860

 

11,257

 

10,289

Mortgage-backed securities

 

83,189

 

73,787

Total

$

94,446

$

84,076

Securities with a carrying value of $176,683 and $203,580 at June 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2022 and December 31, 2021, 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.

12

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not been recognized at June 30, 2022 and December 31, 2021, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

 

Less Than 12 Months  

12 Months or Greater

Total  

Number of

Number of

Number of

 

Securities in a

Fair

Unrealized

Securities in a

Fair

Unrealized

Securities in a

Fair

Unrealized

June 30, 2022

   

Loss Position

   

Value 

   

Losses 

   

Loss Position

   

Value 

   

Losses 

   

Loss Position

   

Value 

   

Losses 

 

U.S. Treasury securities

53

$

232,013

$

16,272

    

$

$

53

$

232,013

$

16,272

U.S. government-sponsored enterprises

5

16,662

453

5

16,662

453

State and municipals:

Taxable

50

45,783

7,083

14

10,707

2,944

64

56,490

10,027

Tax-exempt

92

70,020

9,523

23

12,370

2,810

115

82,390

12,333

Residential mortgage-backed securities:

U.S. government agencies

9

17,550

1,908

9

17,550

1,908

U.S. government-sponsored enterprises

30

91,177

11,118

10

53,591

10,934

40

144,768

 

22,052

Commercial mortgage-backed securities:

U.S. government-sponsored enterprises

4

 

12,102

 

272

4

 

12,102

 

272

Corporate debt securities

4

2,811

189

2

899

101

6

3,710

290

Total

247

$

488,118

$

46,818

49

$

77,567

$

16,789

296

$

565,685

$

63,607

Less Than 12 Months  

12 Months or Greater

Total  

 

Number of

Number of

Number of

 

Securities in a

Fair

Unrealized

Securities in a

Fair

Unrealized

Securities in a

Fair

Unrealized

December 31, 2021

   

Loss Position

   

Value 

   

Losses  

   

Loss Position

   

Value 

   

Losses  

   

Loss Position

   

Value  

   

Losses 

 

U.S. Treasury securities

42

$

179,974

$

2,382

    

$

$

42

$

179,974

$

2,382

State and municipals:

Taxable

27

26,827

718

8

8,008

364

35

34,835

1,082

Tax-exempt

61

 

38,693

 

358

2

10,319

 

313

63

 

49,012

 

671

Residential mortgage-backed securities:

 

U.S. government agencies

3

18,398

 

391

3

 

18,398

 

391

U.S. government-sponsored enterprises

13

 

77,875

 

1,454

7

48,276

1,920

20

 

126,151

 

3,374

Corporate debt securities

4

 

2,449

 

51

1

470

30

5

 

2,919

 

81

Total

150

$

344,216

$

5,354

18

$

67,073

$

2,627

168

$

411,289

$

7,981

Management does not consider the unrealized losses on the debt securities, as a result of significantly higher market 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 known 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 June 30, 2022. There was no OTTI recognized for the three or six months ended June 30, 2022 and 2021.

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2022 and December 31, 2021 are summarized as follows. The Company had net deferred loan origination fees of $602 and $1,567 at June 30, 2022 and December 31, 2021, respectively. The decrease to the fees since year-end is due in part to the forgiveness by the Small Business Administration (“SBA”) of Paycheck Protection Program (“PPP”) loans.

13

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

    

June 30, 2022

    

December 31, 2021

 

Commercial

$

596,809

$

613,127

Real estate:

Commercial

 

1,569,658

 

1,343,539

Residential

 

317,672

 

297,624

Consumer

 

81,440

 

74,883

Total

$

2,565,579

$

2,329,173

PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.  These loans carry a fixed rate of 1.00% and a term of two years or five years, if not forgiven, in whole or in part.  Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. PPP fees are deferred and accreted into interest income over the contractual period of 24 months or 60 months, as applicable.  Upon SBA forgiveness, unamortized fees are then recognized into interest income. 

The Bank originated additional loans through the PPP, which expired on May 31, 2021.  During 2021, the Bank had generated and received SBA approval on 1,062 PPP loans totaling $121,599 and generated $4,370 in related deferred PPP net fees. 

Net deferred loan origination fees remaining related to PPP loans is $392 at June 30, 2022, compared to $1,659 at December 31, 2021. The PPP loans are included in the commercial loan classification and had an outstanding balance at June 30, 2022 of $27,036 comprised of $13,921 remaining from those originated during 2021 as part of round two and $13,115 remaining from loans originated during 2020 under round one of the program. At December 31, 2021, PPP loans had outstanding balances totaling $68,893. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. At June 30, 2022, there were two loans past due totaling $7. At December 31, 2021, the outstanding PPP balance was considered current.

14

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2022 and 2021 are summarized as follows:

    

Real estate

June 30, 2022

    

Commercial

    

Commercial

    

Residential

Consumer

Total

 

Allowance for loan losses:

Beginning Balance April 1, 2022

$

7,593

$

16,789

$

3,255

$

770

$

28,407

Charge-offs

 

 

 

(2)

 

(96)

 

(98)

Recoveries

 

20

 

61

 

 

34

 

115

Provisions (credits)

 

153

 

719

 

(33)

 

111

 

950

Ending balance

$

7,766

$

17,569

$

3,220

$

819

$

29,374

Real estate

June 30, 2021

    

Commercial

    

Commercial

    

Residential

Consumer

Total

 

Allowance for loan losses:

Beginning Balance April 1, 2021

$

8,215

$

14,703

$

2,994

$

871

$

26,783

Charge-offs

 

 

(144)

 

(2)

 

(44)

 

(190)

Recoveries

 

18

 

8

 

1

 

19

 

46

Provisions (credits)

 

287

 

(286)

 

76

 

23

 

100

Ending balance

$

8,520

  

$

14,281

$

3,069

$

869

$

26,739

  

Real estate  

June 30, 2022

    

Commercial

    

Commercial  

    

Residential  

Consumer  

Total

Allowance for loan losses:

  

Beginning Balance January 1, 2022

  

$

8,453

$

15,928

$

3,209

$

793

$

28,383

Charge-offs

  

 

(161)

 

(132)

 

(2)

 

(158)

 

(453)

Recoveries

  

 

29

 

77

 

3

 

85

 

194

Provisions (credits)

  

 

(555)

 

1,696

 

10

 

99

 

1,250

Ending balance

  

$

7,766

  

$

17,569

$

3,220

$

819

$

29,374

Real estate  

June 30, 2021

    

Commercial

    

Commercial  

    

Residential  

Consumer  

Total

Allowance for loan losses:

Beginning Balance January 1, 2021

$

8,734

$

14,559

$

3,129

$

922

$

27,344

Charge-offs

 

(15)

 

(240)

 

(24)

 

(106)

 

(385)

Recoveries

 

79

 

66

 

2

 

33

 

180

Provisions (credits)

 

(278)

 

(104)

 

(38)

 

20

 

(400)

Ending balance

$

8,520

$

14,281

$

3,069

$

869

$

26,739

15

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2022 and December 31, 2021 is summarized as follows:

  

Real estate

 

June 30, 2022

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

   Total

 

Allowance for loan losses:

 

  

Ending balance

$

7,766

$

17,569

  

$

3,220

$

819

$

29,374

  

Ending balance: individually evaluated for impairment

 

 

34

15

48

 

97

  

Ending balance: collectively evaluated for impairment

 

$

7,732

$

17,554

$

3,172

$

819

$

29,277

  

Loans receivable:

Ending balance

$

596,809

$

1,569,658

  

$

317,672

$

81,440

$

2,565,579

  

Ending balance: individually evaluated for impairment

 

160

2,903

1,267

 

4,330

  

Ending balance: collectively evaluated for impairment

$

596,649

$

1,566,755

$

316,405

$

81,440

$

2,561,249

  

  

Real estate

 

December 31, 2021

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

   Total

 

Allowance for loan losses:

 

  

Ending balance

$

8,453

$

15,928

  

$

3,209

$

793

$

28,383

  

Ending balance: individually evaluated for impairment

 

 

40

109

26

 

175

  

Ending balance: collectively evaluated for impairment

 

$

8,413

$

15,819

$

3,183

$

793

$

28,208

  

Loans receivable:

Ending balance

$

613,127

$

1,343,539

  

$

297,624

$

74,883

$

2,329,173

  

Ending balance: individually evaluated for impairment

 

199

2,889

1,274

 

4,362

  

Ending balance: collectively evaluated for impairment

$

612,928

$

1,340,650

$

296,350

$

74,883

$

2,324,811

  

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

16

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan 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 affected in the future.

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 June 30, 2022 and December 31, 2021:

Special

 

June 30, 2022

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

$

587,907

$

8,077

$

825

$

$

596,809

Real estate:

Commercial

 

1,555,363

 

8,028

 

6,267

 

1,569,658

Residential

 

315,835

 

119

 

1,718

 

317,672

Consumer

 

81,131

 

 

309

 

81,440

Total

$

2,540,236

$

16,224

$

9,119

$

$

2,565,579

Special

 

December 31, 2021

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

$

611,151

$

896

$

1,080

$

$

613,127

Real estate:

Commercial

 

1,324,646

 

13,939

 

4,954

 

1,343,539

Residential

 

294,892

 

333

 

2,399

 

297,624

Consumer

 

74,744

 

 

139

 

74,883

Total

$

2,305,433

$

15,168

$

8,572

$

$

2,329,173

The increase to special mention commercial loans is primarily the result of the downgrade of one credit with an outstanding balance of $7,800 due to insufficient cash flows as the borrower’s operations have not stabilized in the anticipated timeframe.  The decrease to special mention commercial real estate loans is due in part to an upgrade of a $3,531 credit resulting from improved financial performance and satisfactory repayment history and the payoff of a $2,429 credit.   The increase to substandard commercial real estate loans is primarily due to the downgrade of three credits totaling $1,745 as a result of repayment uncertainty. These downgrades were offset by the payoff/reduction of various credits. Substandard residential real estate loans decreased $681 primarily due to the payoff of a $538 credit.

17

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Information concerning nonaccrual loans by major loan classification at June 30, 2022 and December 31, 2021 is summarized as follows:

    

June 30, 2022

    

December 31, 2021

 

Commercial

$

147

$

185

Real estate:

Commercial

 

1,889

 

1,793

Residential

 

613

 

694

Consumer

 

270

 

139

Total

$

2,919

$

2,811

Nonaccrual loans increased $108 from year end December 31, 2021 due to increases in commercial real estate and consumer loans, partially offset by reduced commercial and residential real estate loans.The major classifications of loans by past due status are summarized as follows:

18

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

    

    

    

Greater

    

    

    

    

Loans > 90

 

30-59 Days

60-89 Days

than 90

Total Past

Days and

 

June 30, 2022

Past Due  

Past Due  

Days  

Due  

Current  

Total Loans  

Accruing  

 

Commercial

$

78

$

19

$

127

$

224

$

596,585

$

596,809

$

Real estate:

Commercial

 

1,561

240

 

708

 

2,509

 

1,567,149

 

1,569,658

Residential

 

270

475

375

 

1,120

 

316,552

 

317,672

190

Consumer

 

523

179

 

123

 

825

 

80,615

 

81,440

 

Total

$

2,432

$

913

$

1,333

$

4,678

$

2,560,901

$

2,565,579

$

190

Improved credit quality resulted in lower levels of past due loans from year end.

    

    

    

Greater

    

    

    

    

Loans > 90

 

30-59 Days

60-89 Days

than 90

Total Past

Days and

 

December 31, 2021

Past Due  

Past Due  

Days  

Due  

Current  

Total Loans  

Accruing  

 

Commercial

$

101

155

$

158

$

414

$

612,713

$

613,127

$

Real estate:

Commercial

 

768

$

423

 

834

 

2,025

 

1,341,514

 

1,343,539

Residential

 

1,552

 

207

 

265

 

2,024

 

295,600

 

297,624

13

Consumer

 

477

 

163

 

51

 

691

 

74,192

 

74,883

 

Total

$

2,898

$

948

$

1,308

$

5,154

$

2,324,019

$

2,329,173

$

13

The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2022 and June 30, 2021, and as of and for the year ended December 31, 2021 by major loan classification:

This Quarter

Year-to-Date

Unpaid

Average

Interest

 

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

 

Recorded

Income

 

June 30, 2022

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

Investment  

    

Recognized  

 

With no related allowance:

    

    

    

    

    

    

Commercial

$

126

$

471

$

132

$

2

$

141

$

4

Real estate:

Commercial

 

2,473

 

3,262

 

2,611

 

10

 

2,532

 

22

Residential

 

996

 

1,181

 

935

 

6

 

914

 

10

Consumer

 

270

 

283

 

238

 

205

Total

 

3,865

 

5,197

 

3,916

 

18

 

3,792

 

36

With an allowance recorded:

Commercial

 

34

 

34

$

34

 

28

 

 

32

 

Real estate:

Commercial

 

430

 

442

 

15

 

435

 

4

 

461

 

8

Residential

 

271

 

276

 

48

 

273

 

3

 

315

 

6

Total

 

735

 

752

 

97

 

736

 

7

 

808

 

14

Total impaired loans

Commercial

 

160

 

505

 

34

 

160

 

2

 

173

 

4

Real estate:

Commercial

 

2,903

 

3,704

 

15

 

3,046

 

14

 

2,993

 

30

Residential

 

1,267

 

1,457

 

48

 

1,208

 

9

 

1,229

 

16

Consumer

 

270

 

283

 

 

238

 

 

205

 

Total

$

4,600

$

5,949

$

97

$

4,652

$

25

$

4,600

$

50

19

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Year Ended  

 

Unpaid

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

 

December 31, 2021

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

    

    

    

    

Commercial

$

158

$

481

$

964

$

13

Real estate:

Commercial

 

2,376

 

3,120

 

2,719

 

22

Residential

 

873

 

1,073

 

1,016

 

19

Consumer

 

139

 

148

 

100

Total

 

3,546

 

4,822

 

4,799

 

54

With an allowance recorded:

Commercial

 

41

 

41

40

 

1,091

 

15

Real estate:

Commercial

 

513

 

543

 

109

 

802

 

22

Residential

 

401

 

401

 

26

 

436

 

13

Consumer

 

 

 

 

Total

 

955

 

985

 

175

 

2,329

 

50

Total impaired loans

Commercial

 

199

 

522

 

40

 

2,055

 

28

Real estate:

Commercial

 

2,889

 

3,663

 

109

 

3,521

 

44

Residential

 

1,274

 

1,474

 

26

 

1,452

 

32

Consumer

 

139

 

148

 

 

100

 

Total

$

4,501

$

5,807

$

175

$

7,128

$

104

This Quarter

Year-to-Date

Unpaid

Average

Interest

 

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

 

Recorded

Income

 

June 30, 2021

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

Investment  

    

Recognized  

 

With no related allowance:

    

    

    

    

    

    

Commercial

$

1,105

$

1,603

$

889

$

3

$

1,343

$

7

Real estate:

Commercial

 

3,009

 

3,970

 

3,145

9

 

2,887

15

Residential

 

1,007

 

1,185

 

1,064

4

 

1,071

10

Consumer

 

76

 

86

 

85

 

94

Total

 

5,197

 

6,844

 

5,183

16

 

5,395

32

With an allowance recorded:

Commercial

 

966

 

999

$

549

 

1,472

5

 

1,663

10

Real estate:

Commercial

 

674

 

771

 

87

 

692

 

6

 

988

 

10

Residential

 

459

 

470

 

58

 

441

 

3

 

447

 

7

Consumer

Total

 

2,099

 

2,240

 

694

 

2,605

 

14

 

3,098

 

27

Total impaired loans

Commercial

 

2,071

 

2,602

 

549

 

2,361

 

8

 

3,006

 

17

Real estate:

Commercial

 

3,683

 

4,741

 

87

 

3,837

 

15

 

3,875

 

25

Residential

 

1,466

 

1,655

 

58

 

1,505

 

7

 

1,518

 

17

Consumer

 

76

 

86

 

85

 

94

Total

$

7,296

$

9,084

$

694

$

7,788

$

30

$

8,493

$

59

20

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 Loan Modifications/Troubled Debt Restructurings/COVID-19

Included in the commercial real estate and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $1,468 at June 30, 2022, $1,649 at December 31, 2021 and $2,637 at June 30, 2021.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

Rate Modification - A modification in which the interest rate is changed to a below market rate.

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification - Any other type of modification, including the use of multiple categories above.

There were no loans modified as troubled debt restructurings during the six months ended June 30, 2022 or 2021.

During the three months and six ended June 30, 2022, or 2021, there were no payment defaults on troubled debt restructurings.

6. Other assets:

The increase in other assets was due to the increase to the net deferred tax asset related to the higher unrealized loss of the available-for-sale securities portfolio. The components of other assets at June 30, 2022, and December 31, 2021 are summarized as follows:

    

June 30, 2022

    

December 31, 2021

 

Other real estate owned

$

121

$

609

Investment in low income housing partnership

 

5,659

 

5,900

Mortgage servicing rights

 

919

 

882

Restricted equity securities (FHLB and other)

 

8,537

 

4,045

Net deferred tax asset

16,266

5,355

Interest rate floor

97

844

Interest rate swaps

14,720

9,026

Other assets

 

8,112

 

6,395

Total

$

54,431

$

33,056

7. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

 

21

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

During the periods ended June 30, 2022 and December 31, 2021 there were no transfers in or out of Level 3.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

 

Interest rate swaps and options:  The Company’s interest rate swaps and options are reported at fair value utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for interest rate, forward rates, rate volatility, and volatility surface. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

22

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021 are summarized as follows:

Fair Value Measurement Using

 

Quoted Prices in

Significant

Significant

 

Active Markets for

Other Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

June 30, 2022

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Treasury securities

    

$

236,458

    

$

236,458

    

$

    

$

U.S. government-sponsored enterprises

23,165

23,165

State and municipals:

Taxable

 

59,972

 

59,972

Tax-exempt

 

89,272

 

89,272

Mortgage-backed securities:

U.S. government agencies

 

1,276

 

1,276

U.S. government-sponsored enterprises

 

100,058

 

100,058

Corporate debt securities

3,710

3,710

Common equity securities

121

121

Total investment securities

$

514,032

$

236,579

$

277,453

$

Loan held for sale

$

681

$

681

Interest rate floor-other assets

$

97

$

97

Interest rate swap-other assets

$

14,720

$

14,720

Interest rate swap-other liabilities

$

(13,982)

$

(13,982)

Fair Value Measurement Using 

 

Quoted Prices in

Significant

Significant

 

Active Markets for

Other Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

December 31, 2021

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Treasury securities

    

$

191,574

    

$

191,574

    

    

$

U.S. government-sponsored enterprises

33,778

$

33,778

State and municipals:

Taxable

 

68,978

 

68,978

Tax-exempt

 

98,250

 

98,250

Mortgage-backed securities:

U.S. government agencies

 

1,843

 

1,843

U.S. government-sponsored enterprises

 

119,980

 

119,980

Corporate debt securities

2,918

2,918

Common equity securities

 

140

140

Total investment securities

$

517,461

$

191,714

$

325,747

$

Loan held for sale

$

408

$

408

Interest rate floor-other assets

$

844

$

844

Interest rate swap-other assets

$

9,026

$

9,026

Interest rate swap-other liabilities

$

(8,811)

$

(8,811)

23

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021 are summarized as follows:

Fair Value Measurement Using

 

Quoted Prices in

Significant

Significant

 

Active Markets for

Other Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

June 30, 2022

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

638

    

    

    

$

638

Fair Value Measurement Using 

 

Quoted Prices in

Significant Other

Significant

 

Active Markets for

Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

December 31, 2021

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

780

    

    

    

$

780

Other real estate owned

$

487

$

487

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements 

 

Fair Value

Range

 

June 30, 2022

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

638

    

Appraisal of collateral

    

Appraisal adjustments

    

19.8% to 97.0%  (70.5)%

 

Liquidation expenses

 

3.0% to 6.0% (5.2)%

Quantitative Information about Level 3 Fair Value Measurements 

 

Fair Value

Range

 

December 31, 2021

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

780

    

Appraisal of collateral

    

Appraisal adjustments

    

6.4% to 97.0%  (65.2)%

 

Liquidation expenses

 

3.0% to 6.0% (5.1)%

Other real estate owned

$

487

 

Appraisal of collateral

 

Appraisal adjustments

 

35.9% to 35.9%  (35.9)%

 

Liquidation expenses

 

3.0% to 6.0% (5.0)%

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 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.

24

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The carrying and fair values of the Company’s financial instruments at June 30, 2022 and December 31, 2021 and their placement within the fair value hierarchy are as follows:

    

    

    

Fair Value Hierarchy 

 

Quoted

   

   

 

Prices in

 

Active

Significant

 

Markets for

Other

Significant

 

Identical

Observable

Unobservable

 

Carrying

Fair

Assets

Inputs

Inputs

 

June 30, 2022

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

Cash and due from banks

$

47,733

$

47,733

$

47,733

Investment securities:

Available-for-sale

 

513,911

 

513,911

236,458

$

277,453

Common equity securities

121

121

121

Held-to-maturity

 

94,446

 

84,076

 

84,076

Loans held for sale

 

681

 

681

 

681

Net loans

 

2,536,205

 

2,507,034

$

2,507,034

Accrued interest receivable

 

9,303

 

9,303

 

9,303

Mortgage servicing rights

 

919

 

1,414

 

1,414

Restricted equity securities (FHLB and other)

8,537

 

8,537

 

8,537

Interest rate floor

97

97

97

Interest rate swaps

 

14,720

 

14,720

 

14,720

Total

$

3,226,673

$

3,187,627

Financial liabilities:

Deposits

$

2,911,283

$

2,903,800

$

2,903,800

Short-term borrowings

129,170

129,083

129,083

Long-term debt

 

1,646

 

1,657

 

1,657

Subordinated debentures

 

33,000

 

33,286

 

33,286

Accrued interest payable

1,269

 

1,269

1,269

Interest rate swaps

 

13,982

 

13,982

13,982

Total

$

3,090,350

$

3,083,077

25

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

    

    

    

Fair Value Hierarchy 

 

Quoted

    

    

 

Prices in

 

Active

Significant

 

Markets for

Other

Significant

 

Identical

Observable

Unobservable

 

Carrying

Fair

Assets

Inputs

Inputs

 

December 31, 2021

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

Cash and due from banks

$

279,933

$

279,933

$

279,933

Investment securities:

Available-for-sale

 

517,321

 

517,321

191,574

$

325,747

Common equity securities

140

140

140

Held-to-maturity

 

71,213

 

70,446

 

70,446

Loans held for sale

 

408

 

408

 

408

Net loans

 

2,300,790

 

2,261,586

$

2,261,586

Accrued interest receivable

 

8,528

 

8,528

 

8,528

Mortgage servicing rights

 

882

 

1,357

 

1,357

Restricted equity securities (FHLB and other)

 

4,045

 

4,045

 

4,045

Interest rate floor

844

844

844

Interest rate swaps

9,026

9,026

9,026

Total

$

3,193,130

$

3,153,634

Financial liabilities:

Deposits

$

2,963,397

$

2,963,547

$

2,963,547

Long-term debt

 

2,711

 

2,778

 

2,778

Subordinated debentures

33,000

32,337

32,337

Accrued interest payable

 

408

 

408

408

Interest rate swaps

8,811

8,811

8,811

Total

$

3,008,327

$

3,007,881

26

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

8. Employee benefit plans:

The Company provides an Employee Stock Ownership Plan (“ESOP”) and a Retirement Profit Sharing Plan. The Company also maintains Supplemental Executive Retirement Plans (“SERPs”) and an Employees’ Pension Plan, which is currently frozen.

For the three and six months ended June 30, salaries and employee benefits expense includes approximately $308 and $597 in 2022, and $342 and $648 in 2021 relating to the employee benefit plans.

Pension Benefits

Three Months Ended June 30, 

    

2022

    

2021

Components of net periodic pension benefit:

    

    

Interest cost

$

114

$

105

Expected return on plan assets

 

(352)

 

(322)

Amortization of unrecognized net gain

 

50

 

76

Net periodic benefit

$

(188)

$

(141)

Pension Benefits

Six Months Ended June 30, 

    

2022

    

2021

Components of net periodic pension benefit:

    

    

Interest cost

$

228

$

210

Expected return on plan assets

 

(704)

 

(644)

Amortization of unrecognized net gain

 

99

 

152

Net periodic benefit

$

(377)

$

(282)

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:

 

Select the persons to be granted awards under the 2017 Plan.

Determine the type, size and term of awards.

Determine whether such performance objectives and conditions have been met.

Accelerate the vesting or excercisability of an award.

Persons eligible to receive awards under the 2017 Plan include directors, officers, employees, consultants and other service providers of the Company and its subsidiaries.

 

As of June 30, 2022, there were 17,365 shares of the Company’s common stock available for grant as awards pursuant to the 2017 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.

 

For the six months ended June 30, 2022 and 2021, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan, with an aggregate of 19,787 shares and 19,818 shares underlying such awards, respectively.

 

The non-performance restricted stock grants made in 2022, 2021 and 2020 vest equally over three years. The performance-based restricted stock units vest over three fiscal years and include conditions based on the Company’s

27

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

three year cumulative diluted earnings per share and three-year average return on equity or tangible equity that determines the number of restricted stock units that may vest.

 

The Company expenses the fair value of all-share based compensation over the requisite service period commencing at grant date. The fair value of restricted stock is expensed on a straight-line basis. Compensation is recognized over the vesting period and adjusted based on the performance criterea. The Company classifies share-based compensation for employees within “salaries and employee benefits expense” on the consolidated statements of income and comprehensive income.

 

The Company recognized net compensation costs of $191 and $390 for the three and six months ended June 30, 2022 for awards granted under the 2017 Plan. The Company recognized compensation expense of $177 and $266 for the three and six months ended June 30, 2021 for awards granted under the 2017 Plan. As of June 30, 2022, the Company had $1,412 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of under 2.0 years.

9. 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 and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income/expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  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. Such derivatives have been used to hedge the variable cash flows associated with existing variable-rate assets and issuances of debt.

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 income (loss) and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company’s variable-rate debt/assets. During the next twelve months, the Company estimates that an additional $41 will be reclassified as an increase 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. 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

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Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 June 30, 2022, the Company had 89 interest rate swaps with an aggregate notional amount of $418,159 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 June 30, 2022 and December 31, 2021.

Asset Derivatives

Asset Derivatives

Liability Derivatives

Liability Derivatives

As of June 30, 2022

As of December 31, 2021 (1)

As of June 30, 2022

As of December 31, 2021 (2)

    

Notional

    

Balance Sheet

    

    

Balance Sheet

    

    

Balance Sheet

    

    

Balance Sheet

    

Amount

Location

Fair Value

Location

Fair Value

Location

Fair Value

Location

Fair Value

Derivatives designated as hedging instruments

Interest Rate Floor

$

25,000

Other Assets

$

97

Other Assets

$

844

Total derivatives designated as hedging instruments

$

97

$

844

$

$

Derivatives not designated as hedging instruments

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest Rate Swaps (2)

$

418,159

Other Assets

 

$

14,720

 

Other Assets

 

$

9,026

 

Other Liabilities

 

$

13,985

 

Other Liabilities

$

8,811

Total derivatives not designated as hedging instruments

 

  

$

14,720

 

  

$

9,026

 

  

$

13,985

 

  

$

8,811

(1)Amounts include accrued interest.
(2)Notional amount of interest rate swaps at December 31, 2021 was $392,677.

29

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income (loss) as of June 30, 2022 and June 30, 2021.

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain (Loss)

Gain (Loss)

Gain (Loss)

Gain (Loss)

Loss

Recognized from

Gain (Loss)

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

   

  

Derivative

   

  

Component

   

  

Component

   

Income into

   

  

OCI into Income

   

  

Included Component

   

  

Excluded Component

Relationships

June 30, 2022

Income

June 30, 2022

Derivatives in Cash Flow Hedging Relationships 

$

$

Interest Expense

$

$

Cash Flow Swap

Other expense

Interest Rate Floor (*)

$

(469)

$

(493)

$

24

Interest Income

$

224

$

256

$

(32)

Total

$

(469)

$

(493)

$

24

$

224

$

256

$

(32)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Gain

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

  

Derivative

  

Component

  

Component

Income into

  

OCI into Income

  

Included Component

  

Excluded Component

Relationships

June 30, 2021

Income

June 30, 2021

Derivatives in Cash Flow Hedging Relationships 

Cash Flow Swap

$

401

$

401

Interest Expense

$

(23)

$

(23)

Cash Flow Swap

Other Expense

(25)

(25)

Interest Rate Floor (*)

$

(25)

$

(83)

$

7

Interest Income

$

268

$

300

$

(32)

Total

$

376

$

318

$

7

$

220

$

252

$

(32)

*Amounts disclosed are gross and not net of taxes.

30

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income and Comprehensive Income

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2022 and June 30, 2021.

Location and Amount of Gain or (Loss) Recognized in

Income on Fair Value and Cash Flow Hedging

Relationships

For the three months ended June 30,

2022

2022

2021

2021

  

  

Interest Income

  

  

Interest Expense

  

  

Interest Income

  

Interest Expense

Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded

$

93

$

$

134

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

$

93

$

$

134

$

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component

$

109

$

$

150

$

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component

$

(16)

$

(16)

$

Location and Amount of Gain or (Loss) Recognized in

Income on Fair Value and Cash Flow Hedging

Relationships

For the six months ended June 30,

2022

2022

2021

2021

  

  

Interest Income

  

  

Interest Expense

  

  

Interest Income

  

Interest Expense

Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded

$

224

$

$

268

$

(48)

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

$

224

$

$

268

$

(23)

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring

$

$

(25)

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component

$

256

$

$

300

$

(48)

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component

$

(32)

$

(32)

$

Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2022 and 2021.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Amount of Gain

Amount of Gain

 

Amount of Gain

Amount of Loss

 Recognized in

 Recognized in

 

Recognized in

Recognized in

Location of Gain or (Loss)

Income 

Income

 

Income 

Income

Recognized in Income on

Three Months Ended

Six Months Ended

 

Three Months Ended

Six Months Ended

Derivatives Not Designated as Hedging Instruments

    

Derivative

    

June 30, 2022

    

June 30, 2022

 

June 30, 2021

    

June 30, 2021

Interest Rate Swaps

 

Interest rate swap revenue

$

283

$

523

$

(237)

$

168

Other Contracts

1

4

Total

 

  

$

284

$

527

$

(237)

$

168

Fee Income

Fee income

$

1

$

104

$

105

$

497

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2022 and December 31, 2021. 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 June 30, 2022

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

  

Assets

  

Balance Sheet

  

Balance Sheet

  

Instruments

  

Received

  

Amount

Derivatives

$

14,816

$

$

14,816

$

100

11,220

$

3,496

Offsetting of Derivative Liabilities

as of June 30, 2022

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Liabilities

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Liabilities

Balance Sheet

Balance Sheet

Instruments

Paid

Amount

Derivatives

$

13,985

$

$

13,985

$

100

7,830

$

6,055

Offsetting of Derivative Assets

as of December 31, 2021

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Balance Sheet

Instruments

Received

Amount

Derivatives

$

9,870

$

$

9,870

$

3,218

$

6,652

Offsetting of Derivative Liabilities

as of December 31, 2021

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Amounts of

Gross Amounts

of Liabilities

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Liabilities

Balance Sheet

Balance Sheet

Instruments

Paid

Amount

Derivatives

$

8,818

$

$

8,818

$

3,218

5,600

$

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Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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.

As of June 30, 2022, 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 $3,402. As of December 31, 2021, 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 $5,600. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and had posted collateral of $7,830 with dealer counterparties at June 30, 2022 and December 31, 2021. Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the agreement. The cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the cash collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.

10. Deposits

The major components of interest-bearing and noninterest-bearing deposits at June 30, 2022 and December 31, 2021 are summarized as follows:

At the period end

    

June 30, 2022

    

December 31, 2021

 

Interest-bearing deposits:

Money market accounts

$

592,989

$

588,245

Now accounts

 

752,397

 

851,086

Savings accounts

 

518,146

 

491,796

Time deposits less than $250

 

219,690

 

203,719

Time deposits $250 or more

 

80,503

 

90,795

Total interest-bearing deposits

 

2,163,725

 

2,225,641

Noninterest-bearing deposits

 

747,558

 

737,756

Total deposits

$

2,911,283

$

2,963,397

Total deposits decreased $52,114 from December 31, 2021 due primarily to outflows of public fund NOW accounts and reductions to high balance time deposits as these customers are typically more price-sensitive. Brokered deposits added during the three months ended June 30, 2022 totaled $25,317 and were used to offset a portion of the deposit outflows and lock-in then current interest rates, as our expectation is for interest rates to continue to increase throughout the remainder of 2022. Of the brokered deposits added during the current period, $11,400 are callable which gives the Bank the option to call the certificates of deposit after the initial three month term.

11. Borrowings

Short-term borrowings consists of FHLB advances representing overnight borrowings or with stated original terms of less than twelve months and other borrowings related to collateral held from derivative counterparties. Total short-term borrowings at June 30, 2022 were $129,170 as compared to no short-term borrowings at December 31, 2021. The increase in short-term borrowings was due primarily to fund a portion of loan growth and replace deposit outflows during the three months ended June 30, 2022, as overnight borrowings with the FHLB were $117,950 at June 30, 2022.

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Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Other borrowings, which include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $11,220 and increased due to higher market interest rates. The table below outlines short-term borrowings at and for the six months ended June 30, 2022 and for the year ended December 31, 2021:   

At and for the six months ended June 30, 2022

Weighted

 

Maximum

Weighted

Average

 

Ending

Average

Month-End

Average

Rate at End

 

    

Balance 

    

Balance 

    

Balance 

    

Rate

    

of the Period

 

Other borrowings

    

$

11,220

    

$

5,466

    

$

11,220

    

0.83

%  

1.58

%

FHLB advances

117,950

13,669

117,950

 

1.63

%  

1.75

Total short-term borrowings

129,170

19,135

129,170

 

1.29

%  

1.74

%

At and for the year ended December 31, 2021

 

Weighted

Weighted

 

Maximum

Average

Average

 

Ending

Average

Month-End

Rate for

Rate at End

 

    

Balance

    

Balance

    

Balance

    

the Year

    

of the Year

 

FHLB advances

$

$

13,973

$

50,000

 

0.56

%  

%

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 June 30, 2022, the maximum borrowing capacity was $1,018,230 of which $119,596 was outstanding in borrowings and $283,500 was used to issue standby letters of credit to collateralize public fund deposits. At December 31, 2021, the maximum borrowing capacity was $896,130 of which $2,711 was outstanding in borrowings and $373,035 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. The overnight borrowing rate resets each day.

Long-term debt consisting of advances from the FHLB at June 30, 2022 and December 31, 2021 are as follows:

Interest Rate 

    

    

 

Due

    

Fixed 

June 30, 2022

December 31, 2021

 

March 2023

4.69

$

1,646

2,711

$

1,646

$

2,711

Maturities of long-term debt, by contractual maturity, for the remainder of 2022 and subsequent years are as follows:

2022

 

1,091

2023

 

555

$

1,646

The advances from the FHLB totaling $1,646 are not convertible.

12. Subordinated debt

On June 1, 2020, the Company sold $33,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes qualify as Tier 2 capital for regulatory capital purposes.

The 2020 Notes bear interest at a rate of 5.375% per year for the first five years and then float based on a benchmark rate (as defined), provided that the interest rate applicable to the outstanding principal balance during the period the 2020 Notes are floating will at no time be less the 4.75%.  Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2020, for the first five years after issuance and will be payable quarterly

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

in arrears thereafter on March 1, June 1, September 1, and December 1. The 2020 Notes will mature on June 1, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after June 1, 2025 and prior to June 1, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, the Company may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100%) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar proceeding by or against the Company or the Bank.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2021.

Cautionary Note Regarding Forward-Looking Statements:

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Peoples Financial Services Corp. and its subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: the COVID-19 crisis and the governmental responses to the crisis; the effects of any recession in the United States; the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine; risks associated with business combinations; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; inability of third party service providers to perform; and our ability to prevent, detect and respond to cyberattacks. Additional factors that may affect our results are discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, in Part II, Item 1A of this report and in reports we file with the Securities and Exchange Commission from time to time.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts may have been reclassified to conform with the current year’s presentation. Any reclassifications did not have any effect on our operating results or financial position.

Critical Accounting Policies:

Disclosure of our significant accounting policies is included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2021, which is incorporated herein by reference. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

Operating Environment:

During the second quarter of 2022, restrictive measures related to the COVID-19 pandemic continued to ease, both on a national level and more specifically in the Company's market area. Most businesses have reopened at full capacity, that has improved commercial and consumer activity which is begininning to return to pre-pandemic levels. Risk of further

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

resurgence and possible reimplementation of restrictions remains.  If there is a resurgence in the virus, the Company could experience adverse effects on its business, financial condition, results of operations and cash flows.

From a lending perspective, loan growth, excluding our PPP loan transactions, continued to improve during the second quarter as momentum from our entrance in two new markets continues and overall economic activity improved in all our markets.  PPP loans declined to $27,036 at June 30, 2022 and we expect the majority of these loans to be forgiven by year-end. From a deposit perspective, competition for funding has increased as excess liquidity held by banks has been deployed into loans.

During the second quarter, high inflation continued, interest rates increased and the likelihood of a recession remained. As a result, the level of loan growth experienced in the first half of the year may not be experienced in the second half of 2022.

Inflation increased during the first half of 2022 to levels well above the Federal Open Market Committee’s

(“FOMC”) long-term desired 2% level for items other than food and energy. Core inflation, as measured by the Consumer Price Index (“CPI”), excluding items known for their volatility such as food and energy, was 5.9% for the 12 months ending June 30, 2022. When including food and energy, CPI was 9.1% due primarily to higher energy costs.

Concerns over the high inflation rate have resulted in central bankers in the U.S. and abroad adjusting interest rates. The FOMC has increased rates three times through June 30, 2022 beginning with a 25 basis point increase in March, a 50 basis point increase in May and a 75 basis point increase in June. In addition there was another 75 basis point increase in July.

Gross domestic product (“GDP”) decreased for the second consecutive quarter. It decreased at an annual rate of 0.9% for the second quarter and 1.6% for the first quarter compared to an increase of 6.9% in the fourth quarter of 2021 on reduced exports, federal spending, private investment and state/local government spending. Business investment, which accounts for approximately 15% of GDP, has ramped up investment since the initial impact of the pandemic; however, investment is unsteady as noted by a decrease in investment in office buildings and retail space (which is driven by increased online shopping and working from home) investment in equipment and intellectual property expanding during the pandemic and continues to be strong.

Per the U.S Bureau of Economic Analysys (“BEA”), the personal consumption index (“PCE”), which represents 70% of economic output, for June increased 6.8% from one year ago, reflecting increases in both goods and services. Excluding food and energy the PCE price index for June increased 4.8% from one year ago.

Home sales were down 8.1% from a year ago, after two years of heightened activity and have returned to prepandemic levels and will likely be impacted by higher interest rates.

Goodwill:

The Company has goodwill with a net carrying value of $63,370 at June 30, 2022 and December 31, 2021. The Company's policy is to test goodwill for impairment annually on December 31 or on an interim basis if an event triggering impairment may have occurred. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. At June 30, 2022, we evaluated whether any events occurred or circumstances changed that would more likely than not reduce the Company's fair value below its carrying value. We noted no such matters. There is no assurance that changes in events or circumstances in the future will not result in impairment.

Review of Financial Position:

Total assets increased $52,056 or 3.1% annualized, to $3,421,539 at June 30, 2022, from $3,369,483 at December 31, 2021. The increase in assets during the six months was due to loan and investment growth, funded primarily with our

37

Table of Contents

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

federal funds sold balances and short-term borrowings. Total loans increased to $2,565,579 at June 30 2022, compared to $2,329,173 at December 31, 2021, an increase of $236,406. Excluding PPP loans and a net decrease of $41,857 to PPP loan balances, loan growth during the first six months of 2022 totaled $278,263, or 24.8% annualized.  Investments increased $19,804 or 6.8% annualized as the purchase of higher yielding investment securities with a portion of our lower earning excess cash position during the first three months of 2022 offset the reduction to the fair value of the available-for-sale investment portfolio due to higher market rates.  Federal funds sold balances decreased $242,425 to $0 at June 30, 2022 from $242,425 at December 31, 2021. Deposits decreased $52,114 to $2,911,283 at June 30, 2022 from $2,963,397. Interest-bearing deposits decreased $61,916 while noninterest-bearing deposits increased $9,802. Total short-term borrowings at June 30, 2021 totaled $129,170.  Total stockholders’ equity decreased $28,229 or 8.3%, from $340,126 at year-end 2021 to $311,897 at June 30, 2022 as net income was offset by a decrease to accumulated other comprehensive income (“AOCI”), resulting from an increase to the unrealized loss on investment securities, and dividends paid to shareholders. For the six months ended June 30, 2022, total assets averaged $3,344,220, an increase of $388,696 from $2,955,524 for the same period of 2021.

Investment Portfolio:

The majority of the investment portfolio is classified as available-for-sale, which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when market opportunities occur. Investment securities available-for-sale totaled $513,911 at June 30, 2022, a decrease of $3,410, or 0.7% from $517,321 at December 31, 2021. The decrease was due to a decline in the market value of the available-for-sale portfolio of $51,281 since December 31, 2021, due to the rapid increase of market rates, and principal received from mortgage-backed securities and maturing bonds, partially offset by the purchase of U.S. Treasury notes, taxable and tax-exempt municipal bonds and mortgage-backed securities as we deployed a portion of excess cash into higher earning assets primarily during the three months ended March 31. Investment securities held-to-maturity totaled $94,446 at June 30, 2022, an increase of $23,233 from $71,213 at December 31, 2021 as a portion of newly purchased low coupon securities were classified as held-to-maturity to mitigate market value risk.

For the six months ended June 30, 2022, the investment portfolio averaged $649,110, an increase of $311,369 or 92.2% compared to $337,741 for the same period last year. Average tax-exempt municipal bonds have increased $35,402 or 47.0% to $110,768 for the six months ended June 30, 2022 from $75,366 during the comparable period of 2021. The increase in tax-exempt municipal bonds is due to purchases during the last twelve months with a portion of excess liquidity. The tax-equivalent yield on the investment portfolio decreased 47 basis points to 1.67% for the six months ended June 30, 2022, from 2.14% for the comparable period of 2021. The decrease in yield is due to lower reinvestment rates for cash flow from matured and called bonds.

Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the AOCI component of stockholders’ equity. We reported net unrealized losses, included as a separate component of stockholders’ equity of $41,927 net of deferred income taxes of $11,145 at June 30, 2022, and net unrealized losses of $1,415, net of deferred income taxes of $376, at December 31, 2021.

Management, from a credit risk perspective, has taken action to identify and assess its COVID-19 related credit exposures based on asset class. No specific COVID-19 related credit impairment was identified within our investment securities portfolio, including our municipal securities, during the first six months of 2022.

Our Asset/Liability Committee (“ALCO”) reviews the performance and risk elements of the investment portfolio quarterly. Through active balance sheet management and analysis of the securities portfolio, we endeavor to maintain sufficient liquidity to satisfy depositor requirements and meet the credit needs of our customers.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Loan Portfolio:

Total loans increased to $2,565,579 at June 30, 2022 from $2,329,173 at December 31, 2021, an increase of $236,406.  Our recent entrance into the Greater Pittsburgh market and Piscataway, New Jersey via community banking offices has resulted in positive loan opportunities and has contributed to the overall loan growth since yearend.

Our loan growth is due to increases in commercial real estate loans and tax-free commercial loans, offset by a reduction in PPP loan balances. At June 30, 2022, we had 16 loans totaling $13,115 remaining from PPP loans originated during 2020 and 67 loans totaling $13,921 remaining from the second PPP program, and we expect the majority to be forgiven during 2022. Excluding the PPP loans, total loans have increased $278,263 or 24.8% annually. Commercial real estate loans increased $226,119 or 33.9% annualized, to $1,569,657 at June 30, 2022 compared to $1,343,539 at December 31, 2021 due to increased activity in all our markets. Commercial and industrial loans, excluding PPP, increased $25,539 to $569,773 at June 30, 2022 compared to $544,234 at December 31, 2021 due to growth of tax-exempt loans. We continue to actively pursue commercial and industrial loans as this segment of our loan portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and wealth management relationships which generate additional fee income.

Consumer loans increased $6,557, or 17.7% on an annualized basis, to $81,440 at June 30, 2022 compared to $74,883 at December 31, 2021. The increase in consumer loans was due to dealer indirect auto loan origination and other consumer loan volumes.

Residential real estate loans increased $20,048, or 13.6% on an annualized basis, to $317,672 at June 30, 2022 compared to $297,624 at December 31, 2021. The increase in residential mortgages is due to increased refinance and purchase activity prior to the recent increase to mortgage rates, increased home equity loan activity, and a higher percentage of loans not eligible to be sold into the secondary market, including jumbo mortgages.  

For the six months ended June 30, 2022, total loans excluding PPP loans, averaged $2,369,330, an increase of $363,432 or 18.1% compared to $2,005,898 for the same period of 2021. The PPP loans averaged $40,079 for the six months ended June 30, 2022 and yielded 7.45% due to the acceleration of unamortized net fees and interest earned. The tax-equivalent yield on the entire loan portfolio was 3.84% for the six months ended June 30, 2022, a 12 basis point decrease from the comparable period last year. The decrease in yield is primarily due to lower levels of PPP fees and interest earned along with lower rates on new loan origination.

In addition to the risks inherent in our loan portfolio, in the normal course of business, we are also a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as on-balance sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements.

Unused commitments at June 30, 2022, totaled $676,636, consisting of $617,371 in unfunded commitments of existing loan facilities and $59,265 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments at December 31, 2021 totaled $553,373, consisting of $495,119 in unfunded commitments of existing loans and $58,254 in standby letters of credit.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Asset Quality:

Distribution of nonperforming assets

June 30, 2022

December 31, 2021

Nonaccrual loans

$

2,919

$

2,811

Troubled debt restructured loans (including nonaccrual TDR)

1,468

1,649

Accruing loans past due 90 days or more:

190

13

Total nonperforming loans

4,577

4,473

Foreclosed assets

488

Total nonperforming assets

$

4,577

$

4,961

Loans modified in a troubled debt restructuring (TDR):

Performing TDR loans

$

1,468

$

1,649

Total TDR loans

$

1,468

$

1,649

Total loans held for investment

$

2,565,579

$

2,329,173

Nonaccrual loans as a percentage of loans held for investment

0.11

%  

0.12

%  

Allowance for loan losses

 

29,374

 

28,383

Allowance for loan losses as a percentage of loans held for investment

1.14

%  

1.22

%  

Allowance for loan losses as a percentage of nonaccrual loans

1006.30

%  

 

1009.71

%  

Nonperforming loans as a percentage of loans, net

 

0.18

%  

 

0.19

%  

We experienced improved asset quality during the first six months of 2022 as evidenced by a decrease of $384 in nonperforming assets. Nonperforming assets totaled $4,577 or 0.14% of total assets at June 30, 2022, a decrease from $4,961 or 0.15% of total assets at December 31, 2021. This was the result of the sale of foreclosed assets during the first quarter 2022.

Loans on nonaccrual status, excluding troubled debt restructured nonaccrual loans, increased $108 to $2,919 at June 30, 2022 from $2,811 at December 31, 2021. The increase to nonaccrual loans since year-end is due primarily to the increase of $134 to the indirect auto portfolio.  Restructured loans decreased $181 to $1,468 at June 30, 2022 from $1,649 at December 31, 2021 due to payments received. Foreclosed assets decreased $488. There were no foreclosed properties at June 30, 2022 compared to three properties at December 31, 2021.

Generally, maintaining a high loan to deposit ratio is our primary goal in order to drive profitability. However, this objective is superseded by our goal of strong asset quality to ensure that asset quality remains strong. We continued our efforts to maintain sound underwriting standards for both commercial and consumer credit.

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended December 13, 2006, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310, “Receivables,” for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, credit administration identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. We consistently use loss experience from the latest

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

twelve quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements to this Quarterly Report.

The Company’s allowance for loan losses increased $991 or 3.49% during the first six months of 2022. The allowance for loan losses equaled $29,374 or 1.14% of loans, net at June 30, 2022 compared to $28,383 or 1.22% of loans, net, at December 31, 2021. Excluding PPP loans that do not carry an allowance for loan losses due to a 100% government guarantee, the ratio equaled 1.16% at June 30, 2022. Loans charged-off, net of recoveries, for the six months ended June 30, 2022, equaled $259 or 0.02% of average loans, compared to $205 or 0.02% of average loans for the comparable period last year. The increase to charge-offs in the current period is due to the delinquency status of one commercial relationship and subsequent net charge-off of $139.

Deposits:

We attract the majority of our deposits from within our market area through the offering of various deposit instruments including demand deposit accounts, NOW accounts, money market deposit accounts, savings accounts, and time deposits, including certificates of deposit and IRAs. For the six months ended June 30, 2022, total deposits decreased $52,114 or 1.76% to $2,911,283 from $2,963,397 at December 31, 2021.  The decrease was the result of outflows of public fund NOW accounts and reductions to high balance time deposits as these customers are price sensitive. Brokered deposits increased $25,300 during the three months ended June 30, 2022 to offset a portion of the deposit outflow.

Interest-bearing deposits decreased $61,916 while noninterest-bearing deposits increased $9,802.  Interest-bearing transaction accounts, including NOW and money market accounts decreased by $93,945, or 6.5%, to $1,345,386 at June 30, 2022, from $1,439,331 at December 31, 2021, savings accounts increased $26,350 to $518,146 as of June 30, 2022 from $491,796 at December 31, 2021.  Time deposits less than $250 increased $15,971, or 7.8%, to $219,690 at June 30, 2022, from $203,719 at December 31, 2021 partially due to the addition of $25,317 of brokered certificates of deposit.  Time deposits $250 or more decreased $10,292, or 11.3% to $80,503 at June 30, 2022 from $90,795 at year end 2021.

For the six months ended June 30, interest-bearing deposits averaged $2,189,477 in 2022 compared to $1,877,950 in 2021, an increase of $311,527 or 16.6%. The cost of interest-bearing deposits was 0.28% in 2022 compared to 0.43% for the same period last year. For the first six months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.37% in 2022 and 0.54% in 2021. The lower costs are due primarily to our actions to lower deposit rates to mitigate net interest margin compression. We intend to monitor deposit rates; the FOMC increased the federal funds target rate three times for a total of 150 basis points through June 30, 2022 and another 75 basis points on July 27, 2022 with the expectation that the FOMC will continue to move to increase the federal funds rate to combat inflation. The volume and velocity of the rate increases will place pressure on our deposit costs.  

Borrowings:

The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB. In addition, the Bank may borrow from the Federal Reserve utilizing the Discount Window.

Overall, total borrowings at June 30, 2022, totaled $163,816, including long-term and subordinated debt, compared to $35,711 at December 31, 2021, an increase of $128,105. Total short-term borrowings at June 30, 2022 were $129,170 as compared to no short-term borrowings outstanding at December 31, 2021. The increase in short-term borrowings was due primarily to fund a portion of loan growth and replace deposit outflows during the three months ended June 30, 2022, as overnight borrowings with the FHLB were $117,950 at June 30, 2022.  Other borrowings, which include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $11,220 and increased due to

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

higher market interest rates.  Long-term debt was $1,646 at June 30, 2022 compared to $2,711 at year end 2021. Subordinated debt outstanding at June 30, 2022 and December 31, 2021 was $33,000.

Market Risk Sensitivity:

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”) associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

Due to the decreases to short-term market rates at the onset of the pandemic, economic uncertainty and more recently the increase in market rates and anticipation of the FOMC to aggressively move the federal funds rate higher to mitigate inflation, it has become challenging to manage IRR. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by our board of directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.

The ALCO, comprised of members of our 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 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”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

Our cumulative one-year RSA/RSL ratio equaled 1.12% at June 30, 2022, a decrease from 1.16% at December 31, 2021. As previously mentioned, a positive gap indicates that if interest rates increase, our earnings would likely be favorably impacted. Given the current economic conditions and outlook, and the action by the FOMC to increase the federal funds rate 225 basis points from March 1, 2022 to date and an expectation the FOMC will continue to increase the federal funds rate to mitigate inflation, we should experience increased net interest income. The overall focus of ALCO is to maintain a well-balanced interest rate risk position in order to safeguard future earnings. The current position at June 30, 2022, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to increase as market rates increase. However, these forward-looking statements are qualified in the aforementioned section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Management’s Discussion and Analysis.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity analysis presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such an analysis.

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at June 30, 2022, produced results similar to those indicated by the one-year static gap position. In addition, parallel and instantaneous shifts in interest rates under various interest rate shocks resulted in changes in net interest income that were well within ALCO policy limits during the first year of simulation. We will continue to monitor our IRR throughout 2022 and endeavor to employ deposit and loan pricing strategies and direct the reinvestment of loan and investment repayments in order to manage our IRR position.

Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.

Liquidity:

Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:

Funding new and existing loan commitments;

Payment of deposits on demand or at their contractual maturity;

Repayment of borrowings as they mature;

Payment of lease obligations; and

Payment of operating expenses.

These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted and strategies are developed to ensure adequate liquidity at all times.

Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale.

Our ALCO generally meets quarterly, and most recently met in May, to review our interest rate risk profile, capital adequacy and liquidity.  Management believes the Company’s liquidity position is strong. At June 30, 2022, the Company’s cash and due from banks balances were $47,733 and we maintained $224,916 of availability at the Federal Reserve Bank’s discount window. The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury and U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities. This portfolio serves as a ready source of liquidity and capital. At June 30, 2022, the Company’s available-for-sale investment securities portfolio totaled $513,911, $348,501 of which were unencumbered. Net unrealized losses on the portfolio were $53,072. The Bank’s unused borrowing capacity at the FHLB at June 30, 2022 was $614,895.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after June 30, 2022. Our noncore funds at June 30, 2022, were comprised of time deposits in denominations of $100 or more and other borrowings. These funds are not considered to be a strong source of liquidity because they are very interest rate sensitive and are considered to be highly volatile. At June 30, 2022, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 10.0%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 6.4%. Comparatively, our overall noncore dependence ratio at year-end 2021 was negative 3.0% and our net short-term noncore funding dependence ratio was negative 5.6%, indicating that our reliance on noncore funds has increased both in the short-term and overall due to our relatively static deposit balances and use of our federal funds sold to fund loan and investment growth.

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $232,200 during the six months ended June 30, 2022. Cash and cash equivalents increased $19,859 for the same period last year. For the six months ended June 30, 2022, net cash inflows of $69,751 from financial activities and $18,738 from operating activities were offset by net cash outflows of $320,689 from investing activities. For the same period of 2021, net cash inflows of $13,001 from operating activities and $107,461 from financing activities were partially offset by net cash outflows of $100,603 from investing activities.

Operating activities provided net cash of $18,738 for the six months ended June 30, 2022, and $13,001 for the corresponding six months of 2021. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for loan losses, is the primary source of funds from operations.

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $320,689 for the six months ended June 30, 2022, compared to using net cash of $100,603 for the same period of 2021. The combination of purchases of investment securities and an increase in lending activities were the primary factors causing the net cash outflow from investing activities in both periods.

Financing activities provided net cash of $69,751 for the six months ended June 30, 2022, and provided net cash of $107,461 for the corresponding six months of 2021. In 2022, short term borrowings provided the predominant financing activity of $129,170, partially offset by a decrease of $52,114 in deposits. During 2021, deposit gathering was our predominant financing activity. Deposits provided cash of $174,653 for the six months ended June 30, 2021 while short term borrowings declined $50,000. We continue to seek deposits from new markets and customers as well as existing customers, including municipalities and school districts.

We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds will enable us to meet all cash obligations as they come due.

Capital:

Stockholders’ equity totaled $311,897 or $43.50 per share at June 30, 2022, compared to $340,126 or $47.44 per share at December 31, 2021. Stockholders’ equity was reduced during the six month period ended June 30, 2022 by cash dividends declared of $5,594, a decrease to AOCI of $41,060 primarily due to an increase to the unrealized loss on investment securities from higher market rates, and the repurchase of 13,567 common shares totaling $646. Net income of $18,983 for the six months ended June 30, 2022 was added to our capital position during the period.

Higher market rates since year end resulted in a mark-to-market impact on the available for sale portfolio of $40,512, which runs through AOCI and affects our book value, but not our regulatory capital ratios.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Dividends declared equaled $0.78 per share through the six months ended June 30, 2022 and $0.74 per share for the same period of 2021. The dividend payout ratio was 29.5% for the six months ended June 30, 2022 and 29.7% for the same period of 2021. 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. The Board declared on July 29, 2022 a third quarter dividend of $0.40 per share payable on September 15, 2022 to shareholders of record as of August 31, 2022. Further dividends, however, 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.

Current rules, which implemented the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act, call for the following capital requirements: (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%; (ii) a minimum ratio of tier 1 capital to risk-weighted assets of 6%; (iii) a minimum ratio of total capital to risk-weighted assets of 8%; and (iv) 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 adequacy of capital is reviewed on an ongoing basis with reference to the size, composition and quality of resources and regulatory guidelines. We seek to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. At June 30, 2022, the Bank’s Tier 1 capital to total average assets was 9.78% as compared to 9.58% at December 31, 2021. The Bank’s Tier 1 capital to risk weighted asset ratio was 12.81% and the total capital to risk weighted asset ratio was 13.97% at June 30, 2022. These ratios were 13.76% and 15.01% at December 31, 2021. The Bank’s common equity Tier 1 to risk weighted asset ratio was 12.81% at June 30, 2022 compared to 13.76% at December 31, 2021. The Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards at June 30, 2022.

Review of Financial Performance:

Peoples reported net income of $9,353, or $1.30 per diluted share for the three months ended June 30, 2022, a 10.2% increase when compared to $8,531, or $1.18 per share for the comparable period of 2021. The increase in earnings for the three months ended June 30, 2022 is due to a $3,417 increase to net interest income and $494 increase in noninterest income during the current three month period when compared to the year ago period. Partially offsetting the increases were a $850 increase in provision for loan losses due to strong loan growth in the current period, and higher noninterest expenses of $2,035 due to higher salaries and benefits and occupancy and equipment costs in part due to our investment in our market expansion strategy and digital technology upgrade.

Peoples reported net income of $18,983, or $2.63 per diluted share for the six months ended June 30, 2022, an increase of 5.6% when compared to $18,009, or $2.49 per diluted share for the comparable period of 2021. The increase in earnings in the six months ended June 30, 2022 is a result of increased net interest income of $5,280 and an increase of $398 in noninterest income. Partially offsetting the increases were a $1,650 increase in provision for loan losses and an increase of $3,695 to noninterest expense. Strong loan growth resulted in a provision for loan losses of $1,250 in the current six month period, as compared to a credit to the loan loss provision of $400 in the year ago period. Higher noninterest expenses were mainly due to higher salaries and benefits of $2,071 and higher occupancy and equipment costs of $1,461 in part due to our investment in our market expansion strategy and digital technology upgrade which commenced during the final six months of 2021.

Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.12% for the second quarter of 2022 compared to 1.14% for the same period of 2021. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 11.71% for the second quarter of 2022 compared to 10.71% for the comparable period in 2021.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Non-GAAP Financial Measures:

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare Peoples’ consolidated financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, Peoples’ non-GAAP measures may not be comparable to non-GAAP measures of other companies. The tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% for 2022 and 2021.

The following table reconciles the non-GAAP financial measures of FTE net interest income for the three and six months ended June 30, 2022 and 2021:

Three months ended June 30

    

2022

    

2021

    

Interest income (GAAP)

$

25,892

$

22,763

Adjustment to FTE

 

461

 

366

Interest income adjusted to FTE (non-GAAP)

 

26,353

 

23,129

Interest expense

 

2,185

 

2,473

Net interest income adjusted to FTE (non-GAAP)

$

24,168

$

20,656

Six months ended June 30

    

2022

    

2021

Interest income (GAAP)

$

50,463

$

46,240

Adjustment to FTE

 

905

 

701

Interest income adjusted to FTE (non-GAAP)

 

51,368

 

46,941

Interest expense

 

4,125

 

5,182

Net interest income adjusted to FTE (non-GAAP)

$

47,243

$

41,759

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

The efficiency ratio is noninterest expenses, less amortization of intangible assets, as a percentage of FTE net interest income plus noninterest income less gains on equity securities and gains on sale of assets. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP for the three and six months ended June 30, 2022 and 2021:

Three months ended June 30

    

2022

    

2021

    

Efficiency ratio (non-GAAP):

Noninterest expense (GAAP)

$

15,493

$

13,458

Less: amortization of intangible assets expense

 

97

 

125

Noninterest expense adjusted for amortization of assets expense (non-GAAP)

15,396

13,333

Net interest income (GAAP)

23,707

20,290

Plus: taxable equivalent adjustment

461

366

Noninterest income (GAAP)

3,881

3,387

Net interest income (FTE) plus noninterest income (non-GAAP)

$

28,049

$

24,043

Efficiency ratio (non-GAAP)

54.9

%

55.5

%

Six months ended June 30

    

2022

    

2021

    

Efficiency ratio (non-GAAP):

Noninterest expense (GAAP)

$

29,782

$

26,157

Less: amortization of intangible assets expense

 

193

 

250

Noninterest expense adjusted for amortization of assets expense (non-GAAP)

29,589

25,907

Net interest income (GAAP)

46,338

41,058

Plus: taxable equivalent adjustment

905

701

Noninterest income (GAAP)

7,302

6,904

Net interest income (FTE) plus noninterest income (non-GAAP)

$

54,545

$

48,663

Efficiency ratio (non-GAAP)

54.3

%

53.2

%

Net Interest Income:

Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings, and subordinated debt comprise interest-bearing liabilities. Net interest income is impacted by:

Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;

Changes in general market rates; and

The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 21.0% in 2022 and 2021.

For the three months ended June 30, tax-equivalent net interest income increased $3,512 to $24,168 in 2022 from $20,656 in 2021. The net interest spread increased to 2.95% for the three months ended June 30, 2022 from 2.81% for the three months ended June 30, 2021 as the earning asset yield increased 2 basis points while the average rate paid on interest bearing liabilities decreased 11 basis points. The tax-equivalent net interest margin increased to 3.06% for the second quarter of 2022 from 2.96% for the comparable period of 2021.

For the three months ended June 30, tax-equivalent interest income, a non-GAAP measure, on earning assets increased $3,224, to $26,353 in 2022 as compared to $23,129 in 2021. The overall yield on earning assets, on a fully tax-equivalent basis, increased 2 basis points for the three months ended June 30, 2022 to 3.34% as compared to 3.32% for the three months ended June 30, 2021. The increase to tax-equivalent interest income is due to the higher earning asset base of $367,654. The higher volume is partially offset by the earning assets repricing downward and new loan originations and investment purchases being added at lower portfolio rates. PPP loan interest income and net fees totaled $440 and the yield was 5.2% during the current quarter. Excluding the PPP loans, the loan yield was 3.81%. The overall yield earned on investments decreased 46 basis points in the second quarter of 2022 to 1.67% from 2.13% for the second quarter of 2021 as investment cashflow from high yielding matured and pre-refunded municipal bonds are deployed into lower yielding bonds.  Average investment balances were $321,205 higher when comparing the current and year ago quarter. Average federal funds sold decreased $196,327 to $23,920 for the three months ended June 30, 2022 and yielded 0.37%, as compared to $220,247 and yield of 0.10% in the year ago period.  We recognized the negative impact to the overall net interest margin due to the high federal funds sold balances and invested a portion into the investment portfolio during the current three month period to improve interest income and asset yield. We expect asset yields to move upward as asset cash flow reprice higher due to the recent increase to the federal funds rate by the FOMC and expectation of further rate increases by the FOMC to combat inflation.  

Total interest expense decreased $288 to $2,185 for the three months ended June 30, 2022 from $2,473 for the three months ended June 30, 2021. The total cost of funds decreased 11 basis points for the three months ended June 30, 2022 to 0.39% as compared to 0.50% in the year ago period. The decrease in costs was due to lower rates on interest bearing deposits partially offset by higher average balances. The average rate paid on deposits declined as we decreased deposit rates throughout 2021 and early in 2022 to mitigate margin compression during a historically low rate environment. We expect our cost of funds to come under pressure over the remaining months of 2022 as market rates have risen rapidly since year end as the FOMC aggressively increases interest rates in an attempt to curb inflation.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Net interest income changes due to rate and volume for the six months ended June 30

2022 vs 2021

Increase (decrease)

attributable to  

Total  

Rate  

Volume  

Interest income:

    

    

    

    

Loans:

Taxable

$

1,933

$

(1,901)

$

3,834

Tax-exempt

 

688

(908)

1,596

Investments:

Taxable

 

1,515

(1,652)

3,167

Tax-exempt

 

284

(353)

637

Interest-bearing deposits

 

16

18

(2)

Federal funds sold

 

(9)

144

(153)

Total interest income

 

4,427

 

(4,652)

 

9,079

Interest expense:

Money market accounts

 

(266)

$

(606)

$

340

NOW accounts

 

(96)

(840)

744

Savings accounts

 

(1)

(47)

46

Time deposits less than $100

 

(154)

(147)

(7)

Time deposits $100 or more

 

(451)

(356)

(95)

Short-term borrowings

 

45

120

(75)

Long-term debt

 

(134)

205

(339)

Subordinated debt

Total interest expense

 

(1,057)

 

(1,671)

 

614

Net interest income - non-GAAP

$

5,484

$

(2,981)

$

8,465

Tax-equivalent net interest income, a non-GAAP measure, was $47,243 in the six months ended June 30, 2022 and $41,759 in the comparable period last year. 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, a non-GAAP measure, of $8,465. A rate variance resulted in a decrease in net interest income of $2,981.

Average earning assets increased $404,072 to $3,161,391 for the six months ended June 30, 2022 from $2,757,319 for the six months ended June 30, 2021 and accounted for a $9,079 increase in interest income. Average loans increased $207,270, which caused interest income to increase $5,430. Specifically, average PPP loans totaled $40,079 and generated $1,481 of interest and net fees in the current period compared to average PPP loans of $196,240 and $3,811 of interest and fees in the prior period. Average taxable investments increased $275,967 comparing 2022 and 2021, which resulted in increased interest income of $3,167 while average tax-exempt investments increased $35,402, which resulted in an increase to interest income of $637. Average federal funds sold decreased $113,375 for the six months ended June 30, 2022 which resulted in a decrease of $153 to interest income.

Average interest-bearing liabilities rose $291,323 to $2,243,797 for the six months ended June 30, 2022 from $1,952,474 for the six months ended June 30, 2021 resulting in a net increase in interest expense of $614. Interest-bearing transaction accounts, including money market, NOW and savings accounts grew $335,934, which in aggregate caused a $1,130 increase in interest expense. In addition, large denomination time deposits averaged $23,235 less in the current period and caused interest expense to decrease $95. A decrease of $1,173 in average time deposits less than $100 thousand decreased interest expense by $7. In addition, short-term borrowings averaged $9,631 lower and decreased interest expense $75 while long-term debt averaged $10,572 lower and decreased interest expense by $339 comparing the first six months of 2022 and 2021.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets decreased 15 basis points while there was a 17 basis point decrease in the cost of funds. As a result, tax-equivalent net interest income decreased $2,981 comparing the six months ended June 30, 2022 and 2021. The tax-equivalent yield on earning assets was 3.28% in the 2022 period compared to 3.43% in 2021 resulting in a decrease in interest income of $4,652. The yield on the taxable investment portfolio decreased 44 basis points to 1.53% during the six months ended June 30, 2022 from 1.97% in the year ago period, resulting in a decrease of $1,652. The yield on the tax exempt investment portfolio decreased 35 basis points to 2.36% during the six months ended June 30, 2022 from 2.71% in the year ago period, resulting in a decrease of $353. The tax-equivalent yield on the loan portfolio decreased 12 basis points to 3.84% in 2022 from 3.96% in 2021 and resulted in a decrease to interest income of $2,809.

PPP loans yielded 7.45% during the six months ended June 30, 2022 compared to 3.92% in the year ago period. The decrease resulted from the higher interest income versus PPP loan forgiveness and the accretion of deferred fees.

A favorable rate variance was experienced in the cost of funds as incremental deposit rate reductions have been completed to mitigate the effect of low market rates to our net interest income. We experienced decreases in the rates paid on most of the major categories of interest-bearing liabilities. The cost of deposits declined 15 basis points and resulted in a $1,996 reduction in interest expense with the largest decreases being our money market and NOW account products. The deposit interest expense declines were partially offset by an 83 basis point increase in the cost of borrowings that increased interest expense $325.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include available-for-sale securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate of 21%.

Three months ended

June 30, 2022

June 30, 2021

Average

Interest Income/

Yield/

Average

Interest Income/

Yield/

    

Balance  

    

Expense

    

Rate  

    

Balance  

    

Expense

    

Rate  

Assets:

Earning assets:

Loans:

Taxable

$

2,254,405

$

22,009

3.92

%

$

2,075,808

$

20,029

3.87

%

Tax-exempt

211,885

1,541

2.92

148,747

1,222

3.30

Total loans

2,466,290

23,550

3.83

2,224,555

21,251

3.83

Investments:

Taxable

553,078

2,110

1.53

264,490

1,301

1.97

Tax-exempt

111,138

652

2.35

78,521

520

2.66

Total investments

664,216

2,762

1.67

343,011

1,821

2.13

Interest-bearing deposits

10,694

18

0.68

9,653

2

0.08

Federal funds sold

23,920

22

0.37

220,247

55

0.10

Total earning assets

3,165,120

26,353

3.34

%

2,797,466

23,129

3.32

%

Less: allowance for loan losses

28,839

27,163

Other assets

210,739

226,245

Total assets

$

3,347,020

$

26,353

$

2,996,548

$

23,129

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Money market accounts

$

588,222

$

448

0.31

%

$

542,600

$

533

0.39

%

NOW accounts

782,501

577

0.30

609,283

561

0.37

Savings accounts

518,847

99

0.08

465,916

96

0.08

Time deposits less than $100

125,653

306

0.98

128,037

373

1.17

Time deposits $100 or more

152,346

167

0.44

175,918

378

0.86

Total interest-bearing deposits

2,167,569

1,597

0.30

1,921,754

1,941

0.41

Short-term borrowings

34,953

122

1.40

7,300

6

0.33

Long-term debt

1,901

23

4.85

11,025

82

2.98

Subordinated debt

33,000

443

5.38

33,000

444

5.38

Total borrowings

69,854

588

3.38

51,325

532

0.69

Total interest-bearing liabilities

2,237,423

2,185

0.39

1,973,079

2,473

0.50

Noninterest-bearing deposits

756,226

680,431

Other liabilities

33,079

23,420

Stockholders’ equity

320,292

319,618

Total liabilities and stockholders’ equity

$

3,347,020

2,185

$

2,996,548

2,473

Net interest income/spread

$

24,168

2.95

%

$

20,656

2.82

%

Net interest margin

3.06

%

2.96

%

Tax-equivalent adjustments:

Loans

$

324

$

257

Investments

137

109

Total adjustments

$

461

$

366

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Six months ended

 

June 30, 2022

 

June 30, 2021

 

Average

Interest Income/

Yield/

 

Average

Interest Income/

Yield/

 

    

Balance  

    

Expense

    

Rate  

    

Balance  

    

Expense

    

Rate  

    

Assets:

    

    

    

    

    

Earning assets:

Loans:

Taxable

$

2,201,621

$

42,862

 

3.93

%  

$

2,065,024

$

40,929

 

4.00

%  

Tax-exempt

 

207,788

 

3,011

 

2.92

 

137,114

 

2,323

 

3.42

Total loans

2,409,409

45,873

3.84

2,202,138

43,252

3.96

Investments:

Taxable

 

538,342

 

4,082

 

1.53

 

262,375

 

2,567

 

1.97

Tax-exempt

 

110,768

 

1,298

 

2.36

 

75,366

 

1,014

 

2.71

Total investments

649,110

5,380

1.67

337,741

3,581

2.14

Interest-bearing deposits

 

10,185

 

20

 

0.40

 

11,378

 

4

 

0.07

Federal funds sold

92,687

95

0.21

206,062

104

0.10

Total earning assets

 

3,161,391

 

51,368

 

3.28

%  

 

2,757,319

 

46,941

 

3.43

%  

Less: allowance for loan losses

 

28,779

 

27,426

Other assets

 

211,608

 

225,631

Total assets

$

3,344,220

$

51,368

$

2,955,524

$

46,941

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Money market accounts

$

592,085

$

833

 

0.28

%  

$

523,557

$

1,099

 

0.42

%  

NOW accounts

 

801,155

 

1,064

 

0.27

 

590,418

 

1,160

 

0.40

Savings accounts

 

512,367

 

192

 

0.08

 

455,698

 

193

 

0.09

Time deposits less than $100

 

126,626

 

608

 

0.97

 

127,799

 

762

1.20

Time deposits $100 or more

 

157,243

 

368

 

0.47

 

180,478

 

819

 

0.92

Total interest-bearing deposits

2,189,476

3,065

0.28

1,877,950

4,033

0.43

Short-term borrowings

 

19,135

 

122

 

1.29

 

28,766

 

77

 

0.54

Long-term debt

 

2,186

 

51

 

4.70

 

12,758

 

185

 

2.92

Subordinated debt

33,000

887

5.42

33,000

887

5.38

Total borrowings

54,321

1,060

3.94

74,524

1,149

3.11

Total interest-bearing liabilities

 

2,243,797

 

4,125

 

0.37

 

1,952,474

 

5,182

 

0.54

Noninterest-bearing deposits

 

745,348

 

657,744

Other liabilities

 

30,816

 

25,385

Stockholders’ equity

 

324,259

 

319,921

Total liabilities and stockholders’ equity

$

3,344,220

4,125

$

2,955,524

5,182

Net interest income/spread

$

47,243

 

2.91

%  

$

41,759

 

2.89

%  

Net interest margin

 

3.01

%  

 

3.05

%  

Tax-equivalent adjustments:

Loans

$

632

$

488

Investments

 

273

 

213

Total adjustments

$

905

$

701

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Provision for Loan Losses:

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We generally make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2022.

For the three months ended June 30, 2022, the provision for loan losses increased $850 to $950 from $100 in the year ago period due to improving credit trends.  The provision for loan losses in the three month period ended June 30, 2022 is the result of growth of non-PPP loans and improved credit quality.

The provision for loan losses was $1,250 for the six months ended June 30, 2022, an increase of $1,650 from a credit of $400 for the comparable period of 2021.  The higher provision in the six month period ended June 30, 2022 is the result of $278,263 in loan growth during the period. The credit in the prior year period was due to improved credit quality and the reversal of COVID related asset quality adjustments.

Noninterest Income:

Noninterest income for the three months ended June 30, 2022 was $3,881, an increase of $494 or 14.6% from $3,387 in 2021. The increase was primarily due to higher revenue from commercial loan interest rate swaps and services charges, fees, commissions and other, partially offset by reduced mortgage banking fees. Commercial loan interest rate swap income increased $416 due to higher credit value adjustment in the quarter compared to a year ago. Services charges, fees, commissions and other were higher in the current period by $136 due to higher service charges on consumer and commercial deposit accounts. Mortgage banking revenue declined $80 in the three month period ended June 30, 2022 due to lower volumes of mortgage loans being sold into the secondary market.

Noninterest income for the six months ended June 30, 2022 was $7,302, an increase of $398 or 5.8% from $6,904 in the year ago period.  During the period, service charges, fees, commissions and other increased $644 due in part to the reversal of an accrual of a $335 bank owned life insurance benefit in the year ago period, an increase in consumer and commercial deposit service charges and higher revenue related to debit card activity. Mortgage banking income decreased $248 during the six months ended June 30, 2022 compared to the prior year on lower sales volume.

Noninterest Expenses:

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, including FDIC assessment, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.

Noninterest expense increased $2,035 or 15.1% to $15,493 for the three months ended June 30, 2022, from $13,458 for the three months ended June 30, 2021. Salaries and employee benefits increased $601 or 8.3% due to annual merit increases and the the addition of lending teams and credit support staff in our newest expansion markets of Piscataway, New Jersey and Pittsburgh, Pennsylvania that opened during the fourth quarter of 2021. Occupancy and equipment expenses were higher by $903 in the current period due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021. Professional and consulting fees increased $197 and other expenses, which includes account processing and advertising, increased $353.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

For the six months ended June 30, noninterest expense increased $3,695 or 14.2% to $29,782 in 2022 from $26,087 in 2021. During the six months ended June 30, 2022, salaries and employee benefits expense totaled $15,891, an increase of $2,071 or 15.0% when compared to $13,820 for the same period of 2021 due primarily to annual merit increases, our investment into our newest markets and lower deferred loan origination costs, which are recorded as a contra-salary expense. Occupancy and equipment expense increased $1,461 or 23.1% to $7,775 in the six month period due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021 and additional costs related to entrance into the Piscataway, New Jersey and Pittsburgh, Pennsylvanita markets. Other expenses included professional, consulting and loan account processing fees.

Income Taxes:

We recorded income tax expense of $1,792 or 16.1% of pre-tax income, and $3,625 or 16.0% of pre-tax income for the three and six months ended June 30, 2022, respectively. This compares to the three and six month periods ended June 30, 2021 in which we recorded tax expense of $1,588 or 15.7% of pre-tax income, and $4,266 or 18.9% of pre-tax income, respectively. The current year to date period benefited from a higher level of tax-exempt income while the prior year included a $621 deferred tax adjustment. Excluding this adjustment, the effective tax rate would have been 16.1% for the six month period ended June 30, 2021.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk to our earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”), which arises from our lending, investing and deposit gathering activities. Our market risk sensitive instruments consist of derivative and non-derivative financial instruments, none of which are entered into for trading purposes. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in reported earnings and/or the market value of net worth. Variations in interest rates affect the underlying economic value of assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value, and provide a basis for the expected change in future earnings related to interest rates. Interest rate changes affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. IRR is inherent in the role of banks as financial intermediaries.

A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The Asset Liability Committee (“ALCO”) is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Generally quarterly, ALCO reports on the status of liquidity and interest rate risk matters to the Company’s board of directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Company’s liquidity, capital adequacy, growth, risk and profitability goals and are within policy limits.

The Company utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and off-balance sheet interest rate contracts to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Note 15 to the Audited Consolidated Financial Statements for additional information.

The ALCO uses income simulation to measure interest rate risk inherent in the Company’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Company’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost time deposits to higher cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed typically quarterly by the ALCO to ensure their accuracy and consistency.

The ALCO reviews simulation results to determine whether the Company’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of June 30, 2022 and December 31, 2021, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Company. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Company’s balance sheet remain stable for a 24-month and 60-month period. In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 24-month and 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios

Model results at June 30, 2022 indicated a significantly higher starting level of net interest income (“NII”) compared to the December 31, 2021 model as balance sheet growth, a shift in balance sheet mix and higher assumed market rates led to an increase to the balance sheet spread of 27 basis points. After the first twelve months of the model simulation, the

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benefit to NII increases as a result of the higher assumed replacement rates on assets resulting from the FOMC’s recent increase to the federal funds rate. Our interest rate risk position exhibits a benefit to rising interest rates after the first twelve months and then throughout the simulations while a sustained falling rate environment presents the greatest potential exposure to earnings. This position at June 30, 2022 is less asset-sensitive than the simulation at December 31, 2021 indicated due to the addition of fixed rate assets to mitigate our exposure to flat and falling rates.

The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Company’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

During the first half of 2022, the FOMC began to increase the federal funds target rate in part to mitigate historically high inflation. Since March 2022 there have been four rate increases totaling 225 basis points. Through June 30, 2022, we have realized higher rates on our existing adjustable rate loans and new originations while we have been able to hold our funding costs relatively stable. However, our funding costs may increase in the future as a result of the FOMC rate adjustments and local competition for deposits and negatively impact our net interest income.

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at June 30, 2022, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:

June 30, 2022

 

% Change in  

 

Changes in Interest Rates (basis points)

Net Interest Income 

Economic Value of Equity 

 

    

Metric 

    

Policy 

    

Metric 

    

Policy 

 

+400

    

(8.0)

(20.0)

(23.5)

(40.0)

+300

 

(6.0)

(20.0)

(17.6)

(30.0)

+200

 

(4.0)

(10.0)

(11.5)

(20.0)

+100

 

(1.7)

(10.0)

(4.8)

(10.0)

Static

-100

 

(2.6)

(10.0)

(0.5)

(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 June 30, 2022, would decrease 1.7% from model results using current interest rates. Additional disclosures about market risk are included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part I, Item 2 of this quarterly report, in each case under the heading “Market Risk Sensitivity,” and are incorporated into this Item 3 by reference.

The Company has certain loans and derivative instruments whose interest rate is indexed to the London Inter Bank Offered Rate (“LIBOR”). The LIBOR index will be discontinued for U.S. Dollar settings effective June 30, 2023. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. The Company has contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. The Company has formed a LIBOR transition team which is currently monitoring this activity. The Company has begun transitioning LIBOR-indexed loans to alternative indexes, including prime and Term SOFR, and adjusting the spread to maintain the overall yield.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and

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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 June 30, 2022, 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.

(b) Changes in internal control.

There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company during the six-months ended June 30, 2022 and through the date of this quarterly report on Form 10-Q.

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K) describes market, credit, and business operations risk factors that could affect our business, results of operations or financial condition including, among other things, outbreaks of highly infectious or contagious diseases. There have been no material changes from the risk factors as previously disclosed in our 2021 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On January 29, 2021, our board of directors authorized a common stock repurchase plan whereby we are authorized to repurchase up to 343,400 shares of our outstanding common stock through open market purchases.

The following purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a)(3), of the Company’s common stock during each of the months for the quarter ended June 30, 2022.

    

    

    

Total Number of

    

Maximum Number

 

Shares Purchased

of Shares that may

 

as Part of Publicly

yet be Purchased

 

Total Number of

Average Price

Announced

Under the

 

Month Ending 

    

Shares Purchased

    

Paid Per Share

    

Programs

    

Programs

 

April 30, 2022

6,853

$

47.83

263,880

288,070

May 31, 2022

263,880

288,070

June 30, 2022

263,880

288,070

Item 3. Defaults upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Item Number

Description

10.1

Supplemental Executive Retirement Plan by and between Peoples Security Bank and Trust Company and John Anderson, dated March 30, 2022 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 1, 2022)*

10.2

Supplemental Executive Retirement Plan by and between Peoples Security Bank and Trust Company and Timothy Kirtley, dated March 30, 2022 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 1, 2022)*

10.3

Deferred Compensation Plan by and between Peoples Security Bank and Trust Company and Susan L. Hubble adopted April 1, 2022.

31.1

CEO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).

31.2

CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a). (a).

32

CEO and CFO Certifications Pursuant to Section 1350.

101

The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended June 30, 2022, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto, duly authorized.

Peoples Financial Services Corp.

(Registrant)

Date: August 8, 2022

/s/ Craig W. Best

Craig W. Best

Chief Executive Officer

(Principal Executive Officer)

Date: August 8, 2022

/s/ John R. Anderson, III

John R. Anderson, III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

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Exhibit 10.3

Deferred Compensation Plan

THIS DEFERRED COMPENSATION PLAN (this “Agreement”), adopted this 1st day of April, 2022, by and between by and between Peoples Security Bank and Trust Company (the “Employer”) and Susan L. Hubble (the “Executive”), formalizes the agreements and understanding between the Employer and the Executive.

WITNESSETH:

WHEREAS, the Executive is employed by the Employer;

WHEREAS, the Employer desires to establish a deferred compensation arrangement for the benefit of the Executive;

WHEREAS, the Employer and the Executive intend this Agreement shall at all times be administered and interpreted in compliance with Code Section 409A, and

WHEREAS, the Employer intends this Agreement shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred compensation arrangement, maintained primarily to provide supplemental retirement benefits for the Executive, a member of select group of management or highly compensated employee of the Employer.

NOW THEREFORE, in consideration of the premises and of the mutual promises herein contained, the Employer and the Executive agree as follows:

Article 1
DEFINITIONS

For the purpose of this Agreement, the following phrases or terms shall have the indicated meanings:

1.1.Administrator” means the Board or its designee.
1.2.Affiliate” means any business entity with whom the Employer would be considered a single employer under Section 414(b) and 414(c) of the Code. Such term shall be interpreted in a manner consistent with the definition of “service recipient” contained in Code Section 409A.
1.3.Beneficiary” means the person or persons designated in writing by the Executive to receive benefits hereunder in the event of the Executive’s death.
1.4.Board” means the board of directors of the Employer.
1.5.Cause” means any of the following acts or circumstances: gross negligence or gross neglect of duties to the Employer; conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive’s employment with the Employer; or fraud, disloyalty, dishonesty or willful violation of any law or significant Employer

policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Employer
1.6.Change in Control” means a change in the ownership or effective control of the Employer, or in the ownership of a substantial portion of the assets of the Employer (that is no less than 75% of such assets), as such change is defined in Code Section 409A and regulations thereunder.
1.7.Contribution” means the amounts the Employer contributes to the Contribution Account, calculated according to the provisions of Article 2.
1.8.Claimant” means a person who believes that he or she is being denied a benefit to which he or she is entitled hereunder.
1.9.Code” means the Internal Revenue Code of 1986, as amended.
1.10.Contribution Account” means the Employer’s accounting of the accumulated Contributions plus accrued interest.
1.11.Crediting Rate” means three percent (3%) per year.
1.12.ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
1.13.Separation from Service” means a termination of the Executive’s employment with the Employer and its Affiliates for reasons other than death. A Separation from Service may occur as of a specified date for purposes of the Agreement even if the Executive continues to provide some services for the Employer or its Affiliates after that date, provided that the facts and circumstances indicate that the Employer and the Executive reasonably anticipated at that date that either no further services would be performed after that date, or that the level of bona fide services the Executive would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) month period (or the full period during which the Executive performed services for the Employer, if that is less than thirty-six (36) months). A Separation from Service will not be deemed to have occurred while the Executive is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months or, if longer, the period for which a statute or contract provides the Executive with the right to reemployment with the Employer. If the Executive’s leave exceeds six (6) months but the Executive is not entitled to reemployment under a statute or contract, the Executive incurs a Separation from Service on the next day following the expiration of such six (6) month period. In determining whether a Separation from Service occurs the Administrator shall take into account, among other things, the definition of “service recipient” and “employer” set forth in Treasury Regulation Section 1.409A-1(h)(3). The Administrator shall have full and final authority, to determine conclusively whether a Separation from Service occurs, and the date of such Separation from Service.

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1.14.Specified Employee” means an individual that satisfies the definition of a “key employee” of the Employer as such term is defined in Code Section 416(i) (without regard to Code Section 416(i)(5)), provided that the stock of the Employer is publicly traded on an established securities market or otherwise, as defined in Treasury Regulation Section 1.897-1(m). If the Executive is a key employee at any time during the twelve (12) months ending on December 31, the Executive is a Specified Employee for the twelve (12) month period commencing on the first day of the following April.
Article 2
CONTRIBUTIONS
2.1.Contributions Generally. The Employer shall contribute the following amounts, at the following times and conditioned on Executive’s continued employment through such date, to the Contribution Account described in Article 3.

Date

Contribution

April 1, 2022

$25,000.00

December 31, 2022

$25,000.00

December 31, 2023

$25,000.00

December 31, 2024

$25,000.00

December 31, 2025

$25,000.00

2.2.Employer Contributions. In addition to the Contributions described in Section 2.1, the Employer may, at any time, make a discretionary contribution to the Contribution Account. Such discretionary contribution amounts may, at the election of the Employer, be subject a vesting schedule or such other provisions as the Employer may provide.
Article 3
DEFERRAL ACCOUNT
3.1.Establishing and Crediting. The Employer shall establish a Contribution Account on its books for the Executive and shall credit to the Contribution Account the following amounts:
(a)any Contributions hereunder; and
(b)on the last day of each calendar month, interest on the Contribution Account balance at an annual rate equal to the Crediting Rate, compounded monthly.
3.2.Recordkeeping Device Only. The Contribution Account is solely a device for measuring amounts to be paid under this Agreement and is not a trust fund of any kind.
Article 4
PAYMENT OF BENEFITS
4.1.Normal Benefit. Except as provided in Section 4.2, upon Separation from Service the Employer shall pay the Executive the Contribution Account balance calculated at Separation from Service in lieu of any other benefit hereunder. This benefit shall be paid in sixty

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(60) consecutive monthly installments and shall commence the month following Separation from Service.
4.2.Change in Control Benefit. If a Change in Control occurs, followed within twenty-four (24) months by Separation from Service, the Employer shall pay the Executive the Contribution Account balance in lieu of any other benefit hereunder. This benefit shall be paid in a lump sum within forty-five (45) days following Separation from Service, with the actual date of payment determined by the Employer in its sole discretion.
4.3.Death Prior to Commencement of Benefit Payments. In the event the Executive dies prior to Separation from Service, the Employer shall pay the Beneficiary the Contribution Account balance in lieu of any other benefit hereunder. This benefit shall be paid in a lump sum within forty-five (45) days of the Executive’s death, with the actual date of payment determined by the Employer in its sole discretion.
4.4.Death or Change in Control Subsequent to Commencement of Benefit Payments. In the event that, while the Executive or Beneficiary is receiving payments, but prior to receiving all payments due and owing hereunder, (i) a Change in Control takes place or (ii) the Executive dies, the Employer shall pay the Executive or Beneficiary the Contribution Account balance in a lump sum within forty-five (45) days of the Executive’s death or the Change in Control.
4.5.Termination for Cause. If the Employer terminates the Executive’s employment for Cause, then the Executive shall forfeit any right to future Contributions under Section 2.1 or interest under Section 3.1(b).
4.6.Restriction on Commencement of Distributions. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee at the time of Separation from Service, the provisions of this Section shall govern all distributions hereunder. Distributions which would otherwise be made to the Executive due to Separation from Service shall not be made during the first six (6) months following Separation from Service. Rather, any distribution which would otherwise be paid to the Executive during such period shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following Separation from Service, or if earlier, upon the Executive’s death. All subsequent distributions shall be paid as they would have had this Section not applied.
4.7.Acceleration of Payments. Except as specifically permitted herein, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) in the following circumstances: (i) as a result of certain domestic relations orders; (ii) in compliance with ethics agreements with the federal government; (iii) in compliance with the ethics laws or conflicts of interest laws; (iv) in limited cashouts (but not in excess of the limit under Code Section 402(g)(1)(B)); (v) to pay employment-related taxes; or (vi) to pay any taxes that may become due at any time that the Agreement fails to meet the requirements of Code Section 409A.

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4.8.Delays in Payment by Employer. A payment may be delayed to a date after the designated payment date under any of the circumstances described below, and the provision will not fail to meet the requirements of establishing a permissible payment event. The delay in the payment will not constitute a subsequent deferral election, so long as the Employer treats all payments to similarly situated Participants on a reasonably consistent basis.
(a)Payments that would violate Federal securities laws or other applicable law. A payment may be delayed where the Employer reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable law provided that the payment is made at the earliest date at which the Employer reasonably anticipates that the making of the payment will not cause such violation. The making of a payment that would cause inclusion in gross income or the application of any penalty provision of the Internal Revenue Code is not treated as a violation of law.
(b)Solvency. Notwithstanding the above, a payment may be delayed where the payment would jeopardize the ability of the Employer to continue as a going concern.
4.9.Treatment of Payment as Made on Designated Payment Date. Solely for purposes of determining compliance with Code Section 409A, any payment under this Agreement made after the required payment date shall be deemed made on the required payment date provided that such payment is made by the latest of: (i) the end of the calendar year in which the payment is due; (ii) the 15th day of the third calendar month following the payment due date; (iii) if Employer cannot calculate the payment amount on account of administrative impracticality which is beyond the Executive’s control, the end of the first calendar year which payment calculation is practicable; and (iv) if Employer does not have sufficient funds to make the payment without jeopardizing the Employer’s solvency, in the first calendar year in which the Employer’s funds are sufficient to make the payment and would not jeopardize the Employer’s solvency.
4.10.Facility of Payment. If a distribution is to be made to a minor, or to a person who is otherwise incompetent, then the Administrator may make such distribution: (i) to the legal guardian, or if none, to a parent of a minor payee with whom the payee maintains his or her residence; or (ii) to the conservator or administrator or, if none, to the person having custody of an incompetent payee. Any such distribution shall fully discharge the Employer and the Administrator from further liability on account thereof.
4.11.Changes in Form of Timing of Benefit Payments. The Employer and the Executive may, subject to the terms hereof, amend this Agreement to delay the timing or change the form of payments. Any such amendment:
(a)must take effect not less than twelve (12) months after the amendment is made;
(b)must, for benefits distributable due solely to the arrival of a specified date, or on account of Separation from Service or Change in Control, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made;

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(c)must, for benefits distributable due solely to the arrival of a specified date, be made not less than twelve (12) months before distribution is scheduled to begin; and
(d)may not accelerate the time or schedule of any distribution.
Article 5
BENEFICIARIES
5.1.Designation of Beneficiaries. The Executive may designate any person to receive any benefits payable under the Agreement upon the Executive’s death, and the designation may be changed from time to time by the Executive by filing a new designation. Each designation will revoke all prior designations by the Executive, shall be in the form prescribed by the Administrator and shall be effective only when filed in writing with the Administrator during the Executive’s lifetime. If the Executive names someone other than the Executive’s spouse as a Beneficiary, the Administrator may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Administrator, executed by the Executive’s spouse and returned to the Administrator. The Executive’s beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.
5.2.Absence of Beneficiary Designation. In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Executive, the Employer shall pay the benefit payment to the Executive’s spouse. If the spouse is not living then the Employer shall pay the benefit payment to the Executive’s living descendants per stirpes, and if there no living descendants, to the Executive’s estate. In determining the existence or identity of anyone entitled to a benefit payment, the Employer may rely conclusively upon information supplied by the Executive’s personal representative, executor, or administrator.
Article 6
ADMINISTRATION
6.1.Administrator Duties. The Administrator shall be responsible for the management, operation, and administration of the Agreement. When making a determination or calculation, the Administrator shall be entitled to rely on information furnished by the Employer, Executive or Beneficiary. No provision of this Agreement shall be construed as imposing on the Administrator any fiduciary duty under ERISA or other law, or any duty similar to any fiduciary duty under ERISA or other law.
6.2.Administrator Authority. The Administrator shall enforce this Agreement in accordance with its terms, shall be charged with the general administration of this Agreement, and shall have all powers necessary to accomplish its purposes.
6.3.Binding Effect of Decision. The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation or application of this Agreement and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in this Agreement.

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6.4.Compensation, Expenses and Indemnity. The Administrator shall serve without compensation for services rendered hereunder. The Administrator is authorized at the expense of the Employer to employ such legal counsel and recordkeeper as it may deem advisable to assist in the performance of its duties hereunder. Expense and fees in connection with the administration of this Agreement shall be paid by the Employer.
6.5.Employer Information. The Employer shall supply full and timely information to the Administrator on all matters relating to the Executive’s compensation, death, disability or Separation from Service, and such other information as the Administrator reasonably requires.
6.6.Termination of Participation. If the Administrator determines in good faith that the Executive no longer qualifies as a member of a select group of management or highly compensated employees, as determined in accordance with ERISA, the Administrator shall have the right, in its sole discretion, to prohibit the Employer from making any additional Contributions hereunder.
6.7.Compliance with Code Section 409A. The Employer and the Executive intend that the Agreement comply with the provisions of Code Section 409A to prevent the inclusion in gross income of any amounts deferred hereunder in a taxable year prior to the year in which amounts are actually paid to the Executive or Beneficiary. This Agreement shall be construed, administered and governed in a manner that affects such intent, and the Administrator shall not take any action that would be inconsistent therewith.
Article 7
CLAIMS AND REVIEW PROCEDURES
7.1.Claims Procedure. A Claimant who has not received benefits under this Agreement that he or she believes should be distributed shall make a claim for such benefits as follows.
(a)Initiation – Written Claim. The Claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.
(b)Timing of Administrator Response. The Administrator shall respond to such Claimant within forty-five (45) days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional thirty (30) days by notifying the Claimant in writing, prior to the end of the initial forty-five (45) day period, that an additional period is required. The extension notice shall specifically explain the standards on which entitlement to a disability benefit is based, the unresolved issues that prevent a decision on the claim and the additional information needed from the Claimant to resolve those issues, and the Claimant shall be afforded at least forty-five (45) days within which to provide the specified information.

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(c)Notice of Decision. If the Administrator denies all or a part of the claim, the Administrator shall notify the Claimant in writing of such denial in a culturally and linguistically appropriate manner. The Administrator shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions of this Agreement on which the denial is based; (iii) a notice that the Claimant has a right to request a review of the claim denial and an explanation of the Agreement’s review procedures and the time limits applicable to such procedures; (iv) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review, and a description of any time limit for bringing such an action; (v) for any Disability claim, a discussion of the decision, including an explanation of the basis for disagreeing with or not following: (A) the views presented by the Claimant of health care professionals treating the Claimant and vocational professionals who evaluated the Claimant; (B) the views of medical or vocational experts whose advice was obtained on behalf of the Employer in connection with a Claimant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; or (C) a disability determination regarding the Claimant presented by the Claimant made by the Social Security Administration (vi) for any Disability claim, the specific internal rules, guidelines, protocols, standards or other similar criteria relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria do not exist; and (viii) for any Disability claim, a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by Department of Labor Regulation Section 2560.503-1(m)(8).
7.2.Review Procedure. If the Administrator denies part or all of the claim, the Claimant shall have the opportunity for a full and fair review by the Administrator of the denial as follows.
(a)Additional Evidence. Prior to the review of the denied claim, the Claimant shall be given, free of charge, any new or additional evidence considered, relied upon, or generated by the Administrator, or any new or additional rationale, as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided, to give the Claimant a reasonable opportunity to respond prior to that date
(b)Initiation – Written Request. To initiate the review, the Claimant, within sixty (60) days after receiving the Administrator’s notice of denial, must file with the Administrator a written request for review.
(c)Additional Submissions – Information Access. After such request the Claimant may submit written comments, documents, records and other information relating to the claim. The Administrator shall also provide the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits.

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(d)Considerations on Review. In considering the review, the Administrator shall consider all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Additional considerations shall be required in the case of a claim for Disability benefits. The claim shall be reviewed by an individual or committee who did not make the initial determination that is subject of the appeal and who is not a subordinate of the individual who made the determination. Additionally, the review shall be made without deference to the initial adverse benefit determination. If the initial adverse benefit determination was based in whole or in part on a medical judgment, the Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination and will not be the subordinate of such individual. If the Administrator obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Administrator will identify such expert.
(e)Timing of Administrator Response. The Administrator shall respond in writing to such Claimant within forty-five (45) days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional forty-five (45) days by notifying the Claimant in writing, prior to the end of the initial forty-five (45) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.
(f)Notice of Decision. The Administrator shall notify the Claimant in writing of its decision on review. The Administrator shall write the notification in a culturally and linguistically appropriate manner calculated to be understood by the Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions of this Agreement on which the denial is based; (iii) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits; (iv) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a); (v) for any Disability claim, a discussion of the decision, including an explanation of the basis for disagreeing with or not following: (A) the views presented by the Claimant of health care professionals treating the Claimant and vocational professionals who evaluated the Claimant; (B) the views of medical or vocational experts whose advice was obtained on behalf of the Employer in connection with a Claimant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; or (C) a disability determination regarding the Claimant presented by the Claimant made by the Social Security Administration; and (vi) for any Disability claim, the specific internal rules, guidelines, protocols, standards or other similar criteria relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria do not exist.
(g)Exhaustion of Remedies. The Claimant must follow these claims review procedures and exhaust all administrative remedies before taking any further action with respect to a claim for benefits.

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(h)Failure to Follow Procedures. In the case of a claim for Disability benefits, if the Administrator fails to strictly adhere to all the requirements of this claims procedure with respect to a Disability claim, the Claimant is deemed to have exhausted the administrative remedies available under the Agreement, and shall be entitled to pursue any available remedies under ERISA Section 502(a) on the basis that the Administrator has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim, except where the violation was: (a) de minimis; (b) non-prejudicial; (c) attributable to good cause or matters beyond the Administrator’s control; (d) in the context of an ongoing good-faith exchange of information; and (e) not reflective of a pattern or practice of noncompliance. The Claimant may request a written explanation of the violation from the Administrator, and the Administrator must provide such explanation within ten (10) days, including a specific description of its basis, if any, for asserting that the violation should not cause the administrative remedies to be deemed exhausted. If a court rejects the Claimant’s request for immediate review on the basis that the Administrator met the standards for the exception, the claim shall be considered as re-filed on appeal upon the Administrator’s receipt of the decision of the court. Within a reasonable time after the receipt of the decision, the Administrator shall provide the claimant with notice of the resubmission.
Article 8
AMENDMENT AND TERMINATION
8.1.Amendment. Except as provided below, this Agreement may be amended only by a written agreement signed by both the Employer and the Executive. Notwithstanding the foregoing, the Agreement may be amended by the Employer at any time, if found necessary in the opinion of the Employer, (i) to ensure that the Agreement is characterized as plan of deferred compensation maintained for a select group of management or highly compensated employees as described under ERISA, (ii) to conform the Agreement to the requirements of any applicable law or (iii) to comply with the written instructions of the Employer’s auditors or banking regulators.
8.2.Agreement Termination Generally. This Agreement may be terminated unilaterally by the Employer at any time by providing written notice of such termination to the Executive. Such termination shall not automatically cause a distribution of benefits under this Agreement. Rather, unless the provisions of Section 8.3 apply, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 4.
8.3.Effect of Complete Termination. Notwithstanding anything to the contrary herein, and subject to the requirements of Code Section 409A and Treasury Regulation Section 1.409A-3(j)(4)(ix), at certain times the Employer may completely terminate and liquidate the Agreement. In the event of a complete termination under subsection (a) or (c) below, or a termination under subsection (b) after benefit payments have commenced hereunder, the Employer shall pay the Executive the Contribution Account balance. Such complete termination of the Agreement shall occur only under the following circumstances and conditions.
(a)Corporate Dissolution or Bankruptcy. The Employer may terminate and liquidate this Agreement within twelve (12) months of a corporate dissolution taxed under Code Section 331, or with the approval of a bankruptcy court, provided that all

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benefits paid under the Agreement are included in the Executive’s gross income in the latest of: (i) the calendar year which the termination occurs; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
(b)Change in Control. The Employer may terminate and liquidate this Agreement by taking irrevocable action to terminate and liquidate within the thirty (30) days preceding or the twelve (12) months following a Change in Control. This Agreement will then be treated as terminated only if all substantially similar arrangements sponsored by the Employer which are treated as deferred under a single plan under Treasury Regulation Section 1.409A-1(c)(2) are terminated and liquidated with respect to each participant who experienced the Change in Control so that the Executive and any participants in any such similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the date the Employer takes the irrevocable action to terminate the arrangements.
(c)Discretionary Termination. The Employer may terminate and liquidate this Agreement provided that: (i) the termination does not occur proximate to a downturn in the financial health of the Employer; (ii) all arrangements sponsored by the Employer and Affiliates that would be aggregated with any terminated arrangements under Treasury Regulation Section 1.409A-1(c) are terminated; (iii) no payments, other than payments that would be payable under the terms of this Agreement if the termination had not occurred, are made within twelve (12) months of the date the Employer takes the irrevocable action to terminate this Agreement; (iv) all payments are made within twenty-four (24) months following the date the Employer takes the irrevocable action to terminate and liquidate this Agreement; and (v) neither the Employer nor any of its Affiliates adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulation Section 1.409A-1(c) if the Executive participated in both arrangements, at any time within three (3) years following the date the Employer takes the irrevocable action to terminate this Agreement.
Article 9
MISCELLANEOUS
9.1.No Effect on Other Rights. This Agreement constitutes the entire agreement between the Employer and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. Nothing contained herein will confer upon the Executive the right to be retained in the service of the Employer nor limit the right of the Employer to discharge or otherwise deal with the Executive without regard to the existence hereof.
9.2.State Law. To the extent not governed by ERISA, the provisions of this Agreement shall be construed and interpreted according to the internal law of the Commonwealth of Pennsylvania without regard to its conflicts of laws principles.
9.3.Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this

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Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
9.4.Non-assignability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
9.5.Unsecured General Creditor Status. Payment to the Executive or any Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be part of the general, unrestricted assets of the Employer and no person shall have any interest in any such asset by virtue of any provision of this Agreement. The Employer’s obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. In the event that the Employer purchases an insurance policy insuring the life of the Executive to recover the cost of providing benefits hereunder, neither the Executive nor the Beneficiary shall have any rights whatsoever in said policy or the proceeds therefrom.
9.6.Life Insurance. If the Employer chooses to obtain insurance on the life of the Executive in connection with its obligations under this Agreement, the Executive hereby agrees to take such physical examinations and to truthfully and completely supply such information as may be required by the Employer or the insurance company designated by the Employer.
9.7.Unclaimed Benefits. The Executive shall keep the Employer informed of the Executive’s current address and the current address of the Beneficiary. If the location of the Executive is not made known to the Employer within three years after the date upon which any payment of any benefits may first be made, the Employer shall delay payment of the Executive’s benefit payment(s) until the location of the Executive is made known to the Employer; however, the Employer shall only be obligated to hold such benefit payment(s) for the Executive until the expiration of three (3) years. Upon expiration of the three (3) year period, the Employer may discharge its obligation by payment to the Beneficiary. If the location of the Beneficiary is not made known to the Employer by the end of an additional two (2) month period following expiration of the three (3) year period, the Employer may discharge its obligation by payment to the Executive’s estate. If there is no estate in existence at such time or if such fact cannot be determined by the Employer, the Executive and Beneficiary shall thereupon forfeit all rights to any benefits provided under this Agreement.
9.8.Removal. Notwithstanding anything in this Agreement to the contrary, the Employer shall not distribute any benefit under this Agreement if the Executive is subject to a final removal or prohibition order issued pursuant to Section 8(e) of the Federal Deposit Insurance Act. Furthermore, any payments made to the Executive pursuant to this Agreement shall, if required, comply with 12 U.S.C. 1828, FDIC Regulation 12 CFR Part 359 and any other regulations or guidance promulgated thereunder.
9.9.Notice. Any notice, consent or demand required or permitted to be given to the Employer or Administrator under this Agreement shall be sufficient if in writing and hand-delivered or sent by registered or certified mail to the Employer’s principal business office. Any notice or filing required or permitted to be given to the Executive or Beneficiary under this Agreement shall be sufficient if in writing and hand-delivered or sent by mail to the last known

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address of the Executive or Beneficiary, as appropriate. Any notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification.
9.10.Headings and Interpretation. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed part of this Agreement. Wherever the fulfillment of the intent and purpose of this Agreement requires and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.
9.11.Alternative Action. In the event it becomes impossible for the Employer or the Administrator to perform any act required by this Agreement due to regulatory or other constraints, the Employer or Administrator may perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Employer, provided that such alternative act does not violate Code Section 409A.
9.12.Coordination with Other Benefits. The benefits provided for the Executive or the Beneficiary under this Agreement are in addition to any other benefits available to the Executive under any other plan or program for employees of the Employer. This Agreement shall supplement and shall not supersede, modify, or amend any other such plan or program except as may otherwise be expressly provided herein.
9.13.Inurement. This Agreement shall be binding upon and shall inure to the benefit of the Employer, its successor and assigns, and the Executive, the Executive’s successors, heirs, executors, administrators, and the Beneficiary.
9.14.Tax Withholding. The Employer may make such provisions and take such action as it deems necessary or appropriate for the withholding of any taxes which the Employer is required by any law or regulation to withhold in connection with any benefits under the Agreement. The Executive shall be responsible for the payment of all individual tax liabilities relating to any benefits paid hereunder.
9.15.Aggregation of Agreement. If the Employer offers other account balance deferred compensation plans in addition to this Agreement, this Agreement and those plans shall be treated as a single plan to the extent required under Code Section 409A.

IN WITNESS WHEREOF, the Executive and a representative of the Employer have executed this Agreement document as indicated below:

Executive:Employer:

Peoples Security Bank and Trust Company

/s/ Susan L. Hubble​ ​​ ​​ ​By: /s/ Thomas P. Tulaney​ ​​ ​​ ​

Susan L. HubbleIts: President

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Peoples Financial Services Corp.

Exhibit 31.1

CERTIFICATION

I, Craig W. Best, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2022, of Peoples Financial Services Corp.;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13A-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in the quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Craig W. Best

Chief Executive Officer

(Principal Executive Officer)

Date: August 8, 2022



Peoples Financial Services Corp.

Exhibit 31.2

CERTIFICATION

I, John R. Anderson, III, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2022, of Peoples Financial Services Corp.;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13A-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in the quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ John R. Anderson, III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: August 8, 2022



Peoples Financial Services Corp.

Exhibit 32

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report on Form 10-Q of Peoples Financial Services Corp. (the “Company”) for the period ended June 30, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Craig W. Best, Chief Executive Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. To my knowledge, the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/ Craig W. Best

Chief Executive Officer

(Principal Executive Officer)

Date: August 8, 2022

/s/ John R. Anderson, III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: August 8, 2022

A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



pfis-20220630.xsd
Attachment: EX-101.SCH


pfis-20220630_cal.xml
Attachment: EX-101.CAL


pfis-20220630_def.xml
Attachment: EX-101.DEF


pfis-20220630_lab.xml
Attachment: EX-101.LAB


pfis-20220630_pre.xml
Attachment: EX-101.PRE