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 September 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: 7,388,480 at October 31, 2019.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended September 30, 2019

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, June 30 and September 30, 2019 and 2018 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months ended September 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	50
Item 4.	Controls and Procedures	51
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
	Signatures	53

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS 

(Dollars in thousands, except share data)

	September 30, 2019		December 31, 2018
Assets:
Cash and due from banks:
Cash and due from banks	$	35,908	$	32,569
Interest-bearing deposits in other banks		5,275		47
Total cash and due from banks		41,183		32,616
Federal funds sold		10,100
Investment securities:
Available-for-sale		268,823		269,682
Equity investments carried at fair value		297		291
Held-to-maturity: Fair value September 30, 2019, $8,016; December 31, 2018, $8,380		7,808		8,361
Total investment securities		276,928		278,334
Loans, net		1,881,090		1,823,266
Less: allowance for loan losses		22,392		21,379
Net loans		1,858,698		1,801,887
Loans held for sale		1,390		749
Premises and equipment, net		47,437		38,889
Accrued interest receivable		6,655		7,115
Goodwill		63,370		63,370
Intangible assets, net		1,738		2,296
Other assets		65,200		63,737
Total assets	$	2,372,699	$	2,288,993
Liabilities:
Deposits:
Noninterest-bearing	$	440,582	$	410,260
Interest-bearing		1,560,703		1,464,762
Total deposits		2,001,285		1,875,022
Short-term borrowings				86,500
Long-term debt		52,509		37,906
Accrued interest payable		1,461		1,195
Other liabilities		21,277		9,756
Total liabilities		2,076,532		2,010,379
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,388,760 shares at September 30, 2019 and 7,399,054 shares at December 31, 2018		14,778		14,798
Capital surplus		135,106		135,310
Retained earnings		149,740		136,582
Accumulated other comprehensive loss		(3,457)		(8,076)
Total stockholders’ equity		296,167		278,614
Total liabilities and stockholders’ equity	$	2,372,699	$	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				Nine Months Ended
September 30,	2019		2018		2019		2018
Interest income:
Interest and fees on loans:
Taxable	$	20,940	$	18,798	$	61,684	$	54,546
Tax-exempt		1,066		919		3,274		2,660
Interest and dividends on investment securities:
Taxable		1,092		998		3,127		2,790
Tax-exempt		411		639		1,493		2,001
Dividends		19		16		60		51
Interest on interest-bearing deposits in other banks		27		49		50		131
Interest on federal funds sold		77				77
Total interest income		23,632		21,419		69,765		62,179
Interest expense:
Interest on deposits		3,966		2,342		11,090		6,135
Interest on short-term borrowings		83		809		1,491		2,317
Interest on long-term debt		347		315		923		936
Total interest expense		4,396		3,466		13,504		9,388
Net interest income		19,236		17,953		56,261		52,791
Provision for loan losses		700		1,050		2,100		3,150
Net interest income after provision for loan losses		18,536		16,903		54,161		49,641
Noninterest income:
Service charges, fees and commissions		2,161		1,883		6,650		5,856
Merchant services income		182		128		837		687
Commission and fees on fiduciary activities		569		570		1,568		1,552
Wealth management income		395		305		1,142		1,048
Mortgage banking income		172		163		457		472
Life insurance investment income		189		190		567		568
Net gains on equity investment securities		14		14		6		14
Net gains on sale of investment securities available-for-sale						23
Net gain on sale of credit card loans								291
Total noninterest income		3,682		3,253		11,250		10,488
Salaries and employee benefits expense		8,056		6,946		23,688		21,291
Net occupancy and equipment expense		2,997		2,681		8,807		8,215
Amortization of intangible assets		183		220		557		670
Professional fees and outside services		487		431		1,343		1,500
FDIC insurance and assessments		68		247		615		830
Donations		386		355		1,077		1,011
Other expenses		1,902		1,657		5,911		5,597
Total noninterest expense		14,079		12,537		41,998		39,114
Income before income taxes		8,139		7,619		23,413		21,015
Income tax expense		991		902		2,709		2,487
Net income		7,148		6,717		20,704		18,528
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale		161		(1,179)		5,211		(4,394)
Reclassification adjustment for net gain on sales included in net income						(23)
Change in derivative fair value		153				659
Other comprehensive gain (loss)		314		(1,179)		5,847		(4,394)
Income tax expense (benefit)		66		(248)		1,228		(925)
Other comprehensive income (loss), net of income taxes		248		(931)		4,619		(3,469)
Comprehensive income	$	7,396	$	5,786	$	25,323	$	15,059
Per share data:
Net income:
Basic	$	0.97	$	0.91	$	2.80	$	2.50
Diluted	$	0.97	$	0.91	$	2.80	$	2.50
Average common shares outstanding:
Basic		7,394,992		7,399,054		7,397,768		7,397,373
Diluted		7,394,992		7,399,054		7,397,768		7,397,373
Dividends declared	$	0.34	$	0.33		1.02		0.98

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						6,412				6,412
Other comprehensive income, net of income taxes								1,976		1,976
Dividends declared: $0.34 per share						(2,516)				(2,516)
Stock based compensation				83						83
Balance, March 31, 2019		14,798		135,393		140,478		(6,100)		284,569
Net income						7,144				7,144
Other comprehensive income, net of income taxes								2,395		2,395
Dividends declared: $0.34 per share						(2,516)				(2,516)
Stock based compensation				157						157
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
Net income						7,148				7,148
Other comprehensive income, net of income taxes								248		248
Dividends declared: $0.34 per share						(2,514)				(2,514)
Stock based compensation				157						157
Share retirement: 10,318 shares		(20)		(435)						(455)
Balance, September 30, 2019	$	14,778	$	135,106	$	149,740	$	(3,457)	$	296,167
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Income (Loss)		Total
Balance, January 1, 2018	$	14,793	$	135,043	$	121,353	$	(6,213)	$	264,976
Net income						5,854				5,854
Other comprehensive loss, net of income taxes								(1,875)		(1,875)
Dividends declared: $0.32 per share						(2,368)				(2,368)
Reclassification related to adoption of ASU 2016-01						2		(2)
Stock based compensation				37						37
Balance, March 31, 2018		14,793		135,080		124,841		(8,090)		266,624
Net income						5,957				5,957
Other comprehensive loss, net of income taxes								(663)		(663)
Dividends declared: $0.33 per share						(2,442)				(2,442)
Stock based compensation				68						68
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
Net income						6,717				6,717
Other comprehensive loss, net of income taxes								(931)		(931)
Dividends declared: $0.33 per share						(2,442)				(2,442)
Stock based compensation				83						83
Balance, September 30, 2018	$	14,798	$	135,226	$	132,631	$	(9,684)	$	272,971

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 Nine Months Ended September 30,	2019		2018
Cash flows from operating activities:
Net income	$	20,704	$	18,528
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,881		1,728
Amortization of right-of-use lease asset		293
Amortization of deferred loan costs		(159)		729
Amortization of intangibles		557		670
Amortization of low income housing partnerships		357		349
Provision for loan losses		2,100		3,150
Net unrealized gain on equity investment securities		(6)
Net loss (gain) on sale of other real estate owned		20		(17)
Loans originated for sale		(11,945)		(9,931)
Proceeds from sale of loans originated for sale		11,374		10,013
Net gain on sale of loans originated for sale		(70)		(74)
Net amortization of investment securities		1,279		1,718
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		(567)		(568)
Stock based compensation		397		188
Net change in:
Accrued interest receivable		460		371
Other assets		(4,633)		516
Accrued interest payable		266		248
Other liabilities		4,998		(2,967)
Net cash provided by operating activities		27,283		24,360
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		45,790		24,087
Held-to-maturity		547		710
Purchases of investment securities:
Available-for-sale		(50,670)		(32,723)
Net redemption of restricted equity securities		2,992		735
Proceeds from sale of student loan portfolio				5,103
Proceeds from sale of credit card loan portfolio				2,407
Net increase in lending activities		(58,987)		(96,916)
Purchases of premises and equipment		(4,296)		(1,979)
Proceeds from the sale of premises and equipment		21		341
Proceeds from investment in life insurance				304
Proceeds from sale of other real estate owned		111		582
Net cash used in investing activities		(54,815)		(97,349)
Cash flows from financing activities:
Net increase in deposits		126,263		108,846
Proceeds from long-term debt		16,000
Repayment of long-term debt		(1,397)		(1,273)
Net decrease in short-term borrowings		(86,500)		(24,225)
Retirement of common stock		(621)
Cash dividends paid		(7,546)		(7,252)
Net cash provided by financing activities		46,199		76,096
Net increase in cash and cash equivalents		18,667		3,107
Cash and cash equivalents at beginning of period		32,616		37,488
Cash and cash equivalents at end of period	$	51,283	$	40,595

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Nine Months Ended September 30,	2019		2018
Supplemental disclosures:
Cash paid during the period for:
Interest	$	8,842	$	9,140
Income taxes		3,300		2,550
Noncash items:
Transfers of loans to other real estate	$	253	$	623
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 nine months ended and as of September 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”) 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 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 October 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company currently qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. 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” which 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.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for the Company). Adoption of this ASU is not expected to have a material impact 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 September 30, 2019 and December 31, 2018 are as follows:

		September 30, 2019		December 31, 2018
Net unrealized gain (loss) on investment securities available-for-sale	$	1,937	$	(3,251)
Income tax		407		(683)
Net of income taxes		1,530		(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		905		246
Income tax		190		52
Net of income taxes		715		194
Accumulated other comprehensive loss	$	(3,457)	$	(8,076)

10

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

3. Earnings per share:

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

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

	2019				2018
For the Three Months Ended September 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,148	$	7,148	$	6,717	$	6,717
Average common shares outstanding		7,394,992		7,394,992		7,399,054		7,399,054
Earnings per share	$	0.97	$	0.97	$	0.91	$	0.91
	2019				2018
For the Nine Months Ended September 30	Basic		Diluted		Basic		Diluted
Net income	$	20,704	$	20,704	$	18,528	$	18,528
Average common shares outstanding		7,397,768		7,397,768		7,397,373		7,397,373
Earnings per share	$	2.80	$	2.80	$	2.50	$	2.50

4. Investment securities:

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,963	$	120	$	17	$	24,066
U.S. Government-sponsored enterprises		92,223		107		340		91,990
State and municipals:
Taxable		21,392		346		238		21,500
Tax-exempt		60,794		920		31		61,683
Residential Mortgage-backed securities:
U.S. Government agencies		9,536		95		18		9,613
U.S. Government-sponsored enterprises		45,284		820		63		46,041
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		13,694		236				13,930
Total	$	266,886	$	2,644	$	707	$	268,823
Held-to-maturity:
Tax-exempt state and municipals	$	6,853	$	182			$	7,035
Residential Mortgage-backed securities:
U.S. Government agencies		33						33
U.S. Government-sponsored enterprises		922		27	$	1		948
Total	$	7,808	$	209	$	1	$	8,016

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 September 30, 2019 and December 31, 2018, we had $297 and $291 respectively, in equity securities recorded at fair value. At September 30, 2019, the fair value of our equity portfolio exceeded the cost basis by $20. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2019 (in thousands):

Three Months Ended September 30,		2019		2018
Net gains recognized during the period on equity securities	$	14	$	14
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$	14	$	14
For the Nine Months Ended September 30,		2019		2018
Net gains recognized during the period on equity securities	$	6	$	14
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$	6	$	14

Restricted Investment In Stock

Restricted investment in stock includes FHLB with a carrying cost of $4,428 and $7,420 at September 30, 2019 and December 31, 2018, respectively, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42, and VISA Class B stock with a carrying cost of $0 at September 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

12

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

in borrowing and other banking services. The investment in FHLB stock may fluctuate, as it is based on the member bank’s use of FHLB’s services.  The decrease in FHLB stock from December 31, 2018 is due to lower borrowings.

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 (1.6228 as of September 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 September 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 September 30, 2019, is summarized as follows:

	Fair
September 30, 2019	Value
Within one year	$	33,989
After one but within five years		121,112
After five but within ten years		11,846
After ten years		28,871
		195,818
Mortgage-backed and other amortizing securities		73,005
Total	$	268,823

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

	Amortized		Fair
September 30, 2019	Cost		Value
Within one year
After one but within five years
After five but within ten years
After ten years	$	6,853	$	7,035
		6,853		7,035
Mortgage-backed securities		955		981
Total	$	7,808	$	8,016

Securities with a carrying value of $142,963 and $161,647 at September 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 September 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 September 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
September 30, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	4,524	$	2	$	5,482	$	15	$	10,006	$	17
U.S. Government-sponsored enterprises		29,242		129		38,468		211		67,710		340
State and municipals:
Taxable		8,970		238						8,970		238
Tax-exempt		6,139		29		1,101		2		7,240		31
Residential Mortgage-backed securities:
U.S. Government agencies		423		1		4,346		17		4,769		18
U.S. Government-sponsored enterprises		3,997		12		5,502		52		9,499		64
Total	$	53,295	$	411	$	54,899	$	297	$	108,194	$	708

	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 72 investment securities, consisting of 10 tax-exempt and 9 taxable state and municipal obligations, 4 U.S. Treasury securities, 25 U.S. Government-sponsored enterprise securities, and 24 mortgage-backed securities that were in unrealized loss positions at September 30, 2019. Of these securities, 2 U.S. Treasury securities, 17 U.S. Government-sponsored enterprise securities, 2 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 September 30, 2019. There was no OTTI recognized for the three or nine months ended September 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 September 30, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $903 and $744 at September 30, 2019 and December 31, 2018.

		September 30, 2019		December 31, 2018
Commercial	$	497,985	$	494,134
Real estate:
Commercial		976,258		907,803
Residential		299,209		299,876
Consumer		107,638		121,453
Total	$	1,881,090	$	1,823,266

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

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2019	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Charge-offs		(26)		(34)		(104)		(144)		(308)
Recoveries		12				11		47		70
Provisions		(205)		762		34		109		700
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
			Real estate
September 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2018	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573
Charge-offs		(148)		(63)				(117)		(328)
Recoveries		12		26		13		67		118
Provisions		414		421		153		62		1,050
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

15

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

			Real estate
September 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		(113)		(383)		(406)		(356)		(1,258)
Recoveries		22				27		122		171
Provisions		498		1,417		43		142		2,100
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
			Real estate
September 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		(150)		(1,232)		(381)		(389)		(2,152)
Recoveries		128		83		80		164		455
Provisions		(22)		2,647		512		13		3,150
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

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

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
Ending balance: individually evaluated for impairment		394		225		196				815
Ending balance: collectively evaluated for impairment	$	5,529	$	11,545	$	3,360	$	1,143	$	21,577
Loans receivable:
Ending balance	$	497,985	$	976,258	$	299,209	$	107,638	$	1,881,090
Ending balance: individually evaluated for impairment		4,772		3,603		2,450		262		11,087
Ending balance: collectively evaluated for impairment	$	493,213	$	972,655	$	296,759	$	107,376	$	1,870,003

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 September 30, 2019 and December 31, 2018:

			Special
September 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	488,395	$	1,971	$	7,619	$	$	497,985
Real estate:
Commercial		948,854		2,644		24,760			976,258
Residential		296,565				2,644			299,209
Consumer		107,354				284			107,638
Total	$	1,841,168	$	4,615	$	35,307	$	$	1,881,090

			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 September 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 complete and the certificate of occupancy has been issued for the property. The Bank considers both of these credit relationships to be well secured and both relationships were current as of September 30, 2019.

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

		September 30, 2019		December 31, 2018
Commercial	$	3,343	$	776
Real estate:
Commercial		3,246		2,663
Residential		1,548		2,580
Consumer		262		212
Total	$	8,399	$	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
September 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	9	$	25	$	3,396	$	3,430	$	494,555	$	497,985	$	53
Real estate:
Commercial		776		159		3,300		4,235		972,023		976,258		54
Residential		656		996		1,827		3,479		295,730		299,209		279
Consumer		435		146		262		843		106,795		107,638
Total	$	1,876	$	1,326	$	8,785	$	11,987	$	1,869,103	$	1,881,090	$	386

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 nine months ended September 30, 2019 and September 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
September 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	3,766	$	4,272			$	4,131	$	18	$	3,974	$	52
Real estate:
Commercial		2,981		3,219				2,969		8		2,501		31
Residential		1,644		1,974				1,132		6		1,273		17
Consumer		262		275				257				226
Total		8,653		9,740				8,489		32		7,974		100
With an allowance recorded:
Commercial		1,006		1,008		394		1,213		9		1,010		21
Real estate:
Commercial		622		1,103		225		766				1,030		10
Residential		806		813		196		1,234		8		1,651		26
Consumer												20
Total		2,434		2,924		815		3,213		17		3,711		57
Total impaired loans
Commercial		4,772		5,280		394		5,344		27		4,984		73
Real estate:
Commercial		3,603		4,322		225		3,735		8		3,531		41
Residential		2,450		2,787		196		2,366		14		2,924		43
Consumer		262		275				257				246
Total	$	11,087	$	12,664	$	815	$	11,702	$	49	$	11,685	$	157

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
September 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,356	$	1,538			$	1,269	$	17	$	1,257	$	50
Real estate:
Commercial		3,414		3,666				3,143		5		3,036		20
Residential		2,366		3,003				2,256		7		2,249		15
Consumer		142		149				101				131
Total		7,278		8,356				6,769		29		6,673		85
With an allowance recorded:
Commercial		939		1,086	$	93		1,020		7		1,089		23
Real estate:
Commercial		1,669		1,774		462		1,712		8		1,807		18
Residential		1,312		1,508		362		1,369		5		1,456		13
Consumer		14		14		14		9				11
Total		3,934		4,382		931		4,110		20		4,363		54
Total impaired loans
Commercial		2,295		2,624		93		2,289		24		2,346		73
Real estate:
Commercial		5,083		5,440		462		4,855		13		4,843		38
Residential		3,678		4,511		362		3,625		12		3,705		28
Consumer		156		163		14		110				142
Total	$	11,212	$	12,738	$	931	$	10,879	$	49	$	11,036	$	139

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 $2,262 at September 30, 2019, $2,779 at December 31, 2018 and $3,230 at September 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 during the three or nine months ended September 30, 2019.  For the three months ended September 30, 2018, there were no loans modified as troubled debt restructurings.  There was one commercial real estate loan modified as a troubled debt restructuring during the nine months ended September 30, 2018 in the amount of $340.  During the three months ended September 30, 2019, there were no payment defaults on troubled debt restructings and one commercial real estate loan paid-off totaling $332.  During the nine months ended September 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 September 30, 2018, there was one payment default on a restructured residential real estate loan with an outstanding balance of $6. During the nine months ended September 30, 2018, there were two payment defaults on  restructured residential real estate loans with a total outstanding balance of $64. 

6. Other assets:

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

		September 30, 2019		December 31, 2018
Other real estate owned	$	485	$	376
Investment in low income housing partnership		7,020		7,377
Mortgage servicing rights		730		718
Bank owned life insurance		34,853		34,288
Restricted equity securities		4,470		7,462
Net deferred tax asset		3,853		5,081
Interest rate floor		1,170		553
Interest rate swaps		6,065		108
Other assets		6,554		7,774
Total	$	65,200	$	63,737

21

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 September 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.

22

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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 September 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
September 30, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,066	$	24,066			$
U.S. Government-sponsored enterprises		91,990			$	91,990
State and Municipals:
Taxable		21,500				21,500
Tax-exempt		61,683				61,683
Mortgage-backed securities:
U.S. Government agencies		9,613				9,613
U.S. Government-sponsored enterprises		59,971				59,971
Common equity securities		297		297
Interest rate floor-other assets		1,170				1,170
Interest rate swap-other assets		6,065				6,065
Interest rate swap-other liabilities		(6,085)				(6,085)
Total	$	270,270	$	24,363	$	245,907	$

	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	$

23

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a nonrecurring basis at September 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
September 30, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	1,619			$	1,619
Other real estate owned	$	357			$	357

	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
September 30, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	1,619	Appraisal of collateral	Appraisal adjustments	7.6% to 97.0%  (73.4)%
				Liquidation expenses	3.0% to 6.0% (5.3)%
Other real estate owned	$	357	Appraisal of collateral	Appraisal adjustments	20.0% to 48.8%  (31.2)%
				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 September 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
September 30, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	51,283	$	51,283	$	51,283
Investment securities:
Available-for-sale		268,823		268,823		24,066	$	244,757
Common equity securities		297		297		297
Held-to-maturity		7,808		8,016				8,016
Loans held for sale		1,390		1,390				1,390
Net loans		1,858,698		1,832,080					$	1,832,080
Accrued interest receivable		6,655		6,655				6,655
Mortgage servicing rights		730		1,739				1,739
Restricted equity securities		4,470		4,470				4,470
Interest rate floor		1,170		1,170				1,170
Interest rate swaps		6,065		6,065				6,065
Total	$	2,207,389	$	2,181,988
Financial liabilities:
Deposits	$	2,001,285	$	2,001,911			$	2,001,911
Long-term debt		52,509		52,875				52,875
Accrued interest payable		1,461		1,461				1,461
Interest rate swaps		6,085		6,085				6,085
Total	$	2,061,340	$	2,062,332

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 nine months ended September 30, salaries and employee benefits expense includes approximately $327 and $1,081, respectively in 2019 and $330 and $1,073, respectively in 2018 relating to the employee benefit plans.

	Pension Benefits
Three Months Ended September 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	128	$	233
Expected return on plan assets		(217)		(360)
Amortization of unrecognized net gain		45		73
Net periodic benefit cost	$	(44)	$	(54)
	Pension Benefits
Nine Months Ended September 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	447	$	389
Expected return on plan assets		(759)		(600)
Amortization of unrecognized net gain		159		122
Net periodic benefit cost	$	(153)	$	(89)

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 September 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.

For the nine months ended September 30, 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 $157 and $397 for the three and nine months ended September 30, 2019 for awards granted under the 2017 Plan. The Company recognized compensation expense of $52 and $95 for the three and nine months ended September 30, 2018 for awards granted under the 2017 Plan and $31 and $93 for awards granted under the 2008 Plan. As of September 30, 2019, the Company had $938 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 1.4 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 September 30, 2019, the Company had 22 interest rate swaps with an aggregate notional amount of $126,574 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 September 30, 2019 and December 31, 2018.

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of September 30, 2019			As of December 31, 2018 (1)			As of September 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	$	1,170		$	553
Total derivatives designated as hedging instruments				$	1,170		$	553
Derivatives not designated as hedging instruments
Interest Rate Swaps	$	126,574	Other Assets	$	6,065	Other Assets	$	108	Other Liabilities	$	6,085	Other Liabilities	$	138
Total derivatives not designated as hedging instruments				$	6,065		$	108		$	6,085		$	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 September 30, 2019. There was no cash flow hedge as of September 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

September 30, 2019

Income

September 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

138

$

186

$

(48)

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

September 30, 2019

Income

September 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

611

$

1,013

$

(402)

Interest Income

$

(48)

$

$

(48)

* 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 nine months ended September 30, 2019 and September 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	$	(48)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other  comprehensive income into income	$	(48)
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	$	(48)

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 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		Nine Months Ended		Three Months Ended		Nine Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	September 30, 2019		September 30, 2019		September 30, 2018		September 30, 2018
Interest Rate Swaps	Other non-interest income	$	355	$	9	$	18	$	103
Fee Income	Other  income / (expense)	$		$	1,136	$		$	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 September 30, 2019 and December 31, 2018. The net amounts of derivative assets or liabilities can be reconciled to

30

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

Offsetting of Derivative Assets
as of September 30, 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	$	7,235	$	$	7,235	$		$	7,235
Offsetting of Derivative Liabilities
as of September 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	$	6,085	$	$	6,085	$		$	6,085
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 September 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 $20. 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 $5,120 against its obligations under these agreements as of September 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 consists of FHLB advances representing overnight borrowings.  The table below outlines short-term borrowings at September 30, 2019 and December 31, 2018:

	At and for the nine months ended September 30, 2019
						Weighted		Weighted
				Maximum		Average		Average
	Ending	Average		Month-End		Rate for		Rate at
	Balance	Balance		Balance		the nine months ended September 30, 2019		September 30,2019
FHLB advances	$	$	74,036	$	133,725	2.69	%		%

	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 September 30, 2019, the maximum borrowing capacity was $719,470 of which $52,509 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. However, growth in deposit balances during the third quarter of 2019 has allowed us to pay down the short-term borrowings to zero at September 30, 2019.  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 September 30, 2019 and December 31, 2018 are as follows:

	Interest Rate
Due	Fixed		Adjustable			September 30, 2019		December 31, 2018
December 2019			3.71	%	$	3,000		3,000
December 2019			3.37			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					7,209		8,606
					$	52,509	$	37,906

32

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	$	19,777
2020		17,963
2021		12,058
2022		2,156
2023		555
	$	52,509

None of the advances from the FHLB are convertible. At September 30, 2019, long-term debt consist of $43,209 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 12.2% and 11.6% for the three and nine months ended September 30, 2019 compared to 11.8% for the three and nine months ended September 30, 2018. The three and nine months ended September 30, 2019 include before tax investment tax credits and other credits of $394 and $1,172 compared to before tax investment tax credits $276 and $819 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 October 2019, the Federal Open Market Committee (“FOMC”) voted to decrease the target range for federal funds to 1.50% to 1.75%, marking the third cut in the overnight rate in the most recent monetary easing cycle, which began in July 2019 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 2.4% for the 12 months ended September 30, 2019. This is up from 2.1% for the 12 months ended June 30, 2019 and from 2.0% for the 12 months ended March 31, 2019. Gross domestic product (“GDP”), the value of all goods and services produced in the nation, came in with an initial third quarter 2019 reading of a 1.9% annualized rate, above all forecasts for the quarter which came in at a

34

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

consensus rate of 1.6% but below the second quarter of 2019 which registered 2.0%. Strong consumer spending has continued in the third quarter of 2019 coming in at 2.9% although this is down from the second quarter of 2019 which came in at 4.6%. The weak global economy as well as trade concerns continue to weigh on overall economic growth.

Review of Financial Position:

Total assets increased $83,706, or 4.9% annualized, to $2,372,699 at September 30, 2019, from $2,288,993 at December 31, 2018. Loans, net increased to $1,881,090 at September 30, 2019, compared to $1,823,266 at December 31, 2018, an increase of $57,824 or 4.2% annualized. The increase in loans, net during 2019 has been funded primarily by borrowings during the first half of the year and more recently by deposit inflows. Deposits increased by $126,263 or 9.0% annualized with the majority of growth occurring in the third quarter of 2019 due in part to seasonal inflows of public deposits. Interest-bearing deposits increased $95,941 while noninterest-bearing deposits increased $30,322. Total stockholders’ equity increased $17,553 or 6.3%, from $278,614 at year-end 2018 to $296,167 at September 30, 2019. For the nine months ended September 30, 2019, total assets averaged $2,324,996, an increase of $106,363 from $2,218,633 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 $268,823 at September 30, 2019, a slight decrease of $859, or 0.3% from $269,682 at December 31, 2018. The decrease was 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 and scheduled maturities and calls of agency and municipal bonds. An increase in the market value of the available-for-sale portfolio due to a decline in market rates and new purchases from investment cashflow and deposit inflows partially offset the decrease.  Investment securities held-to-maturity totaled $7,808 at September 30, 2019, a decrease of $553 or 6.6% from $8,361 at December 31, 2018 due to payments received on mortgage backed securities.

For the nine months ended September 30, 2019, the investment portfolio averaged $273,083, a decrease of $9,258 or 3.3% compared to $282,341 for the same period last year. Average tax-exempt municipal bonds have decreased $21,119 or 20.6% to $81,227 for the nine months ended Septemebr 30, 2019 from $102,346 during the comparable period of 2018.  The tax-equivalent yield on the investment portfolio decreased 11 basis points to 2.49% for the nine months ended September 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 loss component of stockholders’ equity. We reported net unrealized gains, included as a separate component of stockholders’ equity of $1,530, net of deferred income taxes of $407, at September 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 third quarter of 2019 accelerated when compared to the second quarter increasing $22,291. Loans, net increased to $1,881,090 at September 30, 2019 from $1,823,266 at December 31, 2018, an increase of $57,824 or 4.2% 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 $68,455 or 10.1% annualized, to $976,258 at September 30, 2019 compared to $907,803 at December 31, 2018 due to increased activity in both our core and expansion markets.  Commercial and industrial loans increased $3,851 or 1.0% annualized, to $497,985 at September 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, offset by a number of large loan payoffs in the current period.  Our growth in commercial  and commercial real estate loans is due in part to the

35

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

success in executing our strategic market expansion initiative in the Lehigh Valley, Greater Delaware Valley and most recently in the Central Pennsylvania region.

Consumer loans decreased $13,815, or 15.2% on an annualized basis, to $107,638 at September 30, 2019 compared to $121,453 at December 31, 2018. The decrease in consumer loans was primarily due to payoffs outpacing dealer indirect 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 $667, or 0.3% on an annualized basis, to $299,209 at September 30, 2019 compared to $299,876 at December 31, 2018. The home equity line of credit portfolio has remained flat during 2019 while the residential real estate loans decreased in part to the sale of $1,038 of non-performing mortgage loans during the first quarter.

For the nine months ended September 30, 2019, loans, net averaged $1,853,811, an increase of $110,803 or 6.4% compared to $1,743,008 for the same period of 2018. The tax-equivalent yield on the loan portfolio was 4.75% for the nine months ended September 30, 2019, a 31 basis point increase from the comparable period last year. The increase in yield is due to higher market rates and floating and adjustable rate loans repricing higher due to the FOMC’s actions to increase the Federal Funds rate 100 basis points during 2018.  During the third quarter of 2019, the FOMC has lowered the Federal Funds rate 50 basis points which resulted in a 4 basis point decrease when comparing the third quarter to the second quarter of 2019.

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 September 30, 2019, totaled $411,142, consisting of $368,045 in unfunded commitments of existing loan facilities and $43,097 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.

36

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

Asset Quality:

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

	2019		2018
United States	3.7	%	3.9	%
New York (statewide)	4.0		4.3
Pennsylvania (statewide)	4.0		4.5
Broome County	4.6		5.2
Bucks County	3.6		3.9
Lackawanna County	4.6		4.8
Lebanon County	3.6		3.9
Lehigh County	4.2		4.8
Luzerne County	5.3		5.6
Monroe County	4.9		5.5
Montgomery County	3.3		3.6
Northampton County	4.2		4.6
Schuylkill County	5.0		5.4
Susquehanna County	4.0		4.2
Wayne County	4.4		4.9
Wyoming County	4.5	%	4.6	%

37

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

		September 30, 2019			December 31, 2018
Nonaccrual loans:
Commercial	$	3,343		$	776
Real estate:
Commercial		3,246			2,328
Residential		1,543			2,574
Consumer		262			212
Total nonaccrual loans		8,394			5,890
Troubled debt restructured loans:
Commercial		1,355			1,438
Real estate:
Commercial		303			719
Residential		604			622
Total troubled debt restructured loans		2,262			2,779
Accruing loans past due 90 days or more:
Commercial		53
Real estate:
Commercial		54			73
Residential		279			850
Total accruing loans past due 90 days or more		386			923
Total nonperforming loans		11,042			9,592
Foreclosed assets		485			376
Total nonperforming assets	$	11,527		$	9,968
Nonperforming loans as a percentage of loans, net		0.59	%		0.53	%
Nonperforming assets as a percentage of loans, net and foreclosed assets		0.61	%		0.55	%

We experienced a decline in our asset quality during the first nine months of  2019 as evidenced by an increase of $1,559 in nonperforming assets.  Nonperforming assets totaled $11,527 or 0.61% of loans, net and foreclosed assets at September 30, 2019, from $9,968 or 0.55% of loans, net and foreclosed assets at December 31, 2018. An increase in nonaccrual loans and foreclosed assets was partially offset by a decrease in restructured loans and accruing loans past due ninety days or more.

Loans on nonaccrual status increased $2,504 to $8,394 at September 30, 2019 from $5,890 at December 31, 2018. The majority of the increase from year end was due to an increase of $2,567 in commercial and industrial loans resulting from the placement of one credit relationship on nonaccrual totaling $4,718 during the first quarter. At September 30, 2019, the value of the collateral is sufficient to support the debt of this credit. Commercial real estate loans on nonaccrual increased $918 from yearend 2018 due to one credit relationship added in the third quarter; an agreement of sale for the property has been received.  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 $517 to $2,262 at September 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 and the payment-in-full of one other commercial real estate loan totaling $332 during the third quarter of 2019. Foreclosed assets increased $109 to $485 at September 30, 2019 from $376 at December 31, 2018.  Other real estate owned comprised seven properties at both September 30, 2019 and December 31, 2018, respectively.

38

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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.

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 $1,013 to $22,392, or 1.19% of loans, net at September 30, 2019, from $21,379, or 1.17% of loans, net at the end of 2018. For the nine months ended September 30, 2019, net charge-offs were $1,087 or 0.08% of average loans outstanding, a $610 decrease compared to $1,697 or 0.13% 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 nine months ended September 30, 2019, total deposits increased $126,263 or 9.0% annualized, to $2,001,285 from $1,875,022 at December 31, 2018. The growth in deposits occurred primarily in the third quarter of 2019 due to seasonal inflows of municipal deposits and growth in commercial balances.  Interest-bearing deposits increased $30,322  and noninterest-bearing deposits increased $95,941. Interest-bearing transaction accounts, including NOW and money market accounts increased $31,619, or 4.2% annualized, to $781,982 at September 30, 2019, from $750,363 at December 31, 2018, savings accounts decreased $5,405, or 1.9% annualized to $372,752 as of September 30, 2019 from $378,157 at December 31, 2018 and time deposits less than $250 increased $14,968, or 8.0% annualized, to $265,424 at September 30, 2019, from $250,456 at December 31, 2018. Time deposits $250 or more increased $54,760, or 85.3% annualized to $140,546 at September 30, 2019 from $85,786 at year end 2018 due in part to growth in short-term municipal accounts.

For the nine months ended September 30, interest-bearing deposits averaged $1,472,466 in 2019 compared to $1,338,689 in 2018, an increase of $133,777, or 10.0%. The cost of interest-bearing deposits was 1.01% in 2019 compared to 0.61% for the same period last year. For the first nine months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 1.14% in 2019 and 0.81% 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.   

39

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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 September 30, 2019, totaled $52,509 compared to $124,406 at December 31, 2018, a decrease of $71,897.  Deposit growth primarily during the third quarter of 2019 resulted in the paydown of overnight short-term borrowings.  There were no short-term borrowings outstanding at September 30, 2019 compared to $86,500 at December 31, 2018. Long-term debt was $52,509 at September 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 and decreases 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 1.32% at September 30, 2019. Given the latest action by the FOMC to lower the targeted federal funds rate 50 basis points during the third quarter of 2019, 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

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Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

loans. With respect to RSL, we are offering short term certificates of deposit in an attempt to decrease duration. The current position at September 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.

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 September 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 September 30, 2019. Our noncore funds at September 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

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Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

because they are very interest rate sensitive and are considered to be highly volatile. At September 30, 2019, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 13.8%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 9.0%. 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 decreased in the near term but increased overall.

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, increased $18,667 during the nine months ended September 30, 2019. Cash and cash equivalents increased $3,107 for the same period last year. For the nine months ended September 30, 2019, net cash inflows of $27,283 from operating activities and $46,199 from financing activities were partially offset by net cash outflows of $54,815 from investing activities. For the same period of 2018, net cash inflows of $24,360 from operating activities and $76,096 from financing activities were partially offset by net cash outflows of $97,349 from investing activities.

Operating activities provided net cash of $27,283 for the nine months ended September 30, 2019, and $24,360 for the corresponding nine 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 $54,815 for the nine months ended September 30, 2019, compared to using net cash of $97,349 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 $46,199 for the nine months ended September 30, 2019, and provided net cash of $76,096 for the corresponding nine 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 provide additional funding. Deposits provided cash of $126,263 for the nine months ended September 30, 2019. Comparatively, deposits increased $108,846 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 $86,500 in the nine months ended September 30, 2019 compared to an decrease of $24,225 for the comparable period in 2018 as deposit growth outpaced the growth in loans. Long term borrowings increased $14,603, net of repayments for the nine months ended September 30, 2019, compared to a decrease of $1,273 for the same nine 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 $296,167 or $40.08 per share at September 30, 2019, compared to $278,614 or $37.66 per share at December 31, 2018. Net income of $20,704 for the nine months ended September 30, 2019 was the primary factor leading to the improved capital position. Stockholders’ equity was also affected by cash dividends declared of $7,546, stock based compensation of $397, and other comprehensive income of $4,619 resulting from market value fluctuations in the investment portfolio and changes to the fair value of derivatives.

Dividends declared equaled $1.02 per share through the nine months ended September 30, 2019 and $0.98 per share for the same period of 2018. The dividend payout ratio was 36.4% for the nine months ended September 30, 2019 and 39.2% 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.

42

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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 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 September 30, 2019, the Bank’s Tier 1 capital to total average assets was 10.05% 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 September 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 September 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 September 30, 2019.

Review of Financial Performance:

Net income for the three months ended September 30, 2019 equaled $7,148 or $0.97 per share compared to $6,717 or $0.91 per share for the comparable period of 2018. The increase in earnings for the current period is the product of higher net interest income of $1,283 due to growth in our average earning assets of $116.1 million since the year ago period, a lower provision for loan losses of $350 and an increase in non-interest income of $429 due primarily to revenue from commercial loan interest rate swap transactions. These increases were partially offset by higher non-interest expenses of $1,542 related to annual merit increases and costs in support of our market expansion initiative.  Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.21% for the third quarter of 2019 compared to 1.19% 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 9.65% for the third quarter of 2019 compared to 9.81% for the comparable period in 2018.

Net income through the first nine months of 2019 equaled $20,704 or $2.80 per share compared to $18,528 or $2.50 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 $3,470 due to growth of our earning assets coupled with a reduction to the provision for loan losses expense of $1,050, partially offset by an increase in non-interest expenses of $2,884. Our ROA and ROE were 1.19% and 9.63% through nine months in 2019 compared to 1.12% and 9.21% 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.

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Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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.

For the three months ended September 30, tax-equivalent net interest income increased $1,259 to $19,627 in 2019 from $18,368 in 2018. The net interest spread decreased to 3.32% for the three months ended September 30, 2019 from 3.36% for the three months ended September 30, 2018 as the average rate paid on interest bearing liabilities increased 21 basis points while the earning asset yield increased 17 basis points. The tax-equivalent net interest margin increased to 3.61% for the third quarter of 2019 from 3.57% for the comparable period of 2018.

For the three months ended September 30, tax-equivalent interest income on earning assets increased $2,189, to $24,023 in 2019 as compared to $21,834 in 2018. The overall yield on earning assets, on a fully tax-equivalent basis, increased 17 basis points for the three months ended September 30, 2019 to 4.42% as compared to 4.25% for the three months ended September 30, 2018. The increase in the yield on earning assets resulted from a 23 basis point increase in loan yields, 4.74% for the third quarter of 2019 compared to 4.51% for the same period last year. Loan yields increased due to higher rates on new loan originations during 2018, 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. However, the FOMC during the third quarter of 2019 has cut the federal funds rate 50 basis points which will put downward pressure on loan yields.  The overall yield earned on investments decreased 23 basis points in the third quarter of 2019 to 2.39% from 2.62% for the third 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 $12,940 lower when comparing the current and year ago quarter.  

Total interest expense increased $930 to $4,396 for the three months ended September 30, 2019 from $3,466 for the three months ended September 30, 2018. An increase in the average balance of interest bearing liabilities of $41,800 combined with a 21 basis point increase in the cost of funds comparing the three months ended September 30, 2019 and 2018 caused the increase. Average short-term borrowings decreased $131,599 to $12,563 for the quarter ended September 30, 2019 compared to $144,162 for the corresponding year ago period as growth in deposits resulted in a reduction to short-term borrowings. Average time deposits $100 or more increased $109,493 and money market accounts increased $69,115.  The increase in interest expense for the three months ended September 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.  The benefit of lower interest bearing liability costs will lag the  aforementioned action of the FOMC to cut rates during the third quarter of 2019.

For the nine months ended September 30, tax-equivalent net interest income increased $3,498 to $57,528 in 2019 from $54,030 in 2018. The net interest spread decreased to 3.31% for the nine months ended September 30, 2019 from 3.38% for the nine months ended September 30, 2018. The tax-equivalent net interest margin for the nine months ended September 30 was 3.60% in 2019 compared to 3.57% in 2018.

For the nine months ended September 30, 2019, tax-equivalent interest income increased $7,614, to $71,032 compared to $63,418 for the nine months ended September 30, 2018. A volume variance in interest income of $3,562 attributable primarily to an increase in the average balance of loans coupled with a $4,052 favorable rate variance due to an increase in the yield on loans for the nine months ended September 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 nine months ended September 30, 2019 to 4.45% as compared to 4.19% for the nine months ended September 30, 2018.

Total interest expense increased $4,116 to $13,504 for the nine months ended September 30, 2019 from $9,388 for the nine months ended September 30, 2018. The average balance of interest bearing liabilities increased to $1,590,671 for the nine months ended September 30, 2019, as compared to $1,541,346 for the nine months ended September 30, 2018.

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Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

An unfavorable rate variance in each of the categories of interest-bearing liabilities totaled $4,602 and was the primary reason for the increase in interest expense.  Unfavorable rate variances were greatest as it related to money market accounts, time depositis of $100 or more, and short-term borrowings.  Offsetting the rate variance was a favorable volume variance of $486 due to lower average short-term borrowings, partially offset by higher time deposits of $100 or more.  All other deposit categories experienced a mix of volume variances that only slightly offset the decrease. The cost of funds increased to 1.14% for the nine months ended September 30, 2019 as compared to 0.81% 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 during 2018 and increased market demand for premium deposit rates.

45

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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

	Three months ended
	September 30, 2019						September 30, 2018
	Average		Interest Income/		Yield/		Average		Interest Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Earning assets:
Loans:
Taxable	$	1,729,741	$	20,940	4.80	%	$	1,632,012	$	18,798	4.57	%
Tax-exempt		135,580		1,348	3.94			123,199		1,162	3.74
Total loans		1,865,321		22,288	4.74			1,755,211		19,960	4.51
Investments:
Taxable		200,444		1,111	2.20			184,623		1,062	2.28
Tax-exempt		70,381		520	2.93			99,142		811	3.25
Total investments		270,825		1,631	2.39			283,765		1,873	2.62
Interest-bearing deposits		5,006		27	2.14			377		1	1.05
Federal funds sold		14,267		77	2.14
Total earning assets		2,155,419		24,023	4.42	%		2,039,353		21,834	4.25	%
Less: allowance for loan losses		22,248						19,944
Other assets		215,289						218,173
Total assets	$	2,348,460	$	24,023			$	2,237,582	$	21,834
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts	$	362,178	$	1,269	1.39	%	$	293,063	$	650	0.88	%
NOW accounts		385,903		721	0.74			382,401		580	0.60
Savings accounts		379,784		128	0.13			389,775		122	0.12
Time deposits less than $100		138,470		514	1.47			141,251		426	1.20
Time deposits $100 or more		254,712		1,334	2.08			145,219		564	1.54
Short-term borrowings		12,563		83	2.62			144,162		809	2.23
Long-term debt		52,731		347	2.61			48,670		315	2.57
Total interest-bearing liabilities		1,586,341		4,396	1.10			1,544,541		3,466	0.89
Noninterest-bearing deposits		445,238						405,671
Other liabilities		22,900						15,609
Stockholders’ equity		293,981						271,761
Total liabilities and stockholders’ equity	$	2,348,460		4,396			$	2,237,582		3,466
Net interest income/spread			$	19,627	3.32	%			$	18,368	3.36	%
Net interest margin					3.61	%					3.57	%
Tax-equivalent adjustments:
Loans			$	282					$	243
Investments				109						172
Total adjustments			$	391					$	415

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Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

	Nine months ended
	September 30, 2019						September 30, 2018
	Average		Interest Income/		Yield/		Average		Interest Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Earning assets:
Loans:
Taxable	$	1,713,173	$	61,684	4.81	%	$	1,619,409	$	54,546	4.50	%
Tax-exempt		140,638		4,144	3.94			123,599		3,367	3.64
Total loans		1,853,811		65,828	4.75			1,743,008		57,913	4.44
Investments:
Taxable		191,856		3,187	2.22			179,995		2,967	2.20
Tax-exempt		81,227		1,890	3.11			102,346		2,533	3.31
Total investments		273,083		5,077	2.49			282,341		5,500	2.60
Interest-bearing deposits		2,877		50	2.32			441		5	1.52
Federal funds sold		4,808		77	2.14
Total earning assets		2,134,579		71,032	4.45	%		2,025,790		63,418	4.19	%
Less: allowance for loan losses		22,087						19,755
Other assets		212,504						212,598
Total assets	$	2,324,996	$	71,032			$	2,218,633	$	63,418
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts	$	339,771	$	3,358	1.32	%	$	290,126	$	1,676	0.77	%
NOW accounts		386,720		2,130	0.74			375,534		1,524	0.54
Savings accounts		382,805		371	0.13			391,613		366	0.12
Time deposits less than $100		137,376		1,477	1.44			145,517		1,275	1.17
Time deposits $100 or more		225,794		3,754	2.22			135,899		1,294	1.27
Short-term borrowings		74,036		1,491	2.69			153,669		2,317	2.02
Long-term debt		44,169		923	2.79			48,988		936	2.55
Total interest-bearing liabilities		1,590,671		13,504	1.14			1,541,346		9,388	0.81
Noninterest-bearing deposits		426,395						392,523
Other liabilities		20,575						15,678
Stockholders’ equity		287,355						269,086
Total liabilities and stockholders’ equity	$	2,324,996		13,504			$	2,218,633		9,388
Net interest income/spread			$	57,528	3.31	%			$	54,030	3.38	%
Net interest margin					3.60	%					3.57	%
Tax-equivalent adjustments:
Loans			$	870					$	707
Investments				397						532
Total adjustments			$	1,267					$	1,239

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 September 30, 2019.

47

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

The provision for loan losses totaled $2,100 for the nine months ended September 30, 2019 and $3,150 for the nine months ended September 30, 2018. For the three months ended September 30, the provision for loan losses was $700 in 2019 and $1,050 in 2018. The decrease in the current period is due to lower than projected loan growth.

Noninterest Income:

Noninterest income for the three months ended September 30, 2019 increased $429 or 13.2% to $3,682 in 2019 from $3,253 in 2018. The increase is due primarily to an increase in service charges, fees, and commissions of $278 or 14.8% due to an increase in fee income on our commercial loan interest rate swap transactions. Merchant revenue increased $54 from the previous period due to higher volume and an increase in rates paid by merchants.  Wealth management revenue increased $90 in the current period when compared to the prior year due to increased volume in both our brokerage and retirement plan services departments.

For the nine months ended September 30, 2019, noninterest income totaled $11,250, an increase of $762 or 7.3% from $10,488 for the comparable period of 2018.  Fee income generated by commercial loan interest rate swap transactions increased $989 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 $150 to $837 for the nine months ended September 30, 2019 from $687 for the same period last year due in part to higher incentive fees and increased rates.  Income generated from our wealth management division increased $94 through the first nine months of 2019 due primarily to increased activity within our retirement plan services department, while mortgage banking income decreased slightly to $457 for the first nine months of 2019 compared to $472 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 third quarter, noninterest expense increased $1,542 or 12.3% to $14,079 in 2019 from $12,537 in 2018. For the nine months ended September 30, noninterest expense increased $2,884 or 7.4% to $41,998 in 2019 from $39,114 in 2018. Personnel costs increased 16.0%, net occupancy and equipment costs increased 11.8%, and all other expense categories which include, professional fees and outside services, FDIC insurance and assessments, donations and other miscellaneous expenses increased 5.7% comparing the three months ended September 30, 2019 and 2018. During the nine months ended September 30, 2019, higher personnel costs of $2,397 or 11.3%, and net occupancy and equipment costs of $592 or 7.2% were the primary reasons for the increase in total non-interest expense. 

Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled $8,056 for the third quarter of 2019, an increase of $1,110 or 16.0% when compared to the third quarter of 2018. Salaries and employee benefits expense totaled $23,688 for the nine months ending September 30, 2019, an increase of $2,397 or 11.3% when compared to $21,291 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 lenders and credit professionals have been put in place to support our expansion in the Lehigh Valley and King of

48

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

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 $316 or 11.8% increase in net occupancy and equipment expense comparing the third quarter of 2019 at $2,997 and 2018 at $2,681. The nine months ended September 30, 2019 resulted in a $592 or 7.2% increase to $8,807 in net occupancy and equipment expense compared to $8,215 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 third quarter, all other expense categories increased $116 or 4.0% to $3,026 from $2,910 comparing 2019 to 2018. Legal and professional expenses increased $56 due to costs related to loan workouts. For the nine months ended September 30, all other expense categories decreased $105 or 2.6% to $9,503 in 2019 compared to $9,608 in 2018. Amortization expense related to intangible assets declined $113, FDIC assessments decreased $215, or 25.9% when comparing the nine months ended September 30, 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 $66, or 6.5% through nine months in 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 $991 or 12.2% of pre-tax income, and $2,709 or 11.6% of pre-tax income for the three and nine months ended September 30, 2019, respectively. In the year ago period, we recorded income tax expense of $902 or 11.8% of pre-tax income, and $2,487 or 11.8% of pre-tax income for those same periods. The three and nine months ended September 30, 2019 include before tax investment tax credits and other credits totaling $394 and $1,172 compared to before tax investment tax credits $276 and $819 for those same periods last year.

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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 September 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

50

Peoples Financial Services Corp.

rate scenario, 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 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 September 30, 2019, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:

	September 30, 2019
	% Change in
Changes in Interest Rates (basis points)	Net Interest Income		Economic Value of Equity
	Metric	Policy	Metric	Policy
+400	0.0	(20.0)	7.4	(40.0)
+300	0.2	(20.0)	6.6	(30.0)
+200	0.2	(10.0)	5.2	(20.0)
+100	0.1	(10.0)	4.0	(10.0)
Static
(100)	(1.8)	(10.0)	(9.6)	(10.0)

Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending September 30, 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 September 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 September 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.

51

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 nine-months ended September 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 September 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
July 31, 2019		$			221,170
August 31, 2019	7,418	$	43.97		213,752
September 30, 2019	2,900	$	44.60		210,852

Item 3. Defaults upon Senior Securities.

None.

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Peoples Financial Services Corp.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.  

None.

Item 6. Exhibits.  

Item Number	Description	Page
10.1	Consulting and Confidentiality Agreement dated August 29, 2019 between Peoples Security Bank and Trust Company and Michael L. Jake.
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 September 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: November 7, 2019	/s/ Craig W. Best
	Craig W. Best
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: November 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)

53

EX-10.1

Exhibit 10.1

CONSULTING AND CONFIDENTIALITY AGREEMENT

THIS CONSULTING AND CONFIDENTIALITY AGREEMENT (“Agreement”) is made as of the latest date written below, by and between Peoples Security Bank and Trust Company, a Pennsylvania bank and trust company (the “Bank”) and the undersigned consultant (the “Consultant” and, together with  the Bank, the “Parties”).

BACKGROUND

A.    The Parties desire the Consultant to provide certain services to the Bank. In order to perform the services, the Consultant may have access to certain confidential information of the Bank and its affiliates.

B.   The Consultant has been advised of and acknowledges the competitive value and proprietary nature of the confidential information of the Bank and its affiliates, and the damage that could result to the Bank and its affiliates if their confidential information is improperly used or disclosed.

C.   The Bank is only willing to engage the Consultant to provide services to the Bank in the event that the Consultant agrees to the terms and conditions set forth in this Agreement.

AGREEMENT

NOW THEREFORE, in consideration the mutual premises and undertakings contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties, intending to be legally bound hereby, agree as follows:

1.  Services. During the term of this Agreement, the Consultant shall perform the services described on Exhibit A hereto (the “Services”). The Consultant shall determine the manner, method, details and means of performing the Services, and the Parties acknowledge and agree that the Consultant may perform services for any other person or entity as long as the performance of such services does not conflict with Consultant’s obligations under this Agreement or are in competition with the business of the Bank and its affiliates.

2.   Term. The term of this Agreement shall commence on September 1, 2019 and, unless sooner terminated as provided herein, shall expire on August 3 l, 2020. Either Party may terminate this Agreement at any time, and for any reason or no reason, by ten days’ written notice to the other Party. Term. The Consultant’s obligations of confidentiality, limited use and  nondisclosure  and shall survive the termination or expiration of this Agreement indefinitely. The consultant agrees that for a period ending two years from the date of termination or expiration of this agreement the consultant will not knowingly or actively solicit, target, sell offer or provide banking services to the Bank customers.

3.   Compensation. In full consideration for the Services to be provided hereunder, the Bank shall pay consultant $3,000.00 per month.

4.   Independent Contractor Relationship. The Consultant shall at all times be an independent contractor and not an employee of the Bank and nothing herein shall be deemed to create an employer-employee relationship. As an independent contractor, the Consultant shall not be eligible to participate in any employee benefits the Bank may provide, such as those it provides to its employees, if any, including, but not limited to: medical, disability, workers’ compensation or other insurance; vacation, personal, sick or holiday pay; or other benefits. The Consultant shall obtain his own insurance and provide proof of insurance to the Bank upon request. The Bank shall not withhold taxes or otherwise make deductions from the Consultant’s compensation and the Consultant shall be issued an IRS Form 1099 in connection

with his compensation to the extent required by law. The Consultant shall be solely responsible for any taxes incurred as a result of the compensation paid under this Agreement.

5.  Definition of Confidential Information. As used in this Agreement, the tenn “Confidential Information” means all oral and written information, including without limitation the Bank Data (as such term is defined below), that is not generally known to the public, including, without limitation, any and all information and trade secrets relating to the operation, business, strategies, financial affairs, products, systems (computer and otherwise), technologies, sales, research and development, user data, services, vendor information, customer information (including nonpublic personal information), employee information or intellectual properties of the Bank or its affiliates or any other party with whom the Bank or its affiliates is doing business, and any and all other information concerning the Bank and its affiliates, including without limitation all information encompassed in descriptions, reports, recommendations, analyses, proposals, test data, other data, business plans or other plans, treatments, scripts, budgets, programs, outlines, specifications, ideas, concepts, models, and documents, whether or not protectable by patent, copyright or other laws, whether furnished before or after the date of this Agreement, together  with any additional information derived from such information and contained in all analyses, compilations, studies or other documents or records prepared by the Consultant or its Representatives, as well as all copies and other reproductions thereof, whether in writing or stored or maintained in or by electronic, magnetic or other means, media or devices. As used in this Agreement, the term “Representatives” means, with respect to any Party, the directors, officers, shareholders, employees, affiliates and controlling persons of such Party (as applicable), and its and their respective  agents, advisors and representatives (including without limitation attorneys, accountants and financial advisors).

6.   Exclusions from Confidential Information. Notwithstanding anything to the contrary contained in Paragraph 5, Confidential Information does not include information which (i) was or becomes available to the public other than as a result of a disclosure by the Consultant or its Representatives; or (ii) was or becomes available to the Consultant on a non-confidential basis from a source other than the Bank or any of its Representatives, provided that such source is not bound by a confidentiality agreement with the Bank or otherwise prohibited from transmitting the information to the Consultant; or (iii) was within the Consultant’s possession prior to its being furnished by or on behalf of the Bank, provided that the source of such information was not bound by a confidentiality agreement with the Bank in respect thereof or otherwise prohibited from transmitting the information to the Consultant.

7.   Use of Confidential Information.

a.           The Consultant agrees to keep any Confidential Information confidential and not to disclose any Confidential Information, or use any Confidential Information for any purpose other than to the extent necessary for the performance of the Services.  Accordingly,  the Consultant agrees to treat the Confidential Information which he receives as he would his own confidential information and to take all reasonable precautions to prevent the unauthorized disclosure to any third party of any Confidential Information.

b.           The Consultant shall be responsible for any improper use of the Confidential Information by his Representatives and agrees, at his own expense, to take all reasonable measures, including but not limited to court proceedings, to restrain his Representatives  from unauthorized disclosure or use of the Confidential Information. Prior to providing  any Representative with access to Confidential Information the Consultant shall (i) take reasonable steps to verify that the relevant Representative is capable of maintaining the privacy, confidentiality and security of the Confidential Information; and (ii) require the third party to maintain adequate safeguards for Confidential Information.

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c.            In addition, the Consultant shall comply with all applicable federal, state and local laws, rules, regulations and ordinances governing or relating to privacy rights in connection with his performance of any services for the Bank, including, without limitation, the Gramm-Leach-Bliley Act, as amended (“GLB”). The Consultant shall implement such physical and other security measures as shall be necessary to (i) ensure the security and confidentiality of the “nonpublic personal information” of the current or former “customers” and “consumers” (as those terms are defined in GLB) of the Bank (collectively: the “Bank Data”) which the Consultant holds, (ii) protect against any threats or hazards to the security and integrity of such Bank Data, and (iii) protect against any unauthorized access to or use of such Bank Data.

d.           Absent the Bank’s prior written consent (which may be withheld in the Bank’s sole discretion) or as otherwise directed by the Bank or as required for the performance of the Services, Bank Data shall not be (i) used, disclosed, monitored, analyzed, individualized, anonymized, aggregated, stored, copied or otherwise provided to third parties by the Consultant or his Representatives, or (ii) sold, assigned, or leased by the Consultant or his Representatives, or (iii) commercially exploited in any form (including any individualized, anonymized or aggregated form) by or on behalf of the Consultant or his Representatives.

e.            The Consultant shall at all times comply with all privacy, safety, security and data retention policies and procedures provided or communicated by the Bank which policies and procedures which may be amended from time to time. Upon request, the Consultant will provide evidence reasonably satisfactory to allow the Bank to confirm that the Consultant has satisfied its obligations as required under this paragraph.

f.           The Consultant shall promptly notify the Bank in writing if the Consultant cannot comply with his obligations under this Section 7. If this is the case, the Bank and the Consultant shall use their best efforts to remedy the situation. The Bank may, in its sole discretion and without penalty of any kind to the Bank, suspend the transfer or disclosure of Bank Data to the Consultant or access to Bank Data by the Consultant, terminate any further processing of Bank Data by the Consultant, and terminate the Agreement, if doing so is necessary to comply with applicable privacy and security laws or is required or requested by a regulator or other governmental body.

g.           Any determination regarding the applicability of privacy and security laws to any actual or threatened breach or compromise of the security, confidentiality, or integrity of Bank Data and/or of Confidential Information (collectively: an “Information Security Incident”) and the scope of the obligations pursuant to such laws shall be within the sole discretion of the Bank, and the Consultant shall comply with any such determination.

h.           In the event of an Information Security Incident, the Consultant will fully cooperate with the Bank to secure Bank Data. The Consultant shall notify the Bank in writing within not more than forty eight (48) hours following discovery of any Information Security Incident, which notice shall include a detailed description of the circumstances of the disclosure and the parties involved. Consultant shall reimburse the Bank for the cost of notification of all affected parties as well as reimbursement of any remedy to correct and mitigate the effect of any such Information Security Incident, including at least one year of credit monitoring services to any affected party whose personal or confidential data may have been compromised.

i.           The content of any filings, communications, notices, press releases or reports related to any Information Security Incident must be approved by the Bank prior to any publication or communication thereof. The Consultant agrees that the Bank retains the sole authority and discretion to contact and involve law enforcement agencies in connection with an Information Security

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Incident when the decision whether to involve such agencies is discretionary (that is, when no legal obligation, statutory or otherwise, requires one of the parties to contact law enforcement). If the Bank elects to contact law enforcement agencies regarding an Information Security Incident, the Consultant agrees to cooperate fully with such law enforcement agencies and any decision made by the Bank regarding the scope and goals of any investigation undertaken by such agencies.

j.           The Consultant will not transfer Bank Data across a country border or to an offshore location.

k.           The Consultant hereby acknowledges  that  he is aware, and that  he will  advise any of his Representatives who receive Confidential Information, that the United States securities laws prohibit any person who has received from an issuer material, nonpublic information from purchasing or selling securities of such issuer (and options, warrants and rights relating thereto) or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person (including, without limitation, any of the Consultant’s Representatives) is likely to purchase or sell such securities.

8.   Access to Information Systems. No access to Bank provided systems

9.   Network Security. The Consultant shall only connect to the Bank Systems through approved network connections (“Approved Connections”). The Consultant shall use an Approved Connection only in accordance with all applicable security and other policies and procedures which the Bank implements and may change from time to time that are provided or communicated to the Consultant by the Bank. The Consultant shall use his best efforts to prevent all security breaches through the Approved Connections, implement stringent security procedures (including, but not limited to, the ones set forth herein and in the Bank’s policies), and act immediately to address any non-approved methods of connection, security breach, or exposure to hacking attempts. The right to connect to Bank Systems from external locations may be revoked at any time. Minimum network security shall include:

a.           The Consultant will allow only those of his Representatives approved in advance by the Bank (“Authorized Personnel”) to access the Bank Systems. The Consultant shall  be solely responsible for ensuring that Authorized Personnel are not security risks, and upon the Bank’s request, the Consultant will provide the Bank with any information reasonably necessary for the Bank to evaluate security issues relating to any Authorized Personnel.

b.          The Consultant shall promptly notify the Bank contact communicated to the Consultant, whenever any Authorized Personnel: leaves the Consultant’s employ, such Authorized Personnel’s service relationship with the Consultant ends or such Authorized Personnel’s service relationship with the Consultant no longer requires access to the Bank Systems. Additionally, the Consultant shall immediately shut down all access to the Bank Systems for any Authorized Personnel no longer engaged by Consultant on providing Services.

c.           Authorized Personnel accessing the Bank Systems externally shall at a minimum do so through password protected systems, shall change passwords on a regular basis (and no less frequently than every 30 days), and shall never access the Bank Systems from a shared or public computer, device or network.

10. No License or Transfer. The Confidential Information shall at all times remain the property of the Bank. No license of any trade secrets, copyrights, patents or other rights is granted by this Agreement or by any disclosure of Confidential Information.

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11.Destruction/Return of Confidential Information. Upon the Bank’s request, all  Confidential Information (including all copies, extracts or other reproductions in whole or in part thereof), whether in writing or stored or maintained in or by electronic, magnetic or other means, media or devices, shall be returned or destroyed, so that no copy of the Confidential Information remains or can be accessed or restored in any way. In the event Confidential Information is destroyed, the Consultant shall certify such destruction to the Bank.

12.   Compelled Disclosure. Notwithstanding anything to the contrary set forth herein, in the event that a Consultant or its Representatives are requested or become legally compelled (by oral questions, interrogatories, request for information or documents, subpoena, civil investigative demand or similar process) to disclose any of the Confidential Information or take any other action prohibited hereby, the Bank will be provided with prompt written notice so that the Bank may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Confidentiality Agreement. In the event that such protective order or other remedy is not sought or obtained or that the compliance with the provisions of this Confidentiality Agreement is waived, the Consultant agrees that it will furnish only that portion of the Confidential Information which, in the reasonable opinion of its counsel, the Consultant is compelled to disclose without standing liable for contempt or suffering other censure or penalty. The Consultant further agrees that it will exercise its best efforts to obtain reliable assurance that confidential treatment will be accorded to that portion of the Confidential Information which subject to the compelled disclosure.

13.   Audit. Consultant agrees that the Bank shall have the right, from time to time, upon written notice to the Consultant, to conduct an investigation and audit of the Consultant’s policies, procedures, books, records and accounts to verify compliance with the provisions of this Agreement, including without limitation, provisions relating to confidentiality, privacy and security. The Consultant agrees to cooperate fully with such investigation, the method of which shall be at the sole discretion of the Bank. Without limiting any other remedies at law or at equity, the Bank may, at the Bank’s sole discretion, terminate this Agreement or suspend or remove any Consultant Representatives.

14.   Injunctive Relief. The Parties acknowledge and agree that, in the event of any breach of this Agreement , the Bank might be irreparably harmed and unable to be made whole by monetary damages.  It is accordingly agreed that the Bank, in addition to any other remedy to which it may be entitled in law or equity, will be entitled to seek an injunction to remedy breaches of this Agreement and/or to compel specific performance of this Agreement.

15.   No Conflicting Obligations. The Consultant represents that he is not a party to any agreement, and does not have any obligations, that conflict with his obligations under this Agreement.

16.   Miscellaneous. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the Commonwealth of Pennsylvania, without respect to its rules on the conflict of laws. The Consultant may not assign this Agreement, or any of his rights or obligations hereunder, without the prior written consent of the Bank. This Agreement shall be binding upon the respective successors and permitted assigns of the Parties and shall inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns. In the event that any term of this Agreement is held to be invalid, illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other portion of this Agreement, and there shall be deemed substituted therefor such term as will most fully realize the intent of the Parties as expressed in this Agreement to the fullest extent permitted by applicable law, the Parties hereby declaring their intent that this Agreement be construed in such fashion as to maintain its existence, validity and enforceability to the greatest extent possible. This Agreement constitutes the entire understanding and agreement of the Parties respecting the subject matter hereof and supersedes any and all prior agreements or arrangements, written or oral, between the Parties relating

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thereto. This Agreement may not be amended or supplemented in any way except by a written document signed by the Party against whom such amendment or supplement is sought to be enforced.  The failure on the part of either Party to enforce, or any delay in enforcing, any right, power or remedy that such Party may have under this Agreement shall not constitute a waiver of any such right, power or remedy, or release the other Party from any obligations under this Agreement, except by a written document signed by the Party against whom such waiver or release is sought to be enforced. This Agreement may be executed by the Parties in separate counterparts, and delivered by facsimile or other electronic means, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument.

[Signature  page follows.]

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IN WITNESS WHEREOF, the Parties have executed this Agreement under their respective hands as of the day and year written.

BANK:		CONSULTANT:
Peoples Security Bank and Trust Company
By:	/s/ Thomas P. Tulaney, Sr.		/s/ Michael L. Jake
	(Signature)		(Signature)
Name:	Thomas P. Tulaney, Sr.	Name:	Michael L. Jake
Title:	SEVP & Chief Operating Officer
Date:	8/29/19	Date:	8-29-19

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Exhibit A

Services

The consultant agrees to act as an advisor to current bank officers and employees while also assisting the bank in various areas where the consultant has established knowledge and expertise. He further agrees to be available on a periodic basis.

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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 September  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: November 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 September 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: November 7, 2019

53

EX-32.2

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 September  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: November 7, 2019

/s/ John R. Anderson, III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: November 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

Employee benefit plans - Components of Net Periodic Benefit Cost (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net periodic pension cost:
Labor and Related Expense	$ 8,056	$ 6,946	$ 23,688	$ 21,291
Pension Benefits
Net periodic pension cost:
Interest cost	128	233	447	389
Expected return on plan assets	(217)	(360)	(759)	(600)
Amortization of unrecognized net gain	45	73	159	122
Net periodic benefit cost	$ (44)	$ (54)	$ (153)	$ (89)

XML

Fair value estimates - Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - Recurring Basis - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	$ 270,270	$ 270,496
U.S. Treasuries
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	24,066	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	91,990	92,818
State and Municipals, Taxable
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	21,500	13,853
State and Municipals, Tax-exempt
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	61,683	85,954
Mortgage-backed Securities, U.S. Government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	9,613	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	59,971	38,836
Common equity securities.
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	297	291
Interest rate floor - other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	1,170	553
Interest rate swap-other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	6,065	108
Interest rate swap-other liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Liabilities measured at fair value	(6,085)	(138)
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	24,363	25,883
Level 1 | U.S. Treasuries
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	24,066	25,592
Level 1 | Common equity securities.
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	297	291
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	245,907	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	91,990	92,818
Level 2 | State and Municipals, Taxable
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	21,500	13,853
Level 2 | State and Municipals, Tax-exempt
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	61,683	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	9,613	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	59,971	38,836
Level 2 | Interest rate floor - other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	1,170	553
Level 2 | Interest rate swap-other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	6,065	108
Level 2 | Interest rate swap-other liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Liabilities measured at fair value	$ (6,085)	$ (138)

XML

Loans, net and allowance for loan losses - Summarized Information in Concerning to Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	$ 8,653	$ 7,278	$ 8,653	$ 7,278	$ 5,653
Unpaid Principal Balance, With no related allowance, Total	9,740	8,356	9,740	8,356	7,017
Average Recorded Investment, With no related allowance, Total	8,489	6,769	7,974	6,673	6,468
Interest Income Recognized, With no related allowance, Total	32	29	100	85	117
Recorded Investment, With an allowance recorded, Total	2,434	3,934	2,434	3,934	3,988
Unpaid Principal Balance, With an allowance recorded, Total	2,924	4,382	2,924	4,382	4,386
Related Allowance, With an allowance recorded, Total	815	931	815	931	1,179
Average Recorded Investment, With an allowance recorded, Total	3,213	4,110	3,711	4,363	4,288
Interest Income Recognized, With an allowance recorded, Total	17	20	57	54	70
Recorded Investment, Total	11,087	11,212	11,087	11,212	9,641
Unpaid Principal Balance, Total	12,664	12,738	12,664	12,738	11,403
Related Allowance, With an allowance recorded, Total	815	931	815	931	1,179
Average Recorded Investment, Total	11,702	10,879	11,685	11,036	10,756
Interest Income Recognized, Total	49	49	157	139	187
Commercial
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	3,766	1,356	3,766	1,356	1,562
Unpaid Principal Balance, With no related allowance, Total	4,272	1,538	4,272	1,538	1,900
Average Recorded Investment, With no related allowance, Total	4,131	1,269	3,974	1,257	1,318
Interest Income Recognized, With no related allowance, Total	18	17	52	50	67
Recorded Investment, With an allowance recorded, Total	1,006	939	1,006	939	675
Unpaid Principal Balance, With an allowance recorded, Total	1,008	1,086	1,008	1,086	675
Related Allowance, With an allowance recorded, Total	394	93	394	93	50
Average Recorded Investment, With an allowance recorded, Total	1,213	1,020	1,010	1,089	1,006
Interest Income Recognized, With an allowance recorded, Total	9	7	21	23	30
Recorded Investment, Total	4,772	2,295	4,772	2,295	2,237
Unpaid Principal Balance, Total	5,280	2,624	5,280	2,624	2,575
Related Allowance, With an allowance recorded, Total	394	93	394	93	50
Average Recorded Investment, Total	5,344	2,289	4,984	2,346	2,324
Interest Income Recognized, Total	27	24	73	73	97
Real estate Commercial
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	2,981	3,414	2,981	3,414	1,969
Unpaid Principal Balance, With no related allowance, Total	3,219	3,666	3,219	3,666	2,299
Average Recorded Investment, With no related allowance, Total	2,969	3,143	2,501	3,036	2,822
Interest Income Recognized, With no related allowance, Total	8	5	31	20	28
Recorded Investment, With an allowance recorded, Total	622	1,669	622	1,669	1,152
Unpaid Principal Balance, With an allowance recorded, Total	1,103	1,774	1,103	1,774	1,323
Related Allowance, With an allowance recorded, Total	225	462	225	462	403
Average Recorded Investment, With an allowance recorded, Total	766	1,712	1,030	1,807	1,676
Interest Income Recognized, With an allowance recorded, Total		8	10	18	18
Recorded Investment, Total	3,603	5,083	3,603	5,083	3,121
Unpaid Principal Balance, Total	4,322	5,440	4,322	5,440	3,622
Related Allowance, With an allowance recorded, Total	225	462	225	462	403
Average Recorded Investment, Total	3,735	4,855	3,531	4,843	4,498
Interest Income Recognized, Total	8	13	41	38	46
Real estate Residential
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	1,644	2,366	1,644	2,366	1,970
Unpaid Principal Balance, With no related allowance, Total	1,974	3,003	1,974	3,003	2,658
Average Recorded Investment, With no related allowance, Total	1,132	2,256	1,273	2,249	2,193
Interest Income Recognized, With no related allowance, Total	6	7	17	15	22
Recorded Investment, With an allowance recorded, Total	806	1,312	806	1,312	2,101
Unpaid Principal Balance, With an allowance recorded, Total	813	1,508	813	1,508	2,328
Related Allowance, With an allowance recorded, Total	196	362	196	362	666
Average Recorded Investment, With an allowance recorded, Total	1,234	1,369	1,651	1,456	1,585
Interest Income Recognized, With an allowance recorded, Total	8	5	26	13	22
Recorded Investment, Total	2,450	3,678	2,450	3,678	4,071
Unpaid Principal Balance, Total	2,787	4,511	2,787	4,511	4,986
Related Allowance, With an allowance recorded, Total	196	362	196	362	666
Average Recorded Investment, Total	2,366	3,625	2,924	3,705	3,778
Interest Income Recognized, Total	14	12	43	28	44
Consumer
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	262	142	262	142	152
Unpaid Principal Balance, With no related allowance, Total	275	149	275	149	160
Average Recorded Investment, With no related allowance, Total	257	101	226	131	135
Recorded Investment, With an allowance recorded, Total	20	14	20	14	60
Unpaid Principal Balance, With an allowance recorded, Total		14		14	60
Related Allowance, With an allowance recorded, Total		14		14	60
Average Recorded Investment, With an allowance recorded, Total		9		11	21
Recorded Investment, Total	262	156	262	156	212
Unpaid Principal Balance, Total	275	163	275	163	220
Related Allowance, With an allowance recorded, Total		14		14	60
Average Recorded Investment, Total	$ 257	$ 110	$ 246	$ 142	$ 156

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Other comprehensive loss - Other Comprehensive Loss and Related Tax Effects (Details) - USD ($) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Other comprehensive loss
Unrealized (loss) gain on investment securities available-for-sale	$ 161			$ (1,179)			$ 5,211	$ (4,394)
Net gain on the sale of investment securities available-for-sale							(23)
Other comprehensive loss	314			(1,179)			5,847	(4,394)
Income tax	66			(248)			1,228	(925)
Other comprehensive loss	$ 248	$ 2,395	$ 1,976	$ (931)	$ (663)	$ (1,875)	$ 4,619	$ (3,469)

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Investment securities - Unrealized and realized gains and losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Investment securities
Net gains recognized during the period on equity securities	$ 14	$ 14	$ 6	$ 14
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$ 14	$ 14	$ 6	$ 14

XML

Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Jun. 30, 2018
Statement of Stockholders' Equity
Dividends declared (in dollars per share)	$ 0.34	$ 0.34	$ 0.33
Share retired, shares		3,830
Common stock grants awarded, net of unearned compensation	$ 10,318	$ 164	$ 113
Common stock grants awarded, net of unearned compensation (in shares)		3,854	2,548

XML

Investment securities - Pledged Securities (Details) - USD ($) $ in Thousands	Sep. 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	$ 142,963	$ 161,647

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Cash and due from banks:
Cash and due from banks	$ 35,908	$ 32,569
Interest-bearing deposits in other banks	5,275	47
Total cash and due from banks	41,183	32,616
Federal funds sold	10,100
Investment securities:
Available-for-sale	268,823	269,682
Equity investments carried at fair value	297	291
Held-to-maturity: Fair value September 30, 2019, $8,016; December 31, 2018, $8,380	7,808	8,361
Total investment securities	276,928	278,334
Loans, net	1,881,090	1,823,266
Less: allowance for loan losses	22,392	21,379
Net loans	1,858,698	1,801,887
Loans held for sale	1,390	749
Premises and equipment, net	47,437	38,889
Accrued interest receivable	6,655	7,115
Goodwill	63,370	63,370
Intangible assets, net	1,738	2,296
Other assets	65,200	63,737
Total assets	2,372,699	2,288,993
Deposits:
Noninterest-bearing	440,582	410,260
Interest-bearing	1,560,703	1,464,762
Total deposits	2,001,285	1,875,022
Short-term borrowings		86,500
Long-term debt	52,509	37,906
Accrued interest payable	1,461	1,195
Other liabilities	21,277	9,756
Total liabilities	2,076,532	2,010,379
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,388,759 shares at September 30, 2019 and 7,399,054 shares at December 31, 2018	14,778	14,798
Capital surplus	135,106	135,310
Retained earnings	149,740	136,582
Accumulated other comprehensive loss	(3,457)	(8,076)
Total stockholders’ equity	296,167	278,614
Total liabilities and stockholders’ equity	$ 2,372,699	$ 2,288,993

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Derivatives and hedging activities

9 Months Ended

Sep. 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 September 30, 2019, the Company had 22 interest rate swaps with an aggregate notional amount of $126,574 related to this program.

Fair Values of Derivative Instruments on the Balance Sheet

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

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of September 30, 2019			As of December 31, 2018 (1)			As of September 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	$	1,170		$	553
Total derivatives designated as hedging instruments				$	1,170		$	553
Derivatives not designated as hedging instruments
Interest Rate Swaps	$	126,574	Other Assets	$	6,065	Other Assets	$	108	Other Liabilities	$	6,085	Other Liabilities	$	138
Total derivatives not designated as hedging instruments				$	6,065		$	108		$	6,085		$	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 September 30, 2019. There was no cash flow hedge as of September 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

September 30, 2019

Income

September 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

138

$

186

$

(48)

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

September 30, 2019

Income

September 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

611

$

1,013

$

(402)

Interest Income

$

(48)

$

$

(48)

* 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 nine months ended September 30, 2019 and September 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	$	(48)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other  comprehensive income into income	$	(48)
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	$	(48)

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 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		Nine Months Ended		Three Months Ended		Nine Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	September 30, 2019		September 30, 2019		September 30, 2018		September 30, 2018
Interest Rate Swaps	Other non-interest income	$	355	$	9	$	18	$	103
Fee Income	Other  income / (expense)	$		$	1,136	$		$	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 September 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 September 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	$	7,235	$	$	7,235	$		$	7,235
Offsetting of Derivative Liabilities
as of September 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	$	6,085	$	$	6,085	$		$	6,085
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 September 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 $20. 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 $5,120 against its obligations under these agreements as of September 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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Loans, net and allowance for loan losses

9 Months Ended

Sep. 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 September 30, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $903 and $744 at September 30, 2019 and December 31, 2018.

		September 30, 2019		December 31, 2018
Commercial	$	497,985	$	494,134
Real estate:
Commercial		976,258		907,803
Residential		299,209		299,876
Consumer		107,638		121,453
Total	$	1,881,090	$	1,823,266

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

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2019	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Charge-offs		(26)		(34)		(104)		(144)		(308)
Recoveries		12				11		47		70
Provisions		(205)		762		34		109		700
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
			Real estate
September 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2018	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573
Charge-offs		(148)		(63)				(117)		(328)
Recoveries		12		26		13		67		118
Provisions		414		421		153		62		1,050
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

			Real estate
September 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		(113)		(383)		(406)		(356)		(1,258)
Recoveries		22				27		122		171
Provisions		498		1,417		43		142		2,100
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
			Real estate
September 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		(150)		(1,232)		(381)		(389)		(2,152)
Recoveries		128		83		80		164		455
Provisions		(22)		2,647		512		13		3,150
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

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

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
Ending balance: individually evaluated for impairment		394		225		196				815
Ending balance: collectively evaluated for impairment	$	5,529	$	11,545	$	3,360	$	1,143	$	21,577
Loans receivable:
Ending balance	$	497,985	$	976,258	$	299,209	$	107,638	$	1,881,090
Ending balance: individually evaluated for impairment		4,772		3,603		2,450		262		11,087
Ending balance: collectively evaluated for impairment	$	493,213	$	972,655	$	296,759	$	107,376	$	1,870,003

			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 September 30, 2019 and December 31, 2018:

			Special
September 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	488,395	$	1,971	$	7,619	$	$	497,985
Real estate:
Commercial		948,854		2,644		24,760			976,258
Residential		296,565				2,644			299,209
Consumer		107,354				284			107,638
Total	$	1,841,168	$	4,615	$	35,307	$	$	1,881,090

			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 September 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 complete and the certificate of occupancy has been issued for the property. The Bank considers both of these credit relationships to be well secured and both relationships were current as of September 30, 2019.

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

		September 30, 2019		December 31, 2018
Commercial	$	3,343	$	776
Real estate:
Commercial		3,246		2,663
Residential		1,548		2,580
Consumer		262		212
Total	$	8,399	$	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
September 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	9	$	25	$	3,396	$	3,430	$	494,555	$	497,985	$	53
Real estate:
Commercial		776		159		3,300		4,235		972,023		976,258		54
Residential		656		996		1,827		3,479		295,730		299,209		279
Consumer		435		146		262		843		106,795		107,638
Total	$	1,876	$	1,326	$	8,785	$	11,987	$	1,869,103	$	1,881,090	$	386

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 nine months ended September 30, 2019 and September 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
September 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	3,766	$	4,272			$	4,131	$	18	$	3,974	$	52
Real estate:
Commercial		2,981		3,219				2,969		8		2,501		31
Residential		1,644		1,974				1,132		6		1,273		17
Consumer		262		275				257				226
Total		8,653		9,740				8,489		32		7,974		100
With an allowance recorded:
Commercial		1,006		1,008		394		1,213		9		1,010		21
Real estate:
Commercial		622		1,103		225		766				1,030		10
Residential		806		813		196		1,234		8		1,651		26
Consumer												20
Total		2,434		2,924		815		3,213		17		3,711		57
Total impaired loans
Commercial		4,772		5,280		394		5,344		27		4,984		73
Real estate:
Commercial		3,603		4,322		225		3,735		8		3,531		41
Residential		2,450		2,787		196		2,366		14		2,924		43
Consumer		262		275				257				246
Total	$	11,087	$	12,664	$	815	$	11,702	$	49	$	11,685	$	157

							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
September 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,356	$	1,538			$	1,269	$	17	$	1,257	$	50
Real estate:
Commercial		3,414		3,666				3,143		5		3,036		20
Residential		2,366		3,003				2,256		7		2,249		15
Consumer		142		149				101				131
Total		7,278		8,356				6,769		29		6,673		85
With an allowance recorded:
Commercial		939		1,086	$	93		1,020		7		1,089		23
Real estate:
Commercial		1,669		1,774		462		1,712		8		1,807		18
Residential		1,312		1,508		362		1,369		5		1,456		13
Consumer		14		14		14		9				11
Total		3,934		4,382		931		4,110		20		4,363		54
Total impaired loans
Commercial		2,295		2,624		93		2,289		24		2,346		73
Real estate:
Commercial		5,083		5,440		462		4,855		13		4,843		38
Residential		3,678		4,511		362		3,625		12		3,705		28
Consumer		156		163		14		110				142
Total	$	11,212	$	12,738	$	931	$	10,879	$	49	$	11,036	$	139

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 $2,262 at September 30, 2019, $2,779 at December 31, 2018 and $3,230 at September 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 during the three or nine months ended September 30, 2019.  For the three months ended September 30, 2018, there were no loans modified as troubled debt restructurings.  There was one commercial real estate loan modified as a troubled debt restructuring during the nine months ended September 30, 2018 in the amount of $340.  During the three months ended September 30, 2019, there were no payment defaults on troubled debt restructings and one commercial real estate loan paid-off totaling $332.  During the nine months ended September 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 September 30, 2018, there was one payment default on a restructured residential real estate loan with an outstanding balance of $6. During the nine months ended September 30, 2018, there were two payment defaults on  restructured residential real estate loans with a total outstanding balance of $64. 

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2019

Borrowings

Summary of short-term borrowings

	At and for the nine months ended September 30, 2019
						Weighted		Weighted
				Maximum		Average		Average
	Ending	Average		Month-End		Rate for		Rate at
	Balance	Balance		Balance		the nine months ended September 30, 2019		September 30,2019
FHLB advances	$	$	74,036	$	133,725	2.69	%		%

	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			September 30, 2019		December 31, 2018
December 2019			3.71	%	$	3,000		3,000
December 2019			3.37			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					7,209		8,606
					$	52,509	$	37,906

Schedule of maturities of long-term debt

2019	$	19,777
2020		17,963
2021		12,058
2022		2,156
2023		555
	$	52,509

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Other assets (Tables)

9 Months Ended

Sep. 30, 2019

Other assets.

Schedule of components of other assets

		September 30, 2019		December 31, 2018
Other real estate owned	$	485	$	376
Investment in low income housing partnership		7,020		7,377
Mortgage servicing rights		730		718
Bank owned life insurance		34,853		34,288
Restricted equity securities		4,470		7,462
Net deferred tax asset		3,853		5,081
Interest rate floor		1,170		553
Interest rate swaps		6,065		108
Other assets		6,554		7,774
Total	$	65,200	$	63,737

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Other comprehensive loss (Tables)

9 Months Ended

Sep. 30, 2019

Other comprehensive loss

Schedule of components of accumulated other comprehensive loss

		September 30, 2019		December 31, 2018
Net unrealized gain (loss) on investment securities available-for-sale	$	1,937	$	(3,251)
Income tax		407		(683)
Net of income taxes		1,530		(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		905		246
Income tax		190		52
Net of income taxes		715		194
Accumulated other comprehensive loss	$	(3,457)	$	(8,076)

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Derivatives and hedging activities - Offsetting Derivatives (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Offsetting of Derivative Assets
Gross Amounts of Recognized Assets	$ 7,235	$ 661
Net Amounts of Assets presented in the Balance Sheet	7,235	661
Net Amount	7,235	661
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities	6,085	138
Net Amounts of Assets presented in the Balance Sheet	6,085	138
Net Amount	$ 6,085	$ 138

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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	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Reclassified from Accumulated OCI into Income		$ (48)
Cash Flow Hedge | Interest Rate Floor
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Recognized in OCI on Derivative	$ 138	611
Amount of Gain Recognized in OCI Included Component	186	1,013
Amount of Gain Recognized in OCI Excluded Component	(48)	(402)
Amount of Loss Reclassified from Accumulated OCI into Income	(16)	(48)
Amount of Loss Reclassified from Accumulated OCI into Income Excluded Component	$ (16)	$ (48)

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Investment securities - Additional Information (Details) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($) shares	Dec. 31, 2018 USD ($)
Value of common stock	$ 14,778	$ 14,798
Visa Class A stock
Conversion ratio of common stock	1.6228
Visa Class B stock
Shares held | shares	44,982
Value of common stock	$ 0	0
Federal Home Loan Bank of Pittsburgh (FHLB)
Value of common stock	4,428	7,420
Atlantic Community Bankers Bank (ACBB)
Value of common stock	$ 42	$ 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 - Allocation of Allowance for Loan Losses and Related Loans by Major Classification of Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Allowance for loan losses:
Ending balance	$ 22,392	$ 21,930	$ 21,379	$ 20,413	$ 19,573	$ 18,960
Ending balance: individually evaluated for impairment	815		1,179
Ending balance: collectively evaluated for impairment	21,577		20,200
Loans receivable:
Ending balance	1,881,090		1,823,266
Ending balance: individually evaluated for impairment	11,087		9,641
Ending balance: collectively evaluated for impairment	1,870,003		1,813,625
Commercial
Allowance for loan losses:
Ending balance	5,923	6,142	5,516	5,469	5,191	5,513
Ending balance: individually evaluated for impairment	394		50
Ending balance: collectively evaluated for impairment	5,529		5,466
Loans receivable:
Ending balance	497,985		494,134
Ending balance: individually evaluated for impairment	4,772		2,237
Ending balance: collectively evaluated for impairment	493,213		491,897
Real estate Commercial
Allowance for loan losses:
Ending balance	11,770	11,042	10,736	10,442	10,058	8,944
Ending balance: individually evaluated for impairment	225		403
Ending balance: collectively evaluated for impairment	11,545		10,333
Loans receivable:
Ending balance	976,258		907,803
Ending balance: individually evaluated for impairment	3,603		3,121
Ending balance: collectively evaluated for impairment	972,655		904,682
Real estate Residential
Allowance for loan losses:
Ending balance	3,556	3,615	3,892	3,322	3,156
Ending balance: individually evaluated for impairment	196		666
Ending balance: collectively evaluated for impairment	3,360		3,226
Loans receivable:
Ending balance	299,209		299,876
Ending balance: individually evaluated for impairment	2,450		4,071
Ending balance: collectively evaluated for impairment	296,759		295,805
Consumer
Allowance for loan losses:
Ending balance	1,143	$ 1,131	1,235	$ 1,180	$ 1,168	$ 1,392
Ending balance: individually evaluated for impairment			60
Ending balance: collectively evaluated for impairment	1,143		1,175
Loans receivable:
Ending balance	107,638		121,453
Ending balance: individually evaluated for impairment	262		212
Ending balance: collectively evaluated for impairment	$ 107,376		$ 121,241

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Loans, net and allowance for loan losses - Major Classification of Loans by Past Due Status (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable, Recorded Investment, Past Due
Total Past Due	$ 11,987	$ 15,392
Current	1,869,103	1,807,874
Total Loans	1,881,090	1,823,266
Loans > 90 Days and Accruing	386	923
30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,876	6,104
60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,326	2,134
Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	8,785	7,154
Commercial
Financing Receivable, Recorded Investment, Past Due
Total Past Due	3,430	1,828
Current	494,555	492,306
Total Loans	497,985	494,134
Loans > 90 Days and Accruing	53
Commercial | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	9	973
Commercial | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	25	79
Commercial | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	3,396	776
Real estate Commercial
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4,235	4,843
Current	972,023	902,960
Total Loans	976,258	907,803
Loans > 90 Days and Accruing	54	73
Real estate Commercial | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	776	1,889
Real estate Commercial | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	159	218
Real estate Commercial | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	3,300	2,736
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Total Loans	299,209	299,876
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due	3,479	7,461
Current	295,730	292,415
Total Loans	299,209	299,876
Loans > 90 Days and Accruing	279	850
Real estate Residential | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	656	2,486
Real estate Residential | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	996	1,545
Real estate Residential | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,827	3,430
Consumer
Financing Receivable, Recorded Investment, Past Due
Total Past Due	843	1,260
Current	106,795	120,193
Total Loans	107,638	121,453
Consumer | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	435	756
Consumer | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	146	292
Consumer | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due	$ 262	$ 212

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Fair value estimates (Tables)

9 Months Ended

Sep. 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
September 30, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,066	$	24,066			$
U.S. Government-sponsored enterprises		91,990			$	91,990
State and Municipals:
Taxable		21,500				21,500
Tax-exempt		61,683				61,683
Mortgage-backed securities:
U.S. Government agencies		9,613				9,613
U.S. Government-sponsored enterprises		59,971				59,971
Common equity securities		297		297
Interest rate floor-other assets		1,170				1,170
Interest rate swap-other assets		6,065				6,065
Interest rate swap-other liabilities		(6,085)				(6,085)
Total	$	270,270	$	24,363	$	245,907	$

	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
September 30, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	1,619			$	1,619
Other real estate owned	$	357			$	357

	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
September 30, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	1,619	Appraisal of collateral	Appraisal adjustments	7.6% to 97.0%   (73.4)%
				Liquidation expenses	3.0% to 6.0% (5.3)%
Other real estate owned	$	357	Appraisal of collateral	Appraisal adjustments	20.0% to 48.8%   (31.2)%
				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
September 30, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	51,283	$	51,283	$	51,283
Investment securities:
Available-for-sale		268,823		268,823		24,066	$	244,757
Common equity securities		297		297		297
Held-to-maturity		7,808		8,016				8,016
Loans held for sale		1,390		1,390				1,390
Net loans		1,858,698		1,832,080					$	1,832,080
Accrued interest receivable		6,655		6,655				6,655
Mortgage servicing rights		730		1,739				1,739
Restricted equity securities		4,470		4,470				4,470
Interest rate floor		1,170		1,170				1,170
Interest rate swaps		6,065		6,065				6,065
Total	$	2,207,389	$	2,181,988
Financial liabilities:
Deposits	$	2,001,285	$	2,001,911			$	2,001,911
Long-term debt		52,509		52,875				52,875
Accrued interest payable		1,461		1,461				1,461
Interest rate swaps		6,085		6,085				6,085
Total	$	2,061,340	$	2,062,332

					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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Earnings per share (Tables)

9 Months Ended

Sep. 30, 2019

Earnings per share

Schedule of earnings per share

	2019				2018
For the Three Months Ended September 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,148	$	7,148	$	6,717	$	6,717
Average common shares outstanding		7,394,992		7,394,992		7,399,054		7,399,054
Earnings per share	$	0.97	$	0.97	$	0.91	$	0.91
	2019				2018
For the Nine Months Ended September 30	Basic		Diluted		Basic		Diluted
Net income	$	20,704	$	20,704	$	18,528	$	18,528
Average common shares outstanding		7,397,768		7,397,768		7,397,373		7,397,373
Earnings per share	$	2.80	$	2.80	$	2.50	$	2.50

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Summary of significant accounting policies (Details) $ in Thousands	9 Months Ended
	Sep. 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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Borrowings - Summary of Short-term Borrowings (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Short-term Debt
Ending Balance		$ 86,500
FHLB advances
Short-term Debt
Ending Balance		86,500
Average Balance	$ 74,036	133,834
Maximum Month-End Balance	$ 133,725	$ 189,275
Weighted Average Rate for	2.69%	2.05%
Weighted Average Rate at		2.62%

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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	9 Months Ended
	Sep. 30, 2019	Sep. 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	$ 153	$ 659
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		(48)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income		(48)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component		$ (48)

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Loans, net and allowance for loan losses - Information Concerning Nonaccrual Loans by Major Loan Classification (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	$ 8,399	$ 6,231
Commercial
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	3,343	776
Real estate Commercial
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	3,246	2,663
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	1,548	2,580
Consumer
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	$ 262	$ 212

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Investment securities - Fair Value and Unrealized Losses of Investment Securities in Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	$ 53,295	$ 25,905
12 Months or More, Fair Value	54,899	189,472
Less Than 12 Months, Unrealized Losses	411	132
12 Months or More, Unrealized Losses	297	3,924
Total, Fair Value	108,194	215,377
Total, Unrealized Losses	708	4,056
State and Municipals, Taxable
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	8,970
Less Than 12 Months, Unrealized Losses	238
Total, Fair Value	8,970
Total, Unrealized Losses	238
State and Municipals, Tax-exempt
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	6,139	9,022
12 Months or More, Fair Value	1,101	52,352
Less Than 12 Months, Unrealized Losses	29	74
12 Months or More, Unrealized Losses	2	714
Total, Fair Value	7,240	61,374
Total, Unrealized Losses	31	788
U.S. Treasuries
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	4,524	1,995
12 Months or More, Fair Value	5,482	19,671
Less Than 12 Months, Unrealized Losses	2	2
12 Months or More, Unrealized Losses	15	363
Total, Fair Value	10,006	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	29,242	2,037
12 Months or More, Fair Value	38,468	89,729
Less Than 12 Months, Unrealized Losses	129	1
12 Months or More, Unrealized Losses	211	2,182
Total, Fair Value	67,710	91,766
Total, Unrealized Losses	340	2,183
Mortgage-backed Securities, U.S. Government agencies
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	423
12 Months or More, Fair Value	4,346	7,800
Less Than 12 Months, Unrealized Losses	1
12 Months or More, Unrealized Losses	17	84
Total, Fair Value	4,769	7,800
Total, Unrealized Losses	18	84
Commercial mortgage-backed Securities, U.S. Government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	3,997
12 Months or More, Fair Value	5,502	6,039
Less Than 12 Months, Unrealized Losses	12
12 Months or More, Unrealized Losses	52	230
Total, Fair Value	9,499	6,039
Total, Unrealized Losses	$ 64	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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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		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Dec. 31, 2018
Allowance for loan losses:
Beginning Balance	$ 21,930	$ 19,573	$ 21,379	$ 18,960
Charge-offs	(308)	(328)	(1,258)	(2,152)
Recoveries	70	118	171	455
Provisions	700	1,050	2,100	3,150
Ending balance	22,392	20,413	22,392	20,413
Beginning Balance	21,930	19,573	21,379	18,960
Ending balance: individually evaluated for impairment					$ 815	$ 1,179
Charge-offs	(308)	(328)	(1,258)	(2,152)
Ending balance: collectively evaluated for impairment					21,577	20,200
Recoveries	70	118	171	455
Ending balance: loans acquired with deteriorated credit quality	21,930	19,573	21,379	18,960	22,392	21,379
Provisions	700	1,050	2,100	3,150
Loans receivable:
Total Loans					1,881,090	1,823,266
Ending balance: individually evaluated for impairment					11,087	9,641
Ending balance: collectively evaluated for impairment					1,870,003	1,813,625
Total Loans					1,881,090	1,823,266
Ending balance	22,392	20,413	22,392	20,413
Ending balance: individually evaluated for impairment					11,087	9,641
Ending balance: collectively evaluated for impairment					1,870,003	1,813,625
Commercial
Allowance for loan losses:
Beginning Balance	6,142	5,191	5,516	5,513
Charge-offs	(26)	(148)	(113)	(150)
Recoveries	12	12	22	128
Provisions	(205)	414	498	(22)
Ending balance	5,923	5,469	5,923	5,469
Beginning Balance	6,142	5,191	5,516	5,513
Ending balance: individually evaluated for impairment					394	50
Charge-offs	(26)	(148)	(113)	(150)
Ending balance: collectively evaluated for impairment					5,529	5,466
Recoveries	12	12	22	128
Ending balance: loans acquired with deteriorated credit quality	6,142	5,191	5,516	5,513	5,923	5,516
Provisions	(205)	414	498	(22)
Loans receivable:
Total Loans					497,985	494,134
Ending balance: individually evaluated for impairment					4,772	2,237
Ending balance: collectively evaluated for impairment					493,213	491,897
Total Loans					497,985	494,134
Ending balance	5,923	5,469	5,923	5,469
Ending balance: individually evaluated for impairment					4,772	2,237
Ending balance: collectively evaluated for impairment					493,213	491,897
Real estate Commercial
Allowance for loan losses:
Beginning Balance	11,042	10,058	10,736	8,944
Charge-offs	(34)	(63)	(383)	(1,232)
Recoveries		26		83
Provisions	762	421	1,417	2,647
Ending balance	11,770	10,442	11,770	10,442
Beginning Balance	11,042	10,058	10,736	8,944
Ending balance: individually evaluated for impairment					225	403
Charge-offs	(34)	(63)	(383)	(1,232)
Ending balance: collectively evaluated for impairment					11,545	10,333
Recoveries		26		83
Ending balance: loans acquired with deteriorated credit quality	11,042	10,058	10,736	8,944	11,770	10,736
Provisions	762	421	1,417	2,647
Loans receivable:
Total Loans					976,258	907,803
Ending balance: individually evaluated for impairment					3,603	3,121
Ending balance: collectively evaluated for impairment					972,655	904,682
Total Loans					976,258	907,803
Ending balance	11,770	10,442	11,770	10,442
Ending balance: individually evaluated for impairment					3,603	3,121
Ending balance: collectively evaluated for impairment					972,655	904,682
Real estate Residential
Allowance for loan losses:
Beginning Balance	3,615	3,156	3,892
Charge-offs	(104)
Recoveries	11	13
Provisions	34	153
Ending balance	3,556	3,322	3,556	3,322
Beginning Balance	3,615	3,156	3,892
Ending balance: individually evaluated for impairment					196	666
Charge-offs	(104)
Ending balance: collectively evaluated for impairment					3,360	3,226
Recoveries	11	13
Ending balance: loans acquired with deteriorated credit quality	3,615	3,156	3,892	3,322	3,556	3,892
Provisions	34	153
Loans receivable:
Total Loans					299,209	299,876
Ending balance: individually evaluated for impairment					2,450	4,071
Ending balance: collectively evaluated for impairment					296,759	295,805
Total Loans					299,209	299,876
Ending balance	3,556	3,322	3,556	3,322
Ending balance: individually evaluated for impairment					2,450	4,071
Ending balance: collectively evaluated for impairment					296,759	295,805
Real estate Residential
Allowance for loan losses:
Beginning Balance			3,892	3,111
Charge-offs			(406)	(381)
Recoveries			27	80
Provisions			43	512
Ending balance	3,556	3,322	3,556	3,322
Beginning Balance			3,892	3,111
Charge-offs			(406)	(381)
Recoveries			27	80
Ending balance: loans acquired with deteriorated credit quality	3,556	3,322	3,892	3,111	3,556	3,892
Provisions			43	512
Loans receivable:
Total Loans					299,209	299,876
Total Loans					299,209	299,876
Ending balance	3,556	3,322	3,556	3,322
Consumer
Allowance for loan losses:
Beginning Balance	1,131	1,168	1,235	1,392
Charge-offs	(144)	(117)	(356)	(389)
Recoveries	47	67	122	164
Provisions	109	62	142	13
Ending balance	1,143	1,180	1,143	1,180
Beginning Balance	1,131	1,168	1,235	1,392
Ending balance: individually evaluated for impairment						60
Charge-offs	(144)	(117)	(356)	(389)
Ending balance: collectively evaluated for impairment					1,143	1,175
Recoveries	47	67	122	164
Ending balance: loans acquired with deteriorated credit quality	1,131	1,168	1,235	1,392	1,143	1,235
Provisions	109	62	142	13
Loans receivable:
Total Loans					107,638	121,453
Ending balance: individually evaluated for impairment					262	212
Ending balance: collectively evaluated for impairment					107,376	121,241
Total Loans					107,638	121,453
Ending balance	$ 1,143	$ 1,180	$ 1,143	$ 1,180
Ending balance: individually evaluated for impairment					262	212
Ending balance: collectively evaluated for impairment					$ 107,376	$ 121,241

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Income taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income taxes
Federal statutory rate	12.20%	11.80%	11.60%	11.80%
Investment and other tax credits	$ 394	$ 276	$ 1,172	$ 819

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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	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Impaired loans	$ 1,619	$ 2,809
Other real estate owned	357	234
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Impaired loans	1,619	2,809
Other real estate owned	$ 357	$ 234

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Loans, net and allowance for loan losses - Loans Modified Resulting in Troubled Debt Restructurings (Details) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019 USD ($) loan payment	Sep. 30, 2018 USD ($) loan payment	Sep. 30, 2019 USD ($) loan	Sep. 30, 2018 USD ($) loan payment	Dec. 31, 2018 USD ($)
Number of loans modified | loan	0	0	0
Pre-Modification Outstanding Recorded Investment			$ 2,262	$ 3,230	$ 2,779
Number of defaults on loans restructured | payment	0
Real estate Commercial
Number of loans modified | loan			2	1
Number of defaults on loans restructured			$ 335
Loans modified as troubled debt restructuring				$ 340
Number of loans repaid | loan	1
Loan repaid	$ 332
Real estate Residential
Number of defaults on loans restructured | payment		1		2
Loans modified as troubled debt restructuring		$ 6		$ 64

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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	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2019
Profit Sharing plan
Company contribution	$ 2,700
Safe harbor contribution		$ 18
Discretionary contributions		92
Future annual premium		$ 0

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Consolidated Statements of Cash Flows $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)
Cash flows from operating activities:
Net income	$ 20,704	$ 18,528
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	1,881	1,728
Amortization of right-of-use lease asset	293
Amortization of deferred loan costs	(159)	729
Amortization of intangibles	557	670
Amortization of low income housing partnerships	357	349
Provision for loan losses	2,100	3,150
Net unrealized loss on equity investment securities	(6)
Net loss on sale of other real estate owned	20	(17)
Loans originated for sale	(11,945)	(9,931)
Proceeds from sale of loans originated for sale	11,374	10,013
Net gain on sale of loans originated for sale	(70)	(74)
Net amortization of investment securities	1,279	1,718
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	(567)	(568)
Stock based compensation	397	188
Net change in:
Accrued interest receivable	460	371
Other assets	(4,633)	516
Accrued interest payable	266	248
Other liabilities	4,998	(2,967)
Net cash provided by operating activities	27,283	24,360
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	45,790	24,087
Held-to-maturity	547	710
Purchases of investment securities:
Available-for-sale	(50,670)	(32,723)
Net purchase of restricted equity securities	2,992	735
Proceeds from sale of student loan portfolio		5,103
Proceeds from sale of credit card loan portfolio		2,407
Net increase in lending activities	(58,987)	(96,916)
Purchases of premises and equipment	(4,296)	(1,979)
Proceeds from the sale of premises and equipment	21	341
Proceeds from investment in life insurance		304
Proceeds from sale of other real estate owned	111	582
Net cash used in investing activities	(54,815)	(97,349)
Cash flows from financing activities:
Net increase (decrease) in deposits	126,263	108,846
Proceeds from long-term debt	16,000
Repayment of long-term debt	(1,397)	(1,273)
Net (decrease) increase in short-term borrowings	(86,500)	(24,225)
Retirement of common stock	(621)
Cash dividends paid	(7,546)	(7,252)
Net cash provided by financing activities	46,199	76,096
Net increase in cash and cash equivalents	18,667	3,107
Cash and cash equivalents at beginning of period	32,616	37,488
Cash and cash equivalents at end of period	51,283	40,595
Cash paid during the period for:
Interest	8,842	9,140
Income taxes	3,300	2,550
Noncash items:
Transfers of loans to other real estate	253	$ 623
Initial recognition of right-of-use assets	6,523
Initial recognition of lease liability	$ 6,523

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Investment securities - Summary of Amortized Cost and Fair Value of Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Amortized Cost of Held-to-maturity Securities
Amortized Cost, After ten years, Held to maturity	$ 6,853
Amortized Cost, Held to maturity	6,853
Amortized Cost, Mortgage-backed securities, Held to maturity	955
Held-to-maturity, Amortized Cost	7,808	$ 8,361
Fair Value of Held-to-maturity Securities
Fair Value, After ten years, Held to maturity	7,035
Fair Value, Held to maturity	7,035
Fair Value, Mortgage-backed securities, Held to maturity	981
Held to maturity, Fair Value	$ 8,016	$ 8,380

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Statement of Financial Position
Held-to-maturity, Fair value	$ 8,016	$ 8,380
Common stock, par value	$ 2.00	$ 2.00
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	7,388,760	7,399,054
Common stock, shares outstanding	7,388,760	7,399,054

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Other comprehensive loss - Components of Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Other comprehensive loss
Net unrealized gain (loss) on investment securities available-for-sale	$ 1,937	$ (3,251)
Income tax	407	(683)
Net of income taxes	1,530	(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	905	246
Income tax	190	52
Net of income taxes	715	194
Accumulated other comprehensive loss	$ (3,457)	$ (8,076)

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Investment securities - Amortized Cost and Fair Value of Investment Securities Aggregated by Investment Category (Details) $ in Thousands	Sep. 30, 2019 USD ($) company	Dec. 31, 2018 USD ($)
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	$ 266,886	$ 272,933
Available-for-sale, Gross Unrealized Gains	2,644	757
Available-for-sale, Gross Unrealized Losses	707	4,008
Available-for-sale, Fair Value	268,823	269,682
Held-to-maturity, Amortized Cost	7,808	8,361
Held-to-maturity, Gross Unrealized Gains	209	67
Held-to-maturity, Gross Unrealized Losses	1	48
Held-to-maturity, Fair value	8,016	8,380
Equity investments carried at fair value	$ 297	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	$ 20
Mortgage-backed Securities, U.S. Government agencies
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	9,536	12,663
Available-for-sale, Gross Unrealized Gains	95	50
Available-for-sale, Gross Unrealized Losses	18	84
Available-for-sale, Fair Value	9,613	12,629
Held-to-maturity, Amortized Cost	33	42
Held-to-maturity, Fair value	33	42
Mortgage-backed Securities, U.S. Government-sponsored enterprises
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	45,284	33,149
Available-for-sale, Gross Unrealized Gains	820	49
Available-for-sale, Gross Unrealized Losses	63	401
Available-for-sale, Fair Value	46,041	32,797
Held-to-maturity, Amortized Cost	922	1,464
Held-to-maturity, Gross Unrealized Gains	27	55
Held-to-maturity, Gross Unrealized Losses	1	5
Held-to-maturity, Fair value	948	1,514
Commercial mortgage-backed Securities, U.S. Government-sponsored enterprises
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	13,694	6,269
Available-for-sale, Gross Unrealized Gains	236
Available-for-sale, Gross Unrealized Losses		230
Available-for-sale, Fair Value	13,930	6,039
U.S. Government-sponsored enterprises state and municipals
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	92,223	94,999
Available-for-sale, Gross Unrealized Gains	107	2
Available-for-sale, Gross Unrealized Losses	340	2,183
Available-for-sale, Fair Value	91,990	92,818
U.S. Treasuries
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	23,963	25,948
Available-for-sale, Gross Unrealized Gains	120	9
Available-for-sale, Gross Unrealized Losses	17	365
Available-for-sale, Fair Value	24,066	25,592
Common equity securities.
Schedule of Trading Securities and Other Trading Assets
Equity investments carried at fair value	297	291
State and Municipals, Taxable
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	21,392	13,544
Available-for-sale, Gross Unrealized Gains	346	309
Available-for-sale, Gross Unrealized Losses	238
Available-for-sale, Fair Value	21,500	13,853
State and Municipals, Tax-exempt
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	60,794	86,361
Available-for-sale, Gross Unrealized Gains	920	338
Available-for-sale, Gross Unrealized Losses	31	745
Available-for-sale, Fair Value	61,683	85,954
Held-to-maturity, Amortized Cost	6,853	6,855
Held-to-maturity, Gross Unrealized Gains	182	12
Held-to-maturity, Gross Unrealized Losses		43
Held-to-maturity, Fair value	$ 7,035	$ 6,824

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Borrowings

9 Months Ended

Sep. 30, 2019

Borrowings

Borrowings

10. Borrowings

Short-term borrowings consists of FHLB advances representing overnight borrowings.  The table below outlines short-term borrowings at September 30, 2019 and December 31, 2018:

	At and for the nine months ended September 30, 2019
						Weighted		Weighted
				Maximum		Average		Average
	Ending	Average		Month-End		Rate for		Rate at
	Balance	Balance		Balance		the nine months ended September 30, 2019		September 30,2019
FHLB advances	$	$	74,036	$	133,725	2.69	%		%

	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 September 30, 2019, the maximum borrowing capacity was $719,470 of which $52,509 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. However, growth in deposit balances during the third quarter of 2019 has allowed us to pay down the short-term borrowings to zero at September 30, 2019.  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 September 30, 2019 and December 31, 2018 are as follows:

	Interest Rate
Due	Fixed		Adjustable			September 30, 2019		December 31, 2018
December 2019			3.71	%	$	3,000		3,000
December 2019			3.37			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					7,209		8,606
					$	52,509	$	37,906

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

2019	$	19,777
2020		17,963
2021		12,058
2022		2,156
2023		555
	$	52,509

None of the advances from the FHLB are convertible. At September 30, 2019, long-term debt consist of $43,209 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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Other assets

9 Months Ended

Sep. 30, 2019

Other assets.

Other assets

6. Other assets:

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

		September 30, 2019		December 31, 2018
Other real estate owned	$	485	$	376
Investment in low income housing partnership		7,020		7,377
Mortgage servicing rights		730		718
Bank owned life insurance		34,853		34,288
Restricted equity securities		4,470		7,462
Net deferred tax asset		3,853		5,081
Interest rate floor		1,170		553
Interest rate swaps		6,065		108
Other assets		6,554		7,774
Total	$	65,200	$	63,737

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Derivatives and hedging activities (Tables)

9 Months Ended

Sep. 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 September 30, 2019			As of December 31, 2018 (1)			As of September 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	$	1,170		$	553
Total derivatives designated as hedging instruments				$	1,170		$	553
Derivatives not designated as hedging instruments
Interest Rate Swaps	$	126,574	Other Assets	$	6,065	Other Assets	$	108	Other Liabilities	$	6,085	Other Liabilities	$	138
Total derivatives not designated as hedging instruments				$	6,065		$	108		$	6,085		$	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

September 30, 2019

Income

September 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

138

$

186

$

(48)

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

September 30, 2019

Income

September 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

611

$

1,013

$

(402)

Interest Income

$

(48)

$

$

(48)

* 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	$	(48)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other  comprehensive income into income	$	(48)
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	$	(48)

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		Nine Months Ended		Three Months Ended		Nine Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	September 30, 2019		September 30, 2019		September 30, 2018		September 30, 2018
Interest Rate Swaps	Other non-interest income	$	355	$	9	$	18	$	103
Fee Income	Other  income / (expense)	$		$	1,136	$		$	53

Schedule of offsetting derivatives

Offsetting of Derivative Assets
as of September 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	$	7,235	$	$	7,235	$		$	7,235
Offsetting of Derivative Liabilities
as of September 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	$	6,085	$	$	6,085	$		$	6,085
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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Loans, net and allowance for loan losses (Tables)

9 Months Ended

Sep. 30, 2019

Loans, net and allowance for loan losses

Schedule of major classifications of loans outstanding

		September 30, 2019		December 31, 2018
Commercial	$	497,985	$	494,134
Real estate:
Commercial		976,258		907,803
Residential		299,209		299,876
Consumer		107,638		121,453
Total	$	1,881,090	$	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 nine months ended September 30, 2019 and 2018 are summarized as follows:

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2019	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Charge-offs		(26)		(34)		(104)		(144)		(308)
Recoveries		12				11		47		70
Provisions		(205)		762		34		109		700
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
			Real estate
September 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2018	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573
Charge-offs		(148)		(63)				(117)		(328)
Recoveries		12		26		13		67		118
Provisions		414		421		153		62		1,050
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

			Real estate
September 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		(113)		(383)		(406)		(356)		(1,258)
Recoveries		22				27		122		171
Provisions		498		1,417		43		142		2,100
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
			Real estate
September 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		(150)		(1,232)		(381)		(389)		(2,152)
Recoveries		128		83		80		164		455
Provisions		(22)		2,647		512		13		3,150
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

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

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
Ending balance: individually evaluated for impairment		394		225		196				815
Ending balance: collectively evaluated for impairment	$	5,529	$	11,545	$	3,360	$	1,143	$	21,577
Loans receivable:
Ending balance	$	497,985	$	976,258	$	299,209	$	107,638	$	1,881,090
Ending balance: individually evaluated for impairment		4,772		3,603		2,450		262		11,087
Ending balance: collectively evaluated for impairment	$	493,213	$	972,655	$	296,759	$	107,376	$	1,870,003

			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
September 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	488,395	$	1,971	$	7,619	$	$	497,985
Real estate:
Commercial		948,854		2,644		24,760			976,258
Residential		296,565				2,644			299,209
Consumer		107,354				284			107,638
Total	$	1,841,168	$	4,615	$	35,307	$	$	1,881,090

			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

		September 30, 2019		December 31, 2018
Commercial	$	3,343	$	776
Real estate:
Commercial		3,246		2,663
Residential		1,548		2,580
Consumer		262		212
Total	$	8,399	$	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
September 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	9	$	25	$	3,396	$	3,430	$	494,555	$	497,985	$	53
Real estate:
Commercial		776		159		3,300		4,235		972,023		976,258		54
Residential		656		996		1,827		3,479		295,730		299,209		279
Consumer		435		146		262		843		106,795		107,638
Total	$	1,876	$	1,326	$	8,785	$	11,987	$	1,869,103	$	1,881,090	$	386

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
September 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	3,766	$	4,272			$	4,131	$	18	$	3,974	$	52
Real estate:
Commercial		2,981		3,219				2,969		8		2,501		31
Residential		1,644		1,974				1,132		6		1,273		17
Consumer		262		275				257				226
Total		8,653		9,740				8,489		32		7,974		100
With an allowance recorded:
Commercial		1,006		1,008		394		1,213		9		1,010		21
Real estate:
Commercial		622		1,103		225		766				1,030		10
Residential		806		813		196		1,234		8		1,651		26
Consumer												20
Total		2,434		2,924		815		3,213		17		3,711		57
Total impaired loans
Commercial		4,772		5,280		394		5,344		27		4,984		73
Real estate:
Commercial		3,603		4,322		225		3,735		8		3,531		41
Residential		2,450		2,787		196		2,366		14		2,924		43
Consumer		262		275				257				246
Total	$	11,087	$	12,664	$	815	$	11,702	$	49	$	11,685	$	157

							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
September 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,356	$	1,538			$	1,269	$	17	$	1,257	$	50
Real estate:
Commercial		3,414		3,666				3,143		5		3,036		20
Residential		2,366		3,003				2,256		7		2,249		15
Consumer		142		149				101				131
Total		7,278		8,356				6,769		29		6,673		85
With an allowance recorded:
Commercial		939		1,086	$	93		1,020		7		1,089		23
Real estate:
Commercial		1,669		1,774		462		1,712		8		1,807		18
Residential		1,312		1,508		362		1,369		5		1,456		13
Consumer		14		14		14		9				11
Total		3,934		4,382		931		4,110		20		4,363		54
Total impaired loans
Commercial		2,295		2,624		93		2,289		24		2,346		73
Real estate:
Commercial		5,083		5,440		462		4,855		13		4,843		38
Residential		3,678		4,511		362		3,625		12		3,705		28
Consumer		156		163		14		110				142
Total	$	11,212	$	12,738	$	931	$	10,879	$	49	$	11,036	$	139

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Loans, net and allowance for loan losses - Net Deferred Loan Costs (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans, net and allowance for loan losses
Net deferred loan costs	$ 903	$ 744

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Loans, net and allowance for loan losses - Major Classification of Loans Portfolio Summarized by Credit Quality (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 1,881,090	$ 1,823,266
Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	497,985	494,134
Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	976,258	907,803
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	299,209	299,876
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	299,209	299,876
Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	107,638	121,453
Pass
Accounts, Notes, Loans and Financing Receivable
Loans, net	1,841,168	1,795,367
Pass | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	488,395	491,531
Pass | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	948,854	886,849
Pass | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	296,565	295,758
Pass | Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	107,354	121,229
Special Mention
Accounts, Notes, Loans and Financing Receivable
Loans, net	4,615	10,160
Special Mention | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	1,971	869
Special Mention | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	2,644	8,934
Special Mention | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net		357
Substandard
Accounts, Notes, Loans and Financing Receivable
Loans, net	35,307	17,739
Substandard | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	7,619	1,734
Substandard | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	24,760	12,020
Substandard | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	2,644	3,761
Substandard | Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 284	$ 224

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Borrowings - Long-term debt advances (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Debt Instrument
Long-term debt	$ 52,509	$ 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)	3.71%
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)	3.37%
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	$ 7,209	$ 8,606
Fixed interest rate (as a percent)	4.69%

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Derivatives and hedging activities - Credit-risk-related Contingent Features (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Derivatives
Derivative Liability	$ 6,085	$ 138
Credit-risk contract
Derivatives
Derivative Liability	20	29
Derivative, Collateral, Obligation to Return Cash	$ 5,120	$ 0

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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 ($)	Sep. 30, 2019 USD ($) security	Dec. 31, 2018 USD ($)
Derivatives, Fair Value
Asset Derivatives		$ 7,235	$ 661
Liability Derivatives		6,085	138
Interest Receivable		6,655	7,115
Interest Payable		1,461	1,195
Interest Rate Floor
Derivatives, Fair Value
Asset Derivatives		1,170	553
Interest Rate Swaps
Derivatives, Fair Value
Asset Derivatives		6,065	108
Derivatives designated as hedging instruments
Derivatives, Fair Value
Asset Derivatives		1,170	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		1,170
Derivatives designated as hedging instruments | Interest Rate Swaps | Other Assets.
Derivatives, Fair Value
Asset Derivatives		6,065	108
Derivatives designated as hedging instruments | Interest Rate Swaps | Other Liabilities.
Derivatives, Fair Value
Liability Derivatives		6,085	138
Derivatives not designated as hedging instruments
Derivatives, Fair Value
Asset Derivatives		6,065	108
Liability Derivatives		$ 6,085	138
Derivatives not designated as hedging instruments | Interest Rate Swaps
Derivatives, Fair Value
Number of instruments held | security		22
Notional amount		$ 126,574
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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Fair value estimates - Carrying and Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Investment securities:
Available-for-sale	$ 268,823	$ 269,682
Common equity securities	297	291
Held-to-maturity	8,016	8,380
Loans held for sale	1,390	749
Mortgage servicing rights	730	718
Other assets	65,200	63,737
Carrying Value
Financial assets:
Cash and cash equivalents	51,283	32,616
Investment securities:
Available-for-sale	268,823	269,682
Common equity securities	297	291
Held-to-maturity	7,808	8,361
Loans held for sale	1,390	749
Net loans	1,858,698	1,801,887
Accrued interest receivable	6,655	7,115
Mortgage servicing rights	730	718
Restricted equity securities	4,470	7,462
Interest rate floor	1,170	553
Interest rate swaps	6,065	108
Total assets	2,207,389	2,129,542
Financial liabilities:
Deposits	2,001,285	1,875,022
Short-term borrowings		86,500
Long-term debt	52,509	37,906
Accrued interest payable	1,461	1,195
Interest rate swap	6,085	138
Total liabilities	2,061,340	2,000,761
Fair Value
Financial assets:
Cash and cash equivalents	51,283	32,616
Investment securities:
Available-for-sale	268,823	269,682
Common equity securities	297	291
Held-to-maturity	8,016	8,380
Loans held for sale	1,390	749
Net loans	1,832,080	1,762,449
Accrued interest receivable	6,655	7,115
Mortgage servicing rights	1,739	1,710
Restricted equity securities	4,470	7,462
Interest rate floor	1,170	553
Interest rate swaps	6,065	108
Total assets	2,181,988	2,091,115
Financial liabilities:
Deposits	2,001,911	1,874,520
Short-term borrowings		86,500
Long-term debt	52,875	38,071
Accrued interest payable	1,461	1,195
Interest rate swap	6,085	138
Total liabilities	2,062,332	2,000,424
Level 1
Financial assets:
Cash and cash equivalents	51,283	32,616
Investment securities:
Available-for-sale	24,066	25,952
Common equity securities	297	291
Level 2
Investment securities:
Available-for-sale	244,757	244,090
Held-to-maturity	8,016	8,380
Loans held for sale	1,390	749
Accrued interest receivable	6,655	7,115
Mortgage servicing rights	1,739	1,710
Restricted equity securities	4,470	7,462
Interest rate floor	1,170	553
Interest rate swaps	6,065	108
Financial liabilities:
Deposits	2,001,911	1,874,520
Short-term borrowings		86,500
Long-term debt	52,875	38,071
Accrued interest payable	1,461	1,195
Interest rate swap	6,085	138
Level 3
Investment securities:
Net loans	$ 1,832,080	$ 1,762,449

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Fair value estimates - Transfers Between Levels (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 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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Borrowings - Maturities of long-term debt (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Borrowings
2019	$ 19,777
2020	17,963
2021	12,058
2022	2,156
2023	555
Total long-term debt	$ 52,509	$ 37,906

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Summary of significant accounting policies (Policies)

9 Months Ended

Sep. 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 nine months ended and as of September 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”) 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 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 October 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company currently qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. 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” which 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.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for the Company). Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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Employee benefit plans

9 Months Ended

Sep. 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 nine months ended September 30, salaries and employee benefits expense includes approximately $327 and $1,081, respectively in 2019 and $330 and $1,073, respectively in 2018 relating to the employee benefit plans.

	Pension Benefits
Three Months Ended September 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	128	$	233
Expected return on plan assets		(217)		(360)
Amortization of unrecognized net gain		45		73
Net periodic benefit cost	$	(44)	$	(54)
	Pension Benefits
Nine Months Ended September 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	447	$	389
Expected return on plan assets		(759)		(600)
Amortization of unrecognized net gain		159		122
Net periodic benefit cost	$	(153)	$	(89)

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 September 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.

For the nine months ended September 30, 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 $157 and $397 for the three and nine months ended September 30, 2019 for awards granted under the 2017 Plan. The Company recognized compensation expense of $52 and $95 for the three and nine months ended September 30, 2018 for awards granted under the 2017 Plan and $31 and $93 for awards granted under the 2008 Plan. As of September 30, 2019, the Company had $938 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 1.4 years.

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Investment securities

9 Months Ended

Sep. 30, 2019

Investment securities

Investment securities

4. Investment securities:

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,963	$	120	$	17	$	24,066
U.S. Government-sponsored enterprises		92,223		107		340		91,990
State and municipals:
Taxable		21,392		346		238		21,500
Tax-exempt		60,794		920		31		61,683
Residential Mortgage-backed securities:
U.S. Government agencies		9,536		95		18		9,613
U.S. Government-sponsored enterprises		45,284		820		63		46,041
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		13,694		236				13,930
Total	$	266,886	$	2,644	$	707	$	268,823
Held-to-maturity:
Tax-exempt state and municipals	$	6,853	$	182			$	7,035
Residential Mortgage-backed securities:
U.S. Government agencies		33						33
U.S. Government-sponsored enterprises		922		27	$	1		948
Total	$	7,808	$	209	$	1	$	8,016

			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 September 30, 2019 and December 31, 2018, we had $297 and $291 respectively, in equity securities recorded at fair value. At September 30, 2019, the fair value of our equity portfolio exceeded the cost basis by $20.  The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2019 (in thousands):

Three Months Ended September 30,		2019		2018
Net gains recognized during the period on equity securities	$	14	$	14
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$	14	$	14
For the Nine Months Ended September 30,		2019		2018
Net gains recognized during the period on equity securities	$	6	$	14
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$	6	$	14

Restricted Investment In Stock

Restricted investment in stock includes FHLB with a carrying cost of $4,428 and $7,420 at September 30, 2019 and December 31, 2018, respectively, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42, and VISA Class B stock with a carrying cost of $0 at September 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 bank’s use of FHLB’s services.  The decrease in FHLB stock from December 31, 2018 is due to lower borrowings.

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 (1.6228 as of September 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 September 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 September 30, 2019, is summarized as follows:

	Fair
September 30, 2019	Value
Within one year	$	33,989
After one but within five years		121,112
After five but within ten years		11,846
After ten years		28,871
		195,818
Mortgage-backed and other amortizing securities		73,005
Total	$	268,823

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

	Amortized		Fair
September 30, 2019	Cost		Value
Within one year
After one but within five years
After five but within ten years
After ten years	$	6,853	$	7,035
		6,853		7,035
Mortgage-backed securities		955		981
Total	$	7,808	$	8,016

Securities with a carrying value of $142,963 and $161,647 at September 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 September 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 September 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
September 30, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	4,524	$	2	$	5,482	$	15	$	10,006	$	17
U.S. Government-sponsored enterprises		29,242		129		38,468		211		67,710		340
State and municipals:
Taxable		8,970		238						8,970		238
Tax-exempt		6,139		29		1,101		2		7,240		31
Residential Mortgage-backed securities:
U.S. Government agencies		423		1		4,346		17		4,769		18
U.S. Government-sponsored enterprises		3,997		12		5,502		52		9,499		64
Total	$	53,295	$	411	$	54,899	$	297	$	108,194	$	708

	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 72 investment securities, consisting of 10 tax-exempt and 9 taxable state and municipal obligations, 4 U.S. Treasury securities, 25 U.S. Government-sponsored enterprise securities, and 24 mortgage-backed securities that were in unrealized loss positions at September 30, 2019. Of these securities, 2 U.S. Treasury securities, 17 U.S. Government-sponsored enterprise securities, 2 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 September 30, 2019. There was no OTTI recognized for the three or nine months ended September 30, 2019 and 2018.

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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			5,854		5,854
Other comprehensive income (loss), net of income taxes				(1,875)	(1,875)
Dividends declared			(2,368)		(2,368)
Stock based compensation		37			37
Balance at Mar. 31, 2018	14,793	135,080	124,841	(8,090)	266,624
Balance at Dec. 31, 2017	14,793	135,043	121,353	(6,213)	264,976
Net income					18,528
Other comprehensive income (loss), net of income taxes					(3,469)
Balance at Sep. 30, 2018	14,798	135,226	132,631	(9,684)	272,971
Reclassification related to adoption of ASU 2016-01			2	(2)
Balance at Mar. 31, 2018	14,793	135,080	124,841	(8,090)	266,624
Net income			5,957		5,957
Other comprehensive income (loss), net of income taxes				(663)	(663)
Dividends declared			(2,442)		(2,442)
Stock based compensation		68			68
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
Net income			6,717		6,717
Other comprehensive income (loss), net of income taxes				(931)	(931)
Dividends declared			(2,442)		(2,442)
Stock based compensation		83			83
Balance at Sep. 30, 2018	14,798	135,226	132,631	(9,684)	272,971
Balance at Dec. 31, 2018	14,798	135,310	136,582	(8,076)	278,614
Net income			6,412		6,412
Other comprehensive income (loss), net of income taxes				1,976	1,976
Dividends declared			(2,516)		(2,516)
Stock based compensation		83			83
Balance at Mar. 31, 2019	14,798	135,393	140,478	(6,100)	284,569
Balance at Dec. 31, 2018	14,798	135,310	136,582	(8,076)	278,614
Net income					20,704
Other comprehensive income (loss), net of income taxes					4,619
Balance at Sep. 30, 2019	14,778	135,106	149,740	(3,457)	296,167
Balance at Mar. 31, 2019	14,798	135,393	140,478	(6,100)	284,569
Net income			7,144		7,144
Other comprehensive income (loss), net of income taxes				2,395	2,395
Dividends declared			(2,516)		(2,516)
Stock based compensation		157			157
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
Net income			7,148		7,148
Other comprehensive income (loss), net of income taxes				248	248
Dividends declared			(2,514)		(2,514)
Stock based compensation		157			157
Common stock grants awarded, net of unearned compensation	(20)	(435)			(455)
Balance at Sep. 30, 2019	$ 14,778	$ 135,106	$ 149,740	$ (3,457)	$ 296,167

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Oct. 31, 2019
Document And Entity Information
Document Type	10-Q
Document Period End Date	Sep. 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		7,388,480
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Central Index Key	0001056943
Amendment Flag	false

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Earnings per share - Shares Considered Anti-dilutive (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings per share
Anti-dilutive shares	0	0	0	0

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Other comprehensive loss

9 Months Ended

Sep. 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 September 30, 2019 and December 31, 2018 are as follows:

		September 30, 2019		December 31, 2018
Net unrealized gain (loss) on investment securities available-for-sale	$	1,937	$	(3,251)
Income tax		407		(683)
Net of income taxes		1,530		(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		905		246
Income tax		190		52
Net of income taxes		715		194
Accumulated other comprehensive loss	$	(3,457)	$	(8,076)

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Investment securities - Restricted Investment In Stock (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) security	Sep. 30, 2018 USD ($)
Available-for-sale and Held-to-maturity securities
Gross realized gains | $			$ 23
Number of securities in continuous unrealized loss position			72
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			10
Number of securities in continuous unrealized loss positions 12 months or longer			2
State and Municipals, Taxable
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position			9
U.S. Treasuries
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position			4
Number of securities in continuous unrealized loss positions 12 months or longer			2
U.S. Government-sponsored enterprises state and municipals
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss position			25
Number of securities in continuous unrealized loss positions 12 months or longer			17
Other-than-temporary impairments recognized | $	$ 0	$ 0	$ 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			24
Number of securities in continuous unrealized loss positions 12 months or longer			20

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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	Sep. 30, 2019	Dec. 31, 2018
Other real estate owned
Fair Value Inputs, Assets, Quantitative Information
Assets, Fair Value Estimate	$ 357	$ 234
Range and weighted average of appraisal adjustments	31.20%	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	48.80%	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	$ 1,619	$ 2,809
Range and weighted average of appraisal adjustments	73.40%	61.80%
Range and weighted average of liquidation expenses	5.30%	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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Other assets - Components of Other Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Other real estate owned	$ 485	$ 376
Investment in low income housing partnership	7,020	7,377
Mortgage servicing rights	730	718
Bank owned life insurance	34,853	34,288
Restricted equity securities	4,470	7,462
Net deferred tax asset	3,853	5,081
Interest rate floor and swaps	7,235	661
Other assets	6,554	7,774
Total	65,200	63,737
Interest Rate Floor
Interest rate floor and swaps	1,170	553
Interest Rate Swaps
Interest rate floor and swaps	$ 6,065	$ 108

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Borrowings - Fixed and adjustable rate information (Details)	Sep. 30, 2019 USD ($)
Debt Instrument
Convertible Debt	$ 0
Long-term debt at fixed rates	43,209,000
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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Fair value estimates

9 Months Ended

Sep. 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 September 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 September 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
September 30, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,066	$	24,066			$
U.S. Government-sponsored enterprises		91,990			$	91,990
State and Municipals:
Taxable		21,500				21,500
Tax-exempt		61,683				61,683
Mortgage-backed securities:
U.S. Government agencies		9,613				9,613
U.S. Government-sponsored enterprises		59,971				59,971
Common equity securities		297		297
Interest rate floor-other assets		1,170				1,170
Interest rate swap-other assets		6,065				6,065
Interest rate swap-other liabilities		(6,085)				(6,085)
Total	$	270,270	$	24,363	$	245,907	$

	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 September 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
September 30, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	1,619			$	1,619
Other real estate owned	$	357			$	357

	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
September 30, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	1,619	Appraisal of collateral	Appraisal adjustments	7.6% to 97.0%   (73.4)%
				Liquidation expenses	3.0% to 6.0% (5.3)%
Other real estate owned	$	357	Appraisal of collateral	Appraisal adjustments	20.0% to 48.8%   (31.2)%
				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 September 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
September 30, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	51,283	$	51,283	$	51,283
Investment securities:
Available-for-sale		268,823		268,823		24,066	$	244,757
Common equity securities		297		297		297
Held-to-maturity		7,808		8,016				8,016
Loans held for sale		1,390		1,390				1,390
Net loans		1,858,698		1,832,080					$	1,832,080
Accrued interest receivable		6,655		6,655				6,655
Mortgage servicing rights		730		1,739				1,739
Restricted equity securities		4,470		4,470				4,470
Interest rate floor		1,170		1,170				1,170
Interest rate swaps		6,065		6,065				6,065
Total	$	2,207,389	$	2,181,988
Financial liabilities:
Deposits	$	2,001,285	$	2,001,911			$	2,001,911
Long-term debt		52,509		52,875				52,875
Accrued interest payable		1,461		1,461				1,461
Interest rate swaps		6,085		6,085				6,085
Total	$	2,061,340	$	2,062,332

					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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Earnings per share

9 Months Ended

Sep. 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 nine month periods ended September 30, 2019 and 2018.

	2019				2018
For the Three Months Ended September 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,148	$	7,148	$	6,717	$	6,717
Average common shares outstanding		7,394,992		7,394,992		7,399,054		7,399,054
Earnings per share	$	0.97	$	0.97	$	0.91	$	0.91
	2019				2018
For the Nine Months Ended September 30	Basic		Diluted		Basic		Diluted
Net income	$	20,704	$	20,704	$	18,528	$	18,528
Average common shares outstanding		7,397,768		7,397,768		7,397,373		7,397,373
Earnings per share	$	2.80	$	2.80	$	2.50	$	2.50

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Income taxes

9 Months Ended

Sep. 30, 2019

Income taxes

Income taxes

11. Income taxes

The effective tax rate of the Company was 12.2% and 11.6% for the three and nine months ended September 30, 2019 compared to 11.8% for the three and nine months ended September 30, 2018. The three and nine months ended September 30, 2019 include before tax investment tax credits and other credits of $394 and $1,172 compared to before tax investment tax credits $276 and $819 for those same periods last year.

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Earnings per share - Schedule of Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings per share
Net income, Basic	$ 7,148	$ 6,717	$ 20,704	$ 18,528
Average common shares outstanding, Basic	7,394,992	7,399,054	7,397,768	7,397,373
Earnings per share, Basic	$ 0.97	$ 0.91	$ 2.80	$ 2.50
Net income, Diluted	$ 7,148	$ 6,717	$ 20,704	$ 18,528
Average common shares outstanding, Diluted	7,394,992	7,399,054	7,397,768	7,397,373
Earnings per share, Diluted	$ 0.97	$ 0.91	$ 2.80	$ 2.50

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Summary of significant accounting policies

9 Months Ended

Sep. 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 nine months ended and as of September 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”) 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 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 October 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company currently qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. 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” which 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.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for the Company). Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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Investment securities - Maturity Distribution of Debt Securities Classified as Available-for-Sale (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Investment securities
Within one year	$ 33,989
After one but within five years	121,112
After five but within ten years	11,846
After ten years	28,871
Available for sale securities	195,818
Mortgage-backed securities	73,005
Total	$ 268,823	$ 269,682

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Consolidated Statements of Income and Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Interest and fees on loans:
Taxable	$ 20,940	$ 18,798	$ 61,684	$ 54,546
Tax-exempt	1,066	919	3,274	2,660
Interest and dividends on investment securities:
Taxable	1,092	998	3,127	2,790
Tax-exempt	411	639	1,493	2,001
Dividends	19	16	60	51
Interest on interest-bearing deposits in other banks	27	49	50	131
Interest on federal funds sold	77		77
Total interest income	23,632	21,419	69,765	62,179
Interest expense:
Interest on deposits	3,966	2,342	11,090	6,135
Interest on short-term borrowings	83	809	1,491	2,317
Interest on long-term debt	347	315	923	936
Total interest expense	4,396	3,466	13,504	9,388
Net interest income	19,236	17,953	56,261	52,791
Provision for loan losses	700	1,050	2,100	3,150
Net interest income after provision for loan losses	18,536	16,903	54,161	49,641
Noninterest income:
Mortgage banking income	172	163	457	472
Life insurance investment income	189	190	567	568
Net losses (gains) on equity investment securities	14	14	6	14
Net gains on sale of investment securities available-for-sale			23
Net gain on sale of credit card loans				291
Total noninterest income	3,682	3,253	11,250	10,488
Noninterest expense:
Salaries and employee benefits expense	8,056	6,946	23,688	21,291
Net occupancy and equipment expense	2,997	2,681	8,807	8,215
Amortization of intangible assets	183	220	557	670
Professional fees and outside services	487	431	1,343	1,500
FDIC insurance and assessments	68	247	615	830
Donations	386	355	1,077	1,011
Other expenses	1,902	1,657	5,911	5,597
Total noninterest expense	14,079	12,537	41,998	39,114
Income before income taxes	8,139	7,619	23,413	21,015
Income tax expense	991	902	2,709	2,487
Net income	7,148	6,717	20,704	18,528
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available-for-sale	161	(1,179)	5,211	(4,394)
Reclassification adjustment for net gain on sales included in net income			(23)
Change in derivative fair value	153		659
Other comprehensive gain (loss)	314	(1,179)	5,847	(4,394)
Income tax expense (benefit)	66	(248)	1,228	(925)
Other comprehensive income (loss), net of income taxes	248	(931)	4,619	(3,469)
Comprehensive income	$ 7,396	$ 5,786	$ 25,323	$ 15,059
Net income:
Basic	$ 0.97	$ 0.91	$ 2.80	$ 2.50
Diluted	$ 0.97	$ 0.91	$ 2.80	$ 2.50
Average common shares outstanding:
Basic	7,394,992	7,399,054	7,397,768	7,397,373
Diluted	7,394,992	7,399,054	7,397,768	7,397,373
Dividends declared	$ 0.34	$ 0.33	$ 1.02	$ 0.98
Service charges, fees and commissions
Noninterest income:
Revenue from contracts with customers	$ 2,161	$ 1,883	$ 6,650	$ 5,856
Merchant services income
Noninterest income:
Revenue from contracts with customers	182	128	837	687
Commission and fees on fiduciary activities
Noninterest income:
Revenue from contracts with customers	569	570	1,568	1,552
Wealth management income
Noninterest income:
Revenue from contracts with customers	$ 395	$ 305	$ 1,142	$ 1,048

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Employee benefit plans (Tables)

9 Months Ended

Sep. 30, 2019

Employee benefit plans

Schedule of components of net periodic benefit cost

	Pension Benefits
Three Months Ended September 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	128	$	233
Expected return on plan assets		(217)		(360)
Amortization of unrecognized net gain		45		73
Net periodic benefit cost	$	(44)	$	(54)
	Pension Benefits
Nine Months Ended September 30,	2019		2018
Components of net periodic pension cost:
Interest cost	$	447	$	389
Expected return on plan assets		(759)		(600)
Amortization of unrecognized net gain		159		122
Net periodic benefit cost	$	(153)	$	(89)

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Investment securities (Tables)

9 Months Ended

Sep. 30, 2019

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,963	$	120	$	17	$	24,066
U.S. Government-sponsored enterprises		92,223		107		340		91,990
State and municipals:
Taxable		21,392		346		238		21,500
Tax-exempt		60,794		920		31		61,683
Residential Mortgage-backed securities:
U.S. Government agencies		9,536		95		18		9,613
U.S. Government-sponsored enterprises		45,284		820		63		46,041
Commercial Mortgage-backed securities:
U.S. Government-sponsored enterprises		13,694		236				13,930
Total	$	266,886	$	2,644	$	707	$	268,823
Held-to-maturity:
Tax-exempt state and municipals	$	6,853	$	182			$	7,035
Residential Mortgage-backed securities:
U.S. Government agencies		33						33
U.S. Government-sponsored enterprises		922		27	$	1		948
Total	$	7,808	$	209	$	1	$	8,016

			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
September 30, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	4,524	$	2	$	5,482	$	15	$	10,006	$	17
U.S. Government-sponsored enterprises		29,242		129		38,468		211		67,710		340
State and municipals:
Taxable		8,970		238						8,970		238
Tax-exempt		6,139		29		1,101		2		7,240		31
Residential Mortgage-backed securities:
U.S. Government agencies		423		1		4,346		17		4,769		18
U.S. Government-sponsored enterprises		3,997		12		5,502		52		9,499		64
Total	$	53,295	$	411	$	54,899	$	297	$	108,194	$	708

	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 nine months ended September 30, 2019 (in thousands):

Three Months Ended September 30,		2019		2018
Net gains recognized during the period on equity securities	$	14	$	14
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$	14	$	14
For the Nine Months Ended September 30,		2019		2018
Net gains recognized during the period on equity securities	$	6	$	14
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date	$	6	$	14

Available-for-Sale Securities.

Schedule of maturity distribution of fair value

	Fair
September 30, 2019	Value
Within one year	$	33,989
After one but within five years		121,112
After five but within ten years		11,846
After ten years		28,871
		195,818
Mortgage-backed and other amortizing securities		73,005
Total	$	268,823

Held-to-maturity Securities.

Schedule of maturity distribution of fair value

	Amortized		Fair
September 30, 2019	Cost		Value
Within one year
After one but within five years
After five but within ten years
After ten years	$	6,853	$	7,035
		6,853		7,035
Mortgage-backed securities		955		981
Total	$	7,808	$	8,016

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Loans, net and allowance for loan losses - Major Classifications of Loans Outstanding (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 1,881,090	$ 1,823,266
Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	497,985	494,134
Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans, net	976,258	907,803
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans, net	299,209	299,876
Consumer
Accounts, Notes, Loans and Financing Receivable
Loans, net	$ 107,638	$ 121,453

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Loans, net and allowance for loan losses - Reclassification of Commercial Credits Category (Details) - Substandard - Real estate Commercial $ in Millions	9 Months Ended
	Sep. 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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Derivatives and hedging activities - Effect of Other Derivative Instruments on the Income Statement (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Fee Income | Other income/(expense)
Derivative Instruments, Gain (Loss)
Amount of Gain Recognized in Income			$ 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	$ 355	$ 18	$ 9	$ 103

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Employee benefit plans - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		21 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019
Employee Benefit Plans
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense	$ 327	$ 330	$ 1,081	$ 1,073
2008 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense		31		93
2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense	$ 157	$ 52	$ 397	$ 95
Common stock available for grant as awards	61,346		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
Unrecognized compensation expense	$ 938		$ 938		$ 938
Weighted average vesting period			1 year 4 months 24 days
Restricted stock units (RSUs) | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Granted shares				11,468

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Borrowings - Additional Information (Details) - Peoples Bank - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Short-term Debt
Maximum borrowing capacity	$ 719,470	$ 700,169
Outstanding amount in borrowings	$ 52,509	$ 124,406