.

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, 2017

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files.    Yes  ☒    No  ◻ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer	◻	Accelerated filer	☒
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: 7,396,505 at October 31, 2017.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended September 30, 2017

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at September 30, 2017 and December 31, 2016	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	47
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	48
	Signatures	50

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	September 30, 2017		December 31, 2016
Assets:
Cash and due from banks:
Cash and due from banks	$	31,839	$	39,496
Interest-bearing deposits in other banks		1,067		445
Total cash and due from banks		32,906		39,941
Investment securities:
Available-for-sale		259,138		259,410
Held-to-maturity: Fair value September 30, 2017, $9,912; December 31, 2016, $10,714		9,564		10,517
Total investment securities		268,702		269,927
Loans, net		1,632,515		1,532,965
Less: allowance for loan losses		18,831		15,961
Net loans		1,613,684		1,517,004
Loans held for sale		460
Premises and equipment, net		37,373		33,260
Accrued interest receivable		5,908		6,228
Goodwill		63,370		63,370
Intangible assets, net		3,427		4,211
Other assets		66,406		65,501
Total assets	$	2,092,236	$	1,999,442
Liabilities:
Deposits:
Noninterest-bearing	$	372,146	$	353,686
Interest-bearing		1,315,709		1,235,071
Total deposits		1,687,855		1,588,757
Short-term borrowings		71,900		82,700
Long-term debt		50,199		58,134
Accrued interest payable		481		462
Other liabilities		15,505		12,771
Total liabilities		1,825,940		1,742,824
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,396,505 shares at September 30, 2017 and 7,394,143 shares at December 31, 2016		14,793		14,788
Capital surplus		134,988		134,871
Retained earnings		119,971		111,114
Accumulated other comprehensive loss		(3,456)		(4,155)
Total stockholders’ equity		266,296		256,618
Total liabilities and stockholders’ equity	$	2,092,236	$	1,999,442

See notes to unaudited consolidated financial statements

3

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

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

	Three Months Ended				Nine Months Ended
September 30,	2017		2016		2017		2016
Interest income:
Interest and fees on loans:
Taxable	$	16,535	$	15,294	$	48,021	$	44,400
Tax-exempt		813		770		2,334		2,301
Interest and dividends on investment securities:
Taxable		714		575		2,130		1,879
Tax-exempt		716		861		2,262		2,611
Dividends		13		10		37		31
Interest on interest-bearing deposits in other banks		40		15		107		47
Total interest income		18,831		17,525		54,891		51,269
Interest expense:
Interest on deposits		1,654		1,356		4,617		3,961
Interest on short-term borrowings		177		116		599		282
Interest on long-term debt		344		353		1,041		1,067
Total interest expense		2,175		1,825		6,257		5,310
Net interest income		16,656		15,700		48,634		45,959
Provision for loan losses		1,200		1,200		3,600		3,600
Net interest income after provision for loan losses		15,456		14,500		45,034		42,359
Noninterest income:
Service charges, fees and commissions		2,156		1,542		5,410		4,513
Merchant services income		165		1,257		2,358		3,209
Commission and fees on fiduciary activities		540		539		1,542		1,495
Wealth management income		414		271		1,081		979
Mortgage banking income		193		217		576		616
Life insurance investment income		193		199		577		594
Net gain on sale of investment securities available-for-sale								623
Net gain on sale of merchant services business						2,278
Total noninterest income		3,661		4,025		13,822		12,029
Noninterest expense:
Salaries and employee benefits expense		6,550		5,466		19,851		16,702
Net occupancy and equipment expense		2,483		2,316		7,327		6,998
Merchant services expense		33		890		1,796		2,270
Amortization of intangible assets		259		297		785		899
Other expenses		3,155		3,048		9,079		8,879
Total noninterest expense		12,480		12,017		38,838		35,748
Income before income taxes		6,637		6,508		20,018		18,640
Income tax expense		1,287		1,390		4,209		3,785
Net income		5,350		5,118		15,809		14,855
Other comprehensive income:
Unrealized (loss) gain on investment securities available-for-sale		(381)		(1,120)		1,076		1,003
Reclassification adjustment for net gain on sales included in net income								(623)
Other comprehensive (loss) income		(381)		(1,120)		1,076		380
Income tax related to other comprehensive (loss) income		(133)		(392)		377		133
Other comprehensive (loss) income, net of income taxes		(248)		(728)		699		247
Comprehensive income	$	5,102	$	4,390	$	16,508	$	15,102
Per share data:
Net income:
Basic	$	0.72	$	0.69	$	2.14	$	2.01
Diluted	$	0.72	$	0.69	$	2.14	$	2.01
Average common shares outstanding:
Basic		7,396,505		7,394,143		7,395,612		7,397,581
Diluted		7,396,505		7,394,143		7,395,612		7,397,581
Dividends declared	$	0.32	$	0.31	$	0.94	$	0.93

See notes to unaudited consolidated financial statements

4

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

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

							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Income (Loss)		Total
Balance, January 1, 2017	$	14,788	$	134,871	$	111,114	$	(4,155)		$	256,618
Stock based compensation				122							122
Net income						15,809					15,809
Other comprehensive income, net of income taxes								699			699
Dividends declared: $0.94 per share						(6,952)					(6,952)
Common stock grants awarded, net of unearned compensation of $53: 2,362 shares		5		(5)
Balance, September 30, 2017	$	14,793	$	134,988	$	119,971	$	(3,456)		$	266,296
Balance, January 1, 2016	$	14,821	$	135,371	$	100,701	$	(2,125)		$	248,768
Stock based compensation				53							53
Net income						14,855					14,855
Other comprehensive income, net of income taxes								247			247
Dividends declared: $0.93 per share						(6,879)					(6,879)
Shares retired: 16,463 shares		(33)		(571)							(604)
Balance, September 30, 2016	$	14,788	$	134,853	$	108,677	$	(1,878)	$		256,440

See notes to unaudited consolidated financial statements

5

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

For the Nine Months Ended September 30,	2017		2016
Cash flows from operating activities:
Net income	$	15,809	$	14,855
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,401		1,208
Amortization of deferred loan costs		662		575
Amortization of intangibles		785		899
Amortization of loss on investment tax credits		352		358
Provision for loan losses		3,600		3,600
Net gain on sale of other real estate owned		(50)		(25)
Loans originated for sale		(16,927)		(17,432)
Proceeds from sale of loans originated for sale		16,622		17,688
Net gain on sale of loans originated for sale		(155)		(616)
Net amortization of investment securities		2,130		2,826
Net gain on sale of investment securities available-for-sale				(623)
Net gain on sale of merchant services business		(2,278)
Life insurance investment income		(577)		(594)
Stock based compensation		122		53
Net change in:
Accrued interest receivable		320		487
Other assets		(1,780)		(1,799)
Accrued interest payable		19		(126)
Other liabilities		2,665		(671)
Net cash provided by operating activities		22,720		20,663
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale				27,408
Proceeds from repayments of investment securities:
Available-for-sale		44,489		42,277
Held-to-maturity		936		1,221
Purchases of investment securities:
Available-for-sale		(45,254)		(36,462)
Net redemption (purchase) of restricted equity securities		710		(1,508)
Net increase in lending activities		(101,320)		(183,482)
Investment in low income housing investment tax credits				(2,045)
Purchases of premises and equipment		(5,514)		(6,100)
Purchase of investment in life insurance				(1,500)
Proceeds from the sale of merchant services business		2,300
Proceeds from sale of other real estate owned		487		702
Net cash used in investing activities		(103,166)		(159,489)
Cash flows from financing activities:
Net increase in deposits		99,098		110,000
Repayment of long-term debt		(7,935)		(1,669)
Net (decrease) increase in short-term borrowings		(10,800)		36,975
Retirement of common stock				(604)
Cash dividends paid		(6,952)		(6,879)
Net cash provided by financing activities		73,411		137,823
Net decrease in cash and cash equivalents		(7,035)		(1,003)
Cash and cash equivalents at beginning of period		39,941		32,917
Cash and cash equivalents at end of period	$	32,906	$	31,914

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

(Dollars in thousands)

For the Nine Months Ended September 30,	2017		2016
Supplemental disclosures:
Cash paid during the period for:
Interest	$	6,238	$	5,436
Income taxes		4,100		3,900
Noncash items:
Transfers of loans to other real estate	$	479	$	761

See notes to unaudited consolidated financial statements

7

Peoples Financial Services Corp.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1. Summary of significant accounting policies:

Nature of operations:

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

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 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 operating results or financial position of the Company. The operating results and financial position of the Company for the three and nine months ended and as of September 30, 2017, are not necessarily indicative of the results of 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 real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, determination of other-than-temporary impairment losses on securities, impairment of goodwill and fair value of assets acquired and liabilities assumed in business combinations. 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 year ended December 31, 2016.

Derivative instruments and hedging activities

The Financial Accounting Standards Board (“FASB”) ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings.

8

Peoples Financial Services Corp.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Recent accounting standards:

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. During 2016, the FASB issued ASU Nos. 2016-10, 2016-12 and 2016-20 that provide additional guidance related to the identification of performance obligations within a contract, assessing collectability, contract costs, and other technical corrections and improvements. ASU 2014-09 will become effective for the Company for the annual period beginning after December 15, 2017 and for interim periods within the annual period. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. The Company has not selected a transition method. However, the Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Based on the Company’s analysis of the effect of the new standard on its recurring revenue streams, it does not expect these changes to have a significant impact on the Company’s financial statements. Upon adoption on January 1, 2018, no significant adjustment to opening retained earnings is expected.

In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01, “Financial Instruments – Overall.” The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of this guidance on the Company’s financial statements but due to the nature of the Company’s investments it is not expected to have a significant impact, if any.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee's perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company’s initial findings conclude that the new

9

Peoples Financial Services Corp.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

pronouncement will not have a significant impact on its consolidated financial statements as the current projected minimum lease payments under existing lease contracts subject to the new pronouncement are less than one percent of its current assets.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU will have a significant impact on the Company’s calculation and accounting for its Allowance for Loan Losses as well as credit losses related to investment securities available-for-sale. A summary of significant provisions of this ASU is as follows:

· The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

· The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.

· This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignificant amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.

· This ASU will be effective for the Company for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations. Further, any impact on the allowance upon adoption is currently unknown but any change in allowance levels will affect regulatory capital and ratios.

In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) –Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues with the objective of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Company, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Company anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test

10

Peoples Financial Services Corp.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Company’s annual and interim goodwill impairment tests beginning in the first quarter of 2020.

In August 2017, the Financial Accounting Standards Board issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements, as exposure to derivatives contracts is only offered under special circumstances. The Company will continue to assess the financial statement impact as adoption draws closer and/or exposure to derivatives contracts grows to a level deemed to be material.

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 and benefit plan adjustments.

The components of accumulated other comprehensive loss included in stockholders’ equity at September 30, 2017 and December 31, 2016 is as follows:

		September 30, 2017		December 31, 2016
Net unrealized gain on investment securities available-for-sale	$	1,629	$	553
Income tax		570		193
Net of income taxes		1,059		360
Benefit plan adjustments		(6,946)		(6,946)
Income tax		(2,431)		(2,431)
Net of income taxes		(4,515)		(4,515)
Accumulated other comprehensive loss	$	(3,456)	$	(4,155)

Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2017 and 2016 is as follows:

Three Months Ended September 30,	2017		2016
Unrealized loss on investment securities available-for-sale	$	(381)	$	(1,120)
Net gain on the sale of investment securities available-for-sale(1)
Other comprehensive loss before taxes		(381)		(1,120)
Income tax benefit		(133)		(392)
Other comprehensive loss before taxes	$	(248)	$	(728)

11

Peoples Financial Services Corp.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Nine Months Ended September 30,	2017		2016
Unrealized gain on investment securities available-for-sale	$	1,076	$	1,003
Net gain on the sale of investment securities available-for-sale(1)				(623)
Other comprehensive income gain before taxes		1,076		380
Income tax expense		377		133
Other comprehensive income	$	699	$	247

(1)Represents amounts reclassified out of accumulated other comprehensive loss and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.

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.

There were no shares considered anti-dilutive for the three and nine month periods ended September 30, 2017 and 2016.

	2017				2016
For the Three Months Ended September 30,	Basic		Diluted		Basic		Diluted
Net Income	$	5,350	$	5,350	$	5,118	$