UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q 

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

for the quarterly period ended March 31, 2020 

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: 7,343,240 at April 30, 2020.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended March 31, 2020

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019	3
	Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2020 and 2019 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2020 and 2019 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2020 and 2019 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
	Signatures	59

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS 

(Dollars in thousands, except share data)

	March 31, 2020		December 31, 2019
Assets:
Cash and due from banks:
Cash and due from banks	$	22,181	$	26,943
Interest-bearing deposits in other banks		13,146		4,210
Total cash and due from banks		35,327		31,153
Investment securities:
Available-for-sale		302,884		330,478
Equity investments carried at fair value		299		423
Held-to-maturity: Fair value March 31, 2020, $7,687; December 31, 2019, $7,889		7,520		7,656
Total investment securities		310,703		338,557
Loans		2,023,155		1,938,240
Less: allowance for loan losses		25,686		22,677
Net loans		1,997,469		1,915,563
Loans held for sale		270		986
Premises and equipment, net		48,619		47,932
Accrued interest receivable		7,283		6,981
Goodwill		63,370		63,370
Intangible assets, net		1,411		1,565
Other assets		79,320		69,220
Total assets	$	2,543,772	$	2,475,327
Liabilities:
Deposits:
Noninterest-bearing	$	467,315	$	463,238
Interest-bearing		1,542,680		1,508,251
Total deposits		2,009,995		1,971,489
Short-term borrowings		164,150		152,150
Long-term debt		32,250		32,733
Accrued interest payable		1,336		1,277
Other liabilities		29,978		18,668
Total liabilities		2,237,709		2,176,317
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,343,240 shares at March 31, 2020 and 7,388,480 shares at December 31, 2019		14,670		14,777
Capital surplus		133,159		135,251
Retained earnings		154,806		152,187
Accumulated other comprehensive income (loss)		3,428		(3,205)
Total stockholders’ equity		306,063		299,010
Total liabilities and stockholders’ equity	$	2,543,772	$	2,475,327

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)

For the Three Months Ended March 31,	2020		2019
Interest income:
Interest and fees on loans:
Taxable	$	20,917	$	20,103
Tax-exempt		1,031		1,099
Interest and dividends on investment securities:
Taxable		1,548		1,010
Tax-exempt		299		562
Dividends		23		19
Interest on interest-bearing deposits in other banks		24		8
Total interest income		23,842		22,801
Interest expense:
Interest on deposits		3,503		3,411
Interest on short-term borrowings		573		813
Interest on long-term debt		205		280
Total interest expense		4,281		4,504
Net interest income		19,561		18,297
Provision for loan losses		3,500		1,050
Net interest income after provision for loan losses		16,061		17,247
Noninterest income:
Service charges, fees and commissions		1,605		1,719
Merchant services income		114		198
Commission and fees on fiduciary activities		506		507
Wealth management income		387		377
Mortgage banking income		137		148
Bank owned life insurance income		187		186
Interest rate swap revenue		470		280
Net (losses) gains on equity investment securities		(123)		1
Net gains on sale of investment securities available-for-sale		267
Total noninterest income		3,550		3,416
Salaries and employee benefits expense		7,856		7,595
Net occupancy and equipment expense		3,079		2,961
Amortization of intangible assets		154		192
Professional fees and outside services		365		331
FDIC insurance and assessments		74		259
Donations		338		332
Other expenses		1,785		1,820
Total noninterest expense		13,651		13,490
Income before income taxes		5,960		7,173
Income tax expense		679		761
Net income		5,281		6,412
Other comprehensive income :
Unrealized gain  on investment securities available-for-sale		7,629		2,439
Reclassification adjustment for net gain on sales included in net income		(267)
Change in derivative fair value		1,036		63
Other comprehensive income		8,398		2,502
Income tax expense		1,765		526
Other comprehensive income , net of income taxes		6,633		1,976
Comprehensive income	$	11,914	$	8,388
Per share data:
Net income:
Basic	$	0.72	$	0.87
Diluted	$	0.71	$	0.87
Average common shares outstanding:
Basic		7,379,438		7,399,054
Diluted		7,406,291		7,408,536
Dividends declared		0.36		0.34

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, 2020	$	14,777	$	135,251	$	152,187	$	(3,205)	$	299,010
Net income						5,281				5,281
Other comprehensive income, net of income taxes								6,633		6,633
Dividends declared: $0.36 per share						(2,662)				(2,662)
Stock based compensation				5						5
Share retirement: 53,746 shares		(107)		(2,097)						(2,204)
Balance, March 31, 2020	$	14,670	$	133,159	$	154,806	$	3,428	$	306,063
							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

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 Three Months Ended March 31,	2020		2019
Cash flows from operating activities:
Net income	$	5,281	$	6,412
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		735		596
Amortization of right-of-use lease asset		104		92
Amortization of deferred loan costs		39		(107)
Amortization of intangibles		154		192
Amortization of low income housing partnerships		120		119
Provision for loan losses		3,500		1,050
Net unrealized (gain) loss on equity investment securities		123		(1)
Net (gain) loss on sale of other real estate owned		(4)		8
Loans originated for sale		(2,297)		(1,501)
Proceeds from sale of loans originated for sale		3,023		2,278
Net gain on sale of loans originated for sale		(10)		(28)
Net amortization of investment securities		281		474
Net gain on sale of investment securities available-for-sale		(267)
Bank owned life insurance income		(187)		(186)
Deferred income tax expense		619		13
Stock based compensation		5		83
Net change in:
Accrued interest receivable		(302)		(96)
Other assets		(10,038)		(3,836)
Accrued interest payable		59		(317)
Other liabilities		10,014		2,545
Net cash provided by operating activities		10,952		7,790
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale		26,502
Proceeds from repayments of investment securities:
Available-for-sale		17,522		14,287
Held-to-maturity		135		196
Purchases of investment securities:
Available-for-sale		(9,080)		(13,021)
Net purchase of restricted equity securities		(482)		(964)
Net increase in lending activities		(86,062)		(26,629)
Purchases of premises and equipment		(627)		(1,062)
Proceeds from the sale of premises and equipment				23
Proceeds from sale of other real estate owned		157		84
Net cash used in investing activities		(51,935)		(27,086)
Cash flows from financing activities:
Net increase (decrease) in deposits		38,506		(6,792)
Repayment of long-term debt		(483)		(460)
Net increase in short-term borrowings		12,000		22,500
Retirement of common stock		(2,204)
Cash dividends paid		(2,662)		(2,516)
Net cash provided by financing activities		45,157		12,732
Net increase (decrease) in cash and cash equivalents		4,174		(6,564)
Cash and cash equivalents at beginning of period		31,153		32,616
Cash and cash equivalents at end of period	$	35,327	$	26,052

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,	2020		2019
Supplemental disclosures:
Cash paid during the period for:
Interest	$	4,222	$	4,821
Income taxes				1,100
Noncash items:
Transfers of loans to other real estate	$	626	$	85
Initial recognition of right-of-use assets		899		5,513
Initial recognition of lease liability		899		5,513

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-nine full-service community banking offices located within the Bucks, 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 three months ended and as of March 31, 2020, 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, 2019. 

Significant events: COVID-19

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to the United States and throughout the world. On March 11, 2020, the World Health Organization declared COVID-19, a global pandemic. In the United States, the rapid spread of the COVID-19 virus invoked various federal and state authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Reserve System’s Federal Open Market Committee (“FOMC”) to aggressively cut the target federal funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve rolled out various market support programs to ease the stress on financial markets.

As the COVID-19 events unfolded throughout the first quarter of 2020, the Company implemented its pandemic plan and executed various strategies and protocols intended to protect its employees, maintain services for customers, assure the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. The Company imposed business travel restrictions, implemented quarantine and work

8

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. The Company also maintained active communications with its primary regulatory agencies and critical vendors in an effort to assure that all mission-critical activities and functions would be performed in line with regulatory expectations and the Company’s service standards.

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The COVID-19 pandemic and its associated impacts on trade (including supply chains), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole.

The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves. During March, the Company reviewed its commercial loan and commercial real estate portfolios and determined approximately $1.2 billion or 73% is categorized as non-life sustaining and subject to shutdown. Based on management’s application of its allowance for loan losses methodology and changes to the economic qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions and the increased inherent risk in the loan portfolio, first quarter 2020 results included $3.5 million in provision for loan and lease losses. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. Through May 6, 2020, the Company granted payment deferral requests for up to four months to 390 business loans and for up to six months on 451 consumer loans, representing $313.6 million of the Company’s loan balances. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

The Company has also participated as a lender in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a $349 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Paycheck Protection Program (“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. Between April 3 and April 17, 2020, the Company processed 836 applications providing over $177.9 million in loans through Phase I of the SBA PPP with an average loan amount of $213 thousand.  Through May 6, 2020, the Company processed another 455 applications providing over $24.0 million in loans through Phase II of the PPP with an average loan amount of $53 thousand furthering Peoples’ commitment to support small businesses.  Funding these loans will generate approximately $6.6 

9

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

million of SBA processing fees.   The Company intends to utilize the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to replace liquidity used to fund PPP loans.

The Company also has goodwill with a net carrying value of $63.4 million at March 31, 2020 and December 31, 2019. The Company completes a goodwill impairment analysis at least annually, or more often if events and circumstances indicate that there may be impairment. In connection with the emergence of COVID-19 as a global pandemic and the decline in our stock price during the 2020 first quarter, management performed a qualitative assessment to determine whether goodwill was impaired.  Management assessed factors that could potentially indicate impairment, including: regional and national economic conditions, banking industry conditions and trends, historical financial performance, and other banking specific factors.  After assessing the factors in totality, management determined that it was more likely than not that the fair value of the Company is higher than its book value as of March 31, 2020, and, therefore, goodwill is not considered impaired. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods with no assurance that the future impairment assessments or tests will not result in a charge to earnings.

Recent accounting standards:

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 November 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company 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.

10

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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. The Company adopted this guidance effective January 1, 2020. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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. The Company adopted this guidance effective January 1, 2020. The adoption of this guidance on January 1, 2020 did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)”, which provides changes to the disclosure requirements for defined benefit plans. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are a result of the disclosure framework project that focuses on improvements to the effectiveness of disclosures in the notes to financial statements. The amendments remove and add certain disclosure requirements. The disclosure requirements being removed relating to public companies are (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, (2) the amount and timing of plan assets expected to be returned to the employer, (3) the 2001 disclosure requirement relating to Japanese Welfare Pension Insurance Law, (4) related party disclosures about the amount of future annual benefits covered by insurance, and (5) the effects of a one-percentage-point change in assumed health care cost trends on the benefit cost and obligation. The disclosure requirements being added relating to public companies are (1) the weighted-average interest crediting rates for cash balance plans, and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for the Company on January 1, 2021 and early adoption is permitted. The amendments should be applied retrospectively however, the Company does not expect the guidance to have a material impact on its disclosures to the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides optional expedients and exceptions for a limited time period to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in ASU 2020-04 are elective for entities with contracts, including derivative contracts, that reference LIBOR or some other reference rate that are expected to be discontinued. For the Company's cash flow hedges, ASU 2020-04 allows: (i) an entity to change the reference rate without having to designate the hedging relationship; (ii) for cash flow hedges in which the designated hedged risk is LIBOR, allows an entity to assert that it remains probable that the hedged forecasted transaction will occur; and (iii) allows an entity to change the designated method used to assess hedge effectiveness and simplifies or temporarily suspends the assessment of hedge effectiveness for hedging relationships. ASU 2020-04 must be applied prospectively and was effective immediately upon issuance and remains effective through December 31, 2022. The Company is currently evaluating the impact that adopting this new accounting standard will have on the consolidated financial statements.

11

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

2. Other comprehensive income (loss):  

The components of other comprehensive income (loss) and their related tax effects are reported in the consolidated statements of income and comprehensive income. The accumulated other comprehensive income (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 income (loss) included in stockholders’ equity at March 31, 2020 and December 31, 2019 are as follows:

		March 31, 2020		December 31, 2019
Net unrealized gain on investment securities available-for-sale	$	9,197	$	1,835
Income tax		1,932		385
Net of income taxes		7,265		1,450
Benefit plan adjustments		(6,579)		(6,579)
Income tax		(1,382)		(1,382)
Net of income taxes		(5,197)		(5,197)
Derivative adjustments		1,723		687
Income tax		363		144
Net of income taxes		1,360		543
Accumulated other comprehensive income (loss)	$	3,428	$	(3,205)

3. Earnings per share:

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

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three months ended March 31,2020 and 2019: 

	2020				2019
For the Three Months Ended March 31	Basic		Diluted		Basic		Diluted
Net income	$	5,281	$	5,281	$	6,412	$	6,412
Average common shares outstanding		7,379,438		7,406,291		7,399,054		7,408,536
Earnings per share	$	0.72	$	0.71	$	0.87	$	0.87

12

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at March 31, 2020 and December 31, 2019 are summarized as follows: 

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2020	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	21,471	$	650			$	22,121
U.S. government-sponsored enterprises		83,028		1,562				84,590
State and municipals:
Taxable		32,116		772	$	328		32,560
Tax-exempt		38,392		1,596		8		39,980
Residential mortgage-backed securities:
U.S. government agencies		7,125		178		3		7,300
U.S. government-sponsored enterprises		98,880		4,143		3		103,020
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,675		638				13,313
Total	$	293,687	$	9,539	$	342	$	302,884
Held-to-maturity:
Tax-exempt state and municipals	$	6,851	$	153	$	15	$	6,989
Residential mortgage-backed securities:
U.S. government agencies		28						28