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 ~~March 31,~~June 30, 2022

☐	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: ~~7,171,958~~7,170,660 at ~~May~~August l, 2022.

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended ~~March 31,~~June 30, 2022


Contents		Page No.

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements

	Consolidated Balance Sheets at ~~March 31,~~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 ~~March 31,~~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 ~~Three~~Six Months ended ~~March 31,~~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	3336

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4955

Item 4.	Controls and Procedures	5156

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	5157

Item 1A.	Risk Factors	5157

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5157

Item 3.	Defaults upon Senior Securities	5257

Item 4.	Mine Safety Disclosures	5258

Item 5.	Other Information	5258

Item 6.	Exhibits	5258

	Signatures	5359

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

March 31, 2022

December 31, 2021

Assets:

Cash and cash equivalents

Cash and due from banks

$
35,863

$
30,415

Interest-bearing deposits in other banks

4,440

7,093

Federal funds sold

101,200

242,425

Total cash and cash equivalents

141,503

279,933

Investment securities:

Available-for-sale

535,482

517,321

Equity investments carried at fair value

144

140

Held-to-maturity: Fair value March 31, 2022, $89,280; December 31, 2021, $70,446

95,829

71,213

Total investment securities

631,455

588,674

Loans

2,397,681

2,329,173

Less: allowance for loan losses

28,407

28,383

Net loans

2,369,274

2,300,790

Loans held for sale

161

408

Premises and equipment, net

51,977

51,502

Accrued interest receivable

9,221

8,528

Goodwill

63,370

63,370

Intangible assets, net

372

468

Bank owned life insurance

43,828

42,754

Other assets

41,640

33,056

Total assets

$
3,352,801

$
3,369,483

Liabilities:

Deposits:

Noninterest-bearing

$
759,986

$
737,756

Interest-bearing

2,204,878

2,225,641

Total deposits

2,964,864

2,963,397

Long-term debt

2,182

2,711

Subordinated debentures

33,000

33,000

Accrued interest payable

844

408

Other liabilities

31,450

29,841

Total liabilities

3,032,340

3,029,357

Stockholders’ equity:

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

14,352

14,341

Capital surplus

127,192

127,549

Retained earnings

210,584

203,750

Accumulated other comprehensive loss

(31,667)

(5,514)

Total stockholders’ equity

320,461

340,126

Total liabilities and stockholders’ equity

$
3,352,801

$
3,369,483



	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

Table of Contents

Peoples Financial Services Corp.

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

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,

2022

2021

Interest income:

Interest and fees on loans:

Taxable

$
20,853

$
20,900

Tax-exempt

1,161

870

Interest and dividends on investment securities:

Taxable

1,972

1,243

Tax-exempt

510

390

Dividends

23

Interest on interest-bearing deposits in other banks

2

2

Interest on federal funds sold

73

49

Total interest income

24,571

23,477

Interest expense:

Interest on deposits

1,468

2,092

Interest on short-term borrowings

71

Interest on long-term debt

28

103

Interest on subordinated debt

444

443

Total interest expense

1,940

2,709

Net interest income

22,631

20,768

Provision (credit) for loan losses

300

(500)

Net interest income after provision for loan losses

22,331

21,268

Noninterest income:

Service charges, fees, commissions and other

1,692

1,184

Merchant services income

114

93

Commission and fees on fiduciary activities

555

533

Wealth management income

351

358

Mortgage banking income

144

312

Increase in cash surrender value of life insurance

218

219

Interest rate swap revenue

343

797

Net gain on equity investment securities

4

21

Total noninterest income

3,421

3,517

Salaries and employee benefits expense

8,040

6,570

Net occupancy and equipment expense

3,825

3,267

Amortization of intangible assets

96

125

Professional fees and outside services

470

439

FDIC insurance and assessments

326

260

Donations

334

339

Other expenses

1,198

1,629

Total noninterest expense

14,289

12,629

Income before income taxes

11,463

12,156

Income tax expense

1,833

2,678

Net income

9,630

9,478

Other comprehensive loss:

Unrealized loss on investment securities available-for-sale

(32,612)

(7,750)

Change in derivative fair value

(493)

242

Other comprehensive loss

(33,105)

(7,508)

Income tax benefit

(6,952)

(1,577)

Other comprehensive loss, net of income taxes

(26,153)

(5,931)

Comprehensive income (loss)

$
(16,523)

$
3,547

Per share data:

Net income:

Basic

$
1.34

$
1.31

Diluted

$
1.33

$
1.31

Average common shares outstanding:

Basic

7,172,455

7,210,952

Diluted

7,216,421

7,246,016

Dividends declared

0.39

0.37


	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

Table of Contents

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








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


							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

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)


For the Three Months Ended March 31,	2022		2021
For the Six Months Ended June 30,					2022		2021
Cash flows from operating activities:
Net income	$	9,630	$	9,478	$	18,983	$	18,009
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		663		680		994		1,352
Amortization of right-of-use lease asset		146		109		294		204
Accretion of deferred loan fees, net		949		626
Amortization (accretion) of deferred loan fees, net						965		(2,614)
Amortization of intangibles		96		125		193		250
Amortization of low income housing partnerships		121		120		241		240
Provision (credit) for loan losses		300		(500)		1,250		(400)
Net unrealized gain on equity investment securities		(4)		(21)
Net (gain) loss on sale of other real estate owned		(458)		10
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		(3,798)		(4,869)		(3,454)		(11,398)
Proceeds from sale of loans originated for sale		4,069		5,382		3,200		10,863
Net gain on sale of loans originated for sale		(24)		(134)		(19)		(173)
Net amortization of investment securities		431		260		799		551
Gain on sale of premises and equipment		(5)
Increase in cash surrender value of life insurance		(218)		(219)		(462)		(444)
Deferred income tax expense		4		620				620
Stock based compensation		(28)		89		88		266
Net change in:
Accrued interest receivable		(693)		49		(777)		411
Other assets		(3,869)		(918)		(2,045)		(1,137)
Accrued interest payable		436		384		861		(267)
Other liabilities		1,388		383		(1,914)		(3,253)
Net cash provided by operating activities		9,136		11,654		18,738		13,001
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale
Proceeds from repayments of investment securities:
Available-for-sale		12,897		12,876		20,816		19,496
Held-to-maturity		1,207		58		2,546		119
Purchases of investment securities:
Available-for-sale		(64,051)		(58,726)		(69,392)		(65,862)
Held-to-maturity		(25,873)				(25,872)
Net redemption (purchase) of restricted equity securities		1,352		(64)
Net (purchase) redemption of restricted equity securities						(4,492)		2,272
Net increase in loans		(69,733)		(2,296)		(237,630)		(56,492)
Purchases of premises and equipment		(1,284)		(521)		(2,880)		(816)
Proceeds from the sale of premises and equipment		5
Investment in bank owned life insurance		(1,081)				(5,881)
Proceeds from bank owned life insurance		225				1,129
Proceeds from sale of other real estate owned		946		549		967		680
Net cash used in investing activities		(145,390)		(48,124)		(320,689)		(100,603)
Cash flows from financing activities:
Net increase in deposits		1,467		113,303
Net (decrease) increase in deposits						(52,114)		174,653
Repayment of long-term debt		(529)		(505)		(1,065)		(11,017)
Net increase in short-term borrowings				1,980
Net increase (decrease) in short-term borrowings						129,170		(50,000)
Retirement of common stock		(318)		(517)		(646)		(845)
Cash dividends paid		(2,796)		(2,665)		(5,594)		(5,330)
Net cash (used in) provided by financing activities		(2,176)		111,596
Net cash provided by financing activities						69,751		107,461
Net (decrease) increase in cash and cash equivalents		(138,430)		75,126		(232,200)		19,859
Cash and cash equivalents at beginning of period		279,933		228,192		279,933		228,192
Cash and cash equivalents at end of period	$	141,503	$	303,318	$	47,733	$	248,051

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)


For the Three Months Ended March 31,	2022		2021
For the Six Months Ended June 30,					2022		2021
Supplemental disclosures:
Cash paid during the period for:
Interest	$	1,504	$	2,325	$	3,264	$	5,449
Income taxes		35				5,285		2,500
Noncash items:
Transfers of loans to other real estate	$		$	57			$	57

See notes to unaudited consolidated financial statements

Table of Contents

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 NaN 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 ~~March 31,~~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.

~~Second~~Third Quarter Dividend Declaration

On ~~April~~July 29, 2022, the Board of Directors declared a ~~second~~third quarter dividend of ~~$0.39~~$0.40 per share. The dividend is payable ~~June~~on September 15, 2022 to shareholders of record ~~May~~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.

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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 ~~March 31,~~June 30, 2022 and December 31, 2021 are as follows:


		March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Net unrealized loss on investment securities available-for-sale	$	(34,403)	$	(1,791)	$	(53,072)	$	(1,791)
Income tax benefit		(7,225)		(376)		(11,145)		(376)
Net of income taxes		(27,178)		(1,415)		(41,927)		(1,415)
Benefit plan adjustments		(5,868)		(5,868)		(5,868)		(5,868)
Income tax benefit		(1,232)		(1,232)		(1,232)		(1,232)
Net of income taxes		(4,636)		(4,636)		(4,636)		(4,636)
Derivative adjustments		187		680		(14)		680
Income tax		40		143
Income tax (benefit) expense						(3)		143
Net of income taxes		147		537		(11)		537
Accumulated other comprehensive loss	$	(31,667)	$	(5,514)	$	(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 ~~March 31,~~June 30, 2022 and 2021:


	2022				2021				2022				2021
For the Three Months Ended March 31,	Basic		Diluted		Basic		Diluted
For the Three Months Ended June 30,									Basic		Diluted		Basic		Diluted
Net income	$	9,630	$	9,630	$	9,478	$	9,478	$	9,353	$	9,353	$	8,531	$	8,531
Average common shares outstanding		7,172,455		7,216,421		7,210,952		7,246,016		7,171,909		7,215,365		7,204,261		7,239,325
Earnings per share	$	1.34	$	1.33	$	1.31	$	1.31	$	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

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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 ~~March 31,~~June 30, 2022 and December 31, 2021 are summarized as follows:


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
March 31, 2022	Cost		Gains		Losses		Value
June 30, 2022									Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	250,268	$	28	$	12,624	$	237,672	$	252,706	$	24	$	16,272	$	236,458
U.S. government-sponsored enterprises		28,174		31		184		28,021		23,616		2		453		23,165
State and municipals:
Taxable		69,027		106		6,021		63,112		69,950		49		10,027		59,972
Tax-exempt		99,805		505		6,843		93,467		100,547		80		11,355		89,272
Residential mortgage-backed securities:
U.S. government agencies		1,563		9		1		1,571		1,290				14		1,276
U.S. government-sponsored enterprises		105,652		50		9,168		96,534		102,500				14,544		87,956
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,396		14		129		12,281		12,374				272		12,102
Corporate debt securities		3,000				176		2,824		4,000				290		3,710
Total	$	569,885	$	743	$	35,146	$	535,482	$	566,983	$	155	$	53,227	$	513,911
Held-to-maturity:
Tax-exempt state and municipals	$	11,266	$	30	$	653	$	10,643	$	11,257	$	10	$	978	$	10,289
Residential mortgage-backed securities:
U.S. government agencies		18,511				1,315		17,196		18,168				1,894		16,274
U.S. government-sponsored enterprises		66,052		1		4,612		61,441		65,021				7,508		57,513
Total	$	95,829	$	31	$	6,580	$	89,280	$	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

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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 ~~$3,413~~$8,495 and $4,003 at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively, and Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 at ~~March 31,~~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 ~~March 31,~~June 30, 2022, there was 0 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 ~~March 31,~~June 30, 2022, is summarized as follows:


	Fair		Fair
March 31, 2022	Value
June 30, 2022			Value
Within one year	$	19,709	$	29,255
After one but within five years		205,581		205,194
After five but within ten years		95,545		83,195
After ten years		101,618		92,422
		422,453		410,066
Mortgage-backed and other amortizing securities		113,029		103,845
Total	$	535,482	$	513,911

The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at ~~March 31,~~June 30, 2022, is summarized as follows:


	Amortized		Fair		Amortized		Fair
March 31, 2022	Cost		Value
June 30, 2022					Cost		Value
Within one year					$		$
After one but within five years
After five but within ten years	$	8,098	$	7,657		8,092		7,429
After ten years		3,168		2,986		3,165		2,860
		11,266		10,643		11,257		10,289
Mortgage-backed securities		84,563		78,637		83,189		73,787
Total	$	95,829	$	89,280	$	94,446	$	84,076

Securities with a carrying value of ~~$186,388~~$176,683 and $203,580 at ~~March 31,~~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 ~~March 31,~~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.

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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 ~~March 31,~~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 More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Less Than 12 Months					12 Months or Greater					Total
March 31, 2022	Value		Losses		Value		Losses		Value		Losses
													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	$	230,144	$	12,624					$	230,144	$	12,624	53	$	232,013	$	16,272		$		$		53	$	232,013	$	16,272
U.S. government-sponsored enterprises		13,918		184						13,918		184	5		16,662		453						5		16,662		453
State and municipals:
Taxable		47,356		4,074	$	11,711	$	1,947		59,067		6,021	50		45,783		7,083	14		10,707		2,944	64		56,490		10,027
Tax-exempt		59,847		5,420		13,125		2,076		72,972		7,496	92		70,020		9,523	23		12,370		2,810	115		82,390		12,333
Residential mortgage-backed securities:
U.S. government agencies		17,193		1,316						17,193		1,316	9		17,550		1,908						9		17,550		1,908
U.S. government-sponsored enterprises		91,894		6,551		58,780		7,229		150,674		13,780	30		91,177		11,118	10		53,591		10,934	40		144,768		22,052
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		10,042		129						10,042		129	4		12,102		272						4		12,102		272
Corporate debt securities		2,356		144		468		32		2,824		176	4		2,811		189	2		899		101	6		3,710		290
Total	$	472,750	$	30,442	$	84,084	$	11,284	$	556,834	$	41,726	247	$	488,118	$	46,818	49	$	77,567	$	16,789	296	$	565,685	$	63,607


														Less Than 12 Months					12 Months or Greater					Total
	Less Than 12 Months				12 Months or More				Total				Number of					Number of					Number of
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Securities in a	Fair		Unrealized		Securities in a	Fair		Unrealized		Securities in a	Fair		Unrealized
December 31, 2021	Value		Losses		Value		Losses		Value		Losses		Loss Position	Value		Losses		Loss Position	Value		Losses		Loss Position	Value		Losses
U.S. Treasury securities	$	179,974	$	2,382					$	179,974	$	2,382	42	$	179,974	$	2,382		$		$		42	$	179,974	$	2,382
State and municipals:
Taxable		26,827		718	$	8,008	$	364		34,835		1,082	27		26,827		718	8		8,008		364	35		34,835		1,082
Tax-exempt		38,693		357		10,319		313		49,012		670	61		38,693		358	2		10,319		313	63		49,012		671
Residential mortgage-backed securities:
U.S. government agencies		18,398		392						18,398		392	3		18,398		391						3		18,398		391
U.S. government-sponsored enterprises		77,875		1,454		48,276		1,919		126,151		3,373	13		77,875		1,454	7		48,276		1,920	20		126,151		3,374
Corporate debt securities		2,449		51		470		31		2,919		82	4		2,449		51	1		470		30	5		2,919		81
Total	$	344,216	$	5,354	$	67,073	$	2,627	$	411,289	$	7,981	150	$	344,216	$	5,354	18	$	67,073	$	2,627	168	$	411,289	$	7,981

The Company had 50 U.S. Treasury securities, 3 U.S. government-sponsored enterprises securities, 45 mortgage-backed securities, 97 tax-exempt municipals, 62 taxable municipals and 5 corporate bonds that were in unrealized loss positions at March 31, 2022. Of these securities, 1 corporate bond, 23 tax-exempt municipals, 10 mortgage-backed securities and 14 taxable municipals were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of 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 ~~March 31,~~June 30, 2022. There was 0 OTTI recognized for the three or six months ended ~~March 31,~~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 ~~March 31,~~June 30, 2022 and December 31, 2021 are summarized as follows. The Company had net deferred loan origination fees of ~~$618~~$602 and $1,567 at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. The decrease to the fees since ~~yearend~~year-end is due in part to the forgiveness by the Small Business Administration (“SBA”) of Paycheck Protection Program (“PPP”) loans.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)



		March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Commercial	$	580,758	$	613,127	$	596,809	$	613,127
Real estate:
Commercial		1,436,196		1,343,539		1,569,658		1,343,539
Residential		306,068		297,624		317,672		297,624
Consumer		74,659		74,883		81,440		74,883
Total	$	2,397,681	$	2,329,173	$	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 ~~$121.6 million~~$121,599 and generated ~~$4.3 million~~$4,370 in related deferred PPP net fees.

Net deferred loan origination fees remaining related to PPP loans is ~~$740~~$392 at ~~March 31,~~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 ~~March 31,~~June 30, 2022 of ~~$38,680~~$27,036 comprised of ~~$25,444~~$13,921 remaining from those originated during 2021 as part of round two and ~~$13,236~~$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. ~~The outstanding balance is considered current at March 31,~~At June 30, 2022, ~~and~~there were 2 loans past due totaling $7. At December 31, ~~2021.~~

2021, the outstanding PPP balance was considered current.

~~The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2022 and 2021 are summarized as follows:~~

Real estate

March 31, 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)

(62)

(355)

Recoveries

9

16

3

51

79

Provisions (credits)

(708)

977

43

(12)

300

Ending balance

$
7,593

$
16,789

$
3,255

$
770

$
28,407

Real estate

March 31, 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)

(96)

(22)

(62)

(195)

Recoveries

61

58

1

14

134

Provisions (credits)

(565)

182

(114)

(3)

(500)

Ending balance

$
8,215

$
14,703

$
2,994

$
871

$
26,783

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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

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 ~~March 31,~~June 30, 2022 and December 31, 2021 is summarized as follows:


			Real estate										Real estate
March 31, 2022	Commercial		Commercial		Residential		Consumer		Total
June 30, 2022											Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	7,593	$	16,789	$	3,255	$	770	$	28,407	$	7,766	$	17,569	$	3,220	$	819	$	29,374
Ending balance: individually evaluated for impairment		21		45		49		—		115		34		15		48				97
Ending balance: collectively evaluated for impairment	$	7,572	$	16,744	$	3,206	$	770	$	28,292	$	7,732	$	17,554	$	3,172	$	819	$	29,277
Loans receivable:
Ending balance	$	580,758	$	1,436,196	$	306,068	$	74,659	$	2,397,681	$	596,809	$	1,569,658	$	317,672	$	81,440	$	2,565,579
Ending balance: individually evaluated for impairment		159		3,188		1,148		—		4,495		160		2,903		1,267				4,330
Ending balance: collectively evaluated for impairment	$	580,599	$	1,433,008	$	304,920	$	74,659	$	2,393,186	$	596,649	$	1,566,755	$	316,405	$	81,440	$	2,561,249



			Real estate										Real estate
December 31, 2021	Commercial		Commercial		Residential		Consumer		Total		Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,453	$	15,928	$	3,209	$	793	$	28,383	$	8,453	$	15,928	$	3,209	$	793	$	28,383
Ending balance: individually evaluated for impairment		40		109		26				175		40		109		26				175
Ending balance: collectively evaluated for impairment	$	8,413	$	15,819	$	3,183	$	793	$	28,208	$	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	$	613,127	$	1,343,539	$	297,624	$	74,883	$	2,329,173
Ending balance: individually evaluated for impairment		199		2,890		1,273				4,362		199		2,889		1,274				4,362
Ending balance: collectively evaluated for impairment	$	612,928	$	1,340,649	$	296,351	$	74,883	$	2,324,811	$	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.

●

1516

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 ~~March 31,~~June 30, 2022 and December 31, 2021:


			Special										Special
March 31, 2022	Pass		Mention		Substandard		Doubtful		Total
June 30, 2022											Pass		Mention		Substandard		Doubtful	Total
Commercial	$	571,829	$	8,089	$	840	$	—	$	580,758	$	587,907	$	8,077	$	825	$	$	596,809
Real estate:
Commercial		1,421,727		8,322		6,147				1,436,196		1,555,363		8,028		6,267			1,569,658
Residential		304,324		127		1,617				306,068		315,835		119		1,718			317,672
Consumer		74,452				207				74,659		81,131				309			81,440
Total	$	2,372,332	$	16,538	$	8,811	$		$	2,397,681	$	2,540,236	$	16,224	$	9,119	$	$	2,565,579


			Special										Special
December 31, 2021	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful	Total
Commercial	$	611,151	$	896	$	1,080	$	—	$	613,127	$	611,151	$	896	$	1,080	$	$	613,127
Real estate:
Commercial		1,324,646		13,939		4,954				1,343,539		1,324,646		13,939		4,954			1,343,539
Residential		294,892		333		2,399				297,624		294,892		333		2,399			297,624
Consumer		74,744				139				74,883		74,744				139			74,883
Total	$	2,305,433	$	15,168	$	8,572	$		$	2,329,173	$	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 1 credit with an outstanding balance of ~~$7.8 million~~$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 ~~$3.5 million~~$3,531 credit resulting from improved financial performance and satisfactory repayment history and the ~~$0.8 million downgrade to ‘substandard’ of 1 credit and $0.2 million charge-off to a second credit~~payoff of a $2,429 credit. The increase to substandard commercial ~~relationship.~~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 ~~$0.8 million~~$681 primarily due to the payoff of a ~~$0.5 million~~$538 credit.

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~NOTES TO CONSOLIDATE~~~~D FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share data)~~

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

March 31, 2022

December 31, 2021

Commercial

$
146

$
185

Real estate:

Commercial

2,143

1,793

Residential

575

694

Consumer

206

139

Total

$
3,070

$
2,811

The increase to non-accrual loans since year end was due primarily to the addition of a $0.8 million commercial real estate loan due to its delinquency status; the loan was subsequently paid-off during April 2022. Partially offsetting the increase was the payoff of a $0.5 million non-accrual real estate loan.

~~The major classifications of loans by past due status are summarized as follows:~~

Greater







Loans > 90

30-59 Days

60-89 Days

than 90

Total Past

Days and

March 31, 2022

Past Due

Past Due

Days

Due

Current

Total Loans

Accruing

Commercial

$
60

$
14

$
126

$
200

$
580,558

$
580,758

Real estate:

Commercial

326

—

1,242

1,568

1,434,628

1,436,196

Residential

1,794

11

249

2,054

304,014

306,068

$
103

Consumer

542

188

95

825

73,834

74,659

Total

$
2,722

$
213

$
1,712

$
4,647

$
2,393,034

$
2,397,681

$
103

~~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

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

~~The following tables summarize information~~Information concerning ~~impaired~~nonaccrual loans ~~as of and for the three months ended March 31,~~by major loan classification at June 30, 2022 and ~~March 31, 2021, and as of and for the year ended~~ December 31, 2021 ~~by major loan classification:~~is summarized as follows:


							For the Quarter Ended					June 30, 2022		December 31, 2021
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
March 31, 2022	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	138	$	475			$	148	$	2	$	147	$	185
Real estate:
Commercial		2,748		3,505				2,562		12		1,889		1,793
Residential		874		1,047				874		4		613		694
Consumer		207		217				173				270		139
Total		3,967		5,244				3,757		18	$	2,919	$	2,811
With an allowance recorded:
Commercial		21		21	$	21		31
Real estate:
Commercial		440		452		45		477		4
Residential		273		274		49		338		3
Total		734		747		115		846		7
Total impaired loans
Commercial		159		496		21		179		2
Real estate:
Commercial		3,188		3,957		45		3,039		16
Residential		1,147		1,321		49		1,212		7
Consumer		207		217				173
Total	$	4,701	$	5,991	$	115	$	4,603	$	25

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:

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


					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

For the Quarter Ended

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

March 31, 2021

Investment

Balance

Allowance

Investment

Recognized

With no related allowance:










Commercial

$
673

$
1,108

$
1,462

$
4

Real estate:

Commercial

3,280

4,051

2,826

6

Residential

1,121

1,241

1,104

6

Consumer

94

105

103

Total

5,168

6,505

5,495

16

With an allowance recorded:

Commercial

1,978

2,041

$
697

2,012

5

Real estate:

Commercial

710

796

108

1,145

4

Residential

422

457

64

441

4

Consumer

Total

3,110

3,294

869

3,598

13

Total impaired loans

Commercial

2,651

3,149

697

3,474

9

Real estate:

Commercial

3,990

4,847

108

3,971

10

Residential

1,543

1,698

64

1,545

10

Consumer

94

105

103

Total

$
8,278

$
9,799

$
869

$
9,093

$
29

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

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

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 ~~$1,503~~$1,468 at ~~March 31,~~June 30, 2022, $1,649 at December 31, 2021 and ~~$2,740~~$2,637 at ~~March 31,~~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 0 loans modified as troubled debt restructurings during the ~~three~~six months ended ~~March 31,~~June 30, 2022 or 2021.

During the three months and six ended ~~March 31,~~June 30, 2022, or 2021, there were 0 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 ~~March 31,~~June 30, 2022, and December 31, 2021 are summarized as follows:

							��
		March 31, 2022		December 31, 2021		June 30, 2022			December 31, 2021
Other real estate owned	$	121	$	609	$	121		$	609
Investment in low income housing partnership		5,780		5,900		5,659			5,900
Mortgage servicing rights		909		882		919			882
Restricted equity securities (FHLB and other)		3,455		4,045		8,537			4,045
Net deferred tax asset		12,303		5,355		16,266			5,355
Interest rate floor		333		844		97			844
Interest rate swaps		10,720		9,026		14,720			9,026
Other assets		8,019		6,395		8,112			6,395
Total	$	41,640	$	33,056	$	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.

2021

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 ~~March 31,~~June 30, 2022 and December 31, 2021 there were 0 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.

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~NOTES TO CONSOLIDATE~~~~D FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share data)~~

~~Assets and liabilities measured at fair value on a recurring 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

March 31, 2022

Amount

(Level 1)

(Level 2)

(Level 3)

U.S. Treasury securities

$
237,672

$
237,672



$

U.S. government-sponsored enterprises

28,021

$
28,021

State and municipals:

Taxable

63,112

63,112

Tax-exempt

93,467

93,467

Mortgage-backed securities:

U.S. government agencies

1,571

1,571

U.S. government-sponsored enterprises

108,815

108,815

Corporate debt securities

2,824

2,824

Common equity securities

144

144

Total investment securities

$
535,626

$
237,816

$
297,810

$

Loan held for sale

$
161

$
161

Interest rate floor-other assets

$
333

$
333

Interest rate swap-other assets

$
10,720

$
10,720

Interest rate swap-other liabilities

$
(10,265)

$
(10,265)

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)

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~~recurring basis at ~~March 31,~~June 30, 2022 and December 31, 2021 are summarized as follows:


	Fair Value Measurement Using						Fair Value Measurement Using
			Quoted Prices in	Significant	Significant				Quoted Prices in		Significant		Significant
			Active Markets for	Other Observable	Unobservable				Active Markets for		Other Observable		Unobservable
			Identical Assets	Inputs	Inputs				Identical Assets		Inputs		Inputs
March 31, 2022	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	620			$	620
Other real estate owned	$				$
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 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

March 31, 2022

Estimate

Valuation Techniques

Unobservable Input

(Weighted Average)

Impaired loans

$
620

Appraisal of collateral

Appraisal adjustments

6.4% to 98.5% (68.3)%

Liquidation expenses

3.0% to 6.0% (5.2)%

Other real estate owned

$
—

Appraisal of collateral

Appraisal adjustments

Liquidation expenses

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.


	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)

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

~~The carrying~~Assets and liabilities measured at fair ~~values of the Company’s financial instruments~~value on a nonrecurring basis at March 31, 2022 and December 31, 2021 ~~and their placement within the fair value hierarchy~~ are summarized as follows:

Fair Value Hierarchy

Quoted




Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

March 31, 2022

Value

Value

(level 1)

(level 2)

(Level 3)

Financial assets:

Cash and due from banks

$
141,503

$
141,503

$
141,503

Investment securities:

Available-for-sale

535,482

535,482

237,672

$
297,810

Common equity securities

144

144

144

Held-to-maturity

95,829

89,280

89,280

Loans held for sale

161

161

161

Net loans

2,369,274

2,333,676

$
2,333,676

Accrued interest receivable

9,221

9,221

9,221

Mortgage servicing rights

909

1,398

1,398

Restricted equity securities (FHLB and other)

3,455

3,455

3,455

Interest rate floor

333

333

333

Interest rate swaps

10,720

10,720

10,720

Total

$
3,167,031

$
3,125,373

Financial liabilities:

Deposits

$
2,964,864

$
2,960,470

$
2,960,470

Long-term debt

2,182

2,214

2,214

Subordinated debentures

33,000

33,152

33,152

Accrued interest payable

844

844

844

Interest rate swaps
��

10,265

10,265

10,265

Total

$
3,011,155

$
3,006,945

Fair Value Measurement Using

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Identical Assets

Inputs

June 30, 2022

Amount

(Level 1)

(Level 2)

(Level 3)

Impaired loans

638

Fair Value Measurement Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

December 31, 2021

Amount

(Level 1)

(Level 2)

(Level 3)

Impaired loans

780

Other real estate owned

487


	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.

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

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

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 ~~March 31,~~June 30, salaries and employee benefits expense includes approximately ~~$256~~$308 and $597 in 2022, and ~~$306~~$342 and $648 in 2021 relating to the employee benefit plans.



	Pension Benefits				Pension Benefits
Three Months Ended March 31,	2022		2021
Three Months Ended June 30,					2022		2021
Components of net periodic pension benefit:
Interest cost	$	114	$	105	$	114	$	105
Expected return on plan assets		(352)		(322)		(352)		(322)
Amortization of unrecognized net gain		50		76		50		76
Net periodic benefit	$	(188)	$	(141)	$	(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.

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~NOTES TO CONSOLIDATE~~~~D FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share data)~~

●

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 ~~March 31,~~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 ~~three~~six months ended ~~March 31,~~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 ~~2020~~ and ~~2019~~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

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 ~~$199~~$191 and $390 for the three and six months ended ~~March 31,~~June 30, 2022 for awards granted under the 2017 Plan. The Company recognized compensation expense of ~~$89~~$177 and $266 for the three and six months ended ~~March 31,~~June 30, 2021 for awards granted under the 2017 Plan. As of ~~March 31,~~June 30, 2022, the Company had ~~$1,635~~$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 ~~2.1~~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.

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~NOTES TO CONSOLIDATE~~~~D FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share data)~~

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 ~~$123~~$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

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 ~~March 31,~~June 30, 2022, the Company had 8689 interest rate swaps with an aggregate notional amount of ~~$399,121~~$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 ~~March 31,~~June 30, 2022 and December 31, 2021.



			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives					Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of March 31, 2022			As of December 31, 2021 (1)			As of March 31, 2022			As of December 31, 2021 (2)					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				Notional	Balance Sheet			Balance Sheet			Balance Sheet			Balance Sheet
		Amount	Location	Fair Value		Location	Fair Value		Location	Fair Value		Location	Fair Value			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	$	333	Other Assets	$	844							$	25,000	Other Assets	$	97	Other Assets	$	844

Total derivatives designated as hedging instruments				$	333		$	844		$			$	0				$	97		$	844		$			$

Derivatives not designated as hedging instruments
Interest Rate Swaps (2)	$	399,121	Other Assets	$	10,720	Other Assets	$	9,026	Other Liabilities	$	10,265	Other Liabilities	$	8,811	$	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				$	10,720		$	9,026		$	10,265		$	8,811				$	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.

2729

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 ~~March 31,~~June 30, 2022 and ~~March 31,~~June 30, 2021.

Location of

Amount of

Location of

Amount of

Gain or (Loss)

Amount of

Gain (Loss)

Amount of

Gain or (Loss)

Amount of

Gain (Loss)

Loss

Recognized from

Gain (Loss)

Reclassified

Gain (Loss)

Loss

Recognized from

Gain (Loss)

Reclassified

Recognized in

Accumulated

Reclassified

from Accumulated

Recognized in

Accumulated

Reclassified

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

Hedging

Derivative

Component

Income into

OCI into Income

Included Component

Excluded Component

Derivative

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

March 31, 2022

Income

March 31, 2022

June 30, 2022

Income

June 30, 2022

Derivatives in Cash Flow Hedging Relationships

Interest Expense

Cash Flow Swap

Other expense

Interest Rate Floor (*)

(361)

(439)

Interest Income

131

147

(16)

(469)

(493)

Interest Income

224

256

(32)

Total

(361)

(439)

131

147

(16)

(469)

(493)

224

256

(32)

Location of

Amount of

Location of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Gain

Recognized from

Loss

Reclassified

Gain

Recognized from

Loss

Reclassified

Recognized in

Accumulated

Reclassified

from Accumulated

Recognized in

Accumulated

Reclassified

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

Hedging

Derivative

Component

Income into

OCI into Income

Included Component

Excluded Component

Derivative

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

March 31, 2021

Income

March 31, 2021

June 30, 2021

Income

June 30, 2021

Derivatives in Cash Flow Hedging Relationships

Cash Flow Swap

401

Interest Expense

(48)

(23)

(25)

401

Interest Expense

(23)

Cash Flow Swap

Other Expense

(25)

Interest Rate Floor (*)

(76)

(85)

Interest Income

133

149

(16)

(25)

(83)

Interest Income

268

300

(32)

Total

325

316

126

(41)

376

318

220

252

(32)

*	Amounts disclosed are gross and not net of taxes.

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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 ~~March 31,~~June 30, 2022 and ~~March 31,~~June 30, 2021.


		Location and Amount of Gain or (Loss) Recognized in								Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging								Income on Fair Value and Cash Flow Hedging
		Relationships								Relationships
		For the three months ended March 31,								For the three months ended June 30,
		2022		2022		2021		2021		2022		2022		2021		2021
		Interest Income		Interest Expense		Interest Income		Interest Expense		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	$	131	$		$	134	$	(23)	$	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	$	131	$		$	134	$	(23)	$	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	$	147	$		$	150	$		$	109	$		$	150	$
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component	$	(16)			$	(16)	$		$	(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 ~~March 31,~~June 30, 2022 and 2021.

Amount of Gain

Amount of Gain

Recognized in

Recognized in

Location of Gain or (Loss)

Income

Income

Recognized in Income on

Three Months Ended

Three Months Ended

Derivatives Not Designated as Hedging Instruments

Derivative

March 31, 2022

March 31, 2021

Interest Rate Swaps

Interest rate swap revenue

$
240

$
405

Fee Income

Fee income

$
103

$
392

~~Offsetting Derivatives~~

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2022 and December 31, 2021. The net amounts of derivative assets or liabilities can be

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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 March 31, 2022

as of June 30, 2022

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Instruments

Received

Amount

Assets

Balance Sheet

Instruments

Received

Amount

Derivatives

11,053

9,395

1,658

14,816

100

11,220

3,496

Offsetting of Derivative Liabilities

as of March 31, 2022

as of June 30, 2022

Gross Amounts Not Offset in the Balance Sheet

Gross

Net Amounts

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Amounts of

Gross Amounts

of Liabilities

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Instruments

Paid

Amount

Liabilities

Balance Sheet

Instruments

Paid

Amount

Derivatives

10,270

9,395

875

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

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Amounts of

Gross Amounts

of Assets

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Instruments

Received

Amount

Assets

Balance Sheet

Instruments

Received

Amount

Derivatives

9,870

3,218

6,652

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

Gross

Net Amounts

Amounts of

Gross Amounts

of Assets

Amounts of

Gross Amounts

of Liabilities

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Recognized

Offset in the

presented in the

Financial

Cash Collateral

Net

Assets

Balance Sheet

Instruments

Paid

Amount

Liabilities

Balance Sheet

Instruments

Paid

Amount

Derivatives

8,818

3,218

5,600

8,818

3,218

5,600

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 ~~March 31,~~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 ~~$0.~~$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 ~~0 posted collateral as of March 31, 2022, compared to having~~ posted collateral of ~~$7,380~~$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

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~NOTES TO CONSOLIDATE~~~~D FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share data)~~

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 ~~March 31,~~June 30, 2022 and December 31, 2021 are summarized as follows:


At the period end	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Interest-bearing deposits:
Money market accounts	$	605,686	$	588,245	$	592,989	$	588,245
Now accounts		797,333		851,086		752,397		851,086
Savings accounts		515,169		491,796		518,146		491,796
Time deposits less than $250		200,345		203,719		219,690		203,719
Time deposits $250 or more		86,345		90,795		80,503		90,795
Total interest-bearing deposits		2,204,878		2,225,641		2,163,725		2,225,641
Noninterest-bearing deposits		759,986		737,756		747,558		737,756
Total deposits	$	2,964,864	$	2,963,397	$	2,911,283	$	2,963,397

Total deposits ~~increased slightly by $1.5~~ ~~million~~decreased $52,114 from December 31, 2021 ~~as seasonal~~due primarily to outflows of public fund ~~non-maturity deposits~~NOW accounts and reductions to high balance time deposits byas these customers ~~seeking higher yields~~are typically more price-sensitive. Brokered deposits added during the three months ended June 30, 2022 totaled $25,317 and were ~~replaced with consumer~~used to offset a portion of the deposit outflows and ~~commercial non-maturity deposits.~~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. ~~During~~Total short-term borrowings at June 30, 2022 were $129,170 as compared to 0 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 ~~March 31,~~June 30, 2022, ~~there~~as overnight borrowings with the FHLB were ~~0 short-term~~$117,950 at June 30, 2022.

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Other borrowings, ~~outstanding~~which include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $11,220 and increased due to ~~the Bank’s liquidity position.~~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

Maximum

Average

Ending

Average

Month-End

Rate for

Rate at End

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 ~~March 31,~~June 30, 2022, the maximum borrowing capacity was ~~$970,621~~$1,018,230 of which ~~$2,182~~$119,596 was outstanding in borrowings and ~~$297,535~~$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.

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~NOTES TO CONSOLIDATE~~~~D FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share data)~~

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


	Interest Rate					Interest Rate
Due	Fixed		March 31, 2022		December 31, 2021	Fixed		June 30, 2022		December 31, 2021
March 2023	4.69	$	2,182		2,711	4.69	$	1,646		2,711
		$	2,182	$	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		1,627		1,091
2023		555		555
	$	2,182	$	1,646

The advances from the FHLB totaling ~~$2,182~~$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

Table of Contents

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.

~~13. Income taxes~~

~~The Company’s effective tax rate was 16.0%~~ ~~for the three months ended March 31, 2022 compared to~~ 22.0% for the three months ended March 31, 2021. The lower tax rate was due to a higher level of tax-exempt income in the current quarter and a $621 deferred tax adjustment related to prior periods in the quarter ended March 31, 2021. Excluding this adjustment, the effective tax rate would have been 16.9% for the three month period ended March 31, 2021.

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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 ~~first~~second quarter of 2022, restrictive measures related to the COVID-19 pandemic ~~began~~continued to ease, both on a national level and more specifically in the Company's market area. Most businesses have reopened at full capacity, ~~which~~that has improved commercial and consumer activity ~~but still has not returned~~which is begininning to return to pre-pandemic levels. Risk of further

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Table of Contents

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 ~~first~~second quarter as momentum from our entrance in two new markets continues and overall economic activity ~~improves~~improved in all our markets. ~~The~~ PPP loans ~~have remaining balances of $38.7 million~~declined to $27,036 at ~~March 31,~~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 ~~quarter~~half of 2022 to ~~a level~~levels well above the Federal Open Market Committee’s

(“FOMC”) long-term desired 2% level for items other than food and energy. ~~For~~Core inflation, as measured by the ~~12 months ended March 31, 2022, the consumer price index~~Consumer Price Index (“CPI”) ~~registered 4.0%. CPI registered 4.5%~~, excluding items known for ~~the 12 months ended December 31, 2021~~their volatility such as food and ~~4.0% for the 12 months ended September 30, 2021. The all items index~~energy, was ~~5.4%~~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, ~~31, 2022, identical to the reading~~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 ~~12 months ending December 31, 2021 and up from the 5.4% which was reported~~second consecutive quarter. It decreased at ~~September 30, 2021. Up until June 30, 2021 this reading was the largest 12 month increase since a 5.4% increase~~an annual rate of 0.9% for ~~the period ended August 31, 2008. As the U.S. economy continues to rebound from the initial slowdown in~~ the second quarter ~~of 2020 that was brought on by the nationwide shutdown, the initial estimate of gross domestic product (“GDP”), the value of all goods~~ and ~~services produced in the nation,~~1.6% for the first quarter ~~2022 indicated growth~~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 ~~2.0% annualized rate per~~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 ~~U.S.~~pandemic and continues to be strong.

Per the U.S Bureau of Economic ~~Analysis~~Analysys (“BEA”)~~. This was lower than~~, the ~~consensus forecast~~personal consumption index (“PCE”), which represents 70% of ~~2.6%~~economic output, for June increased 6.8% from one year ago, reflecting increases in both goods and services. Excluding food and energy the ~~quarter. Personal consumption slowed~~PCE price index for June increased 4.8% from ~~12.0% in the second quarter~~one year ago.

Home sales were down 8.1% from a year ago, after two years of ~~2021~~heightened activity and have returned to ~~1.6% in the current quarter on a 9.2% decline in goods consumption as spending on motor vehicles~~prepandemic levels and ~~parts dropped significantly.~~will likely be impacted by higher interest rates.

~~Housing activity was down 7.7%, while business investment also disappointed expectations with a 3.2% decline in investment in equipment.~~

Goodwill:

The Company has goodwill with a net carrying value of ~~$63.4 million~~$63,370 at ~~March 31,~~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 ~~March 31,~~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 ~~decreased $16,682,~~increased $52,056 or ~~2.0%~~3.1% annualized, to ~~$3,352,801~~$3,421,539 at ~~March 31,~~June 30, 2022, from $3,369,483 at December 31, 2021. The ~~decrease~~increase in assets during the ~~three~~six months was due ~~in part~~ to ~~a $32,612 reduction in the fair value of our available-for-sale investment portfolio. Loan~~loan and investment growth, ~~was~~ funded primarily with our

Table of Contents

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

federal funds sold balances ~~as deposit growth was relatively stable since yearend.~~and short-term borrowings. Total loans increased to ~~$2,397,681~~$2,565,579 at ~~March 31~~June 30 2022, compared to $2,329,173 at December 31, 2021, an increase of ~~$68,508.~~$236,406. Excluding PPP loans and a net decrease of ~~$30,212~~$41,857 to PPP loan balances, loan growth during the first ~~three~~six months of 2022 totaled ~~$98,720,~~$278,263, or ~~17.7%~~24.8% annualized. Investments increased ~~$42,781~~$19,804 or ~~29.5%~~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.~~portfolio due to higher market rates. Federal funds sold balances decreased ~~$141,225~~$242,425 to ~~$101,200~~$0 at ~~March 31,~~June 30, 2022 from $242,425 at December 31, 2021. Deposits ~~were relatively stable increasing $1,467 or 0.2% annualized, as consumer and commercial growth offset the seasonal outflow of public fund deposits.~~decreased $52,114 to $2,911,283 at June 30, 2022 from $2,963,397. Interest-bearing deposits decreased ~~$20,763~~$61,916 while noninterest-bearing deposits increased ~~$22,230.~~$9,802. Total short-term borrowings at ~~March 31,~~June 30, 2021 ~~total $35,182.~~totaled $129,170. Total stockholders’ equity decreased ~~$19,665~~$28,229 or ~~5.8%~~8.3%, from $340,126 at year-end 2021 to ~~$320,461~~$311,897 at ~~March 31,~~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 ~~three~~six months ended ~~March 31,~~June 30, 2022, total assets averaged ~~$3,341,561,~~$3,344,220, an increase of ~~$427,516~~$388,696 from ~~$2,914,045~~$2,955,524 for the same period of 2021.

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~~Peoples Financial Services Corp.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~(Dollars in thousands, except per share data)~~

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 ~~$535,482~~$513,911 at ~~March 31,~~June 30, 2022, ~~an increase~~a decrease of ~~$18,021,~~$3,410, or ~~3.5%~~0.7% from ~~$517,461~~$517,321 at December 31, 2021. The ~~increase~~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. A decrease in~~assets primarily during the market value of the available-for-sale portfolio of $32,612 since December 31, 2021, due to the rapid increase of market rates, and principal received from mortgage-backed securities and maturing bonds partially offset the increases.three months ended March 31. Investment securities held-to-maturity totaled ~~$95,829~~$94,446 at ~~March 31,~~June 30, 2022, an increase of ~~$24,616~~$23,233 from $71,213 at December 31, 2021 ~~due to classifying new~~as a portion of newly purchased low coupon ~~security purchases~~securities were classified as held-to-maturity to mitigate market value risk.

For the ~~three~~six months ended ~~March 31,~~June 30, 2022, the investment portfolio averaged ~~$633,695,~~$649,110, an increase of ~~$301,280~~$311,369 or ~~90.6%~~92.2% compared to ~~$332,415~~$337,741 for the same period last year. Average tax-exempt municipal bonds have increased ~~$38,217~~$35,402 or ~~52.9%~~47.0% to ~~$110,394~~$110,768 for the ~~three~~six months ended ~~March 31, 2021~~June 30, 2022 from ~~$72,177~~$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 ~~1.68%~~1.67% for the ~~three~~six months ended ~~March 31,~~June 30, 2022, from ~~2.15%~~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 ~~$27,178~~$41,927 net of deferred income taxes of ~~$7,225~~$11,145 at ~~March 31,~~June 30, 2022, and net unrealized ~~gains~~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 ~~three~~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 ~~$2,397,681~~$2,565,579 at ~~March 31,~~June 30, 2022 from $2,329,173 at December 31, 2021, an increase of ~~$68,508. Loan activity improved since year-end as the economic outlook improved and certain government restrictions began to ease.~~$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 ~~March 31,~~June 30, 2022, we had 1816 loans totaling ~~$13,236~~$13,115 remaining from PPP loans originated during 2020 and ~~151~~67 loans totaling ~~$25,444~~$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 ~~$98,720~~$278,263 or ~~17.7%~~24.8% annually. Commercial real estate loans increased ~~$92,657~~$226,119 or ~~28.0%~~33.9% annualized, to ~~$1,436,196~~$1,569,657 at ~~March 31,~~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, ~~decreased $2,153~~increased $25,539 to ~~$542,077~~$569,773 at ~~March 31,~~June 30, 2022 compared to ~~$544,230~~$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 ~~decreased $224,~~increased $6,557, or ~~1.2%~~17.7% on an annualized basis, to ~~$74,659~~$81,440 at ~~March 31,~~June 30, 2022 compared to $74,883 at December 31, 2021. The ~~decrease~~increase in consumer loans was ~~primarily~~ due to ~~payoffs outpacing~~ dealer indirect auto loan origination ~~volumes. Lower origination volumes have resulted from changes to the structure of the Bank’s~~and other consumer loan ~~pricing.~~

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~~Peoples Financial Services Corp.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~(Dollars in thousands, except per share data)~~volumes.

Residential real estate loans increased ~~$8,444,~~$20,048, or ~~11.5%~~13.6% on an annualized basis, to ~~$306,068~~$317,672 at ~~March 31,~~June 30, 2022 compared to $297,624 at December 31, 2021. The increase in residential mortgages is due to increased refinance and purchase activity ~~during~~prior to the ~~current low rate environment coupled with~~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 ~~three~~six months ended ~~March 31,~~June 30, 2022, total loans excluding PPP loans, averaged ~~$2,302,912,~~$2,369,330, an increase of ~~$318,964~~$363,432 or ~~16.1%~~18.1% compared to ~~$1,983,947~~$2,005,898 for the same period of 2021. The PPP loans averaged ~~$48,984~~$40,079 for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and yielded ~~8.55%~~7.45% due to the acceleration of unamortized net fees and interest earned. The tax-equivalent yield on the entire loan portfolio was ~~3.85%~~3.84% for the ~~three~~six months ended ~~March 31,~~June 30, 2022, a 2412 basis point decrease from the comparable period last year. The decrease in yield is primarily due to ~~decreases in market rates. The FOMC took aggressive steps in March 2020 to combat the COVID-19 pandemic by cutting the federal funds rate 100 basis points to a target range~~lower levels of ~~0.00% to 0.25% during an emergency meeting which followed an emergency 50 basis point cut on March 3, 2020. The~~PPP fees and interest earned along with lower ~~market~~ rates ~~negatively impacted our floating and adjustable rate loans and yields~~ on new loan ~~originations.~~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 ~~March 31,~~June 30, 2022, totaled ~~$572,484,~~$676,636, consisting of ~~$514,920~~$617,371 in unfunded commitments of existing loan facilities and ~~$57,564~~$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 ~~$533,373,~~$553,373, consisting of $495,119 in unfunded commitments of existing loans and $58,254 in standby letters of credit.

~~Asset Quality:~~

~~Distribution of nonperforming assets~~

March 31, 2022

December 31, 2021

Nonaccrual loans

$
3,070

$
2,811

Troubled debt restructured loans (including nonaccrual TDR)

1,503

1,649

Accruing loans past due 90 days or more:

103

13

Total nonperforming loans

4,676

4,473

Foreclosed assets

488

Total nonperforming assets

$
4,676

$
4,961

Loans modified in a troubled debt restructuring (TDR):

Performing TDR loans

$
1,503

$
1,649

Nonperforming TDR loans

Total TDR loans

$
1,503

$
1,649

Total loans held for investment

$
2,397,681

$
2,329,173

Nonaccrual loans as a percentage of loans held for investment

0.13
%

0.12
%
Allowance for loan losses

28,407

28,383

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

1.18
%

1.22
%
Allowance for loan losses as a percentage of nonaccrual loans

925.31
%

1009.71
%
Nonperforming loans as a percentage of loans, net

0.20
%

0.19
%

3639

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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 ~~three~~six months of 2022 as evidenced by a decrease of ~~$285~~$384 in nonperforming assets. Nonperforming assets totaled ~~$4,676~~$4,577 or 0.14% of total assets at ~~March 31,~~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 ~~quarter.~~first quarter 2022.

Loans on nonaccrual status, excluding ~~trouble~~troubled debt restructured nonaccrual loans, increased ~~$259~~$108 to ~~$3,070~~$2,919 at ~~March 31,~~June 30, 2022 from $2,811 at December 31, 2021. The increase to nonaccrual loans since year-end is due primarily to the ~~addition~~increase of ~~a $852 million commercial real estate loan due~~$134 to ~~its delinquency status;~~ the ~~loan was subsequently paid-off during April 2022. Partially offsetting the increase was the payoff of a $546 million non-accrual real estate loan.~~ indirect auto portfolio. Restructured loans decreased ~~$146~~$181 to ~~$1,503~~$1,468 at ~~March 31,~~June 30, 2022 from $1,649 at December 31, 2021 due to payments received. Foreclosed assets decreased $488. There were no foreclosed properties at ~~March 31,~~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 ~~$24~~$991 or ~~0.08%~~3.49% during the first ~~three~~six months of 2022. The allowance for loan losses equaled ~~$28,407~~$29,374 or ~~1.18%~~1.14% of loans, net at ~~March 31,~~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 ~~1.20%~~1.16% at ~~March 31,~~June 30, 2022. Loans charged-off, net of recoveries, for the ~~three~~six months ended ~~March 31,~~June 30, 2022, equaled ~~$276~~$259 or ~~0.05%~~0.02% of average loans, compared to ~~$61~~$205 or ~~0.01%~~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 ~~$219. A partial recovery of charge-off was received during April upon sale of the property.~~$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 ~~three~~six months ended ~~March 31,~~June 30, 2022, total deposits ~~increased $1,467~~decreased $52,114 or ~~0.05%~~1.76% to ~~$2,964,864~~$2,911,283 from $2,963,397 at December 31, 2021. ~~Growth~~The decrease was the result of ~~consumer and commercial deposits replaced the seasonal~~ outflows of public fund ~~deposits.~~ 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 ~~$20,763~~$61,916 while noninterest-bearing deposits increased ~~$22,230.~~$9,802. Interest-bearing transaction accounts, including NOW and money market accounts

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~~Peoples Financial Services Corp.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~(Dollars in thousands, except per share data)~~

decreased by ~~$36,312,~~$93,945, or ~~2.6%~~6.5%, to ~~$1,403,019~~$1,345,386 at ~~March 31,~~June 30, 2022, from $1,439,331 at December 31, 2021, savings accounts increased ~~$23,373~~$26,350 to ~~$515,169~~$518,146 as of ~~March 31,~~June 30, 2022 from $491,796 at December 31, 2021. Time deposits less than $250 ~~decreased $3,374,~~increased $15,971, or ~~1.7%~~7.8%, to ~~$200,345~~$219,690 at ~~March 31,~~June 30, 2022, from $203,719 at December 31, ~~2021.~~2021 partially due to the addition of $25,317 of brokered certificates of deposit. Time deposits $250 or more decreased ~~$4,450,~~$10,292, or ~~4.9%~~11.3% to ~~$86,345~~$80,503 at ~~March 31,~~June 30, 2022 from $90,795 at year end 2021.

For the ~~three~~six months ended ~~March 31,~~June 30, interest-bearing deposits averaged ~~$2,211,629~~$2,189,477 in 2022 compared to ~~$1,833,661~~$1,877,950 in 2021, an increase of ~~$377,968~~$311,527 or ~~20.6%~~16.6%. The cost of interest-bearing deposits was ~~0.27%~~0.28% in 2022 compared to ~~0.46%~~0.43% for the same period last year. For the first ~~three~~six months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was ~~0.35%~~0.37% in 2022 and ~~0.57%~~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 25three times for a total of 150 basis points ~~in March~~through June 30, 2022 50and another 75 basis points on ~~May 4,~~July 27, 2022 ~~and~~with the expectation is that the FOMC will continue to move ~~aggressively over the short-term~~ 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 ~~March 31,~~June 30, 2022, totaled ~~$35,182,~~$163,816, including long-term and subordinated debt, compared to $35,711 at December 31, 2021, ~~a decrease~~an increase of ~~$529.~~$128,105. ~~There~~Total short-term borrowings at June 30, 2022 were $129,170 as compared to no short-term borrowings outstanding at ~~March 31, 2022 and~~ 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 ~~$2,182~~$1,646 at ~~March 31,~~June 30, 2022 compared to $2,711 at year end 2021. Subordinated debt outstanding at ~~March 31,~~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.

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~~Peoples Financial Services Corp.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~(Dollars in thousands, except per share data)~~

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 ~~1.48%~~1.12% at ~~March 31,~~June 30, 2022, ~~an increase~~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 25225 basis points ~~at their~~from March 1, 2022 ~~meeting~~to date and an expectation the FOMC will ~~aggressively~~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 ~~March 31,~~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 ~~March 31,~~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;

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~~Peoples Financial Services Corp.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~(Dollars in thousands, except per share data)~~

●

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 ~~February,~~May, to review our interest rate risk profile, capital adequacy and liquidity. Management believes the Company’s liquidity position is strong. At ~~March 31,~~June 30, 2022, the Company’s cash and due from banks balances were ~~$141,503~~$47,733 and we maintained ~~$152,542~~$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 ~~March 31,~~June 30, 2022, the Company’s available-for-sale investment securities portfolio totaled ~~$535,482, $358,546~~$513,911, $348,501 of which were unencumbered. Net unrealized losses on the portfolio were ~~$34,403.~~$53,072. The Bank’s unused borrowing capacity at the FHLB at ~~March 31,~~June 30, 2022 was ~~$670,708.~~$614,895.

Table of Contents

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 ~~March 31,~~June 30, 2022. Our noncore funds at ~~March 31,~~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 ~~March 31,~~June 30, 2022, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was ~~2.4%~~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 ~~negative 0.3% due to our short-term investments including $101.2 million of federal funds sold, exceeding our noncore funds.~~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 ~~$138,430~~$232,200 during the ~~three~~six months ended ~~March 31,~~June 30, 2022. Cash and cash equivalents increased ~~$75,126~~$19,859 for the same period last year. For the ~~three~~six months ended ~~March 31,~~June 30, 2022, net cash inflows of ~~$9,136~~$69,751 from financial activities and $18,738 from operating activities were offset by net cash outflows of ~~$145,390~~$320,689 from investing ~~activities and net cash outflows of $2,176 from financing~~ activities. For the same period of 2021, net cash inflows of ~~$11,654~~$13,001 from operating activities and ~~$111,596~~$107,461 from financing activities were partially offset by net cash outflows of ~~$48,124~~$100,603 from investing activities.

Operating activities provided net cash of ~~$9,136~~$18,738 for the ~~three~~six months ended ~~March 31,~~June 30, 2022, and ~~$11,654~~$13,001 for the corresponding ~~three~~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 ~~$145,390~~$320,689 for the ~~three~~six months ended ~~March 31,~~June 30, 2022, compared to using net cash of ~~$48,124~~

~~Table of Contents~~

~~Peoples Financial Services Corp.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~(Dollars in thousands, except per share data)~~

$100,603 for the same period of 2021. ~~In 2022, the~~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 ~~while an increase~~ in ~~investment purchases was the primary factor during the 2021 comparable period.~~both periods.

Financing activities ~~used~~provided net cash of ~~$2,176~~$69,751 for the ~~three~~six months ended ~~March 31,~~June 30, 2022, and provided net cash of ~~$111,596~~$107,461 for the corresponding ~~three~~six months of 2021. ~~Deposit~~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 iswas our predominant financing activity. Deposits provided cash of ~~$1,467~~$174,653 for the ~~three~~six months ended ~~March 31, 2022. Comparatively, deposits provided $113,303 for the same period of 2021.~~June 30, 2021 while short term borrowings declined $50,000. We continue to seek ~~low-cost~~ deposits from new markets and customers as well as existing customers, including municipalities and school districts. In the event that loan growth should exceed the growth in deposits, short-term and long-term borrowings provide additional funding. Long term borrowings were paid down and used $529 during the three months ended March 31, 2022.

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 ~~$320,461~~$311,897 or ~~$44.64~~$43.50 per share at ~~March 31,~~June 30, 2022, compared to $340,126 or $47.44 per share at December 31, 2021. Stockholders’ equity was reduced during the ~~three~~six month period ended ~~March 31,~~June 30, 2022 by cash dividends declared of ~~$2,796,~~$5,594, a decrease to AOCI of ~~$26,153~~$41,060 primarily due to an increase to the unrealized ~~gain~~loss on investment securities from higher market rates, and the repurchase of ~~6,714~~13,567 common shares totaling ~~$318.~~$646. Net income of ~~$9,630~~$18,983 for the ~~three~~six months ended ~~March 31,~~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 ~~$27,178,~~$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 ~~$0.39~~$0.78 per share through the ~~three~~six months ended ~~March 31,~~June 30, 2022 and ~~$0.37~~$0.74 per share for the same period of 2021. The dividend payout ratio was ~~29.3%~~29.5% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and ~~28.2%~~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 ~~April~~July 29, 2022 a ~~second~~third quarter dividend of ~~$0.39~~$0.40 per share payable ~~June~~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 ~~March 31,~~June 30, 2022, the Bank’s Tier 1 capital to total average assets was ~~9.64%~~9.78% as compared to 9.58% at December 31, 2021. The Bank’s Tier 1 capital to risk weighted asset ratio was ~~13.47%~~12.81% and the total capital to risk weighted asset ratio was ~~14.67%~~13.97% at ~~March 31,~~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 ~~13.47%~~12.81% at ~~March 31,~~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 ~~March 31,~~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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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

~~Review of Financial Performance:~~

Peoples reported net income of $9,630, or $1.33 per diluted share for the three months ended March 31, 2022, an increase of 2.0% when compared to $9,478, or $1.31 per diluted share for the comparable period of 2021. The increase in earnings for the three months ended March 31, 2022 is the product of an increase to net interest income of $1,863, due to higher income on our securities portfolio and lower funding costs, as well as a lower income tax provision. Partially offsetting these increases were a higher provision for loan losses, lower noninterest income and higher noninterest expenses.

Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.17% for the first quarter of 2022 compared to 1.32% 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 11.82% for the first quarter of 2022 compared to 12.00% for the comparable period in 2021.

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 ~~March 31,~~June 30, 2022 and 2021:

Three months ended March 31

2022

2021

Interest income (GAAP)

$
24,571

$
23,477

Adjustment to FTE

445

335

Interest income adjusted to FTE (non-GAAP)

25,016

23,812

Interest expense

1,940

2,709

Net interest income adjusted to FTE (non-GAAP)

$
23,076

$
21,103


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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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 ~~March 31,~~June 30, 2022 and 2021:

Three months ended March 31

2022

2021

Efficiency ratio (non-GAAP):

Noninterest expense (GAAP)

$
14,289

$
12,629

Less: amortization of intangible assets expense

96

125

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

14,193

12,504

Net interest income (GAAP)

22,631

20,768

Plus: taxable equivalent adjustment

445

335

Noninterest income (GAAP)

3,421

3,517

Less: net gains (losses) on equity securities

4

21

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

$
26,493

$
24,599

Efficiency ratio (non-GAAP)

53.6
%

50.8
%


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 ~~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 March 31, tax-equivalent net interest income increased $1,973 to $23,076 in 2022 from $21,103 in 2021. The net interest spread decreased to 2.87% for the three months ended March 31, 2022 from 2.98% for the three months ended March 31, 2021 as the earning asset yield decreased 33 basis points while the average rate paid on interest bearing liabilities decreased 22 basis points. The tax-equivalent net interest margin decreased to 2.97% for the first quarter of 2022 from 3.15% for the comparable period of 2021.

For the three months ended March 31, tax-equivalent interest income, a non-GAAP measure, on earning assets increased $1,204, to $25,016 in 2022 as compared to $23,812 in 2021. The overall yield on earning assets, on a fully tax-equivalent basis, decreased 33 basis points for the three months ended March 31, 2022 to 3.22% as compared to 3.55%

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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 ~~March 31,~~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 ~~despite the lower overall earning asset yield~~ is due ~~primarily from~~to the higher earning asset base of ~~$436,830.~~$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. ~~Loan yields decreased due to lower rates on new loan originations during 2022 and adjustable and variable rate loans repricing into a lower rate environment.~~ PPP loan interest income and net fees totaled ~~$1,033~~$440 and the yield was ~~8.6%~~5.2% during the current quarter. Excluding the PPP loans, the loan yield was ~~3.75%~~3.81%. The overall yield earned on investments decreased 4746 basis points in the ~~first~~second quarter of 2022 to ~~1.68%~~1.67% from ~~2.15%~~2.13% for the ~~first~~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 ~~$301,280~~$321,205 higher when comparing the current and year ago quarter. Average federal funds sold decreased ~~$29,502~~$196,327 to ~~$162,218~~$23,920 for the three months ended ~~March 31,~~June 30, 2022 and yielded ~~0.18%~~0.37%, as compared to ~~$191,720~~$220,247 and yield of 0.10% in the year ago period. We ~~recognize~~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 ~~at higher volumes and velocity~~ by the FOMC to combat inflation.

Total interest expense decreased ~~$769~~$288 to ~~$1,940~~$2,185 for the three months ended ~~March 31,~~June 30, 2022 from ~~$2,709~~$2,473 for the three months ended ~~March 31,~~June 30, 2021. The total cost of funds decreased 2211 basis points for the three months ended ~~March 31,~~June 30, 2022 to ~~0.35%~~0.39% as compared to ~~0.57%~~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 ~~yearend~~year end as the FOMC aggressively increases interest rates in ~~anticipation of the FOMC’s action~~an attempt to ~~aggressively increase the targeted federal funds rate to subdue~~curb inflation.

~~Net interest income changes due to rate and volume for the three months ended March 31~~

2022 vs 2021

Increase (decrease)

attributable to

Total

Rate

Volume

Interest income:







Loans:

Taxable

$
(47)

$
(3,913)

$
3,866

Tax-exempt

369

(1,157)

1,526

Investments:

Taxable

706

(1,765)

2,471

Tax-exempt

152

(424)

576

Interest-bearing deposits

—

7

(7)

Federal funds sold

24

71

(47)

Total interest income

1,204

(7,181)

8,385

Interest expense:

Money market accounts

(181)

(711)

530

NOW accounts

(111)

(1,109)

998

Savings accounts

(4)

(59)

55

Time deposits less than $100

(87)

(89)

2

Time deposits $100 or more

(241)

(192)

(49)

Short-term borrowings

(71)

(35)

(36)

Long-term debt

(75)

258

(333)

Subordinated debt

1

1

Total interest expense

(769)

(1,936)

1,167

Net interest income - non-GAAP

$
1,973

$
(5,245)

$
7,218

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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 ~~$23,076~~$47,243 in the ~~three~~six months ended ~~March 31,~~June 30, 2022 and ~~$21,103~~$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 ~~$7,218.~~$8,465. A rate variance resulted in a decrease in net interest income of ~~$5,245.~~$2,981.

Average earning assets increased ~~$436,830~~$404,072 to ~~$3,153,697~~$3,161,391 for the ~~three~~six months ended ~~March 31,~~June 30, 2022 from ~~$2,716,867~~$2,757,319 for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and accounted for a ~~$8,385~~$9,079 increase in interest income. Average loans increased ~~$172,424,~~$207,270, which caused interest income to increase ~~$5,392.~~$5,430. Specifically, average PPP loans totaled ~~$48,984~~$40,079 and generated ~~$1,033~~$1,481 of interest and net fees in the current period compared to average PPP loans of ~~$195,525~~$196,240 and ~~$2,469~~$3,811 of interest and fees in the prior period. Average taxable investments increased ~~$263,063~~$275,967 comparing 2022 and 2021, which resulted in increased interest income of ~~$2,471~~$3,167 while average tax-exempt investments increased ~~$38,217,~~$35,402, which resulted in an increase to interest income of ~~$576.~~$637. Average federal funds sold decreased ~~$29,502~~$113,375 for the ~~three~~six months ended ~~March 31,~~June 30, 2022 which resulted in a decrease of ~~$47~~$153 to interest income.

Average interest-bearing liabilities rose ~~$315,463~~$291,323 to ~~$2,247,103~~$2,243,797 for the ~~three~~six months ended ~~March 31,~~June 30, 2022 from ~~$1,931,640~~$1,952,474 for the ~~three~~six months ended ~~March 31,~~June 30, 2021 resulting in a net increase in interest expense of ~~$1,167.~~$614. Interest-bearing transaction accounts, including money market, NOW and savings accounts grew ~~$400,810,~~$335,934, which in aggregate caused a ~~$1,583~~$1,130 increase in interest expense. In addition, large denomination time deposits averaged ~~$22,892~~$23,235 less in the current period and caused interest expense to decrease ~~$49. An increase~~$95. A decrease of ~~$50~~$1,173 in average time deposits less than $100 thousand ~~increased~~decreased interest expense by ~~$2.~~$7. In addition, short-term borrowings averaged ~~$50,470~~$9,631 lower and decreased interest expense ~~$36~~$75 while long-term debt averaged ~~$12,035~~$10,572 lower and decreased interest expense by ~~$333~~$339 comparing the first ~~three~~six months of 2022 and 2021.

Table of Contents

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 3315 basis points while there was a 2217 basis point decrease in the cost of funds. As a result, tax-equivalent net interest income decreased ~~$5,245~~$2,981 comparing the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021. The tax-equivalent yield on earning assets was ~~3.22%~~3.28% in the 2022 period compared to ~~3.55%~~3.43% in 2021 resulting in a decrease in interest income of ~~$7,181.~~$4,652. The yield on the taxable investment portfolio decreased 44 basis points to 1.53% during the ~~three~~six months ended ~~March 31,~~June 30, 2022 from 1.97% in the year ago period, resulting in a decrease of ~~$1,765.~~$1,652. The yield on the tax exempt investment portfolio decreased 4135 basis points to ~~2.37%~~2.36% during the ~~three~~six months ended ~~March 31,~~June 30, 2022 from ~~2.78%~~2.71% in the year ago period, resulting in a decrease of ~~$424.~~$353. The tax-equivalent yield on the loan portfolio decreased 2412 basis points to ~~3.85%~~3.84% in 2022 from ~~4.09%~~3.96% in 2021 and resulted in a decrease to interest income of ~~$5,070.~~$2,809.

PPP loans yielded ~~8.55%~~7.45% during the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to ~~5.12%~~3.92% in the year ago period. The ~~increase~~decrease resulted from the ~~high volume of~~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 money market accounts decreased 20 basis points comparing the three months ended March 31, 2022 and 2021. The decrease resulted in a decrease in interest expense of $711. The cost of NOW accounts decreased 19deposits declined 15 basis points and resulted in a ~~$1,109~~$1,996 reduction of interest expense. The cost of savings accounts decreased 2 basis points and resulted in a $59 reduction of interest expense. With regard to time deposits, the average rate paid for time deposits less than $100 thousand decreased 28 basis points while time deposits $100 thousand or more decreased 47 basis points, which together resulted in a $281 decrease in interest ~~expense. Interest~~ expense ~~increased $258 from a 171~~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 ~~average rate paid on long-term debt.~~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

March 31, 2022

March 31, 2021

Average

Interest Income/

Yield/

Average

Interest Income/

Yield/


Balance

Expense

Rate

Balance

Expense

Rate

Assets:

Earning assets:

Loans:

Taxable

$
2,148,251

$
20,853

3.94
%
$
2,054,120

$
20,900

4.13
%
Tax-exempt

203,645

1,470

2.93

125,352

1,101

3.56

Total loans

2,351,896

22,323

3.85

2,179,472

22,001

4.09

Investments:

Taxable

523,301

1,972

1.53

260,238

1,266

1.97

Tax-exempt

110,394

646

2.37

72,177

494

2.78

Total investments

633,695

2,618

1.68

332,415

1,760

2.15

Interest-bearing deposits

5,888

2

0.14

13,260

2

0.06

Federal funds sold

162,218

73

0.18

191,720

49

0.10

Total earning assets

3,153,697

25,016

3.22
%

2,716,867

23,812

3.55
%
Less: allowance for loan losses

28,717

27,692

Other assets

216,581

224,870

Total assets

$
3,341,561

$
25,016

$
2,914,045

$
23,812

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Money market accounts

$
595,991

$
385

0.26
%
$
504,302

$
566

0.46
%
NOW accounts

820,016

488

0.24

571,344

599

0.43

Savings accounts

505,816

93

0.07

445,367

97

0.09

Time deposits less than $100

127,610

302

0.96

127,560

389

1.24

Time deposits $100 or more

162,196

200

0.50

185,088

441

0.97

Total interest-bearing deposits

2,211,629

1,468

0.27

1,833,661

2,092

0.46

Short-term borrowings

50,470

71

0.57

Long-term debt

2,474

28

4.59

14,509

103

2.88

Subordinated debt

33,000

444

5.38

33,000

443

5.38

Total borrowings

35,474

472

5.32

97,979

617

2.55

Total interest-bearing liabilities

2,247,103

1,940

0.35

1,931,640

2,709

0.57

Noninterest-bearing deposits

734,348

634,806

Other liabilities

29,816

27,371

Stockholders’ equity

330,294

320,228

Total liabilities and stockholders’ equity

$
3,341,561

1,940

$
2,914,045

2,709

Net interest income/spread

$
23,076

2.87
%

$
21,103

2.98
%
Net interest margin

2.97
%

3.15
%
Tax-equivalent adjustments:

Loans

$
309

$
231

Investments

136

104

Total adjustments

$
445

$
335


	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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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 ~~March 31,~~June 30, 2022.

For the three months ended ~~March 31,~~June 30, 2022, the provision for loan losses increased ~~$800~~$850 to ~~$300~~$950 from ~~a credit of $500~~$100 in the year ago period due to improving credit trends. The provision for loan losses in the three month period ended ~~March 31,~~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 ~~March 31,~~June 30, 2022 was ~~$3,421, a decrease~~$3,881, an increase of ~~$96~~$494 or ~~2.7%~~14.6% from ~~$3,517~~$3,387 in 2021. The ~~decrease~~increase was primarily due to ~~a decrease in~~higher revenue ~~generated~~ from ~~our~~ commercial loan interest rate swaps ~~of $454~~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 ~~transaction volumes and~~ credit value ~~adjustments~~adjustment in the quarter compared to a year ~~ago period.~~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 ~~$168~~$80 in the three month period ended ~~March 31,~~June 30, 2022 due to lower volumes of mortgage loans being sold into the secondary market. ~~Services~~

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 ~~were higher~~increased $644 due in ~~the current period by $508 due~~part to the reversal of an accrual of a ~~$0.3 million~~$335 bank owned life insurance benefit in the year ago period, an increase in consumer and ~~a $0.1 million incentive received~~commercial deposit service charges and higher revenue related to ~~our~~ debit card ~~activity in~~activity. Mortgage banking income decreased $248 during the ~~current period.~~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 ~~$1,660~~$2,035 or ~~13.1%~~15.1% to ~~$14,289~~$15,493 for the three months ended ~~March 31,~~June 30, 2022, from ~~$12,629~~$13,458 for the three months ended ~~March 31,~~June 30, 2021. Salaries and employee benefits increased ~~$1,470~~$601 or ~~22.4%~~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. Additionally, deferred loan origination costs, which are recorded as a contra-salary expense, were $0.7 million higher in the year ago period due to the origination of PPP loans related to round two of the program. Occupancy and equipment expenses were higher by ~~$558~~$903 in the current period due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021. ~~Other~~Professional and consulting fees increased $197 and other expenses, ~~were lower by $368 due primarily to higher gains realized on the sale of other real estate owned of $412.~~

~~Income Taxes:~~

~~We recorded income tax expense of $1,833 or 16.0% of pre-tax income for the three months ended March 30, 2022. This compares to the three month period ended March 31, 2021 in~~ which ~~we recordedtax expense of $2,678 or 22.0% of pre-tax income. The current quarter benefited from a higher level of tax-exempt income while the prior year’s quarter~~includes account processing and advertising, increased $353.

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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 recordedtax 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 related to prior periods.~~adjustment. Excluding this adjustment, the effective tax rate would have been ~~16.9%~~16.1% for the ~~three~~six month period ended ~~March 31,~~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 ~~March 31,~~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 ~~March 31,~~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 1627 basis points. AsAfter the first twelve months of the model simulation, ~~progresses~~ the ~~benefit to NII~~

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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 and the recent bond market sell-off.~~rate. Our interest rate risk position ~~continues to exhibit~~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 ~~March 31,~~June 30, 2022 is ~~slightly~~ less asset-sensitive than the simulation at December 31, 2021 ~~indicated.~~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.

~~The~~During the first half of 2022, the FOMC ~~increased~~began to increase the federal funds target ~~by 25 basis points in March 2022 to a range of 25 to 50 basis points~~rate in part to mitigate historically high inflation. ~~Recent statements by members~~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 ~~strongly signal that~~ rate ~~increases will continue in 2022 to combat inflation,~~adjustments and ~~no final decision on the pace of the tightening had been made. Given the Company’s current asset/liability position, higher market~~local competition for deposits and negatively impact our net interest ~~rates may have a positive impact on our earning asset yields and variable-rate loans indexed to prime, LIBOR or other market rates.~~

income.

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at ~~March 31,~~June 30, 2022, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:


	March 31, 2022				June 30, 2022
	% Change in				% Change in
Changes in Interest Rates (basis points)	Net Interest Income		Economic Value of Equity		Net Interest Income		Economic Value of Equity
	Metric	Policy	Metric	Policy	Metric	Policy	Metric	Policy
+400	0.8	(20.0)	(16.5)	(40.0)	(8.0)	(20.0)	(23.5)	(40.0)
+300	0.6	(20.0)	(12.3)	(30.0)	(6.0)	(20.0)	(17.6)	(30.0)
+200	0.2	(10.0)	(8.1)	(20.0)	(4.0)	(10.0)	(11.5)	(20.0)
+100	0.2	(10.0)	(3.0)	(10.0)	(1.7)	(10.0)	(4.8)	(10.0)
Static
-100	(4.8)	(10.0)	(7.2)	(10.0)	(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 ~~March 31,~~June 30, 2022, would ~~increase 0.2%~~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.

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~~Peoples Financial Services Corp.~~

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At ~~March 31,~~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 ~~March 31,~~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 ~~three-months~~six-months ended ~~March 31,~~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.

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~~Peoples Financial Services Corp.~~

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 ~~March 31,~~June 30, 2022.

��

Total Number of

Maximum Number

Total Number of

Maximum Number

Shares Purchased

of Shares that may

Shares Purchased

of Shares that may

as Part of Publicly

yet be Purchased

as Part of Publicly

yet be Purchased

Total Number of

Average Price

Announced

Under the

Total Number of

Average Price

Announced

Under the

Month Ending

Shares Purchased

Paid Per Share

Programs

Shares Purchased

Paid Per Share

Programs

January 31, 2022

250,313

301,637

February 28, 2022

3,865

47.65

254,178

297,772

March 31, 2022

2,849

46.96

257,027

294,923

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 ~~March 31,~~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: ~~May 9,~~August 8, 2022	/s/ Craig W. Best
	Craig W. Best
	Chief Executive Officer
	(Principal Executive Officer)

Date: ~~May 9,~~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)

5359


Three months ended March 31	2022		2021
Interest income (GAAP)	$	24,571	$	23,477
Adjustment to FTE		445		335
Interest income adjusted to FTE (non-GAAP)		25,016		23,812
Interest expense		1,940		2,709
Net interest income adjusted to FTE (non-GAAP)	$	23,076	$	21,103