10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

for the quarterly period ended June 30, 2019

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: 7,399,078 at July 31, 2019.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended June 30, 2019

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2019 and 2018 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months ended June 30, 2019 and 2018 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults upon Senior Securities	50
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51
	Signatures	51

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS 

(Dollars in thousands, except share data)

	June 30, 2019		December 31, 2018
Assets:
Cash and due from banks:
Cash and due from banks	$	26,615	$	32,569
Interest-bearing deposits in other banks		3,347		47
Total cash and due from banks		29,962		32,616
Investment securities:
Available-for-sale		261,665		269,682
Equity investments carried at fair value		283		291
Held-to-maturity: Fair value June 30, 2019, $8,151; December 31, 2018, $8,380		7,969		8,361
Total investment securities		269,917		278,334
Loans, net		1,858,799		1,823,266
Less: allowance for loan losses		21,930		21,379
Net loans		1,836,869		1,801,887
Loans held for sale		831		749
Premises and equipment, net		46,468		38,889
Accrued interest receivable		7,303		7,115
Goodwill		63,370		63,370
Intangible assets, net		1,921		2,296
Other assets		67,625		63,737
Total assets	$	2,324,266	$	2,288,993
Liabilities:
Deposits:
Noninterest-bearing	$	419,995	$	410,260
Interest-bearing		1,456,804		1,464,762
Total deposits		1,876,799		1,875,022
Short-term borrowings		82,700		86,500
Long-term debt		52,980		37,906
Accrued interest payable		1,058		1,195
Other liabilities		19,146		9,756
Total liabilities		2,032,683		2,010,379
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,399,078 shares at June 30, 2019 and 7,399,054 shares at December 31, 2018		14,798		14,798
Capital surplus		135,384		135,310
Retained earnings		145,106		136,582
Accumulated other comprehensive loss		(3,705)		(8,076)
Total stockholders’ equity		291,583		278,614
Total liabilities and stockholders’ equity	$	2,324,266	$	2,288,993

See notes to unaudited consolidated financial statements

3

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

	Three Months Ended				Six Months Ended
June 30,	2019		2018		2019		2018
Interest income:
Interest and fees on loans:
Taxable	$	20,641	$	18,239	$	40,744	$	35,748
Tax-exempt		1,109		871		2,208		1,741
Interest and dividends on investment securities:
Taxable		1,025		934		2,035		1,792
Tax-exempt		520		661		1,082		1,362
Dividends		22		19		41		35
Interest on interest-bearing deposits in other banks		15		42		23		82
Total interest income		23,332		20,766		46,133		40,760
Interest expense:
Interest on deposits		3,713		1,959		7,124		3,793
Interest on short-term borrowings		595		841		1,408		1,508
Interest on long-term debt		296		315		576		621
Total interest expense		4,604		3,115		9,108		5,922
Net interest income		18,728		17,651		37,025		34,838
Provision for loan losses		350		1,050		1,400		2,100
Net interest income after provision for loan losses		18,378		16,601		35,625		32,738
Noninterest income:
Service charges, fees and commissions		2,490		1,885		4,489		3,973
Merchant services income		457		309		655		559
Commission and fees on fiduciary activities		492		485		999		982
Wealth management income		370		332		747		743
Mortgage banking income		137		162		285		309
Life insurance investment income		192		191		378		378
Net losses (gains) on equity investment securities		(9)		8		(8)
Net gains on sale of investment securities available-for-sale		23				23
Net gain on sale of credit card loans				291				291
Total noninterest income		4,152		3,663		7,568		7,235
Salaries and employee benefits expense		8,037		7,390		15,632		14,345
Net occupancy and equipment expense		2,849		2,720		5,810		5,534
Amortization of intangible assets		182		220		374		450
Professional fees and outside services		525		446		856		1,069
FDIC insurance and assessments		288		297		547		583
Donations		359		343		691		656
Other expenses		2,189		2,080		4,009		3,940
Total noninterest expense		14,429		13,496		27,919		26,577
Income before income taxes		8,101		6,768		15,274		13,396
Income tax expense		957		811		1,718		1,585
Net income		7,144		5,957		13,556		11,811
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale		2,611		(839)		5,050		(3,215)
Reclassification adjustment for net gain on sales included in net income		(23)				(23)
Change in derivative fair value		443				506
Other comprehensive gain (loss)		3,031		(839)		5,533		(3,215)
Income tax expense (benefit)		637		(176)		1,162		(677)
Other comprehensive income (loss), net of income taxes		2,394		(663)		4,371		(2,538)
Comprehensive income	$	9,538	$	5,294	$	17,927	$	9,273
Per share data:
Net income:
Basic	$	0.96	$	0.81	$	1.83	$	1.60
Diluted	$	0.96	$	0.81	$	1.83	$	1.60
Average common shares outstanding:
Basic		7,399,302		7,396,533		7,399,178		7,396,519
Diluted		7,399,302		7,396,533		7,399,178		7,396,519
Dividends declared	$	0.34	$	0.33		0.68		0.65

See notes to unaudited consolidated financial statements

4

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Income (Loss)		Total
Balance, January 1, 2019	$	14,798	$	135,310	$	136,582	$	(8,076)	$	278,614
Net income						13,556				13,556
Other comprehensive income, net of income taxes								4,371		4,371
Dividends declared: $0.68 per share						(5,032)				(5,032)
Stock based compensation				240						240
Share retirement: 3,830 shares		(8)		(158)						(166)
Common stock grants awarded, net of unearned compensation of $164: 3,854 shares		8		(8)
Balance, June 30, 2019	$	14,798	$	135,384	$	145,106	$	(3,705)	$	291,583
Balance, January 1, 2018	$	14,793	$	135,043	$	121,353	$	(6,213)	$	264,976
Net income						11,811				11,811
Other comprehensive loss, net of income taxes								(2,538)		(2,538)
Dividends declared: $0.65 per share						(4,810)				(4,810)
Stock based compensation				105						105
Reclassification related to adoption of ASU 2016-01						2		(2)
Common stock grants awarded, net of unearned compensation of $113: 2,548 shares		5		(5)
Balance, June 30, 2018	$	14,798	$	135,143	$	128,356	$	(8,753)	$	269,544

See notes to unaudited consolidated financial statements

5

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2019		2018
Cash flows from operating activities:
Net income	$	13,556	$	11,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,227		1,140
Amortization of right-of-use lease asset		187
Amortization of deferred loan costs		(156)		482
Amortization of intangibles		374		450
Amortization of low income housing partnerships		238		233
Provision for loan losses		1,400		2,100
Net unrealized loss on equity investment securities		8
Net loss on sale of other real estate owned		20		19
Loans originated for sale		(5,848)		(5,932)
Proceeds from sale of loans originated for sale		5,813		6,074
Net gain on sale of loans originated for sale		(47)		(36)
Net amortization of investment securities		895		1,197
Net gain on sale of investment securities available-for-sale		(23)
Net gain on sale of credit card loans held for sale				(291)
Life insurance investment income		(378)		(378)
Stock based compensation		240		105
Net change in:
Accrued interest receivable		(188)		134
Other assets		(4,114)		(1,187)
Accrued interest payable		(137)		41
Other liabilities		3,022		(914)
Net cash provided by operating activities		16,089		15,048
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale		9,677
Proceeds from repayments of investment securities:
Available-for-sale		24,651		15,445
Held-to-maturity		387		485
Purchases of investment securities:
Available-for-sale		(22,151)		(22,627)
Net purchase of restricted equity securities		(371)		(2,794)
Proceeds from sale of student loan portfolio				3,171
Net increase in lending activities		(36,380)		(68,291)
Purchases of premises and equipment		(2,541)		(1,071)
Proceeds from the sale of premises and equipment		21		340
Proceeds from sale of other real estate owned		111		200
Net cash used in investing activities		(26,596)		(75,142)
Cash flows from financing activities:
Net increase (decrease) in deposits		1,777		(157)
Proceeds from long-term debt		16,000
Repayment of long-term debt		(926)		(823)
Net (decrease) increase in short-term borrowings		(3,800)		63,775
Retirement of common stock		(166)
Cash dividends paid		(5,032)		(4,810)
Net cash provided by financing activities		7,853		57,985
Net decrease in cash and cash equivalents		(2,654)		(2,109)
Cash and cash equivalents at beginning of period		32,616		37,488
Cash and cash equivalents at end of period	$	29,962	$	35,379

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2019		2018
Supplemental disclosures:
Cash paid during the period for:
Interest	$	9,245	$	5,881
Income taxes		2,200		2,050
Noncash items:
Transfers of loans to other real estate	$	172	$	495
Initial recognition of right-of-use assets		6,523
Initial recognition of lease liability		6,523

See notes to unaudited consolidated financial statements

7

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

1. Summary of significant accounting policies:

Nature of operations:

Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company. Unless the context indicates otherwise, all references in this quarterly report to “Peoples”, “Company”, “Bank”, “we”, “us” and “our” refer to Peoples Financial Services Corp., its subsidiaries and its and their respective predecessors. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within the Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York. Additionally, we operate a Limited Purpose Banking Office(“LPO”) located in and serving Schuylkill County, Pennsylvania.

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 six months ended and as of June 30, 2019, 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 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, 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, 2018.

Recent accounting standards:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”.  From the lessees’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.  The ROU asset and lease liability are calculated based on the present value of future lease payments using an estimated incremental borrowing rate.  The Company utilized the incremental borrowing rate of interest on a collateralized basis for the lease term as quoted by the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income 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 is 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 amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

8

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The new standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. In order to establish the value of the ROU and lease liability and in accordance with the guidance, management determined the term of the leases held by carefully evaluating and assessing each lease and applying economic and other relevant factors to determine whether the Company is reasonably certain to exercise or not to exercise a renewal option within each lease. We have also elected an accounting policy not to restate comparative periods upon adoption. The Company elected to adopt this pronouncement using the optional transition method under ASU 2018-11 as of January 1, 2019 and recorded right-of-use assets and lease liabilities for operating leases of $6,523 on its consolidated balance sheets, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income and comprehensive income.

In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments were adopted on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842) Codification Improvements” which was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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 GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU 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.

9

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 In July 2019, the FASB agreed to issue a proposal to delay the effective date for smaller reporting companies, which the Company currently qualifies as such. If approved, the proposal could delay the effective date until 2023, though the Company may need to adopt earlier if it no longer qualifies as a smaller reporting company. 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.

We are evaluating the impact of the ASU on our consolidated financial statements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements”. In accordance with the Concepts Statement, this ASU removes, modifies and adds select disclosure requirements under Topic 820 after consideration of costs and benefits. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public entities, with early adoption permitted. The adoption of this guidance on January 1, 2020 is not expected to have a material effect on the Company’s consolidated financial statements.

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.

The components of accumulated other comprehensive loss included in stockholders’ equity at June 30, 2019 and December 31, 2018 are as follows:

		June 30, 2019		December 31, 2018
Net unrealized loss on investment securities available-for-sale	$	1,776	$	(3,251)
Income tax		373		(683)
Net of income taxes		1,403		(2,568)
Benefit plan adjustments		(7,218)		(7,218)
Income tax		(1,516)		(1,516)
Net of income taxes		(5,702)		(5,702)
Derivative adjustments		752		246
Income tax		158		52
Net of income taxes		594		194
Accumulated other comprehensive loss	$	(3,705)	$	(8,076)

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.

10

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

There were no shares considered anti-dilutive for the three and six month periods ended June 30, 2019 and 2018.

	2019				2018
For the Three Months Ended June 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,144	$	7,144	$	5,957	$	5,957
Average common shares outstanding		7,399,302		7,399,302		7,396,533		7,396,533
Earnings per share	$	0.96	$	0.96	$	0.81	$	0.81
	2019				2018
For the Six Months Ended June 30	Basic		Diluted		Basic		Diluted
Net income	$	13,556	$	13,556	$	11,811	$	11,811
Average common shares outstanding		7,399,178		7,399,178		7,396,519		7,396,519
Earnings per share	$	1.83	$	1.83	$	1.60	$	1.60

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at June 30, 2019 and December 31, 2018 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,958	$	143	$	17	$	24,084
U.S. Government-sponsored enterprises		93,830		82		423		93,489
State and municipals:
Taxable		12,475		367				12,842
Tax-exempt		69,454		713		32		70,135
Residential Mortgage-backed securities:
U.S. Government agencies		10,669		135		20		10,784
U.S. Government-sponsored enterprises		40,901		776		92		41,585
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		8,601		145				8,746
Total	$	259,888	$	2,361	$	584	$	261,665
Held-to-maturity:
Tax-exempt state and municipals	$	6,854	$	151			$	7,005
Residential Mortgage-backed securities:
U.S. Government agencies		36						36
U.S. Government-sponsored enterprises		1,079		32	$	1		1,110
Total	$	7,969	$	183	$	1	$	8,151

11

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	25,948		9	$	365	$	25,592
U.S. Government-sponsored enterprises		94,999	$	2		2,183		92,818
State and municipals:
Taxable		13,544		309				13,853
Tax-exempt		86,361		338		745		85,954
Residential Mortgage-backed securities:
U.S. Government agencies		12,663		50		84		12,629
U.S. Government-sponsored enterprises		33,149		49		401		32,797
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		6,269				230		6,039
Total	$	272,933	$	757	$	4,008	$	269,682
Held-to-maturity:
Tax-exempt state and municipals	$	6,855	$	12	$	43	$	6,824
Residential Mortgage-backed securities:
U.S. Government agencies		42						42
U.S. Government-sponsored enterprises		1,464		55		5		1,514
Total	$	8,361	$	67	$	48	$	8,380

Equity Securities

Our equity securities portfolio consists of stock of two other financial institutions. At June 30, 2019 and December 31, 2018, we had $283 and $291 respectively, in equity securities recorded at fair value. At June 30, 2019, the fair value of our equity portfolio exceeded the cost basis by $6. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2019 (in thousands):

For the Three Months Ended June 30,		2019		2018
Net gains (losses) recognized during the period on equity securities	$	(9)	$	8
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(9)	$	8
For the Six Months Ended June 30,		2019		2018
Net gains (losses) recognized during the period on equity securities	$	(8)	$
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(8)	$

Restricted Investment In Stock

Restricted investment in stock includes FHLB with a carrying cost of $7,791 and $7,420 at June 30, 2019 and December 31, 2018, respectively and Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 and VISA Class B stock with a carry cost of $0 at June 30, 2019 and December 31, 2018, 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 banks’ use of FHLB’s services.

12

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The Company owns 44,982 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Company’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6298 as of June 30, 2019), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B stock. Due to the lack of orderly trades and public information of such trades, Visa Class B stock has no readily determinable fair value.

These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) periodically. As of June 30, 2019, there was no OTTI associated with these investments.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2019, is summarized as follows:

	Fair
June 30, 2019	Value
Within one year	$	38,102
After one but within five years		133,582
After five but within ten years		10,729
After ten years		18,137
		200,550
Mortgage-backed securities		61,115
Total	$	261,665

The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2019, is summarized as follows:

	Amortized		Fair
June 30, 2019	Cost		Value
Within one year
After one but within five years
After five but within ten years
After ten years	$	6,854	$	7,005
		6,854		7,005
Mortgage-backed securities		1,115		1,146
Total	$	7,969	$	8,151

Securities with a carrying value of $144,991 and $161,647 at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2019 and December 31, 2018, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises, that exceeded 10.0 percent of stockholders’ equity.

13

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not been recognized at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$		$		$	7,993	$	17	$	7,993	$	17
U.S. Government-sponsored enterprises						75,292		423		75,292		423
State and municipals:
Tax-exempt						14,499		32		14,499		32
Residential Mortgage-backed securities:
U.S. Government agencies						5,281		20		5,281		20
U.S. Government-sponsored enterprises						10,372		93		10,372		93
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises										—		—
Total	$	—	$	—	$	113,437	$	585	$	113,437	$	585

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	1,995	$	2	$	19,671	$	363	$	21,666	$	365
U.S. Government-sponsored enterprises		2,037		1		89,729		2,182		91,766		2,183
State and municipals:
Tax-exempt		9,022		74		52,352		714		61,374		788
Residential Mortgage-backed securities:
U.S. Government agencies						7,800		84		7,800		84
U.S. Government-sponsored enterprises		12,851		55		13,881		351		26,732		406
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises						6,039		230		6,039		230
Total	$	25,905	$	132	$	189,472	$	3,924	$	215,377	$	4,056

The Company had 73 investment securities, consisting of 20 tax-exempt state and municipal obligations, 3 U.S. Treasury securities, 28 U.S. Government-sponsored enterprise securities, and 22 mortgage-backed securities that were in unrealized loss positions at June 30, 2019. Of these securities, 3 U.S. Treasury securities, 28 U.S. Government-sponsored enterprise securities, 20 tax-exempt state and municipal obligations, and 20 mortgage-backed securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2019. There was no OTTI recognized for the three or six months ended June 30, 2019 and 2018.

14

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $901 and $744 at June 30, 2019 and December 31, 2018.

		June 30, 2019		December 31, 2018
Commercial	$	513,655	$	494,134
Real estate:
Commercial		935,578		907,803
Residential		298,527		299,876
Consumer		111,039		121,453
Total	$	1,858,799	$	1,823,266

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2019 and 2018 are summarized as follows:

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2019	$	5,955	$	11,074	$	3,880	$	1,196	$	22,105
Charge-offs		(10)		(343)		(143)		(80)		(576)
Recoveries		2				12		37		51
Provisions		195		311		(134)		(22)		350
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
			Real estate
June 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2018	$	5,198	$	10,301	$	2,924	$	1,295	$	19,718
Charge-offs		(2)		(1,169)		(82)		(145)		(1,398)
Recoveries		59		30		57		57		203
Provisions		(64)		896		257		(39)		1,050
Ending balance	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573

15

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892		1,235		21,379
Charge-offs		(87)		(349)		(302)		(212)		(950)
Recoveries		10				16		75		101
Provisions		703		655		9		33		1,400
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
			Real estate
June 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2018	$	5,513	$	8,944	$	3,111	$	1,392	$	18,960
Charge-offs		(2)		(1,169)		(381)		(272)		(1,824)
Recoveries		116		57		67		97		337
Provisions		(436)		2,226		359		(49)		2,100
Ending balance	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2019 and December 31, 2018 is summarized as follows:

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Ending balance: individually evaluated for impairment		615		216		295				1,126
Ending balance: collectively evaluated for impairment	$	5,527	$	10,826	$	3,320	$	1,131	$	20,804
Loans receivable:
Ending balance	$	513,655	$	935,578	$	298,527	$	111,039	$	1,858,799
Ending balance: individually evaluated for impairment		5,915		3,867		2,280		251		12,313
Ending balance: collectively evaluated for impairment	$	507,740	$	931,711	$	296,247	$	110,788	$	1,846,486

16

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

			Real estate
December 31, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Ending balance: individually evaluated for impairment		50		403		666		60		1,179
Ending balance: collectively evaluated for impairment	$	5,466	$	10,333	$	3,226	$	1,175	$	20,200
Loans receivable:
Ending balance	$	494,134	$	907,803	$	299,876	$	121,453	$	1,823,266
Ending balance: individually evaluated for impairment		2,237		3,121		4,071		212		9,641
Ending balance: collectively evaluated for impairment	$	491,897	$	904,682	$	295,805	$	121,241	$	1,813,625

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.

· 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.

17

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2019 and December 31, 2018:

			Special
June 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	504,060	$	2,029	$	7,566	$	$	513,655
Real estate:
Commercial		905,398		3,054		27,126			935,578
Residential		296,021		351		2,155			298,527
Consumer		110,672				367			111,039
Total	$	1,816,151	$	5,434	$	37,214	$	$	1,858,799

			Special
December 31, 2018	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	491,531	$	869	$	1,734	$	$	494,134
Real estate:
Commercial		886,849		8,934		12,020			907,803
Residential		295,758		357		3,761			299,876
Consumer		121,229				224			121,453
Total	$	1,795,367	$	10,160	$	17,739	$	$	1,823,266

The increase in substandard loans from December 31, 2018 to June 30, 2019 is primarily associated with the reclassification of several larger commercial credits to this category. The largest relationship totals $10.4 million and consists of commercial real estate and equipment financing for a borrowing group that has encountered some financial difficulties. The second largest reclassification consists of a $5.3 million commercial real estate construction loan that experienced significant construction delays. The construction is now complete and the property recently received its certificate of occupancy. The Bank considers both of these credit relationships to be well secured and both relationships were current as of June 30, 2019.

Information concerning nonaccrual loans by major loan classification at June 30, 2019 and December 31, 2018 is summarized as follows:

		June 30, 2019		December 31, 2018
Commercial	$	4,494	$	776
Real estate:
Commercial		3,044		2,663
Residential		1,464		2,580
Consumer		251		212
Total	$	9,253	$	6,231

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
June 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	385	$	136	$	4,502	$	5,023	$	508,632	$	513,655	$	8
Real estate:
Commercial		1,200		54		3,192		4,446		931,132		935,578		148
Residential		1,930		427		1,649		4,006		294,521		298,527		185
Consumer		495		128		251		874		110,165		111,039
Total	$	4,010	$	745	$	9,594	$	14,349	$	1,844,450	$	1,858,799	$	341

18

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The Company classifies all nonaccrual loans in the greater than 90 days category.

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2018	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	973	$	79	$	776	$	1,828	$	492,306	$	494,134
Real estate:
Commercial		1,889		218		2,736		4,843		902,960		907,803	$	73
Residential		2,486		1,545		3,430		7,461		292,415		299,876		850
Consumer		756		292		212		1,260		120,193		121,453
Total	$	6,104	$	2,134	$	7,154	$	15,392	$	1,807,874	$	1,823,266	$	923

The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2019 and June 30, 2018, and as of and for the year ended, December 31, 2018 by major loan classification:

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	4,495	$	4,931			$	5,284	$	17	$	4,043	$	34
Real estate:
Commercial		2,957		3,116				2,528		10		2,341		23
Residential		619		888				740		4		1,150		11
Consumer		251		261				245				214
Total		8,322		9,196				8,797		31		7,748		68
With an allowance recorded:
Commercial		1,420		1,432		615		1,180		5		1,012		12
Real estate:
Commercial		910		1,380		216		1,174		5		1,166		10
Residential		1,661		1,740		295		1,848		7		1,932		18
Consumer												20
Total		3,991		4,552		1,126		4,202		17		4,130		40
Total impaired loans
Commercial		5,915		6,363		615		6,464		22		5,055		46
Real estate:
Commercial		3,867		4,496		216		3,702		15		3,507		33
Residential		2,280		2,628		295		2,588		11		3,082		29
Consumer		251		261				245				234
Total	$	12,313	$	13,748	$	1,126	$	12,999	$	48	$	11,878	$	108

19

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2018	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	1,562	$	1,900			$	1,318	$	67
Real estate:
Commercial		1,969		2,299				2,822		28
Residential		1,970		2,658				2,193		22
Consumer		152		160				135
Total		5,653		7,017				6,468		117
With an allowance recorded:
Commercial		675		675		50		1,006		30
Real estate:
Commercial		1,152		1,323		403		1,676		18
Residential		2,101		2,328		666		1,585		22
Consumer		60		60		60		21
Total		3,988		4,386		1,179		4,288		70
Total impaired loans
Commercial		2,237		2,575		50		2,324		97
Real estate:
Commercial		3,121		3,622		403		4,498		46
Residential		4,071		4,986		666		3,778		44
Consumer		212		220		60		156
Total	$	9,641	$	11,403	$	1,179	$	10,756	$	187

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,182	$	1,355			$	1,197	$	16	$	1,224	$	33
Real estate:
Commercial		2,871		3,262				2,921		9		2,910		15
Residential		2,146		2,848				2,218		4		2,210		8
Consumer		60		67				106				127
Total		6,259		7,532				6,442		29		6,471		56
With an allowance recorded:
Commercial		1,100		1,124	$	146		1,117		8		1,139		16
Real estate:
Commercial		1,755		1,876		502		2,079		4		1,853		10
Residential		1,425		1,550		378		1,458		4		1,504		8
Consumer		3		3		3		11				10
Total		4,283		4,553		1,029		4,665		16		4,506		34
Total impaired loans
Commercial		2,282		2,479		146		2,314		24		2,363		49
Real estate:
Commercial		4,626		5,138		502		5,000		13		4,763		25
Residential		3,571		4,398		378		3,676		8		3,714		16
Consumer		63		70		3		117				137
Total	$	10,542	$	12,085	$	1,029	$	11,107	$	45	$	10,977	$	90

20

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,677 at June 30, 2019, $2,779 at December 31, 2018 and $3,307 at June 30, 2018.

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.

· Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time.

· 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 for the three months ended June 30, 2019.  There was one commercial real estate loan modified as a troubled debt restructuring during the six months ended June 30, 2019 in the amount of $340. There was one commercial real estate loan modified as a troubled debt restructuring for the three and six months ended June 30, 2018 totaling $340. During the three and six months ended June 30, 2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off. During the three months ended June 30, 2018, there were no payment defaults on restructured loans. During the six months ended June 30, 2018, there was one payment default on a restructured residential mortgage loan with an outstanding balance of $58. 

6. Other assets:

The components of other assets at June 30, 2019, and December 31, 2018 are summarized as follows:

		June 30, 2019		December 31, 2018
Other real estate owned	$	408	$	376
Investment in low income housing partnership		7,139		7,377
Mortgage servicing rights		719		718
Bank owned life insurance		34,667		34,288
Restricted equity securities		7,833		7,462
Net deferred tax asset		3,919		5,081
Other assets		12,940		8,435
Total	$	67,625	$	63,737

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

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

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

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

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

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

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

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

During the periods ended June 30, 2019 and December 31, 2018 there were no significant transfers between Level 1 and Level 2 and 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:  The Company’s interest rate swaps 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 swaps, Libor rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

22

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a recurring basis at June 30, 2019 and December 31, 2018 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,084	$	24,084			$
U.S. Government-sponsored enterprises		93,489			$	93,489
State and Municipals:
Taxable		12,842				12,842
Tax-exempt		70,135				70,135
Mortgage-backed securities:
U.S. Government agencies		10,784				10,784
U.S. Government-sponsored enterprises		50,331				50,331
Common equity securities		283		283
Interest rate floor-other assets		1,025				1,025
Interest rate swap-other assets		3,807				3,807
Interest rate swap-other liabilities		(4,182)				(4,182)
Total	$	262,598	$	24,367	$	238,231	$

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2018	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	25,592	$	25,592			$
U.S. Government-sponsored enterprises		92,818			$	92,818
State and Municipals:
Taxable		13,853				13,853
Tax-exempt		85,954				85,954
Mortgage-backed securities:
U.S. Government agencies		12,629				12,629
U.S. Government-sponsored enterprises		38,836				38,836
Common equity securities		291		291
Interest rate floor-other assets		553				553
Interest rate swap-other assets		108				108
Interest rate swap-other liabilities		(138)				(138)
Total	$	270,496	$	25,883	$	244,613	$

Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2019 and December 31, 2018 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	2,865			$	2,865
Other real estate owned	$	250			$	250

23

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2018	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	2,809			$	2,809
Other real estate owned	$	234			$	234

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

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	2,865	Appraisal of collateral	Appraisal adjustments	7.6% to 97.0%  (56.7)%
				Liquidation expenses	3.0% to 6.0% (5.4)%
Other real estate owned	$	250	Appraisal of collateral	Appraisal adjustments	20.0% to 43.3%  (32.0)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2018	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	2,809	Appraisal of collateral	Appraisal adjustments	7.1% to 97.0%  (61.8)%
				Liquidation expenses	3.0% to 6.0% (4.4)%
Other real estate owned	$	234	Appraisal of collateral	Appraisal adjustments	26.0% to 73.3%  (38.9)%
				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

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The carrying and fair values of the Company’s financial instruments at June 30, 2019 and December 31, 2018 and their placement within the fair value hierarchy are as follows:

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	29,962	$	29,962	$	29,962
Investment securities:
Available-for-sale		261,665		261,665		24,084	$	237,581
Common equity securities		283		283		283
Held-to-maturity		7,969		8,151				8,151
Net loans		1,836,869		1,830,139					$	1,830,139
Accrued interest receivable		7,303		7,303				7,303
Mortgage servicing rights		719		1,712				1,712
Restricted equity securities		7,833		7,833				7,833
Interest rate floor		1,025		1,025				1,025
Interest rate swaps		3,807		3,807				3,807
Total	$	2,157,435	$	2,151,880
Financial liabilities:
Deposits	$	1,876,799	$	1,862,246			$	1,862,246
Short-term borrowings		82,700		82,700				82,700
Long-term debt		52,980		53,338				53,338
Accrued interest payable		1,058		1,058				1,058
Interest rate swaps		4,182		4,182				4,182
Total	$	2,017,719	$	2,003,524

25

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2018	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	32,616	$	32,616	$	32,616
Investment securities:
Available-for-sale		269,682		269,682		25,952	$	244,090
Common equity securities		291		291		291
Held-to-maturity		8,361		8,380				8,380
Loans held for sale		749		749				749
Net loans		1,801,887		1,762,449					$	1,762,449
Accrued interest receivable		7,115		7,115				7,115
Mortgage servicing rights		718		1,710				1,710
Restricted equity securities		7,462		7,462				7,462
Interest rate floor		553		553				553
Interest rate swaps		108		108				108
Total	$	2,129,542	$	2,091,115
Financial liabilities:
Deposits	$	1,875,022	$	1,874,520			$	1,874,520
Short-term borrowings		86,500		86,500				86,500
Long-term debt		37,906		38,071				38,071
Accrued interest payable		1,195		1,195				1,195
Interest rate swaps		138		138				138
Total	$	2,000,761	$	2,000,424

8. Employee benefit plans:

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

For the three and six months ended June 30, salaries and employee benefits expense includes approximately $415 and $755, respectively in 2019 and $403 and $743, respectively in 2018 relating to the employee benefit plans.

	Pension Benefits
Three Months Ended June 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	192	$	156
Expected return on plan assets		(325)		(240)
Amortization of unrecognized net gain		68		49
Net periodic benefit cost	$	(65)	$	(35)
	Pension Benefits
Six Months Ended June 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	320	$	156
Expected return on plan assets		(542)		(240)
Amortization of unrecognized net gain		113		49
Net periodic benefit cost	$	(109)	$	(35)

26

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The Company contributed $2,700 to the pension plan during the third quarter of 2018. This contribution reduced the unfunded portion of the pension plan and also reduced future premium costs associated with the plan. Previously, the Company paid a fixed premium cost of $18 annually with an additional $92 for the variable portion of the premium. This was reduced to $0 with the current funding status of the pension.

The 2008 long-term incentive plan (“2008 Plan”) allowed for eligible participants to be granted equity awards. No awards may be made under the 2008 Plan after January 15, 2018.

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

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

· Determine the type, size and term of awards.

· Determine whether such performance objectives and conditions have been met.

· Accelerate the vesting or excercisability of an award.

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

As of June 30, 2019, there were 61,346 shares of the Company’s common stock available for grant as awards pursuant to the 2017 Plan. The 2008 Plan expired in January 2018but will remain in effect in accordance with its terms to govern outstanding awards under that 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.

In the first six months of 2019 and 2018, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan,with an aggregate of 17,345 shares and 11,468 shares underlying such awards, respectively.

The non-performance restricted stock grants made in 2019 and 2018 vest equally over three years from the grant date. The performance-based restricted stock units vest three years after the grant date and include conditions based on the Company’s three year cumulative diluted earnings per share and three-year average return on 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. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period. 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 compensation expense of $240 and $157 for the three and six  months ended June 30, 2019 for awards granted under the 2017 Plan. The Company recognized compensation expense of $37 and $43 for the three and six months ended June 30, 2018 for awards granted under the 2017 Plan and $31 and $62 for awards granted under the 2008 Plan. As of June 30, 2019, the Company had $1,071 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of just under 1.7 years.

27

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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. 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as part of its interest rate risk management strategy. 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.

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 Loss and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During 2019, the Company estimates that an additional $64 will be reclassified as a reduction to interest income. 

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2019, the Company had 22 interest rate swaps with an aggregate notional amount of $123,351 related to this program.

28

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018.

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of June 30, 2019			As of December 31, 2018 (1)			As of June 30, 2019			As of December 31, 2018 (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	$	1,025		$	553
Total derivatives designated as hedging instruments				$	1,025		$	553
Derivatives not designated as hedging instruments
Interest Rate Swaps	$	123,351	Other Assets	$	3,807	Other Assets	$	108	Other Liabilities	$	4,182	Other Liabilities	$	138
Total derivatives not designated as hedging instruments				$	3,807		$	108		$	4,182		$	138

(1) Assets amount does not include accrued interest receivable of $13

(2) Liabilities amount does not include accrued interest payable of $13

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

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Loss as of June 30, 2019. There was no cash flow hedge as of June 30, 2018.

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

427

$

532

$

(105)

Interest Income

$

(16)

$

$

(16)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

474

$

827

$

(353)

Interest Income

$

(31)

$

$

(31)

* Amounts disclosed are gross and not net of taxes.

29

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and June 30, 2018.

		Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging
		Relationships
		2019	2018
		Interest Income	Interest Income
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	$	(31)
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	$	(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income -  included component
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income -  excluded component	$	(31)

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and 2018.

		Amount of Loss		Amount of Loss		Amount of Gain		Amount of Gain
		Recognized in		Recognized in		Recognized in		Recognized in
	Location of Gain or (Loss)	Income		Income		Income		Income
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	June 30, 2019		June 30, 2019		June 30, 2018		June 30, 2018
Interest Rate Swaps	Other non-interest income	$	(236)	$	(346)	$	19	$	85
Fee Income	Other  income / (expense)	$	744	$	1,136	$	53	$	53

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2019 and December 31, 2018. The net amounts of derivative assets or liabilities can be reconciled to the

30

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheets.

Offsetting of Derivative Assets
as of June 30, 2019
						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	$	4,833	$	$	4,833	$		$	4,833
Offsetting of Derivative Liabilities
as of June 30, 2019
						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	$	4,183	$	$	4,183	$		$	4,183
Offsetting of Derivative Assets
as of December 31, 2018
						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	$	661	$	$	661	$		$	661
Offsetting of Derivative Liabilities
as of December 31, 2018
						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	$	138	$	$	138	$		$	138

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.

The Company has agreements with certain of its derivative counterparties that contain provisions that require the Company’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating is reduced below investment grade then a termination event shall be deemed to have occurred and the non-affected counterparty shall have the right but not obligation to terminate all affected transactions under the agreement.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

As of June 30, 2019, 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 $376. As of December 31, 2018, 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 $29. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $3,310 against its obligations under these agreements as of June 30, 2019, compared to having no posted collateral with a counterparty at December 31, 2018. 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. Borrowings

Short-term borrowings consisted of FHLB advances representing overnight borrowings at June 30, 2019 and December 31, 2018:

	At and for the six months ended June 30, 2019
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at
	Balance		Balance		Balance		the six monthe ended June 30,2019		June 30,2019
FHLB advances	$	82,700	$	105,212	$	133,725	2.70	%	2.46	%

	At and for the year ended December 31, 2018
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
	Balance		Balance		Balance		the Year		of the Year
FHLB advances	$	86,500	$	133,834	$	189,275	2.05	%	2.62	%

The Company has an agreement with the FHLB which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At June 30, 2019, the maximum borrowing capacity was $706,808 of which $135,680 was outstanding in borrowings. At December 31, 2018, the maximum borrowing capacity was $700,169 of which $124,406 was outstanding in borrowings. Short-term borrowings were used to fund our loan growth during the first six months of 2019 as deposit balances were relatively unchanged from year end. Short-term borrowings were lower by $3,800 from year end 2018 in part to us locking in $16,000 of new long term borrowings at lower fixed rates under the FHLB’s ‘Community Lending Program’. 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 short-term borrowing rate resets each day.  

Long-term debt consisting of advances from the FHLB at June 30, 2019 and December 31, 2018 are as follows:

	Interest Rate
Due	Fixed		Adjustable			June 30, 2019		December 31, 2018
December 2019			4.09	%	$	3,000		3,000
December 2019			3.63			6,300		6,300
December 2019	1.62	%				10,000		10,000
June 2020	1.74					5,000		5,000
June 2020	2.22					6,000
December 2020	1.84					5,000		5,000
June 2021	1.99					10,000
March 2023	4.69					7,680		8,606
					$	52,980	$	37,906

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Maturities of long-term debt, by contractual maturity, for the remainder of 2019 and subsequent years are as follows:

2019	$	20,248
2020		17,963
2021		12,058
2022		2,156
2023		555
	$	52,980

None of the advances from the FHLB are convertible. At June 30, 2019, long-term debt consist of $43,680 at fixed rates and $9,300 at adjustable rates which reset quarterly based on three-month LIBOR plus 1.21% to plus 1.57%. New long-term advances totaling $16,000 were entered into with the FHLB during the second quarter of 2019. The advances were qualified under the FHLB’s ‘Community Lending Program’ which offers rates lower than their stated rates when the advances are used for community development.

11. Income taxes

The effective tax rate of the Company was 11.8% and 11.2% for the three and six months ended June 30, 2019 compared to 12.0% and 11.8% for the three and six months ended June 30, 2018. The three and six months ended June 30, 2019 include before tax investment tax credits and other credits of $390 and $778 compared to before tax investment tax credits $273 and $543 for those same periods last year.

33

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2018.

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: 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, 2018, 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, 2018. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

Operating Environment:

In July 2019, the Federal Open Market Committee (“FOMC”) voted to decrease the target range for federal funds to 2.00% to 2.25% after maintaining the target range for federal funds at 2.25% to 2.50% since their last 25 basis point rate increase in December 2018. Overall inflation remains near the committee’s long-term desired 2 percent level for items other than food and energy. The consumer price index (“CPI”) registered 2.1% for the 12 months ended June 30, 2019. This is up from 2.0% for the 12 months ended March 31, 2019 and from 1.9% for the 12 months ended December 31, 2018. Gross domestic product (“GDP”), the value of all goods and services produced in the nation, came in with an initial second quarter reading of a 2.1% annualized rate, above all forecasts for the quarter which came in at a consensus rate of 2.0% but well below the first quarter of 2019 which registered 3.2%. The latest reading of GDP has led to

34

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

speculation that the weakening growth in much of the world’s economy may be spilling over into the United States. Consumer activity has been strong but manufacturing has slowed and housing remains weak.

Review of Financial Position:

Total assets increased $35,273, or 3.1% annualized, to $2,324,266 at June 30, 2019, from $2,288,993 at December 31, 2018. Loans, net increased to $1,858,799 at June 30, 2019, compared to $1,823,266 at December 31, 2018, an increase of $35,533 or 3.9% annualized. The increase in loans, net during 2019 has been funded primarily by borrowings and to a lesser extent investment cash flow. Deposits increased slightly by $1,777 or 0.2% annualized during the first half of 2019. Interest-bearing deposits decreased $7,958 while noninterest-bearing deposits increased $9,735. Total stockholders’ equity increased $12,969 or 4.7%, from $278,614 at year-end 2018 to $291,583 at June 30, 2019. For the six months ended June 30, 2019, total assets averaged $2,313,053, an increase of $105,654 from $2,207,399 for the same period of 2018.

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 $261,665 at June 30, 2019, a decrease of $8,017, or 3.0% from $269,682 at December 31, 2018. The decrease was primarily due to the sale of $9,654 of short-term, low yielding municipal securities with the proceeds used to paydown borrowings and reinvest into higher yielding, longer term securities. An increase in the market value of the available-for-sale portfolio due to a decline in market rates partially offset the decrease.  Investment securities held-to-maturity totaled $7,969 at June 30, 2019, a decrease of $392 or 4.7% from $8,361 at December 31, 2018 due to payments received on mortgage backed securities.

For the six months ended June 30, 2019, the investment portfolio averaged $274,230, a decrease of $6,671 or 2.4% compared to $280,901 for the same period last year. The tax-equivalent yield on the investment portfolio decreased 7 basis points to 2.53% for the six months ended June 30, 2019, from 2.60% for the comparable period of 2018. The decrease in yield is due to lower reinvestment rates for cash flow from matured and called higher yielding municipal bonds.

Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported net unrealized gains, included as a separate component of stockholders’ equity of $1,403, net of deferred income taxes of $373, at June 30, 2019, and net unrealized losses of $2,568, net of deferred income taxes of $683, at December 31, 2018.

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:

Loan growth during the second quarter of 2019 slowed when compared to the first quarter increasing $9,197. Loans, net increased to $1,858,799 at June 30, 2019 from $1,823,266 at December 31, 2018, an increase of $35,533 or 3.9% annualized. The growth was primarily from commercial real estate loans and to a lesser extent from commercial and industrial loans. Partially offsetting the increases were reductions to consumer loans, primarily dealer indirect auto loans, and a slight decline to the residential real estate portfolio.  Commercial real estate loans increased $27,775 or 6.2% annualized, to $935,578 at June 30, 2019 compared to $907,803 at December 31, 2018 due to growth primarily in our expansion markets.  Commercial and industrial loans increased $19,521 or 8.0% annualized , to $513,655 at June 30, 2019 compared to $494,134 at December 31, 2018 due to growth in loans to small businesses, as we focus on developing total banking relationships with this market segment.  Our growth in commercial  and commercial real estate loans is due in part to our continued success in executing the strategic market expansion initiative in the Lehigh Valley and Greater Delaware Valley. Our newest branch in Lebanon County in Central Pennsylvania further extends this strategy.

Consumer loans decreased $10,414, or 17.3% on an annualized basis, to $111,039 at June 30, 2019 compared to $121,453 at December 31, 2018. The decrease in consumer loans was primarily due to payoffs outpacing dealer indirect

35

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

auto loan origination volumes. Lower origination volumes have resulted from the Bank’s change to the structure of its loan pricing which began during 2018.   

Residential real estate loans decreased $1,349, or 0.9% on an annualized basis, to $298,527 at June 30, 2019 compared to $299,876 at December 31, 2018. The residential real estate loans decrease was due to principal reductions in our home equity line of credit portfolio and a slight increase in first lien residential mortgages as a majority of new loan originations are being underwritten based on the Bank’s guidelines and being held in portfolio.  The residential mortgage portfolio increased during the first half of 2019 despite the sale of $1,038 of non-performing mortgage loans during the first quarter.

For the six months ended June 30, 2019, loans, net averaged $1,847,960, an increase of $117,291 or 6.8% compared to $1,730,669 for the same period of 2018. The tax-equivalent yield on the loan portfolio was 4.75% for the six months ended June 30, 2019, a 33 basis point increase from the comparable period last year. The increase in yield is due to higher market rates and loan yields resulting from the FOMC’s actions to increase the Federal Funds rate 100 basis points during 2018, coupled with adjustable rate loans repricing at higher rates.

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 financial statements.

Unused commitments at June 30, 2019, totaled $401,630, consisting of $367,230 in unfunded commitments of existing loan facilities and $34,400 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, 2018 totaled $379,187, consisting of $345,912 in unfunded commitments of existing loans and $33,275 in standby letters of credit.

Asset Quality:

National, Pennsylvania, New York and market area unemployment rates at June 30, 2019 and 2018, are summarized as follows:

	2019		2018
United States	3.8	%	4.0	%
New York (statewide)	4.1		4.5
Pennsylvania (statewide)	3.9		4.5
Broome County	4.7		5.5
Bucks County	3.4		3.9
Lackawanna County	4.3		4.7
Lebanon County	3.4		3.9
Lehigh County	4.1		4.8
Luzerne County	5.1		5.6
Monroe County	4.8		5.6
Montgomery County	3.1		3.6
Northampton County	4.0		4.6
Schuylkill County	4.8		5.4
Susquehanna County	4.2		4.4
Wayne County	4.7		5.3
Wyoming County	4.5	%	4.8	%

36

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

The employment conditions improved for the nation, Pennsylvania, and New York and in all of the thirteen counties representing our market areas in Pennsylvania and New York from one year ago. Unemployment rates have fallen to multi year lows.

Distribution of nonperforming assets

		June 30, 2019			December 31, 2018
Nonaccrual loans:
Commercial	$	4,494		$	776
Real estate:
Commercial		3,044			2,328
Residential		1,460			2,574
Consumer		251			212
Total nonaccrual loans		9,249			5,890
Troubled debt restructured loans:
Commercial		1,391			1,438
Real estate:
Commercial		675			719
Residential		611			622
Total troubled debt restructured loans		2,677			2,779
Accruing loans past due 90 days or more:
Commercial		8
Real estate:
Commercial		148			73
Residential		185			850
Total accruing loans past due 90 days or more		341			923
Total nonperforming loans		12,267			9,592
Foreclosed assets		408			376
Total nonperforming assets	$	12,675		$	9,968
Nonperforming loans as a percentage of loans, net		0.66	%		0.53	%
Nonperforming assets as a percentage of loans, net and foreclosed assets		0.68	%		0.55	%

We experienced a decline in our asset quality during the first six months of  2019 as evidenced by an increase of $2,707 in nonperforming assets.  Nonperforming assets totaled $12,675 or 0.68% of loans, net and foreclosed assets at June 30, 2019, from $9,968 or 0.55% of loans, net and foreclosed assets at December 31, 2018. An increase in nonaccrual loans and slight increase in foreclosed assets was partially offset by a decrease in restructured loans and loans past due ninety days or more.

Loans on nonaccrual status increased $3,359 to $9,249 at June 30, 2019 from $5,890 at December 31, 2018. The majority of the increase from year end was due to an increase of $3,718 in commercial and industrial loans resulting from the placement of one large credit relationship on nonaccrual totaling $4,718 during the first quarter. At June 30, 2019, the value of the collateral is sufficient to support the debt of this credit. A decrease in nonaccrual residential real estate loans due to a sale of a pool of non-performing loans during the first quarter partially offset the increase in commercial real estate loans. Restructured loans decreased $102 to $2,677 at June 30, 2019 from $2,779 at December 31, 2018 due in part to a default and subsequent charge off of two commercial real estate loans during the second quarter partially offset by the addition of one commercial real estate loan totaling $340 during the second quarter of 2019. Foreclosed assets increased $32 to $408 at June 30, 2019 from $376 at December 31, 2018.  Other real estate owned comprised six properties at June 30, 2019 and seven properties at December 31, 2018, respectively.

Generally, maintaining a high loan to deposit ratio is our primary goal in order to drive profitability. However, this objective is superseded by our attempts to ensure that asset quality remains strong. We continued our efforts to maintain sound underwriting standards for both commercial and consumer credit. Most commercial lending is done primarily with locally owned small businesses.

37

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, “Receivables,” for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, credit administration identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. We consistently use loss experience from the latest 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 allowance for loan losses increased $551 to $21,930, or 1.18% of loans, net at June 30, 2019, from $21,379, or 1.17% of loans, net at the end of 2018. For the six months ended June 30, 2019, net charge-offs were $849 or 0.09% of average loans outstanding, a $638 decrease compared to $1,487 or 0.17% of average loans outstanding in the same period of 2018. The decrease in the current period is due to the charge off of one large commercial real estate loan during the year ago period totaling $1,154.

Deposits:

We attract the majority of our deposits from within our market area that stretches from Montgomery County in southeastern Pennsylvania to Broome County in the Southern Tier of New York State to Lebanon County in Central Pennsylvania 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 IRA’s. For the six months ended June 30, 2019, total deposits increased $1,777 or 0.2% annualized, to $1,876,799 from $1,875,022 at December 31, 2018. Interest-bearing deposits decreased $7,958 due to seasonal outflows of public deposits, while noninterest-bearing deposits increased $9,735. Interest-bearing transaction accounts, including NOW and money market accounts, experienced the majority of the municipal deposit ouflow decreasing $37,516, or 10.1% annualized, to $712,847 at June 30, 2019, from $750,363 at December 31, 2018, savings accounts increased $1,675, or 0.9% annualized to $379,832 as of June 30, 2019 from $378,157 at December 31, 2018 and time deposits less than $250 increased $8,185, or 6.6% annualized, to $258,641 at June 30, 2019, from $250,456 at December 31, 2018. Time deposits $250 or more increased $19,697, or 46.3% annualized to $105,483 at June 30, 2019 from $85,786 at year end 2018 due in part to growth in commercial and municipal accounts.

For the six months ended June 30, interest-bearing deposits averaged $1,447,773 in 2019 compared to $1,325,523 in 2018, an increase of $122,250, or 9.2%. The cost of interest-bearing deposits was 0.99% in 2019 compared to 0.58% for the same period last year. For the first six months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 1.15% in 2019 and 0.78% in 2018. The higher costs are due primarily to higher short-term market rates, the result of the FOMC’s action to increase the overnight borrowing rate 100 basis points during 2018.   

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.

Overall, total borrowings at June 30, 2019, totaled $135,680 compared to $124,406 at December 31, 2018, an increase of $11,274.  The additional borrowings from yearend was used to fund loan growth, as deposit balances had a small

38

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

increase from year end.  Total short-term borrowings at June 30, 2019, totaled $82,700 compared to $86,500 at December 31, 2018, a decrease of $3,800. Long-term debt was $52,980 at June 30, 2019, compared to $37,906 at year end 2018. The increase to long-term borrowings was the result of terming out and fixing $16,000 of the variable rate short-term borrowings at lower rates under the FHLB’s ‘Community Lending Program’ during the second quarter of 2019.

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.

As a result of economic uncertainty, a prolonged era of historically low market rates and the recent increases to short-term 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 1.29% at June 30, 2019. Given the latest action by the FOMC to lower the targeted federal funds rate 25 basis points, after increasing rates 100 basis points during 2018, and the potential for rates to decrease in the future. The focus of ALCO has been to create a balanced static gap position. With regard to RSA, we predominantly offer medium-term, fixed-rate loans as well as adjustable rate loans. With respect to RSL, we are offering short term certificates of deposit in an attempt to decrease duration. The current position at June 30, 2019, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to decrease as market rates decrease. 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.

39

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table 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 a table.

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at June 30, 2019, 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 2019 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. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after June 30, 2019. Our noncore funds at June 30, 2019, were comprised of time deposits in denominations of $100 or more and other borrowings. These funds are not considered to be a strong source of liquidity because they are very interest rate sensitive and are considered to be highly volatile. At June 30, 2019, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 16.5%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 11.4%. Comparatively, our overall noncore dependence ratio at year-end 2018 was 15.0% and our net short-term noncore funding dependence ratio was 6.3%, indicating that our reliance on noncore funds has increased overall.

40

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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 $2,654 during the six months ended June 30, 2019. Cash and cash equivalents decreased $2,109 for the same period last year. For the six months ended June 30, 2019, net cash inflows of $16,089 from operating activities and $7,853 from financing activities were more than offset by net cash outflows of $26,596 from investing activities. For the same period of 2018, net cash inflows of $15,048 from operating activities and $57,985 from financing activities were more than offset by net cash outflows of $75,142 from investing activities.

Operating activities provided net cash of $16,089 for the six months ended June 30, 2019, and $15,048 for the corresponding six months of 2018. 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 $26,596 for the six months ended June 30, 2019, compared to using net cash of $75,142 for the same period of 2018. In 2019 and 2018, an increase in lending activities was the primary factor causing the net cash outflow from investing activities.

Financing activities provided net cash of $7,853 for the six months ended June 30, 2019, and provided net cash of $57,985 for the corresponding six months of 2018. Deposit gathering is our predominant financing activity. In the event that loan growth should exceed the growth in deposits, short-term and long-term borrowings fill in the gap in funding. Deposits used cash of $1,777 for the six months ended June 30, 2019. Comparatively, deposits decreased $157 for the same period of 2018. We continue to seek deposits from new markets and customers as well as existing customers, including municipalities and school districts. Short term borrowings decreased $3,800 in the six months ended June 30, 2019 compared to an increase of $63,775 for the comparable period in 2018. Long term borrowings increased $15,074, net of repayments for the six months ended June 30, 2019, compared to a decrease of $823 for the same six months in 2018. With favorable borrowing rates we locked $16,000 in longer term funding at the FHLB.

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 $291,583 or $39.41 per share at June 30, 2019, compared to $278,614 or $37.66 per share at December 31, 2018. Net income of $13,556 for the six months ended June 30, 2019 was the primary factor leading to the improved capital position. Stockholders’ equity was also affected by cash dividends declared of $5,032, stock based compensation of $166, and other comprehensive income of $4,371 resulting from market value fluctuations in the investment portfolio and changes to the fair value of derivatives.

Dividends declared equaled $0.68 per share through the six months ended June 30, 2019 and $0.65 per share for the same period of 2018. The dividend payout ratio was 37.2% for the six months ended June 30, 2019 and 40.6% for the same period of 2018. It is the intention of our board of directors to continue to pay cash dividends in the future. However, these decisions are affected by operating results, financial and economic decisions, capital and growth objectives, appropriate dividend restrictions and other relevant factors.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules 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

41

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.  The capital conservation buffer for all banking organizations was phased in beginning on Janury 1, 2016, and was fully phased in on January 1, 2019.

The adequacy of capital is reviewed on an ongoing basis with reference to the size, composition and quality of resources and regulatory guidelines. We seek to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. At June 30, 2019, the Bank’s Tier 1 capital to total average assets was 9.98% as compared to 9.78% at December 31, 2018. The Bank’s Tier 1 capital to risk weighted asset ratio was 11.85% and the total capital to risk weighted asset ratio was 13.00% at June 30, 2019. These ratios were 11.64% and 12.80% at December 31, 2018. The Bank’s common equity Tier 1 to risk weighted asset ratio was 11.85% at June 30, 2019 compared to 11.64% at December 31, 2018. The Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards at June 30, 2019.

Review of Financial Performance:

Net income for the second quarter of 2019 equaled $7,144 or $0.96 per share compared to $5,957 or $0.81 per share for the second quarter of 2018. The increase in earnings for the current period is the product of higher net interest income of $1,077 due to growth in our average earning assets of $102.3 million since the year ago period, a lower provision for loan losses of $700 and an increase in non-interest income of $489 due primarily to revenue from commercial loan interest rate swap transactions. These increases were partially offset by higher non-interest expenses of $933 related to our market expansion initiative. In the second quarter of 2018, we entered into a credit card account purchase agreement with a third party to sell our credit card portfolio. The sale resulted in a pre-tax gain of $291. Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.24% for the second quarter of 2019 compared to 1.08% for the same period of 2018. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 9.98% for the second quarter of 2019 compared to 8.90% for the comparable period in 2018.

Net income through six months in 2019 equaled $13,556 or $1.83 per share compared to $11,811 or $1.60 per share for the same period of 2018. The increase in earnings in the current period is the result of higher net interest income of $2,187 due to our earning asset growth coupled with a reduction to the provision for loan losses expense of $700, partially offset by an increase in non-interest expenses of $1,342.  Our ROA and ROE were 1.18% and 9.63% through six months in 2019 compared to 1.08% and 8.90% for the same period of 2018.

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 comprise interest-bearing liabilities. Net interest income is impacted by:

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

· Changes in general market rates; and

· The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 21.0% in 2019 and 2018.

42

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

For the three months ended June 30, tax-equivalent net interest income increased $1,105 to $19,162 in 2019 from $18,057 in 2018. The net interest spread decreased to 3.32% for the three months ended June 30, 2019 from 3.39% for the three months ended June 30, 2018 as the average rate paid on interest bearing liabilities increased 36 basis points while the earning asset yield increased 29 basis points. The tax-equivalent net interest margin increased to 3.62% for the second quarter of 2019 from 3.58% for the comparable period of 2018. The tax-equivalent net interest margin for the fourth quarter of 2018 was 3.63%.

For the three months ended June 30, tax-equivalent interest income on earning assets increased $2,594, to $23,766 in 2019 as compared to $21,172 in 2018. The overall yield on earning assets, on a fully tax-equivalent basis, increased 29 basis points for the three months ended June 30, 2019 to 4.49% as compared to 4.20% for the three months ended June 30, 2018. The increase in the yield on earning assets resulted from a 32 basis point increase in loan yields, 4.78% for the second quarter of 2019 compared to 4.46% for the same period last year. Loan yields increased due to higher rates on new loan originations, coupled with adjustable rate loans repricing into a higher rate environment due to the Federal Open Market Committee (“FOMC”) actions to increase the effective federal funds rate 100 basis points in 2018. The overall yield earned on investments decreased 9 basis points in the second quarter of 2019 to 2.51% from 2.60% for the second quarter of 2018 as investment cashflow from high yielding matured and pre-refunded municipal bonds are being deployed into lower yielding bonds.  Average investment balances were $10,406 lower when comparing the current and year ago quarter.  

Total interest expense increased $1,489, to $4,604 for the three months ended June 30, 2019 from $3,115 for the three months ended June 30, 2018. An increase in the average balance of interest bearing liabilities of $40,637 combined with a 36 basis point increase in the cost of funds comparing the three months ended June 30, 2019 and 2018 caused the increase. Average short-term borrowings decreased $74,804 to $88,792 for the quarter ended June 30, 2019 compared to $163,596 for the corresponding year ago period as growth in deposits resulted in a reduction to short-term borrowings. The increase in interest expense for the three months ended June 30, 2019 was primarily due to higher deposit and borrowing costs which were impacted directly by the actions of the FOMC to increase the targeted federal funds rate 100 basis points during 2018, ending at a range of 2.25% to 2.50%.

For the six months ended June 30, tax-equivalent net interest income increased $2,239 to $37,900 in 2019 from $35,661 in 2018. The net interest spread decreased to 3.31% for the six months ended June 30, 2019 from 3.39% for the six months ended June 30, 2018. The tax-equivalent net interest margin for the six months ended June 30 was 3.60% in 2019 compared to 3.57% in 2018.

For the six months ended June 30, 2019, tax-equivalent interest income increased $5,425, to $47,008 compared to $41,583 for the six months ended June 30, 2018. A volume variance in interest income of $2,468 attributable to an increase in the average balance of earning assets coupled with a $2,957 favorable rate variance due to an increase in the yield on loans for the six months ended June 30, 2019 from the same period in 2018 caused the increase. The overall yield on earning assets, on a fully tax-equivalent basis, increased for the six months ended June 30, 2019 to 4.46% as compared to 4.17% for the six months ended June 30, 2018.

Total interest expense increased $3,186 to $9,108 for the six months ended June 30, 2019 from $5,922 for the six months ended June 30, 2018. The average balance of interest bearing liabilities increased to $1,592,872 for the six months ended June 30, 2019, as compared to $1,538,115 for the six months ended June 30, 2018. A volume variance in time deposits of $100 or more, money market accounts and NOW accounts caused interest expense to increase $898. Adding to the volume variance, a rate variance of $2,320 in time deposits of $100 or more, money market accounts and NOW accounts resulted in the increased interest expense through six months in 2019. All other deposit categories experienced a mix of rate and volume variances that only slightly offset these increases. The cost of funds increased to 1.15% for the six months ended June 30, 2019 as compared to 0.78% for the same period in 2018, the result of higher short-term market rates resulting from the FOMC’s actions of raising the targeted federal funds rate and increased market demand for premium deposit rates.

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Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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

	Three months ended
	June 30, 2019						June 30, 2018
	Average		Interest Income/		Yield/		Average		Interest Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Earning assets:
Loans:
Taxable	$	1,707,730	$	20,641	4.85	%	$	1,616,729	$	18,239	4.52	%
Tax-exempt		142,310		1,404	3.96			122,876		1,103	3.60
Total loans		1,850,040		22,045	4.78			1,739,605		19,342	4.46
Investments:
Taxable		189,265		1,045	2.21			178,957		991	2.22
Tax-exempt		82,565		659	3.20			103,279		837	3.25
Total investments		271,830		1,704	2.51			282,236		1,828	2.60
Interest-bearing deposits		2,554		17	2.67			342		2	2.35
Federal funds sold
Total earning assets		2,124,424		23,766	4.49	%		2,022,183		21,172	4.20	%
Less: allowance for loan losses		22,341						20,094
Other assets		212,924						216,013
Total assets	$	2,315,007	$	23,766			$	2,218,102	$	21,172
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts	$	325,555	$	1,058	1.30	%	$	290,194	$	557	0.77	%
NOW accounts		383,276		702	0.73			367,456		475	0.52
Savings accounts		385,995		124	0.13			395,750		123	0.12
Time deposits less than $100		137,613		498	1.45			146,940		426	1.16
Time deposits $100 or more		217,226		1,331	2.46			126,696		378	1.20
Short-term borrowings		88,792		595	2.69			163,596		841	2.06
Long-term debt		41,948		296	2.83			49,136		315	2.57
Total interest-bearing liabilities		1,580,405		4,604	1.17			1,539,768		3,115	0.81
Noninterest-bearing deposits		426,791						394,461
Other liabilities		20,773						15,376
Stockholders’ equity		287,038						268,497
Total liabilities and stockholders’ equity	$	2,315,007		4,604			$	2,218,102		3,115
Net interest income/spread			$	19,162	3.32	%			$	18,057	3.39	%
Net interest margin					3.62	%					3.58	%
Tax-equivalent adjustments:
Loans			$	295					$	232
Investments				139						176
Total adjustments			$	434					$	408

44

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

	Six months ended
	June 30, 2019						June 30, 2018
	Average		Interest Income/		Yield/		Average		Interest Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Earning assets:
Loans:
Taxable	$	1,704,750	$	40,744	4.82	%	$	1,606,666	$	35,748	4.49	%
Tax-exempt		143,210		2,795	3.94			124,003		2,204	3.58
Total loans		1,847,960		43,539	4.75			1,730,669		37,952	4.42
Investments:
Taxable		187,490		2,076	2.23			175,316		1,903	2.19
Tax-exempt		86,740		1,370	3.19			105,585		1,724	3.29
Total investments		274,230		3,446	2.53			280,901		3,627	2.60
Interest-bearing deposits		1,796		23	2.58			506		4	1.59
Federal funds sold
Total earning assets		2,123,986		47,008	4.46	%		2,012,076		41,583	4.17	%
Less: allowance for loan losses		22,005						19,659
Other assets		211,072						214,982
Total assets	$	2,313,053	$	47,008			$	2,207,399	$	41,583
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts	$	328,382	$	2,089	1.28	%	$	287,156	$	1,026	0.72	%
NOW accounts		387,135		1,409	0.73			368,590		944	0.52
Savings accounts		384,341		243	0.13			393,471		244	0.13
Time deposits less than $100		136,820		963	1.42			149,831		849	1.14
Time deposits $100 or more		211,095		2,420	2.31			126,475		730	1.16
Short-term borrowings		105,282		1,408	2.70			163,282		1,508	1.86
Long-term debt		39,817		576	2.92			49,310		621	2.54
Total interest-bearing liabilities		1,592,872		9,108	1.15			1,538,115		5,922	0.78
Noninterest-bearing deposits		416,817						385,840
Other liabilities		19,383						15,712
Stockholders’ equity		283,981						267,732
Total liabilities and stockholders’ equity	$	2,313,053		9,108			$	2,207,399		5,922
Net interest income/spread			$	37,900	3.31	%			$	35,661	3.39	%
Net interest margin					3.60	%					3.57	%
Tax-equivalent adjustments:
Loans			$	587					$	463
Investments				288						362
Total adjustments			$	875					$	825

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 make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2019.

45

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

The provision for loan losses totaled $1,400 for the six months ended June 30, 2019 and $2,100 for the six months ended June 30, 2018. For the three months ended June 30, the provision for loan losses was $350 in 2019 and $1,050 in 2018. The decrease in the current period is due to smaller loan growth and stable credit quality.

Noninterest Income:

Noninterest income for the second quarter increased $489 or 13.3% to $4,152 in 2019 from $3,663 in 2018. The increase is due primarily to an increase in service charges, fees, and commissions of $605 or 32.1% due to an increase in commercial loan interest rate swap transaction revenue of $437 and a recovery of $216 on a purchased impaired commercial credit, the balance of which had previously been charged-off to a specific credit mark set-up at time of acquisition under purchase accounting. Merchant revenue increased $148 from the previous period due to higher incentive fees. In the second quarter of 2018, we completed the sale of our credit card portfolio and recognized a gain of $291. There is no comparable gain in the corresponding period of 2019.

For the six months ended June 30, 2019, noninterest income totaled $7,568, an increase of $333 or 4.6% from $7,235 for the comparable period of 2018.  Fee income generated by commercial loan interest rate swap transactions increased $651 in the current period due to higher volume. Included in service charges, fees and commissions in the current period is a recovery of $216 on a purchased impaired commercial credit, the balance of which had previously been charged-off to a specific credit mark set-up at time of acquisition under purchase accounting. In the year ago period, service charges, fees and commissions included an accrual for death benefit proceeds on a bank owned life insurance (BOLI) policy totaling $365, with no comparable amount in the current period.  Additionally in the year ago period, we recognized a gain on the sale of our credit card portfolio of $291.  Merchant services income increased $96 to $655 for the six months ended June 30, 2019 from $559 for the same period last year due in part to higher incentive fees.  Income generated from commissions and fees on fiduciary activities increased slightly to $999 for the six months ended June 30, 2019 compared to $982 for the same period in 2018 due to higher market valuations. Income generated from our wealth management division increased slightly through the first six months of 2019, while mortgage banking income decreased modestly to $285 for the first six months of 2019 compared to $309 for the comparable period in 2018.

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.

For the second quarter, noninterest expense increased $933 or 6.9% to $14,429 in 2019 from $13,496 in 2018. For the six months ended June 30, noninterest expense increased $1,342 or 5.0% to $27,919 in 2019 from $26,577 in 2018. Personnel costs increased 8.8%, net occupancy and equipment costs increased 4.7%, and all other expense categories which include, professional fees and outside services, FDIC insurance and assessments, donations and other miscellaneous expenses increased 6.2% comparing the three months ended June 30, 2019 and 2018.  During the six months ended June 30, 2019, higher personnel costs of $1,287 or 9.0% was the primary reason for the increase in total non-interest expense. 

Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled $8,037 for the second quarter of 2019, an increase of $647 or 8.8% when compared to the second quarter of 2018. Salaries and employee benefits expense totaled $15,632 for the six months ending June 30, 2019, an increase of $1,287 or 9.0% when compared to $14,345 for the same period of 2018. Annual merit increases and additional resources related to our continued strategic market expansion initiative contributed to the increase. Additional staffing in the form of commercial

46

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

lenders and credit professionals have been put in place to support our expansion and to continue our momentum in the Lehigh Valley and King of Prussia markets. Additionally, during the second quarter of 2019 we opened our newest branch office located on Norman Drive in Lebanon, Pennsylvania.

We experienced a $129 or 4.7% increase in net occupancy and equipment expense comparing the second quarter of 2019 at $2,849 and 2018 at $2,720. The six months ended June 30, 2019 resulted in a $276 or 5.0% increase to $5,810 in net occupancy and equipment expense compared to $5,534 for the same period in 2018. Additional depreciation expense related to the transformation of two of our legacy branch offices, investment in our global information technology systems, and investment into our newest markets was the primary reason for the increase. In general, as we expand and increase our presence in new markets, depreciation expenses and technology costs associated with the implementation and maintenance of new infrastructure within those markets increases.

For the second quarter, all other expense categories increased $157 or 4.6% to $3,543 from $3,386 comparing 2019 to 2018.  Legal and professional expenses increased $79 due to costs related to loan workouts.  Loan processing fees related to new loan originations increased $75, and $55 of other assets were written-off during the current quarter. For the six months ended June 30, all other expense categories decreased $221 or 3.3% to $6,477 in 2019 compared to $6,698 in 2018. Amortization expense related to intangible assets declined $76; FDIC assessments decreased $36, or 6.2% when comparing the first half of 2019 to the same period in 2018,. Professional fees and outside services were lower due to insurance proceeds in the amount of $181 received as settlement to legal costs previously incurred. Donations increased $35, or 5.3% in the first half of 2019 when compared to the same period in 2018 as support for civic organizations and charitable entities grows as we enter new markets.

Income Taxes:

We recorded income tax expense of $957 or 11.8% of pre-tax income, and $1,718 or 11.2% of pre-tax income for the three and six months ended June 30, 2019, respectively. In the year ago period, we recorded income tax expense of $811 or 12.0% of pre-tax income, and $1,585 or 11.8% of pre-tax income for those same periods. The three and six months ended June 30, 2019 include before tax investment tax credits and other credits totaling $390 and $778 compared to before tax investment tax credits $273 and $543 for those same periods last year.

47

Peoples Financial Services Corp.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

Interest rate risk is the risk of loss to future earnings due to changes in interest rates.  The Asset Liability Committee (“ALCO”) is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk.  Generally quarterly, the 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 9 to the Unaudited Consolidated Financial Statements for additional information.

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

The ALCO reviews simulation results to determine whether the Company’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure.  As of June 30, 2019 and December 31, 2018, 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 60-month period.  In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario,

48

Peoples Financial Services Corp.

the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

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 of up to 500 basis points as well as parallel changes in interest rates of up to 400 basis points.  Because income simulations assume that the Company’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at June 30, 2019, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:

	June 30, 2019
	% Change in
Changes in Interest Rates (basis points)	Net Interest Income		Economic Value of Equity
	Metric	Policy	Metric	Policy
+400	(1.1)	(20.0)	3.0	(40.0)
+300	(0.6)	(20.0)	3.2	(30.0)
+200	(0.3)	(10.0)	3.0	(20.0)
+100	0.0	(10.0)	2.6	(10.0)
Static
(100)	(1.7)	(10.0)	(7.7)	(10.0)

Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending June 30, 2020, would be relatively unchanged 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, 2018, 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. There were no material changes in our market risk from December 31, 2018.

The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by the end of 2021. The Company has material contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. The Company is currently monitoring this activity and evaluating the risks involved.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At June 30, 2019, 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 June 30, 2019, 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.

49

Peoples Financial Services Corp.

(b) Changes in internal control.

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

PART II—OTHER INFORMATION 

Item 1. Legal Proceedings.

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company during the six-months ended June 30, 2019 and through the date of this quarterly report on Form 10-Q.

Item 1A. Risk Factors.  

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

On February 1, 2019, our board of directors reauthorized a common stock repurchase plan whereby we are authorized to repurchase up to 225,000 shares of our outstanding common stock through open market purchases.

The following purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a)(3), of the Company’s common stock during each of the months for the quarter ended June 30, 2019.

				Total Number of	Maximum Number
				Shares Purchased	of Shares that may
				as Part of Publicly	yet be Purchased
	Total Number of	Average Price		Announced	Under the
Month Ending	Shares Purchased	Paid Per Share		Programs	Programs
April 30, 2019		$			225,000
May 31, 2019	1,559	$	43.62		223,441
June 30, 2019	2,271	$	42.93		221,170

Item 3. Defaults upon Senior Securities.

None.

50

Peoples Financial Services Corp.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.  

None.

Item 6. Exhibits.  

Item Number	Description	Page
31.1	CEO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).	52
31.2	CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).	53
32	CEO and CFO Certifications Pursuant to Section 1350.	54
101	The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended June 30, 2019, formatted in 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.

SIGNATURES

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

	Peoples Financial Services Corp.
	(Registrant)
Date: August 7, 2019	/s/ Craig W. Best
	Craig W. Best
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 7, 2019	/s/ John R. Anderson, III
	John R. Anderson, III
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

51

EX-31.1

Peoples Financial Services Corp.

Exhibit 31.1

CERTIFICATION

I, Craig W. Best, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended June  30, 2019, of Peoples Financial Services Corp.;

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

/s/ Craig W. Best

President and Chief Executive Officer

(Principal Executive Officer)

Date: August 7, 2019

52

EX-31.2

Peoples Financial Services Corp.

Exhibit 31.2

CERTIFICATION

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

1. I have reviewed this quarterly report on Form 10-Q for the period ended June  30, 2019, of Peoples Financial Services Corp.;

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

/s/ John R. Anderson, III

Executive Vice President and Chief Financial  Officer

(Principal Financial Officer)

Date: August 7, 2019

53

EX-32

Peoples Financial Services Corp.

Exhibit 32

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report on Form 10-Q of Peoples Financial Services Corp. (the “Company”) for the period ended June  30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Craig W. Best, President and Chief Executive Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Craig W. Best

President and Chief Executive Officer

(Principal Executive Officer)

Date: August 7, 2019

/s/ John R. Anderson, III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: August 7, 2019

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

54

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Jul. 31, 2019
Document And Entity Information
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Entity Registrant Name	PEOPLES FINANCIAL SERVICES CORP.
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		7,399,078
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Entity Central Index Key	0001056943
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Cash and due from banks:
Cash and due from banks	$ 26,615	$ 32,569
Interest-bearing deposits in other banks	3,347	47
Total cash and due from banks	29,962	32,616
Investment securities:
Available-for-sale	261,665	269,682
Equity investments carried at fair value	283	291
Held-to-maturity: Fair value June 30, 2019, $8,151; December 31, 2018, $8,380	7,969	8,361
Total investment securities	269,917	278,334
Loans, net	1,858,799	1,823,266
Less: allowance for loan losses	21,930	21,379
Net loans	1,836,869	1,801,887
Loans held for sale	831	749
Premises and equipment, net	46,468	38,889
Accrued interest receivable	7,303	7,115
Goodwill	63,370	63,370
Intangible assets, net	1,921	2,296
Other assets	67,625	63,737
Total assets	2,324,266	2,288,993
Deposits:
Noninterest-bearing	419,995	410,260
Interest-bearing	1,456,804	1,464,762
Total deposits	1,876,799	1,875,022
Short-term borrowings	82,700	86,500
Long-term debt	52,980	37,906
Accrued interest payable	1,058	1,195
Other liabilities	19,146	9,756
Total liabilities	2,032,683	2,010,379
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,399,078 shares at June 30, 2019 and 7,399,054 shares at December 31, 2018	14,798	14,798
Capital surplus	135,384	135,310
Retained earnings	145,106	136,582
Accumulated other comprehensive loss	(3,705)	(8,076)
Total stockholders’ equity	291,583	278,614
Total liabilities and stockholders’ equity	$ 2,324,266	$ 2,288,993

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Statement of Financial Position
Held-to-maturity, Fair value	$ 8,151	$ 8,380
Common stock, par value	$ 2.00	$ 2.00
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	7,399,078	7,399,054
Common stock, shares outstanding	7,399,078	7,399,054

XML

Consolidated Statements of Income and Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Interest and fees on loans:
Taxable	$ 20,641	$ 18,239	$ 40,744	$ 35,748
Tax-exempt	1,109	871	2,208	1,741
Interest and dividends on investment securities:
Taxable	1,025	934	2,035	1,792
Tax-exempt	520	661	1,082	1,362
Dividends	22	19	41	35
Interest on interest-bearing deposits in other banks	15	42	23	82
Total interest income	23,332	20,766	46,133	40,760
Interest expense:
Interest on deposits	3,713	1,959	7,124	3,793
Interest on short-term borrowings	595	841	1,408	1,508
Interest on long-term debt	296	315	576	621
Total interest expense	4,604	3,115	9,108	5,922
Net interest income	18,728	17,651	37,025	34,838
Provision for loan losses	350	1,050	1,400	2,100
Net interest income after provision for loan losses	18,378	16,601	35,625	32,738
Noninterest income:
Mortgage banking income	137	162	285	309
Life insurance investment income	192	191	378	378
Net losses (gains) on equity investment securities	(9)	8	(8)
Net gains on sale of investment securities available-for-sale	23		23
Net gain on sale of credit card loans		291		291
Total noninterest income	4,152	3,663	7,568	7,235
Noninterest expense:
Salaries and employee benefits expense	8,037	7,390	15,632	14,345
Net occupancy and equipment expense	2,849	2,720	5,810	5,534
Amortization of intangible assets	182	220	374	450
Professional fees and outside services	525	446	856	1,069
FDIC insurance and assessments	288	297	547	583
Donations	359	343	691	656
Other expenses	2,189	2,080	4,009	3,940
Total noninterest expense	14,429	13,496	27,919	26,577
Income before income taxes	8,101	6,768	15,274	13,396
Income tax expense	957	811	1,718	1,585
Net income	7,144	5,957	13,556	11,811
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale	2,611	(839)	5,050	(3,215)
Reclassification adjustment for net gain on sales included in net income	(23)		(23)
Change in derivative fair value	443		506
Other comprehensive gain (loss)	3,031	(839)	5,533	(3,215)
Income tax expense (benefit)	637	(176)	1,162	(677)
Other comprehensive income (loss), net of income taxes	2,394	(663)	4,371	(2,538)
Comprehensive income	$ 9,538	$ 5,294	$ 17,927	$ 9,273
Net income:
Basic	$ 0.96	$ 0.81	$ 1.83	$ 1.60
Diluted	$ 0.96	$ 0.81	$ 1.83	$ 1.60
Average common shares outstanding:
Basic	7,399,302	7,396,533	7,399,178	7,396,519
Diluted	7,399,302	7,396,533	7,399,178	7,396,519
Dividends declared	$ 0.34	$ 0.33	$ 0.68	$ 0.65
Service charges, fees and commissions
Noninterest income:
Revenue from contracts with customers	$ 2,490	$ 1,885	$ 4,489	$ 3,973
Merchant services income
Noninterest income:
Revenue from contracts with customers	457	309	655	559
Commission and fees on fiduciary activities
Noninterest income:
Revenue from contracts with customers	492	485	999	982
Wealth management income
Noninterest income:
Revenue from contracts with customers	$ 370	$ 332	$ 747	$ 743

XML

Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Capital Surplus	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Balance at Dec. 31, 2017	$ 14,793	$ 135,043	$ 121,353	$ (6,213)	$ 264,976
Net income			11,811		11,811
Other comprehensive income (loss), net of income taxes				(2,538)	(2,538)
Dividends declared			(4,810)		(4,810)
Stock based compensation		105			105
Common stock grants awarded, net of unearned compensation	5	(5)
Balance at Jun. 30, 2018	14,798	135,143	128,356	(8,753)	269,544
Reclassification related to adoption of ASU 2016-01			2	(2)
Balance at Dec. 31, 2018	14,798	135,310	136,582	(8,076)	278,614
Net income			13,556		13,556
Other comprehensive income (loss), net of income taxes				4,371	4,371
Dividends declared			(5,032)		(5,032)
Stock based compensation		240			240
Share retirement	(8)	(158)			(166)
Common stock grants awarded, net of unearned compensation	8	(8)
Balance at Jun. 30, 2019	$ 14,798	$ 135,384	$ 145,106	$ (3,705)	$ 291,583

XML

Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Statement of Stockholders' Equity
Dividends declared (in dollars per share)	$ 0.68	$ 0.65
Share retired, shares	3,830
Common stock grants awarded, net of unearned compensation	$ 164	$ 113
Common stock grants awarded, net of unearned compensation (in shares)	3,854	2,548

XML

Consolidated Statements of Cash Flows $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($)	Jun. 30, 2018 USD ($)
Cash flows from operating activities:
Net income	$ 13,556	$ 11,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	1,227	1,140
Amortization of right-of-use lease asset	187
Amortization of deferred loan costs	(156)	482
Amortization of intangibles	374	450
Amortization of low income housing partnerships	238	233
Provision for loan losses	1,400	2,100
Net unrealized loss on equity investment securities	8
Net loss on sale of other real estate owned	20	19
Loans originated for sale	(5,848)	(5,932)
Proceeds from sale of loans originated for sale	5,813	6,074
Net gain on sale of loans originated for sale	(47)	(36)
Net amortization of investment securities	895	1,197
Net gain on sale of investment securities available-for-sale	(23)
Net gain on sale of credit card loans held for sale		(291)
Life insurance investment income	(378)	(378)
Stock based compensation	240	105
Net change in:
Accrued interest receivable	(188)	134
Other assets	(4,114)	(1,187)
Accrued interest payable	(137)	41
Other liabilities	3,022	(914)
Net cash provided by operating activities	16,089	15,048
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale	9,677
Proceeds from repayments of investment securities:
Available-for-sale	24,651	15,445
Held-to-maturity	387	485
Purchases of investment securities:
Available-for-sale	(22,151)	(22,627)
Net purchase of restricted equity securities	(371)	(2,794)
Proceeds from sale of student loan portfolio		3,171
Net increase in lending activities	(36,380)	(68,291)
Purchases of premises and equipment	(2,541)	(1,071)
Proceeds from the sale of premises and equipment	21	340
Proceeds from sale of other real estate owned	111	200
Net cash used in investing activities	(26,596)	(75,142)
Cash flows from financing activities:
Net increase (decrease) in deposits	1,777	(157)
Proceeds from long-term debt	16,000
Repayment of long-term debt	(926)	(823)
Net (decrease) increase in short-term borrowings	(3,800)	63,775
Retirement of common stock	(166)
Cash dividends paid	(5,032)	(4,810)
Net cash provided by financing activities	7,853	57,985
Net decrease in cash and cash equivalents	(2,654)	(2,109)
Cash and cash equivalents at beginning of period	32,616	37,488
Cash and cash equivalents at end of period	29,962	35,379
Cash paid during the period for:
Interest	9,245	5,881
Income taxes	2,200	2,050
Noncash items:
Transfers of loans to other real estate	172	$ 495
Initial recognition of right-of-use assets	6,523
Initial recognition of lease liability	$ 6,523

XML

Summary of significant accounting policies

6 Months Ended

Jun. 30, 2019

Summary of significant accounting policies

Summary of significant accounting policies

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. Unless the context indicates otherwise, all references in this quarterly report to “Peoples”, “Company”, “Bank”, “we”, “us” and “our” refer to Peoples Financial Services Corp., its subsidiaries and its and their respective predecessors. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within the Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York. Additionally, we operate a Limited Purpose Banking Office(“LPO”) located in and serving Schuylkill County, Pennsylvania.

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 six months ended and as of June 30, 2019, 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 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, 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, 2018.

Recent accounting standards:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”.  From the lessees’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.  The ROU asset and lease liability are calculated based on the present value of future lease payments using an estimated incremental borrowing rate.  The Company utilized the incremental borrowing rate of interest on a collateralized basis for the lease term as quoted by the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income 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 is 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 amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The new standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. In order to establish the value of the ROU and lease liability and in accordance with the guidance, management determined the term of the leases held by carefully evaluating and assessing each lease and applying economic and other relevant factors to determine whether the Company is reasonably certain to exercise or not to exercise a renewal option within each lease. We have also elected an accounting policy not to restate comparative periods upon adoption. The Company elected to adopt this pronouncement using the optional transition method under ASU 2018-11 as of January 1, 2019 and recorded right-of-use assets and lease liabilities for operating leases of $6,523 on its consolidated balance sheets, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income and comprehensive income.

In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments were adopted on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842) Codification Improvements” which was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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 GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU 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.
	In July 2019, the FASB agreed to issue a proposal to delay the effective date for smaller reporting companies, which the Company currently qualifies as such. If approved, the proposal could delay the effective date until 2023, though the Company may need to adopt earlier if it no longer qualifies as a smaller reporting company. 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.

We are evaluating the impact of the ASU on our consolidated financial statements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements”. In accordance with the Concepts Statement, this ASU removes, modifies and adds select disclosure requirements under Topic 820 after consideration of costs and benefits. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public entities, with early adoption permitted. The adoption of this guidance on January 1, 2020 is not expected to have a material effect on the Company’s consolidated financial statements.

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Other comprehensive loss

6 Months Ended

Jun. 30, 2019

Other comprehensive loss

Other comprehensive loss

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.

The components of accumulated other comprehensive loss included in stockholders’ equity at June 30,  2019 and December 31, 2018 are as follows:

		June 30, 2019		December 31, 2018
Net unrealized loss on investment securities available-for-sale	$	1,776	$	(3,251)
Income tax		373		(683)
Net of income taxes		1,403		(2,568)
Benefit plan adjustments		(7,218)		(7,218)
Income tax		(1,516)		(1,516)
Net of income taxes		(5,702)		(5,702)
Derivative adjustments		752		246
Income tax		158		52
Net of income taxes		594		194
Accumulated other comprehensive loss	$	(3,705)	$	(8,076)

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Earnings per share

6 Months Ended

Jun. 30, 2019

Earnings per share

Earnings per share

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 six month periods ended June 30, 2019 and 2018.

	2019				2018
For the Three Months Ended June 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,144	$	7,144	$	5,957	$	5,957
Average common shares outstanding		7,399,302		7,399,302		7,396,533		7,396,533
Earnings per share	$	0.96	$	0.96	$	0.81	$	0.81
	2019				2018
For the Six Months Ended June 30	Basic		Diluted		Basic		Diluted
Net income	$	13,556	$	13,556	$	11,811	$	11,811
Average common shares outstanding		7,399,178		7,399,178		7,396,519		7,396,519
Earnings per share	$	1.83	$	1.83	$	1.60	$	1.60

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Investment securities

6 Months Ended

Jun. 30, 2019

Investment securities

Investment securities

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at June 30, 2019 and December 31, 2018 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,958	$	143	$	17	$	24,084
U.S. Government-sponsored enterprises		93,830		82		423		93,489
State and municipals:
Taxable		12,475		367				12,842
Tax-exempt		69,454		713		32		70,135
Residential Mortgage-backed securities:
U.S. Government agencies		10,669		135		20		10,784
U.S. Government-sponsored enterprises		40,901		776		92		41,585
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		8,601		145				8,746
Total	$	259,888	$	2,361	$	584	$	261,665
Held-to-maturity:
Tax-exempt state and municipals	$	6,854	$	151			$	7,005
Residential Mortgage-backed securities:
U.S. Government agencies		36						36
U.S. Government-sponsored enterprises		1,079		32	$	1		1,110
Total	$	7,969	$	183	$	1	$	8,151

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	25,948		9	$	365	$	25,592
U.S. Government-sponsored enterprises		94,999	$	2		2,183		92,818
State and municipals:
Taxable		13,544		309				13,853
Tax-exempt		86,361		338		745		85,954
Residential Mortgage-backed securities:
U.S. Government agencies		12,663		50		84		12,629
U.S. Government-sponsored enterprises		33,149		49		401		32,797
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		6,269				230		6,039
Total	$	272,933	$	757	$	4,008	$	269,682
Held-to-maturity:
Tax-exempt state and municipals	$	6,855	$	12	$	43	$	6,824
Residential Mortgage-backed securities:
U.S. Government agencies		42						42
U.S. Government-sponsored enterprises		1,464		55		5		1,514
Total	$	8,361	$	67	$	48	$	8,380

Equity Securities

Our equity securities portfolio consists of stock of two other financial institutions. At June 30, 2019 and December 31, 2018, we had $283 and $291 respectively, in equity securities recorded at fair value. At June 30, 2019, the fair value of our equity portfolio exceeded the cost basis by $6.  The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2019 (in thousands):

For the Three Months Ended June 30,		2019		2018
Net gains (losses) recognized during the period on equity securities	$	(9)	$	8
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(9)	$	8
For the Six Months Ended June 30,		2019		2018
Net gains (losses) recognized during the period on equity securities	$	(8)	$
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(8)	$

Restricted Investment In Stock

Restricted investment in stock includes FHLB with a carrying cost of $7,791 and $7,420 at June 30, 2019 and December 31, 2018, respectively and Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42 and VISA Class B stock with a carry cost of $0 at June 30, 2019 and December 31, 2018, 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 banks’ use of FHLB’s services.

The Company owns 44,982 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Company’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6298 as of June 30, 2019), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B stock. Due to the lack of orderly trades and public information of such trades, Visa Class B stock has no readily determinable fair value.

These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) periodically. As of June 30, 2019, there was no OTTI associated with these investments.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2019, is summarized as follows:

	Fair
June 30, 2019	Value
Within one year	$	38,102
After one but within five years		133,582
After five but within ten years		10,729
After ten years		18,137
		200,550
Mortgage-backed securities		61,115
Total	$	261,665

The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2019, is summarized as follows:

	Amortized		Fair
June 30, 2019	Cost		Value
Within one year
After one but within five years
After five but within ten years
After ten years	$	6,854	$	7,005
		6,854		7,005
Mortgage-backed securities		1,115		1,146
Total	$	7,969	$	8,151

Securities with a carrying value of $144,991 and $161,647 at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2019 and December 31, 2018, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises, that exceeded 10.0 percent of stockholders’ equity.

The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not been recognized at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$		$		$	7,993	$	17	$	7,993	$	17
U.S. Government-sponsored enterprises						75,292		423		75,292		423
State and municipals:
Tax-exempt						14,499		32		14,499		32
Residential Mortgage-backed securities:
U.S. Government agencies						5,281		20		5,281		20
U.S. Government-sponsored enterprises						10,372		93		10,372		93
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises										—		—
Total	$	—	$	—	$	113,437	$	585	$	113,437	$	585

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	1,995	$	2	$	19,671	$	363	$	21,666	$	365
U.S. Government-sponsored enterprises		2,037		1		89,729		2,182		91,766		2,183
State and municipals:
Tax-exempt		9,022		74		52,352		714		61,374		788
Residential Mortgage-backed securities:
U.S. Government agencies						7,800		84		7,800		84
U.S. Government-sponsored enterprises		12,851		55		13,881		351		26,732		406
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises						6,039		230		6,039		230
Total	$	25,905	$	132	$	189,472	$	3,924	$	215,377	$	4,056

The Company had 73 investment securities, consisting of 20 tax-exempt state and municipal obligations, 3 U.S. Treasury securities, 28 U.S. Government-sponsored enterprise securities, and 22 mortgage-backed securities that were in unrealized loss positions at June 30, 2019. Of these securities, 3 U.S. Treasury securities, 28 U.S. Government-sponsored enterprise securities, 20 tax-exempt state and municipal obligations, and 20 mortgage-backed securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2019. There was no OTTI recognized for the three or six months ended June 30, 2019 and 2018.

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Loans, net and allowance for loan losses

6 Months Ended

Jun. 30, 2019

Loans, net and allowance for loan losses

Loans, net and allowance for loan losses

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $901 and $744 at June 30, 2019 and December 31, 2018.

		June 30, 2019		December 31, 2018
Commercial	$	513,655	$	494,134
Real estate:
Commercial		935,578		907,803
Residential		298,527		299,876
Consumer		111,039		121,453
Total	$	1,858,799	$	1,823,266

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2019 and 2018 are summarized as follows:

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2019	$	5,955	$	11,074	$	3,880	$	1,196	$	22,105
Charge-offs		(10)		(343)		(143)		(80)		(576)
Recoveries		2				12		37		51
Provisions		195		311		(134)		(22)		350
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
			Real estate
June 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2018	$	5,198	$	10,301	$	2,924	$	1,295	$	19,718
Charge-offs		(2)		(1,169)		(82)		(145)		(1,398)
Recoveries		59		30		57		57		203
Provisions		(64)		896		257		(39)		1,050
Ending balance	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892		1,235		21,379
Charge-offs		(87)		(349)		(302)		(212)		(950)
Recoveries		10				16		75		101
Provisions		703		655		9		33		1,400
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
			Real estate
June 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2018	$	5,513	$	8,944	$	3,111	$	1,392	$	18,960
Charge-offs		(2)		(1,169)		(381)		(272)		(1,824)
Recoveries		116		57		67		97		337
Provisions		(436)		2,226		359		(49)		2,100
Ending balance	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2019 and December 31, 2018 is summarized as follows:

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Ending balance: individually evaluated for impairment		615		216		295				1,126
Ending balance: collectively evaluated for impairment	$	5,527	$	10,826	$	3,320	$	1,131	$	20,804
Loans receivable:
Ending balance	$	513,655	$	935,578	$	298,527	$	111,039	$	1,858,799
Ending balance: individually evaluated for impairment		5,915		3,867		2,280		251		12,313
Ending balance: collectively evaluated for impairment	$	507,740	$	931,711	$	296,247	$	110,788	$	1,846,486

			Real estate
December 31, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Ending balance: individually evaluated for impairment		50		403		666		60		1,179
Ending balance: collectively evaluated for impairment	$	5,466	$	10,333	$	3,226	$	1,175	$	20,200
Loans receivable:
Ending balance	$	494,134	$	907,803	$	299,876	$	121,453	$	1,823,266
Ending balance: individually evaluated for impairment		2,237		3,121		4,071		212		9,641
Ending balance: collectively evaluated for impairment	$	491,897	$	904,682	$	295,805	$	121,241	$	1,813,625

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.

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

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

· Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2019 and December 31, 2018:

			Special
June 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	504,060	$	2,029	$	7,566	$	$	513,655
Real estate:
Commercial		905,398		3,054		27,126			935,578
Residential		296,021		351		2,155			298,527
Consumer		110,672				367			111,039
Total	$	1,816,151	$	5,434	$	37,214	$	$	1,858,799

			Special
December 31, 2018	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	491,531	$	869	$	1,734	$	$	494,134
Real estate:
Commercial		886,849		8,934		12,020			907,803
Residential		295,758		357		3,761			299,876
Consumer		121,229				224			121,453
Total	$	1,795,367	$	10,160	$	17,739	$	$	1,823,266

The increase in substandard loans from December 31, 2018 to June 30, 2019 is primarily associated with the reclassification of several larger commercial credits to this category. The largest relationship totals $10.4 million and consists of commercial real estate and equipment financing for a borrowing group that has encountered some financial difficulties. The second largest reclassification consists of a $5.3 million commercial real estate construction loan that experienced significant construction delays. The construction is now complete and the property recently received its certificate of occupancy. The Bank considers both of these credit relationships to be well secured and both relationships were current as of June 30, 2019.

Information concerning nonaccrual loans by major loan classification at June 30, 2019 and December 31, 2018 is summarized as follows:

		June 30, 2019		December 31, 2018
Commercial	$	4,494	$	776
Real estate:
Commercial		3,044		2,663
Residential		1,464		2,580
Consumer		251		212
Total	$	9,253	$	6,231

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
June 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	385	$	136	$	4,502	$	5,023	$	508,632	$	513,655	$	8
Real estate:
Commercial		1,200		54		3,192		4,446		931,132		935,578		148
Residential		1,930		427		1,649		4,006		294,521		298,527		185
Consumer		495		128		251		874		110,165		111,039
Total	$	4,010	$	745	$	9,594	$	14,349	$	1,844,450	$	1,858,799	$	341

The Company classifies all nonaccrual loans in the greater than 90 days category.

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2018	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	973	$	79	$	776	$	1,828	$	492,306	$	494,134
Real estate:
Commercial		1,889		218		2,736		4,843		902,960		907,803	$	73
Residential		2,486		1,545		3,430		7,461		292,415		299,876		850
Consumer		756		292		212		1,260		120,193		121,453
Total	$	6,104	$	2,134	$	7,154	$	15,392	$	1,807,874	$	1,823,266	$	923

The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2019 and June 30, 2018, and as of and for the year ended, December 31, 2018 by major loan classification:

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	4,495	$	4,931			$	5,284	$	17	$	4,043	$	34
Real estate:
Commercial		2,957		3,116				2,528		10		2,341		23
Residential		619		888				740		4		1,150		11
Consumer		251		261				245				214
Total		8,322		9,196				8,797		31		7,748		68
With an allowance recorded:
Commercial		1,420		1,432		615		1,180		5		1,012		12
Real estate:
Commercial		910		1,380		216		1,174		5		1,166		10
Residential		1,661		1,740		295		1,848		7		1,932		18
Consumer												20
Total		3,991		4,552		1,126		4,202		17		4,130		40
Total impaired loans
Commercial		5,915		6,363		615		6,464		22		5,055		46
Real estate:
Commercial		3,867		4,496		216		3,702		15		3,507		33
Residential		2,280		2,628		295		2,588		11		3,082		29
Consumer		251		261				245				234
Total	$	12,313	$	13,748	$	1,126	$	12,999	$	48	$	11,878	$	108

							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2018	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	1,562	$	1,900			$	1,318	$	67
Real estate:
Commercial		1,969		2,299				2,822		28
Residential		1,970		2,658				2,193		22
Consumer		152		160				135
Total		5,653		7,017				6,468		117
With an allowance recorded:
Commercial		675		675		50		1,006		30
Real estate:
Commercial		1,152		1,323		403		1,676		18
Residential		2,101		2,328		666		1,585		22
Consumer		60		60		60		21
Total		3,988		4,386		1,179		4,288		70
Total impaired loans
Commercial		2,237		2,575		50		2,324		97
Real estate:
Commercial		3,121		3,622		403		4,498		46
Residential		4,071		4,986		666		3,778		44
Consumer		212		220		60		156
Total	$	9,641	$	11,403	$	1,179	$	10,756	$	187

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,182	$	1,355			$	1,197	$	16	$	1,224	$	33
Real estate:
Commercial		2,871		3,262				2,921		9		2,910		15
Residential		2,146		2,848				2,218		4		2,210		8
Consumer		60		67				106				127
Total		6,259		7,532				6,442		29		6,471		56
With an allowance recorded:
Commercial		1,100		1,124	$	146		1,117		8		1,139		16
Real estate:
Commercial		1,755		1,876		502		2,079		4		1,853		10
Residential		1,425		1,550		378		1,458		4		1,504		8
Consumer		3		3		3		11				10
Total		4,283		4,553		1,029		4,665		16		4,506		34
Total impaired loans
Commercial		2,282		2,479		146		2,314		24		2,363		49
Real estate:
Commercial		4,626		5,138		502		5,000		13		4,763		25
Residential		3,571		4,398		378		3,676		8		3,714		16
Consumer		63		70		3		117				137
Total	$	10,542	$	12,085	$	1,029	$	11,107	$	45	$	10,977	$	90

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,677 at June 30, 2019, $2,779 at December 31, 2018 and $3,307 at June 30, 2018.

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.

· Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time.

· 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 for the three months ended June 30, 2019.  There was one commercial real estate loan modified as a troubled debt restructuring during the six months ended June 30, 2019 in the amount of $340. There was one commercial real estate loan modified as a troubled debt restructuring for the three and six months ended June 30, 2018 totaling $340. During the three and six months ended June 30, 2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off. During the three months ended June 30, 2018, there were no payment defaults on restructured loans. During the six months ended June 30, 2018, there was one payment default on a restructured residential mortgage loan with an outstanding balance of $58. 

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Other assets

6 Months Ended

Jun. 30, 2019

Other assets.

Other assets

6. Other assets:

The components of other assets at June 30, 2019, and December 31, 2018 are summarized as follows:

		June 30, 2019		December 31, 2018
Other real estate owned	$	408	$	376
Investment in low income housing partnership		7,139		7,377
Mortgage servicing rights		719		718
Bank owned life insurance		34,667		34,288
Restricted equity securities		7,833		7,462
Net deferred tax asset		3,919		5,081
Other assets		12,940		8,435
Total	$	67,625	$	63,737

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Fair value estimates

6 Months Ended

Jun. 30, 2019

Fair value estimates

Fair value estimates

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.

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

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

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

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

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

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

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

During the periods ended June 30, 2019 and December 31, 2018 there were no significant transfers between Level 1 and Level 2 and 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:  The Company’s interest rate swaps 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 swaps, Libor rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2019 and December 31, 2018 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,084	$	24,084			$
U.S. Government-sponsored enterprises		93,489			$	93,489
State and Municipals:
Taxable		12,842				12,842
Tax-exempt		70,135				70,135
Mortgage-backed securities:
U.S. Government agencies		10,784				10,784
U.S. Government-sponsored enterprises		50,331				50,331
Common equity securities		283		283
Interest rate floor-other assets		1,025				1,025
Interest rate swap-other assets		3,807				3,807
Interest rate swap-other liabilities		(4,182)				(4,182)
Total	$	262,598	$	24,367	$	238,231	$

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2018	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	25,592	$	25,592			$
U.S. Government-sponsored enterprises		92,818			$	92,818
State and Municipals:
Taxable		13,853				13,853
Tax-exempt		85,954				85,954
Mortgage-backed securities:
U.S. Government agencies		12,629				12,629
U.S. Government-sponsored enterprises		38,836				38,836
Common equity securities		291		291
Interest rate floor-other assets		553				553
Interest rate swap-other assets		108				108
Interest rate swap-other liabilities		(138)				(138)
Total	$	270,496	$	25,883	$	244,613	$

Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2019 and December 31, 2018 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	2,865			$	2,865
Other real estate owned	$	250			$	250

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2018	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	2,809			$	2,809
Other real estate owned	$	234			$	234

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

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	2,865	Appraisal of collateral	Appraisal adjustments	7.6% to 97.0%   (56.7)%
				Liquidation expenses	3.0% to 6.0% (5.4)%
Other real estate owned	$	250	Appraisal of collateral	Appraisal adjustments	20.0% to 43.3%   (32.0)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2018	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	2,809	Appraisal of collateral	Appraisal adjustments	7.1% to 97.0%   (61.8)%
				Liquidation expenses	3.0% to 6.0% (4.4)%
Other real estate owned	$	234	Appraisal of collateral	Appraisal adjustments	26.0% to 73.3%   (38.9)%
				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.

The carrying and fair values of the Company’s financial instruments at June 30, 2019 and December 31, 2018 and their placement within the fair value hierarchy are as follows:

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	29,962	$	29,962	$	29,962
Investment securities:
Available-for-sale		261,665		261,665		24,084	$	237,581
Common equity securities		283		283		283
Held-to-maturity		7,969		8,151				8,151
Net loans		1,836,869		1,830,139					$	1,830,139
Accrued interest receivable		7,303		7,303				7,303
Mortgage servicing rights		719		1,712				1,712
Restricted equity securities		7,833		7,833				7,833
Interest rate floor		1,025		1,025				1,025
Interest rate swaps		3,807		3,807				3,807
Total	$	2,157,435	$	2,151,880
Financial liabilities:
Deposits	$	1,876,799	$	1,862,246			$	1,862,246
Short-term borrowings		82,700		82,700				82,700
Long-term debt		52,980		53,338				53,338
Accrued interest payable		1,058		1,058				1,058
Interest rate swaps		4,182		4,182				4,182
Total	$	2,017,719	$	2,003,524

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2018	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	32,616	$	32,616	$	32,616
Investment securities:
Available-for-sale		269,682		269,682		25,952	$	244,090
Common equity securities		291		291		291
Held-to-maturity		8,361		8,380				8,380
Loans held for sale		749		749				749
Net loans		1,801,887		1,762,449					$	1,762,449
Accrued interest receivable		7,115		7,115				7,115
Mortgage servicing rights		718		1,710				1,710
Restricted equity securities		7,462		7,462				7,462
Interest rate floor		553		553				553
Interest rate swaps		108		108				108
Total	$	2,129,542	$	2,091,115
Financial liabilities:
Deposits	$	1,875,022	$	1,874,520			$	1,874,520
Short-term borrowings		86,500		86,500				86,500
Long-term debt		37,906		38,071				38,071
Accrued interest payable		1,195		1,195				1,195
Interest rate swaps		138		138				138
Total	$	2,000,761	$	2,000,424

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Employee benefit plans

6 Months Ended

Jun. 30, 2019

Employee benefit plans

Employee benefit plans

8. Employee benefit plans:

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

For the three and six months ended June 30, salaries and employee benefits expense includes approximately $415 and $755, respectively in 2019 and $403 and $743, respectively in 2018 relating to the employee benefit plans.

	Pension Benefits
Three Months Ended June 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	192	$	156
Expected return on plan assets		(325)		(240)
Amortization of unrecognized net gain		68		49
Net periodic benefit cost	$	(65)	$	(35)
	Pension Benefits
Six Months Ended June 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	320	$	156
Expected return on plan assets		(542)		(240)
Amortization of unrecognized net gain		113		49
Net periodic benefit cost	$	(109)	$	(35)

The Company contributed $2,700 to the pension plan during the third quarter of 2018. This contribution reduced the unfunded portion of the pension plan and also reduced future premium costs associated with the plan. Previously, the Company paid a fixed premium cost of $18 annually with an additional $92 for the variable portion of the premium. This was reduced to $0 with the current funding status of the pension.

The 2008 long-term incentive plan (“2008 Plan”) allowed for eligible participants to be granted equity awards. No awards may be made under the 2008 Plan after January 15, 2018.

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

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

· Determine the type, size and term of awards.

· Determine whether such performance objectives and conditions have been met.

· Accelerate the vesting or excercisability of an award.

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

As of June 30, 2019, there were 61,346 shares of the Company’s common stock available for grant as awards pursuant to the 2017 Plan. The 2008 Plan expired in January 2018but will remain in effect in accordance with its terms to govern outstanding awards under that 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.

In the first six months of 2019 and 2018, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan,with an aggregate of 17,345 shares and 11,468 shares underlying such awards, respectively.

The non-performance restricted stock grants made in 2019 and 2018 vest equally over three years from the grant date. The performance-based restricted stock units vest three years after the grant date and include conditions based on the Company’s three year cumulative diluted earnings per share and three-year average return on 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. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period. 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 compensation expense of $240 and $157 for the three and six  months ended June 30, 2019 for awards granted under the 2017 Plan. The Company recognized compensation expense of $37 and $43 for the three and six months ended June 30, 2018 for awards granted under the 2017 Plan and $31 and $62 for awards granted under the 2008 Plan. As of June 30, 2019, the Company had $1,071 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of just under 1.7 years.

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Derivatives and hedging activities

6 Months Ended

Jun. 30, 2019

Derivatives and hedging activities

Derivatives and hedging activities

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. 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as part of its interest rate risk management strategy. 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.

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 Loss and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During 2019, the Company estimates that an additional $64 will be reclassified as a reduction to interest income. 

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2019, the Company had 22 interest rate swaps with an aggregate notional amount of $123,351 related to this program.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018.

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of June 30, 2019			As of December 31, 2018 (1)			As of June 30, 2019			As of December 31, 2018 (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	$	1,025		$	553
Total derivatives designated as hedging instruments				$	1,025		$	553
Derivatives not designated as hedging instruments
Interest Rate Swaps	$	123,351	Other Assets	$	3,807	Other Assets	$	108	Other Liabilities	$	4,182	Other Liabilities	$	138
Total derivatives not designated as hedging instruments				$	3,807		$	108		$	4,182		$	138

(1) Assets amount does not include accrued interest receivable of $13

(2) Liabilities amount does not include accrued interest payable of $13

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

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Loss as of June 30, 2019. There was no cash flow hedge as of June 30, 2018.

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

427

$

532

$

(105)

Interest Income

$

(16)

$

$

(16)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

474

$

827

$

(353)

Interest Income

$

(31)

$

$

(31)

* Amounts disclosed are gross and not net of taxes.

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

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and June 30, 2018.

		Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging
		Relationships
		2019	2018
		Interest Income	Interest Income
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	$	(31)
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	$	(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income -  included component
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income -  excluded component	$	(31)

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and 2018.

		Amount of Loss		Amount of Loss		Amount of Gain		Amount of Gain
		Recognized in		Recognized in		Recognized in		Recognized in
	Location of Gain or (Loss)	Income		Income		Income		Income
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	June 30, 2019		June 30, 2019		June 30, 2018		June 30, 2018
Interest Rate Swaps	Other non-interest income	$	(236)	$	(346)	$	19	$	85
Fee Income	Other  income / (expense)	$	744	$	1,136	$	53	$	53

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2019 and December 31, 2018. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheets.

Offsetting of Derivative Assets
as of June 30, 2019
						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	$	4,833	$	$	4,833	$		$	4,833
Offsetting of Derivative Liabilities
as of June 30, 2019
						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	$	4,183	$	$	4,183	$		$	4,183
Offsetting of Derivative Assets
as of December 31, 2018
						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	$	661	$	$	661	$		$	661
Offsetting of Derivative Liabilities
as of December 31, 2018
						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	$	138	$	$	138	$		$	138

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.

The Company has agreements with certain of its derivative counterparties that contain provisions that require the Company’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating is reduced below investment grade then a termination event shall be deemed to have occurred and the non-affected counterparty shall have the right but not obligation to terminate all affected transactions under the agreement.

As of June 30, 2019, 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 $376. As of December 31, 2018, 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 $29. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $3,310 against its obligations under these agreements as of June 30, 2019, compared to having no posted collateral with a counterparty at December 31, 2018. 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.

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Borrowings

6 Months Ended

Jun. 30, 2019

Borrowings

Borrowings

10. Borrowings

Short-term borrowings consisted of FHLB advances representing overnight borrowings at June 30, 2019 and December 31, 2018:

	At and for the six months ended June 30, 2019
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at
	Balance		Balance		Balance		the six monthe ended June 30,2019		June 30,2019
FHLB advances	$	82,700	$	105,212	$	133,725	2.70	%	2.46	%

	At and for the year ended December 31, 2018
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
	Balance		Balance		Balance		the Year		of the Year
FHLB advances	$	86,500	$	133,834	$	189,275	2.05	%	2.62	%

The Company has an agreement with the FHLB which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At June 30, 2019, the maximum borrowing capacity was $706,808 of which $135,680 was outstanding in borrowings. At December 31, 2018, the maximum borrowing capacity was $700,169 of which $124,406 was outstanding in borrowings. Short-term borrowings were used to fund our loan growth during the first six months of 2019 as deposit balances were relatively unchanged from year end. Short-term borrowings were lower by $3,800 from year end 2018 in part to us locking in $16,000 of new long term borrowings at lower fixed rates under the FHLB’s ‘Community Lending Program’. 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 short-term borrowing rate resets each day.  

Long-term debt consisting of advances from the FHLB at June 30, 2019 and December 31, 2018 are as follows:

	Interest Rate
Due	Fixed		Adjustable			June 30, 2019		December 31, 2018
December 2019			4.09	%	$	3,000		3,000
December 2019			3.63			6,300		6,300
December 2019	1.62	%				10,000		10,000
June 2020	1.74					5,000		5,000
June 2020	2.22					6,000
December 2020	1.84					5,000		5,000
June 2021	1.99					10,000
March 2023	4.69					7,680		8,606
					$	52,980	$	37,906

Maturities of long-term debt, by contractual maturity, for the remainder of 2019 and subsequent years are as follows:

2019	$	20,248
2020		17,963
2021		12,058
2022		2,156
2023		555
	$	52,980

None of the advances from the FHLB are convertible. At June 30, 2019, long-term debt consist of $43,680 at fixed rates and $9,300 at adjustable rates which reset quarterly based on three-month LIBOR plus 1.21% to plus 1.57%. New long-term advances totaling $16,000 were entered into with the FHLB during the second quarter of 2019. The advances were qualified under the FHLB’s ‘Community Lending Program’ which offers rates lower than their stated rates when the advances are used for community development.

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Income taxes

6 Months Ended

Jun. 30, 2019

Income taxes

Income taxes

11. Income taxes

The effective tax rate of the Company was 11.8% and 11.2% for the three and six months ended June 30, 2019 compared to 12.0% and 11.8% for the three and six months ended June 30, 2018. The three and six months ended June 30, 2019 include before tax investment tax credits and other credits of $390 and $778 compared to before tax investment tax credits $273 and $543 for those same periods last year.

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Summary of significant accounting policies (Policies)

6 Months Ended

Jun. 30, 2019

Summary of significant accounting policies

Nature of operations

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. Unless the context indicates otherwise, all references in this quarterly report to “Peoples”, “Company”, “Bank”, “we”, “us” and “our” refer to Peoples Financial Services Corp., its subsidiaries and its and their respective predecessors. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within the Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York. Additionally, we operate a Limited Purpose Banking Office(“LPO”) located in and serving Schuylkill County, Pennsylvania.

Basis of presentation

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 six months ended and as of June 30, 2019, 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 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, 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, 2018.

Recent accounting standards

Recent accounting standards:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”.  From the lessees’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.  The ROU asset and lease liability are calculated based on the present value of future lease payments using an estimated incremental borrowing rate.  The Company utilized the incremental borrowing rate of interest on a collateralized basis for the lease term as quoted by the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income 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 is 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 amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The new standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. In order to establish the value of the ROU and lease liability and in accordance with the guidance, management determined the term of the leases held by carefully evaluating and assessing each lease and applying economic and other relevant factors to determine whether the Company is reasonably certain to exercise or not to exercise a renewal option within each lease. We have also elected an accounting policy not to restate comparative periods upon adoption. The Company elected to adopt this pronouncement using the optional transition method under ASU 2018-11 as of January 1, 2019 and recorded right-of-use assets and lease liabilities for operating leases of $6,523 on its consolidated balance sheets, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income and comprehensive income.

In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments were adopted on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842) Codification Improvements” which was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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 GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU 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.
	In July 2019, the FASB agreed to issue a proposal to delay the effective date for smaller reporting companies, which the Company currently qualifies as such. If approved, the proposal could delay the effective date until 2023, though the Company may need to adopt earlier if it no longer qualifies as a smaller reporting company. 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.

We are evaluating the impact of the ASU on our consolidated financial statements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements”. In accordance with the Concepts Statement, this ASU removes, modifies and adds select disclosure requirements under Topic 820 after consideration of costs and benefits. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public entities, with early adoption permitted. The adoption of this guidance on January 1, 2020 is not expected to have a material effect on the Company’s consolidated financial statements.

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Other comprehensive loss (Tables)

6 Months Ended

Jun. 30, 2019

Other comprehensive loss

Schedule of components of accumulated other comprehensive loss

		June 30, 2019		December 31, 2018
Net unrealized loss on investment securities available-for-sale	$	1,776	$	(3,251)
Income tax		373		(683)
Net of income taxes		1,403		(2,568)
Benefit plan adjustments		(7,218)		(7,218)
Income tax		(1,516)		(1,516)
Net of income taxes		(5,702)		(5,702)
Derivative adjustments		752		246
Income tax		158		52
Net of income taxes		594		194
Accumulated other comprehensive loss	$	(3,705)	$	(8,076)

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Earnings per share (Tables)

6 Months Ended

Jun. 30, 2019

Earnings per share

Schedule of earnings per share

	2019				2018
For the Three Months Ended June 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,144	$	7,144	$	5,957	$	5,957
Average common shares outstanding		7,399,302		7,399,302		7,396,533		7,396,533
Earnings per share	$	0.96	$	0.96	$	0.81	$	0.81
	2019				2018
For the Six Months Ended June 30	Basic		Diluted		Basic		Diluted
Net income	$	13,556	$	13,556	$	11,811	$	11,811
Average common shares outstanding		7,399,178		7,399,178		7,396,519		7,396,519
Earnings per share	$	1.83	$	1.83	$	1.60	$	1.60

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Investment securities (Tables)

6 Months Ended

Jun. 30, 2019

Schedule of amortized cost and fair value of investment securities aggregated by investment category

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,958	$	143	$	17	$	24,084
U.S. Government-sponsored enterprises		93,830		82		423		93,489
State and municipals:
Taxable		12,475		367				12,842
Tax-exempt		69,454		713		32		70,135
Residential Mortgage-backed securities:
U.S. Government agencies		10,669		135		20		10,784
U.S. Government-sponsored enterprises		40,901		776		92		41,585
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		8,601		145				8,746
Total	$	259,888	$	2,361	$	584	$	261,665
Held-to-maturity:
Tax-exempt state and municipals	$	6,854	$	151			$	7,005
Residential Mortgage-backed securities:
U.S. Government agencies		36						36
U.S. Government-sponsored enterprises		1,079		32	$	1		1,110
Total	$	7,969	$	183	$	1	$	8,151

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	25,948		9	$	365	$	25,592
U.S. Government-sponsored enterprises		94,999	$	2		2,183		92,818
State and municipals:
Taxable		13,544		309				13,853
Tax-exempt		86,361		338		745		85,954
Residential Mortgage-backed securities:
U.S. Government agencies		12,663		50		84		12,629
U.S. Government-sponsored enterprises		33,149		49		401		32,797
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		6,269				230		6,039
Total	$	272,933	$	757	$	4,008	$	269,682
Held-to-maturity:
Tax-exempt state and municipals	$	6,855	$	12	$	43	$	6,824
Residential Mortgage-backed securities:
U.S. Government agencies		42						42
U.S. Government-sponsored enterprises		1,464		55		5		1,514
Total	$	8,361	$	67	$	48	$	8,380

Schedule of fair value and unrealized losses of investment securities in continuous unrealized loss position

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$		$		$	7,993	$	17	$	7,993	$	17
U.S. Government-sponsored enterprises						75,292		423		75,292		423
State and municipals:
Tax-exempt						14,499		32		14,499		32
Residential Mortgage-backed securities:
U.S. Government agencies						5,281		20		5,281		20
U.S. Government-sponsored enterprises						10,372		93		10,372		93
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises										—		—
Total	$	—	$	—	$	113,437	$	585	$	113,437	$	585

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	1,995	$	2	$	19,671	$	363	$	21,666	$	365
U.S. Government-sponsored enterprises		2,037		1		89,729		2,182		91,766		2,183
State and municipals:
Tax-exempt		9,022		74		52,352		714		61,374		788
Residential Mortgage-backed securities:
U.S. Government agencies						7,800		84		7,800		84
U.S. Government-sponsored enterprises		12,851		55		13,881		351		26,732		406
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises						6,039		230		6,039		230
Total	$	25,905	$	132	$	189,472	$	3,924	$	215,377	$	4,056

Summary of unrealized and realized gains and losses

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2019 (in thousands):

For the Three Months Ended June 30,		2019		2018
Net gains (losses) recognized during the period on equity securities	$	(9)	$	8
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(9)	$	8
For the Six Months Ended June 30,		2019		2018
Net gains (losses) recognized during the period on equity securities	$	(8)	$
Less: Net gains and (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(8)	$

Available-for-Sale Securities.

Schedule of maturity distribution of fair value

	Fair
June 30, 2019	Value
Within one year	$	38,102
After one but within five years		133,582
After five but within ten years		10,729
After ten years		18,137
		200,550
Mortgage-backed securities		61,115
Total	$	261,665

Held-to-maturity Securities.

Schedule of maturity distribution of fair value

	Amortized		Fair
June 30, 2019	Cost		Value
Within one year
After one but within five years
After five but within ten years
After ten years	$	6,854	$	7,005
		6,854		7,005
Mortgage-backed securities		1,115		1,146
Total	$	7,969	$	8,151

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Loans, net and allowance for loan losses (Tables)

6 Months Ended

Jun. 30, 2019

Loans, net and allowance for loan losses

Schedule of major classifications of loans outstanding

		June 30, 2019		December 31, 2018
Commercial	$	513,655	$	494,134
Real estate:
Commercial		935,578		907,803
Residential		298,527		299,876
Consumer		111,039		121,453
Total	$	1,858,799	$	1,823,266

Schedule of changes in allowance for loan losses account by major classification of loans

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2019 and 2018 are summarized as follows:

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2019	$	5,955	$	11,074	$	3,880	$	1,196	$	22,105
Charge-offs		(10)		(343)		(143)		(80)		(576)
Recoveries		2				12		37		51
Provisions		195		311		(134)		(22)		350
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
			Real estate
June 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2018	$	5,198	$	10,301	$	2,924	$	1,295	$	19,718
Charge-offs		(2)		(1,169)		(82)		(145)		(1,398)
Recoveries		59		30		57		57		203
Provisions		(64)		896		257		(39)		1,050
Ending balance	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892		1,235		21,379
Charge-offs		(87)		(349)		(302)		(212)		(950)
Recoveries		10				16		75		101
Provisions		703		655		9		33		1,400
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
			Real estate
June 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2018	$	5,513	$	8,944	$	3,111	$	1,392	$	18,960
Charge-offs		(2)		(1,169)		(381)		(272)		(1,824)
Recoveries		116		57		67		97		337
Provisions		(436)		2,226		359		(49)		2,100
Ending balance	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2019 and December 31, 2018 is summarized as follows:

			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Ending balance: individually evaluated for impairment		615		216		295				1,126
Ending balance: collectively evaluated for impairment	$	5,527	$	10,826	$	3,320	$	1,131	$	20,804
Loans receivable:
Ending balance	$	513,655	$	935,578	$	298,527	$	111,039	$	1,858,799
Ending balance: individually evaluated for impairment		5,915		3,867		2,280		251		12,313
Ending balance: collectively evaluated for impairment	$	507,740	$	931,711	$	296,247	$	110,788	$	1,846,486

			Real estate
December 31, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Ending balance: individually evaluated for impairment		50		403		666		60		1,179
Ending balance: collectively evaluated for impairment	$	5,466	$	10,333	$	3,226	$	1,175	$	20,200
Loans receivable:
Ending balance	$	494,134	$	907,803	$	299,876	$	121,453	$	1,823,266
Ending balance: individually evaluated for impairment		2,237		3,121		4,071		212		9,641
Ending balance: collectively evaluated for impairment	$	491,897	$	904,682	$	295,805	$	121,241	$	1,813,625

Schedule of major classification of loans portfolio summarized by credit quality

			Special
June 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	504,060	$	2,029	$	7,566	$	$	513,655
Real estate:
Commercial		905,398		3,054		27,126			935,578
Residential		296,021		351		2,155			298,527
Consumer		110,672				367			111,039
Total	$	1,816,151	$	5,434	$	37,214	$	$	1,858,799

			Special
December 31, 2018	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	491,531	$	869	$	1,734	$	$	494,134
Real estate:
Commercial		886,849		8,934		12,020			907,803
Residential		295,758		357		3,761			299,876
Consumer		121,229				224			121,453
Total	$	1,795,367	$	10,160	$	17,739	$	$	1,823,266

Schedule of information concerning nonaccrual loans by major loan classification

		June 30, 2019		December 31, 2018
Commercial	$	4,494	$	776
Real estate:
Commercial		3,044		2,663
Residential		1,464		2,580
Consumer		251		212
Total	$	9,253	$	6,231

Schedule of major classifications of loans by past due status

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
June 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	385	$	136	$	4,502	$	5,023	$	508,632	$	513,655	$	8
Real estate:
Commercial		1,200		54		3,192		4,446		931,132		935,578		148
Residential		1,930		427		1,649		4,006		294,521		298,527		185
Consumer		495		128		251		874		110,165		111,039
Total	$	4,010	$	745	$	9,594	$	14,349	$	1,844,450	$	1,858,799	$	341

The Company classifies all nonaccrual loans in the greater than 90 days category.

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2018	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	973	$	79	$	776	$	1,828	$	492,306	$	494,134
Real estate:
Commercial		1,889		218		2,736		4,843		902,960		907,803	$	73
Residential		2,486		1,545		3,430		7,461		292,415		299,876		850
Consumer		756		292		212		1,260		120,193		121,453
Total	$	6,104	$	2,134	$	7,154	$	15,392	$	1,807,874	$	1,823,266	$	923

Summarized information concerning impaired loans

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	4,495	$	4,931			$	5,284	$	17	$	4,043	$	34
Real estate:
Commercial		2,957		3,116				2,528		10		2,341		23
Residential		619		888				740		4		1,150		11
Consumer		251		261				245				214
Total		8,322		9,196				8,797		31		7,748		68
With an allowance recorded:
Commercial		1,420		1,432		615		1,180		5		1,012		12
Real estate:
Commercial		910		1,380		216		1,174		5		1,166		10
Residential		1,661		1,740		295		1,848		7		1,932		18
Consumer												20
Total		3,991		4,552		1,126		4,202		17		4,130		40
Total impaired loans
Commercial		5,915		6,363		615		6,464		22		5,055		46
Real estate:
Commercial		3,867		4,496		216		3,702		15		3,507		33
Residential		2,280		2,628		295		2,588		11		3,082		29
Consumer		251		261				245				234
Total	$	12,313	$	13,748	$	1,126	$	12,999	$	48	$	11,878	$	108

							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2018	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	1,562	$	1,900			$	1,318	$	67
Real estate:
Commercial		1,969		2,299				2,822		28
Residential		1,970		2,658				2,193		22
Consumer		152		160				135
Total		5,653		7,017				6,468		117
With an allowance recorded:
Commercial		675		675		50		1,006		30
Real estate:
Commercial		1,152		1,323		403		1,676		18
Residential		2,101		2,328		666		1,585		22
Consumer		60		60		60		21
Total		3,988		4,386		1,179		4,288		70
Total impaired loans
Commercial		2,237		2,575		50		2,324		97
Real estate:
Commercial		3,121		3,622		403		4,498		46
Residential		4,071		4,986		666		3,778		44
Consumer		212		220		60		156
Total	$	9,641	$	11,403	$	1,179	$	10,756	$	187

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,182	$	1,355			$	1,197	$	16	$	1,224	$	33
Real estate:
Commercial		2,871		3,262				2,921		9		2,910		15
Residential		2,146		2,848				2,218		4		2,210		8
Consumer		60		67				106				127
Total		6,259		7,532				6,442		29		6,471		56
With an allowance recorded:
Commercial		1,100		1,124	$	146		1,117		8		1,139		16
Real estate:
Commercial		1,755		1,876		502		2,079		4		1,853		10
Residential		1,425		1,550		378		1,458		4		1,504		8
Consumer		3		3		3		11				10
Total		4,283		4,553		1,029		4,665		16		4,506		34
Total impaired loans
Commercial		2,282		2,479		146		2,314		24		2,363		49
Real estate:
Commercial		4,626		5,138		502		5,000		13		4,763		25
Residential		3,571		4,398		378		3,676		8		3,714		16
Consumer		63		70		3		117				137
Total	$	10,542	$	12,085	$	1,029	$	11,107	$	45	$	10,977	$	90

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Other assets (Tables)

6 Months Ended

Jun. 30, 2019

Other assets.

Schedule of components of other assets

		June 30, 2019		December 31, 2018
Other real estate owned	$	408	$	376
Investment in low income housing partnership		7,139		7,377
Mortgage servicing rights		719		718
Bank owned life insurance		34,667		34,288
Restricted equity securities		7,833		7,462
Net deferred tax asset		3,919		5,081
Other assets		12,940		8,435
Total	$	67,625	$	63,737

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Fair value estimates (Tables)

6 Months Ended

Jun. 30, 2019

Fair value estimates

Schedule of assets and liabilities measured at fair value on a recurring basis

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,084	$	24,084			$
U.S. Government-sponsored enterprises		93,489			$	93,489
State and Municipals:
Taxable		12,842				12,842
Tax-exempt		70,135				70,135
Mortgage-backed securities:
U.S. Government agencies		10,784				10,784
U.S. Government-sponsored enterprises		50,331				50,331
Common equity securities		283		283
Interest rate floor-other assets		1,025				1,025
Interest rate swap-other assets		3,807				3,807
Interest rate swap-other liabilities		(4,182)				(4,182)
Total	$	262,598	$	24,367	$	238,231	$

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2018	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	25,592	$	25,592			$
U.S. Government-sponsored enterprises		92,818			$	92,818
State and Municipals:
Taxable		13,853				13,853
Tax-exempt		85,954				85,954
Mortgage-backed securities:
U.S. Government agencies		12,629				12,629
U.S. Government-sponsored enterprises		38,836				38,836
Common equity securities		291		291
Interest rate floor-other assets		553				553
Interest rate swap-other assets		108				108
Interest rate swap-other liabilities		(138)				(138)
Total	$	270,496	$	25,883	$	244,613	$

Schedule of assets and liabilities measured at fair value on a nonrecurring basis

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	2,865			$	2,865
Other real estate owned	$	250			$	250

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2018	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	2,809			$	2,809
Other real estate owned	$	234			$	234

Schedule of additional quantitative information about assets measured at fair value on a nonrecurring basis

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	2,865	Appraisal of collateral	Appraisal adjustments	7.6% to 97.0%   (56.7)%
				Liquidation expenses	3.0% to 6.0% (5.4)%
Other real estate owned	$	250	Appraisal of collateral	Appraisal adjustments	20.0% to 43.3%   (32.0)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2018	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	2,809	Appraisal of collateral	Appraisal adjustments	7.1% to 97.0%   (61.8)%
				Liquidation expenses	3.0% to 6.0% (4.4)%
Other real estate owned	$	234	Appraisal of collateral	Appraisal adjustments	26.0% to 73.3%   (38.9)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

Schedule of carrying and fair values of financial instruments

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	29,962	$	29,962	$	29,962
Investment securities:
Available-for-sale		261,665		261,665		24,084	$	237,581
Common equity securities		283		283		283
Held-to-maturity		7,969		8,151				8,151
Net loans		1,836,869		1,830,139					$	1,830,139
Accrued interest receivable		7,303		7,303				7,303
Mortgage servicing rights		719		1,712				1,712
Restricted equity securities		7,833		7,833				7,833
Interest rate floor		1,025		1,025				1,025
Interest rate swaps		3,807		3,807				3,807
Total	$	2,157,435	$	2,151,880
Financial liabilities:
Deposits	$	1,876,799	$	1,862,246			$	1,862,246
Short-term borrowings		82,700		82,700				82,700
Long-term debt		52,980		53,338				53,338
Accrued interest payable		1,058		1,058				1,058
Interest rate swaps		4,182		4,182				4,182
Total	$	2,017,719	$	2,003,524

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2018	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	32,616	$	32,616	$	32,616
Investment securities:
Available-for-sale		269,682		269,682		25,952	$	244,090
Common equity securities		291		291		291
Held-to-maturity		8,361		8,380				8,380
Loans held for sale		749		749				749
Net loans		1,801,887		1,762,449					$	1,762,449
Accrued interest receivable		7,115		7,115				7,115
Mortgage servicing rights		718		1,710				1,710
Restricted equity securities		7,462		7,462				7,462
Interest rate floor		553		553				553
Interest rate swaps		108		108				108
Total	$	2,129,542	$	2,091,115
Financial liabilities:
Deposits	$	1,875,022	$	1,874,520			$	1,874,520
Short-term borrowings		86,500		86,500				86,500
Long-term debt		37,906		38,071				38,071
Accrued interest payable		1,195		1,195				1,195
Interest rate swaps		138		138				138
Total	$	2,000,761	$	2,000,424

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Employee benefit plans (Tables)

6 Months Ended

Jun. 30, 2019

Employee benefit plans

Schedule of components of net periodic benefit cost

	Pension Benefits
Three Months Ended June 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	192	$	156
Expected return on plan assets		(325)		(240)
Amortization of unrecognized net gain		68		49
Net periodic benefit cost	$	(65)	$	(35)
	Pension Benefits
Six Months Ended June 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	320	$	156
Expected return on plan assets		(542)		(240)
Amortization of unrecognized net gain		113		49
Net periodic benefit cost	$	(109)	$	(35)

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Derivatives and hedging activities (Tables)

6 Months Ended

Jun. 30, 2019

Derivatives and hedging activities

Schedule of fair value of derivative financial instruments and balance sheet classification

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of June 30, 2019			As of December 31, 2018 (1)			As of June 30, 2019			As of December 31, 2018 (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	$	1,025		$	553
Total derivatives designated as hedging instruments				$	1,025		$	553
Derivatives not designated as hedging instruments
Interest Rate Swaps	$	123,351	Other Assets	$	3,807	Other Assets	$	108	Other Liabilities	$	4,182	Other Liabilities	$	138
Total derivatives not designated as hedging instruments				$	3,807		$	108		$	4,182		$	138

(1) Assets amount does not include accrued interest receivable of $13

(2) Liabilities amount does not include accrued interest payable of $13

Schedule of effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

427

$

532

$

(105)

Interest Income

$

(16)

$

$

(16)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

474

$

827

$

(353)

Interest Income

$

(31)

$

$

(31)

* Amounts disclosed are gross and not net of taxes.

Schedule of effect of derivative financial instruments on Income Statement

		Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging
		Relationships
		2019	2018
		Interest Income	Interest Income
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	$	(31)
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	$	(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income -  included component
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income -  excluded component	$	(31)

Schedule of gain (loss) on derivative instruments not designated as hedging instruments

		Amount of Loss		Amount of Loss		Amount of Gain		Amount of Gain
		Recognized in		Recognized in		Recognized in		Recognized in
	Location of Gain or (Loss)	Income		Income		Income		Income
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	June 30, 2019		June 30, 2019		June 30, 2018		June 30, 2018
Interest Rate Swaps	Other non-interest income	$	(236)	$	(346)	$	19	$	85
Fee Income	Other  income / (expense)	$	744	$	1,136	$	53	$	53

Schedule of offsetting derivatives

Offsetting of Derivative Assets
as of June 30, 2019
						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	$	4,833	$	$	4,833	$		$	4,833
Offsetting of Derivative Liabilities
as of June 30, 2019
						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	$	4,183	$	$	4,183	$		$	4,183
Offsetting of Derivative Assets
as of December 31, 2018
						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	$	661	$	$	661	$		$	661
Offsetting of Derivative Liabilities
as of December 31, 2018
						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	$	138	$	$	138	$		$	138

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Borrowings (Tables)

6 Months Ended

Jun. 30, 2019

Borrowings

Summary of short-term borrowings

	At and for the six months ended June 30, 2019
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at
	Balance		Balance		Balance		the six monthe ended June 30,2019		June 30,2019
FHLB advances	$	82,700	$	105,212	$	133,725	2.70	%	2.46	%

	At and for the year ended December 31, 2018
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
	Balance		Balance		Balance		the Year		of the Year
FHLB advances	$	86,500	$	133,834	$	189,275	2.05	%	2.62	%

Schedule of long-term debt advances

	Interest Rate
Due	Fixed		Adjustable			June 30, 2019		December 31, 2018
December 2019			4.09	%	$	3,000		3,000
December 2019			3.63			6,300		6,300
December 2019	1.62	%				10,000		10,000
June 2020	1.74					5,000		5,000
June 2020	2.22					6,000
December 2020	1.84					5,000		5,000
June 2021	1.99					10,000
March 2023	4.69					7,680		8,606
					$	52,980	$	37,906

Schedule of maturities of long-term debt

2019	$	20,248
2020		17,963
2021		12,058
2022		2,156
2023		555
	$	52,980

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Summary of significant accounting policies (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) Office	Jan. 01, 2019 USD ($)
Summary of significant accounting policies
Number of full-service community banking offices | Office	28
Lease liabilities for operating leases	$ 6,523	$ 6,523
Right-of-use assets	$ 6,523	$ 6,523

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Other comprehensive loss - Components of Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Other comprehensive loss
Net unrealized loss on investment securities available-for-sale	$ 1,776	$ (3,251)
Income tax	373	(683)
Net of income taxes	1,403	(2,568)
Benefit plan adjustments	(7,218)	(7,218)
Income tax	1,516	1,516
Net of income taxes	(5,702)	(5,702)
Derivative adjustments	752	246
Income tax	158	52
Net of income taxes	594	194
Accumulated other comprehensive loss	$ (3,705)	$ (8,076)

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Other comprehensive loss - Other Comprehensive Loss and Related Tax Effects (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Other comprehensive loss
Unrealized (loss) gain on investment securities available-for-sale	$ 2,611	$ (839)	$ 5,050	$ (3,215)
Net gain on the sale of investment securities available-for-sale	(23)		(23)
Other comprehensive loss	3,031	(839)	5,533	(3,215)
Income tax	637	(176)	1,162	(677)
Other comprehensive loss	$ 2,394	$ (663)	$ 4,371	$ (2,538)

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Earnings per share - Shares Considered Anti-dilutive (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Earnings per share
Anti-dilutive shares	0	0	0	0

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Earnings per share - Schedule of Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Earnings per share
Net income, Basic	$ 7,144	$ 5,957	$ 13,556	$ 11,811
Average common shares outstanding, Basic	7,399,302	7,396,533	7,399,178	7,396,519
Earnings per share, Basic	$ 0.96	$ 0.81	$ 1.83	$ 1.60
Net income, Diluted	$ 7,144	$ 5,957	$ 13,556	$ 11,811
Average common shares outstanding, Diluted	7,399,302	7,396,533	7,399,178	7,396,519
Earnings per share, Diluted	$ 0.96	$ 0.81	$ 1.83	$ 1.60

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Investment securities - Amortized Cost and Fair Value of Investment Securities Aggregated by Investment Category (Details) $ in Thousands	Jun. 30, 2019 USD ($) company	Dec. 31, 2018 USD ($)
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	$ 259,888	$ 272,933
Available-for-sale, Gross Unrealized Gains	2,361	757
Available-for-sale, Gross Unrealized Losses	584	4,008
Available-for-sale, Fair Value	261,665	269,682
Held-to-maturity, Amortized Cost	7,969	8,361
Held-to-maturity, Gross Unrealized Gains	183	67
Held-to-maturity, Gross Unrealized Losses	1	48
Held-to-maturity, Fair value	8,151	8,380
Equity investments carried at fair value	$ 283	291
Number of equity securities portfolio consisting of stock of other financial institutions | company	2
Fair value of equity portfolio in excess of cost basis	$ 6
Mortgage-backed Securities, U.S. Government agencies
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	10,669	12,663
Available-for-sale, Gross Unrealized Gains	135	50
Available-for-sale, Gross Unrealized Losses	20	84
Available-for-sale, Fair Value	10,784	12,629
Held-to-maturity, Amortized Cost	36	42
Held-to-maturity, Fair value	36	42
Mortgage-backed Securities, U.S. Government-sponsored enterprises
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	40,901	33,149
Available-for-sale, Gross Unrealized Gains	776	49
Available-for-sale, Gross Unrealized Losses	92	401
Available-for-sale, Fair Value	41,585	32,797
Held-to-maturity, Amortized Cost	1,079	1,464
Held-to-maturity, Gross Unrealized Gains	32	55
Held-to-maturity, Gross Unrealized Losses	1	5
Held-to-maturity, Fair value	1,110	1,514
Commercial mortgage-backed Securities, U.S. Government-sponsored enterprises
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	8,601	6,269
Available-for-sale, Gross Unrealized Gains	145
Available-for-sale, Gross Unrealized Losses		230
Available-for-sale, Fair Value	8,746	6,039
U.S. Government-sponsored enterprises state and municipals
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	93,830	94,999
Available-for-sale, Gross Unrealized Gains	82	2
Available-for-sale, Gross Unrealized Losses	423	2,183
Available-for-sale, Fair Value	93,489	92,818
U.S. Treasuries
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	23,958	25,948
Available-for-sale, Gross Unrealized Gains	143	9
Available-for-sale, Gross Unrealized Losses	17	365
Available-for-sale, Fair Value	24,084	25,592
Common equity securities.
Schedule of Trading Securities and Other Trading Assets
Equity investments carried at fair value	283	291
State and Municipals, Taxable
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	12,475	13,544
Available-for-sale, Gross Unrealized Gains	367	309
Available-for-sale, Fair Value	12,842	13,853
State and Municipals, Tax-exempt
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	69,454	86,361
Available-for-sale, Gross Unrealized Gains	713	338
Available-for-sale, Gross Unrealized Losses	32	745
Available-for-sale, Fair Value	70,135	85,954
Held-to-maturity, Amortized Cost	6,854	6,855
Held-to-maturity, Gross Unrealized Gains	151	12
Held-to-maturity, Gross Unrealized Losses		43
Held-to-maturity, Fair value	$ 7,005	$ 6,824

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Investment securities - Unrealized and realized gains and losses (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019
Investment securities
Net gains recognized during the period on equity securities	$ (9)	$ 8	$ (8)
Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting date	$ (9)	$ 8	$ (8)

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Investment securities - Restricted Investment In Stock (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) security	Jun. 30, 2018 USD ($)
Available-for-sale and Held-to-maturity securities
Proceeds from sale of available-for-sale investment securities | $	$ 9,677
Gross realized gains | $	$ 23
Number of securities in continuous unrealized loss position	73
Other-than-temporary impairments recognized | $	$ 0
State and Municipals, Tax-exempt
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position	20
Number of securities in continuous unrealized loss positions 12 months or longer	20
U.S. Treasuries
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position	3
Number of securities in continuous unrealized loss positions 12 months or longer	3
U.S. Government-sponsored enterprises state and municipals
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position	28
Number of securities in continuous unrealized loss positions 12 months or longer	28
Other-than-temporary impairments recognized | $	$ 0	$ 0
Mortgage-backed Securities, U.S. Government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position	22
Number of securities in continuous unrealized loss positions 12 months or longer	20

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Investment securities - Maturity Distribution of Debt Securities Classified as Available-for-Sale (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Investment securities
Within one year	$ 38,102
After one but within five years	133,582
After five but within ten years	10,729
After ten years	18,137
Available for sale securities	200,550
Mortgage-backed securities	61,115
Total	$ 261,665	$ 269,682

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Investment securities - Summary of Amortized Cost and Fair Value of Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Amortized Cost of Held-to-maturity Securities
Amortized Cost, After ten years, Held to maturity	$ 6,854
Amortized Cost, Held to maturity	6,854
Amortized Cost, Mortgage-backed securities, Held to maturity	1,115
Held-to-maturity, Amortized Cost	7,969	$ 8,361
Fair Value of Held-to-maturity Securities
Fair Value, After ten years, Held to maturity	7,005
Fair Value, Held to maturity	7,005
Fair Value, Mortgage-backed securities, Held to maturity	1,146
Held to maturity, Fair Value	$ 8,151	$ 8,380

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Investment securities - Pledged Securities (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Available-for-sale and Held-to-maturity securities
Carrying value of securities pledged	us-gaap:AssetPledgedAsCollateralMember	us-gaap:AssetPledgedAsCollateralMember
Collateral Pledged
Available-for-sale and Held-to-maturity securities
Carrying value of securities pledged	$ 144,991	$ 161,647

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Investment securities - Fair Value and Unrealized Losses of Investment Securities in Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		$ 25,905
12 Months or More, Fair Value	$ 113,437	189,472
Less Than 12 Months, Unrealized Losses		132
12 Months or More, Unrealized Losses	585	3,924
Total, Fair Value	113,437	215,377
Total, Unrealized Losses	585	4,056
State and Municipals, Tax-exempt
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		9,022
12 Months or More, Fair Value	14,499	52,352
Less Than 12 Months, Unrealized Losses		74
12 Months or More, Unrealized Losses	32	714
Total, Fair Value	14,499	61,374
Total, Unrealized Losses	32	788
U.S. Treasuries
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		1,995
12 Months or More, Fair Value	7,993	19,671
Less Than 12 Months, Unrealized Losses		2
12 Months or More, Unrealized Losses	17	363
Total, Fair Value	7,993	21,666
Total, Unrealized Losses	17	365
U.S. Government-sponsored enterprises state and municipals
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		2,037
12 Months or More, Fair Value	75,292	89,729
Less Than 12 Months, Unrealized Losses		1
12 Months or More, Unrealized Losses	423	2,182
Total, Fair Value	75,292	91,766
Total, Unrealized Losses	423	2,183
Mortgage-backed Securities, U.S. Government agencies
Available-for-sale and Held-to-maturity securities
12 Months or More, Fair Value	5,281	7,800
12 Months or More, Unrealized Losses	20	84
Total, Fair Value	5,281	7,800
Total, Unrealized Losses	20	84
Commercial mortgage-backed Securities, U.S. Government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
12 Months or More, Fair Value	10,372	6,039
12 Months or More, Unrealized Losses	93	230
Total, Fair Value	10,372	6,039
Total, Unrealized Losses	$ 93	230
Mortgage-backed Securities, U.S. Government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		12,851
12 Months or More, Fair Value		13,881
Less Than 12 Months, Unrealized Losses		55
12 Months or More, Unrealized Losses		351
Total, Fair Value		26,732
Total, Unrealized Losses		$ 406

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Investment securities - Additional Information (Details) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019 USD ($) shares	Dec. 31, 2018 USD ($)
Value of common stock	$ 14,798	$ 14,798
Visa Class A stock
Conversion ratio of common stock	1.6298
Visa Class B stock
Shares held | shares	44,982
Value of common stock		0
Federal Home Loan Bank of Pittsburgh (FHLB)
Value of common stock	$ 7,791	$ 7,420
Atlantic Community Bankers Bank (ACBB)
Value of common stock	$ 42
U.S. Government-sponsored enterprises state and municipals
Maximum percentage of stockholders' equity exceeded for securities of any individual issuer	10.00%	10.00%

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Loans, net and allowance for loan losses - Net Deferred Loan Costs (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Loans, net and allowance for loan losses
Net deferred loan costs	$ 901	$ 744

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Loans, net and allowance for loan losses - Major Classifications of Loans Outstanding (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 1,858,799	$ 1,823,266
Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	513,655	494,134
Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	935,578	907,803
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	298,527	299,876
Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 111,039	$ 121,453

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Loans, net and allowance for loan losses - Changes in Allowance for Loan Losses Account by Major Classification of Loans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Dec. 31, 2018
Allowance for loan losses:
Beginning Balance	$ 22,105	$ 19,718	$ 21,379	$ 18,960
Charge-offs	(576)	(1,398)	(950)	(1,824)
Recoveries	51	203	101	337
Provisions	350	1,050	1,400	2,100
Ending balance	21,930	19,573	21,930	19,573
Beginning Balance	22,105	19,718	21,379	18,960
Ending balance: individually evaluated for impairment					$ 1,126	$ 1,179
Charge-offs	(576)	(1,398)	(950)	(1,824)
Ending balance: collectively evaluated for impairment					20,804	20,200
Recoveries	51	203	101	337
Ending balance: loans acquired with deteriorated credit quality	22,105	19,718	21,379	18,960	21,930	21,379
Provisions	350	1,050	1,400	2,100
Loans receivable:
Total Loans					1,858,799	1,823,266
Ending balance: individually evaluated for impairment					12,313	9,641
Ending balance: collectively evaluated for impairment					1,846,486	1,813,625
Total Loans					1,858,799	1,823,266
Ending balance	21,930	19,573	21,930	19,573
Ending balance: individually evaluated for impairment					12,313	9,641
Ending balance: collectively evaluated for impairment					1,846,486	1,813,625
Commercial
Allowance for loan losses:
Beginning Balance	5,955	5,198	5,516	5,513
Charge-offs	(10)	(2)	(87)	(2)
Recoveries	2	59	10	116
Provisions	195	(64)	703	(436)
Ending balance	6,142	5,191	6,142	5,191
Beginning Balance	5,955	5,198	5,516	5,513
Ending balance: individually evaluated for impairment					615	50
Charge-offs	(10)	(2)	(87)	(2)
Ending balance: collectively evaluated for impairment					5,527	5,466
Recoveries	2	59	10	116
Ending balance: loans acquired with deteriorated credit quality	5,955	5,198	5,516	5,513	6,142	5,516
Provisions	195	(64)	703	(436)
Loans receivable:
Total Loans					513,655	494,134
Ending balance: individually evaluated for impairment					5,915	2,237
Ending balance: collectively evaluated for impairment					507,740	491,897
Total Loans					513,655	494,134
Ending balance	6,142	5,191	6,142	5,191
Ending balance: individually evaluated for impairment					5,915	2,237
Ending balance: collectively evaluated for impairment					507,740	491,897
Real estate Commercial
Allowance for loan losses:
Beginning Balance	11,074	10,301	10,736	8,944
Charge-offs	(343)	(1,169)	(349)	(1,169)
Recoveries		30		57
Provisions	311	896	655	2,226
Ending balance	11,042	10,058	11,042	10,058
Beginning Balance	11,074	10,301	10,736	8,944
Ending balance: individually evaluated for impairment					216	403
Charge-offs	(343)	(1,169)	(349)	(1,169)
Ending balance: collectively evaluated for impairment					10,826	10,333
Recoveries		30		57
Ending balance: loans acquired with deteriorated credit quality	11,074	10,301	10,736	8,944	11,042	10,736
Provisions	311	896	655	2,226
Loans receivable:
Total Loans					935,578	907,803
Ending balance: individually evaluated for impairment					3,867	3,121
Ending balance: collectively evaluated for impairment					931,711	904,682
Total Loans					935,578	907,803
Ending balance	11,042	10,058	11,042	10,058
Ending balance: individually evaluated for impairment					3,867	3,121
Ending balance: collectively evaluated for impairment					931,711	904,682
Real estate Residential
Allowance for loan losses:
Beginning Balance	3,880	2,924	3,892
Charge-offs	(143)	(82)
Recoveries	12	57
Provisions	(134)	257
Ending balance	3,615	3,156	3,615	3,156
Beginning Balance	3,880	2,924	3,892
Ending balance: individually evaluated for impairment					295	666
Charge-offs	(143)	(82)
Ending balance: collectively evaluated for impairment					3,320	3,226
Recoveries	12	57
Ending balance: loans acquired with deteriorated credit quality	3,880	2,924	3,892	3,156	3,615	3,892
Provisions	(134)	257
Loans receivable:
Total Loans					298,527	299,876
Ending balance: individually evaluated for impairment					2,280	4,071
Ending balance: collectively evaluated for impairment					296,247	295,805
Total Loans					298,527	299,876
Ending balance	3,615	3,156	3,615	3,156
Ending balance: individually evaluated for impairment					2,280	4,071
Ending balance: collectively evaluated for impairment					296,247	295,805
Real estate Residential
Allowance for loan losses:
Beginning Balance			3,892	3,111
Charge-offs			(302)	(381)
Recoveries			16	67
Provisions			9	359
Ending balance	3,615	3,156	3,615	3,156
Beginning Balance			3,892	3,111
Charge-offs			(302)	(381)
Recoveries			16	67
Ending balance: loans acquired with deteriorated credit quality	3,615	3,156	3,892	3,111	3,615	3,892
Provisions			9	359
Loans receivable:
Total Loans					298,527	299,876
Total Loans					298,527	299,876
Ending balance	3,615	3,156	3,615	3,156
Consumer
Allowance for loan losses:
Beginning Balance	1,196	1,295	1,235	1,392
Charge-offs	(80)	(145)	(212)	(272)
Recoveries	37	57	75	97
Provisions	(22)	(39)	33	(49)
Ending balance	1,131	1,168	1,131	1,168
Beginning Balance	1,196	1,295	1,235	1,392
Ending balance: individually evaluated for impairment						60
Charge-offs	(80)	(145)	(212)	(272)
Ending balance: collectively evaluated for impairment					1,131	1,175
Recoveries	37	57	75	97
Ending balance: loans acquired with deteriorated credit quality	1,196	1,295	1,235	1,392	1,131	1,235
Provisions	(22)	(39)	33	(49)
Loans receivable:
Total Loans					111,039	121,453
Ending balance: individually evaluated for impairment					251	212
Ending balance: collectively evaluated for impairment					110,788	121,241
Total Loans					111,039	121,453
Ending balance	$ 1,131	$ 1,168	$ 1,131	$ 1,168
Ending balance: individually evaluated for impairment					251	212
Ending balance: collectively evaluated for impairment					$ 110,788	$ 121,241

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Loans, net and allowance for loan losses - Allocation of Allowance for Loan Losses and Related Loans by Major Classification of Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
Allowance for loan losses:
Ending balance	$ 21,930	$ 22,105	$ 21,379	$ 19,573	$ 19,718	$ 18,960
Ending balance: individually evaluated for impairment	1,126		1,179
Ending balance: collectively evaluated for impairment	20,804		20,200
Loans receivable:
Ending balance	1,858,799		1,823,266
Ending balance: individually evaluated for impairment	12,313		9,641
Ending balance: collectively evaluated for impairment	1,846,486		1,813,625
Commercial
Allowance for loan losses:
Ending balance	6,142	5,955	5,516	5,191	5,198	5,513
Ending balance: individually evaluated for impairment	615		50
Ending balance: collectively evaluated for impairment	5,527		5,466
Loans receivable:
Ending balance	513,655		494,134
Ending balance: individually evaluated for impairment	5,915		2,237
Ending balance: collectively evaluated for impairment	507,740		491,897
Real estate Commercial
Allowance for loan losses:
Ending balance	11,042	11,074	10,736	10,058	10,301	8,944
Ending balance: individually evaluated for impairment	216		403
Ending balance: collectively evaluated for impairment	10,826		10,333
Loans receivable:
Ending balance	935,578		907,803
Ending balance: individually evaluated for impairment	3,867		3,121
Ending balance: collectively evaluated for impairment	931,711		904,682
Real estate Residential
Allowance for loan losses:
Ending balance	3,615	3,880	3,892	3,156	2,924
Ending balance: individually evaluated for impairment	295		666
Ending balance: collectively evaluated for impairment	3,320		3,226
Loans receivable:
Ending balance	298,527		299,876
Ending balance: individually evaluated for impairment	2,280		4,071
Ending balance: collectively evaluated for impairment	296,247		295,805
Consumer
Allowance for loan losses:
Ending balance	1,131	$ 1,196	1,235	$ 1,168	$ 1,295	$ 1,392
Ending balance: individually evaluated for impairment			60
Ending balance: collectively evaluated for impairment	1,131		1,175
Loans receivable:
Ending balance	111,039		121,453
Ending balance: individually evaluated for impairment	251		212
Ending balance: collectively evaluated for impairment	$ 110,788		$ 121,241

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Loans, net and allowance for loan losses - Major Classification of Loans Portfolio Summarized by Credit Quality (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 1,858,799	$ 1,823,266
Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	513,655	494,134
Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	935,578	907,803
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	298,527	299,876
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	298,527	299,876
Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	111,039	121,453
Pass
Accounts, Notes, Loans and Financing Receivable
Loans, net	1,816,151	1,795,367
Pass | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	504,060	491,531
Pass | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	905,398	886,849
Pass | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	296,021	295,758
Pass | Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	110,672	121,229
Special Mention
Accounts, Notes, Loans and Financing Receivable
Loans, net	5,434	10,160
Special Mention | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	2,029	869
Special Mention | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	3,054	8,934
Special Mention | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	351	357
Substandard
Accounts, Notes, Loans and Financing Receivable
Loans, net	37,214	17,739
Substandard | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	7,566	1,734
Substandard | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	27,126	12,020
Substandard | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	2,155	3,761
Substandard | Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 367	$ 224

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Loans, net and allowance for loan losses - Reclassification of Commercial Credits Category (Details) - Substandard - Real estate Commercial $ in Millions	6 Months Ended
	Jun. 30, 2019 USD ($)
Accounts, Notes, Loans and Financing Receivable
Change in category due to financial difficulties	$ 10.4
Change in category due to construction delays	$ 5.3

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Loans, net and allowance for loan losses - Information Concerning Nonaccrual Loans by Major Loan Classification (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	$ 9,253	$ 6,231
Commercial
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	4,494	776
Real estate Commercial
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	3,044	2,663
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	1,464	2,580
Consumer
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	$ 251	$ 212

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Loans, net and allowance for loan losses - Major Classification of Loans by Past Due Status (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Financing Receivable, Recorded Investment, Past Due
Total Past Due	$ 14,349	$ 15,392
Current	1,844,450	1,807,874
Total Loans	1,858,799	1,823,266
Loans > 90 Days and Accruing	341	923
30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4,010	6,104
60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	745	2,134
Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	9,594	7,154
Commercial
Financing Receivable, Recorded Investment, Past Due
Total Past Due	5,023	1,828
Current	508,632	492,306
Total Loans	513,655	494,134
Loans > 90 Days and Accruing	8
Commercial | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	385	973
Commercial | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	136	79
Commercial | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4,502	776
Real estate Commercial
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4,446	4,843
Current	931,132	902,960
Total Loans	935,578	907,803
Loans > 90 Days and Accruing	148	73
Real estate Commercial | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,200	1,889
Real estate Commercial | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	54	218
Real estate Commercial | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	3,192	2,736
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Total Loans	298,527	299,876
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4,006	7,461
Current	294,521	292,415
Total Loans	298,527	299,876
Loans > 90 Days and Accruing	185	850
Real estate Residential | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,930	2,486
Real estate Residential | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	427	1,545
Real estate Residential | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,649	3,430
Consumer
Financing Receivable, Recorded Investment, Past Due
Total Past Due	874	1,260
Current	110,165	120,193
Total Loans	111,039	121,453
Consumer | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	495	756
Consumer | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	128	292
Consumer | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	$ 251	$ 212

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Loans, net and allowance for loan losses - Summarized Information in Concerning to Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	$ 8,322	$ 6,259	$ 8,322	$ 6,259	$ 5,653
Unpaid Principal Balance, With no related allowance, Total	9,196	7,532	9,196	7,532	7,017
Average Recorded Investment, With no related allowance, Total	8,797	6,442	7,748	6,471	6,468
Interest Income Recognized, With no related allowance, Total	31	29	68	56	117
Recorded Investment, With an allowance recorded, Total	3,991	4,283	3,991	4,283	3,988
Unpaid Principal Balance, With an allowance recorded, Total	4,552	4,553	4,552	4,553	4,386
Related Allowance, With an allowance recorded, Total	1,126	1,029	1,126	1,029	1,179
Average Recorded Investment, With an allowance recorded, Total	4,202	4,665	4,130	4,506	4,288
Interest Income Recognized, With an allowance recorded, Total	17	16	40	34	70
Recorded Investment, Total	12,313	10,542	12,313	10,542	9,641
Unpaid Principal Balance, Total	13,748	12,085	13,748	12,085	11,403
Related Allowance, With an allowance recorded, Total	1,126	1,029	1,126	1,029	1,179
Average Recorded Investment, Total	12,999	11,107	11,878	10,977	10,756
Interest Income Recognized, Total	48	45	108	90	187
Commercial
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	4,495	1,182	4,495	1,182	1,562
Unpaid Principal Balance, With no related allowance, Total	4,931	1,355	4,931	1,355	1,900
Average Recorded Investment, With no related allowance, Total	5,284	1,197	4,043	1,224	1,318
Interest Income Recognized, With no related allowance, Total	17	16	34	33	67
Recorded Investment, With an allowance recorded, Total	1,420	1,100	1,420	1,100	675
Unpaid Principal Balance, With an allowance recorded, Total	1,432	1,124	1,432	1,124	675
Related Allowance, With an allowance recorded, Total	615	146	615	146	50
Average Recorded Investment, With an allowance recorded, Total	1,180	1,117	1,012	1,139	1,006
Interest Income Recognized, With an allowance recorded, Total	5	8	12	16	30
Recorded Investment, Total	5,915	2,282	5,915	2,282	2,237
Unpaid Principal Balance, Total	6,363	2,479	6,363	2,479	2,575
Related Allowance, With an allowance recorded, Total	615	146	615	146	50
Average Recorded Investment, Total	6,464	2,314	5,055	2,363	2,324
Interest Income Recognized, Total	22	24	46	49	97
Real estate Commercial
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	2,957	2,871	2,957	2,871	1,969
Unpaid Principal Balance, With no related allowance, Total	3,116	3,262	3,116	3,262	2,299
Average Recorded Investment, With no related allowance, Total	2,528	2,921	2,341	2,910	2,822
Interest Income Recognized, With no related allowance, Total	10	9	23	15	28
Recorded Investment, With an allowance recorded, Total	910	1,755	910	1,755	1,152
Unpaid Principal Balance, With an allowance recorded, Total	1,380	1,876	1,380	1,876	1,323
Related Allowance, With an allowance recorded, Total	216	502	216	502	403
Average Recorded Investment, With an allowance recorded, Total	1,174	2,079	1,166	1,853	1,676
Interest Income Recognized, With an allowance recorded, Total	5	4	10	10	18
Recorded Investment, Total	3,867	4,626	3,867	4,626	3,121
Unpaid Principal Balance, Total	4,496	5,138	4,496	5,138	3,622
Related Allowance, With an allowance recorded, Total	216	502	216	502	403
Average Recorded Investment, Total	3,702	5,000	3,507	4,763	4,498
Interest Income Recognized, Total	15	13	33	25	46
Real estate Residential
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	619	2,146	619	2,146	1,970
Unpaid Principal Balance, With no related allowance, Total	888	2,848	888	2,848	2,658
Average Recorded Investment, With no related allowance, Total	740	2,218	1,150	2,210	2,193
Interest Income Recognized, With no related allowance, Total	4	4	11	8	22
Recorded Investment, With an allowance recorded, Total	1,661	1,425	1,661	1,425	2,101
Unpaid Principal Balance, With an allowance recorded, Total	1,740	1,550	1,740	1,550	2,328
Related Allowance, With an allowance recorded, Total	295	378	295	378	666
Average Recorded Investment, With an allowance recorded, Total	1,848	1,458	1,932	1,504	1,585
Interest Income Recognized, With an allowance recorded, Total	7	4	18	8	22
Recorded Investment, Total	2,280	3,571	2,280	3,571	4,071
Unpaid Principal Balance, Total	2,628	4,398	2,628	4,398	4,986
Related Allowance, With an allowance recorded, Total	295	378	295	378	666
Average Recorded Investment, Total	2,588	3,676	3,082	3,714	3,778
Interest Income Recognized, Total	11	8	29	16	44
Consumer
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	251	60	251	60	152
Unpaid Principal Balance, With no related allowance, Total	261	67	261	67	160
Average Recorded Investment, With no related allowance, Total	245	106	214	127	135
Recorded Investment, With an allowance recorded, Total	20	3	20	3	60
Unpaid Principal Balance, With an allowance recorded, Total		3		3	60
Related Allowance, With an allowance recorded, Total		3		3	60
Average Recorded Investment, With an allowance recorded, Total		11		10	21
Recorded Investment, Total	251	63	251	63	212
Unpaid Principal Balance, Total	261	70	261	70	220
Related Allowance, With an allowance recorded, Total		3		3	60
Average Recorded Investment, Total	$ 245	$ 117	$ 234	$ 137	$ 156

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Loans, net and allowance for loan losses - Loans Modified Resulting in Troubled Debt Restructurings (Details) $ in Thousands	3 Months Ended	6 Months Ended		12 Months Ended
	Jun. 30, 2019 USD ($) loan	Jun. 30, 2019 USD ($) loan	Jun. 30, 2018 USD ($) loan payment	Dec. 31, 2018 USD ($)
Number of loans modified | loan	0
Pre-Modification Outstanding Recorded Investment		$ 2,677	$ 3,307	$ 2,779
Number of defaults on loans restructured | payment			1
Real estate Commercial
Number of loans modified | loan	2	2	1
Number of defaults on loans restructured		$ 335
Loans modified as troubled debt restructuring	$ 340	$ 340	$ 340
Real estate Residential
Loans modified as troubled debt restructuring			$ 58

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Other assets - Components of Other Assets (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Other assets.
Other real estate owned	$ 408	$ 376
Investment in low income housing partnership	7,139	7,377
Mortgage servicing rights	719	718
Bank owned life insurance	34,667	34,288
Restricted equity securities	7,833	7,462
Net deferred tax asset	3,919	5,081
Other assets	12,940	8,435
Total	$ 67,625	$ 63,737

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Fair value estimates - Transfers Between Levels (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Fair value estimates
Fair value of assets transfers from level 1 to level 2	$ 0	$ 0
Fair value of assets transfers from level 2 to level 1	0	0
Fair value of liabilities transfers from level 1 to level 2	0	0
Fair value of liabilities transfers from level 2 to level 1	0	0
Fair value of assets transfers into level 3	0	0
Fair value of assets transfers out of level 3	0	0
Fair value of liabilities transfers into level 3	0	0
Fair value of liabilities transfers out of level 3	$ 0	$ 0

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Fair value estimates - Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - Recurring Basis - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	$ 262,598	$ 270,496
U.S. Treasuries
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	24,084	25,592
U.S. Government-sponsored enterprises state and municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	93,489	92,818
State and Municipals, Taxable
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	12,842	13,853
State and Municipals, Tax-exempt
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	70,135	85,954
Mortgage-backed Securities, U.S. Government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	10,784	12,629
Mortgage-backed Securities, U.S. Government-sponsored enterprises
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	50,331	38,836
Common equity securities.
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	283	291
Interest rate floor - other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	1,025	553
Interest rate swap-other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	3,807	108
Interest rate swap-other liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Liabilities measured at fair value	(4,182)	(138)
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	24,367	25,883
Level 1 | U.S. Treasuries
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	24,084	25,592
Level 1 | Common equity securities.
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	283	291
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	238,231	244,613
Level 2 | U.S. Government-sponsored enterprises state and municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	93,489	92,818
Level 2 | State and Municipals, Taxable
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	12,842	13,853
Level 2 | State and Municipals, Tax-exempt
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	70,135	85,954
Level 2 | Mortgage-backed Securities, U.S. Government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	10,784	12,629
Level 2 | Mortgage-backed Securities, U.S. Government-sponsored enterprises
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	50,331	38,836
Level 2 | Interest rate floor - other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	1,025	553
Level 2 | Interest rate swap-other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	3,807	108
Level 2 | Interest rate swap-other liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Liabilities measured at fair value	$ (4,182)	$ (138)

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Fair value estimates - Schedule of Assets and Liabilities Measured at Fair Value on Nonrecurring Basis (Details) - Nonrecurring Basis - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Impaired loans	$ 2,865	$ 2,809
Other real estate owned	250	234
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Impaired loans	2,865	2,809
Other real estate owned	$ 250	$ 234

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Fair value estimates - Additional Quantitative Information about Assets Measured at Fair Value on Nonrecurring Basis (Details) - Level 3 - Nonrecurring Basis - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Other real estate owned
Fair Value Inputs, Assets, Quantitative Information
Assets, Fair Value Estimate	$ 250	$ 234
Range and weighted average of appraisal adjustments	32.00%	38.90%
Range and weighted average of liquidation expenses	5.00%	5.00%
Other real estate owned | Minimum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	20.00%	26.00%
Range and weighted average of liquidation expenses	3.00%	3.00%
Other real estate owned | Maximum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	43.30%	73.30%
Range and weighted average of liquidation expenses	6.00%	6.00%
Impaired loans
Fair Value Inputs, Assets, Quantitative Information
Assets, Fair Value Estimate	$ 2,865	$ 2,809
Range and weighted average of appraisal adjustments	56.70%	61.80%
Range and weighted average of liquidation expenses	5.40%	4.40%
Impaired loans | Minimum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	7.60%	7.10%
Range and weighted average of liquidation expenses	3.00%	3.00%
Impaired loans | Maximum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	97.00%	97.00%
Range and weighted average of liquidation expenses	6.00%	6.00%

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Fair value estimates - Carrying and Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Investment securities:
Available-for-sale	$ 261,665	$ 269,682
Common equity securities	283	291
Held-to-maturity	8,151	8,380
Loans held for sale	831	749
Mortgage servicing rights	719	718
Other assets	67,625	63,737
Carrying Value
Financial assets:
Cash and cash equivalents	29,962	32,616
Investment securities:
Available-for-sale	261,665	269,682
Common equity securities	283	291
Held-to-maturity	7,969	8,361
Loans held for sale		749
Net loans	1,836,869	1,801,887
Accrued interest receivable	7,303	7,115
Mortgage servicing rights	719	718
Restricted equity securities	7,833	7,462
Interest rate floor	1,025	553
Interest rate swaps	3,807	108
Total assets	2,157,435	2,129,542
Financial liabilities:
Deposits	1,876,799	1,875,022
Short-term borrowings	82,700	86,500
Long-term debt	52,980	37,906
Accrued interest payable	1,058	1,195
Interest rate swap	4,182	138
Total liabilities	2,017,719	2,000,761
Fair Value
Financial assets:
Cash and cash equivalents	29,962	32,616
Investment securities:
Available-for-sale	261,665	269,682
Common equity securities	283	291
Held-to-maturity	8,151	8,380
Loans held for sale		749
Net loans	1,830,139	1,762,449
Accrued interest receivable	7,303	7,115
Mortgage servicing rights	1,712	1,710
Restricted equity securities	7,833	7,462
Interest rate floor	1,025	553
Interest rate swaps	3,807	108
Total assets	2,151,880	2,091,115
Financial liabilities:
Deposits	1,862,246	1,874,520
Short-term borrowings	82,700	86,500
Long-term debt	53,338	38,071
Accrued interest payable	1,058	1,195
Interest rate swap	4,182	138
Total liabilities	2,003,524	2,000,424
Level 1
Financial assets:
Cash and cash equivalents	29,962	32,616
Investment securities:
Available-for-sale	24,084	25,952
Common equity securities	283	291
Level 2
Investment securities:
Available-for-sale	237,581	244,090
Held-to-maturity	8,151	8,380
Loans held for sale		749
Accrued interest receivable	7,303	7,115
Mortgage servicing rights	1,712	1,710
Restricted equity securities	7,833	7,462
Interest rate floor	1,025	553
Interest rate swaps	3,807	108
Financial liabilities:
Deposits	1,862,246	1,874,520
Short-term borrowings	82,700	86,500
Long-term debt	53,338	38,071
Accrued interest payable	1,058	1,195
Interest rate swap	4,182	138
Level 3
Investment securities:
Net loans	$ 1,830,139	$ 1,762,449

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Employee benefit plans - Components of Net Periodic Benefit Cost (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Net periodic pension cost:
Labor and Related Expense	$ 8,037	$ 7,390	$ 15,632	$ 14,345
Pension Benefits
Net periodic pension cost:
Interest cost	192	156	320	156
Expected return on plan assets	(325)	(240)	(542)	(240)
Amortization of unrecognized net gain	68	49	113	49
Net periodic benefit cost	$ (65)	$ (35)	$ (109)	$ (35)

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Employee benefit plans - Salaries and Employee Benefits Expense - Profit Sharing (Details) - Retirement Profit Sharing Plan - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Sep. 30, 2018	Jun. 30, 2019
Profit Sharing plan
Company contribution	$ 2,700
Safe harbor contribution		$ 18
Discretionary contributions		92
Future annual premium		$ 0

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Employee benefit plans - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended			6 Months Ended		12 Months Ended	15 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018	Mar. 31, 2019
Employee Benefit Plans
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense	$ 415		$ 403	$ 755	$ 743
2008 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense			31		62
2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense	$ 240		$ 37	$ 157	$ 43
Common stock available for grant as awards	61,346			61,346
Non-Performance-based restricted stock | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Shares or units vesting period		3 years				3 years
Performance-based restricted stock units | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Shares or units vesting period		3 years				3 years
Cumulative diluted earnings per share period used for conditions for vesting of performance-based restricted stock units							3 years
Average return on equity period used for conditions for vesting of performance-based restricted stock units		3 years				3 years
Restricted Stock | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Granted shares				17,345	17,345
Unrecognized compensation expense	$ 1,071			$ 1,071
Weighted average vesting period				1 year 8 months 12 days
Restricted stock units (RSUs) | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Granted shares				11,468	11,468

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Derivatives and hedging activities - Fair Values of Derivative Instruments on the Balance Sheet (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)	Jun. 30, 2019 USD ($) security	Dec. 31, 2018 USD ($)
Derivatives, Fair Value
Asset Derivatives		$ 4,833	$ 661
Liability Derivatives		4,183	138
Interest Receivable		7,303	7,115
Interest Payable		1,058	1,195
Derivatives designated as hedging instruments
Derivatives, Fair Value
Asset Derivatives		1,025	553
Derivatives designated as hedging instruments | Interest Rate Floor
Derivatives, Fair Value
Notional amount		25
Asset Derivatives			553
Derivatives designated as hedging instruments | Interest Rate Floor | Other Assets.
Derivatives, Fair Value
Asset Derivatives		1,025
Derivatives designated as hedging instruments | Interest Rate Swaps | Other Assets.
Derivatives, Fair Value
Asset Derivatives		3,807	108
Derivatives designated as hedging instruments | Interest Rate Swaps | Other Liabilities.
Derivatives, Fair Value
Liability Derivatives		4,182	138
Derivatives not designated as hedging instruments
Derivatives, Fair Value
Asset Derivatives		3,807	108
Liability Derivatives		$ 4,182	138
Derivatives not designated as hedging instruments | Interest Rate Swaps
Derivatives, Fair Value
Number of instruments held | security		22
Notional amount		$ 123,351
Interest Receivable			13
Interest Payable			$ 13
Forecast | Cash Flow Hedge | Interest income
Derivatives, Fair Value
Amount of gain or (loss) reclassified as a reduction to interest income	$ 64

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Derivatives and hedging activities - Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Details) - Interest income - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2019
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Reclassified from Accumulated OCI into Income		$ (31)
Cash Flow Hedge | Interest Rate Floor
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Recognized in OCI on Derivative	$ 427	474
Amount of Gain Recognized in OCI Included Component	532	827
Amount of Gain Recognized in OCI Excluded Component	(105)	(353)
Amount of Loss Reclassified from Accumulated OCI into Income	(16)	(31)
Amount of Loss Reclassified from Accumulated OCI into Income Excluded Component	$ (16)	$ (31)

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Derivatives and hedging activities - Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2019
Derivative Instruments, Gain (Loss)
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	$ 443	$ 506
Interest income
Derivative Instruments, Gain (Loss)
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		(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income		(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component		$ (31)

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Derivatives and hedging activities - Effect of Other Derivative Instruments on the Income Statement (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Fee Income | Other income/(expense)
Derivative Instruments, Gain (Loss)
Amount of Gain Recognized in Income	$ 744	$ 53	$ 1,136	$ 53
Derivatives not designated as hedging instruments | Interest Rate Swaps | Other non-interest income
Derivative Instruments, Gain (Loss)
Amount of Gain Recognized in Income	$ (236)	$ 19	$ (346)	$ 85

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Derivatives and hedging activities - Credit-risk-related Contingent Features (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Derivatives
Derivative Liability	$ 4,183	$ 138
Credit-risk contract
Derivatives
Derivative Liability	376	29
Derivative, Collateral, Obligation to Return Cash	$ 3,310	$ 0

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Derivatives and hedging activities - Offsetting Derivatives (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Offsetting of Derivative Assets
Gross Amounts of Recognized Assets	$ 4,833	$ 661
Net Amounts of Assets presented in the Balance Sheet	4,833	661
Net Amount	4,833	661
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities	4,183	138
Net Amounts of Assets presented in the Balance Sheet	4,183	138
Net Amount	$ 4,183	$ 138

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Borrowings - Summary of Short-term Borrowings (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Short-term Debt
Ending Balance	$ 82,700	$ 86,500
FHLB advances
Short-term Debt
Ending Balance	82,700	86,500
Average Balance	105,212	133,834
Maximum Month-End Balance	$ 133,725	$ 189,275
Weighted Average Rate for	2.70%	2.05%
Weighted Average Rate at	2.46%	2.62%

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Borrowings - Additional Information (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Short-term Debt
Decrease in borrowings	$ 3,800
Long term borrowings	16,000
Peoples Bank
Short-term Debt
Maximum borrowing capacity	706,808	$ 700,169
Outstanding amount in borrowings	$ 135,680	$ 124,406

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Borrowings - Long-term debt advances (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Debt Instrument
Long-term debt	$ 52,980	$ 37,906
Long-term 4.09% adjustable rate debt due December 2019
Debt Instrument
Long-term debt	$ 3,000	3,000
Adjustable interest rate (as a percent)	4.09%
Long-term 3.63% adjustable rate debt due December 2019
Debt Instrument
Long-term debt	$ 6,300	6,300
Adjustable interest rate (as a percent)	3.63%
Long-term 1.62% fixed rate debt due December 2019
Debt Instrument
Long-term debt	$ 10,000	10,000
Fixed interest rate (as a percent)	1.62%
Long-term 1.74% fixed rate debt due June 2020
Debt Instrument
Long-term debt	$ 5,000	5,000
Fixed interest rate (as a percent)	1.74%
Long-term 2.22% fixed rate debt due June 2020
Debt Instrument
Long-term debt	$ 6,000
Fixed interest rate (as a percent)	2.22%
Long-term 1.84% fixed rate debt due December 2020
Debt Instrument
Long-term debt	$ 5,000	5,000
Fixed interest rate (as a percent)	1.84%
Long-term 1.99% fixed rate debt due June 2021
Debt Instrument
Long-term debt	$ 10,000
Fixed interest rate (as a percent)	1.99%
Long-term 4.69% fixed rate debt due March 2023
Debt Instrument
Long-term debt	$ 7,680	$ 8,606
Fixed interest rate (as a percent)	4.69%

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Borrowings - Maturities of long-term debt (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Borrowings
2019	$ 20,248
2020	17,963
2021	12,058
2022	2,156
2023	555
Total long-term debt	$ 52,980	$ 37,906

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Borrowings - Fixed and adjustable rate information (Details)	Jun. 30, 2019 USD ($)
Debt Instrument
Convertible Debt	$ 0
Long-term debt at fixed rates	43,680,000
Long-term debt at adjustable rates	9,300,000
FHLB long-term advances	16,000,000
Minimum
Debt Instrument
Long-term debt at adjustable rates	1.21
Maximum
Debt Instrument
Long-term debt at adjustable rates	$ 1.57

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Income taxes (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Income taxes
Federal statutory rate	11.80%	12.00%	11.20%	11.80%
Investment and other tax credits	$ 390	$ 273	$ 778	$ 543