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xbrli:shares pfis:security

Table of Contents

​

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

​

​

Form 10-Q

​

​

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

for the quarterly period ended September 30, 2022

or

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

for the transition period from

001-36388

(Commission File Number)

​

​

PEOPLES FINANCIAL SERVICES CORP.

(Exact name of registrant as specified in its charter)

​

​

Pennsylvania | 23-2391852
(State of incorporation) | (IRS Employer ID Number)
150 North Washington Avenue, Scranton, PA | 18503
(Address of principal executive offices) | (Zip code)

​

(570) 346-7741

(Registrant’s telephone number, including area code)

​

Securities registered pursuant to Section 12(b) of the Act:

​ | ​ | ​ | ​ | ​
Title of each class: |  | Trading Symbol |  | Name of each exchange on which registered:
Common stock, $2.00 par value | ​ | PFIS | ​ | The Nasdaq Stock Market

​

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

​

Large accelerated filer | ☐ | Accelerated filer | ☒
Non-accelerated filer | ☐ | Smaller reporting company | ☐
Emerging growth company | ☐ | ​ | ​

​

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 7,160,198 at November l, 2022.

​

​

​

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

​

For the Quarter Ended September 30, 2022

​

​

​ | ​ | ​ | ​ | ​
Contents | ​ | ​ | ​ | Page No.
​ | ​ | ​ | ​ | ​
PART I. | ​ | FINANCIAL INFORMATION: | ​ | ​
​ | ​ | ​ | ​ | ​
Item 1. | ​ | Financial Statements | ​ | ​
​ | ​ | ​ | ​ | ​
​ | ​ | Consolidated Balance Sheets at September 30, 2022 (Unaudited) and December 31, 2021 (Unaudited) | ​ | 3
​ | ​ | ​ | ​ | ​
​ | ​ | Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2022 and 2021 (Unaudited) | ​ | 4
​ | ​ | ​ | ​ | ​
​ | ​ | Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, June 30 and September 30, 2022 and 2021 (Unaudited) | ​ | 5
​ | ​ | ​ | ​ | ​
​ | ​ | Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2022 and 2021 (Unaudited) | ​ | 6
​ | ​ | ​ | ​ | ​
​ | ​ | Notes to Consolidated Financial Statements (Unaudited) | ​ | 8
​ | ​ | ​ | ​ | ​
Item 2. | ​ | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ​ | 36
​ | ​ | ​ | ​ | ​
Item 3. | ​ | Quantitative and Qualitative Disclosures About Market Risk | ​ | 55
​ | ​ | ​ | ​ | ​
Item 4. | ​ | Controls and Procedures | ​ | 57
​ | ​ | ​ | ​ | ​
PART II | ​ | OTHER INFORMATION | ​ | ​
​ | ​ | ​ | ​ | ​
Item 1. | ​ | Legal Proceedings | ​ | 57
​ | ​ | ​ | ​ | ​
Item 1A. | ​ | Risk Factors | ​ | 57
​ | ​ | ​ | ​ | ​
Item 2. | ​ | Unregistered Sales of Equity Securities and Use of Proceeds | ​ | 57
​ | ​ | ​ | ​ | ​
Item 3. | ​ | Defaults upon Senior Securities | ​ | 58
​ | ​ | ​ | ​ | ​
Item 4. | ​ | Mine Safety Disclosures | ​ | 58
​ | ​ | ​ | ​ | ​
Item 5. | ​ | Other Information | ​ | 58
​ | ​ | ​ | ​ | ​
Item 6. | ​ | Exhibits | ​ | 58
​ | ​ | ​ | ​ | ​
​ | ​ | Signatures | ​ | 59

​

​

​

2

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEET S

(Dollars in thousands, except share data)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, 2022 |  | December 31, 2021 |
Assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and cash equivalents | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and due from banks | ​ | $ | 35,000 | ​ | $ | 30,415 | ​
Interest-bearing deposits in other banks | ​ | ​ | 8,410 | ​ | ​ | 7,093 | ​
Federal funds sold | ​ |  | 69,600 | ​ |  | 242,425 | ​
Total cash and cash equivalents | ​ | ​ | 113,010 | ​ | ​ | 279,933 | ​
​ | ​ | ​ | ​ | ​ |  | ​ | ​
Investment securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Available-for-sale | ​ |  | 477,590 | ​ |  | 517,321 | ​
Equity investments carried at fair value | ​ | ​ | 103 | ​ | ​ | 140 | ​
Held-to-maturity: Fair value September 30, 2022, $78,512; December 31, 2021, $70,446 | ​ |  | 92,771 | ​ |  | 71,213 | ​
Total investment securities | ​ |  | 570,464 | ​ |  | 588,674 | ​
Loans | ​ |  | 2,623,706 | ​ |  | 2,329,173 | ​
Less: allowance for loan losses | ​ |  | 29,822 | ​ |  | 28,383 | ​
Net loans | ​ |  | 2,593,884 | ​ |  | 2,300,790 | ​
Loans held for sale | ​ | ​ | 653 | ​ | ​ | 408 | ​
Premises and equipment, net | ​ |  | 54,394 | ​ |  | 51,502 | ​
Accrued interest receivable | ​ |  | 10,082 | ​ |  | 8,528 | ​
Goodwill | ​ |  | 63,370 | ​ |  | 63,370 | ​
Intangible assets, net | ​ |  | 179 | ​ |  | 468 | ​
Bank owned life insurance | ​ | ​ | 48,235 | ​ | ​ | 42,754 | ​
Other assets | ​ |  | 62,535 | ​ |  | 33,056 | ​
Total assets | ​ | $ | 3,516,806 | ​ | $ | 3,369,483 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Deposits: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Noninterest-bearing | ​ | $ | 769,935 | ​ | $ | 737,756 | ​
Interest-bearing | ​ |  | 2,354,205 | ​ |  | 2,225,641 | ​
Total deposits | ​ |  | 3,124,140 | ​ |  | 2,963,397 | ​
Short-term borrowings | ​ |  | 14,700 | ​ |  | ​ | ​
Long-term debt | ​ |  | 1,104 | ​ |  | 2,711 | ​
Subordinated debentures | ​ | ​ | 33,000 | ​ | ​ | 33,000 | ​
Accrued interest payable | ​ |  | 1,129 | ​ |  | 408 | ​
Other liabilities | ​ |  | 40,923 | ​ |  | 29,841 | ​
Total liabilities | ​ |  | 3,214,996 | ​ |  | 3,029,357 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Stockholders’ equity: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,162,750 shares at September 30, 2022 and 7,169,372 shares at December 31, 2021 | ​ |  | 14,330 | ​ |  | 14,341 | ​
Capital surplus | ​ |  | 126,845 | ​ |  | 127,549 | ​
Retained earnings | ​ |  | 224,238 | ​ |  | 203,750 | ​
Accumulated other comprehensive loss | ​ |  | (63,603) | ​ |  | (5,514) | ​
Total stockholders’ equity | ​ |  | 301,810 | ​ |  | 340,126 | ​
Total liabilities and stockholders’ equity | ​ | $ | 3,516,806 | ​ | $ | 3,369,483 | ​

​

See notes to unaudited consolidated financial statements

​

3

Table of Contents

Peoples Financial Services Corp.

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

(Dollars in thousands, except per share data)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended | ​ | Nine Months Ended | ​
September 30, |  | 2022 |  | 2021 |  | 2022 |  | 2021 |
Interest income: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest and fees on loans: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | $ | 25,128 | ​ | $ | 21,276 | ​ | $ | 67,990 | ​ | $ | 62,205 | ​
Tax-exempt | ​ |  | 1,338 | ​ |  | 1,024 | ​ |  | 3,717 | ​ |  | 2,859 | ​
Interest and dividends on investment securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 2,096 | ​ |  | 1,285 | ​ |  | 6,176 | ​ |  | 3,804 | ​
Tax-exempt | ​ |  | 521 | ​ |  | 432 | ​ |  | 1,546 | ​ |  | 1,233 | ​
Dividends | ​ |  | ​ | ​ |  | 24 | ​ |  | 2 | ​ |  | 72 | ​
Interest on interest-bearing deposits in other banks | ​ |  | 41 | ​ |  | 2 | ​ |  | 61 | ​ |  | 6 | ​
Interest on federal funds sold | ​ |  | 106 | ​ |  | 124 | ​ | ​ | 201 | ​ |  | 228 | ​
Total interest income | ​ |  | 29,230 | ​ |  | 24,167 | ​ |  | 79,693 | ​ |  | 70,407 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest expense: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest on deposits | ​ |  | 3,316 | ​ |  | 1,698 | ​ |  | 6,381 | ​ |  | 5,731 | ​
Interest on short-term borrowings | ​ |  | 457 | ​ |  | ​ | ​ |  | 579 | ​ |  | 78 | ​
Interest on long-term debt | ​ |  | 16 | ​ |  | 41 | ​ |  | 67 | ​ |  | 225 | ​
Interest on subordinated debt | ​ | ​ | 443 | ​ | ​ | 443 | ​ | ​ | 1,330 | ​ |  | 1,330 | ​
Total interest expense | ​ |  | 4,232 | ​ |  | 2,182 | ​ |  | 8,357 | ​ |  | 7,364 | ​
Net interest income | ​ |  | 24,998 | ​ |  | 21,985 | ​ |  | 71,336 | ​ |  | 63,043 | ​
Provision for loan losses | ​ |  | 450 | ​ |  | 400 | ​ |  | 1,700 | ​ |  | ​ | ​
Net interest income after provision (credit) for loan losses | ​ |  | 24,548 | ​ |  | 21,585 | ​ |  | 69,636 | ​ |  | 63,043 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Noninterest income: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Service charges, fees, commissions and other | ​ |  | 1,714 | ​ |  | 1,667 | ​ |  | 5,167 | ​ |  | 4,476 | ​
Merchant services income | ​ |  | 157 | ​ |  | 158 | ​ |  | 833 | ​ |  | 759 | ​
Commission and fees on fiduciary activities | ​ |  | 591 | ​ |  | 639 | ​ |  | 1,697 | ​ |  | 1,725 | ​
Wealth management income | ​ |  | 339 | ​ |  | 432 | ​ |  | 1,064 | ​ |  | 1,207 | ​
Mortgage banking income | ​ |  | 135 | ​ |  | 244 | ​ |  | 407 | ​ |  | 764 | ​
Increase in cash surrender value of life insurance | ​ |  | 269 | ​ |  | 225 | ​ |  | 731 | ​ |  | 669 | ​
Interest rate swap revenue | ​ | ​ | 130 | ​ | ​ | 79 | ​ | ​ | 757 | ​ |  | 744 | ​
Net (losses) gains on equity investment securities | ​ | ​ | (18) | ​ |  | 5 | ​ |  | (37) | ​ |  | 9 | ​
Total noninterest income | ​ |  | 3,317 | ​ |  | 3,449 | ​ |  | 10,619 | ​ |  | 10,353 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Salaries and employee benefits expense | ​ |  | 8,474 | ​ |  | 7,829 | ​ |  | 24,365 | ​ |  | 21,649 | ​
Net occupancy and equipment expense | ​ |  | 3,898 | ​ |  | 3,150 | ​ |  | 11,673 | ​ |  | 9,464 | ​
Amortization of intangible assets | ​ |  | 96 | ​ |  | 125 | ​ |  | 289 | ​ |  | 375 | ​
Net losses (gains) on sale of other real estate | ​ |  | ​ | ​ | ​ | (97) | ​ |  | (478) | ​ | ​ | (195) | ​
Professional fees and outside services | ​ | ​ | 664 | ​ | ​ | 629 | ​ | ​ | 1,900 | ​ | ​ | 1,645 | ​
FDIC insurance and assessments | ​ | ​ | 324 | ​ | ​ | 305 | ​ | ​ | 969 | ​ | ​ | 836 | ​
Donations | ​ | ​ | 373 | ​ | ​ | 366 | ​ | ​ | 1,038 | ​ | ​ | 1,084 | ​
Other expenses | ​ |  | 2,106 | ​ |  | 1,840 | ​ |  | 5,961 | ​ | ​ | 5,376 | ​
Total noninterest expense | ​ |  | 15,935 | ​ |  | 14,147 | ​ |  | 45,717 | ​ |  | 40,234 | ​
Income before income taxes | ​ |  | 11,930 | ​ |  | 10,887 | ​ |  | 34,538 | ​ |  | 33,162 | ​
Income tax expense | ​ |  | 1,962 | ​ |  | 1,791 | ​ |  | 5,587 | ​ |  | 6,057 | ​
Net income | ​ |  | 9,968 | ​ |  | 9,096 | ​ |  | 28,951 | ​ |  | 27,105 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Other comprehensive (loss) income: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Unrealized loss on investment securities available-for-sale | ​ |  | (21,510) | ​ |  | (3,130) | ​ |  | (72,791) | ​ |  | (8,409) | ​
Change in derivative fair value | ​ | ​ | (46) | ​ | ​ | (128) | ​ | ​ | (740) | ​ | ​ | (22) | ​
Other comprehensive loss | ​ |  | (21,556) | ​ | ​ | (3,258) | ​ | ​ | (73,531) | ​ | ​ | (8,431) | ​
Income tax benefit related to other comprehensive loss | ​ |  | (4,527) | ​ |  | (684) | ​ |  | (15,442) | ​ |  | (1,771) | ​
Other comprehensive loss, net of income tax benefit | ​ |  | (17,029) | ​ |  | (2,574) | ​ |  | (58,089) | ​ |  | (6,660) | ​
Comprehensive (loss) income | ​ | $ | (7,061) | ​ | $ | 6,522 | ​ | $ | (29,138) | ​ | $ | 20,445 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Per share data: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net income: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Basic | ​ | $ | 1.39 | ​ | $ | 1.26 | ​ | $ | 4.04 | ​ | $ | 3.76 | ​
Diluted | ​ | $ | 1.38 | ​ | $ | 1.26 | ​ | $ | 4.01 | ​ | $ | 3.74 | ​
Average common shares outstanding: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Basic | ​ |  | 7,169,809 | ​ |  | 7,198,125 | ​ |  | 7,171,382 | ​ |  | 7,204,399 | ​
Diluted | ​ |  | 7,213,147 | ​ |  | 7,233,189 | ​ |  | 7,214,966 | ​ |  | 7,239,463 | ​
Dividends declared | ​ | $ | 0.40 | ​ | $ | 0.38 | ​ | $ | 1.18 | ​ | $ | 1.12 | ​

​

See notes to unaudited consolidated financial statements

​

​

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUIT Y (UNAUDITED)

(Dollars in thousands, except per share data)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |  | Accumulated | ​ | ​ | ​ |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Other | ​ | ​ | ​ |
​ | ​ | Common | ​ | Capital | ​ | Retained | ​ | Comprehensive | ​ | ​ | ​ |
​ |  | Stock |  | Surplus |  | Earnings |  | ​ | Loss |  | Total |
Balance, January 1, 2022 | ​ | $ | 14,341 | ​ | $ | 127,549 | ​ | $ | 203,750 | ​ | $ | (5,514) | ​ | $ | 340,126 | ​
Net income | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  | 9,630 | ​ | ​ | ​ | ​ | ​ | 9,630 | ​
Other comprehensive loss, net of income taxes | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (26,153) | ​ | ​ | (26,153) | ​
Dividends declared: $0.39 per share | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  | (2,796) | ​ | ​ | ​ | ​ | ​ | (2,796) | ​
Stock based compensation | ​ | ​ | ​ | ​ | ​ | (28) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (28) | ​
Restricted stock issued: 12,332 shares, (unearned income $210k) | ​ | ​ | 24 | ​ | ​ | (24) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Share retirement: 6,714 shares | ​ | ​ | (13) | ​ | ​ | (305) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (318) | ​
Balance, March 31, 2022 | ​ | $ | 14,352 | ​ | $ | 127,192 | ​ | $ | 210,584 | ​ | $ | (31,667) | ​ | $ | 320,461 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net income | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 9,353 | ​ | ​ | ​ | ​ | ​ | 9,353 | ​
Other comprehensive loss, net of income taxes | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (14,907) | ​ | ​ | (14,907) | ​
Dividends declared: $0.39 per share | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (2,798) | ​ | ​ | ​ | ​ | ​ | (2,798) | ​
Stock based compensation | ​ | ​ | ​ | ​ | ​ | 116 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 116 | ​
Restricted stock issued: 4,071 shares, (unearned income $210k) | ​ | ​ | 8 | ​ | ​ | (8) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Share retirement: 6,853 shares | ​ | ​ | (14) | ​ | ​ | (314) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (328) | ​
Balance, June 30, 2022 | ​ | $ | 14,346 | ​ | $ | 126,986 | ​ | $ | 217,139 | ​ | $ | (46,574) | ​ | $ | 311,897 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net income | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 9,968 | ​ | ​ | ​ | ​ | ​ | 9,968 | ​
Other comprehensive loss, net of income taxes | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (17,029) | ​ | ​ | (17,029) | ​
Dividends declared: $0.40 per share | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (2,869) | ​ | ​ | ​ | ​ | ​ | (2,869) | ​
Stock based compensation | ​ | ​ | ​ | ​ | ​ | 223 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 223 | ​
Share retirement: 7,911 shares | ​ | ​ | (16) | ​ | ​ | (364) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (380) | ​
Balance, September 30, 2022 | ​ | $ | 14,330 | ​ | $ | 126,845 | ​ | $ | 224,238 | ​ | $ | (63,603) | ​ | $ | 301,810 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |  | 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 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net income | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  | 9,096 | ​ | ​ | ​ | ​ | ​ | 9,096 | ​
Other comprehensive loss, net of income taxes | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (2,574) | ​ | ​ | (2,574) | ​
Dividends declared: $0.38 per share | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  | (2,737) | ​ | ​ | ​ | ​ | ​ | (2,737) | ​
Stock based compensation | ​ | ​ | ​ | ​ | ​ | 213 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 213 | ​
Share retirement: 25,699 shares | ​ | ​ | (51) | ​ | ​ | (1,106) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | (1,157) | ​
Balance, September 30, 2021 | ​ | $ | 14,356 | ​ | $ | 127,826 | ​ | $ | 190,061 | ​ | $ | (4,511) | ​ | $ | 327,732 | ​

​

See notes to unaudited consolidated financial statements

​

​

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOW S (UNAUDITED)

(Dollars in thousands, except per share data)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
For the Nine Months Ended September 30, |  | 2022 |  | 2021 |
Cash flows from operating activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net income | ​ | $ | 28,951 | ​ | $ | 27,105 | ​
Adjustments to reconcile net income to net cash provided by operating activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Depreciation of premises and equipment | ​ |  | 2,051 | ​ |  | 1,883 | ​
Amortization of right-of-use lease asset | ​ | ​ | 443 | ​ | ​ | 320 | ​
Amortization (accretion) of deferred loan fees, net | ​ |  | 1,314 | ​ | ​ | (4,636) | ​
Amortization of intangibles | ​ |  | 289 | ​ |  | 375 | ​
Amortization of low income housing partnerships | ​ | ​ | 362 | ​ | ​ | 360 | ​
Provision for loan losses | ​ |  | 1,700 | ​ |  | ​ | ​
Net unrealized loss (gain) on equity investment securities | ​ | ​ | 37 | ​ | ​ | (9) | ​
Net gain on sale of other real estate owned | ​ |  | (478) | ​ |  | (195) | ​
Loans originated for sale | ​ |  | (6,139) | ​ | ​ | (18,462) | ​
Proceeds from sale of loans originated for sale | ​ |  | 5,937 | ​ | ​ | 18,577 | ​
Net gain on sale of loans originated for sale | ​ |  | (43) | ​ | ​ | (275) | ​
Net amortization of investment securities | ​ |  | 1,146 | ​ |  | 875 | ​
Gain on sale of premises and equipment | ​ |  | ​ | ​ |  | (20) | ​
Increase in cash surrender value of life insurance | ​ |  | (731) | ​ |  | (669) | ​
Deferred income tax expense | ​ |  | ​ | ​ |  | 620 | ​
Stock based compensation | ​ |  | 311 | ​ |  | 479 | ​
Net change in: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Accrued interest receivable | ​ |  | (1,555) | ​ |  | (25) | ​
Other assets | ​ |  | (1,911) | ​ |  | 313 | ​
Accrued interest payable | ​ |  | 721 | ​ |  | 136 | ​
Other liabilities | ​ |  | (2,180) | ​ |  | (1,108) | ​
Net cash provided by operating activities | ​ |  | 30,225 | ​ |  | 25,644 | ​
Cash flows from investing activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Proceeds from repayments of investment securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Available-for-sale | ​ |  | 35,314 | ​ |  | 40,111 | ​
Held-to-maturity | ​ |  | 4,188 | ​ |  | 367 | ​
Purchases of investment securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Available-for-sale | ​ |  | (69,392) | ​ |  | (214,856) | ​
Held-to-maturity | ​ | ​ | (25,872) | ​ |  | (25,996) | ​
Net (purchase) redemption of restricted equity securities | ​ |  | (457) | ​ |  | 1,481 | ​
Net increase in loans | ​ |  | (296,108) | ​ |  | (24,238) | ​
Purchases of premises and equipment | ​ |  | (5,386) | ​ |  | (3,668) | ​
Proceeds from the sale of premises and equipment | ​ |  | ​ | ​ | ​ | 101 | ​
Investment in bank owned life insurance | ​ | ​ | (5,881) | ​ | ​ | ​ | ​
Proceeds from bank owned life insurance | ​ | ​ | 1,132 | ​ | ​ | 251 | ​
Proceeds from sale of other real estate owned | ​ |  | 967 | ​ |  | 995 | ​
Net cash used in investing activities | ​ |  | (361,495) | ​ |  | (225,452) | ​
Cash flows from financing activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net increase in deposits | ​ |  | 160,743 | ​ |  | 403,806 | ​
Repayment of long-term debt | ​ |  | (1,607) | ​ |  | (11,534) | ​
Net increase (decrease) in short-term borrowings | ​ |  | 14,700 | ​ |  | (50,000) | ​
Retirement of common stock | ​ |  | (1,026) | ​ | ​ | (2,002) | ​
Cash dividends paid | ​ |  | (8,463) | ​ |  | (8,067) | ​
Net cash provided by financing activities | ​ |  | 164,347 | ​ |  | 332,203 | ​
Net (decrease) increase in cash and cash equivalents | ​ |  | (166,923) | ​ |  | 132,395 | ​
Cash and cash equivalents at beginning of period | ​ |  | 279,933 | ​ |  | 228,192 | ​
Cash and cash equivalents at end of period | ​ | $ | 113,010 | ​ | $ | 360,587 | ​

​

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Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
For the Nine Months Ended September 30, |  | 2022 |  | 2021 |
Supplemental disclosures: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash paid during the period for: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest | ​ | $ | 7,636 | ​ | $ | 7,228 | ​
Income taxes | ​ |  | 7,395 | ​ |  | 5,600 | ​
Noncash items: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Transfers of loans to other real estate | ​ | ​ | ​ | ​ | $ | 545 | ​
Initial recognition of right-of-use assets | ​ | ​ | ​ | ​ | ​ | 2,253 | ​
Initial recognition of lease liability | ​ | ​ | ​ | ​ | ​ | 2,253 | ​

​

See notes to unaudited consolidated financial statements

​

​

​

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Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

1. Summary of significan t accounting policies:

​

Nature of operations:

​

Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company (“the Bank”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within Allegheny, Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna and Wyoming Counties of Pennsylvania, Middlesex County of New Jersey and Broome County of New York.

​

Basis of presentation:

​

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

​

Fourth Quarter Dividend Decl aration

​

On October 28, 2022, the Board of Directors declared a fourth quarter dividend of $0.40 per share. The dividend is payable on December 15, 2022 to shareholders of record as of November 30, 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 CONSOLIDATE D 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 write-offs by year of origination for financing receivables. The Company is required to adopt this guidance effective January 1, 2023. The Company is currently evaluating the impact adoption of this ASU will have on its financial results and will add the required disclosures for gross charge offs 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 CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

​

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

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | September 30, 2022 |  | ​ | December 31, 2021 |
Net unrealized loss on investment securities available-for-sale | ​ | $ | (74,582) | ​ | $ | (1,791) | ​
Income tax benefit | ​ |  | (15,662) | ​ |  | (376) | ​
Net of income taxes | ​ |  | (58,920) | ​ |  | (1,415) | ​
Benefit plan adjustments | ​ |  | (5,868) | ​ |  | (5,868) | ​
Income tax benefit | ​ |  | (1,232) | ​ |  | (1,232) | ​
Net of income taxes | ​ |  | (4,636) | ​ |  | (4,636) | ​
Derivative adjustments | ​ |  | (60) | ​ |  | 680 | ​
Income tax (benefit) expense | ​ |  | (13) | ​ |  | 143 | ​
Net of income taxes | ​ |  | (47) | ​ |  | 537 | ​
Accumulated other comprehensive loss | ​ | $ | (63,603) | ​ | $ | (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 nine months ended September 30, 2022 and 2021:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2022 | ​ | 2021 | ​
For the Three Months Ended September 30, |  | Basic |  | Diluted |  | Basic |  | Diluted |
Net income |  | $ | 9,968 |  | $ | 9,968 |  | $ | 9,096 |  | $ | 9,096 |
Average common shares outstanding | ​ |  | 7,169,809 | ​ |  | 7,213,147 | ​ |  | 7,198,125 | ​ |  | 7,233,189 | ​
Earnings per share | ​ | $ | 1.39 | ​ | $ | 1.38 | ​ | $ | 1.26 | ​ | $ | 1.26 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2022 | ​ | 2021 | ​
For the Nine Months Ended September 30, | ​ | Basic | ​ | Diluted | ​ | Basic | ​ | Diluted | ​
Net income |  | $ | 28,951 |  | $ | 28,951 |  | $ | 27,105 | ​ | $ | 27,105 |
Average common shares outstanding | ​ |  | 7,171,382 | ​ |  | 7,214,966 | ​ |  | 7,204,399 | ​ |  | 7,239,463 | ​
Earnings per share | ​ | $ | 4.04 | ​ | $ | 4.01 | ​ | $ | 3.76 | ​ | $ | 3.74 | ​

​

​

10

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 September 30, 2022 and December 31, 2021 are summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Gross | ​ | Gross | ​ | ​ | ​ | ​
​ | ​ | Amortized | ​ | Unrealized | ​ | Unrealized | ​ | Fair |
September 30, 2022 |  | Cost |  | Gains |  | Losses |  | Value |
Available-for-sale: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. Treasury securities | ​ | $ | 247,812 | ​ | $ | ​ | ​ | $ | 23,476 | ​ | $ | 224,336 | ​
U.S. government-sponsored enterprises | ​ | ​ | 16,976 | ​ | ​ | ​ | ​ | ​ | 625 | ​ | ​ | 16,351 | ​
State and municipals: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 69,913 | ​ | ​ | 1 | ​ | ​ | 13,680 | ​ |  | 56,234 | ​
Tax-exempt | ​ |  | 100,078 | ​ |  | 1 | ​ | ​ | 15,493 | ​ |  | 84,586 | ​
Residential mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ |  | 1,130 | ​ |  | ​ | ​ | ​ | 39 | ​ |  | 1,091 | ​
U.S. government-sponsored enterprises | ​ |  | 100,020 | ​ |  | ​ | ​ |  | 20,312 | ​ |  | 79,708 | ​
Commercial mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government-sponsored enterprises | ​ |  | 12,243 | ​ |  | ​ | ​ |  | 564 | ​ |  | 11,679 | ​
Corporate debt securities | ​ | ​ | 4,000 | ​ | ​ | ​ | ​ | ​ | 395 | ​ | ​ | 3,605 | ​
Total | ​ | $ | 552,172 | ​ | $ | 2 | ​ | $ | 74,584 | ​ | $ | 477,590 | ​
Held-to-maturity: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Tax-exempt state and municipals | ​ | $ | 11,247 | ​ | $ | ​ | ​ | $ | 1,286 | ​ | $ | 9,961 | ​
Residential mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ |  | 17,732 | ​ |  | ​ | ​ | ​ | 2,679 | ​ |  | 15,053 | ​
U.S. government-sponsored enterprises | ​ |  | 63,792 | ​ |  | ​ | ​ | ​ | 10,294 | ​ |  | 53,498 | ​
Total | ​ | $ | 92,771 | ​ | $ | ​ | ​ | $ | 14,259 | ​ | $ | 78,512 | ​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ |  | Gross |  | Gross |  | ​ | ​ |
​ | ​ | Amortized | ​ | Unrealized | ​ | Unrealized | ​ | Fair |
December 31, 2021 |  | Cost |  | Gains |  | Losses |  | Value |
Available-for-sale: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. Treasury securities | ​ | $ | 193,849 | ​ | $ | 107 | ​ | $ | 2,382 | ​ | $ | 191,574 | ​
U.S. government-sponsored enterprises | ​ | ​ | 33,435 | ​ | ​ | 343 | ​ | ​ | ​ | ​ |  | 33,778 | ​
State and municipals: | ​ |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 69,066 | ​ |  | 994 | ​ | ​ | 1,082 | ​ |  | 68,978 | ​
Tax-exempt | ​ |  | 96,412 | ​ |  | 2,452 | ​ |  | 614 | ​ |  | 98,250 | ​
Residential mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ |  | 1,790 | ​ |  | 53 | ​ |  | ​ | ​ |  | 1,843 | ​
U.S. government-sponsored enterprises | ​ |  | 109,018 | ​ |  | 939 | ​ |  | 2,925 | ​ |  | 107,032 | ​
Commercial mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government-sponsored enterprises | ​ | ​ | 12,542 | ​ | ​ | 406 | ​ | ​ | ​ | ​ | ​ | 12,948 | ​
Corporate debt securities | ​ | ​ | 3,000 | ​ | ​ | ​ | ​ | ​ | 82 | ​ | ​ | 2,918 | ​
Total | ​ | $ | 519,112 | ​ | $ | 5,294 | ​ | $ | 7,085 | ​ | $ | 517,321 | ​
Held-to-maturity: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Tax-exempt state and municipals | ​ | $ | 11,476 | ​ | $ | 126 | ​ | $ | 56 | ​ | $ | 11,546 | ​
Residential mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ | ​ | 18,802 | ​ |  | ​ | ​ | ​ | 392 | ​ |  | 18,410 | ​
U.S. government-sponsored enterprises | ​ |  | 40,935 | ​ |  | 3 | ​ | ​ | 448 | ​ |  | 40,490 | ​
Total | ​ | $ | 71,213 | ​ | $ | 129 | ​ | $ | 896 | ​ | $ | 70,446 | ​

​

11

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 $4.5 million and $4.0 million at September 30, 2022 and December 31, 2021, respectively, and Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 thousand at September 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 September 30, 2022, there was no OTTI associated with these investments.

​

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

​

​ | ​ | ​ | ​ | ​
​ | ​ | Fair |
September 30, 2022 |  | Value |
Within one year | ​ | $ | 18,608 | ​
After one but within five years | ​ |  | 204,991 | ​
After five but within ten years | ​ |  | 74,710 | ​
After ten years | ​ |  | 84,516 | ​
​ | ​ |  | 382,825 | ​
Mortgage-backed and other amortizing securities | ​ |  | 94,765 | ​
Total | ​ | $ | 477,590 | ​

​

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

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Amortized | ​ | Fair |
September 30, 2022 |  | Cost |  | Value |
After five but within ten years | ​ | $ | 8,294 | ​ | $ | 7,410 | ​
After ten years | ​ | ​ | 2,953 | ​ | ​ | 2,551 | ​
​ | ​ |  | 11,247 | ​ |  | 9,961 | ​
Mortgage-backed securities | ​ |  | 81,524 | ​ |  | 68,551 | ​
Total | ​ | $ | 92,771 | ​ | $ | 78,512 | ​

​

Securities with a carrying value of $165.1 million and $203.6 million at September 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 September 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, which exceeded 10.0 percent of stockholders’ equity.

​

12

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 September 30, 2022 and December 31, 2021, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
​ | ​ | ​ | ​ | Less Than 12 Months | ​ | ​ | ​ | 12 Months or Greater | ​ | ​ | ​ | Total | ​
​ | ​ | Number of | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Number of | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Number of | ​ | ​ | ​ | ​ | ​ | ​ |
​ | ​ | Securities in a | ​ | Fair | ​ | Unrealized | ​ | Securities in a | ​ | Fair | ​ | Unrealized | ​ | Securities in a | ​ | Fair | ​ | Unrealized | ​
September 30, 2022 |  | Loss Position |  | Value |  | Losses |  | Loss Position |  | Value |  | Losses |  | Loss Position |  | Value |  | Losses |
U.S. Treasury securities | ​ | 16 | ​ | $ | 83,156 | ​ | $ | 5,372 | ​ | 37 | ​ | $ | 141,180 | ​ | $ | 18,104 | ​ | 53 | ​ | $ | 224,336 | ​ | $ | 23,476 | ​
U.S. government-sponsored enterprises | ​ | 5 | ​ | ​ | 16,351 | ​ | ​ | 625 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 5 | ​ | ​ | 16,351 | ​ | ​ | 625 | ​
State and municipals: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | 32 | ​ | ​ | 27,779 | ​ | ​ | 4,951 | ​ | 34 | ​ | ​ | 26,547 | ​ | ​ | 8,729 | ​ | 66 | ​ | ​ | 54,326 | ​ | ​ | 13,680 | ​
Tax-exempt | ​ | 74 | ​ | ​ | 57,580 | ​ | ​ | 7,835 | ​ | 58 | ​ | ​ | 35,886 | ​ | ​ | 8,944 | ​ | 132 | ​ | ​ | 93,466 | ​ | ​ | 16,779 | ​
Residential mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ | 6 | ​ | ​ | 1,098 | ​ | ​ | 39 | ​ | 3 | ​ | ​ | 15,046 | ​ | ​ | 2,679 | ​ | 9 | ​ | ​ | 16,144 | ​ | ​ | 2,718 | ​
U.S. government-sponsored enterprises | ​ | 26 | ​ | ​ | 54,953 | ​ | ​ | 9,141 | ​ | 16 | ​ | ​ | 78,254 | ​ | ​ | 21,465 | ​ | 42 | ​ | ​ | 133,207 | ​ |  | 30,606 | ​
Commercial mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government-sponsored enterprises | ​ | 4 | ​ |  | 11,679 | ​ |  | 564 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 4 | ​ |  | 11,679 | ​ |  | 564 | ​
Corporate debt securities | ​ | 1 | ​ | ​ | 947 | ​ | ​ | 53 | ​ | 5 | ​ | ​ | 2,658 | ​ | ​ | 342 | ​ | 6 | ​ | ​ | 3,605 | ​ | ​ | 395 | ​
Total | ​ | 164 | ​ | $ | 253,543 | ​ | $ | 28,580 | ​ | 153 | ​ | $ | 299,571 | ​ | $ | 60,263 | ​ | 317 | ​ | $ | 553,114 | ​ | $ | 88,843 | ​

​

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

​

The unrealized losses on securities are primarily due to the changes in market interest rates subsequent to purchase. The Company did not consider these securities to have OTTI at September 30, 2022 or December 31, 2021 since the decline in market value was attributable to changes in interest rates and not to changes in credit quality. In addition, the Company does not intend to sell and does not believe that it is more likely than not that it will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result, no impairment loss was recognized during the nine months ended September 30, 2022 or for the year ended December 31, 2021.

​

5. Loans, net and allowance for loan losses:

​

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2022 and December 31, 2021 are summarized as follows. The Company had net deferred loan origination fees of $0.3 million and $1.6 million at September 30, 2022 and December 31, 2021, respectively. The decrease to the fees since year-end is due in part to the forgiveness by the Small Business Administration (“SBA”) of Paycheck Protection Program (“PPP”) loans.

13

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
At the period end |  | ​ | September 30, 2022 |  | December 31, 2021 |
Commercial | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | $ | 371,164 | ​ | $ | 424,455 | ​
Non-taxable | ​ | ​ | 224,764 | ​ | ​ | 188,672 | ​
Total | ​ | ​ | 595,928 | ​ | ​ | 613,127 | ​
Real estate | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ | ​ | 1,620,116 | ​ |  | 1,343,539 | ​
Residential | ​ | ​ | 326,223 | ​ |  | 297,624 | ​
Total | ​ | ​ | 1,946,339 | ​ | ​ | 1,641,163 | ​
Consumer | ​ | ​ | ​ | ​ | ​ | ​ | ​
Indirect Auto | ​ | ​ | 70,006 | ​ | ​ | 65,791 | ​
Consumer Other | ​ | ​ | 11,433 | ​ |  | 9,092 | ​
Total | ​ | ​ | 81,439 | ​ | ​ | 74,883 | ​
Total | ​ | $ | 2,623,706 | ​ | $ | 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 and generated $4.4 million in related deferred PPP net fees.

​

Net deferred loan origination fees remaining related to PPP loans is $0.3 million at September 30, 2022, compared to $1.7 million at December 31, 2021. The PPP loans are included in the taxable commercial loan classification and had an outstanding balance at September 30, 2022 of $22.7 million comprised of $11.2 million remaining from those originated during 2021 as part of round two and $11.5 million remaining from loans originated during 2020 under round one of the program. At December 31, 2021, PPP loans had outstanding balances totaling $68.9 million. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. At September 30, 2022 and December 31, 2021, the outstanding PPP balances were considered current.

​

14

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 nine months ended September 30, 2022 and 2021 are summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ |  | ​ | ​ | Real estate | ​ | ​ | ​ | ​ | ​ | ​ | ​
September 30, 2022 |  | Commercial |  | Commercial |  | Residential | ​ | Consumer | ​ | Total |
Allowance for loan losses: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Beginning Balance July 1, 2022 | ​ | $ | 7,766 | ​ | $ | 17,569 | ​ | $ | 3,220 | ​ | $ | 819 | ​ | $ | 29,374 | ​
Charge-offs | ​ |  | ​ | ​ |  | (15) | ​ |  | ​ | ​ |  | (86) | ​ |  | (101) | ​
Recoveries | ​ |  | 10 | ​ |  | 32 | ​ |  | 1 | ​ |  | 56 | ​ |  | 99 | ​
Provisions (credits) | ​ |  | (5) | ​ |  | 437 | ​ |  | 9 | ​ |  | 9 | ​ |  | 450 | ​
Ending balance | ​ | $ | 7,771 | ​ | $ | 18,023 | ​ | $ | 3,230 | ​ | $ | 798 | ​ | $ | 29,822 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Real estate | ​ | ​ | ​ | ​ | ​ | ​ | ​
September 30, 2021 |  | Commercial |  | Commercial |  | Residential | ​ | Consumer | ​ | Total |
Allowance for loan losses: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Beginning Balance July 1, 2021 | ​ | $ | 8,520 | ​ | $ | 14,281 | ​ | $ | 3,069 | ​ | $ | 869 | ​ | $ | 26,739 | ​
Charge-offs | ​ |  | (446) | ​ |  | (12) | ​ |  | ​ | ​ |  | (8) | ​ |  | (466) | ​
Recoveries | ​ |  | 4 | ​ |  | 1 | ​ |  | ​ | ​ |  | 15 | ​ |  | 20 | ​
Provisions (credits) | ​ |  | (164) | ​ |  | 519 | ​ |  | 92 | ​ |  | (47) | ​ |  | 400 | ​
Ending balance | ​ | $ | 7,914 |  | $ | 14,789 | ​ | $ | 3,161 | ​ | $ | 829 | ​ | $ | 26,693 | ​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ | ​ | Real estate | ​ | ​ | ​ | ​ | ​ | ​ | ​
September 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) | ​ |  | (147) | ​ |  | (2) | ​ |  | (244) | ​ |  | (554) | ​
Recoveries |  |  | 39 | ​ |  | 109 | ​ |  | 4 | ​ |  | 141 | ​ |  | 293 | ​
Provisions (credits) |  |  | (560) | ​ |  | 2,133 | ​ |  | 19 | ​ |  | 108 | ​ |  | 1,700 | ​
Ending balance |  | $ | 7,771 |  | $ | 18,023 | ​ | $ | 3,230 | ​ | $ | 798 | ​ | $ | 29,822 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Real estate | ​ | ​ | ​ | ​ | ​ | ​ | ​
September 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 | ​ |  | (461) | ​ |  | (252) | ​ |  | (24) | ​ |  | (114) | ​ |  | (851) | ​
Recoveries | ​ |  | 83 | ​ |  | 67 | ​ |  | 2 | ​ |  | 48 | ​ |  | 200 | ​
Provisions (credits) | ​ |  | (442) | ​ |  | 415 | ​ |  | 54 | ​ |  | (27) | ​ |  | — | ​
Ending balance | ​ | $ | 7,914 | ​ | $ | 14,789 | ​ | $ | 3,161 | ​ | $ | 829 | ​ | $ | 26,693 | ​

15

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 September 30, 2022 and December 31, 2021 is summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ |  | ​ | Real estate | ​ | ​ | ​ | ​ | ​ | ​ |
September 30, 2022 |  | Commercial |  | Commercial |  | Residential |  | Consumer |  | Total |
Allowance for loan losses: | ​ |  |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Ending balance | ​ | $ | 7,771 | ​ | $ | 18,023 |  | $ | 3,230 | ​ | $ | 798 | ​ | $ | 29,822 |
Ending balance: individually evaluated for impairment |  |  | 19 | ​ | ​ | 1 | ​ | ​ | 21 | ​ | ​ | ​ | ​ |  | 41 |
Ending balance: collectively evaluated for impairment |  | $ | 7,752 | ​ | $ | 18,022 | ​ | $ | 3,209 | ​ | $ | 798 | ​ | $ | 29,781 |
Loans receivable: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Ending balance | ​ | $ | 595,928 | ​ | $ | 1,620,116 |  | $ | 326,223 | ​ | $ | 81,439 | ​ | $ | 2,623,706 |
Ending balance: individually evaluated for impairment | ​ |  | 114 | ​ | ​ | 2,721 | ​ | ​ | 1,161 | ​ | ​ | ​ | ​ |  | 3,996 |
Ending balance: collectively evaluated for impairment | ​ | $ | 595,814 | ​ | $ | 1,617,395 | ​ | $ | 325,062 | ​ | $ | 81,439 | ​ | $ | 2,619,710 |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ |  | ​ | Real estate | ​ | ​ | ​ | ​ | ​ | ​ |
December 31, 2021 |  | Commercial |  | Commercial |  | Residential |  | Consumer |  | Total |
Allowance for loan losses: | ​ |  |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Ending balance | ​ | $ | 8,453 | ​ | $ | 15,928 |  | $ | 3,209 | ​ | $ | 793 | ​ | $ | 28,383 |
Ending balance: individually evaluated for impairment |  |  | 40 | ​ | ​ | 109 | ​ | ​ | 26 | ​ | ​ | ​ | ​ |  | 175 |
Ending balance: collectively evaluated for impairment |  | $ | 8,413 | ​ | $ | 15,819 | ​ | $ | 3,183 | ​ | $ | 793 | ​ | $ | 28,208 |
Loans receivable: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Ending balance | ​ | $ | 613,127 | ​ | $ | 1,343,539 |  | $ | 297,624 | ​ | $ | 74,883 | ​ | $ | 2,329,173 |
Ending balance: individually evaluated for impairment | ​ |  | 199 | ​ | ​ | 2,889 | ​ | ​ | 1,274 | ​ | ​ | ​ | ​ |  | 4,362 |
Ending balance: collectively evaluated for impairment | ​ | $ | 612,928 | ​ | $ | 1,340,650 | ​ | $ | 296,350 | ​ | $ | 74,883 | ​ | $ | 2,324,811 |

​

​

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

​

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

​

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

​

16

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 September 30, 2022 and December 31, 2021:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Special | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
September 30, 2022 |  | Pass |  | Mention |  | Substandard |  | Doubtful |  | Total |
Commercial | ​ | $ | 587,033 | ​ | $ | 8,065 | ​ | $ | 830 | ​ | $ | ​ | ​ | $ | 595,928 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 1,606,076 | ​ |  | 7,722 | ​ |  | 6,318 | ​ | ​ | ​ | ​ |  | 1,620,116 | ​
Residential | ​ |  | 324,452 | ​ |  | 114 | ​ |  | 1,657 | ​ | ​ | ​ | ​ |  | 326,223 | ​
Consumer | ​ |  | 81,170 | ​ |  | ​ | ​ |  | 269 | ​ | ​ | ​ | ​ |  | 81,439 | ​
Total | ​ | $ | 2,598,731 | ​ | $ | 15,901 | ​ | $ | 9,074 | ​ | $ | ​ | ​ | $ | 2,623,706 | ​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Special | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
December 31, 2021 |  | Pass |  | Mention |  | Substandard |  | Doubtful |  | Total |
Commercial | ​ | $ | 611,151 | ​ | $ | 896 | ​ | $ | 1,080 | ​ | $ | ​ | ​ | $ | 613,127 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 1,324,646 | ​ |  | 13,939 | ​ |  | 4,954 | ​ | ​ | ​ | ​ |  | 1,343,539 | ​
Residential | ​ |  | 294,892 | ​ |  | 333 | ​ |  | 2,399 | ​ | ​ | ​ | ​ |  | 297,624 | ​
Consumer | ​ |  | 74,744 | ​ |  | ​ | ​ |  | 139 | ​ | ​ | ​ | ​ |  | 74,883 | ​
Total | ​ | $ | 2,305,433 | ​ | $ | 15,168 | ​ | $ | 8,572 | ​ | $ | ​ | ​ | $ | 2,329,173 | ​

​

The increase to special mention commercial loans is primarily the result of the downgrade of one credit with an outstanding balance of $7.8 million, 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 credit resulting from improved financial performance and satisfactory repayment history and the payoff of a $2.4 million credit. The increase to substandard commercial real estate loans is primarily due to the downgrade of three credits totaling $1.7 million as a result of repayment uncertainty. These downgrades were offset by the payoff/reduction of various credits. Substandard residential real estate loans decreased $0.7 million primarily due to the payoff of a $0.5 million credit.

​

17

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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 September 30, 2022 and December 31, 2021 is summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | September 30, 2022 |  | ​ | December 31, 2021 |
Commercial | ​ | $ | 102 | ​ | $ | 185 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 1,787 | ​ |  | 1,793 | ​
Residential | ​ |  | 423 | ​ |  | 694 | ​
Consumer | ​ |  | 245 | ​ |  | 139 | ​
Total | ​ | $ | 2,557 | ​ | $ | 2,811 | ​

​

Nonaccrual loans decreased $254 thousand from year end December 31, 2021 due to decreases in commercial, commercial real estate and residential loans, partially offset by increases in consumer loans.

​

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 |
September 30, 2022 | ​ | Past Due | ​ | Past Due | ​ | Days | ​ | Due | ​ | Current | ​ | Total Loans | ​ | Accruing |
Commercial | ​ | $ | 35 | ​ | $ | ​ | ​ | $ | 102 | ​ | $ | 137 | ​ | $ | 595,791 | ​ | $ | 595,928 | ​ | $ | ​ | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 146 | ​ | ​ | 605 | ​ |  | 330 | ​ |  | 1,081 | ​ |  | 1,619,035 | ​ |  | 1,620,116 | ​ | ​ | ​ | ​
Residential | ​ |  | 341 | ​ | ​ | 640 | ​ | ​ | 565 | ​ |  | 1,546 | ​ |  | 324,677 | ​ |  | 326,223 | ​ | ​ | 280 | ​
Consumer | ​ |  | 405 | ​ | ​ | 234 | ​ |  | 98 | ​ |  | 737 | ​ |  | 80,702 | ​ |  | 81,439 | ​ |  | ​ | ​
Total | ​ | $ | 927 | ​ | $ | 1,479 | ​ | $ | 1,095 | ​ | $ | 3,501 | ​ | $ | 2,620,205 | ​ | $ | 2,623,706 | ​ | $ | 280 | ​

​

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 | ​

​

18

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2022 and September 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 |
September 30, 2022 |  | Investment |  | Balance |  | Allowance |  | Investment |  | Recognized |  | Investment |  | Recognized |
With no related allowance: |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ | ​ | ​ | ​ |  | ​ | ​ | ​
Commercial | ​ | $ | 94 | ​ | $ | 425 | ​ | ​ | ​ | ​ | $ | 110 | ​ | $ | 3 | ​ | $ | 129 | ​ | $ | 7 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 2,389 | ​ |  | 3,193 | ​ | ​ | ​ | ​ |  | 2,431 | ​ |  | 9 | ​ |  | 2,497 | ​ |  | 31 | ​
Residential | ​ |  | 918 | ​ |  | 1,102 | ​ | ​ | ​ | ​ |  | 957 | ​ |  | 6 | ​ |  | 915 | ​ |  | 16 | ​
Consumer | ​ |  | 245 | ​ |  | 256 | ​ | ​ | ​ | ​ |  | 258 | ​ | ​ | ​ | ​ |  | 215 | ​ | ​ | ​ | ​
Total | ​ |  | 3,646 | ​ |  | 4,976 | ​ | ​ | ​ | ​ |  | 3,756 | ​ |  | 18 | ​ |  | 3,756 | ​ |  | 54 | ​
With an allowance recorded: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 20 | ​ |  | 20 | ​ | $ | 19 | ​ |  | 27 | ​ |  | — | ​ |  | 29 | ​ |  | — | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 332 | ​ |  | 332 | ​ |  | 1 | ​ |  | 381 | ​ |  | 7 | ​ |  | 429 | ​ |  | 15 | ​
Residential | ​ |  | 243 | ​ |  | 247 | ​ |  | 21 | ​ |  | 257 | ​ |  | 3 | ​ |  | 297 | ​ |  | 9 | ​
Total | ​ |  | 595 | ​ |  | 599 | ​ |  | 41 | ​ |  | 665 | ​ |  | 10 | ​ |  | 755 | ​ |  | 24 | ​
Total impaired loans | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 114 | ​ |  | 445 | ​ |  | 19 | ​ |  | 137 | ​ |  | 3 | ​ |  | 158 | ​ |  | 7 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 2,721 | ​ |  | 3,525 | ​ |  | 1 | ​ |  | 2,812 | ​ |  | 16 | ​ |  | 2,926 | ​ |  | 46 | ​
Residential | ​ |  | 1,161 | ​ |  | 1,349 | ​ |  | 21 | ​ |  | 1,214 | ​ |  | 9 | ​ |  | 1,212 | ​ |  | 25 | ​
Consumer | ​ |  | 245 | ​ |  | 256 | ​ |  | ​ | ​ |  | 258 | ​ |  | ​ | ​ |  | 215 | ​ |  | ​ | ​
Total | ​ | $ | 4,241 | ​ | $ | 5,575 | ​ | $ | 41 | ​ | $ | 4,421 | ​ | $ | 28 | ​ | $ | 4,511 | ​ | $ | 78 | ​

​

​

19

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 |
September 30, 2021 |  | Investment |  | Balance |  | Allowance |  | Investment |  | Recognized |  | Investment |  | Recognized |
With no related allowance: |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ | ​ | ​ | ​ |  | ​ | ​ | ​
Commercial | ​ | $ | 634 | ​ | $ | 1,097 | ​ | ​ | ​ | ​ | $ | 870 | ​ | $ | 2 | ​ | $ | 1,166 | ​ | $ | 9 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 2,560 | ​ |  | 3,275 | ​ | ​ | ​ | ​ |  | 2,785 | ​ | ​ | 4 | ​ |  | 2,805 | ​ | ​ | 19 | ​
Residential | ​ |  | 991 | ​ |  | 1,184 | ​ | ​ | ​ | ​ |  | 999 | ​ | ​ | 5 | ​ |  | 1,051 | ​ | ​ | 15 | ​
Consumer | ​ |  | 82 | ​ |  | 96 | ​ | ​ | ​ | ​ |  | 79 | ​ | ​ | ​ | ​ |  | 91 | ​ | ​ | ​ | ​
Total | ​ |  | 4,267 | ​ |  | 5,652 | ​ | ​ | ​ | ​ |  | 4,733 | ​ | ​ | 11 | ​ |  | 5,113 | ​ | ​ | 43 | ​
With an allowance recorded: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 424 | ​ |  | 424 | ​ | $ | 18 | ​ |  | 695 | ​ | ​ | 5 | ​ |  | 1,354 | ​ | ​ | 15 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 534 | ​ |  | 564 | ​ |  | 107 | ​ |  | 604 | ​ |  | 4 | ​ |  | 875 | ​ |  | 14 | ​
Residential | ​ |  | 440 | ​ |  | 446 | ​ |  | 41 | ​ |  | 450 | ​ |  | 3 | ​ |  | 445 | ​ |  | 10 | ​
Consumer | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total | ​ |  | 1,398 | ​ |  | 1,434 | ​ |  | 166 | ​ |  | 1,749 | ​ |  | 12 | ​ |  | 2,674 | ​ |  | 39 | ​
Total impaired loans | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 1,058 | ​ |  | 1,521 | ​ |  | 18 | ​ |  | 1,565 | ​ |  | 7 | ​ |  | 2,520 | ​ |  | 24 | ​
Real estate: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial | ​ |  | 3,094 | ​ |  | 3,839 | ​ |  | 107 | ​ |  | 3,389 | ​ |  | 8 | ​ |  | 3,680 | ​ |  | 33 | ​
Residential | ​ |  | 1,431 | ​ |  | 1,630 | ​ |  | 41 | ​ |  | 1,449 | ​ |  | 8 | ​ |  | 1,496 | ​ |  | 25 | ​
Consumer | ​ |  | 82 | ​ |  | 96 | ​ | ​ | ​ | ​ |  | 79 | ​ | ​ | ​ | ​ |  | 91 | ​ | ​ | ​ | ​
Total | ​ | $ | 5,665 | ​ | $ | 7,086 | ​ | $ | 166 | ​ | $ | 6,482 | ​ | $ | 23 | ​ | $ | 7,787 | ​ | $ | 82 | ​

​

20

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 $1.4 million at September 30, 2022, $1.6 million at December 31, 2021 and $2.6 million at September 30, 2021.

​

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

​

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

​

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

​

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

​

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

​

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

​

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

​

​

6. Other assets:

​

The increase in other assets was due to the increase to the net deferred tax asset related to the higher unrealized loss of the available-for-sale securities portfolio and an increase in the fair value of our commercial customers interest rate swaps due to higher market rates. The components of other assets at September 30, 2022 and December 31, 2021 are summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | September 30, 2022 |  | ​ | December 31, 2021 |
Other real estate owned | ​ | $ | 121 | ​ | $ | 609 | ​
Investment in low income housing partnership | ​ |  | 5,539 | ​ |  | 5,900 | ​
Mortgage servicing rights | ​ |  | 931 | ​ |  | 882 | ​
Restricted equity securities (FHLB and other) | ​ |  | 4,502 | ​ |  | 4,045 | ​
Net deferred tax asset | ​ | ​ | 20,793 | ​ | ​ | 5,355 | ​
Interest rate floor | ​ | ​ | 4 | ​ | ​ | 844 | ​
Interest rate swaps | ​ | ​ | 22,807 | ​ | ​ | 9,026 | ​
Other assets | ​ |  | 7,838 | ​ |  | 6,395 | ​
Total | ​ | $ | 62,535 | ​ | $ | 33,056 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​

​

​

7. Fair value estimates:

​

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

​

21

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 September 30, 2022 and December 31, 2021 there were no transfers in or out of Level 3.

​

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

​

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

​

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

​

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

​

​

22

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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 September 30, 2022 and December 31, 2021 are summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Fair Value Measurement Using |
​ | ​ | ​ | ​ | Quoted Prices in | ​ | Significant | ​ | Significant |
​ | ​ | ​ | ​ | Active Markets for | ​ | Other Observable | ​ | Unobservable |
​ | ​ | ​ | ​ | Identical Assets | ​ | Inputs | ​ | Inputs |
September 30, 2022 |  | Amount |  | (Level 1) |  | (Level 2) |  | (Level 3) |
U.S. Treasury securities |  | $ | 224,336 |  | $ | 224,336 |  | $ | ​ |  | $ | ​ | ​
U.S. government-sponsored enterprises | ​ | ​ | 16,351 | ​ | ​ | ​ | ​ | ​ | 16,351 | ​ | ​ | ​ | ​
State and municipals: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 56,234 | ​ | ​ | ​ | ​ |  | 56,234 | ​ | ​ | ​ | ​
Tax-exempt | ​ |  | 84,586 | ​ | ​ | ​ | ​ |  | 84,586 | ​ | ​ | ​ | ​
Mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ |  | 1,091 | ​ | ​ | ​ | ​ |  | 1,091 | ​ | ​ | ​ | ​
U.S. government-sponsored enterprises | ​ |  | 91,387 | ​ | ​ | ​ | ​ |  | 91,387 | ​ | ​ | ​ | ​
Corporate debt securities | ​ | ​ | 3,605 | ​ | ​ | ​ | ​ | ​ | 3,605 | ​ | ​ | ​ | ​
Common equity securities | ​ | ​ | 103 | ​ | ​ | 103 | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total investment securities | ​ | $ | 477,693 | ​ | $ | 224,439 | ​ | $ | 253,254 | ​ | $ | ​ | ​
Loan held for sale | ​ | $ | 653 | ​ | ​ | ​ | ​ | $ | 653 | ​ | ​ | ​ | ​
Interest rate floor-other assets | ​ | $ | 4 | ​ | ​ | ​ | ​ | $ | 4 | ​ | ​ | ​ | ​
Interest rate swap-other assets | ​ | $ | 22,953 | ​ | ​ | ​ | ​ | $ | 22,953 | ​ | ​ | ​ | ​
Interest rate swap-other liabilities | ​ | $ | (22,089) | ​ | ​ | ​ | ​ | $ | (22,089) | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Fair Value Measurement Using |
​ | ​ | ​ | ​ | ​ | Quoted Prices in | ​ | Significant | ​ | Significant |
​ | ​ | ​ | ​ | Active Markets for | ​ | Other Observable | ​ | Unobservable |
​ | ​ | ​ | ​ | Identical Assets | ​ | Inputs | ​ | Inputs |
December 31, 2021 |  | Amount |  | (Level 1) |  | (Level 2) |  | (Level 3) |
U.S. Treasury securities |  | $ | 191,574 |  | $ | 191,574 |  | ​ | ​ |  | $ | ​ | ​
U.S. government-sponsored enterprises | ​ | ​ | 33,778 | ​ | ​ | ​ | ​ | $ | 33,778 | ​ | ​ | ​ | ​
State and municipals: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 68,978 | ​ | ​ | ​ | ​ |  | 68,978 | ​ | ​ | ​ | ​
Tax-exempt | ​ |  | 98,250 | ​ | ​ | ​ | ​ |  | 98,250 | ​ | ​ | ​ | ​
Mortgage-backed securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. government agencies | ​ |  | 1,843 | ​ | ​ | ​ | ​ |  | 1,843 | ​ | ​ | ​ | ​
U.S. government-sponsored enterprises | ​ |  | 119,980 | ​ | ​ | ​ | ​ |  | 119,980 | ​ | ​ | ​ | ​
Corporate debt securities | ​ | ​ | 2,918 | ​ | ​ | ​ | ​ | ​ | 2,918 | ​ | ​ | ​ | ​
Common equity securities | ​ |  | 140 | ​ | ​ | 140 | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total investment securities | ​ | $ | 517,461 | ​ | $ | 191,714 | ​ | $ | 325,747 | ​ | $ | ​ | ​
Loan held for sale | ​ | $ | 408 | ​ | ​ | ​ | ​ | $ | 408 | ​ | ​ | ​ | ​
Interest rate floor-other assets | ​ | $ | 844 | ​ | ​ | ​ | ​ | $ | 844 | ​ | ​ | ​ | ​
Interest rate swap-other assets | ​ | $ | 9,026 | ​ | ​ | ​ | ​ | $ | 9,026 | ​ | ​ | ​ | ​
Interest rate swap-other liabilities | ​ | $ | (8,811) | ​ | ​ | ​ | ​ | $ | (8,811) | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

23

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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 nonrecurring basis at September 30, 2022 and December 31, 2021 are summarized as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Fair Value Measurement Using |
​ | ​ | ​ | ​ | ​ | Quoted Prices in | ​ | Significant | ​ | Significant |
​ | ​ | ​ | ​ | Active Markets for | ​ | Other Observable | ​ | Unobservable |
​ | ​ | ​ | ​ | Identical Assets | ​ | Inputs | ​ | Inputs |
September 30, 2022 |  | Amount |  | (Level 1) |  | (Level 2) |  | (Level 3) |
Impaired loans |  | $ | 553 |  | ​ | ​ |  | ​ | ​ |  | $ | 553 | ​

​

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 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 |
September 30, 2022 |  | Estimate |  | Valuation Techniques |  | Unobservable Input |  | (Weighted Average) |
Impaired loans |  | $ | 553 |  | Appraisal of collateral |  | Appraisal adjustments |  | 21.6% to 97.0% (70.6)% | ​
​ | ​ | ​ | ​ | ​ | ​ |  | Liquidation expenses |  | 3.0% to 6.0% (5.2)% | ​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Quantitative Information about Level 3 Fair Value Measurements |
​ | ​ | Fair Value | ​ | ​ | ​ | ​ | ​ | Range |
December 31, 2021 |  | Estimate |  | Valuation Techniques |  | Unobservable Input |  | (Weighted Average) |
Impaired loans |  | $ | 780 |  | Appraisal of collateral |  | Appraisal adjustments |  | 6.4% to 97.0% (65.2)% | ​
​ | ​ | ​ | ​ | ​ | ​ |  | Liquidation expenses |  | 3.0% to 6.0% (5.1)% | ​
Other real estate owned | ​ | $ | 487 |  | Appraisal of collateral |  | Appraisal adjustments |  | 35.9% to 35.9% (35.9)% | ​
​ | ​ | ​ | ​ | ​ | ​ |  | Liquidation expenses |  | 3.0% to 6.0% (5.0)% | ​

​

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

​

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

24

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

The carrying and fair values of the Company’s financial instruments at September 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 |
September 30, 2022 |  | Value |  | Value |  | (level 1) |  | (level 2) |  | (Level 3) |
Financial assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and due from banks | ​ | $ | 113,010 | ​ | $ | 113,010 | ​ | $ | 113,010 | ​ | ​ | ​ | ​ | ​ | ​ | ​
Investment securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Available-for-sale | ​ |  | 477,590 | ​ |  | 477,590 | ​ | ​ | 224,336 | ​ | $ | 253,254 | ​ | ​ | ​ | ​
Common equity securities | ​ | ​ | 103 | ​ | ​ | 103 | ​ | ​ | 103 | ​ | ​ | ​ | ​ | ​ | ​ | ​
Held-to-maturity | ​ |  | 92,771 | ​ |  | 78,512 | ​ | ​ | ​ | ​ |  | 78,512 | ​ | ​ | ​ | ​
Loans held for sale | ​ |  | 653 | ​ |  | 653 | ​ | ​ | ​ | ​ |  | 653 | ​ | ​ | ​ | ​
Net loans | ​ |  | 2,593,884 | ​ |  | 2,508,050 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | $ | 2,508,050 | ​
Accrued interest receivable | ​ |  | 10,082 | ​ |  | 10,082 | ​ | ​ | ​ | ​ |  | 10,082 | ​ | ​ | ​ | ​
Mortgage servicing rights | ​ |  | 931 | ​ |  | 1,433 | ​ | ​ | ​ | ​ |  | 1,433 | ​ | ​ | ​ | ​
Restricted equity securities (FHLB and other) | ​ | ​ | 4,502 | ​ |  | 4,502 | ​ | ​ | ​ | ​ |  | 4,502 | ​ | ​ | ​ | ​
Interest rate floor | ​ | ​ | 4 | ​ | ​ | 4 | ​ | ​ | ​ | ​ | ​ | 4 | ​ | ​ | ​ | ​
Interest rate swaps | ​ |  | 22,953 | ​ |  | 22,953 | ​ | ​ | ​ | ​ |  | 22,953 | ​ | ​ | ​ | ​
Total | ​ | $ | 3,316,483 | ​ | $ | 3,216,892 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Deposits | ​ | $ | 3,124,140 | ​ | $ | 3,113,415 | ​ | ​ | ​ | ​ | $ | 3,113,415 | ​ | ​ | ​ | ​
Short-term borrowings | ​ | ​ | 14,700 | ​ | ​ | 14,700 | ​ | ​ | ​ | ​ | ​ | 14,700 | ​ | ​ | ​ | ​
Long-term debt | ​ |  | 1,104 | ​ |  | 1,106 | ​ | ​ | ​ | ​ |  | 1,106 | ​ | ​ | ​ | ​
Subordinated debentures | ​ |  | 33,000 | ​ |  | 33,211 | ​ | ​ | ​ | ​ |  | 33,211 | ​ | ​ | ​ | ​
Accrued interest payable | ​ | ​ | 1,129 | ​ |  | 1,129 | ​ | ​ | ​ | ​ | ​ | 1,129 | ​ | ​ | ​ | ​
Interest rate swaps | ​ |  | 22,089 | ​ |  | 22,089 | ​ | ​ | ​ | ​ | ​ | 22,089 | ​ | ​ | ​ | ​
Total | ​ | $ | 3,196,162 | ​ | $ | 3,185,650 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​

25

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ |  | ​ | ​ |  | Fair Value Hierarchy |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Quoted |  | ​ | ​ |  | ​ | ​ |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Prices in | ​ | ​ | ​ | ​ | ​ | ​ |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Active | ​ | Significant | ​ | ​ | ​ |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Markets for | ​ | Other | ​ | Significant |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Identical | ​ | Observable | ​ | Unobservable |
​ | ​ | Carrying | ​ | Fair | ​ | Assets | ​ | Inputs | ​ | Inputs |
December 31, 2021 |  | Value |  | Value |  | (level 1) |  | (level 2) |  | (Level 3) |
Financial assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and due from banks | ​ | $ | 279,933 | ​ | $ | 279,933 | ​ | $ | 279,933 | ​ | ​ | ​ | ​ | ​ | ​ | ​
Investment securities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Available-for-sale | ​ |  | 517,321 | ​ |  | 517,321 | ​ | ​ | 191,574 | ​ | $ | 325,747 | ​ | ​ | ​ | ​
Common equity securities | ​ | ​ | 140 | ​ | ​ | 140 | ​ | ​ | 140 | ​ | ​ | ​ | ​ | ​ | ​ | ​
Held-to-maturity | ​ |  | 71,213 | ​ |  | 70,446 | ​ | ​ | ​ | ​ |  | 70,446 | ​ | ​ | ​ | ​
Loans held for sale | ​ |  | 408 | ​ |  | 408 | ​ | ​ | ​ | ​ |  | 408 | ​ | ​ | ​ | ​
Net loans | ​ |  | 2,300,790 | ​ |  | 2,261,586 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | $ | 2,261,586 | ​
Accrued interest receivable | ​ |  | 8,528 | ​ |  | 8,528 | ​ | ​ | ​ | ​ |  | 8,528 | ​ | ​ | ​ | ​
Mortgage servicing rights | ​ |  | 882 | ​ |  | 1,357 | ​ | ​ | ​ | ​ |  | 1,357 | ​ | ​ | ​ | ​
Restricted equity securities (FHLB and other) | ​ |  | 4,045 | ​ |  | 4,045 | ​ | ​ | ​ | ​ |  | 4,045 | ​ | ​ | ​ | ​
Interest rate floor | ​ | ​ | 844 | ​ | ​ | 844 | ​ | ​ | ​ | ​ | ​ | 844 | ​ | ​ | ​ | ​
Interest rate swaps | ​ | ​ | 9,026 | ​ | ​ | 9,026 | ​ | ​ | ​ | ​ | ​ | 9,026 | ​ | ​ | ​ | ​
Total | ​ | $ | 3,193,130 | ​ | $ | 3,153,634 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Deposits | ​ | $ | 2,963,397 | ​ | $ | 2,963,547 | ​ | ​ | ​ | ​ | $ | 2,963,547 | ​ | ​ | ​ | ​
Long-term debt | ​ |  | 2,711 | ​ |  | 2,778 | ​ | ​ | ​ | ​ |  | 2,778 | ​ | ​ | ​ | ​
Subordinated debentures | ​ | ​ | 33,000 | ​ | ​ | 32,337 | ​ | ​ | ​ | ​ | ​ | 32,337 | ​ | ​ | ​ | ​
Accrued interest payable | ​ |  | 408 | ​ |  | 408 | ​ | ​ | ​ | ​ | ​ | 408 | ​ | ​ | ​ | ​
Interest rate swaps | ​ | ​ | 8,811 | ​ | ​ | 8,811 | ​ | ​ | ​ | ​ | ​ | 8,811 | ​ | ​ | ​ | ​
Total | ​ | $ | 3,008,327 | ​ | $ | 3,007,881 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​

26

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 nine months ended September 30, salaries and employee benefits expense includes approximately $373 thousand and $970 thousand in 2022, and $343 thousand and $991 thousand in 2021 relating to the employee benefit plans.

​

​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​
​ | ​ | Pension Benefits
Three Months Ended September 30, |  | 2022 |  | 2021
Components of net periodic pension benefit: |  | ​ | ​ |  | ​ | ​
Interest cost | ​ | $ | 114 | ​ | $ | 105
Expected return on plan assets | ​ |  | (352) | ​ |  | (322)
Amortization of unrecognized net gain | ​ |  | 50 | ​ |  | 76
Net periodic benefit | ​ | $ | (188) | ​ | $ | (141)
​ | ​ | ​
​ | ​ | Pension Benefits
Nine Months Ended September 30, |  | 2022 |  | 2021
Components of net periodic pension benefit: |  | ​ | ​ |  | ​ | ​
Interest cost | ​ | $ | 342 | ​ | $ | 315
Expected return on plan assets | ​ |  | (1,056) | ​ |  | (966)
Amortization of unrecognized net gain | ​ |  | 149 | ​ |  | 227
Net periodic benefit | ​ | $ | (565) | ​ | $ | (424)

​

In May 2017, the Company’s stockholders approved the 2017 equity incentive plan (“2017 Plan”). The 2017 Plan allows for eligible participants to be granted equity awards. Under the 2017 Plan the Compensation Committee of the Board of Directors has the authority to, among other things:

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

​

| ● | Determine the type, size and term of awards.

​

| ● | Determine whether such performance objectives and conditions have been met.

​

| ● | Accelerate the vesting or exercisability 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 September 30, 2022, there were 17,364 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 nine months ended September 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.

27

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

The non-performance restricted stock grants made in 2022, 2021 and 2020 vest equally over three years. The performance-based restricted stock units vest over three fiscal years and include conditions based on the Company’s 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 criteria. 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 $223 thousand and $613 thousand for the three and nine months ended September 30, 2022 for awards granted under the 2017 Plan. The Company recognized compensation expense of $213 thousand and $479 thousand for the three and nine months ended September 30, 2021 for awards granted under the 2017 Plan. As of September 30, 2022, the Company had $1.2 million 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 1.8 years.

​

9. Derivatives and hedging activities

​

Risk Management Objective of Using Derivatives

​

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets and borrowings.

​

Cash Flow Hedges of Interest Rate Risk

​

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

​

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company’s variable-rate debt/assets. During the next twelve months, the Company estimates that an additional $64 thousand will be reclassified as an increase to interest income.

​

28

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

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 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 September 30, 2022, the Company had 86 interest rate swaps with an aggregate notional amount of $386.2 million 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 September 30, 2022 and December 31, 2021.

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | Asset Derivatives | ​ | Asset Derivatives | ​ | Liability Derivatives | ​ | Liability Derivatives
​ | ​ | ​ | ​ | As of September 30, 2022 (1) | ​ | As of December 31, 2021 (1) | ​ | As of September 30, 2022 (2) | ​ | As of December 31, 2021 (2)
​ |  | Notional |  | Balance Sheet |  | ​ | ​ |  | Balance Sheet |  | ​ | ​ |  | Balance Sheet |  | ​ | ​ |  | Balance Sheet |  | ​ | ​
​ | ​ | Amount | ​ | Location | ​ | Fair Value | ​ | Location | ​ | Fair Value | ​ | Location | ​ | Fair Value | ​ | Location | ​ | Fair Value
Derivatives designated as hedging instruments | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest Rate Floor | $ | 25,000 | ​ | Other Assets | ​ | $ | 4 | ​ | Other Assets | ​ | $ | 844 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total derivatives designated as hedging instruments | ​ | ​ | ​ | ​ | ​ | $ | 4 | ​ | ​ | ​ | $ | 844 | ​ | ​ | ​ | $ | ​ | ​ | ​ | ​ | $ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Derivatives not designated as hedging instruments |  | ​ | ​ |  |  | ​ |  |  |  |  | ​ |  |  |  |  | ​ |  |  |  |  | ​ |
Interest Rate Swaps (2) | $ | 386,171 | ​ | Other Assets |  | $ | 22,953 |  | Other Assets |  | $ | 9,026 |  | Other Liabilities |  | $ | 22,089 |  | Other Liabilities | ​ | $ | 8,811
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total derivatives not designated as hedging instruments |  | ​ | ​ |  | ​ | $ | 22,953 |  |  | ​ | $ | 9,026 |  |  | ​ | $ | 22,089 |  |  | ​ | $ | 8,811

(1) | Amounts include accrued interest.

(2) | Notional amount of interest rate swaps at December 31, 2021 was $392,677.

​

29

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 September 30, 2022 and September 30, 2021.

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Location of | ​ | ​ | ​ | ​ | ​ | Amount of | ​ | ​ | Amount of
​ | ​ | ​ | Amount of | ​ | ​ | Amount of | ​ | ​ | Amount of | ​ | Gain or (Loss) | ​ | ​ | Amount of | ​ | ​ | Gain | ​ | ​ | (Loss)
​ | ​ | ​ | (Loss) | ​ | ​ | (Loss) | ​ | ​ | (Loss) | ​ | Recognized from | ​ | ​ | Gain | ​ | ​ | Reclassified | ​ | ​ | Reclassified
​ | ​ | ​ | Recognized in | ​ | ​ | Recognized in | ​ | ​ | Recognized in | ​ | Accumulated | ​ | ​ | Reclassified | ​ | ​ | from Accumulated | ​ | ​ | from Accumulated
Derivatives in | ​ | ​ | OCI on | ​ | ​ | OCI Included | ​ | ​ | OCI Excluded | ​ | Other Comprehensive | ​ | ​ | from Accumulated | ​ | ​ | OCI into Income | ​ | ​ | OCI into Income
Hedging |  |  | Derivative |  |  | Component |  |  | Component |  | Income into |  |  | OCI into Income |  |  | Included Component |  |  | Excluded Component
Relationships | ​ | ​ | ​ | ​ | ​ | September 30, 2022 | ​ | ​ | ​ | ​ | Income | ​ | ​ | ​ | ​ | ​ | September 30, 2022 | ​ | ​ | ​
Derivatives in Cash Flow Hedging Relationships | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash Flow Swap | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Other expense | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest Rate Floor (*) | ​ | $ | (512) | ​ | $ | (497) | ​ | $ | (15) | ​ | Interest Income | ​ | $ | 228 | ​ | $ | 276 | ​ | $ | (48)
Total | ​ | $ | (512) | ​ | $ | (497) | ​ | $ | (15) | ​ | ​ | ​ | $ | 228 | ​ | $ | 276 | ​ | $ | (48)
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Location of | ​ | ​ | ​ | ​ | ​ | Amount of | ​ | ​ | Amount of
​ | ​ | ​ | Amount of | ​ | ​ | Amount of | ​ | ​ | Amount of | ​ | Gain or (Loss) | ​ | ​ | Amount of | ​ | ​ | Gain (Loss) | ​ | ​ | Loss
​ | ​ | ​ | Gain (Loss) | ​ | ​ | Gain (Loss) | ​ | ​ | Gain | ​ | Recognized from | ​ | ​ | Gain (Loss) | ​ | ​ | Reclassified | ​ | ​ | Reclassified
​ | ​ | ​ | Recognized in | ​ | ​ | Recognized in | ​ | ​ | Recognized in | ​ | Accumulated | ​ | ​ | Reclassified | ​ | ​ | from Accumulated | ​ | ​ | from Accumulated
Derivatives in | ​ | ​ | OCI on | ​ | ​ | OCI Included | ​ | ​ | OCI Excluded | ​ | Other Comprehensive | ​ | ​ | from Accumulated | ​ | ​ | OCI into Income | ​ | ​ | OCI into Income
Hedging | ​ |  | Derivative | ​ |  | Component | ​ |  | Component | ​ | Income into | ​ |  | OCI into Income | ​ |  | Included Component | ​ |  | Excluded Component
Relationships | ​ | ​ | ​ | ​ | ​ | September 30, 2021 | ​ | ​ | ​ | ​ | Income | ​ | ​ | ​ | ​ | ​ | September 30, 2021 | ​ | ​ | ​
Derivatives in Cash Flow Hedging Relationships | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash Flow Swap | ​ | $ | 401 | ​ | $ | 401 | ​ | ​ | ​ | ​ | Interest Expense | ​ | $ | (23) | ​ | $ | (23) | ​ | ​ | ​
Cash Flow Swap | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Other Expense | ​ | ​ | (25) | ​ | ​ | (25) | ​ | ​ | ​
Interest Rate Floor (*) | ​ | $ | (66) | ​ | $ | (70) | ​ | $ | 4 | ​ | Interest Income | ​ | $ | 405 | ​ | $ | 453 | ​ | $ | (48)
Total | ​ | $ | 335 | ​ | $ | 331 | ​ | $ | 4 | ​ | ​ | ​ | $ | 357 | ​ | $ | 405 | ​ | $ | (48)
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

* | Amounts disclosed are gross and not net of taxes.

​

30

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D 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 nine months ended September 30, 2022 and September 30, 2021.

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | Location and Amount of Gain or (Loss) Recognized in
​ | ​ | ​ | Income on Fair Value and Cash Flow Hedging
​ | ​ | ​ | Relationships
​ | ​ | ​ | For the three months ended September 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 | ​ | $ | 4 | ​ | $ | ​ | ​ | $ | 137 | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
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 | ​ | $ | 4 | ​ | $ | ​ | ​ | $ | 137 | ​ | $ | ​
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 | ​ | $ | 20 | ​ | $ | ​ | ​ | $ | 153 | ​ | $ | ​
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component | ​ | $ | (16) | ​ | ​ | ​ | ​ | $ | (16) | ​ | $ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | Location and Amount of Gain or (Loss) Recognized in
​ | ​ | ​ | Income on Fair Value and Cash Flow Hedging
​ | ​ | ​ | Relationships
​ | ​ | ​ | For the nine months ended September 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 | ​ | $ | 228 | ​ | $ | ​ | ​ | $ | 405 | ​ | $ | (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 | ​ | $ | 228 | ​ | $ | ​ | ​ | $ | 405 | ​ | $ | (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 | ​ | $ | 276 | ​ | $ | ​ | ​ | $ | 453 | ​ | $ | (48)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component | ​ | $ | (48) | ​ | ​ | ​ | ​ | $ | (48) | ​ | $ | ​

​

31

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

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 nine months ended September 30, 2022 and 2021.

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | 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 | ​ | Nine Months Ended |  | Three Months Ended | ​ | Nine Months Ended
Derivatives Not Designated as Hedging Instruments |  | Derivative |  | September 30, 2022 |  | September 30, 2022 |  | September 30, 2021 |  | September 30, 2021
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest Rate Swaps |  | Interest rate swap revenue | ​ | $ | 129 | ​ | $ | 652 | ​ | $ | 7 | ​ | $ | 175
Other Contracts | ​ | ​ | ​ | ​ | 1 | ​ | ​ | 4 | ​ | ​ | ​ | ​ | ​ | ​
Total |  |  | ​ | $ | 130 | ​ | $ | 656 | ​ | $ | 7 | ​ | $ | 175
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Fee Income | ​ | Fee income | ​ | $ | 2 | ​ | $ | 106 | ​ | $ | 72 | ​ | $ | 569

​

32

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 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 September 30, 2022 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Gross Amounts Not Offset in the Balance Sheet | ​ | ​ | ​
​ | ​ | Gross | ​ | ​ | ​ | Net Amounts | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Amounts of | ​ | Gross Amounts | ​ | of Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Recognized | ​ | Offset in the | ​ | presented in the | ​ | Financial | ​ | Cash Collateral | ​ | Net
​ |  | Assets |  | Balance Sheet |  | Balance Sheet |  | Instruments |  | Received |  | Amount
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Derivatives | ​ | $ | 22,957 | ​ | $ | ​ | ​ | $ | 22,957 | ​ | $ | ​ | ​ | $ | 14,700 | ​ | $ | 8,257
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Offsetting of Derivative Liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
as of September 30, 2022 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Gross Amounts Not Offset in the Balance Sheet | ​ | ​ | ​
​ | ​ | Gross | ​ | ​ | ​ | Net Amounts | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Amounts of | ​ | Gross Amounts | ​ | of Liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Recognized | ​ | Offset in the | ​ | presented in the | ​ | Financial | ​ | Cash Collateral | ​ | Net
​ | ​ | Liabilities | ​ | Balance Sheet | ​ | Balance Sheet | ​ | Instruments | ​ | Paid* | ​ | Amount
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Derivatives | ​ | $ | 22,089 | ​ | $ | ​ | ​ | $ | 22,089 | ​ | $ | 22,089 | ​ | $ | ​ | ​ | $ | ​
*Cash collateral of $7,830 was paid but not presented as an offset above. | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Offsetting of Derivative Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
as of December 31, 2021 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Gross Amounts Not Offset in the Balance Sheet | ​ | ​ | ​
​ | ​ | Gross | ​ | ​ | ​ | Net Amounts | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Amounts of | ​ | Gross Amounts | ​ | of Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Recognized | ​ | Offset in the | ​ | presented in the | ​ | Financial | ​ | Cash Collateral | ​ | Net
​ | ​ | Assets | ​ | Balance Sheet | ​ | Balance Sheet | ​ | Instruments | ​ | Received | ​ | Amount
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Derivatives | ​ | $ | 9,870 | ​ | $ | ​ | ​ | $ | 9,870 | ​ | $ | 3,218 | ​ | $ | ​ | ​ | $ | 6,652
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Offsetting of Derivative Liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
as of December 31, 2021 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Gross Amounts Not Offset in the Balance Sheet | ​ | ​ | ​
​ | ​ | Gross | ​ | ​ | ​ | Net Amounts | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Amounts of | ​ | Gross Amounts | ​ | of Liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Recognized | ​ | Offset in the | ​ | presented in the | ​ | Financial | ​ | Cash Collateral | ​ | Net
​ | ​ | Liabilities | ​ | Balance Sheet | ​ | Balance Sheet | ​ | Instruments | ​ | Paid | ​ | Amount
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Derivatives | ​ | $ | 8,818 | ​ | $ | ​ | ​ | $ | 8,818 | ​ | $ | 3,218 | ​ | $ | 5,600 | ​ | $ | ​

​

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 September 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 $2.2 million. 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 $5.6 million. The Company has minimum

33

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

collateral posting thresholds with certain of its derivative counterparties, and had posted collateral of $7.8 million with dealer counterparties at September 30, 2022 and December 31, 2021. Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the agreement. The cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the cash collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.

​

10. Deposits

​

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

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
At the period end |  | September 30, 2022 |  | December 31, 2021 |  |
Interest-bearing deposits: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Money market accounts | ​ | $ | 706,947 | ​ | $ | 588,245 | ​ | ​
Now accounts | ​ |  | 813,743 | ​ |  | 851,086 | ​ | ​
Savings accounts | ​ |  | 530,124 | ​ |  | 491,796 | ​ | ​
Time deposits less than $250 | ​ |  | 224,517 | ​ |  | 203,719 | ​ | ​
Time deposits $250 or more | ​ |  | 78,874 | ​ |  | 90,795 | ​ | ​
Total interest-bearing deposits | ​ |  | 2,354,205 | ​ |  | 2,225,641 | ​ | ​
Noninterest-bearing deposits | ​ |  | 769,935 | ​ |  | 737,756 | ​ | ​
Total deposits | ​ | $ | 3,124,140 | ​ | $ | 2,963,397 | ​ | ​

​

Total deposits increased $160.7 million from December 31, 2021 due to an increase of $128.6 million to interest-bearing deposits and $32.1 million increase to noninterest-bearing deposits. Money market deposits increased $118.7 million, savings accounts increased $38.3 million and time deposits less than $250 thousand increased $20.8 million. Non-maturity deposits, including non-interest checking, money markets and savings accounts increased in part due to growth of new customer relationships in our newest markets in Pittsburgh, Pennsylvania and Piscataway, New Jersey and to depositors holding more cash. Brokered deposits added during the nine months ended September 30, 2022 totaled $33.3 million and were used to offset a portion of the deposit outflows and lock-in then current interest rates during the second quarter 2022, as our expectation is for interest rates to continue to increase throughout the remainder of 2022. Of the brokered deposits added since December 31, 2021, $11.4 million 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 consist of FHLB advances representing overnight borrowings or with stated original terms of less than twelve months and other borrowings related to collateral held from derivative counterparties. Total short-term borrowings at September 30, 2022 were $14.7 million as compared to no short-term borrowings at December 31, 2021. Other borrowings, which include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $14.7 million and increased due to higher market interest rates. The table below outlines short-term borrowings at and for the nine months ended September 30, 2022 and for the year ended December 31, 2021:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | At and for the nine months ended September 30, 2022
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Weighted |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Maximum | ​ | Weighted | ​ | Average |
​ | ​ | Ending | ​ | Average | ​ | Month-End | ​ | Average | ​ | Rate at End |
​ |  | Balance |  | Balance |  | Balance |  | Rate |  | of the Period |
Other borrowings |  | $ | 14,700 |  | $ | 8,434 |  | $ | 14,700 |  | 1.17 | % | 3.08 | %
FHLB advances | ​ | ​ | ​ | ​ | ​ | 31,967 | ​ | ​ | 125,975 |  | 2.11 | % | ​ | ​
Total short-term borrowings | ​ | $ | 14,700 | ​ | $ | 40,401 | ​ | $ | 140,675 |  | 1.92 | % | 3.08 | %

34

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | At and for the year ended December 31, 2021 |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Weighted | ​ | Weighted |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Maximum | ​ | Average | ​ | Average |
​ | ​ | Ending | ​ | Average | ​ | Month-End | ​ | Rate for | ​ | Rate at End |
​ |  | Balance |  | Balance |  | Balance |  | the Year |  | of the Year |
FHLB advances | ​ | $ | ​ | ​ | $ | 13,973 | ​ | $ | 50,000 |  | 0.56 | % | ​ | %

​

The Company has an agreement with the FHLB which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At September 30, 2022, the maximum borrowing capacity was $1.1 billion of which $1.1 million was outstanding in borrowings and $383.2 million was used to issue standby letters of credit to collateralize public fund deposits. At December 31, 2021, the maximum borrowing capacity was $896.1 million of which $2.7 million was outstanding in borrowings and $373.0 million was used to issue standby letters of credit to collateralize public fund deposits.

Advances with the FHLB are secured under terms of a blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral, such as investments and mortgage-backed securities and mortgage loans. Interest accrues daily on the FHLB advances based on rates of the FHLB discount notes. The overnight borrowing rate resets each day.

Long-term debt consisting of one advance from the FHLB at September 30, 2022 and December 31, 2021 is as follows:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Interest Rate | ​ |  | ​ | ​ |  | ​ | ​ |
Due |  | Fixed | ​ | ​ | ​ | September 30, 2022 | ​ | ​ | December 31, 2021 |
March 2023 | ​ | 4.69 | ​ | ​ | $ | 1,104 | ​ | ​ | 2,711 | ​
​ | ​ | ​ | ​ | ​ | $ | 1,104 | ​ | $ | 2,711 | ​

​

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

​

​ | ​ | ​ | ​ | ​
2022 | ​ | $ | 549 | ​
2023 | ​ |  | 555 | ​
​ | ​ | $ | 1,104 | ​

​

The advance from the FHLB totaling $1.1 million is not convertible.

​

12. Subordinated debt

​

On June 1, 2020, the Company sold $33.0 million 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 in arrears thereafter on March 1, June 1, September 1, and December 1. The 2020 Notes will mature on June 1, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after June 1, 2025 and prior to June 1, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, the Company may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100%) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

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

​

​

​

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

Item 2. Management’s Discussio n 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.

​

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

Operating Environment:

​

The first nine months of 2022 have been centered in uncertainty around the lingering effects of COVID-19, high inflation, a tight labor market, fear of recession and the global impact of Russia’s invasion of the Ukraine. As COVID-19 restrictions began to ease and commercial and consumer activity returned to pre-pandemic levels, strong demand driven by low interest rates and government stimulus clashed with weakened supply chains and pandemic-related shortages.

​

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

(“FOMC”) long-term desired 2% level for items other than food and energy and remained elevated in the third quarter. Core inflation, as measured by the Consumer Price Index (“CPI”), excluding items known for their volatility such as food and energy, was 6.6% for the 12 months ended September 30, 2022, the largest increase since August 1982. When including food and energy, CPI increased 8.2% during the 12 months ended September 30, 2022 due primarily to higher energy costs.

​

Concerns over the high inflation rate have resulted in central bankers in the U.S. adjusting interest rates. The FOMC has increased rates six times through November 2, 2022 for a total of 375 basis points and additional increases are expected through year-end and into the first three months of 2023. These higher rates are expected to continue to negatively impact the fair value of our investment portfolio and to slow economic activity by curbing spending, hiring and investment which may reduce loan demand and result in deposit outflows.

​

We saw strong loan growth in the third quarter despite these higher rates. However, we have seen lower mortgage origination and sales volume as interest rates on mortgage loans have reached 20 year highs and the housing market cools off. From a funding perspective, the competition and subsequent costs of deposits has increased and likely will continue to increase as the FOMC adjusts rates.

​

The labor market remains strong with unemployment at 3.5% in September 2022. This along with reduced labor force participation has made it difficult and costly for companies to fill open positions and thus could increase our salaries and benefits expenses.

​

Real gross domestic product (“GDP”) increased at a seasonally adjusted annual rate of 2.6% during the three months ended September 30, 2022, according to the Bureau of Economic Analysis’s “Advance” estimate, after decreasing 0.6% in the three months ended June 30, 2022 and after falling 1.6% during the three months ended March 31, 2022. The increase in the most recent period may likely be a temporary boost rather than an indication of sustainable upward momentum as indications suggest consumers are reducing spending and business spending is slowing. Durable goods orders increased 0.4% during September 2022 and while the headline growth in orders remains positive heading into the fourth quarter, corporate investment has slowed markedly as businesses struggle amid rising costs of property, labor and parts. Particularly as consumers continue to adjust or downshift their spending patterns, businesses may increasingly struggle to reduce expenditures as sales remain thin. Economic uncertainty and reductions to spending by retail and commercial customers due to rising costs may reduce loan demand and increase loan delinquencies in the near-term.

​

Goodwill:

​

The Company has goodwill with a net carrying value of $63,370 at September 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 September 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.

​

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

Review of Financial Position:

​

Total assets increased $147.3 million or 5.9% annualized, to $3.5 billion at September 30, 2022, from $3.4 billion at December 31, 2021. The increase in assets during the nine months was due to loan growth, funded primarily with our federal funds sold balances and short-term borrowings. Total loans increased to $2.6 billion at September 30 2022, compared to $2.3 billion at December 31, 2021, an increase of $294.5 million. Excluding PPP loans and a net decrease of $46.2 million to PPP loan balances, loan growth during the first nine months of 2022 totaled $340.7 million, or 20.2% annualized. Investments decreased $18.2 million or 4.1% 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 was offset by the reduction to the fair value of the available-for-sale investment portfolio due to higher market rates. Federal funds sold balances decreased $172.8 million to $69.6 million at September 30, 2022 from $242.4 million at December 31, 2021. Deposits increased $160.7 million to $3.1 billion at September 30, 2022 from $3.0 billion. Interest-bearing deposits increased $128.5 million while noninterest-bearing deposits increased $32.2 million. Total short-term borrowings at September 30, 2022 totaled $14.7 million. Total stockholders’ equity decreased $38.3 million or 11.3%, from $340.1 million at year-end 2021 to $301.8 million at September 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 nine months ended September 30, 2022, total assets averaged $3.4 billion, an increase of $387.8 million from $3.0 billion for the same period of 2021.

​

Investment Portfolio:

​

The majority of the investment portfolio is classified as available-for-sale, which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when market opportunities occur. Investment securities available-for-sale totaled $477.6 million at September 30, 2022, a decrease of $39.7 million, or 7.7% from $517.3 million at December 31, 2021. The decrease was primarily due to a decline in the market value of the available-for-sale portfolio of $72.8 million since December 31, 2021, due to the rapid increase of market rates, and principal received from mortgage-backed securities and maturing bonds, partially offset by the purchase of U.S. Treasury notes, taxable and tax-exempt municipal bonds and mortgage-backed securities as we deployed a portion of excess cash into higher earning assets primarily during the three months ended March 31. Investment securities held-to-maturity totaled $92.8 million at September 30, 2022, an increase of $21.6 million from $71.2 million at December 31, 2021 as a portion of newly purchased low coupon securities were classified as held-to-maturity to mitigate market value risk.

​

For the nine months ended September 30, 2022, the investment portfolio averaged $651.6 million, an increase of $304.5 million or 87.7% compared to $347.1 million for the same period last year. Average tax-exempt municipal bonds have increased $32.5 million or 41.4% to $111.0 million for the nine months ended September 30, 2022 from $78.5 million 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 42

basis points to 1.67% for the nine months ended September 30, 2022, from 2.09% 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 $58.9 million net of deferred income taxes of $15.7 million at September 30, 2022, and net unrealized losses of $1.4 million, net of deferred income taxes of $0.4 million, at December 31, 2021. The increase to deferred income taxes, a component of other assets on the balance sheet, of $15.3 million was a primary reason for the increase to other assets since 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 nine months of 2022.

​

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

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.

​

Loan Portfolio:

​

Total loans increased to $2.6 billion at September 30, 2022 from $2.3 billion at December 31, 2021, an increase of $294.5 million. 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 year end.

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 September 30, 2022, we had 13 loans totaling $11.5 million remaining from PPP loans originated during 2020 and 18 loans totaling $11.2 million remaining from the second PPP program, and we expect the majority to be forgiven during 2022. Excluding the PPP loans, total loans have increased $340.7 million or 20.2% annualized, in 2022.

​

Commercial real estate loans increased $276.6 million or 27.5% annualized, to $1.6 billion at September 30, 2022 compared to $1.3 billion at December 31, 2021 due to increased activity in all our markets. Commercial and industrial loans, excluding PPP, increased $29.0 million to $573.2 million at September 30, 2022 compared to $544.2 million at December 31, 2021 due to growth of tax-exempt loans. We continue to actively pursue commercial and industrial loans as this segment of our loan portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and wealth management relationships which generate additional fee income.

​

Consumer loans increased $6.6 million, or 11.7% on an annualized basis, to $81.4 million at September 30, 2022 compared to $74.9 million at December 31, 2021. The increase in consumer loans was due to dealer indirect auto loan origination and other consumer loan volumes.

​

Residential real estate loans increased $28.6 million, or 12.8% on an annualized basis, to $326.2 million at September 30, 2022 compared to $297.6 million at December 31, 2021. The increase in residential mortgages is due to increased refinance and purchase activity prior to the recent increase to mortgage rates, increased home equity loan activity, and a higher percentage of loans not eligible to be sold into the secondary market, including jumbo

mortgages.

​

For the nine months ended September 30, 2022, total loans, excluding PPP loans, averaged $2.4 billion, an increase of $413.5 million or 20.4% compared to $2.0 billion for the same period of 2021. The PPP loans averaged $37.8 million for the nine months ended September 30, 2022 and yielded 5.96% due to the acceleration of unamortized net fees and interest earned. The tax-equivalent yield on the entire loan portfolio was 3.93% for the nine months ended

September 30, 2022, a 7 basis point decrease from the comparable period last year. The decrease in yield is primarily due to lower levels of PPP fees and interest earned.

​

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 September 30, 2022, totaled $568.0 million, consisting of $508.6 million in unfunded commitments of existing loan facilities and $59.4 million in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and, therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments at December 31, 2021 totaled $553.4 million, consisting of $495.1 in unfunded commitments of existing loans and $58.3 in standby letters of credit.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

​

Asset Quality:

​

​

Distribution of nonperforming assets

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | September 30, 2022 | ​ | ​ | December 31, 2021 | ​
Nonaccrual loans | ​ | $ | 2,557 | ​ | $ | 2,811 | ​
Troubled debt restructured loans (including nonaccrual TDR) | ​ | ​ | 1,381 | ​ | ​ | 1,649 | ​
Accruing loans past due 90 days or more: | ​ | ​ | 280 | ​ | ​ | 13 | ​
Total nonperforming loans | ​ | ​ | 4,218 | ​ | ​ | 4,473 | ​
Foreclosed assets | ​ | ​ | ​ | ​ | ​ | 488 | ​
Total nonperforming assets | ​ | $ | 4,218 | ​ | $ | 4,961 | ​
Loans modified in a troubled debt restructuring (TDR): | ​ | ​ | ​ | ​ | ​ | ​ | ​
Performing TDR loans | ​ | $ | 1,381 | ​ | $ | 1,649 | ​
Total TDR loans | ​ | $ | 1,381 | ​ | $ | 1,649 | ​
Total loans held for investment | ​ | $ | 2,623,706 | ​ | $ | 2,329,173 | ​
Nonaccrual loans as a percentage of loans held for investment | ​ | ​ | 0.10 | % | ​ | 0.12 | %
Allowance for loan losses | ​ |  | 29,822 | ​ |  | 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 | ​ | ​ | 1166.29 | % |  | 1009.71 | %
Nonperforming loans as a percentage of loans, net | ​ |  | 0.16 | % |  | 0.19 | %

​

We experienced improved asset quality during the first nine months of 2022 as evidenced by a decrease of $743 thousand in nonperforming assets. Nonperforming assets totaled $4.2 million or 0.12% of total assets at September 30, 2022, a decrease from $5.0 million or 0.15% of total assets at December 31, 2021. This was the result of the sale of foreclosed assets during the first quarter 2022.

​

Loans on nonaccrual status, excluding troubled debt restructured nonaccrual loans, decreased $254 thousand to $2.6 million at September 30, 2022 from $2.8 million at December 31, 2021. The decrease to nonaccrual loans since year-end is due primarily to a decrease to residential real estate loans of $271 thousand partially offset by an increase of $134 thousand to the indirect portfolio. Restructured loans decreased $268 thousand to $1.4 million at September 30, 2022 from $1.6 million at December 31, 2021 due to payments received. Foreclosed assets decreased $488. There were no foreclosed properties at September 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

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(Dollars in thousands, except per share data)

​

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 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 $1.4 million or 5.1% during the first nine months of 2022. The allowance for loan losses equaled $29.8 million or 1.14% of loans, net at September 30, 2022 compared to $28.4 million 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 1.15% at September 30, 2022. Loans charged-off, net of recoveries, for the nine months ended September 30, 2022, equaled $261 thousand and less than 0.01% of average loans, compared to $651 thousand or 0.04% of average loans for the comparable period last year. The decrease to charge-offs in the current period is due to improved credit quality resulting in fewer charge-offs.

​

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 nine months ended September 30, 2022, total deposits increased $160.7 million or 5.4% to $3.1 billion from $3.0 billion at December 31, 2021. Non-maturity deposits, including non-interest checking, money markets and savings accounts increased in part due to growth of new customer relationships in our newest markets in Pittsburgh, Pennsylvania and Piscataway, New Jersey, and to depositors holding more cash. Brokered deposits increased $33.3 million during the nine months ended September 30, 2022, primarily to offset a portion of the deposit outflow that occurred earlier in 2022.

​

Interest-bearing deposits increased $128.6 million while noninterest-bearing deposits increased $32.2 million. Interest-bearing transaction accounts, including NOW and money market accounts increased by $81.4 million, or 5.6%, to $1.5 billion at September 30, 2022, from $1.4 billion at December 31, 2021. Savings accounts increased $38.3 million to $530.1 million as of September 30, 2022 from $491.8 million at December 31, 2021. Time deposits less than $250 thousand increased $20.8 million, or 10.2%, to $224.5 million at September 30, 2022, from $203.7 million at December 31, 2021 primarily due to the addition of $33.3 million in brokered certificates of deposit. Time deposits $250 thousand or more decreased $11.9 million, or 13.1% to $78.9 million at September 30, 2022 from $90.8 million

at year end 2021 as rate sensitive depositors sought higher rates.

​

For the nine months ended September 30, interest-bearing deposits averaged $2.2 billion in 2022 compared to

$1.9 billion in 2021, an increase of $281.0 million or 14.6%. The cost of interest-bearing deposits was 0.39% in 2022 compared to 0.40% for the same period last year. For the first nine months, the overall cost of interest-bearing liabilities, including the cost of borrowed funds, was 0.49% in 2022 and 0.50% in 2021. The lower costs are due primarily to our actions to lower deposit rates to mitigate net interest margin compression in the earlier portion of 2022. We intend to monitor deposit rates; the FOMC increased the federal funds target rate three times for a total of 150 basis points

through June 30, 2022 and another 150 basis points by September 30, 2022, with the expectation that the FOMC will continue to move to increase the federal funds rate to combat inflation. The volume and velocity of the rate increases will place pressure on our funding 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 were $48.8 million at September 30, 2022, which included a combination of other

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(Dollars in thousands, except per share data)

​

borrowings, long-term debt, and subordinated debt, compared to $35.7 million at December 31, 2021, an increase of $13.1 million. There were no overnight borrowings at September 30, 2022 and December 31, 2021. Other borrowings, which include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $14.7 million compared to none at December 31, 2021. The increase was primarily due to higher market interest rates. Long-term debt was $1.1 million at September 30, 2022 compared to $2.7 million at year end 2021. Subordinated debt outstanding at September 30, 2022 and December 31, 2021 was $33.0 million.

​

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.

​

Market interest rates have increased rapidly during 2022 from historic lows as the FOMC has raised the federal funds rate 75 basis points at their June, July, September and November meetings, respectively. Market expectations are that the FOMC will continue to raise rates aggressively at their remaining meeting in 2022 to combat high inflation resulting in even higher market rates. It has become challenging to manage IRR. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by our board of directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.

​

The ALCO, comprised of members of our board of directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

​

Our cumulative one-year RSA/RSL ratio equaled 1.23% at September 30, 2022, an increase 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 375 basis points during 2022 and an expectation the FOMC will continue to increase the federal funds rate to mitigate inflation, we should experience increased net interest income. The overall focus of ALCO is to maintain a well-balanced interest rate risk position in order to safeguard future earnings. The current position at September 30,

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(Dollars in thousands, except per share data)

​

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.

​

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 September 30, 2022, produced results similar to those indicated by the one-year static gap position. In addition, parallel and instantaneous shifts in interest rates under various interest rate shocks resulted in changes in net interest income that were well within ALCO policy limits during the first year of simulation. We will continue to monitor our IRR throughout 2022 and endeavor to employ deposit and loan pricing strategies and direct the reinvestment of loan and investment repayments in order to manage our IRR position.

​

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

​

Liquidity:

​

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

​

| ● | Funding new and existing loan commitments;

​

| ● | Payment of deposits on demand or at their contractual maturity;

​

| ● | Repayment of borrowings as they mature;

​

| ● | Payment of lease obligations; and

​

| ● | Payment of operating expenses.

​

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

​

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

​

Our ALCO generally meets quarterly, and most recently met in August, to review our interest rate risk profile, capital adequacy and liquidity. Management believes the Company’s liquidity position is strong. At September 30, 2022, the Company’s cash and due from banks balances were $43.4 million and we maintained $231.4 million of availability at the Federal Reserve Bank’s discount window. The Company also maintains an available-for-sale investment securities

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(Dollars in thousands, except per share data)

​

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 September 30, 2022, the Company’s available-for-sale investment securities portfolio totaled $477.6 million, $323.7 million of which were unencumbered. Net unrealized losses on the portfolio were $74.6 million. The Bank’s unused borrowing capacity at the FHLB at September 30, 2022 was $715.8 million.

​

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 September 30, 2022. Our noncore funds at September 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 September 30, 2022, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 4.5%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 1.3%. 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 $166.9 million during the nine months ended September 30, 2022. Cash and cash equivalents increased $132.4 million for the same period last year. For the nine months ended September 30, 2022, net cash inflows of $164.3 million from financial activities and $30.2 million from operating activities were offset by net cash outflows of $361.5 million from investing activities. For the same period of 2021, net cash inflows of $25.7 million from operating activities and $332.2 million from financing activities were partially offset by net cash outflows of $225.5 million from investing activities.

​

Operating activities provided net cash of $30.2 million for the nine months ended September 30, 2022, and $25.7 million for the corresponding nine 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 $361.5 million for the nine months ended September 30, 2022, compared to using net cash of $225.5 million for the same period of 2021. The combination of purchases of investment securities and an increase in lending activities were the primary factors causing the net cash outflow from investing activities in both periods.

​

Financing activities provided net cash of $164.3 million for the nine months ended September 30, 2022, and provided net cash of $332.2 million for the corresponding nine months of 2021. In 2022 and 2021, deposit gathering was our predominant financing activity. Deposits provided cash of $160.7 million for the nine months ended September 30, 2022 while short term borrowings increased $14.7 million. We continue to seek deposits from new markets and customers as well as existing customers, including municipalities and school districts.

​

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

​

Capital:

​

Stockholders’ equity totaled $301.8 million or $42.14 per share at September 30, 2022, compared to $340,126 or $47.44 per share at December 31, 2021. Stockholders’ equity was reduced during the nine month period ended September 30, 2022 by cash dividends declared of $8.5 million, a decrease to AOCI of $58.1 million primarily due to an increase to the unrealized loss on investment securities from higher market rates, and the repurchase of 21,478 common shares totaling

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

$1.0 million. Net income of $28,951 for the nine months ended September 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 $57.5 million, which runs through AOCI and affects our book value, but not our regulatory capital ratios.

​

Dividends declared equaled $1.18 per share through the nine months ended September 30, 2022 and $1.12 per share for the same period of 2021. The dividend payout ratio was 29.4% for the nine months ended September 30, 2022 and 29.9% 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 October 28, 2022 a fourth quarter dividend of $0.40 per share payable on December 15, 2022 to shareholders of record as of November 30, 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 September 30, 2022, the Bank’s Tier 1 capital to total average assets was 9.63% as compared to 9.58% at December 31, 2021. The Bank’s Tier 1 capital to risk weighted asset ratio was 12.48% and the total capital to risk weighted asset ratio was 13.60% at September 30, 2022. These ratios were 13.76% and 15.01% at December 31, 2021. The Bank’s common equity Tier 1 to risk weighted asset ratio was 12.48% at September 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 September 30, 2022.

​

Review of Financial Performance:

​

Peoples reported net income of $10.0 million or $1.38 per diluted share for the three months ended September 30, 2022, a 9.6% increase when compared to $9.1 million or $1.26 per share for the comparable period of 2021. The increase in earnings for the three months ended September 30, 2022 is due to a $3.0 million increase in net interest income during the current three month period when compared to the year ago period. Partially offsetting the increases were higher noninterest expenses of $1.8 million due to higher salaries and benefits and occupancy and equipment costs in part due to our market expansion strategy and digital technology upgrade.

​

Peoples reported net income of $29.0 million or $4.01 per diluted share for the nine months ended September 30, 2022, an increase of 6.8% when compared to $27.1 million, or $3.74 per diluted share for the comparable period of 2021. The increase in earnings in the nine months ended September 30, 2022 is a result of increased net interest income of $8.3 million and an increase of $266 thousand in noninterest income. Partially offsetting the increases were a $1.7 million increase in provision for loan losses and an increase of $5.5 million to noninterest expense. Strong loan growth drove

an increase in our current provision for loan loss of $1.7 million, as compared to no provision in the year ago period. Higher noninterest expenses were mainly due to higher salaries and benefits of $2.7 million and higher occupancy and equipment costs of $2.2 million in part due to our investment in our market expansion strategy and digital technology upgrade which commenced during the latter half of 2021.

​

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.14% for the third quarter of 2022 compared to 1.17% 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 12.69% for the third quarter of 2022 compared to 11.01% 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 nine months ended September 30, 2022 and 2021:

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Three months ended September 30 |  | 2022 |  | 2021 |
Interest income (GAAP) | ​ | $ | 29,230 | ​ | $ | 24,167 | ​
Adjustment to FTE | ​ |  | 494 | ​ |  | 387 | ​
Interest income adjusted to FTE (non-GAAP) | ​ |  | 29,724 | ​ |  | 24,554 | ​
Interest expense | ​ |  | 4,232 | ​ |  | 2,182 | ​
Net interest income adjusted to FTE (non-GAAP) | ​ | $ | 25,492 | ​ | $ | 22,372 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Nine months ended September 30 |  | 2022 |  | 2021 | ​
Interest income (GAAP) | ​ | $ | 79,693 | ​ | $ | 70,407 | ​
Adjustment to FTE | ​ |  | 1,399 | ​ |  | 1,088 | ​
Interest income adjusted to FTE (non-GAAP) | ​ |  | 81,092 | ​ |  | 71,495 | ​
Interest expense | ​ |  | 8,357 | ​ |  | 7,364 | ​
Net interest income adjusted to FTE (non-GAAP) | ​ | $ | 72,735 | ​ | $ | 64,131 | ​

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(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 nine months ended September 30, 2022 and 2021:

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Three months ended September 30 |  | 2022 |  | 2021 |
Efficiency ratio (non-GAAP): | ​ | ​ | ​ | ​ | ​ | ​ | ​
Noninterest expense (GAAP) | ​ | $ | 15,935 | ​ | $ | 14,147 | ​
Less: amortization of intangible assets expense | ​ |  | 96 | ​ |  | 125 | ​
Noninterest expense adjusted for amortization of assets expense (non-GAAP) | ​ | ​ | 15,839 | ​ | ​ | 14,022 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net interest income (GAAP) | ​ | ​ | 24,998 | ​ | ​ | 21,985 | ​
Plus: taxable equivalent adjustment | ​ | ​ | 494 | ​ | ​ | 387 | ​
Noninterest income (GAAP) | ​ | ​ | 3,317 | ​ | ​ | 3,449 | ​
Less: net (losses) gains on equity securities | ​ | ​ | (18) | ​ | ​ | 5 | ​
Net interest income (FTE) plus noninterest income (non-GAAP) | ​ | $ | 28,827 | ​ | $ | 25,816 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Efficiency ratio (non-GAAP) | ​ | ​ | 54.9 | % | ​ | 54.3 | %
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Nine months ended September 30 |  | 2022 |  | 2021 |
Efficiency ratio (non-GAAP): | ​ | ​ | ​ | ​ | ​ | ​ | ​
Noninterest expense (GAAP) | ​ | $ | 45,717 | ​ | $ | 40,234 | ​
Less: amortization of intangible assets expense | ​ |  | 289 | ​ |  | 375 | ​
Noninterest expense adjusted for amortization of assets expense (non-GAAP) | ​ | ​ | 45,428 | ​ | ​ | 39,859 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net interest income (GAAP) | ​ | ​ | 71,336 | ​ | ​ | 63,043 | ​
Plus: taxable equivalent adjustment | ​ | ​ | 1,399 | ​ | ​ | 1,088 | ​
Noninterest income (GAAP) | ​ | ​ | 10,619 | ​ | ​ | 10,353 | ​
Less: net (losses) gains on equity securities | ​ | ​ | (37) | ​ | ​ | 9 | ​
Net interest income (FTE) plus noninterest income (non-GAAP) | ​ | $ | 83,391 | ​ | $ | 74,475 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Efficiency ratio (non-GAAP) | ​ | ​ | 54.5 | % | ​ | 53.5 | %

​

​

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

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Peoples Financial Services Corp.

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(Dollars in thousands, except per share data)

​

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 September 30, tax-equivalent net interest income increased $3.1 million to $25.5 million in 2022 from $22.4 million in 2021. The net interest spread decreased to 2.87% for the three months ended September 30, 2022 from 2.95% for the three months ended September 30, 2021 as the earning asset yield increased 22 basis points while the average rate paid on interest-bearing liabilities increased 30 basis points. The tax-equivalent net interest margin increased to 3.08% for the third quarter of 2022 from 3.07% for the comparable period of 2021.

​

For the three months ended September 30, tax-equivalent interest income, a non-GAAP measure, on earning assets increased $5.2 million to $29.7 million in 2022 as compared to $24.5 million in 2021. The overall yield on earning assets, on a fully tax-equivalent basis, increased 22 basis points for the three months ended September 30, 2022 to

3.59% as compared to 3.37% for the three months ended September 30, 2021. The increase to tax-equivalent interest income is due to the increase in our earning asset base of $391.1 million. PPP loan interest income and net fees

contributed $204 thousand in income for the quarter. Excluding the PPP loans, the loan yield was 4.10%. The overall yield earned on investments decreased 34 basis points in the third quarter of 2022 to 1.67% from 2.01% for the third quarter of 2021 as investment cash flow from high yielding securities matured and pre-refunded municipal bonds are deployed into lower yielding bonds. Average investment balances were $290.9 million higher when comparing the current and year ago quarter. Average federal funds sold decreased $297.4 million to $13.7 million for the three months ended September 30, 2022 and yielded 3.08%, as compared to $311.0 million and yield of 0.16% in the year ago period, to fund our loan growth and investment purchases. We expect asset yields to move upward as asset cash flow reprices higher due to the recent increases to the federal funds rate by the FOMC and expectation of further rate increases by the FOMC to combat inflation.

​

Total interest expense increased $2.0 million to $4.2 million for the three months ended September 30, 2022 from $2.2 million for the three months ended September 30, 2021. The total cost of funds increased 30 basis points for the three months ended September 30, 2022 to 0.72% as compared to 0.42% in the year ago period. The increase in costs was due to higher rates on interest-bearing deposits combined with higher average balances including higher short-term borrowings in the current period. Average rates paid on deposits has increased as the result of the FOMC’s corresponding rate increases. We expect our cost of funds to come under pressure over the remaining months of 2022 as market rates have risen rapidly since year end as the FOMC aggressively increases interest rates in an attempt to curb inflation.

​

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Peoples Financial Services Corp.

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(Dollars in thousands, except per share data)

​

Net interest income changes due to rate and volume for the nine months ended September 30

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2022 vs 2021 | ​
​ | ​ | Increase (decrease) | ​
​ | ​ | attributable to | ​
​ | ​ | Total | ​ | Rate | ​ | Volume | ​
Interest income: |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ |
Loans: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | $ | 5,785 | ​ | $ | (696) | ​ | $ | 6,481 | ​
Tax-exempt | ​ |  | 1,086 | ​ | ​ | (593) | ​ | ​ | 1,679 | ​
Investments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 2,302 | ​ | ​ | (1,396) | ​ | ​ | 3,698 | ​
Tax-exempt | ​ |  | 396 | ​ | ​ | (287) | ​ | ​ | 683 | ​
Interest-bearing deposits | ​ |  | 55 | ​ | ​ | 56 | ​ | ​ | (1) | ​
Federal funds sold | ​ |  | (27) | ​ | ​ | 313 | ​ | ​ | (340) | ​
Total interest income | ​ |  | 9,597 | ​ |  | (2,603) | ​ |  | 12,200 | ​
Interest expense: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Money market accounts | ​ | $ | 510 | ​ | $ | 304 | ​ | $ | 206 | ​
NOW accounts | ​ |  | 589 | ​ | ​ | 98 | ​ | ​ | 491 | ​
Savings accounts | ​ |  | 27 | ​ | ​ | (10) | ​ | ​ | 37 | ​
Time deposits less than $100 | ​ |  | (135) | ​ | ​ | (142) | ​ | ​ | 7 | ​
Time deposits $100 or more | ​ |  | (341) | ​ | ​ | (252) | ​ | ​ | (89) | ​
Short-term borrowings | ​ |  | 502 | ​ | ​ | 341 | ​ | ​ | 161 | ​
Long-term debt | ​ |  | (159) | ​ | ​ | 124 | ​ | ​ | (283) | ​
Subordinated debt | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total interest expense | ​ |  | 993 | ​ |  | 463 | ​ |  | 530 | ​
Net interest income - non-GAAP | ​ | $ | 8,604 | ​ | $ | (3,066) | ​ | $ | 11,670 | ​

​

Tax-equivalent net interest income, a non-GAAP measure, was $72.7 million in the nine months ended September 30, 2022 and $64.1 million 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 $11.7 million. A rate variance resulted in a decrease in net interest income of $3.1 million.

​

Average earning assets increased $400.0 million to $3.2 billion for the nine months ended September 30, 2022

from $2.8 billion for the nine months ended September 30, 2021 and accounted for a $12.2 million increase in interest income. Average loans increased $272.4 million, which caused interest income to increase $8.2 million. Specifically, average PPP loans totaled $37.8 million and generated $1.7 million of interest and net fees in the current period compared to average PPP loans of $179.0 million and $6.3 million of interest and fees in the prior period. Average taxable investments increased $271.9 million comparing 2022 and 2021, which resulted in increased interest income of $3.7 million while average tax-exempt investments increased $32.5 million, which resulted in an increase to interest income of $0.7 million. Average federal funds sold decreased $175.0 million for the nine months ended

September 30, 2022 which resulted in a decrease of $0.3 million to interest income.

​

Average interest-bearing liabilities rose $295.0 million to $2.3 billion for the nine months ended September 30, 2022 from $2.0 billion for the nine months ended September 30, 2021 resulting in a net increase in interest expense of $530 thousand. Interest-bearing transaction accounts, including money market, NOW and savings accounts grew $295.2 million, which in aggregate caused a $734 thousand increase in interest expense. In addition, large denomination time deposits averaged $14.7 million less in the current period and caused interest expense to decrease $89 thousand. An increase of $487 thousand in average time deposits less than $100 thousand resulted in an increase to interest expense

of $7 thousand. In addition, short-term borrowings averaged $21.7 million higher and increased interest expense $161 thousand while long-term debt averaged $7.7 million lower and decreased interest expense by $283 thousand comparing the first nine months of 2022 and 2021.

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(Dollars in thousands, except per share data)

​

​

A slightly unfavorable rate variance occurred, as the tax-equivalent yield on earning assets decreased 2 basis points while there was a 1 basis point decrease in the cost of funds. As a result, tax-equivalent net interest income decreased $3.1 million comparing the nine months ended September 30, 2022 and 2021. The tax-equivalent yield on earning assets was 3.39% in the 2022 period compared to 3.41% in 2021 resulting in a decrease in interest income of $2.6 million. The yield on the taxable investment portfolio decreased 40 basis points to 1.53% during the nine months ended September 30, 2022 from 1.93% in the year ago period, resulting in a decrease of $1.4 million. The yield on the tax exempt investment portfolio decreased 30 basis points to 2.36% during the nine months ended September 30, 2022 from 2.66% in the year ago period, resulting in a decrease of $287 thousand. The tax-equivalent yield on the loan portfolio decreased 7 basis points to 3.93% in 2022 from 4.00% in 2021 and resulted in a decrease to interest income of $1.3 million.

​

PPP loans yielded 5.96% during the nine months ended September 30, 2022 compared to 4.69% in the year ago period. The increase resulted from the higher interest income versus PPP loan forgiveness and the accretion of deferred fees.

​

The cost of deposits and borrowings were relatively flat when compared to a year ago.

​

​

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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 | ​
​ | ​ | September 30, 2022 | ​ | September 30, 2021 | ​
​ | ​ | Average | ​ | Interest Income/ | ​ | Yield/ | ​ | Average | ​ | Interest Income/ | ​ | Yield/ | ​
​ |  | Balance |  | Expense |  | Rate |  | Balance |  | Expense |  | Rate | ​
Assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Earning assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | $ | 2,377,803 | ​ | $ | 25,128 | ​ | 4.19 | % | $ | 2,033,752 | ​ | $ | 21,276 | ​ | 4.15 | %
Tax-exempt | ​ | ​ | 225,637 | ​ | ​ | 1,694 | ​ | 2.98 | ​ | ​ | 169,273 | ​ | ​ | 1,296 | ​ | 3.04 | ​
Total loans | ​ | ​ | 2,603,440 | ​ | ​ | 26,822 | ​ | 4.09 | ​ | ​ | 2,203,025 | ​ | ​ | 22,572 | ​ | 4.06 | ​
Investments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | ​ | 544,782 | ​ | ​ | 2,096 | ​ | 1.53 | ​ | ​ | 280,767 | ​ | $ | 1,309 | ​ | 1.85 | ​
Tax-exempt | ​ | ​ | 111,578 | ​ | ​ | 659 | ​ | 2.34 | ​ | ​ | 84,701 | ​ | ​ | 547 | ​ | 2.56 | ​
Total investments | ​ | ​ | 656,360 | ​ | ​ | 2,755 | ​ | 1.67 | ​ | ​ | 365,468 | ​ | ​ | 1,856 | ​ | 2.01 | ​
Interest-bearing deposits | ​ | ​ | 9,180 | ​ | ​ | 41 | ​ | 1.77 | ​ | ​ | 12,004 | ​ | ​ | 2 | ​ | 0.07 | ​
Federal funds sold | ​ | ​ | 13,665 | ​ | ​ | 106 | ​ | 3.08 | ​ | ​ | 311,015 | ​ | ​ | 124 | ​ | 0.16 | ​
Total earning assets | ​ | ​ | 3,282,645 | ​ | ​ | 29,724 | ​ | 3.59 | % | ​ | 2,891,512 | ​ | ​ | 24,554 | ​ | 3.37 | %
Less: allowance for loan losses | ​ | ​ | 29,863 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 26,947 | ​ | ​ | ​ | ​ | ​ | ​
Other assets | ​ | ​ | 210,724 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 229,403 | ​ | ​ | ​ | ​ | ​ | ​
Total assets | ​ | $ | 3,463,506 | ​ | $ | 29,724 | ​ | ​ | ​ | $ | 3,093,968 | ​ | $ | 24,554 | ​ | ​ | ​
Liabilities and Stockholders’ Equity: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest-bearing liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Money market accounts | ​ | $ | 630,165 | ​ | $ | 1,228 | ​ | 0.77 | % | $ | 567,971 | ​ | $ | 452 | ​ | 0.32 | %
NOW accounts | ​ | ​ | 770,582 | ​ | ​ | 1,184 | ​ | 0.61 | ​ | ​ | 667,867 | ​ | $ | 499 | ​ | 0.30 | ​
Savings accounts | ​ | ​ | 527,244 | ​ | ​ | 123 | ​ | 0.09 | ​ | ​ | 476,966 | ​ | $ | 96 | ​ | 0.08 | ​
Time deposits less than $100 | ​ | ​ | 132,599 | ​ | ​ | 358 | ​ | 1.07 | ​ | ​ | 128,846 | ​ | $ | 338 | ​ | 1.04 | ​
Time deposits $100 or more | ​ | ​ | 168,239 | ​ | ​ | 423 | ​ | 1.00 | ​ | ​ | 166,218 | ​ | $ | 313 | ​ | 0.75 | ​
Total interest-bearing deposits | ​ | ​ | 2,228,829 | ​ | ​ | 3,316 | ​ | 0.59 | ​ | ​ | 2,007,868 | ​ | ​ | 1,698 | ​ | 0.34 | ​
Short-term borrowings | ​ | ​ | 78,922 | ​ | ​ | 457 | ​ | 2.30 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Long-term debt | ​ | ​ | 1,369 | ​ | ​ | 16 | ​ | 4.64 | ​ | ​ | 3,475 | ​ | $ | 41 | ​ | 4.68 | ​
Subordinated debt | ​ | ​ | 33,000 | ​ | ​ | 443 | ​ | 5.33 | ​ | ​ | 33,000 | ​ | $ | 443 | ​ | 5.37 | ​
Total borrowings | ​ | ​ | 113,291 | ​ | ​ | 916 | ​ | 3.21 | ​ | ​ | 36,475 | ​ | ​ | 484 | ​ | 0.45 | ​
Total interest-bearing liabilities | ​ | ​ | 2,342,120 | ​ | ​ | 4,232 | ​ | 0.72 | ​ | ​ | 2,044,343 | ​ | ​ | 2,182 | ​ | 0.42 | ​
Noninterest-bearing deposits | ​ | ​ | 770,833 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 696,331 | ​ | ​ | ​ | ​ | ​ | ​
Other liabilities | ​ | ​ | 38,840 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 25,635 | ​ | ​ | ​ | ​ | ​ | ​
Stockholders’ equity | ​ | ​ | 311,713 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 327,659 | ​ | ​ | ​ | ​ | ​ | ​
Total liabilities and stockholders’ equity | ​ | $ | 3,463,506 | ​ | ​ | 4,232 | ​ | ​ | ​ | $ | 3,093,968 | ​ | ​ | 2,182 | ​ | ​ | ​
Net interest income/spread | ​ | ​ | ​ | ​ | $ | 25,492 | ​ | 2.87 | % | ​ | ​ | ​ | $ | 22,372 | ​ | 2.95 | %
Net interest margin | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 3.08 | % | ​ | ​ | ​ | ​ | ​ | ​ | 3.07 | %
Tax-equivalent adjustments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans | ​ | ​ | ​ | ​ | $ | 356 | ​ | ​ | ​ | ​ | ​ | ​ | $ | 272 | ​ | ​ | ​
Investments | ​ | ​ | ​ | ​ | ​ | 138 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 115 | ​ | ​ | ​
Total adjustments | ​ | ​ | ​ | ​ | $ | 494 | ​ | ​ | ​ | ​ | ​ | ​ | $ | 387 | ​ | ​ | ​

​

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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Nine months ended |
​ | ​ | September 30, 2022 |  | September 30, 2021 |
​ | ​ | Average | ​ | Interest Income/ | ​ | Yield/ |  | Average | ​ | Interest Income/ | ​ | Yield/ |
​ |  | Balance |  | Expense |  | Rate |  | Balance |  | Expense |  | Rate |
Assets: |  | ​ | ​ |  | ​ | ​ |  | ​ | ​ | ​ | ​ |  | ​ | ​ |  | ​ | ​
Earning assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ | $ | 2,260,993 | ​ | $ | 67,990 |  | 4.02 | % | $ | 2,054,486 | ​ | $ | 62,205 |  | 4.05 | %
Tax-exempt | ​ |  | 213,803 | ​ |  | 4,705 |  | 2.94 | ​ |  | 147,952 | ​ |  | 3,619 |  | 3.27 | ​
Total loans | ​ | ​ | 2,474,796 | ​ | ​ | 72,695 | ​ | 3.93 | ​ | ​ | 2,202,438 | ​ | ​ | 65,824 | ​ | 4.00 | ​
Investments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Taxable | ​ |  | 540,512 | ​ |  | 6,178 |  | 1.53 | ​ |  | 268,573 | ​ |  | 3,876 |  | 1.93 | ​
Tax-exempt | ​ |  | 111,041 | ​ |  | 1,957 |  | 2.36 | ​ |  | 78,512 | ​ |  | 1,561 |  | 2.66 | ​
Total investments | ​ | ​ | 651,553 | ​ | ​ | 8,135 | ​ | 1.67 | ​ | ​ | 347,085 | ​ | ​ | 5,437 | ​ | 2.09 | ​
Interest-bearing deposits | ​ |  | 9,846 | ​ |  | 61 |  | 0.83 | ​ |  | 11,589 | ​ |  | 6 |  | 0.07 | ​
Federal funds sold | ​ | ​ | 66,057 | ​ | ​ | 201 |  | 0.41 | ​ | ​ | 241,103 | ​ | ​ | 228 | ​ | 0.13 | ​
Total earning assets | ​ |  | 3,202,252 | ​ |  | 81,092 |  | 3.39 | % |  | 2,802,215 | ​ |  | 71,495 |  | 3.41 | %
Less: allowance for loan losses | ​ |  | 29,144 | ​ | ​ | ​ | ​ | ​ | ​ |  | 27,264 | ​ | ​ | ​ | ​ | ​ | ​
Other assets | ​ |  | 216,960 | ​ | ​ | ​ | ​ | ​ | ​ |  | 227,297 | ​ | ​ | ​ | ​ | ​ | ​
Total assets | ​ | $ | 3,390,068 | ​ | $ | 81,092 | ​ | ​ | ​ | $ | 3,002,248 | ​ | $ | 71,495 | ​ | ​ | ​
Liabilities and Stockholders’ Equity: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest-bearing liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Money market accounts | ​ | $ | 604,918 | ​ | $ | 2,061 |  | 0.46 | % | $ | 538,524 | ​ | $ | 1,551 |  | 0.39 | %
NOW accounts | ​ |  | 790,852 | ​ |  | 2,248 |  | 0.38 | ​ |  | 616,518 | ​ |  | 1,659 |  | 0.36 | ​
Savings accounts | ​ |  | 517,381 | ​ |  | 316 |  | 0.08 | ​ |  | 462,865 | ​ |  | 289 |  | 0.08 | ​
Time deposits less than $100 | ​ |  | 128,639 | ​ |  | 965 |  | 1.00 | ​ |  | 128,152 | ​ |  | 1,100 | ​ | 1.15 | ​
Time deposits $100 or more | ​ |  | 160,949 | ​ |  | 791 |  | 0.66 | ​ |  | 175,673 | ​ |  | 1,132 |  | 0.86 | ​
Total interest-bearing deposits | ​ | ​ | 2,202,739 | ​ | ​ | 6,381 | ​ | 0.39 | ​ | ​ | 1,921,732 | ​ | ​ | 5,731 | ​ | 0.40 | ​
Short-term borrowings | ​ |  | 40,401 | ​ |  | 579 |  | 1.92 | ​ |  | 18,682 | ​ |  | 77 |  | 0.55 | ​
Long-term debt | ​ |  | 1,911 | ​ |  | 67 |  | 4.69 | ​ |  | 9,629 | ​ |  | 226 |  | 3.14 | ​
Subordinated debt | ​ | ​ | 33,000 | ​ | ​ | 1,330 |  | 5.39 | ​ | ​ | 33,000 | ​ | ​ | 1,330 | ​ | 5.37 | ​
Total borrowings | ​ | ​ | 75,312 | ​ | ​ | 1,976 | ​ | 3.51 | ​ | ​ | 61,311 | ​ | ​ | 1,633 | ​ | 3.56 | ​
Total interest-bearing liabilities | ​ |  | 2,278,051 | ​ |  | 8,357 |  | 0.49 | ​ |  | 1,983,043 | ​ |  | 7,364 |  | 0.50 | ​
Noninterest-bearing deposits | ​ |  | 751,549 | ​ | ​ | ​ | ​ | ​ | ​ |  | 670,748 | ​ | ​ | ​ | ​ | ​ | ​
Other liabilities | ​ |  | 35,947 | ​ | ​ | ​ | ​ | ​ | ​ |  | 25,929 | ​ | ​ | ​ | ​ | ​ | ​
Stockholders’ equity | ​ |  | 324,521 | ​ | ​ | ​ | ​ | ​ | ​ |  | 322,528 | ​ | ​ | ​ | ​ | ​ | ​
Total liabilities and stockholders’ equity | ​ | $ | 3,390,068 | ​ | ​ | 8,357 | ​ | ​ | ​ | $ | 3,002,248 | ​ | ​ | 7,364 | ​ | ​ | ​
Net interest income/spread | ​ | ​ | ​ | ​ | $ | 72,735 |  | 2.90 | % | ​ | ​ | ​ | $ | 64,131 |  | 2.91 | %
Net interest margin | ​ | ​ | ​ | ​ | ​ | ​ |  | 3.04 | % | ​ | ​ | ​ | ​ | ​ |  | 3.06 | %
Tax-equivalent adjustments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans | ​ | ​ | ​ | ​ | $ | 988 | ​ | ​ | ​ | ​ | ​ | ​ | $ | 760 | ​ | ​ | ​
Investments | ​ | ​ | ​ | ​ |  | 411 | ​ | ​ | ​ | ​ | ​ | ​ |  | 328 | ​ | ​ | ​
Total adjustments | ​ | ​ | ​ | ​ | $ | 1,399 | ​ | ​ | ​ | ​ | ​ | ​ | $ | 1,088 | ​ | ​ | ​

​

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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 September 30, 2022.

​

For the three months ended September 30, 2022, the provision for loan losses increased to $450 thousand from $400 thousand in the year ago period due to improving credit trends. The provision for loan losses in the three month period ended September 30, 2022 is the result of growth of non-PPP loans.

​

The provision for loan losses was $1.7 million for the nine months ended September 30, 2022, compared to no provision for the comparable period of 2021. The higher provision in the nine month period ended September 30, 2022 is the result of $340.7 million in non-PPP loan growth during the period. The lack of a provision 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 September 30, 2022 was $3.3 million, a decrease of $132 thousand or 3.8% from $3.4 million in the same quarter a year ago. The decline was primarily due to decreases in mortgage banking revenue of $109 thousand, due to lower volumes of mortgage loans being sold into the secondary market and a reduction in fees earned from our Wealth Management division of $93 thousand, due to stock market fluctuations. The reductions in quarterly income were partially offset by an increase of $51 thousand from commercial loan interest rate swaps due to higher credit value adjustments in the quarter when compared to the same quarter a year ago.

​

Noninterest income for the nine months ended September 30, 2022 was $10.6 million, an increase of $266 thousand or 2.6% from $10.3 million in the same period a year ago. During the period, service charges, fees, and commissions increased $691 thousand due to an increase in consumer and commercial deposit related service charges, and the reversal of an accrual of a $335 thousand bank owned life insurance benefit in the year ago period, partially offset by a decrease in mortgage banking income of $357 thousand due to lower sales volumes.

​

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 $1.8 million or 12.6% to $15.9 million for the three months ended September 30, 2022, from $14.1 for the same period a year ago. Salaries and employee benefits increased $645 thousand or 8.2% due to annual merit increases and the addition of lending teams and credit support staff in our newest expansion markets of Piscataway, New Jersey and Pittsburgh, Pennsylvania that opened during the fourth quarter of 2021. Occupancy and equipment expenses were higher by $748 thousand in the current period also due to our expansion markets, plus the addition of information technology investments related to mobile/digital banking solutions implemented during the second half of 2021.

​

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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

​

For the nine months ended September 30, 2022, noninterest expense increased $5.5 million or 13.6% to $45.7 million from $40.2 million for the same period in 2021. Salaries and employee benefits expense increased $2.7 million 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 $2.2 million 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, Pennsylvania markets. Other expenses, which include professional, consulting and loan account processing fees increased by $0.9 million due to higher consulting and advisory expenses, Pennsylvania shares taxes and FDIC assessments.

​

Income Taxes:

​

We recorded income tax expense of $2.0 million or 16.4% of pre-tax income, and $5.6 million or 16.2% of pre-tax income for the three and nine months ended September 30, 2022, respectively. This compares to the three and nine month periods ended September 30, 2021 in which we recorded tax expense of $1.8 million or 16.5% of pre-tax income, and $6.1 million or 18.2% of pre-tax income, respectively. The current year to date period benefited from a higher level of tax-exempt income while the prior year included a $621 deferred tax adjustment. Excluding this adjustment, the effective tax rate would have been 16.4% for the nine month period ended September 30, 2021.

​

​

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Item 3. Quantitative and Qualitativ e 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 September 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 September 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

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market rates led to an increase to the balance sheet spread of 27 basis points. After the first twelve months of the model simulation, the benefit to NII increases as a result of the higher assumed replacement rates on assets resulting from the FOMC’s increase to the federal funds rate of 300 basis points during the first nine months of 2022. Our interest rate risk position exhibits a relatively well-matched position to both rising and falling interest rate environments in the first year of simulation while a sustained falling rate environment presents the greatest potential risk to NII over the longer-term horizon. This position at September 30, 2022 is less asset-sensitive than the simulation at December 31, 2021 indicated due to the addition of fixed rate assets to mitigate our exposure to flat and falling rates.

​

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

​

During 2022, the FOMC has increased the federal funds target rate in part to mitigate historically high inflation. Through November 2, 2022, there have been six rate increases totaling 375 basis points. Although we have realized higher rates on our existing adjustable rate loans and new originations, our average funding costs have been under pressure and during the three months ended September 30, 2022 increased 33 basis points compared to the three months ended June 30, 2022 as rate-sensitive customers seek higher returns. We expect our funding costs to continue to increase in the future due to expectations the FOMC will continue to increase the targeted federal funds rate which may negatively impact our net interest income.

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

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | September 30, 2022 |
​ | ​ | % Change in |
Changes in Interest Rates (basis points) | ​ | Net Interest Income | ​ | Economic Value of Equity |
​ |  | Metric |  | Policy |  | Metric |  | Policy |
+400 |  | (6.7) | ​ | (20.0) | ​ | 2.5 | ​ | (40.0) | ​
+300 |  | (5.1) | ​ | (20.0) | ​ | 2.9 | ​ | (30.0) | ​
+200 |  | (3.6) | ​ | (10.0) | ​ | 2.9 | ​ | (20.0) | ​
+100 |  | (1.5) | ​ | (10.0) | ​ | 2.6 | ​ | (10.0) | ​
Static | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
-100 |  | (1.2) | ​ | (10.0) | ​ | (6.5) | ​ | (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 September 30, 2022, would decrease 1.5% 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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Item 4. Control s and Procedures.

​

(a) Evaluation of disclosure controls and procedures.

​

At September 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 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 September 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 Proceeding s.

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 nine-months ended September 30, 2022 and through the date of this quarterly report on Form 10-Q.

​

Item 1A. Risk Factor s

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 Sale s 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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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 September 30, 2022.

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ | ​ |  |  | Total Number of |  | Maximum Number |
​ | ​ | ​ | ​ | ​ | ​ | ​ | Shares Purchased | ​ | of Shares that may |
​ | ​ | ​ | ​ | ​ | ​ | ​ | as Part of Publicly | ​ | yet be Purchased |
​ | ​ | Total Number of | ​ | ​ | Average Price | ​ | Announced | ​ | Under the |
Month Ending |  | Shares Purchased |  | ​ | Paid Per Share |  | Programs |  | Programs |
July 31, 2022 | ​ | ​ | ​ | $ | ​ | ​ | 263,880 | ​ | 288,070 | ​
August 31, 2022 | ​ | ​ | ​ | ​ | ​ | ​ | 263,880 | ​ | 288,070 | ​
September 30, 2022 | ​ | 7,911 | ​ | ​ | 47.99 | ​ | 271,791 | ​ | 280,159 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​

Item 3. Defaults upo n Senior Securities.

None.

​

Item 4. Mine Safety Disclosures.

Not applicable.

​

Item 5. Other Information.

None.

​

Item 6. Exhibits.

​

Item Number | ​ | Description
​ | ​ | ​
​ | ​ | ​
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 September 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)
​ | ​ | ​

​

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SIGNATURE S

​

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: November 8, 2022 | /s/ Craig W. Best
​ | Craig W. Best
​ | Chief Executive Officer
​ | (Principal Executive Officer)
​ | ​
Date: November 8, 2022 | /s/ John R. Anderson, III
​ | John R. Anderson, III
​ | Executive Vice President and Chief Financial Officer
​ | (Principal Financial Officer and Principal Accounting Officer)

​

​

​

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