10-Q - PFIS - Equibles

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q ****

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

for the quarterly period ended June 30, 2024 ****

☐	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<br><br>incorporation)	(IRS Employer<br><br>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: 9,975,789 at August 1, 2024.

Table of Contents PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended June 30, 2024


Contents		Page No.

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements

	Consolidated Balance Sheets at June 30, 2024 (Unaudited) and December 31, 2023 (Unaudited)	3

	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2024 and 2023 (Unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, June 30, 2024 and 2023 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2024 and 2023 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58

Item 4.	Controls and Procedures	60

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	61

Item 6.	Exhibits	61

	Signatures	62

Table of Contents Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEET S

(Dollars in thousands, except share data)



****	****	June 30, 2024		****	December 31, 2023		****
Assets:
Cash and cash equivalents
Cash and due from banks		$	41,234		$	33,524
Interest-bearing deposits in other banks			8,722			9,141
Federal funds sold						144,700
Total cash and cash equivalents			49,956			187,365

Investment securities:
Available for sale: Amortized cost of $439,189 and $450,454, respectively, net of allowance for credit losses of $0 at June 30, 2024 and December 31, 2023			385,240			398,927
Equity investments carried at fair value			78			98
Held to maturity: Fair value of $68,224 and $71,698, respectively, net of allowance for credit losses of $0 at June 30, 2024 and December 31, 2023			81,598			84,851
Total investment securities			466,916			483,876
Loans			2,869,553			2,849,897
Less: allowance for credit losses			23,123			21,895
Net loans			2,846,430			2,828,002
Loans held for sale						250
Goodwill			63,370			63,370
Premises and equipment, net			58,565			61,276
Bank owned life insurance			49,955			49,397
Deferred tax assets			14,460			13,770
Accrued interest receivable			13,326			12,734
Other assets			53,077			42,249
Total assets		$	3,616,055		$	3,742,289

Liabilities:
Deposits:
Noninterest-bearing		$	620,971		$	644,683
Interest-bearing			2,443,988			2,634,354
Total deposits			3,064,959			3,279,037
Short-term borrowings			104,250			17,590
Long-term debt			25,000			25,000
Subordinated debt			33,000			33,000
Accrued interest payable			5,507			5,765
Other liabilities			42,532			41,475
Total liabilities			3,275,248			3,401,867

Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,057,258 shares at June 30, 2024 and 7,040,852 shares at December 31, 2023			14,122			14,093
Capital surplus			122,449			122,130
Retained earnings			249,511			248,550
Accumulated other comprehensive loss			(45,275)			(44,351)
Total stockholders’ equity			340,807			340,422
Total liabilities and stockholders’ equity		$	3,616,055		$	3,742,289

See notes to unaudited consolidated financial statements

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOM E (UNAUDITED)

(Dollars in thousands, except per share data)


		Three Months Ended						Six Months Ended
June 30,	****	2024		****	2023		****	2024		2023		****
Interest income:
Interest and fees on loans:
Taxable		$	34,406		$	32,139		$	68,447	$	62,188
Tax-exempt			1,399			1,405			2,817		2,794
Interest and dividends on investment securities:
Taxable			1,904			1,929			3,822		4,053
Tax-exempt			371			378			742		835
Dividends			2			2			4		4
Interest on interest-bearing deposits in other banks			115			85			235		99
Interest on federal funds sold			179			798			1,306		1,041
Total interest income			38,376			36,736			77,373		71,014

Interest expense:
Interest on deposits			18,114			13,714			36,818		23,324
Interest on short-term borrowings			633			213			895		1,299
Interest on long-term debt			269			269			539		296
Interest on subordinated debt			444			444			887		887
Total interest expense			19,460			14,640			39,139		25,806
Net interest income			18,916			22,096			38,234		45,208
Provision for (credit to) credit losses			596			(2,201)			1,304		(937)
Net interest income after provision for (credit to) credit losses			18,320			24,297			36,930		46,145

Noninterest income:
Service charges, fees, commissions and other			1,885			1,982			3,921		3,947
Merchant services income			260			254			375		372
Commission and fees on fiduciary activities			517			528			1,068		1,085
Wealth management income			416			386			777		784
Mortgage banking income			87			105			179		208
Increase in cash surrender value of life insurance			286			262			565		520
Interest rate swap gain			102			23			78		246
Net (losses) gains on equity investment securities			(12)			12			(20)		(17)
Net gains on sale of investment securities available for sale											81
Total noninterest income			3,541			3,552			6,943		7,226

Noninterest expense:
Salaries and employee benefits expense			8,450			8,482			17,289		17,562
Net occupancy and equipment expense			4,576			4,277			9,301		8,380
Acquisition related expenses			1,071			121			1,557		121
Amortization of intangible assets						28					57
Professional fees and outside services			779			507			1,467		1,270
FDIC insurance and assessments			504			556			1,098		1,057
Donations			433			467			842		865
Other expenses			2,345			2,176			4,672		3,856
Total noninterest expense			18,158			16,614			36,226		33,168
Income before income taxes			3,703			11,235			7,647		20,203
Provision for income tax expense			421			1,810			899		3,199
Net income			3,282			9,425			6,748		17,004

Other comprehensive (loss) income:
Unrealized gain (loss) on investment securities available for sale			18			(5,148)			(2,423)		5,688
Reclassification adjustment for net gain on sales included in net income											(81)
Change in derivative fair value			160			2,049			1,239		79
Other comprehensive income (loss)			178			(3,099)			(1,184)		5,686
Income tax expense (benefit) related to other comprehensive income (loss)			38			(668)			(260)		1,223
Other comprehensive income (loss), net of income tax expense (benefit)			140			(2,431)			(924)		4,463
Comprehensive income		$	3,422		$	6,994		$	5,824	$	21,467

Per share data:
Net income:
Basic		$	0.47		$	1.32		$	0.96	$	2.38
Diluted		$	0.46		$	1.31		$	0.95	$	2.37
Weighted average common shares outstanding:
Basic			7,057,258			7,145,975			7,055,085		7,151,732
Diluted			7,114,115			7,177,915			7,108,113		7,188,384
Dividends declared		$	0.41		$	0.41		$	0.82	$	0.82

See notes to unaudited consolidated financial statements

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

(Dollars in thousands, except per share data)


	****			****			****			****	Accumulated
											Other
		Common			Capital			Retained			Comprehensive
	****	Stock		****	Surplus		****	Earnings		****	Loss		****	Total
Balance, January 1, 2024		$	14,093		$	122,130		$	248,550		$	(44,351)		$	340,422
Net income									3,466						3,466
Other comprehensive loss, net of tax												(1,064)			(1,064)
Cash dividends declared: $0.41 per common share									(2,893)						(2,893)
Stock compensation, including tax effects and expenses						61									61
Restricted stock issued: 14,434 shares			29			(29)
Balance, March 31, 2024		$	14,122		$	122,162		$	249,123		$	(45,415)		$	339,992

Net income									3,282						3,282
Other comprehensive income, net of tax												140			140
Dividends declared: $0.41 per share									(2,894)						(2,894)
Stock compensation, including tax effects and expenses						287									287
Balance, June 30, 2024		$	14,122		$	122,449		$	249,511		$	(45,275)		$	340,807



	****			****			****			****	Accumulated
											Other
		Common			Capital			Retained			Comprehensive
	****	Stock		****	Surplus		****	Earnings		****	Loss		****	Total
Balance, January 1, 2023		$	14,321		$	126,850		$	230,515		$	(56,336)		$	315,350
Cumulative impact of adoption of ASC 326, net of tax									2,364						2,364
Net income									7,579						7,579
Other comprehensive income, net of tax												6,894			6,894
Cash dividends declared: $0.41 per common share									(2,936)						(2,936)
Stock compensation, including tax effects and expenses						209									209
Restricted stock issued: 17,640 shares.			35			(35)
Share retirement: 16,573 shares			(33)			(793)									(826)
Balance, March 31, 2023		$	14,323		$	126,231		$	237,522		$	(49,442)		$	328,634

Net income									9,425						9,425
Other comprehensive loss, net of tax												(2,431)			(2,431)
Dividends declared: $0.41 per share									(2,930)						(2,930)
Stock compensation, including tax effects and expenses						160									160
Share retirement: 25,555 shares			(51)			(1,020)									(1,071)
Balance, June 30, 2023		$	14,272		$	125,371		$	244,017		$	(51,873)		$	331,787

Table of Contents Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOW S (UNAUDITED)

(Dollars in thousands, except per share data)


For the Six Months Ended June 30,	****	2024		****	2023
Cash flows from operating activities:
Net income		$	6,748		$	17,004
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment			1,475			1,401
Amortization of right-of-use lease asset			282			244
Amortization of deferred loan fees, net			376			382
Amortization of intangibles						57
Amortization of low income housing partnerships			251			241
Provision for (credit to) credit losses			1,304			(937)
Net unrealized loss on equity investment securities			20			17
Loans originated for sale			(1,159)			(2,486)
Proceeds from sale of loans originated for sale			1,406			2,496
Net loss (gain) on sale of loans originated for sale			3			(10)
Net amortization of investment securities			425			533
Net gain on sale of investment securities available for sale						(81)
Gain on sale of premises and equipment			(4)			(14)
Increase in cash surrender value of life insurance			(565)			(520)
Deferred income tax (benefit) expense			(431)			607
Stock compensation, including tax effects and expenses			348			369
Net change in:
Accrued interest receivable			(592)			309
Other assets			(6,565)			(2,436)
Accrued interest payable			(258)			3,798
Other liabilities			1,901			(3,412)
Net cash provided by operating activities			4,965			17,562
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale						67,363
Proceeds from repayments of investment securities:
Available for sale			10,887			19,728
Held to maturity			3,206			2,911
Net (purchase) redemption of restricted equity securities			(2,556)			5,091
Net increase in loans			(20,136)			(113,538)
Purchases of premises and equipment			(614)			(4,476)
Proceeds from the sale of premises and equipment			44			14
Net cash used in investing activities			(9,169)			(22,907)
Cash flows from financing activities:
Net (decrease) increase in deposits			(214,078)			182,883
Proceeds from long-term debt						25,000
Repayment of long-term debt						(555)
Net increase (decrease) in short-term borrowings			86,660			(95,400)
Retirement of common stock						(1,897)
Cash dividends paid			(5,787)			(5,866)
Net cash (used in) provided by financing activities			(133,205)			104,165
Net (decrease) increase in cash and cash equivalents			(137,409)			98,820
Cash and cash equivalents at beginning of period			187,365			37,868
Cash and cash equivalents at end of period		$	49,956		$	136,688

Table of Contents Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)


For the Six Months Ended June 30,	****	2024		****	2023
Supplemental disclosures:
Cash paid during the period for:
Interest		$	39,397		$	22,008
Income taxes			504			1,722
Noncash items:
U.S. Treasury bond matured - receivable			5,000
Transfers of fixed assets to other real estate			1,556
Transfers of loans to other real estate			27
Removal of right-of-use assets						(785)
Removal of lease liability						(820)

See notes to unaudited consolidated financial statements

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

1. Summary of significan t accounting policies:

Nature of operations

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

Basis of presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the three and six months ended and as of June 30, 2024, 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 credit losses, fair value of financial instruments, the valuation of deferred tax assets, and impairment of goodwill. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2023.

Merger with FNCB Bancorp, Inc.

On July 1, 2024, the Company completed its previously announced merger with FNCB Bancorp, Inc. (“FNCB”), a Pennsylvania corporation and the parent company of FNCB Bank, a Pennsylvania-chartered bank (“FNCB Bank”), pursuant to the Agreement and Plan of Merger dated September 27, 2023 between Peoples and FNCB (the “Merger Agreement”). On July 1, 2024, FNCB merged with and into the Company, with the Company as the surviving entity. Immediately following the merger, FNCB Bank merged with and into Peoples Bank, with Peoples Bank as the surviving bank and a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, the shareholders of FNCB as of the effective time of the merger received a fixed exchange ratio of 0.1460 shares of the Company's common stock for each share of the FNCB’s common stock. The total aggregate consideration paid in the FNCB merger was 2,935,456 shares of the Company’s common stock, which had a value of $45.54 per share, which was the closing price of the Company’s common stock on June 28, 2024, the last trading day prior to the consummation of the merger. Also included in the total consideration was cash in lieu of any fractional shares.

The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Merger Agreement filed by the Company as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Third Quarter Dividend Decl aration

On July 26, 2024, the Board of Directors declared a third quarter dividend of $0.6175 per share. The dividend is payable on September 13, 2024 to shareholders of record as of August 30, 2024. The dividend represents an increase of 50.6% compared to the dividend declared in the second quarter of 2024 and the third quarter in the prior year, which increase was contemplated as part of the Merger Agreement between the Company and FNCB.

Recent accounting standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the required effective dates. The following should be read in conjunction with "Note 1 Summary of significant accounting policies" of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2023.

Unless otherwise discussed, management believes the impact of any recently issued standards, including those issued but not yet effective, will not have a material impact on the Company’s consolidated financial statements.

ASU 2024-01, “Compensation – Stock Compensation (Topic 718) – Scope Application of Profits Interest and Similar Awards” (ASU 2024-01) clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a significant impact on the consolidated financial statements.

ASU 2024-02 “Codification Improvements” (“ASU 2024-02”) amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on the financial statements.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

2. Other comprehensive (loss) income:

The components of other comprehensive (loss) income (“OCI”) and their related tax effects are reported in the consolidated statements of income and comprehensive income. The accumulated other comprehensive loss included in the consolidated balance sheets relates to net unrealized gains and losses on investment securities available for sale, benefit plan adjustments and adjustments to derivative fair values.

The components of accumulated other comprehensive loss included in stockholders’ equity at June 30, 2024 and December 31, 2023 are as follows:


(Dollars in thousands)	****		June 30, 2024	****		December 31, 2023	****
Net unrealized loss on investment securities available for sale		$	(53,949)		$	(51,527)
Income tax benefit			(11,800)			(11,270)
Net of income taxes			(42,149)			(40,257)
Benefit plan adjustments			(4,370)			(4,370)
Income tax benefit			(956)			(956)
Net of income taxes			(3,414)			(3,414)
Derivative adjustments			368			(871)
Income tax expense (benefit)			80			(191)
Net of income taxes			288			(680)
Accumulated other comprehensive loss		$	(45,275)		$	(44,351)

3. Earnings per share:

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

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three and six months ended June 30, 2024 and 2023:



(Dollars in thousands, except per share data)		2024						2023
For the Three Months Ended June 30,	****	Basic		****	Diluted		****	Basic		****	Diluted
Net income		$	3,282		$	3,282		$	9,425		$	9,425
Average common shares outstanding			7,057,258			7,114,115			7,145,975			7,177,915
Earnings per share		$	0.47		$	0.46		$	1.32		$	1.31



(Dollars in thousands, except per share data)	2024				2023
For the Six Months Ended June 30,	Basic		Diluted		Basic		****	Diluted
Net income	$	6,748	$	6,748	$	17,004		$	17,004
Average common shares outstanding		7,055,085		7,108,113		7,151,732			7,188,384
Earnings per share	$	0.96	$	0.95	$	2.38		$	2.37

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at June 30, 2024 and December 31, 2023 are summarized as follows:


		June 30, 2024
					Gross		Gross
		Amortized			Unrealized		Unrealized			Fair		****
(Dollars in thousands)	****	Cost		****	Gains	****	Losses		****	Value		****
Available for sale:
U.S. Treasury securities		$	193,092		$		$	13,085		$	180,007
U.S. government-sponsored enterprises			2,409					377			2,032
State and municipals:
Taxable			67,761					10,924			56,837
Tax-exempt			74,877					9,873			65,004
Residential mortgage-backed securities:
U.S. government agencies			638					34			604
U.S. government-sponsored enterprises			86,754					19,090			67,664
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises			9,658					294			9,364
Corporate debt securities			4,000					272			3,728
Total available for sale		$	439,189		$		$	53,949		$	385,240
Held to maturity:
Tax-exempt state and municipals		$	11,184		$		$	873		$	10,311
Residential mortgage-backed securities:
U.S. government agencies			14,554					2,706			11,848
U.S. government-sponsored enterprises			55,860					9,795			46,065
Total held to maturity		$	81,598		$		$	13,374		$	68,224


	****	December 31, 2023											****
					Gross		****	Gross
		Amortized			Unrealized			Unrealized			Fair		****
(Dollars in thousands)	****	Cost		****	Gains		****	Losses		****	Value		****
Available for sale:
U.S. Treasury securities		$	197,920		$			$	13,863		$	184,057
U.S. government-sponsored enterprises			2,539						387			2,152
State and municipals:
Taxable			67,831						10,731			57,100
Tax-exempt			75,742						8,618			67,124
Residential mortgage-backed securities:
U.S. government agencies			758						34			724
U.S. government-sponsored enterprises			89,935						17,264			72,671
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises			11,729						360			11,369
Corporate debt securities			4,000						270			3,730
Total available for sale		$	450,454		$			$	51,527		$	398,927
Held to maturity:
Tax-exempt state and municipals		$	11,201		$	1		$	660		$	10,542
Residential mortgage-backed securities:
U.S. government agencies			15,400						2,653			12,747
U.S. government-sponsored enterprises			58,250						9,841			48,409
Total held to maturity		$	84,851		$	1		$	13,154		$	71,698

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

There were no investment sales during the six month period ended June 30, 2024. During the six month period ended June 30, 2023, investment securities, including U.S. Treasury bonds and mortgage-backed securities, with a par value of $65.6 million were sold at a net gain of $81 thousand. The proceeds were used to pay-down higher cost short-term borrowings.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available for sale at June 30, 2024, is summarized as follows:


		Amortized		****	Fair
(Dollars in thousands)	****	Cost		****	Value
Within one year		$	43,852		$	42,651
After one but within five years			171,504			158,031
After five but within ten years			53,729			46,189
After ten years			70,645			58,705
			339,730			305,576
Mortgage-backed and other amortizing securities			99,459			79,664
Total		$	439,189		$	385,240

The maturity distribution of the amortized cost and fair value, of debt securities classified as held to maturity at June 30, 2024, is summarized as follows:


		Amortized			Fair
(Dollars in thousands)	****	Cost		****	Value
After one but within five years		$	1,192		$	1,097
After five but within ten years			9,991			9,213
			11,183			10,310
Mortgage-backed securities			70,415			57,914
Total		$	81,598		$	68,224

Securities with a carrying value of $313.3 million and $322.4 million at June 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law and pledged to the Discount Window at the Federal Reserve.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2024, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. government agencies and sponsored enterprises, which exceeded 10.0 percent of stockholders’ equity. 12

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The fair value and gross unrealized losses of investment securities with unrealized losses at June 30, 2024 and December 31, 2023, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:


	June 30, 2024
	Less than Twelve Months					Twelve Months or Longer					Total
	Total # in a loss				Unrealized	Total # in a loss				Unrealized	Total # in a loss				Unrealized
(Dollars in thousands)	Position		Fair Value		Losses	Position		Fair Value		Losses	Position		Fair Value		Losses
Securities Available for Sale
U.S. Treasury securities		$		$		42	$	180,007	$	13,085	42	$	180,007	$	13,085
U.S. government-sponsored enterprises						2		2,032		377	2		2,032		377
State and municipals:
Taxable						66		56,837		10,924	66		56,837		10,924
Tax-exempt						94		65,004		9,873	94		65,004		9,873
Residential mortgage-backed securities:
U.S. government agencies						3		604		34	3		604		34
U.S. government-sponsored enterprises						30		67,664		19,090	30		67,664		19,090
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises						4		9,364		294	4		9,364		294
Corporate debt securities						6		3,728		272	6		3,728		272

Total		$	****	$	****	247	$	385,240	$	53,949	247	$	385,240	$	53,949

Securities Held to Maturity
State and municipals:
Tax-exempt	5	$	2,883	$	11	12	$	7,428	$	862	17	$	10,311	$	873
Residential mortgage-backed securities:
U.S. government agencies						4		11,848		2,706	4		11,848		2,706
U.S. government-sponsored enterprises						8		46,065		9,795	8		46,065		9,795
Total	5	$	2,883	$	11	24	$	65,341	$	13,363	29	$	68,224	$	13,374


	December 31, 2023
	Less than Twelve Months					Twelve Months or Longer					Total
	Total # in a loss				Unrealized	Total # in a loss				Unrealized	Total # in a loss				Unrealized
(Dollars in thousands)	Position		Fair Value		Losses	Position		Fair Value		Losses	Position		Fair Value		Losses
Securities Available for Sale
U.S. Treasury securities						43	$	184,057	$	13,863	43	$	184,057	$	13,863
U.S. government-sponsored enterprises						2		2,152		387	2		2,152		387
State and municipals:
Taxable	1		995		6	65		56,105		10,725	66		57,100		10,731
Tax-exempt	2		575		5	93		66,393		8,613	95		66,968		8,618
Residential mortgage-backed securities:
U.S. government agencies						3		724		34	3		724		34
U.S. government-sponsored enterprises						32		72,671		17,264	32		72,671		17,264
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises						4		11,369		360	4		11,369		360
Corporate debt securities						6		3,730		270	6		3,730		270
Total	3		1,570		11	248		397,201		51,516	251		398,771		51,527

Securities Held to Maturity
State and municipals:
Tax-exempt	2	$	1,438	$	36	10	$	6,209	$	624	12	$	7,647	$	660
Residential mortgage-backed securities:
U.S. government agencies						4		12,747		2,653	4		12,747		2,653
U.S. government-sponsored enterprises						8		48,409		9,841	8		48,409		9,841
Total	2	$	1,438	$	36	22	$	67,365	$	13,118	24	$	68,803	$	13,154

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Management considered whether a credit loss existed related to the investments in an unrealized loss position by determining (i) whether the decline in fair value is attributable to adverse conditions specifically related to the financial condition of the security issuer or specific conditions in an industry or geographic area; (ii) whether the credit rating of the issuer of the security has been downgraded; (iii) whether dividend or interest payments have been reduced or have not been made and (iv) an adverse change in the remaining expected cash flows from the security such that the Company will not recover the amortized cost of the security. If the decline is judged to be due to factors related to credit, the credit loss should be recorded as an allowance for credit losses (“ACL”) with an offsetting entry to net income. The portion of the loss related to non-credit factors are recorded in OCI.

Based on management’s assessment of the factors identified above, it is determined the fair value of all the identified investments being less than the amortized costs is primarily caused by the rapid increase in market rates and not credit quality. All interest payments have been received as scheduled, substantially all debt securities are rated above investment grade and no material downgrades announced. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider the unrealized loss to be credit related, thus no allowance for credit loss expense was recorded at June 30, 2024 or December 31, 2023.

Cost method investments consist primarily of Federal Home Loan Bank (“FHLB”) of Pittsburgh stock totaling $7.7 million and $5.2 million at June 30, 2024 and December 31, 2023, respectively, and are included in other assets in the Consolidated Balance Sheets. Cost method investments are evaluated for impairment whenever events or circumstances suggest that their carrying value may not be recoverable.

5. Loans, net and allowance for credit losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2024 and December 31, 2023 are summarized as follows. The Company had net deferred loan origination fees of $0.8 million and $0.4 million at June 30, 2024 and December 31, 2023, respectively.



(Dollars in thousands)	****		June 30, 2024	****	December 31, 2023
Commercial and Industrial		$	461,014		$	368,411
Municipal			170,991			175,304
Total			632,005			543,715
Real estate
Commercial			1,793,652			1,863,118
Residential			369,671			360,803
Total			2,163,323			2,223,921
Consumer
Indirect Auto			66,792			75,389
Consumer Other			7,433			6,872
Total			74,225			82,261
Total		$	2,869,553		$	2,849,897

The ACL represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and held to maturity securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the ACL for loans is considered a critical accounting estimate by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded ACL. The ACL related to loans receivable and held to maturity debt securities is reported separately as a contra-asset on the consolidated balance sheets. The expected credit loss for unfunded lending commitments and 14

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

unfunded loan commitments is reported on the consolidated balance sheets in other liabilities while the provision for credit losses related to unfunded commitments is reported in other noninterest expense in the consolidated statements of income and comprehensive income.

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans, available for sale securities, and held to maturity securities. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Balance Sheets, totaled $11.4 million and $9.7 million at June 30, 2024 and 2023 and is excluded from the estimate of credit losses. Accrued interest receivable on available for sale securities and held to maturity securities, also a component of accrued interest receivable on the Consolidated Balance Sheets, and totaled $1.7 million and $188 thousand, respectively, at June 30, 2024 and is excluded from the estimate of credit losses, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. At June 30, 2023, accrued interest receivable on available for sale securities and held to maturity securities was $1.5 million and $198 thousand, respectively.

The following tables present the balance of the allowance for credit losses at June 30, 2024 and 2023. The tables identify the valuation allowances attributable to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated credit quality, as well as valuation allowances for impairments on loans evaluated collectively. The tables include the underlying balance of loans receivable applicable to each category as of those dates.


		June 30, 2024
		****			****			Real estate
(Dollars in thousands)	****	Commercial		****	Municipal		****	Commercial		****	Residential		Consumer		Total		****
Allowance for credit losses:
Beginning Balance April 1, 2024		$	2,287		$	698		$	14,470		$	4,258	$	884	$	22,597
Charge-offs			(41)											(94)		(135)
Recoveries			25									2		38		65
(Credits) provisions			(100)			13			686			(30)		27		596
Ending balance		$	2,171		$	711		$	15,156		$	4,230	$	855	$	23,123

		June 30, 2023
								Real estate
(Dollars in thousands)	****	Commercial		****	Municipal		****	Commercial		****	Residential		Consumer		Total		****
Allowance for loan losses:
Beginning Balance April 1, 2023		$	2,481		$	2,318		$	15,692		$	3,868	$	1,085	$	25,444
Charge-offs														(77)		(77)
Recoveries			5									3		44		52
Provisions (credits)			265			(1,491)			(731)			(104)		(140)		(2,201)
Ending balance		$	2,751		$	827		$	14,961		$	3,767	$	912	$	23,218

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)


		June 30, 2024
								Real estate
(Dollars in thousands)	****	Commercial		****	Municipal		****	Commercial		****	Residential		Consumer		Total
Allowance for credit losses:
Beginning Balance January 1, 2024		$	2,272		$	788		$	14,153		$	3,782	$	900	$	21,895
Charge-offs			(46)											(197)		(243)
Recoveries			80									4		83		167
(Credits) provisions			(135)			(77)			1,003			444		69		1,304
Ending balance		$	2,171		$	711		$	15,156		$	4,230	$	855	$	23,123

		June 30, 2023
								Real estate
(Dollars in thousands)	****	Commercial		****	Municipal		****	Commercial		****	Residential		Consumer		Total
Allowance for credit losses:
Beginning Balance January 1, 2023		$	4,365		$	1,247		$	17,915		$	3,072	$	873	$	27,472
Impact of adopting ASC 326			(1,683)			747			(3,344)			967		30		(3,283)
Beginning Balance January 1, 2023			2,682			1,994			14,571			4,039		903		24,189
Charge-offs			(4)											(148)		(152)
Recoveries			5						1			19		93		118
Provisions (credits)			68			(1,167)			389			(291)		64		(937)
Ending balance		$	2,751		$	827		$	14,961		$	3,767	$	912	$	23,218

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The following table represents the allowance for credit losses by major classification of loan and whether the loans were individually or collectively evaluated and collateral dependent by class of loans at June 30, 2024 and December 31, 2023.


		June 30, 2024
								Real estate
(Dollars in thousands)	****	Commercial		****	Municipal		****	Commercial		****	Residential		****	Consumer		****	Total		****
Allowance for credit losses:
Ending balance		$	2,171		$	711		$	15,156		$	4,230		$	855		$	23,123
Ending balance: individually evaluated			7						415									422
Ending balance: collectively evaluated		$	2,164		$	711		$	14,741		$	4,230		$	855		$	22,701
Loans receivable:
Ending balance		$	461,014		$	170,991		$	1,793,652		$	369,671		$	74,225		$	2,869,553
Individually evaluated - collateral dependent - real estate			378						5,139			1,327						6,844
Individually evaluated - collateral dependent - non-real estate			7															7
Collectively evaluated			460,629			170,991			1,788,513			368,344			74,225			2,862,702



		December 31, 2023
								Real estate
(Dollars in thousands)	****	Commercial		****	Municipal		****	Commercial		****	Residential		****	Consumer		****	Total		****
Allowance for loan losses:
Ending balance		$	2,272		$	788		$	14,153		$	3,782		$	900		$	21,895
Ending balance: individually evaluated for impairment			10						21									31
Ending balance: collectively evaluated for impairment		$	2,262		$	788		$	14,132		$	3,782		$	900		$	21,864
Loans receivable:
Ending balance		$	368,411		$	175,304		$	1,863,118		$	360,803		$	82,261		$	2,849,897
Individually evaluated - collateral dependent - real estate			7						2,974			1,749						4,730
Individually evaluated - collateral dependent - non-real estate			10															10
Collectively evaluated			368,394			175,304			1,860,144			359,054			82,261			2,845,157

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Nonaccrual Loans

The following table presents the Company’s nonaccrual loans at June 30, 2024 and December 31, 2023.



			June 30, 2024
			Total		Nonaccrual with		Nonaccrual with
			Nonaccrual		an Allowance for		no Allowance for
(Dollars in thousands)	****		Loans		Credit Losses		Credit Losses
Commercial		$	378	$	7	$	371
Municipal
Real estate:
Commercial			5,138		4,923		215
Residential			1,327				1,327
Consumer			274				274
Total		$	7,117	$	4,930	$	2,187



			December 31, 2023
			Total		Nonaccrual with		Nonaccrual with
			Nonaccrual		an Allowance for		no Allowance for
(Dollars in thousands)	****		Loans		Credit Losses		Credit Losses
Commercial		$	10	$	10	$
Municipal
Real estate:
Commercial			2,974		1,170		1,804
Residential			760				760
Consumer			218				218
Total		$	3,962	$	1,180	$	2,782

Interest income recorded on nonaccrual loans was $43 thousand and $35 thousand for the three months ended June 30, 2024 and June 30, 2023, respectively. Interest income recorded on nonaccrual loans was $74 thousand and $414 thousand for the six months ended June 30, 2024 and June 30, 2023, respectively.

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.
---	---

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

●	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 table presents the amortized cost of loans and gross charge-offs by year of origination and by major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2024 and December 31, 2023:


	As of June 30, 2024
(Dollars in thousands)		2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial
Pass	$	13,103	$	36,862	$	67,146	$	65,299	$	35,316	$	91,621	$	141,169	$	139	$	450,655
Special Mention		1,253		1,142		733		246		2,113		1,451		1,777				8,715
Substandard				32		62		40				497		1,013				1,644
Total Commercial		14,356	****	38,036	****	67,941	****	65,585	****	37,429	****	93,569	****	143,959	****	139	****	461,014

Municipal
Pass		1,106		1,307		49,200		93,134		10,433		15,773		38				170,991
Special Mention
Substandard
Total Municipal		1,106	****	1,307	****	49,200	****	93,134	****	10,433	****	15,773	****	38	****	****	****	170,991

Commercial real estate
Pass		67,209		131,565		532,372		437,529		127,512		461,610				92		1,757,889
Special Mention				2,360		967		1,138		1,061		19,988						25,514
Substandard				167		1,845		1,318		157		6,762						10,249
Total Commercial real estate		67,209		134,092		535,184		439,985		128,730		488,360		****		92		1,793,652

Residential real estate
Pass		12,525		28,059		50,687		64,295		25,489		95,395		91,919		60		368,429
Special Mention
Substandard				4						307		927		4				1,242
Total Residential real estate		12,525	****	28,063	****	50,687	****	64,295	****	25,796	****	96,322	****	91,923	****	60	****	369,671

Consumer
Pass		7,199		22,998		24,658		9,795		3,842		3,942		1,517				73,951
Special Mention
Substandard				60		31		115		35		33						274
Total Consumer		7,199	****	23,058	****	24,689	****	9,910	****	3,877	****	3,975	****	1,517	****	****	****	74,225

Total Loans	$	102,395	$	224,556	$	727,701	$	672,909	$	206,265	$	697,999	$	237,437	$	291	$	2,869,553

Gross charge-offs
Commercial	$		$	41	$		$		$		$	5	$		$		$	46
Municipal
Commercial real estate
Residential real estate
Consumer				15		81		60		11		30						197
Total Gross charge-offs	$	****	$	56	$	81	$	60	$	11	$	35	$	****	$	****	$	243

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)



	As of December 31, 2023
(Dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial
Pass	$	9,856	$	38,172	$	28,127	$	29,966	$	44,551	$	82,190	$	131,536	$	650	$	365,048
Special Mention				876		182						49		832				1,939
Substandard		15		19		42				33		534		781				1,424
Total Commercial		9,871	****	39,067	****	28,351	****	29,966	****	44,584	****	82,773	****	133,149	****	650	****	368,411

Municipal
Pass		1,888		48,095		94,791		10,804		16		19,652		58				175,304
Special Mention
Substandard
Total Municipal		1,888	****	48,095	****	94,791	****	10,804	****	16	****	19,652	****	58	****	****	****	175,304

Commercial real estate
Pass		156,277		553,754		491,506		143,068		153,426		351,142				117		1,849,290
Special Mention				1,299						360		2,761						4,420
Substandard		169		1,338		1,520		160		697		5,524						9,408
Total Commercial real estate		156,446		556,391		493,026		143,228		154,483		359,427		****		117		1,863,118

Residential real estate
Pass		17,385		52,093		65,280		27,118		16,652		84,652		83,507		13,490		360,177
Special Mention
Substandard		4						329				288		5				626
Total Residential real estate		17,389	****	52,093	****	65,280	****	27,447	****	16,652	****	84,940	****	83,512	****	13,490	****	360,803

Consumer
Pass		27,053		30,307		12,460		5,441		3,107		2,981		694				82,043
Special Mention
Substandard				58		79		31		30		20						218
Total Consumer		27,053	****	30,365	****	12,539	****	5,472	****	3,137	****	3,001	****	694	****	****	****	82,261

Total Loans	$	212,647	$	726,011	$	693,987	$	216,917	$	218,872	$	549,793	$	217,413	$	14,257	$	2,849,897

Gross charge-offs
Commercial	$		$		$		$	21	$		$	33	$	4	$		$	58
Municipal
Commercial real estate												2,598						2,598
Residential real estate
Consumer				95		101		69		49		55						369
Total Gross charge-offs	$	****	$	95	$	101	$	90	$	49	$	2,686	$	4	$	****	$	3,025

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The major classifications of loans by past due status are summarized as follows:


	****	June 30, 2024																			****
	****			****			****	Greater		****			****			****			****	Loans > 90	****
		30-59 Days			60-89 Days			than 90			Total Past									Days and	****
(Dollars in thousands)		Past Due			Past Due			Days			Due			Current			Total Loans			Accruing	****
Commercial		$	463		$	290		$	7		$	760		$	460,254		$	461,014		$
Municipal															170,991			170,991
Real estate:
Commercial			3,871			2,086			4,003			9,960			1,783,692			1,793,652
Residential			1,395			101			713			2,209			367,462			369,671
Consumer			865			313			134			1,312			72,913			74,225
Total		$	6,594		$	2,790		$	4,857		$	14,241		$	2,855,312		$	2,869,553		$


	****	December 31, 2023																				****
	****			****			****	Greater		****			****			****			****	Loans > 90		****
		30-59 Days			60-89 Days			than 90			Total Past									Days and		****
(Dollars in thousands)		Past Due			Past Due			Days			Due			Current			Total Loans			Accruing		****
Commercial		$	53		$	155		$	10		$	218		$	368,193		$	368,411		$
Municipal															175,304			175,304
Real estate:
Commercial			152			5			279			436			1,862,682			1,863,118
Residential			1,456			50			1,610			3,116			357,687			360,803			986
Consumer			1,069			285			85			1,439			80,822			82,261
Total		$	2,730		$	495		$	1,984		$	5,209		$	2,844,688		$	2,849,897		$	986

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Allowance for Credit Losses on Off Balance Sheet Commitments

The following table presents the activity in the ACL on off balance sheet commitments, which include commitments to extend credit, unused portions of lines of credit and standby letters of credit, for the three and six months ended June 30, 2024 and 2023:


		For the three months ended
(Dollars in thousands)		June 30, 2024		June 30, 2023
Beginning balance	$	530	$	264
Provision for (credit to) credit losses recorded in noninterest expense		(196)		(171)
Total allowance for credit losses on off balance sheet commitments	$	334	$	93

		For the six months ended
(Dollars in thousands)		June 30, 2024		June 30, 2023
Beginning balance	$	43	$	179
Impact of adopting Topic 326				270
Provision for (credit to) credit losses recorded in noninterest expense		291		(356)
Total allowance for credit losses on off balance sheet commitments	$	334	$	93

The contractual amounts of off-balance sheet commitments at June 30, 2024 and 2023 are as follows:


(Dollars in thousands)	****	2024		****	2023		****
Commitments to extend credit		$	86,125		$	228,887
Unused portions of lines of credit			383,483			368,372
Standby letters of credit			43,659			52,826
		$	513,267		$	650,085

Modifications to Borrowers Experiencing Financial Difficulty

ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) eliminated the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In accordance with the new guidance, the Company no longer evaluates loans with modifications made to borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and evaluated collectively for impairment to establish an ACL.

There was one modification made to a commercial and industrial loan with a borrower experiencing financial difficulty during the three and six months ended June 30, 2024 which involved the deferral of the principal payment and the extension of the loan’s maturity date three months to September 16, 2024. The loan had an outstanding principal balance of $370 thousand at June 30, 2024. There were no loans made to borrowers that were modified during the three and six months ended June 30, 2023.

During the three and six months ended June 30, 2024 and June 30, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

6. Other assets:

The components of other assets at June 30, 2024 and December 31, 2023 are summarized as follows:


(Dollars in thousands)	****		June 30, 2024	****		December 31, 2023	****
Other real estate owned		$	1,152		$
Mortgage servicing rights			852			870
Prepaid shares tax			819			949
Prepaid pension			4,018			3,764
Prepaid expenses			4,992			4,840
Restricted equity securities (FHLB and other)			7,736			5,180
Investment in low income housing partnership			4,890			5,015
Interest rate swaps^(1)^			20,958			19,278
Receivable - matured U.S. Treasury bond			5,000
Other assets			2,660			2,353
Total		$	53,077		$	42,249
(1)	Interest rate swaps balance represents the fair value of the commercial loan back-to-back swaps.
---	---

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.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

●	Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
●	Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
---	---

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

During the periods ended June 30, 2024 and December 31, 2023 there were no transfers in or out of Level 3.

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

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

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

Assets and liabilities measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023 are summarized as follows:


		Fair Value Measurement Using
					Quoted Prices in			Significant			Significant
					Active Markets for			Other Observable			Unobservable
(Dollars in thousands)					Identical Assets			Inputs			Inputs
June 30, 2024	****	Amount		****	(Level 1)		****	(Level 2)		****	(Level 3)	****
U.S. Treasury securities		$	180,007		$	180,007		$			$
U.S. government-sponsored enterprises			2,032						2,032
State and municipals:
Taxable			56,837						56,837
Tax-exempt			65,004						65,004
Mortgage-backed securities:
U.S. government agencies			604						604
U.S. government-sponsored enterprises			77,028						77,028
Corporate debt securities			3,728						3,728
Common equity securities			78			78
Total investment securities		$	385,318		$	180,085		$	205,233		$
Interest rate swap-other assets		$	20,958					$	20,958
Interest rate swap-other liabilities		$	(20,538)					$	(20,538)

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)


		Fair Value Measurement Using
					Quoted Prices in			Significant			Significant
					Active Markets for			Other Observable			Unobservable
(Dollars in thousands)					Identical Assets			Inputs			Inputs
December 31, 2023	****	Amount		****	(Level 1)		****	(Level 2)		****	(Level 3)	****
U.S. Treasury securities		$	184,057		$	184,057		$			$
U.S. government-sponsored enterprises			2,152						2,152
State and municipals:
Taxable			57,100						57,100
Tax-exempt			67,124						67,124
Mortgage-backed securities:
U.S. government agencies			724						724
U.S. government-sponsored enterprises			84,040						84,040
Corporate debt securities			3,730						3,730
Common equity securities			98			98
Total investment securities		$	399,025		$	184,155		$	214,870		$
Interest rate swap-other assets		$	19,278					$	19,278
Interest rate swap-other liabilities		$	(18,808)					$	(18,808)

Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2024 and December 31, 2023 are summarized as follows:


		Fair Value Measurement Using
					Quoted Prices in		Significant		Significant
					Active Markets for		Other Observable		Unobservable
(Dollars in thousands)					Identical Assets		Inputs		Inputs
June 30, 2024	****	Amount		****	(Level 1)	****	(Level 2)	****	(Level 3)		****
Loans individually evaluated for credit loss		$	6,851		$		$		$	6,851
Other real estate owned		$	1,152						$	1,152


		Fair Value Measurement Using
					Quoted Prices in		Significant Other		Significant
					Active Markets for		Observable		Unobservable
(Dollars in thousands)					Identical Assets		Inputs		Inputs
December 31, 2023	****	Amount		****	(Level 1)	****	(Level 2)	****	(Level 3)		****
Loans individually evaluated for credit loss		$	4,740		$		$		$	4,740

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
(Dollars in thousands, except percents)		Fair Value							Range
June 30, 2024	****	Estimate		****	Valuation Techniques	****	Unobservable Input	****	(Weighted Average)	****
Loans individually evaluated for credit loss		$	6,851		Appraisal of collateral		Appraisal adjustments		22.8% to 94.0% (67.5)%
							Liquidation expenses		3.0% to 6.0% (5.6)%
Other real estate owned		$	1,152		Appraisal of collateral		Appraisal adjustments		1.0% to 1.0% (1.0)%
							Liquidation expenses		3.0% to 6.0% (4.5)%

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)


		Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands, except percents)		Fair Value							Range
December 31, 2023	****	Estimate		****	Valuation Techniques	****	Unobservable Input	****	(Weighted Average)	****
Loans individually evaluated for credit loss		$	4,740		Appraisal of collateral		Appraisal adjustments		22.8% to 82.4% (63.6)%
							Liquidation expenses		3.0% to 6.0% (5.2)%

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

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

The carrying and fair values of the Company’s financial instruments at June 30, 2024 and December 31, 2023 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		****
(Dollars in thousands)		Carrying			Fair			Assets			Inputs			Inputs		****
June 30, 2024	****	Value		****	Value		****	(Level 1)		****	(Level 2)		****	(Level 3)		****
Financial assets:
Cash and due from banks		$	49,956		$	49,956		$	49,956		$			$
Investment securities:
Available for sale			385,240			385,240			180,007			205,233
Common equity securities			78			78			78
Held to maturity			81,598			68,224						68,224
Loans held for sale
Net loans			2,846,430			2,646,017									2,646,017
Accrued interest receivable			13,326			13,326						13,326
Mortgage servicing rights			852			1,709						1,709
Restricted equity securities (FHLB and other)			7,736			7,736						7,736
Other assets - interest rate swaps			20,958			20,958						20,958
Total		$	3,406,174		$	3,193,244
Financial liabilities:
Deposits		$	3,064,959		$	3,059,952		$			$	3,059,952		$
Short-term borrowings			104,250			104,254						104,254
Long-term debt			25,000			24,761						24,761
Subordinated debt			33,000			43,284						43,284
Accrued interest payable			5,507			5,507						5,507
Other liabilities - interest rate swaps			20,538			20,538						20,538
Total		$	3,253,254		$	3,258,296

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)


	****			****			****	Fair Value Hierarchy								****
								Quoted		****			****			****
								Prices in								****
								Active			Significant					****
								Markets for			Other			Significant		****
								Identical			Observable			Unobservable		****
(Dollars in thousands)		Carrying			Fair			Assets			Inputs			Inputs		****
December 31, 2023	****	Value		****	Value		****	(Level 1)		****	(Level 2)		****	(Level 3)		****
Financial assets:
Cash and due from banks		$	187,365		$	187,365		$	187,365		$			$
Investment securities:
Available for sale			398,927			398,927			184,057			214,870
Common equity securities			98			98			98
Held to maturity			84,851			71,698						71,698
Loans held for sale			250			250
Net loans			2,828,002			2,593,151									2,593,151
Accrued interest receivable			12,734			12,734						12,734
Mortgage servicing rights			870			1,745						1,745
Restricted equity securities (FHLB and other)			5,180			5,180						5,180
Other assets - interest rate swaps			19,278			19,278						19,278
Total		$	3,537,555		$	3,290,426
Financial liabilities:
Deposits		$	3,279,037		$	3,274,774		$			$	3,274,774		$
Short-term borrowings			17,590			17,590						17,590
Long-term debt			25,000			24,924						24,924
Subordinated debt			33,000			45,504						45,504
Accrued interest payable			5,765			5,765						5,765
Other liabilities - interest rate swaps			18,808			18,808						18,808
Total		$	3,379,200		$	3,387,365

8. Employee benefit plans:

****

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

For the three and six months ended June 30, salaries and employee benefits expense includes approximately $294 thousand and $620 thousand in 2024 and $360 thousand and $837 thousand in 2023 relating to the employee benefit plans.


(Dollars in thousands)	Pension Benefits				****
Three Months Ended June 30,	2024		2023		****
Net periodic pension benefit:
Interest cost	$	158	$	164
Expected return on plan assets		(320)		(293)
Amortization of unrecognized net loss		49		50
Net periodic pension benefit	$	(113)	$	(79)

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)


(Dollars in thousands)	Pension Benefits
Six Months Ended June 30,	2024		2023
Net periodic pension income:
Interest cost	$	317	$	328
Expected return on plan assets		(641)		(585)
Amortization of unrecognized net loss		97		99
Net periodic pension income:		(227)		(158)

In May 2017, the Company’s stockholders approved the 2017 equity incentive plan (“2017 Plan”). In May 2023, the Company’s stockholders approved the 2023 equity incentive plan (“2023 Plan”). Under the 2017 Plan and 2023 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 Plan.
●	Determine the type, size and term of awards.
---	---
●	Determine whether such performance objectives and conditions have been met.
---	---
●	Accelerate the vesting or exercisability of an award.
---	---

Persons eligible to receive awards under the 2017 Plan and 2023 Plan include directors, officers, employees, consultants and other service providers of the Company and its subsidiaries.

As of June 30, 2024, 66,298 shares of the Company’s common stock were available for grants as awards pursuant to the 2023 Plan. While the 2017 Plan will remain in effect in accordance with its terms to govern outstanding awards under that plan, the Company intends to make future grants under the 2023 Plan. If any outstanding awards are forfeited by the holder or canceled by the Company, the underlying shares would be available for regrant to others under the 2023 Plan.

The 2017 Plan and 2023 Plan authorize grants of stock options, stock appreciation rights, cash awards, performance awards, restricted stock and restricted stock units.

For the six months ended June 30, 2024, the Company granted 23,243 performance based restricted stock units and 8,895 time based restricted stock awards, under the 2023 Plan. For the six months ended June 30, 2023, the Company granted 18,222 performance based restricted stock units and 5,206 time based restricted stock awards, under the 2023 Plan.

The non-performance restricted stock grants made in 2024, 2023 and 2022 vest equally over three years. The performance-based restricted stock units vest over three fiscal years and include conditions based on the Company’s three year cumulative diluted earnings per share and three-year average return on tangible common that determines the number of restricted stock units that may vest.

The Company expenses the fair value of all-share based compensation over the requisite service period commencing at grant date. The fair value of restricted stock is expensed on a straight-line basis. Compensation is recognized over the vesting period and adjusted based on the performance criteria. The Company classifies share-based compensation for employees within “salaries and employee benefits expense” on the consolidated statements of income and comprehensive income.

The Company recognized net compensation costs of $200 thousand and $399 thousand for the three and six months ended June 30, 2024 for awards granted under the 2023 Plan and recognized compensation expense of $84 thousand and $167 thousand for the three and six months ended June 30, 2024 for the awards granted under the 2017 Plan. As of 28

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

June 30, 2024, the Company had $1.8 million of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of under 2.0 years.

9. Derivatives and hedging activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s existing credit derivatives result from participations of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.

Cash Flow Hedges of Interest Rate Risk

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive (loss) income, (AOCI) and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company’s variable-rate debt/assets. During the next twelve months, the Company estimates that no amount will be reclassified as a reduction to interest income.

Fair Value Hedges of Interest Rate Risk

The Company **** is exposed to changes in the fair value of certain of its fixed-rate pools of assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, the Secured Overnight Financing Rate (“SOFR”). Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

As of June 30, 2024, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustment for fair value hedges:


Line Item in the Consolidated Statement of Financial Position in Which the Hedged Item is Included			Amortized Amount of the Hedged Assets/(Liabilities)				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(Dollars in thousands)			June 30, 2024		December 31, 2023		June 30, 2024		December 31, 2023
AFS Securities (1)		$	142,638	$	143,573	$	(368)	$	871
Fixed Rate Loans (2)			49,897		50,462		(103)		462
Total		$	192,535	$	194,035	$	(471)	$	1,333
(1)	These amounts include the amortized cost basis of closed portfolios of fixed rate assets used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At June 30, 2024, the amortized cost basis of the closed portfolios used in these hedging relationships was $142.6 million. The amounts of the designated hedged items were $100.0 million.
---	---

(2)	Fixed Rate Loan Assets. These amounts include the carrying value of fixed rate loan assets used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At June 30, 2024, the principal value of the hedged item was $50.0 million.

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 derivatives 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 derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. As of June 30, 2024, the Company had 119 interest rate swaps with an aggregate notional amount of $245.2 million related to this program.

The Company’s existing credit derivatives result from participations in or out of interest rate swaps provided by or to external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.

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 Sheet as of June 30, 2024 and December 31, 2023.



Fair Values of Derivative Instruments
		Derivative Assets								Derivative Liabilities
		As of June 30, 2024				As of December 31, 2023 (1)				As of June 30, 2024				As of December 31, 2023
(Dollars in thousands)		Notional Amount	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value		Notional Amount	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest Rate Products	$	150,000	Other Assets	$	518	Other Assets	$		$		Other Liabilities	$	0	Other Liabilities	$	1,270
Total derivatives designated as hedging instruments				$	518		$					$	0		$	1,270

Derivatives not designated as hedging instruments
Interest Rate Products	$	237,083	Other Assets	$	21,513	Other Assets	$	19,833	$	237,083	Other Liabilities	$	21,093	Other Liabilities	$	19,364
Other Contracts		8,131	Other Assets		2	Other Assets		3		7,303	Other Liabilities			Other Liabilities
Total derivatives not designated as hedging instruments				$	21,515		$	19,836				$	21,093		$	19,364
(1) The notional asset amount of interest rate swaps at December 31, 2023 was 230.3 million and 8.4 million for risk participation agreements.
Amounts include accrued interest.

All values are in US Dollars. 30

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive (loss) income as of June 30, 2024 and June 30, 2023.


(Dollars in thousands) Three months ended June 30, 2024		Amount of (Loss) Recognized in OCI on Derivative		Amount of (Loss) Recognized in OCI Included Component		Amount of (Loss) Recognized in OCI Excluded Component	Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component		Amount of (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$		$		$		Interest Income	$		$		$
Total	$		$		$			$		$		$

(Dollars in thousands) Three months ended June 30, 2023		Amount of (Loss) Recognized in OCI on Derivative		Amount of (Loss) Recognized in OCI Included Component		Amount of (Loss) Recognized in OCI Excluded Component	Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income Included Component		Amount of (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1)	$		$	(1)	Interest Income	$	(16)	$		$	(16)
Total	$	(1)	$		$	(1)		$	(16)	$		$	(16)

(Dollars in thousands) Six months ended June 30, 2024		Amount of (Loss) Recognized in OCI on Derivative		Amount of (Loss) Recognized in OCI Included Component		Amount of (Loss) Recognized in OCI Excluded Component	Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income Included Component		Amount of (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$		$		$		Interest Income	$		$		$
Total	$		$		$			$		$		$

(Dollars in thousands) Six months ended June 30, 2023		Amount of (Loss) Recognized in OCI on Derivative		Amount of (Loss) Recognized in OCI Included Component		Amount of (Loss) Recognized in OCI Excluded Component	Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income Included Component		Amount of (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1)	$		$	(1)	Interest Income	$	(32)	$		$	(32)
Total	$	(1)	$		$	(1)		$	(32)	$		$	(32)

*	Amounts disclosed are gross and not net of taxes.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of income and comprehensive income for the three and six months ended June 30, 2024 and 2023.


	Location and Amount of Gain or (Loss)
	Recognized in Income on Fair Value and
	Cash Flow Hedging Relationships
	For the three months ended June 30,
		2024		2023
(Dollars in thousands)		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.	$	226	$	115

The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships
Interest contracts
Hedged items		(160)		(2,034)
Derivatives designated as hedging instruments		386		2,165
Derivatives designated as hedging instruments
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of (loss) gain reclassified from AOCI into income				(16)
Amount of gain reclassified from AOCI into income - Included Component
Amount of (loss) reclassified from AOCI into income - Excluded Component	$		$	(16)


	Location and Amount of Gain or (Loss)
	Recognized in Income on Fair Value and
	Cash Flow Hedging Relationships
	For the six months ended June 30,
		2024		2023
(Dollars in thousands)		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.	$	448	$	130

The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships
Interest contracts
Hedged items		(1,239)		(48)
Derivatives designated as hedging instruments		1,687		210
in earnings based on an amortization approach
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount excluded from effectiveness testing recognized
Amount of gain reclassified from AOCI into income - Included Component
Amount of (loss) reclassified from AOCI into income - Excluded Component	$		$	(32)

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Effect of Derivative Instruments Not Designated as Hedging Instruments on the Consolidated Statements of Income and Comprehensive Income


		Amount of Gain or (Loss)		Amount of Gain or (Loss)		Amount of Gain		Amount of Gain or (Loss)
		** Recognized in**		** Recognized in**		Recognized in		Recognized in
	Location of Gain or (Loss)	Income on Derivative		Income on Derivative		Income on Derivative		Income on Derivative
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
(Dollars in thousands)	Derivative	June 30, 2024		June 30, 2024		June 30, 2023		June 30, 2023
Derivatives Not Designated as Hedging Instruments:
Interest Rate Products	Other income / (expense)	$	(8)	$	(50)	$	23	$	(138)
Other Contracts	Other income / (expense)				(1)		30		30
Total		$	(8)	$	(51)	$	53	$	(108)

Fee Income	Fee income	$	110	$	128	$		$	384

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2024 and December 31, 2023. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheets.


Offsetting of Derivative Assets
as of June 30, 2024
						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
(Dollars in thousands)	Assets		Balance Sheet	Balance Sheet		Instruments		Posted		Amount

Derivatives	$	22,031	$	$	22,031	$		$	20,350	$	1,681


Offsetting of Derivative Liabilities
as of June 30, 2024
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Liabilities
	Recognized		Offset in the	presented in the		Financial		Cash Collateral		Net
(Dollars in thousands)	Liabilities		Balance Sheet	Balance Sheet		Instruments		Posted*		Amount

Derivatives	$	21,093	$	$	21,093	$	21,093	$		$
*Cash collateral of $270 was paid in June 2024, but not presented as an offset above.

Offsetting of Derivative Assets
as of December 31, 2023
						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
(Dollars in thousands)	Assets		Balance Sheet	Balance Sheet		Instruments		Posted		Amount

Derivatives	$	19,833	$	$	19,833	$		$	17,590	$	2,243


Offsetting of Derivative Liabilities
as of December 31, 2023
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Liabilities
	Recognized		Offset in the	presented in the		Financial		Cash Collateral		Net
(Dollars in thousands)	Liabilities		Balance Sheet	Balance Sheet		Instruments		Posted		Amount

Derivatives	$	20,633	$	$	20,633	$	20,633	$		$

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of June 30, 2024, 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 $330 thousand. As of December 31, 2023, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.7 million. The Company has minimum 34

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $270 thousand against its obligations under these agreements at June 30, 2024. Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the agreement. The cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the cash collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.

10. Deposits

The major components of interest-bearing and noninterest-bearing deposits at June 30, 2024 and December 31, 2023 are summarized as follows:



(Dollars in thousands)	****		June 30, 2024	****		December 31, 2023
Interest-bearing deposits:
Money market accounts		$	690,631		$	782,243
NOW accounts			715,890			796,426
Savings accounts			397,827			429,011
Time deposits less than $250			504,879			505,409
Time deposits $250 or more			134,761			121,265
Total interest-bearing deposits			2,443,988			2,634,354
Noninterest-bearing deposits			620,971			644,683
Total deposits		$	3,064,959		$	3,279,037

The deposit base consisted of 42.8% retail accounts, 34.7% commercial accounts, 14.4% municipal relationships and 8.1% brokered deposits at June 30, 2024. At June 30, 2024, total estimated uninsured deposits, were approximately $744.7 million, or approximately 24.3% of total deposits; as compared to approximately $883.5 million, or 26.9% of total deposits at December 31, 2023. Included in the uninsured total at June 30, 2024 is $292.9 million of municipal deposits collateralized by letters of credit issued by the FHLB and pledged investment securities, and $.7 million of affiliate company deposits. As an additional resource to our uninsured depositors, we offer all depositors access to IntraFi's CDARS and ICS programs which allows deposit customers to obtain full FDIC deposit insurance while maintaining the deposit relationship with our Bank.

The scheduled maturities of time deposits are summarized below, through June 30 of each year:


(Dollars in thousands)
2025	$	375,157
2026		108,595
2027		48,579
2028		95,187
2029		6,192
Thereafter		5,930
	$	639,640

11. Borrowings

Short-term borrowings consist of FHLB advances representing overnight borrowings or with stated original terms of less than twelve months and other borrowings related to collateral held from derivative counterparties. Total short-term borrowings at June 30, 2024 were $104.3 million and consisted primarily of overnight FHLB advances as compared to $17.6 million at December 31, 2023. Other borrowings, which include cash collateral pledged by derivative 35

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

counterparties to offset interest rate exposure, totaled $20.4 million at June 30, 2024 and $17.6 million at December 31, 2023.

The table below outlines short-term borrowings at and for the six months ended June 30, 2024 and at and for the year ended December 31, 2023:


		At and for the six months ended June 30, 2024
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
(Dollars in thousands, except percents)	Balance		Balance		Balance		the Year		of the Period
Other borrowings	$	20,350	$	20,861	$	25,050	5.39	%	5.33	%
FHLB advances		83,900		11,674		83,900	5.78		5.67
Total short-term borrowings	$	104,250	$	32,535	$	108,950	5.53	%	5.60	%


	At and for the year ended December 31, 2023
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
(Dollars in thousands, except percents)	Balance		Balance		Balance		the Year		of the Year
Other borrowings	$	17,590	$	19,160	$	28,470	5.54	%	5.35	%
FHLB advances				19,171		158,000	4.48
Total short-term borrowings	$	17,590	$	38,331	$	186,470	5.01	%	5.35	%

The Company has an agreement with the FHLB which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At June 30, 2024, the maximum borrowing capacity was $1.3 billion of which $108.9 million was outstanding in borrowings and $239.5 million was used to issue standby letters of credit to collateralize public fund deposits. At December 31, 2023, the maximum borrowing capacity was $1.2 billion of which $25.0 million was outstanding in long-term debt and $345.4 million was used to issue standby letters of credit to collateralize public fund deposits.

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

In addition to borrowings from FHLB and correspondent bank lines of credit, we have availability through the Federal Reserve Bank’s Discount Window and Bank Term Funding Program (“BTFP”) of $413.5 million at June 30, 2024. The FRB’s borrower-in-custody program allows depository institutions to pledge loans as collateral for Discount Window advances while retaining possession of the loan documentation. At June 30, 2024, $331.2 million in loans were pledged as collateral for the borrower-in-custody program and provided $235.4 million in borrowing capacity. At June 30, 2024, securities with a current par value of $166.0 million were pledged at the Discount Window resulting in borrowing capacity of $153.1 million. An additional $25.0 million in securities were pledged at the BTFP at June 30, 2024 in anticipation of the merger with FNCB and the assumption of their BTFP debt.

At December 31, 2023, $365.8 million in loans were pledged as collateral for the borrower-in-custody program and provided $246.1 million in borrowing capacity. At December 31, 2023, $191.0 million in securities were pledged to the BTFP and $11 thousand was pledged to the Discount Window. The BTFP allowed depository institutions to borrow up to the par value of eligible securities pledged at the FRB. The BTFP expired on March 11, 2024 and the Company transferred the eligible securities pledged to the Federal Reserve Discount Window.

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Long-term debt consisting of advances from the FHLB at June 30, 2024 and December 31, 2023 is as follows:


	Interest Rate
(Dollars in thousands, except percents)	Fixed			June 30, 2024		December 31, 2023
March 2025	4.37	%	$	10,000	$	10,000
March 2026	4.20			15,000		15,000
			$	25,000	$	25,000

Maturities of long-term debt, by contractual maturity, for the remainder of 2024 and subsequent years are as follows:


(Dollars in thousands)
2025	$	10,000
2026		15,000
	$	25,000

The advances from the FHLB totaling $25.0 million are not convertible and have a fixed rate.

12. Subordinated debt

On June 1, 2020, the Company sold $33.0 million aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes qualify as Tier 2 capital for regulatory capital purposes.

The 2020 Notes bear interest at a rate of 5.375% per year for the first five years and then float based on a benchmark rate (as defined), provided that the interest rate applicable to the outstanding principal balance during the period the 2020 Notes are floating will at no time be less the 4.75%. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2020, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 1, June 1, September 1, and December 1. The 2020 Notes will mature on June 1, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after June 1, 2025 and prior to June 1, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, the Company may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100%) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar proceeding by or against the Company or Peoples Bank. 37

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Peoples Financial Services Corp.

NOTES TO CONSOLIDATE D FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

13. Subsequent events

On July 1, 2024, the Company completed its previously announced merger with FNCB, pursuant to which FNCB merged with and into the Company, and FNCB Bank merged with and into Peoples Bank.

Pursuant to the terms of the Merger Agreement, each outstanding share of FNCB‘s common stock was converted into the right to receive 0.146 shares of the Company’s common stock. The value of the total transaction consideration was approximately $133.7 million. The consideration included the issuance of 2,935,456 shares of the Company’s common stock, which had a value of $45.54 per share, which was the closing price of the Company’s common stock on June 28, 2024, the last trading day prior to the consummation of the acquisition. Also included in the total consideration was cash in lieu of any fractional shares.


(Dollars in thousands)
Purchase Price:
Peoples Financial Services Corp. common stock paid at closing price of $45.54 as of June 30, 2024	$	133,681
Cash consideration (cash in lieu for fractional shares)		32
Total purchase price	$	133,713

Sales of Acquired Securities

As of July 2, 2024, the Company sold $271.2 million par value of available for sale securities, which were acquired from FNCB on July 1, 2024, for net proceeds of $241.2 million and used $189 million of the proceeds to reduce FHLB advances.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2023.

Cautionary Note Regarding Forward-Looking Statements:

This quarterly report on Form 10-Q 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 that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control). 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: macroeconomic trends; the effects of any recession in the United States; the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine and the conflict in Israel; risks associated with business combinations, including, the possibility that we may be unable to achieve expected synergies and operating efficiencies in the merger with FNCB within the expected timeframes or at all and to successfully integrate operations of FNCB and FNCB Bank and those of Peoples and Peoples Bank, which may be more difficult, time consuming or costly than expected; diversion of management's attention from ongoing business operations and opportunities; effects of the completion of the FNCB merger on the ability of Peoples to retain customers and retain and hire key personnel and maintain relationships with their vendors, and on their operating results and businesses generally; 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; adverse developments in the financial industry generally, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior; 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, 2023, in Part II, Item 1A of this report and in reports we file with the Securities and Exchange Commission from time to time.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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, 2023, which is incorporated herein by reference. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

Operating Environment: ****

In 2024, the economy appears to be expanding at a solid pace with reduced inflation and strong employment data. As of August 1, 2024, factors supporting this include:

●	Gross domestic product (“GDP”) – Real GDP rose at a 2.8 percent annualized pace in the second quarter after increasing 1.4 percent in the first quarter. The increase was a result of increases in consumer spending, private inventory investment and nonresidential fixed investment.
●	Core Consumer Price Index (“CPI”) – Core CPI, which excludes food and energy, was 3.3 percent for the 12 months ending June 30, 2024 and was driven by increased shelter expenses. When including food and energy, CPI was 3.0 percent.
---	---
●	Personal Consumption Expenditures Index (“PCE”) - PCE, a measure of the prices that people living in the U.S. pay for goods and services, increased 2.5 percent in June compared to a year ago. Excluding food and energy, PCE increased 2.6 percent.
---	---
●	Tight Labor Market – The unemployment rate was 4.1 percent in June, its highest point in more than two years. Demand for labor has decreased and wage growth has slowed.
---	---

Concerns over the high inflation rate have resulted in central bankers in the U.S. increasing interest rates seven times in 2022 and an additional four times in 2023 for a total of 525 basis points. Rates have remained constant since late July 2023. While we experienced strong loan growth early in 2023, lending has tempered as higher rates affected borrowers demand for credit. Additionally, the Company has intentionally prioritized increasing liquidity over loan growth. We have seen lower mortgage origination and sales volume as interest rates on mortgage loans have reached 20 year highs during 2023. Conversely, competition and subsequent costs of deposits have increased throughout most of 2023 and 2024. While inflation decreased during 2023 from levels of the previous year, they remain above the Federal Open Market Committee’s (“FOMC”) long-term desired 2 percent level for items other than food and energy. The FOMC has stated that they will continue to monitor economic data and will hold the fed funds rate at 5.25 percent to 5.50 percent until inflation is sustainably at 2.0 percent.

Goodwill:

The Company has goodwill with a net carrying value of $63.4 million at June 30, 2024 and December 31, 2023. The Company's policy is to test goodwill for impairment annually on December 31 or on an interim basis if an event triggering impairment may have occurred. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. At June 30, 2024, we performed a qualitative evaluation, which involves determining whether any events occurred or circumstances changed that would more likely than not reduce the Company's fair value below its carrying value. We noted no such matters. There is no assurance that changes in events or circumstances in the future will not result in impairment.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Review of Financial Position:

Total assets decreased $126.2 million or 6.8% annualized from December 31, 2023, to $3.6 billion at June 30, 2024. The decrease in assets during the six months was primarily due to decreases in federal funds sold, utilized in part to fund loan growth and seasonal outflow of deposits. Total loans increased $19.7 million since December 31, 2023 and totaled $2.9 billion at June 30, 2024. Investments decreased $17.0 million due primarily to maturities, principal payments and adjustments in market value. There were no Federal funds sold balances at June 30, 2024 compared to a balance of $144.7 million at December 31, 2023.

Deposits decreased $214.1 million to $3.1 billion at June 30, 2024 from $3.3 billion at December 31, 2023, due in part to seasonal municipal deposit outflows. Interest-bearing deposits decreased $190.4 million to $2.4 billion compared to $2.6 billion at December 31, 2023. Non-interest bearing deposits decreased $23.7 million to $621.0 million from $644.7 million as of December 31, 2023. Total short-term borrowings at June 30, 2024 were $104.3 million, an increase of $86.7 million from $17.6 million at December 31, 2023. Long term debt and subordinated debentures remained unchanged at $25.0 million and $33.0 million respectively at June 30, 2024 and December 31, 2023. Total stockholders’ equity increased $0.4 million from $340.4 million at year-end 2023 to $340.8 million at June 30, 2024 due to net income, partially offset by an increase to accumulated other comprehensive loss resulting from an increase in unrealized loss on available for sale investment securities and the payment of the dividends.

The unrealized losses on the held to maturity portfolio totaled $13.4 million and $13.2 million at June 30, 2024 and December 31, 2023, respectively. For the six months ended June 30, 2024, total assets averaged $3.6 billion, and increased $29.8 million from the same period of 2023.

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 $385.2 million at June 30, 2024, a decrease of $13.7 million, or 3.4% from $398.9 million at December 31, 2023. The decrease was primarily due to maturities and principal payments combined with a decrease in fair value due to market value adjustments.

Investment securities held to maturity, which consisted of 86.3% of mortgage-backed securities issued or guaranteed by U.S. Government agency and U.S. Government-sponsored entities, totaled $81.6 million at June 30, 2024, a decrease of $3.3 million, or 3.4% from $84.9 million at December 31, 2023. Held to maturity securities had a market value of $68.2 million at June 30, 2024 compared to $71.7 million at December 31, 2023.

For the six months ended June 30, 2024, the investment portfolio averaged $531.7 million, a decrease of $47.1 million or 8.1% compared to $578.8 million for the same period last year. Average tax-exempt municipal bonds have decreased $7.7 million or 8.2% to $86.6 million for the six months ended June 30, 2024 from $94.3 million during the comparable period of 2023. The FTE yield on the investment portfolio increased 2 basis points to 1.80% for the six months ended June 30, 2024, from 1.78% for the comparable period of 2023.

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 losses, included as a separate component of stockholders’ equity of $42.1 million net of a deferred income tax benefit of $11.8 million at June 30, 2024, and net unrealized losses of $40.3 million, net of deferred income tax benefit of $11.3 million, at December 31, 2023. 41

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Our Asset/Liability Committee (“ALCO”) reviews the performance and risk elements of the investment portfolio quarterly. Through active balance sheet management and analysis of the securities portfolio, we endeavor to maintain sufficient liquidity to satisfy depositor requirements and meet the credit needs of our customers.

Loan Portfolio:

Total loans increased $19.7 million or 1.4% annualized since December 31, 2023 and totaled $2.9 billion at June 30, 2024. This level of loan growth is consistent with the Company's current balance sheet strategy to slow loan growth and build on balance sheet liquidity. The loan growth that was achieved was due primarily to increases in commercial and industrial loans.

Commercial and industrial loans increased $88.3 million, or 32.6% annualized, to $632.0 million at June 30, 2024 compared to $543.7 million at December 31, 2023.

Commercial real estate loans decreased $69.5 million or 7.5% annualized, to $1.8 billion at June 30, 2024 compared to $1.9 billion at December 31, 2023.

Consumer loans decreased $8.0 million, or 19.6% on an annualized basis, to $74.2 million at June 30, 2024 compared to $82.3 million at December 31, 2023, from a decrease of $8.6 million in the indirect auto loans portfolio, partially offset by an increase in the remainder of our consumer portfolios.

Residential real estate loans increased $8.9 million, or 4.9% on an annualized basis, to $369.7 million at June 30, 2024 compared to $360.8 million at December 31, 2023. The increase in residential mortgages was due to increased home equity line activity.

For the six months ended June 30, 2024, total loans averaged $2.9 billion, an increase of $53.2 million or 1.9% compared to $2.8 billion for the same period of 2023. The FTE yield on the entire loan portfolio was 5.07% for the six months ended June 30, 2024, a 35 basis point increase from the comparable period last year. The increase in yield was primarily due to the FOMC interest rate increases in 2022 and through July 2023 and the corresponding effect those increases had on our offering rates on new originations and the indices at which our adjustable and floating rate loans reprice.

In addition to the risks inherent in our loan portfolio, in the normal course of business, we are also a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as on-balance sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements.

Unused commitments at June 30, 2024, totaled $513.3 million, consisting of $469.6 million in unfunded commitments of existing loan facilities and $43.7 million in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and, therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments at December 31, 2023 totaled $587.6 million, consisting of $525.4 million in unfunded commitments of existing loans and $62.2 million in standby letters of credit.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Asset Quality:

Distribution of nonperforming assets


(Dollars in thousands, except percents)		June 30, 2024			December 31, 2023
Nonaccrual loans	$	7,117		$	3,962
Accruing loans past due 90 days or more:					986
Total nonperforming loans		7,117			4,948
Foreclosed assets		27
Total nonperforming assets	$	7,144		$	4,948
Total loans held for investment	$	2,869,553		$	2,849,897
Allowance for credit losses		23,123			21,895
Allowance for credit losses as a percentage of loans held for investment		0.81	%		0.77	%
Allowance for credit losses as a percentage of nonaccrual loans		324.90	%		552.62	%
Nonaccrual loans as a percentage of loans held for investment		0.25	%		0.14	%
Nonperforming loans as a percentage of loans, net		0.25	%		0.17	%
Nonperforming assets as a percentage of total assets		0.20	%		0.13	%

Nonperforming assets increased by $2.2 million during the first six months of 2024. Nonperforming assets totaled $7.1 million or 0.20% of total assets at June 30, 2024, an increase from $4.9 million or 0.13% of total assets at December 31, 2023.

Loans on nonaccrual status increased $3.2 million to $7.1 million at June 30, 2024 from $4.0 million at December 31, 2023. Nonaccrual loans increased due primarily to placing a collateral dependent real estate loan on nonaccrual as the primary source of repayment is in doubt and there are limited secondary sources of repayment. Potential loss is mitigated as the loan carries a 70 percent guarantee of a government agency for a significant amount of the outstanding balance. There was one foreclosed property at June 30, 2024 in the amount of $27 thousand. There were no foreclosed properties at December 31, 2023.

Generally, maintaining a high loan-to-deposit ratio is our primary goal in order to drive profitability. However, this objective is superseded by our goal of maintaining strong asset quality. We continued our efforts to maintain sound underwriting standards for both commercial and consumer credit.

The allowance for credit losses equaled $23.1 million or 0.81% of loans, net at June 30, 2024 compared to $21.9 million or 0.77% of loans, net, at December 31, 2023. Loans charged-off, net of recoveries, for the six months ended June 30, 2024, equaled $76 thousand and less than 0.01% of average loans, compared to $34 thousand and less than 0.01% of average loans for the comparable period last year.

Deposits:

We attract the majority of our deposits from within our market area through the offering of various deposit instruments including demand deposit accounts, NOW accounts, money market deposit accounts, savings accounts, and time deposits, including certificates of deposit and IRAs.

For the six months ended June 30, 2024, total deposits decreased $214.1 million or 13.1% annualized to $3.1 billion from $3.3 billion at December 31, 2023. Noninterest-bearing deposits decreased $23.7 million, or 7.4% annualized and interest-bearing deposits decreased $190.4 million, or 14.5% annualized during the six months ended June 30, 2024. The 43

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

decrease in deposits was due to an $80.7 million decrease in retail and commercial accounts, a $121.3 million decrease in municipal deposits, and a $12.1 million decrease in brokered deposits.

Interest-bearing checking, NOW, and money market accounts decreased $172.1 million to $1.4 billion at June 30, 2024 from $1.6 billion at December 31, 2023 due in part to seasonal municipal outflows and depositors shifting to higher earning products both internally and externally. Savings accounts decreased $31.2 million to $397.8 million as of June 30, 2024 from $429.0 million at December 31, 2023 as depositors moved funds to higher rate products. Time deposits less than $250 thousand decreased $0.5 million to $504.9 million at June 30, 2024, from $505.4 million at December 31, 2023. Time deposits $250 thousand or more increased $13.5 million to $134.8 million at June 30, 2024 from $121.3 million at year end 2023.

The deposit base consisted of 42.8% retail accounts, 34.7% commercial accounts, 14.4% municipal relationships and 8.1% brokered deposits at June 30, 2024. At June 30, 2024, total estimated uninsured deposits were approximately $744.7 million, or 24.3% of total deposits; as compared to approximately $883.5 million, or 26.9% of total deposits at December 31, 2023. Included in the uninsured total at June 30, 2024 is $292.9 million of municipal deposits collateralized by letters of credit issued by the FHLB and pledged investment securities, and $0.7 million of affiliate company deposits. As an additional resource to our uninsured depositors, we offer all depositors access to IntraFi's CDARS and ICS programs which allows deposit customers to obtain full FDIC deposit insurance while maintaining their relationship with our Bank.

For the six months ended June 30, interest-bearing deposits averaged $2.5 billion in 2024 compared to $2.4 billion in 2023, an increase of $128.8 million or 5.3%. The cost of interest-bearing deposits was 2.91% in 2024 compared to 1.95% for the same period last year. For the first six months, the cost of total deposits, including noninterest-bearing deposits, was 2.33% in 2024 and 1.49% in 2023. The higher costs are due primarily to increases in interest rates paid in order to attract and retain current balances.

Borrowings:

****

Peoples Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the FHLB provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB. In addition, Peoples Bank may borrow from the Federal Reserve utilizing the Discount Window.

Overall, total borrowings were $162.3 million at June 30, 2024, which included short-term borrowings, long-term debt, other borrowings and subordinated debt, compared to $75.6 million at December 31, 2023, an increase of $86.7 million. At June 30, 2024, other borrowings, which include cash collateral pledged by derivative counterparties to offset interest rate exposure, totaled $20.4 million compared to $17.6 million at December 31, 2023. Higher market interest rates resulted in heightened exposure requiring an increase to pledged cash collateral. FHLB short-term borrowings totaled $83.9 million at June 30, 2024, compared to none at December 31, 2023, as the increase was due to funding the outflow of deposits. . Long-term debt was $25.0 million at June 30, 2024 and at year end 2023. Subordinated debt outstanding at June 30, 2024 and December 31, 2023 was $33.0 million.

Market Risk Sensitivity:

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily 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 44

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

Market interest rates increased rapidly during 2022 and continued to increase through July 2023 as the FOMC raised the federal funds rate. A total of seven increases for a total of 425 basis points occurred in 2022, and four additional increases totaling 100 basis points were made through July 31, 2023, resulting in a total of 525 basis points since the beginning of the FOMC’s initiative to curb inflation. 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 an 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 an 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 1.10% at June 30, 2024, an increase from 0.73% at December 31, 2023. As previously mentioned, a positive gap indicates that if interest rates increase, our earnings would likely be favorably impacted. Given the current economic conditions and outlook, we should experience increased net interest income. The overall focus of ALCO is to maintain a well-balanced interest rate risk position in order to safeguard future earnings. The current position at June 30, 2024, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to increase as market rates increase. However, these forward-looking statements are qualified in the aforementioned section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Management’s Discussion and Analysis.

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity analysis presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such an analysis.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at June 30, 2024, 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 2024 and endeavor to employ deposit and loan pricing strategies and direct the reinvestment of loan and investment repayments in order to manage our IRR position.

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

Liquidity:

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

●	Funding new and existing loan commitments;

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

●	Repayment of borrowings as they mature;

●	Payment of lease obligations; and

●	Payment of operating expenses.

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

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

Our ALCO generally meets quarterly, and most recently met in May to review our interest rate risk profile, capital adequacy and liquidity. At June 30, 2024, the Company’s cash and due from banks balances were $50.0 million. Our maximum borrowing capacity with the FHLB as of June 30, 2024 was $1.3 billion, of which $108.9 million was outstanding in borrowings, $239.5 million was outstanding in the form of irrevocable standby letters of credit, and $924.4 million was available. Additionally, the Company maintains $413.5 million of availability at the Federal Reserve Bank’s Discount Window, through the pledging of securities and through a borrower-in-custody of collateral arrangement, which enables us to pledge certain loans not being used as collateral elsewhere. The Company also maintains an available for sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities. This portfolio serves as an additional source of liquidity and capital. At June 30, 2024, the Company’s available for sale investment securities portfolio totaled $385.2 million, $83.1 million of which were unencumbered. We believe our liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after June 30, 2024. Our noncore funds at June 30, 2024, were comprised of time deposits in denominations of $100 thousand or more, brokered deposits and other borrowings. These funds are not considered to be a strong source of liquidity because they are very interest rate sensitive and are considered to be highly volatile. At June 30, 2024, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 18.9%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 10.2%. Comparatively, our overall noncore dependence ratio at year-end 2023 was 12.1% and our net short-term noncore funding dependence ratio was 4.7%, indicating that our reliance on noncore funds has increased overall due to exhausting our federal funds sold balance of $144.7 million and increasing short-term borrowings to fund the outflow of deposits during the first six months of 2024.

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $137.4 million during the six months ended June 30, 2024. Cash and cash equivalents increased $98.8 million for the same period last year. For the six months ended June 30, 2024, net cash outflows of $133.2 million from financing activities and $9.2 million from investing activities were partially offset by net cash inflows of $5.0 million from operating activities. For the same period of 2023, net cash inflows of $17.6 million from operating activities and $104.2 million from financing activities were partially offset by net cash outflows of $22.9 million from investing activities.

Operating activities provided net cash of $5.0 million for the six months ended June 30, 2024, and $17.6 million for the corresponding six months of 2023. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for credit 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 $9.2 million for the six months ended June 30, 2024, compared to using net cash of $22.9 million for the same period of 2023. A net increase in loans was the primary factor causing the net cash outflow from investing activities in both periods. The current period included proceeds of $10.9 million from the maturities, calls and principal payments of investments, while the year ago period included proceeds from the sale of investment securities to fund a portion of the strong loan growth.

Financing activities used net cash of $133.2 million for the six months ended June 30, 2024, and provided net cash of $104.2 million for the corresponding six months of 2023. In 2024, deposit decreases caused the net cash outflow in financing activity. The year ago period included new long-term borrowings and the addition of brokered deposits to build our cash position. While a portion of the outflow is seasonal, we continue to seek deposits from new markets and customers as well as existing customers, including municipalities and school districts.

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

Capital:

Stockholders’ equity totaled $340.8 million or $48.29 per share at June 30, 2024, compared to $340.4 million or $48.35 per share at December 31, 2023. Stockholders’ equity increased during the six month period ended June 30, 2024 primarily due to earnings, offset by a dividend payout of $5.8 million and an increase to other comprehensive loss of $0.9 million, due to changes in market values of available for sale securities.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Dividends declared equaled $0.82 per share for the six months ended June 30, 2024 and $0.82 per share for the same period of 2023. The dividend payout ratio was 85.4% for the six months ended June 30, 2024 and 34.5% for the same period of 2023. The Company has paid cash dividends since its formation as a bank holding company in 1986. The Board declared on July 26, 2024 a third quarter dividend of $0.6175 per share payable on September 13, 2024 to shareholders of record as of August 30, 2024. The increase in the quarterly cash dividend was contemplated as part of the Merger Agreement between the Company and FNCB. It is the present intention of the Board of Directors to continue this dividend payment policy. Further dividends, however, must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of Directors considers payment of dividends.

Current rules, which implemented the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act, call for the following capital requirements: (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%; (ii) a minimum ratio of tier 1 capital to risk-weighted assets of 6%; (iii) a minimum ratio of total capital to risk-weighted assets of 8%; and (iv) a minimum leverage ratio of 4%. In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.

The adequacy of capital is reviewed on an ongoing basis with reference to the size, composition and quality of resources and regulatory guidelines. We seek to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. At June 30, 2024, Peoples Bank’s Tier 1 capital to total average assets was 9.82% as compared to 9.34% at December 31, 2023. Peoples Bank’s Tier 1 capital to risk weighted asset ratio was 13.09% and the total capital to risk weighted asset ratio was 13.95% at June 30, 2024. These ratios were 13.01% and 13.82% at December 31, 2023. Peoples Bank’s common equity Tier 1 to risk weighted asset ratio was 13.09% at June 30, 2024 compared to 13.01% at December 31, 2023. Peoples Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards at June 30, 2024.

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Review of Financial Performance:

Peoples reported net income of $3.3 million or $0.46 per diluted share for the three months ended June 30, 2024, a 65.2% decrease when compared to $9.4 million or $1.31 per share for the comparable period of 2023. Quarterly net income included lower net interest income of $3.2 million due to higher deposit costs. Noninterest income was in line with the year ago period. Non-interest expenses increased by $1.5 million, which included merger related expenses of $1.0 million, increases to occupancy and equipment expenses of $0.3 million, higher professional services expenses of $0.2 million, and $0.2 million in higher other expenses. Provision for income tax decreased by $1.4 million on lower earnings.

Peoples reported net income of $6.7 million, or $0.95 per diluted share for the six months ended June 30, 2024, a decrease of 60.3% when compared to $17.0 million, or $2.37 per diluted share for the comparable period of 2023. The decrease in earnings in the six months ended June 30, 2024 is a result of lower net interest income of $7.0 million as higher interest income on earning assets, due to increased loan rates, was more than offset by increased funding costs, higher operating expenses of $3.1 million, a $2.2 million increase to the provision for credit losses, and a decrease of $0.3 million in non-interest income. Higher noninterest expenses were mainly due to $1.5 million in merger related expenses, higher occupancy and equipment related expenses of $0.9 million, and higher other expenses of $0.8 million, partially offset by a decrease of $0.3 million in salaries and benefits.

Return on average assets (“ROA”) measures our net income in relation to total assets. Our annualized ROA was 0.37% for the second quarter of 2024 compared to 1.04% for the same period of 2023. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our annualized ROE was 3.88% for the second quarter of 2024 compared to 11.42% for the comparable period in 2023. The declines in our annualized ROA and ROE were due primarily to a lower level of net income.

Non-GAAP Financial Measures:

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare Peoples’ consolidated financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, Peoples’ non-GAAP measures may not be comparable to non-GAAP measures of other companies. The tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% for 2024 and 2023.

The following table reconciles the non-GAAP financial measures of FTE net interest income for the three and six months ended June 30, 2024 and 2023:


(Dollars in thousands)
Three Months Ended June 30,	****	2024		****	2023		****
Interest income (GAAP)		$	38,376		$	36,736
Adjustment to FTE			471			478
Interest income adjusted to FTE (non-GAAP)			38,847			37,214
Interest expense			19,460			14,640
Net interest income adjusted to FTE (non-GAAP)		$	19,387		$	22,574

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)


(Dollars in thousands)
Six Months Ended June 30,	****	2024		****	2023
Interest income (GAAP)		$	77,373		$	71,014
Adjustment to FTE			946			965
Interest income adjusted to FTE (non-GAAP)			78,319			71,979
Interest expense			39,139			25,806
Net interest income adjusted to FTE (non-GAAP)		$	39,180		$	46,173

The efficiency ratio is noninterest expenses, less amortization of intangible assets and acquisition related expenses, as a percentage of FTE net interest income plus noninterest income less gains on equity securities and gains on sale of assets. Management monitors the efficiency ratio to determine how well it is managing its operating expenses; a lower efficiency ratio is generally preferable as it indicates the Company is spending less to generate income. The Company is continuing to pursue opportunities to reduce expenses as a percentage of operating revenues.

The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP for the three and six months ended June 30, 2024 and 2023:


(Dollars in thousands, except percents)
Three Months Ended June 30,	****	2024		****	2023		****
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)		$	18,158		$	16,614
Less: amortization of intangible assets expense						28
Less: acquisition related expenses			1,071			121
Noninterest expense adjusted (non-GAAP)			17,087			16,465

Net interest income (GAAP)			18,916			22,096
Plus: taxable equivalent adjustment			470			478
Noninterest income (GAAP)			3,541			3,552
Less: net losses on equity securities			(12)			12
Net interest income (FTE) plus noninterest income (non-GAAP)		$	22,939		$	26,114

Efficiency ratio (non-GAAP)			74.5	%		63.1	%


(Dollars in thousands, except percents)
Six Months Ended June 30,	****	2024		****	2023		****
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)		$	36,226		$	33,168
Less: amortization of intangible assets expense						57
Less: acquisition related expenses			1,557			121
Noninterest expense adjusted (non-GAAP)			34,669			32,990

Net interest income (GAAP)			38,234			45,208
Plus: taxable equivalent adjustment			946			965
Noninterest income (GAAP)			6,943			7,226
Less: net losses on equity securities			(20)			(17)
Less: gains (losses) on sale of available for sale securities						81
Net interest income (FTE) plus noninterest income (non-GAAP)		$	46,143		$	53,335
Efficiency ratio (non-GAAP)			75.1	%		61.9	%

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Net Interest Income:

Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings, and subordinated debt comprise interest-bearing liabilities. Net interest income is impacted by:

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

●	Changes in general market rates; and

●	The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the 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 FTE basis, as FTE net interest income using the prevailing federal statutory tax rate of 21.0% in 2024 and 2023.

For the three months ended June 30, FTE net interest income, a non-GAAP measure, decreased $3.2 million to $19.4 million in 2024 from $22.6 million in 2023. The net interest spread decreased to 1.57% for the three months ended June 30, 2024 from 2.02% for the three months ended June 30, 2023 as the earning asset yield increased 27 basis points while the average rate paid on interest-bearing liabilities increased 72 basis points. The FTE net interest margin decreased to 2.29% for the second quarter of 2024 from 2.61% for the comparable period of 2023.

For the three months ended June 30, FTE interest income on earning assets, a non-GAAP measure, increased $1.6 million to $38.8 million in 2024 as compared to $37.2 million in 2023. The overall yield on earning assets, on a FTE basis, increased 27 basis points for the three months ended June 30, 2024 to 4.58% as compared to 4.31% for the three months ended June 30, 2023. The increase to FTE interest income is due to the increase in rates for newly acquired assets and rising rate indices, partially offset by a decrease in our earning asset base of $56.0 million. The overall yield earned on investments increased 7 basis points in the second quarter of 2024 to 1.80% from 1.73% for the second quarter of 2023 as a result of maturities and payments to lower yielding securities. Average investment balances were $28.5 million lower when comparing the current and year ago quarter. The yield on loans increased 30 basis points in the second quarter of 2024 to 5.09% from 4.79% for the second quarter of 2023 as a result of new loans and loans repricing higher. Average loan balances were $19.0 million higher when compared to the same quarter in 2023. Average federal funds sold decreased $48.4 million to $12.7 million for the three months ended June 30, 2024 and yielded 5.68%, as compared to $61.1 million and a yield of 5.24% in the year ago period. We expect asset yields to move upward gradually as asset cash flow reprices higher due to higher market rates.

Total interest expense increased $4.8 million to $19.5 million for the three months ended June 30, 2024 from $14.6 million for the three months ended June 30, 2023. The total cost of funds increased 72 basis points for the three months ended June 30, 2024 to 3.01% as compared to 2.29% in the year ago period. The increase in costs was due to an increase to the average balance of higher priced brokered certificate of deposits, higher rates paid on both interest-bearing deposits and short term borrowings, combined with higher average balances in the current period. Average rates 51

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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

paid on deposits increased as the result of higher market rates and local competition for deposits. We expect increased competition for funding to continue to impact costs during the remaining months of 2024.

Net interest income changes due to rate and volume for the six months ended June 30


	2024 vs 2023
	Increase (decrease)
	attributable to
(Dollars in thousands)	Total		Rate		Volume
Interest income:
Loans:
Taxable	$	6,259	$	4,860	$	1,399
Tax-exempt		29		41		(12)
Investments:
Taxable		(231)		224		(455)
Tax-exempt		(118)		(37)		(81)
Interest-bearing deposits		136		8		128
Federal funds sold		265		85		180
Total interest income		6,340		5,181		1,159
Interest expense:
Money market accounts		4,370		3,756		614
NOW accounts		2,911		2,866		45
Savings accounts		100		295		(195)
Time deposits less than $100		3,555		1,206		2,349
Time deposits $100 or more		2,558		1,950		608
Short-term borrowings		(404)		430		(834)
Long-term debt		243				243
Total interest expense		13,333		10,503		2,830
FTE net interest income changes (Non-GAAP)	$	(6,993)	$	(5,322)	$	(1,671)

FTE net interest income, a non-GAAP measure, was $39.2 million in the six months ended June 30, 2024 and $46.2 million in the comparable period last year. There was a negative volume and rate variance. The growth in average interest-bearing liabilities exceeded that of the growth in earning assets, and resulted in lower FTE net interest income, a non-GAAP measure, of $1.7 million. A rate variance resulted in a decrease in net interest income of $5.3 million.

Average earning assets increased $17.5 million to $3.4 billion for the six months ended June 30, 2024 and accounted for a $1.2 million increase in interest income. Average taxable loans increased $53.7 million, which caused interest income to increase $1.4 million. Average tax-exempt loans decreased $0.5 million which caused interest income to decrease $12 thousand. Average taxable investments decreased $39.4 million comparing 2024 and 2023, which resulted in decreased interest income of $0.5 million while average tax-exempt investments decreased $7.7 million, which resulted in a decrease to interest income of $81 thousand. Average interest bearing deposits increased $4.9 million which resulted in an increase of $0.1 million to interest income. Average federal funds sold increased $6.5 million for the six months ended June 30, 2024 which resulted in an increase of $0.2 million to interest income.

Average interest-bearing liabilities rose $118.6 million to $2.6 billion for the six months ended June 30, 2024 from $2.5 billion for the six months ended June 30, 2023 resulting in a net increase in interest expense of $2.8 million. Interest-bearing deposit accounts, including money market, NOW and savings accounts decreased $35.1 million. In addition, large denomination time deposits averaged $42.5 million more in the current period and caused interest expense to increase $0.6 million. An increase of $121.5 million in average time deposits less than $100 thousand which included higher priced callable brokered CDs, resulted in an increase to interest expense of $2.3 million. In addition, short-term 52

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

borrowings averaged $21.5 million lower and decreased interest expense $0.8 million while long-term borrowing increased $11.2 million and resulted in an increase to interest expense of $0.2 million.

For the six months ended June 30, 2024, an unfavorable rate variance occurred, as the FTE yield on earning assets increased 34 basis points while there was a 92 basis point increase in the cost of funds. As a result, FTE net interest income decreased $5.3 million comparing the six months ended June 30, 2024 and 2023. The FTE yield on earning assets was 4.57% in the 2024 period compared to 4.23% in 2023 resulting in an increase in interest income of $5.2 million. The yield on the taxable investment portfolio increased 4 basis points to 1.73% during the six months ended June 30, 2024 from 1.69% in the year ago period, resulting in an increase of $0.2 million in interest income. The yield on the tax exempt investment portfolio decreased 8 basis points to 2.18% during the six months ended June 30, 2024 from 2.26% in the year ago period, resulting in a decrease of $37 thousand in interest income. The FTE yield on the loan portfolio increased 35 basis points to 5.07% in 2024 from 4.72% in 2023 and resulted in an increase to interest income of $4.9 million.

The yield on interest bearing deposits increased 96 basis points to 2.91% from 1.95% in the year ago period resulting in an increase in interest expense of $10.1 million. The yield on long term borrowings increased 2 basis points to 4.34% from 4.32% in the year ago period but had a negligible effect to interest expense. The yield on short term borrowings increased 68 basis points to 5.53% from 4.85% in the year ago period and resulted in an increase to interest expense of $0.4 million.

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 FTE basis using the prevailing federal statutory tax rate of 21%. 53

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)


		Three months ended
		June 30, 2024								June 30, 2023
		Average			Interest Income/			Yield/		Average			Interest Income/			Yield/
	****	Balance		****	Expense		****	Rate	****	Balance		****	Expense		****	Rate
Assets:
Earning assets:
Loans:
Taxable		$	2,637,164		$	34,406		5.25	%	$	2,615,881		$	32,139		4.93	%
Tax-exempt			222,655			1,771		3.20			224,960			1,780		3.17
Total loans			2,859,819			36,177		5.09			2,840,841			33,919		4.79
Investments:
Taxable			443,146			1,906		1.73			469,712			1,931		1.65
Tax-exempt			86,418			470		2.19			88,371			481		2.18
Total investments			529,564			2,376		1.80			558,083			2,412		1.73
Interest-bearing deposits			8,763			115		5.28			6,839			85		4.99
Federal funds sold			12,672			179		5.68			61,093			798		5.24
Total earning assets			3,410,818			38,847		4.58	%		3,466,856			37,214		4.31	%
Less: allowance for credit losses			23,046								25,895
Other assets			221,294								209,915
Total assets		$	3,609,066		$	38,847				$	3,650,876		$	37,214
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts		$	714,669		$	6,749		3.80	%	$	664,451		$	4,958		2.99	%
Interest-bearing demand and NOW accounts			729,196			4,400		2.43			771,690			3,537		1.84
Savings accounts			408,883			280		0.28			483,385			239		0.20
Time deposits less than $100			403,069			3,964		3.96			375,799			3,620		3.86
Time deposits $100 or more			240,481			2,721		4.55			198,355			1,360		2.75
Total interest-bearing deposits			2,496,298			18,114		2.92			2,493,680			13,714		2.21
Short-term borrowings			45,383			633		5.61			16,854			213		5.07
Long-term debt			25,000			269		4.33			25,000			269		4.32
Subordinated debt			33,000			444		5.41			33,000			444		5.40
Total borrowings			103,383			1,346		5.24			74,854			926		4.96
Total interest-bearing liabilities			2,599,681			19,460		3.01			2,568,534			14,640		2.29
Noninterest-bearing deposits			620,256								711,729
Other liabilities			48,630								39,494
Stockholders’ equity			340,499								331,119
Total liabilities and stockholders’ equity		$	3,609,066							$	3,650,876
Net interest income/spread					$	19,387		1.57	%				$	22,574		2.02	%
Net interest margin								2.29	%							2.61	%
Tax-equivalent adjustments:
Loans					$	372							$	375
Investments						99								103
Total adjustments					$	471							$	478

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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)


		Six months ended
		June 30, 2024								June 30, 2023
		Average			Interest Income/			Yield/		Average			Interest Income/			Yield/
(Dollars in thousands, except percents)	****	Balance		****	Expense		****	Rate	****	Balance		****	Expense		****	Rate	****
Assets:	****
Earning assets:
Loans:
Taxable		$	2,634,859		$	68,447		5.22	%	$	2,581,167		$	62,188		4.86	%
Tax-exempt			223,974			3,566		3.20			224,442			3,537		3.18
Total loans			2,858,833			72,013		5.07			2,805,609			65,725		4.72
Investments:
Taxable			445,071			3,826		1.73			484,437			4,057		1.69
Tax-exempt			86,641			939		2.18			94,337			1,057		2.26
Total investments			531,712			4,765		1.80			578,774			5,114		1.78
Interest-bearing deposits			8,894			235		5.31			4,044			99		4.94
Federal funds sold			46,813			1,306		5.61			40,338			1,041		5.20
Total interest-earning assets			3,446,252			78,319		4.57	%		3,428,765			71,979		4.23	%
Less: allowance for credit losses			22,668								25,230
Other assets			219,324								209,535
Total assets		$	3,642,908		$	78,319				$	3,613,070		$	71,979
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts		$	734,779		$	13,884		3.80	%	$	692,999		$	9,514		2.77	%
Interest-bearing demand and NOW accounts			756,827			9,237		2.45			751,655			6,326		1.70
Savings accounts			415,849			555		0.27			497,939			455		0.18
Time deposits less than $100			406,131			8,301		4.11			284,659			4,746		3.36
Time deposits $100 or more			231,470			4,841		4.21			188,993			2,283		2.44
Total interest-bearing deposits			2,545,056			36,818		2.91			2,416,245			23,324		1.95
Short-term borrowings			32,535			895		5.53			53,985			1,299		4.85
Long-term debt			25,000			539		4.34			13,803			296		4.32
Subordinated debt			33,000			887		5.41			33,000			887		5.42
Total borrowings			90,535			2,321		5.16			100,788			2,482		4.97
Total interest-bearing liabilities			2,635,591		$	39,139		2.99	%		2,517,033		$	25,806		2.07	%
Noninterest-bearing deposits			618,433								728,238
Other liabilities			48,159								39,208
Stockholders’ equity			340,725								328,591
Total liabilities and stockholders’ equity		$	3,642,908							$	3,613,070
Net interest income/spread					$	39,180		1.58	%				$	46,173		2.16	%
Net interest margin (Non-GAAP)								2.29	%							2.72	%
Tax-equivalent adjustments:
Loans					$	749							$	743
Investments						197								222
Total adjustments					$	946							$	965

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Provision for Credit Losses:

Effective January 1, 2023 the Company transitioned to ASU 2016-13 Financial Instruments - Credit Losses (Topic 326), commonly referred to as CECL. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2024.

For the three months ended June 30, 2024, $0.6 million was recorded to the provision for credit losses compared to a credit of $2.2 million in the year ago period. The current period provision was due to a higher calculated allowance for credit losses and the establishment of a specific reserve for an individually evaluated loan, along with higher pooled loan reserves. Although the current overall model loss rate declined due to an improving economic forecast and a reduction in the existing loan portfolio, additional reserves were required due to loan growth. The prior period reversal was due to the impact of various factors, such as updated economic assumptions as well as changes in qualitative adjustments, portfolio composition, and asset quality. Changes to qualitative factors related to lower loan growth, offset by banking industry concerns, resulted in a lower expected credit loss.

For the six months ended June 30, 2024, a provision for credit losses of $1.3 million was recorded due to the establishment of a specific reserve for an individually evaluated loan along with higher pooled loan reserves. Pooled loan reserves increased due to loan growth and a higher model loss rate that was primarily attributed to the loan portfolio’s favorable performance versus peers, and new loan originations. The provision in the prior six month period included a credit of $0.9 million which was attributed to various factors, including updated economic assumptions as well as changes in qualitative factors, portfolio composition and asset quality.

Noninterest Income:

Noninterest income for the three months ended June 30, 2024 was $3.5 million, relatively unchanged from the same quarter a year ago. Decreases to service charges, fees, and commissions, were partially offset by increases in interest rate swap revenue.

Noninterest income was $6.9 million for the six months ended June 30, 2024 and $7.2 million for the comparable period ended June 30, 2023. The primary driver of the decrease was a $0.2 million reduction in interest rate swap revenue. The year ago period also included a gain of $81 thousand on the sale of available for sale investment securities.

Noninterest Expenses:

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses, and other expenses. However, included in the current period are acquisition related expenses incurred in connection with our merger with FNCB. 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, provision for unfunded commitments, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.

Noninterest expense increased $1.5 million or 9.3% to $18.2 million for the three months ended June 30, 2024, from $16.6 million for the same period a year ago. Acquisition related expenses, such as legal and consulting, totaled $1.1 million in the current three month period compared to $0.1 million in the same period a year ago. Salaries and employee benefits were flat at $8.5 million in the current and year ago periods. Occupancy and equipment expenses were higher by $0.3 million in the current period due to technology related enhancements and increases to property maintenance 56

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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

expense due in part to inflationary price increases. Other expenses increased $0.4 million primarily due to the write-down of the Company’s former East Stroudsburg branch.

Noninterest expense for the six months ended June 30, 2024 was $36.2 million, an increase of $3.1 million or 9.2% from $33.2 million for the six months ended June 30, 2023. The increase was due primarily to $0.9 million in higher occupancy and technology related expenses, $1.4 million in acquisition related expenses, and an increase of $0.8 million in other expenses, which include a $0.4 million write-down the aforementioned former branch and a $0.6 million increase to the provision for unfunded commitments.

Income Taxes:

We recorded income tax expense of $0.4 million or 11.4% of pre-tax income, and $0.9 million or 11.8% for the three and six months ended June 30, 2024. This compares to the three and six month period ended June 30, 2023 in which we recorded tax expense of $1.8 million or 16.1% of pre-tax income, and $3.2 million or 15.8% of pre-tax income, respectively. Lower income tax expense was due to lower pre-tax income for the six months ended June 30, 2024 compared to the prior year’s period.

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Peoples Financial Services Corp.

Item 3. Quantitative and Qualitativ e Disclosures about Market Risk.

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

A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The Asset Liability Committee (“ALCO”) is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Generally quarterly, ALCO reports on the status of liquidity and interest rate risk matters to the Company’s board of directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Company’s liquidity, capital adequacy, growth, risk and profitability goals and are within policy limits.

The Company utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and off-balance sheet interest rate contracts to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Note 14 to the Audited Consolidated Financial Statements and Note 9 to the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report for additional information.

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

The ALCO reviews simulation results to determine whether the Company’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of June 30, 2024 and December 31, 2023, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Company. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Company’s balance sheet remain stable for a 24-month and 60-month period. In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 24-month and 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios. 58

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Model results at June 30, 2024 indicated a lower starting level of net interest income (“NII”) compared to the March 31, 2024 model as a shift in balance sheet mix and higher assumed market rates was offset by a decline in earning assets and higher interest-bearing liability costs which lead to the balance sheet spread remaining static.

After the first eighteen months of the model simulation, the benefit to NII increases as a result of the higher assumed replacement rates on assets resulting from the FOMC’s increase to the federal funds rate of 525 basis points since March 2022. Our interest rate risk position exhibits a relatively well-matched position to both rising and falling interest rate environments in the first year of simulation while a sustained falling rate environment presents the greatest potential risk to NII over the longer-term horizon. This position at June 30, 2024 is similar to our March 31, 2024 results.

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.

Since 2022, the FOMC has increased the federal funds target rate in part to mitigate historically high inflation. Through July 31, 2023, there were eleven rate increases totaling 525 basis points. Although we have realized higher rates on our existing adjustable rate loans and new originations, our average funding costs have increased at a faster pace than the loan yields as rate-sensitive customers sought higher returns. We expect our funding costs to stabilize in the near term, as market rates appear to have peaked and the FOMC has paused its rate increases. Additionally, if deposit costs have to be increased more than the simulation assumptions and/or we experience a shift from non-maturity deposits to higher costing time deposits, net interest income would be reduced from projected levels.

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at June 30, 2024, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:


		June 30, 2024
		% Change in
Changes in Interest Rates (basis points)		Net Interest Income				Economic Value of Equity			****
	****	Metric	****	Policy	****	Metric	****	Policy	****
+400		(7.2)		(20.0)		18.9		(40.0)
+300		(5.6)		(20.0)		15.2		(30.0)
+200		(4.1)		(10.0)		10.3		(20.0)
+100		(1.7)		(10.0)		7.0		(10.0)
Static
-100		3.3		(10.0)		(9.6)		(10.0)
-200		5.2		(10.0)		(25.3)		(20.0)
-300		6.7		(20.0)		(46.7)		(30.0)
-400		7.3		(20.0)		(75.7)		(40.0)

Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending June 30, 2024, would decrease 1.7% 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, 2023, and in Part I, Item 2 of this quarterly report, in each case under the heading “Market Risk Sensitivity,” and are incorporated into this Item 3 by reference.

The Company has certain loans and derivative instruments whose interest rate is indexed to the London Inter Bank Offered Rate (“LIBOR”). The LIBOR index was discontinued for U.S. Dollar settings effective June 30, 2023. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Funding Rate (“SOFR”) replace USDLIBOR. The Company has contracts that are indexed to USD-LIBOR. The Company formed a LIBOR transition team to monitor this activity. The Company has transitioned its LIBOR-indexed loans to alternative indexes, including prime and Term SOFR, and adjusting the spread to maintain the overall yield. 59

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Item 4. Control s and Procedures.

(a) Evaluation of disclosure controls and procedures.

At June 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at June 30, 2024, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.

(b) Changes in internal control.

There were no changes in the Company’s internal control over financial reporting in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION ****

Item 1. Legal Proceeding s.

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company during the six-months ended June 30, 2024 and through the date of this quarterly report on Form 10-Q.

Item 1A. Risk Factor s.

Our Annual Report on Form 10-K for the year ended December 31, 2023 (2023 Form 10-K) describes market, credit, and business operations risk factors that could affect our business, results of operations or financial condition. There have been no material changes from the risk factors as previously disclosed in our 2023 Form 10-K.

Item 2. Unregistered Sale s of Equity Securities and Use of Proceeds.

During the quarter ended June 30, 2024, we did not issue or sell any shares of our Common Stock or other equity securities pursuant to unregistered transactions in reliance upon an exemption from the registration requirements of the Securities Act.

There were no repurchases of our common stock during the three months ended June 30, 2024.

Item 3. Defaults upo n Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information .

During the fiscal quarter ended June 30, 2024, none of the Company’s directors or officers informed management of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.

Item 6. Exhibits .

****

Item Number			Description

<br><br>
2.1			Agreement and Plan of Merger, dated as of September 27, 2023, by and between Peoples Financial Services Corp. and FNCB Bancorp, Inc.* (incorporated by reference to Exhibit 2.1 to Peoples Financial Services Corp.’s Current Report on Form 8-K filed on September 27, 2023)

31.1			CEO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a)

31.2			CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).

32			CEO and CFO Certifications Pursuant to Section 1350.

101			The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended June 30, 2024, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive (Loss) Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements

104			Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

			*The schedules and exhibits have been omitted pursuant to Item 601(b) (2) of Regulation S-K. Peoples Financial Services Corp. agrees to furnish a copy of such schedules and exhibits, or any section thereof, to the SEC upon request

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Peoples Financial Services Corp.

SIGNATURE S

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

	Peoples Financial Services Corp.
	(Registrant)

Date: August 7, 2024	/s/ Craig W. Best
	Craig W. Best
	Chief Executive Officer
	(Principal Executive Officer)

Date: August 7, 2024	/s/ John R. Anderson, III
	John R. Anderson, III
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

Peoples Financial Services Corp.

Exhibit 31.1

CERTIFICATION

I, Craig W. Best, certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2024, 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
Chief Executive Officer
(Principal Executive Officer)

Date: August 7, 2024

Peoples Financial Services Corp.

Exhibit 31.2

CERTIFICATION

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

1.	I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2024, of Peoples Financial Services Corp.;

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

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

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

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

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

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

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

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

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

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


/s/ John R. Anderson, III
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

Date: August 7, 2024

Peoples Financial Services Corp.

Exhibit 32

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report on Form 10-Q of Peoples Financial Services Corp. (the “Company”) for the period ended June 30, 2024, as filed with the Securities and Exchange Commission (the “Report”), I, Craig W. Best, 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:

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

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
Chief Executive Officer
(Principal Executive Officer)
Date: August 7, 2024

/s/ John R. Anderson, III
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 7, 2024

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.