10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

for the quarterly period ended June 30, 2020

or

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

for the transition period from

001-36388

(Commission File Number)

PEOPLES FINANCIAL SERVICES CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2391852
(State of incorporation)	(IRS Employer ID Number)
150 North Washington Avenue, Scranton, PA	18503
(Address of principal executive offices)	(Zip code)

(570) 346-7741

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common stock, $2.00 par value	PFIS	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  ☐    No  ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 7,284,209 at July 31, 2020.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended June 30, 2020

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 2019	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2020 and 2019 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, and June 30, 2020 and 2019 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and 2019 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	59
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	62
Item 3.	Defaults upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
	Signatures	65

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	June 30, 2020		December 31, 2019
Assets:
Cash and due from banks:
Cash and due from banks	$	27,146	$	26,943
Interest-bearing deposits in other banks		14,788		4,210
Federal funds sold		10,000
Total cash and due from banks		51,934		31,153
Investment securities:
Available-for-sale		287,709		330,478
Equity investments carried at fair value		338		423
Held-to-maturity: Fair value June 30, 2020, $7,717; December 31, 2019, $7,889		7,401		7,656
Total investment securities		295,448		338,557
Loans		2,181,909		1,938,240
Less: allowance for loan losses		26,957		22,677
Net loans		2,154,952		1,915,563
Loans held for sale		1,939		986
Premises and equipment, net		48,378		47,932
Accrued interest receivable		8,368		6,981
Goodwill		63,370		63,370
Intangible assets, net		1,257		1,565
Other assets		74,778		69,220
Total assets	$	2,700,424	$	2,475,327
Liabilities:
Deposits:
Noninterest-bearing	$	575,206	$	463,238
Interest-bearing		1,634,918		1,508,251
Total deposits		2,210,124		1,971,489
Short-term borrowings		50,000		152,150
Long-term debt		60,938		32,733
Subordinated debentures		33,000
Accrued interest payable		872		1,277
Other liabilities		33,446		18,668
Total liabilities		2,388,380		2,176,317
Stockholders’ equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,332,856 shares at June 30, 2020 and 7,388,480 shares at December 31, 2019		14,649		14,777
Capital surplus		133,002		135,251
Retained earnings		159,739		152,187
Accumulated other comprehensive income (loss)		4,654		(3,205)
Total stockholders’ equity		312,044		299,010
Total liabilities and stockholders’ equity	$	2,700,424	$	2,475,327

See notes to unaudited consolidated financial statements

3

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

	Three Months Ended				Six Months Ended
June 30,	2020		2019		2020		2019
Interest income:
Interest and fees on loans:
Taxable	$	21,160	$	20,641	$	42,077	$	40,744
Tax-exempt		941		1,109		1,972		2,208
Interest and dividends on investment securities:
Taxable		1,420		1,025		2,968		2,035
Tax-exempt		295		520		594		1,082
Dividends		25		22		48		41
Interest on interest-bearing deposits in other banks		5		15		29		23
Interest on federal funds sold		6				6
Total interest income		23,852		23,332		47,694		46,133
Interest expense:
Interest on deposits		2,864		3,713		6,367		7,124
Interest on short-term borrowings		102		595		675		1,408
Interest on long-term debt		231		296		436		576
Interest on subordinated debt		148				148
Total interest expense		3,345		4,604		7,626		9,108
Net interest income		20,507		18,728		40,068		37,025
Provision for loan losses		1,800		350		5,300		1,400
Net interest income after provision for loan losses		18,707		18,378		34,768		35,625
Noninterest income:
Service charges, fees and commissions		1,433		1,981		3,038		3,700
Merchant services income		472		457		586		655
Commission and fees on fiduciary activities		493		492		999		999
Wealth management income		231		370		618		747
Mortgage banking income		312		137		449		285
Bank owned life insurance income		193		192		380		378
Interest rate swap revenue		249		509		719		789
Net gains (losses) on equity investment securities		39		(9)		(84)		(8)
Net gains on sale of investment securities available-for-sale				23		267		23
Total noninterest income		3,422		4,152		6,972		7,568
Salaries and employee benefits expense		7,048		8,037		14,904		15,632
Net occupancy and equipment expense		3,042		2,849		6,121		5,810
Amortization of intangible assets		154		182		308		374
Professional fees and outside services		611		525		976		856
FDIC insurance and assessments		336		288		410		547
Donations		341		359		679		691
Other expenses		1,710		2,189		3,495		4,009
Total noninterest expense		13,242		14,429		26,893		27,919
Income before income taxes		8,887		8,101		14,847		15,274
Income tax expense		1,311		957		1,990		1,718
Net income		7,576		7,144		12,857		13,556
Other comprehensive income :
Unrealized gain on investment securities available-for-sale		2,094		2,611		9,723		5,050
Reclassification adjustment for net gain on sales included in net income				(23)		(267)		(23)
Change in derivative fair value		(543)		443		493		506
Other comprehensive income		1,551		3,031		9,949		5,533
Income tax expense		325		636		2,090		1,162
Other comprehensive income , net of income taxes		1,226		2,395		7,859		4,371
Comprehensive income	$	8,802	$	9,539	$	20,716	$	17,927
Per share data:
Net income:
Basic	$	1.03	$	0.96	$	1.75	$	1.83
Diluted	$	1.03	$	0.96	$	1.74	$	1.83
Average common shares outstanding:
Basic		7,341,636		7,399,302		7,360,517		7,399,178
Diluted		7,376,700		7,413,114		7,391,202		7,410,558
Dividends declared	$	0.36	$	0.34		0.72		0.68

See notes to unaudited consolidated financial statements

4

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Income (Loss)		Total
Balance, January 1, 2020	$	14,777	$	135,251	$	152,187	$	(3,205)	$	299,010
Net income						5,281				5,281
Other comprehensive income, net of income taxes								6,633		6,633
Dividends declared: $0.36 per share						(2,662)				(2,662)
Stock based compensation				5						5
Share retirement: 53,476 shares		(107)		(2,097)						(2,204)
Balance, March 31, 2020	$	14,670	$	133,159	$	154,806	$	3,428	$	306,063
Net income						7,576				7,576
Other comprehensive income, net of income taxes								1,226		1,226
Dividends declared: $0.36 per share						(2,643)				(2,643)
Stock based compensation				186						186
Share retirement: 10,383 shares		(21)		(343)						(364)
Balance, June 30, 2020		14,649		133,002		159,739		4,654		312,044
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Income (Loss)		Total
Balance, January 1, 2019	$	14,798	$	135,310	$	136,582	$	(8,076)	$	278,614
Net income						6,412				6,412
Other comprehensive income, net of income taxes								1,976		1,976
Dividends declared: $0.34 per share						(2,516)				(2,516)
Stock based compensation				83						83
Balance, March 31, 2019	$	14,798	$	135,393	$	140,478	$	(6,100)	$	284,569
Net income						7,144				7,144
Other comprehensive loss, net of income taxes								2,395		2,395
Dividends declared: $0.34 per share						(2,516)				(2,516)
Stock based compensation				157						157
Share retirement: 3,830 shares		(8)		(158)						(166)
Common stock grants awarded, net of unearned compensation of $164: 3,854 shares		8		(8)
Balance, June 30, 2019		14,798		135,384		145,106		(3,705)		291,583

See notes to unaudited consolidated financial statements

5

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2020		2019
Cash flows from operating activities:
Net income	$	12,857	$	13,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		1,458		1,227
Amortization of right-of-use lease asset		209		187
Amortization of deferred loan costs		(665)		(156)
Amortization of intangibles		308		374
Amortization of low income housing partnerships		262		238
Provision for loan losses		5,300		1,400
Net unrealized loss on equity investment securities		85		8
Net (gain) loss on sale of other real estate owned		(4)		20
Loans originated for sale		(16,215)		(5,848)
Proceeds from sale of loans originated for sale		15,148		5,813
Net gain on sale of loans originated for sale		(156)		(47)
Net amortization of investment securities		553		895
Net gain on sale of investment securities available-for-sale		(267)		(23)
Bank owned life insurance income		(380)		(378)
Deferred income tax expense		619		—
Stock based compensation		191		240
Net change in:
Accrued interest receivable		(1,387)		(188)
Other assets		(11,445)		(4,114)
Accrued interest payable		(405)		(137)
Other liabilities		13,586		3,022
Net cash provided by operating activities		19,652		16,089
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale		26,502		9,677
Proceeds from repayments of investment securities:
Available-for-sale		34,520		24,651
Held-to-maturity		253		387
Purchases of investment securities:
Available-for-sale		(9,080)		(22,151)
Net redemption (purchase) of restricted equity securities		4,849		(371)
Net increase in lending activities		(244,675)		(36,380)
Purchases of premises and equipment		(1,214)		(2,541)
Proceeds from the sale of premises and equipment				21
Proceeds from sale of other real estate owned		157		111
Net cash used in investing activities		(188,688)		(26,596)
Cash flows from financing activities:
Net increase in deposits		238,635		1,777
Proceeds from long-term debt				16,000
Proceeds from Paycheck Protection Program Liquidity Facility		103,650
Proceeds from subordinated debentures		33,000
Repayment of long-term debt		(11,970)		(926)
Repayment of Paycheck Protection Program Liquidity Facility		(63,475)
Net decrease in short-term borrowings		(102,150)		(3,800)
Retirement of common stock		(2,568)		(166)
Cash dividends paid		(5,305)		(5,032)
Net cash provided by financing activities		189,817		7,853
Net increase (decrease) in cash and cash equivalents		20,781		(2,654)
Cash and cash equivalents at beginning of period		31,153		32,616
Cash and cash equivalents at end of period	$	51,934	$	29,962

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2020		2019
Supplemental disclosures:
Cash paid during the period for:
Interest	$	8,031	$	9,245
Income taxes				2,200
Noncash items:
Transfers of loans to other real estate	$	730	$	172
Initial recognition of right-of-use assets		899		6,523
Initial recognition of lease liability		899		6,523

See notes to unaudited consolidated financial statements

7

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

1. Summary of significant accounting policies:

Nature of operations:

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

In June, we notified our customers and primary state and federal regulators of our intent to permanently close the Duryea, Gouldsboro, and South Scranton branch offices during the third quarter of 2020.

Basis of presentation:

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the six months ended and as of June 30, 2020, are not necessarily indicative of the results of consolidated operations and financial position that may be expected in the future.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, determination of other-than-temporary impairment losses on securities, and impairment of goodwill. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

Significant events: COVID-19

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

As the COVID-19 events unfolded throughout the first six months of 2020, the Company implemented its pandemic plan and executed various strategies and protocols intended to protect its employees, maintain services for customers, assure

8

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. The Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. We follow the recommendations of our state and local governments as to conducting business and have opened the lobbies of the majority of our branches while maintaining safety protocols. The Company also maintained active communications with its primary regulatory agencies and critical vendors in an effort to keep all mission-critical activities and functions performing in line with regulatory expectations and the Company’s service standards.

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

The full impact of COVID-19 is unknown and continues to evolve. It has caused substantial disruption in U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves, including retail, hospitality and restaurants and food and service. During March, the Company reviewed its commercial loan and commercial real estate portfolios and determined approximately $1.2 billion or 73% is categorized as non-life sustaining and were subject to shutdown at the onset of the pandemic. Based on management’s application of its allowance for loan losses methodology and primarily changes to the economic qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions and the increased inherent risk in the loan portfolio, our provision for loan and lease losses for the first six months on 2020 was $5.3 million. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the Financial Accounting Standards Board (“FASB”) staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of July 30, 2020, the Company granted payment deferral requests for up to six months to a total of 481 commercial loans with outstanding loan balances of $306.9 million and to 505 consumer loans with outstanding balances of $23.3 million. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

The Company has also participated as a lender in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a $349 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Paycheck Protection Program

9

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

(“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. The Company began accepting and processing applications for loans under the PPP on April 3, 2020.  Through July 30, 2020, the Company processed 1,417 applications from existing and new customers providing over $216.2 million in loans with an average loan amount of $153 thousand furthering Peoples’ commitment to support small businesses.  Funding these loans will generate approximately $6.9 million of SBA processing fees.   The processing fee income is deferred and amortized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. During the three months ended June 30, 2020, $0.7 million was recognized in interest and fees on loans in the unaudited Consolidated Statements of Income. The Company utilized the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) and an increase of in-market deposits to replace liquidity used to fund PPP loans.

The Company also has goodwill with a net carrying value of $63.4 million at June 30, 2020 and December 31, 2019. The Company completes a goodwill impairment analysis at least annually, or more often if events and circumstances indicate that there may be impairment. In connection with the emergence of COVID-19 as a global pandemic and the decline in our stock price during 2020, management retained a financial advisory firm to assist in the preparation of a quantitative assessment for potential goodwill impairment. To arrive at the fair value of the Company, management utilized an income and market approach and applied weighting factors to each result and concluded the fair value of the Company was in excess of its carrying value, including goodwill and, as such, no impairment exists at June 30, 2020. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods with no assurance that the future impairment assessments or tests will not result in a charge to earnings.

Recent accounting standards:

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

●	The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
●	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.
●	This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignificant
	amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.
●	In November 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

10

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

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

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for the Company on January 1, 2021. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.

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

The Company adopted the amendments in ASU 2020-04 as of the March 12, 2020 issuance date, on a prospective basis. The adoption did not have an immediate direct impact to our financial statements. As contracts are modified through December 2022, we will assess the impact based on this guidance. We do not expect there will be a material impact to our financial statements.

2. Other comprehensive income (loss):

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

11

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at June 30, 2020 and December 31, 2019 are as follows:

		June 30, 2020		December 31, 2019
Net unrealized gain on investment securities available-for-sale	$	11,291	$	1,835
Income tax		2,371		385
Net of income taxes		8,920		1,450
Benefit plan adjustments		(6,579)		(6,579)
Income tax		(1,382)		(1,382)
Net of income taxes		(5,197)		(5,197)
Derivative adjustments		1,180		687
Income tax		248		144
Net of income taxes		932		543
Accumulated other comprehensive income (loss)	$	4,654	$	(3,205)

3. Earnings per share:

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

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three and six months ended June 30, 2020 and 2019:

	2020				2019
For the Three Months Ended June 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,576	$	7,576	$	7,144	$	7,144
Average common shares outstanding		7,341,636		7,376,700		7,399,302		7,413,114
Earnings per share	$	1.03	$	1.03	$	0.96	$	0.96
	2020				2019
For the Six Months Ended June 30	Basic		Diluted		Basic		Diluted
Net income	$	12,857	$	12,857	$	13,556	$	13,556
Average common shares outstanding		7,360,517		7,391,202		7,399,178		7,410,558
Earnings per share	$	1.75	$	1.74	$	1.83	$	1.83

12

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at June 30, 2020 and December 31, 2019 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2020	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	21,473	$	604			$	22,077
U.S. government-sponsored enterprises		79,473		1,628				81,101
State and municipals:
Taxable		31,694		1,467				33,161
Tax-exempt		35,617		2,408				38,025
Residential mortgage-backed securities:
U.S. government agencies		5,717		154	$	4		5,867
U.S. government-sponsored enterprises		89,787		4,057		7		93,837
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,657		984				13,641
Total	$	276,418	$	11,302	$	11	$	287,709
Held-to-maturity:
Tax-exempt state and municipals	$	6,850	$	294	$		$	7,144
Residential mortgage-backed securities:
U.S. government agencies		26						26
U.S. government-sponsored enterprises		525		22				547
Total	$	7,401	$	316	$		$	7,717

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,966	$	162			$	24,128
U.S. government-sponsored enterprises		87,156		181	$	227		87,110
State and municipals:
Taxable		35,418		295		815		34,898
Tax-exempt		59,127		1,056		20		60,163
Residential mortgage-backed securities:
U.S. government agencies		8,368		112		10		8,470
U.S. government-sponsored enterprises		101,914		1,011		77		102,848
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,694		171		4		12,861
Total	$	328,643	$	2,988	$	1,153	$	330,478
Held-to-maturity:
Tax-exempt state and municipals	$	6,852	$	208	$		$	7,060
Residential mortgage-backed securities:
U.S. government agencies		31						31
U.S. government-sponsored enterprises		773		25				798
Total	$	7,656	$	233	$		$	7,889

Equity Securities

Our equity securities portfolio consists of stock of two other financial institutions. At June 30, 2020 and December 31, 2019, we had $338 and $423 respectively, in equity securities recorded at fair value. At June 30, 2020, the fair value of

13

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

our equity portfolio exceeded the cost basis by $61. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30 2020 (in thousands):

Three Months Ended June 30,		2020		2019
Net gain (loss) recognized during the period on equity securities	$	39	$	(9)
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$	39	$	(9)
For the Six Months Ended June 30,		2020		2019
Net loss recognized during the period on equity securities	$	(84)	$	(8)
Less: Net gains (loss) recognized during the period on equity securities sold during the period
Unrealized loss recognized during the reporting period on equity securities still held at the reporting date	$	(84)	$	(8)

Restricted Investment In Stock

Restricted investment in stock includes FHLB with a carrying cost of $5,311 and $10,159 at June 30, 2020 and December 31, 2019, respectively, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42, and VISA Class B stock with a carrying cost of $0 at June 30, 2020 and December 31, 2019, are included in other assets in the consolidated balance sheets. FHLB and ACBB stock was issued as a requirement to facilitate participation in borrowing and other banking services. The investment in FHLB stock may fluctuate, as it is based on the member bank’s use of FHLB’s services. The decrease in FHLB stock from December 31, 2019 is due to a decrease in short term borrowings at FHLB.

The Company owns 44,982 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Company’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6228 as of June 30, 2020), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B stock. Due to the lack of orderly trades and public information of such trades, Visa Class B stock has no readily determinable fair value.

These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) periodically. As of June 30, 2020, there was no OTTI associated with these investments.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2020, is summarized as follows:

	Fair
June 30, 2020	Value
Within one year	$	34,156
After one but within five years		76,757
After five but within ten years		19,411
After ten years		40,631
		170,955
Mortgage-backed and other amortizing securities		116,754
Total	$	287,709

14

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2020, is summarized as follows:

	Amortized		Fair
June 30, 2020	Cost		Value
After ten years	$	6,850	$	7,144
		6,850		7,144
Mortgage-backed securities		551		573
Total	$	7,401	$	7,717

Securities with a carrying value of $131,913 and $157,047 at June 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2020 and December 31, 2019, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. government agencies and sponsored enterprises, that exceeded 10.0 percent of stockholders’ equity.

The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not been recognized at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2020	Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed securities:
U.S. government agencies	$	747	$	2	$	571	$	2	$	1,318	$	4
U.S. government-sponsored enterprises		1,197		4		561		3		1,758		7
Total	$	1,944	$	6	$	1,132	$	5	$	3,076	$	11

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. government-sponsored enterprises	$	13,695	$	149	$	36,070	$	78	$	49,765	$	227
State and municipals:
Taxable		23,929		815						23,929		815
Tax-exempt		2,684		19		1,098		1		3,782		20
Residential mortgage-backed securities:
U.S. government agencies		992		1		2,362		9		3,354		10
U.S. government-sponsored enterprises		36,939		51		3,751		30		40,690		81
Total	$	78,239	$	1,035	$	43,281	$	118	$	121,520	$	1,153

Management, from a credit risk perspective, has taken action to identify and assess its COVID-19 related credit exposures based on asset class. No specific COVID-19 related credit impairment was identified within our investment securities portfolio, including our municipal securities, during the second quarter of 2020. The Company had 15 mortgage-backed securities that were in unrealized loss positions at June 30, 2020. Of these securities, eight were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does

15

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2020. There was no OTTI recognized for the three or six months ended June 30, 2020 and 2019.

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2020 and December 31, 2019 are summarized as follows. The Company had net deferred loan origination fees of $3,508 at June 30, 2020 due to the origination of $201.3 million of PPP loans and $6.6 million of SBA processing fees during the 2020 second quarter. At December 31, 2019, we had net deferred loan costs of $908.

		June 30, 2020		December 31, 2019
Commercial	$	694,551	$	522,957
Real estate:
Commercial		1,099,818		1,011,423
Residential		297,880		301,378
Consumer		89,660		102,482
Total	$	2,181,909	$	1,938,240

The PPP loans are included in the commercial loan classification and had an outstanding balance at June 30, 2020 of $201,274. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. The outstanding balance is considered current at June 30, 2020.

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2020 and 2019 are summarized as follows:

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2020	$	7,969	$	13,007	$	3,624	$	1,086	$	25,686
Charge-offs		(335)		(47)		(81)		(154)		(617)
Recoveries		31				3		54		88
Provisions		822		895		21		62		1,800
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2019	$	5,955	$	11,074	$	3,880	$	1,196	$	22,105
Charge-offs		(10)		(343)		(143)		(80)		(576)
Recoveries		2				12		37		51
Provisions		195		311		(134)		(22)		350
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930

16

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2020	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Charge-offs		(985)		(47)		(135)		(248)		(1,415)
Recoveries		298				13		84		395
Provisions		2,286		2,406		463		145		5,300
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Charge-offs		(87)		(349)		(302)		(212)		(950)
Recoveries		10				16		75		101
Provisions		703		655		9		33		1,400
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930

The Company's allowance for loan losses increased $4.3 million or 18.9% in 2020, due largely to the adjustment of qualitative factors in our allowance for loan losses methodology, which reflect current economic decline due to COVID-19's adverse impact on economic and business operating conditions.

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2020 and December 31, 2019 is summarized as follows:

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
Ending balance: individually evaluated for impairment		1,339		239		163				1,741
Ending balance: collectively evaluated for impairment	$	7,148	$	13,616	$	3,404	$	1,048	$	25,216
Loans receivable:
Ending balance	$	694,551	$	1,099,818	$	297,880	$	89,660	$	2,181,909
Ending balance: individually evaluated for impairment		5,408		4,490		1,925		160		11,983
Ending balance: collectively evaluated for impairment	$	689,143	$	1,095,328	$	295,955	$	89,500	$	2,169,926

17

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

			Real estate
December 31, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Ending balance: individually evaluated for impairment		363		279		135				777
Ending balance: collectively evaluated for impairment	$	6,525	$	11,217	$	3,091	$	1,067	$	21,900
Loans receivable:
Ending balance	$	522,957	$	1,011,423	$	301,378	$	102,482	$	1,938,240
Ending balance: individually evaluated for impairment		4,658		3,048		2,153		261		10,120
Ending balance: collectively evaluated for impairment	$	518,299	$	1,008,375	$	299,225	$	102,221	$	1,928,120

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

● Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

● Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

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

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

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

18

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2020 and December 31, 2019:

			Special
June 30, 2020	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	677,234	$	10,915	$	6,402	$	$	694,551
Real estate:
Commercial		1,083,864		6,606		9,348			1,099,818
Residential		294,627				3,253			297,880
Consumer		89,483				177			89,660
Total	$	2,145,208	$	17,521	$	19,180	$	$	2,181,909

			Special
December 31, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	513,994	$	3,837	$	5,126	$	$	522,957
Real estate:
Commercial		993,645		2,508		15,270			1,011,423
Residential		298,449		597		2,332			301,378
Consumer		102,145				337			102,482
Total	$	1,908,233	$	6,942	$	23,065	$	$	1,938,240

The increase in special mention loans from December 31, 2019 to June 30, 2020 is primarily associated with the reclassification of one large commercial real estate credit and two large commercial credits. The commercial real estate credit totaled $3.8 million and was downgraded to special mention due to the loss of major tenants. The commercial credits relate to a $6.8 million relationship which is experiencing short-term cash flow issues while the other credit totaling $2.1 million has experienced financial difficulties directly related to COVID-19. The decrease to substandard loans resulted from the payoff of a $5.1 million commercial real estate construction loan that had experienced significant construction delays.

Information concerning nonaccrual loans by major loan classification at June 30, 2020 and December 31, 2019 is summarized as follows:

		June 30, 2020		December 31, 2019
Commercial	$	5,443	$	3,336
Real estate:
Commercial		3,109		2,765
Residential		1,135		1,148
Consumer		160		261
Total	$	9,847	$	7,510

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

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
June 30, 2020	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	329	$	351	$	5,468	$	6,148	$	688,403	$	694,551	$	25
Real estate:
Commercial		575		234		3,149		3,958		1,095,860		1,099,818		40
Residential		80		150		1,361		1,591		296,289		297,880		226
Consumer		229		66		160		455		89,205		89,660
Total	$	1,213	$	801	$	10,138	$	12,152	$	2,169,757	$	2,181,909	$	291

19

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. Through June 30, 2020, the Company granted payment deferral requests for up to six months on 479 commercial loans with outstanding balances of $306,770 and on 512 consumer loans with outstanding balances of $23,349. In accordance with Section 4013 of the CARES Act and the interagency statement, we have not accounted for such loans as TDRs, nor have we designated them as past due or nonaccrual.

The increase in the greater than 90 day category was due to an increase in nonaccrual loans which are included in the category. Three large commercial loans were added to non-accrual. All three loans have been individually measured for impairment and have specific reserves allocated.

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	75			$	3,036	$	3,111	$	519,846	$	522,957
Real estate:
Commercial		926	$	175		2,765		3,866		1,007,557		1,011,423
Residential		2,164		1,227		1,526		4,917		296,461		301,378	$	378
Consumer		523		123		261		907		101,575		102,482
Total	$	3,688	$	1,525	$	7,588	$	12,801	$	1,925,439	$	1,938,240	$	378

20

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2020 and June 30, 2019, and as of and for the year ended December 31, 2019 by major loan classification:

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2020	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	2,921	$	3,480			$	3,314	$	9	$	3,422	$	25
Real estate:
Commercial		2,042		2,606				2,153		17		2,074		22
Residential		1,115		1,273				1,122		5		1,321		10
Consumer		160		178				181				207
Total		6,238		7,537				6,770		31		7,024		57
With an allowance recorded:
Commercial		2,487		2,516		1,339		2,222				1,821		6
Real estate:
Commercial		2,448		2,774		239		1,856				1,614
Residential		810		878		163		758		3		650		7
Consumer
Total		5,745		6,168		1,741		4,836		3		4,085		13
Total impaired loans
Commercial		5,408		5,996		1,339		5,536		9		5,243		31
Real estate:
Commercial		4,490		5,380		239		4,009		17		3,688		22
Residential		1,925		2,151		163		1,880		8		1,971		17
Consumer		160		178				181				207
Total	$	11,983	$	13,705	$	1,741	$	11,606	$	34	$	11,109	$	70

21

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2019	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	3,638	$	4,175			$	3,907	$	63
Real estate:
Commercial		1,918		2,205				2,385		38
Residential		1,718		2,060				1,362		25
Consumer		261		274				233
Total		7,535		8,714				7,887		126
With an allowance recorded:
Commercial		1,020		1,038		363		1,012		32
Real estate:
Commercial		1,130		1,811		279		1,050		10
Residential		435		450		135		1,408		29
Consumer								20
Total		2,585		3,299		777		3,490		71
Total impaired loans
Commercial		4,658		5,213		363		4,919		95
Real estate:
Commercial		3,048		4,016		279		3,435		48
Residential		2,153		2,510		135		2,770		54
Consumer		261		274				253
Total	$	10,120	$	12,013	$	777	$	11,377	$	197

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

22

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

 Loan Modifications/Troubled Debt Restructurings/COVID-19

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $3,168 at June 30 2020, $2,193 at December 31, 2019 and $2,677 at June 30, 2019.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

● Rate Modification - A modification in which the interest rate is changed to a below market rate.

● Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

● Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

● Combination Modification - Any other type of modification, including the use of multiple categories above.

The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:

		2020
	For the Three Months Ended June 30,					For the Six Months Ended June 30,
			Pre-Modification	Post-Modification				Pre-Modification		Post-Modification
	Number	Recorded		Recorded		Number		Recorded		Recored
	of Loans	Investment		Investment		of Loans		Investment		Investment
Commercial real estate	3	$	1,073	$	1,073	3	$	1,073	$	1,073
Commercial and industrial	1		12		12	1		12		12
Total	4	$	1,085	$	1,085	4	$	1,085	$	1,085

		2019
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
			Pre-Modification	Post-Modification			Pre-Modification		Post-Modification
	Number	Recorded		Recorded	Number		Recorded		Recored
	of Loans	Investment		Investment	of Loans		Investment		Investment
Commercial real estate					1	$	340	$	300
Total		$		$	1	$	340	$	300

During the six months ended June 30, 2020, there was one payment default on a residential real estate loan in the amount of $52 and there were no payment defaults on troubled debt restructurings. During the three and six months ended June 30, 2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off. 

The Company has received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and has agreed to many such deferrals or are in the process of doing so. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019, will be considered current for COVID-19 modifications. A financial institution can then use FASB agreed upon temporary changes to GAAP for loan modifications related to

23

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR), and suspend any determination of a loan modified as a result of COVID-19 being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

Beginning in March 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. As of June 30, 2020, the Company had 479 commercial loan and 512 consumer loan temporary modifications with principal balances totaling $330,119. As of July 30, 2020, 481 commercial loans and 505 consumer loans were on deferral with principal balances of $330,135.

The following table provides information as of June 30, 2020 with respect to the Company’s payment deferrals granted on commercial loans by North American Industry Classification System (“NAICS”) categories:

NAICS category	Number of Loans		Balance	Percentage of Total Loan Portfolio		Percentage of Tier 1 Capital (Bank)
Lessors of Nonresidential Buildings	65	$	71,899	3.3	%	26.9	%
Lessors of Residential Buildings and Dwellings	64		53,564	2.5		19.9
Hotels and Motels	27		39,261	1.8		14.5
Full-Service Restaurants	33		27,783	1.3		10.3
Limited-Service Restaurants	8		11,829	0.5		4.4
Gasoline Stations with Convenience Stores	18		12,422	0.6		4.6
Construction and Mining	13		9,718	0.4		3.6
Assisted Living Facilities for the Elderly	2		6,319	0.3		2.3
Colleges, Universities, and Professional Schools	1		6,301	0.3		2.3
All Others	248		67,674	3.1		24.9
	479	$	306,770	14.1	%	113.7	%

6. Other assets:

The components of other assets at June 30, 2020, and December 31, 2019 are summarized as follows:

		June 30, 2020		December 31, 2019
Other real estate owned	$	964	$	450
Investment in low income housing partnership		6,639		6,901
Mortgage servicing rights		772		738
Bank owned life insurance		35,412		35,041
Restricted equity securities (FHLB and other)		5,353		10,201
Net deferred tax asset		1,272		3,362
Interest rate floor		2,019		944
Interest rate swaps		15,985		4,728
Other assets		6,362		6,855
Total	$	74,778	$	69,220

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.

24

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

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

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

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

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

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

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

During the periods ended June 30, 2020 and December 31, 2019 there were no significant transfers between Level 1 and Level 2 and no transfers in or out of Level 3.

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

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

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

Interest rate swaps 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.

25

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2020	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	22,077	$	22,077			$
U.S. government-sponsored enterprises		81,101			$	81,101
State and municipals:
Taxable		33,161				33,161
Tax-exempt		38,025				38,025
Mortgage-backed securities:
U.S. government agencies		5,867				5,867
U.S. government-sponsored enterprises		107,478				107,478
Common equity securities		338		338
Loan held for sale		1,939				1,939
Interest rate floor-other assets		2,019				2,019
Interest rate swap-other assets		15,912				15,912
Interest rate swap-other liabilities		(16,005)				(16,005)
Total	$	291,912	$	22,415	$	269,497	$

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,128	$	24,128			$
U.S. government-sponsored enterprises		87,110			$	87,110
State and municipals:
Taxable		34,898				34,898
Tax-exempt		60,163				60,163
Mortgage-backed securities:
U.S. government agencies		8,470				8,470
U.S. government-sponsored enterprises		115,709				115,709
Common equity securities		423		423
Loan held for sale		986				986
Interest rate floor-other assets		944				944
Interest rate swap-other assets		4,728				4,728
Interest rate swap-other liabilities		(4,680)				(4,680)
Total	$	332,879	$	24,551	$	308,328	$

Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2020 and December 31, 2019 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2020	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	4,004			$	4,004
Other real estate owned	$	588			$	588

26

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	1,808			$	1,808
Other real estate owned	$	283			$	283

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

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2020	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	4,004	Appraisal of collateral	Appraisal adjustments	5.0% to 97.0%  (57.2)%
				Liquidation expenses	3.0% to 6.0% (5.6)%
Other real estate owned	$	588	Appraisal of collateral	Appraisal adjustments	18.4% to 63.5%  (40.6)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	1,808	Appraisal of collateral	Appraisal adjustments	8.6% to 97.0%  (54.4)%
				Liquidation expenses	3.0% to 6.0% (5.2)%
Other real estate owned	$	283	Appraisal of collateral	Appraisal adjustments	20.0% to 63.6%  (43.7)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

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

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

27

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The carrying and fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019 and their placement within the fair value hierarchy are as follows:

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2020	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	51,934	$	51,934	$	51,934
Investment securities:
Available-for-sale		287,709		287,709		22,077	$	265,632
Common equity securities		338		338		338
Held-to-maturity		7,401		7,717				7,717
Loans held for sale		1,939		1,939				1,939
Net loans		2,154,952		2,132,783					$	2,132,783
Accrued interest receivable		8,368		8,368				8,368
Mortgage servicing rights		772		1,359				1,359
Restricted equity securities (FHLB and other)		5,353		5,353				5,353
Interest rate floor		2,019		2,019				2,019
Interest rate swaps		15,912		15,912				15,912
Total	$	2,536,697	$	2,515,431
Financial liabilities:
Deposits	$	2,210,124	$	2,214,974			$	2,214,974
Long-term debt		60,938		61,453				61,453
Subordinated debentures		33,000		33,201				33,201
Accrued interest payable		872		872				872
Interest rate swaps		16,005		16,005				16,005
Total	$	2,320,939	$	2,326,505

28

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	31,153	$	31,153	$	31,153
Investment securities:
Available-for-sale		330,478		330,478		24,128	$	306,350
Common equity securities		423		423		423
Held-to-maturity		7,656		7,889				7,889
Loans held for sale		986		986				986
Net loans		1,915,563		1,881,658					$	1,881,658
Accrued interest receivable		6,981		6,981				6,981
Mortgage servicing rights		738		1,444				1,444
Restricted equity securities (FHLB and other)		10,201		10,201				10,201
Interest rate floor		944		944				944
Interest rate swaps		4,728		4,728				4,728
Total	$	2,309,851	$	2,276,885
Financial liabilities:
Deposits	$	1,971,489	$	1,972,084			$	1,972,084
Long-term debt		32,733		33,075				33,075
Accrued interest payable		1,277		1,277				1,277
Interest rate swaps		4,680		4,680				4,680
Total	$	2,010,179	$	2,011,116

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 $353 and $660 in 2020 and $415 and $755 in 2019 relating to the employee benefit plans.

	Pension Benefits
Three Months Ended June 30,	2020		2019
Components of net periodic pension benefit:
Interest cost	$	163	$	192
Expected return on plan assets		(371)		(325)
Amortization of unrecognized net gain		65		68
Net periodic benefit	$	(143)	$	(65)
	Pension Benefits
Six Months Ended June 30,	2020		2019
Components of net periodic pension cost:
Interest cost	$	217	$	320
Expected return on plan assets		(494)		(542)
Amortization of unrecognized net gain		87		113
Net periodic benefit cost	$	(190)	$	(109)

29

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

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

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

● Determine the type, size and term of awards.

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

● Accelerate the vesting or excercisability of an award.

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

As of June 30, 2020, there were 54,506 shares of the Company’s common stock available for grant as awards pursuant to the 2017 Plan. The 2008 Plan expired in January 2018 but remained in effect in accordance with its terms to govern outstanding awards under that plan. If any outstanding awards under the 2017 Plan are forfeited by the holder or canceled by the Company, the underlying shares would be available for regrant to others.

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

For the six months ended June 30, 2020 and 2019, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan, with an aggregate of 16,269 shares and 17,345 shares underlying such awards, respectively.

The non-performance restricted stock grants made in 2020, 2019 and 2018 vest equally over three years from the grant date. 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 equity that determines the number of restricted stock units that may vest.

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

The Company recognized net compensation costs of $186 and $191 for the three and six months ended June 30, 2020 for awards granted under the 2017 Plan. The Company recognized compensation expense of $157 and $240 for the three and six months ended June 30, 2019 for awards granted under the 2017 Plan. As of June 30, 2020, the Company had $769 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of just under 2 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

30

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets.  

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income/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. During 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets and issuances of debt.

The Company executed an interest rate swap to reduce its exposure to variability in the interest rate associated with floating-rate borrowings. 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 Income and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income 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 2020, the Company estimates that an additional $134 will be reclassified as an increase to interest expense and an additional $531 will be reclassified as an increase to interest income. 

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2020, the Company had 52 interest rate swaps with an aggregate notional amount of $254,598 related to this program.

31

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30 2020 and December 31, 2019.

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of June 30, 2020			As of December 31, 2019 (1)			As of June 30, 2020			As of December 31, 2019 (2)
		Notional	Balance Sheet			Balance Sheet			Balance Sheet			Balance Sheet
		Amount	Location	Fair Value		Location	Fair Value		Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Floor	$	25,000	Other Assets	$	2,019	Other Assets	$	944
Cash Flow Swap	$	50,000							Other Liabilities		510
Total derivatives designated as hedging instruments				$	2,019		$	944			510
Derivatives not designated as hedging instruments
Interest Rate Swaps (3)	$	254,598	Other Assets	$	15,912	Other Assets	$	4,728	Other Liabilities	$	16,005	Other Liabilities	$	4,680
Total derivatives not designated as hedging instruments				$	15,912		$	4,728		$	16,005		$	4,680

(1) Assets amount does not include accrued interest receivable of $195.

(2) Liabilities amount does not include accrued interest payable of $195.

(3) Notional amount of interest rate swaps at June 30, 2019 $123,351.

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

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income (loss) as of June 30, 2020 and June 30, 2019.

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Loss

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2020

Income

June 30, 2020

Derivatives in Cash Flow Hedging Relationships

Cash Flow Swap

$

(510)

$

(510)

$

Interest Expense

$

73

$

73

$

Interest Rate Floor (*)

$

150

$

151

$

(1)

Interest Income

$

110

$

126

$

(16)

Total

$

(360)

$

(359)

$

(1)

$

183

$

199

$

(16)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

474

$

827

$

(353)

Interest Income

$

(31)

$

$

(31)

* Amounts disclosed are gross and not net of taxes.

32

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2020 and June 30, 2019.

		Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging
		Relationships
		2020		2020		2019	2019
		Interest Income		Interest Expense		Interest Income	Interest Expense
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	$	110	$	73	$	(31)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	110	$	73	$	(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component		126	$	73
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component	$	(16)			$	(31)

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2020 and 2019.

		Amount of Loss		Amount of Loss		Amount of Loss		Amount of Loss
		Recognized in		Recognized in		Recognized in		Recognized in
	Location of Gain or (Loss)	Income		Income		Income		Income
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	June 30, 2020		June 30, 2020		June 30, 2019		June 30, 2019
Interest Rate Swaps	Other non-interest income	$	(10)	$	(141)	$	(236)	$	(346)
Fee Income	Other income	$	259	$	860	$	744	$	1,136

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, 2020 and December 31, 2019. The net amounts of derivative assets or liabilities can be

33

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

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, 2020
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	17,930	$	$	17,930	$		$	17,930
Offsetting of Derivative Liabilities
as of June 30, 2020
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	16,515	$	$	16,515	$		$	16,515
Offsetting of Derivative Assets
as of December 31, 2019
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	5,672	$	$	5,672	$		$	5,672
Offsetting of Derivative Liabilities
as of December 31, 2019
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	4,680	$	$	4,680	$		$	4,680

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, 2020, 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 $93. As of December 31, 2019, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $48. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $14,690 against its obligations under these agreements as of June 30, 2020, compared to having posted collateral of $4,140 with counterparties at December 31, 2019. 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.

34

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

10. Deposits

The major components of interest-bearing and noninterest-bearing deposits at June 30, 2020 and December 31, 2019 are summarized as follows:

At the period end	June 30, 2020		December 31, 2019
Interest-bearing deposits:
Money market accounts	$	434,628	$	365,463
Now accounts		440,202		402,999
Savings accounts		404,040		370,270
Time deposits less than $250		251,121		231,450
Time deposits $250 or more		104,927		138,069
Total interest-bearing deposits		1,634,918		1,508,251
Noninterest-bearing deposits		575,206		463,238
Total deposits	$	2,210,124	$	1,971,489

The growth in deposits occurred primarily in non-maturity deposits due to proceeds of PPP loans retained on deposit by our commercial borrowers. Time deposits $250 thousand or more decreased due to the maturity of a few large public fund certificates of deposit.

11. Borrowings

Short-term borrowings consists of FHLB advances representing overnight borrowings or with stated original terms of less than twelve months. The table below outlines short-term borrowings at June 30, 2020 and December 31, 2019:

			At and for the six months ended June 30, 2020
									Weighted
					Maximum		Weighted		Average
	Ending		Average		Month-End		Average		Rate at
	Balance		Balance		Balance		Rate		June 30, 2020
FHLB advances	$	50,000	$	117,784	$	164,150	1.15	%	0.67	%

	At and for the year ended December 31, 2019
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
	Balance		Balance		Balance		the Year		of the Year
FHLB advances	$	152,150	$	62,941	$	152,150	2.61	%	1.84	%

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, 2020, the maximum borrowing capacity was $808,312 of which $70,762 was outstanding in borrowings and $137,600 was used to issue standby letters of credit to collateralize public fund deposits. At December 31, 2019, the maximum borrowing capacity was $723,608 of which $184,883 was outstanding in borrowings and $185,750 was used to issue standby letters of credit to collateralize public fund deposits. Short-term borrowings were used to fund a portion of our loan growth during the first six months of 2020.  Advances with the FHLB are secured under terms of a blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral, such as investments and mortgage-backed securities and mortgage loans. Interest accrues daily on the FHLB advances based on rates of the FHLB discount notes. The short-term borrowing rate resets each day.

35

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Long-term debt consisting of advances from the FHLB and from the Federal Reserve Bank under the PPPLF with, generally, maturities of twenty-four months, at June 30, 2020 and December 31, 2019 are as follows:

	Interest Rate
Due	Fixed			June 30, 2020		December 31, 2019
June 2020	1.74	%			$	5,000
June 2020	2.22					6,000
December 2020	1.84		$	5,000		5,000
June 2021	1.99			10,000		10,000
April 2022	0.35			40,175
March 2023	4.69			5,763		6,733
			$	60,938	$	32,733

Maturities of long-term debt, by contractual maturity, for the remainder of 2020 and subsequent years are as follows:

2020	$	5,992
2021		12,058
2022		42,333
2023		555
	$	60,938

None of the advances from the FHLB totaling $20,763 are convertible. The advances under the PPPLF due in April 2022 with an outstanding balance of $40,175 may be prepaid without penalty prior to maturity whether or not the PPP loans collateralizing the advances have matured.

12. Subordinated debt

On June 1, 2020, the Company sold $33,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are intended to be treated 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 the benchmark rate, 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 will be 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 law of the Company or the Bank.

13. Income taxes

The effective tax rate of the Company was 14.8% and 13.4% for the three and six months ended June 30, 2020 compared to 11.8% and 11.2% for the three and six months ended June 30, 2019. The three and six months ended June 30, 2020 includes before tax investment tax credits of $273 and $546 compared to before tax investment tax credits and other credits of $390 and $778 for the same period last year.

36

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2019.

Cautionary Note Regarding Forward-Looking Statements:

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Peoples Financial Services Corp. and its subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: the unfolding COVID-19 crisis and the governmental responses to the crisis; risks associated with business combinations; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; inability of third party service providers to perform; and our ability to prevent, detect and respond to cyberattacks. Additional factors that may affect our results are discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, and in reports we file with the Securities and Exchange Commission from time to time.

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

Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts may have been reclassified to conform with the current year’s presentation. Any reclassifications did not have any effect on our operating results or financial position.

Critical Accounting Policies:

Disclosure of our significant accounting policies is included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2019. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

Operating Environment:

On March 11, 2020, the World Health Organization declared a coronavirus, identified as COVID-19, a global pandemic. In the United States, the rapid spread of the COVID-19 virus invoked various federal, state and local authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. Concerns about the spread of the disease and its anticipated negative impact on economic activity severely disrupted domestic financial markets prompting the Federal Reserve System’s FOMC to aggressively cut the target federal funds rate to a range of 0% to 0.25%, including a 50 basis

37

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve rolled out various market support programs to ease the stress on financial markets.

The rate cuts in March marked the fourth and fifth cut in the overnight rate in the most recent monetary easing cycle, which began in July 2019 after the most recent high for the target range for federal funds of 2.25% to 2.50% which was in December 2018. Overall inflation lags below the FOMC’s long-term desired 2% level for items other than food and energy. The consumer price index (“CPI”) registered 1.2% for the 12 months ended June 30, 2020. This is down from 2.1% for the 12 months ended March 31, 2020 and from 2.3% for the 12 months ended December 31, 2019. The all items index increased 0.6% for the 12 months ending June 30, 2020, down from the reading for the 12 months ending March 31, 2020 which came in at 1.5% and a notably smaller increase than the 2.3% increase for the 12 month period ending December 31, 2019. Gross domestic product (“GDP”), the value of all goods and services produced in the nation, came in with an initial second quarter 2020 reading of a -32.9% annualized rate, slightly better than the consensus forecast of -34.5% for the quarter but still the worst recorded contraction on record. The 32.9% contraction was driven by weakness in almost every category of expenditure and investment. Personal consumption dropped by 34.6%, as consumers were required to avoid certain economic activities. Business investment fell 27.0%, while one of the few increases came in the form of government spending, up 2.7%.

The full impact of COVID-19 is unknown and continues to evolve. It has caused substantial disruption in U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves, including retail, hospitality and restaurants and food and service. During March, the Company reviewed its commercial loan and commercial real estate portfolios and determined approximately $1.2 billion or 73% is categorized as non-life sustaining and were subject to shutdown at the onset of the pandemic. Based on management’s application of its allowance for loan losses methodology and primarily changes to the economic qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions and the increased inherent risk in the loan portfolio, 2020 results included $5.3 million in provision for loan and lease losses. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of July 30, 2020, the Company granted payment deferral requests for up to six months to a total of 481 commercial loans with outstanding loan balances of $306.9 million and to 505 consumer loans with outstanding balances of $23.3 million. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and our market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag time behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is our current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.

38

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

The following table provides information with respect to the Company’s payment deferrals granted on commercial loans by NAICS code at July 30, 2020 and June 30, 2020 that may have suffered, or are expected to suffer, greater losses as a result of COVID-19.

	July 30, 2020			June 30, 2020
NAICS category	Number of Loans		Balance	Number of Loans		Balance
Lessors of Nonresidential Buildings	66	$	72,563	65	$	71,899
Lessors of Residential Buildings and Dwellings	66		53,666	64		53,564
Hotels and Motels	27		39,217	27		39,261
Full-Service Restaurants	33		27,727	33		27,783
Limited-Service Restaurants	8		11,817	8		11,829
Gasoline Stations with Convenience Stores	18		12,348	18		12,422
Construction and Mining	13		9,718	13		9,718
Assisted Living Facilities for the Elderly	2		6,319	2		6,319
Colleges, Universities, and Professional Schools	1		6,301	1		6,301
All Others	247		67,203	248		67,674
	481	$	306,879	479	$	306,770

The Company has also participated as a lender in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a $349 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Paycheck Protection Program (“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. The Company began accepting and processing applications for loans under the PPP on April 3, 2020.  Through July 30, 2020, the Company processed 1,417 applications from existing and new customers providing over $216.2 million in loans with an average loan amount of $153 thousand furthering Peoples’ commitment to support small businesses.  Funding these loans will generate approximately $6.9 million of SBA processing fees.   The processing fee income is deferred and amortized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. During the three months ended June 30, 2020, $0.7 million was recognized in interest and fees on loans in the unaudited Consolidated Statements of Income. The Company utilized the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) and an increase of in-market deposits to replace liquidity used to fund PPP loans.

At June 30, 2020, our non-performing assets were not materially impacted by the economic pressures of COVID-19.

We are monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our equity investments and have reviewed our investment portfolio for impairment at period end. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.

Goodwill:

The Company also has goodwill with a net carrying value of $63.4 million at June 30, 2020 and December 31, 2019. The Company completes a goodwill impairment analysis at least annually, or more often if events and circumstances indicate that there may be impairment. In connection with the emergence of COVID-19 as a global pandemic and the decline in our stock price during 2020, management retained a financial advisory firm to assist in the preparation of a quantitative assessment for potential goodwill impairment. To arrive at the fair value of the Company, management utilized an income and market approach and applied weighting factors to each result and concluded the fair value of the Company was in excess of its carrying value, including goodwill and, as such, no impairment exists at June 30, 2020. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods with no assurance that the future impairment assessments or tests will not result in a charge to earnings.

39

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

As of June 30, 2020, the Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards. Our reported and regulatory capital ratios could be adversely impacted by credit losses resulting from the COVID-19 pandemic.

Review of Financial Position:

Total assets increased $225,097, or 18.3% annualized, to $2,700,424 at June 30, 2020, from $2,475,327 at December 31, 2019. Total loans increased to $2,181,909 at June 30, 2020, compared to $1,938,240 at December 31, 2019, an increase of $243,669 or 25.3% annualized. The increase in loans during the first six months of 2020 was primarily due to $201,274 of PPP loans originated during the second quarter. Investments decreased $43,109 or 12.7% due largely to the sale during the first quarter of a pool of low-yielding municipal bonds with proceeds totaling $26,502 coupled with return of principal on called and matured bonds. Deposits increased by $238,635 or 24.3% annualized due to proceeds of PPP loans retained on deposit by our commercial borrowers, stimulus payments received and retained by our customers and organic growth of customer relationships. Interest-bearing deposits increased $126,667 while noninterest-bearing deposits increased $111,968. Total stockholders’ equity increased $13,034 or 4.4%, from $299,010 at year-end 2019 to $312,044 at June 30, 2020. For the six months ended June 30, 2020, total assets averaged $2,588,545, an increase of $275,492 from $2,313,053 for the same period of 2019.

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 $287,709 at June 30, 2020, a decrease of $42,769, or 12.9% from $330,478 at December 31, 2019. The decrease was largely due to the sale of $26,502 of short-term, low yielding municipal securities with the proceeds used to fund loan growth in the first quarter. An increase in the market value of the available-for-sale portfolio of $9,456 since December 31, 2019, due to the decline in market rates related to COVID-19 partially offset the declines due to receipt of principal cash flow from mortgage-backed securities and proceeds received from called and matured bonds. Investment securities held-to-maturity totaled $7,401 at June 30, 2020, a decrease of $255 or 3.3% from $7,656 at December 31, 2019 due to payments received on mortgage backed securities.

For the six months ended June 30, 2020, the investment portfolio averaged $309,925, an increase of $35,695 or 13.0% compared to $274,230 for the same period last year. Average tax-exempt municipal bonds have decreased $40,484 or 46.7% to $46,256 for the six months ended June 30, 2020 from $86,740 during the comparable period of 2019. The decrease in tax-exempt municipal bonds is due to the aforementioned sale during the first quarter 2020, the sale of approximately $9,135 of low-yielding tax-exempt municipal bonds during the second quarter of 2019 and matured and called bonds. The tax-equivalent yield on the investment portfolio decreased 9 basis points to 2.44% for the six months ended June 30, 2020, from 2.53% for the comparable period of 2019. The decrease in yield is due to lower reinvestment rates for cash flow from matured and called higher yielding municipal bonds.

Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported net unrealized gains, included as a separate component of stockholders’ equity of $8,920, net of deferred income taxes of $2,371, at June 30, 2020, and net unrealized gains of $1,450, net of deferred income taxes of $385, at December 31, 2019.

Management, from a credit risk perspective, has taken action to identify and assess its COVID-19 related credit exposures based on asset class. No specific COVID-19 related credit impairment was identified within our investment securities portfolio, including our municipal securities, during the first six months of 2020.

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.

40

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Loan Portfolio:

Total loans increased to $2,181,909 at June 30, 2020 from $1,938,240 at December 31, 2019, an increase of $243,669. The loan growth is due primarily to our participation in the PPP loan program. During the second quarter of 2020, the Company processed 1,373 applications providing over $201,274 in loans through the Small Business Administration (SBA) PPP. The loan growth is expected to be only temporary as the SBA has provided loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. We believe the majority of the PPP loans will be forgiven during the second half of 2020. Excluding the PPP loans, loans have increased $42,395 or 4.4% primarily from commercial real estate loans partially offset by reductions to non-PPP commercial loans, residential real estate and consumer loans, primarily dealer indirect auto loans. Commercial real estate loans increased $88,395 or 17.6% annualized, to $1,099,818 at June 30, 2020 compared to $1,011,423 at December 31, 2019 due to increased activity in both our core and expansion markets. Our growth in commercial real estate loans is due in part to the success in executing our strategic market expansion initiative in the Lehigh Valley, Greater Delaware Valley and Central Pennsylvania regions. Commercial and industrial loans, excluding PPP, decreased $29,680 or 11.4% annualized, to $493,277 at June 30, 2020 compared to $522,957 at December 31, 2019 as we experienced prepayments on a few large credits. We will continue to actively pursue commercial and industrial loans, although this is temporarily more challenging due to the current economic conditions, as this segment of our loan portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and wealth management relationships which generate additional fee income.

Consumer loans decreased $12,822, or 25.2% on an annualized basis, to $89,660 at June 30, 2020 compared to $102,482 at December 31, 2019. The decrease in consumer loans was primarily due to payoffs outpacing dealer indirect auto loan origination volumes. Lower origination volumes have resulted from the Bank’s change to the structure of its loan pricing which began during 2018. Also, during 2020 in response to COVID-19 auto dealerships were ordered to shut down by their state governments due to their non-essential business status. 

Residential real estate loans decreased $3,498, or 2.3% on an annualized basis, to $297,880 at June 30, 2020 compared to $301,378 at December 31, 2019. Lower mortgage rates resulting from the FOMC’s action to cut the federal funds rate has led to increased home refinancing. The majority of the refinancing are being sold into the secondary market which has increased our mortgage banking revenue. 

Loan activity beyond the PPP is expected to decline based on uncertainty related to the scope, duration and full-effects of COVID-19 on regional and national economies and resulting effect to our loan customers.

For the six months ended June 30, 2020, total loans excluding PPP loans, averaged $1,981,445, an increase of $133,485 or 7.2% compared to $1,847,960 for the same period of 2019. The PPP loans averaged $81,650 for the six months ended June 30, 2020 and yielded 2.64%. The tax-equivalent yield on the entire loan portfolio was 4.34% for the six months ended June 31, 2020, a 41 basis point decrease from the comparable period last year. The decrease in yield is primarily due to decreases in market rates as the FOMC cut the federal funds rate three times during the second half of 2019 in response to concerns of slowing economic growth, which affected new originations and refinancing activity, as well as existing adjustable rate loans. Additionally, the FOMC took aggressive steps in March 2020 to combat the COVID-19 pandemic by cutting the federal funds rate 100 basis points to a target range of 0.00% to 0.25% during an emergency meeting which followed an emergency 50 basis point cut on March 3. The recent FOMC actions will continue to place downward pressure on loan yields.

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

Unused commitments at June 30, 2020, totaled $373,786, consisting of $329,033 in unfunded commitments of existing loan facilities and $44,753 in standby letters of credit. Due to fixed maturity dates, specified conditions within these

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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, 2019 totaled $387,703, consisting of $342,685 in unfunded commitments of existing loans and $45,018 in standby letters of credit.

Asset Quality:

National, Pennsylvania, New York and market area unemployment rates at June 30, 2020 and 2019, are summarized as follows:

	2020		2019
United States	13.0	%	3.6	%
New York (statewide)	9.5		4.1
Pennsylvania (statewide)	9.7		4.2
Broome County	9.0		4.9
Bucks County	9.1		3.7
Lackawanna County	10.7		4.7
Lebanon County	8.5		3.7
Lehigh County	10.1		4.4
Luzerne County	12.0		5.6
Monroe County	12.7		5.2
Montgomery County	8.2		3.4
Northampton County	9.8		4.4
Schuylkill County	10.2		5.3
Susquehanna County	8.5		4.4
Wayne County	11.0		5.0
Wyoming County	9.8	%	4.9	%

42

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

The employment situation deteriorated in New York and Pennsylvania and in all of the thirteen counties representing our market areas in Pennsylvania and New York from one year ago when comparing June 30, 2020 to June 30, 2019. Projections for our local market unemployment are not readily available, however the most current economic statistics as of July 30, 2020 show continuing jobless claims of over 17 million. The unemployment rate is at a historically elevated 13.0% per the latest report from the Bureau of Labor Statistics at June 30, 2020. By comparison, the highest annual unemployment rate in our Nation’s history was 24.9% during the peak of the Great Depression in 1933 and the lowest recorded unemployment rate registered 1.2% during the subsequent economic expansion in 1944. The highest recorded unemployment rate in recent history was 9.9% in 2009 during the Great Recession. Elevated unemployment rates will likely have an adverse effect on our credit quality and may result in increased credit losses within the loan portfolio in future periods.

Distribution of nonperforming assets

		June 30, 2020			December 31, 2019
Nonaccrual loans:
Commercial	$	4,697		$	3,336
Real estate:
Commercial		3,109			2,765
Residential		1,080			1,144
Consumer		160			261
Total nonaccrual loans		9,046			7,506
Troubled debt restructured loans:
Commercial		1,228			1,302
Real estate:
Commercial		1,341			283
Residential		599			608
Total troubled debt restructured loans		3,168			2,193
Accruing loans past due 90 days or more:
Commercial		25
Real estate:
Commercial		40
Residential		226			378
Total accruing loans past due 90 days or more		291			378
Total nonperforming loans		12,505			10,077
Foreclosed assets		964			450
Total nonperforming assets	$	13,469		$	10,527
Nonperforming loans as a percentage of loans, net		0.57	%		0.52	%
Nonperforming assets as a percentage of loans, net and foreclosed assets		0.62	%		0.54	%

We experienced a decline in our asset quality during the first six months of 2020 as evidenced by an increase of $2,942 in nonperforming assets. Nonperforming assets totaled $13,469 or 0.62% of loans, net and foreclosed assets at June 30, 2020, from $10,527 or 0.54% of loans, net and foreclosed assets at December 31, 2019. An increase in nonaccrual loans, foreclosed assets and restructured loans was partially offset by a decrease in accruing loans past due ninety days or more.

Loans on nonaccrual status increased $1,540 to $9,046 at June 30, 2020 from $7,506 at December 31, 2019. The majority of the increase from year end was due to an increase of $1,361 in commercial and industrial loans resulting from the placement of two credit relationships on nonaccrual totaling $1,715 during the first quarter. Commercial real estate loans on nonaccrual increased $344 from yearend 2019 due in part to one credit relationship added in the first quarter totaling $594; the borrower encountered temporary financial difficulties and is seeking remedies to bring the credit current.  A decrease in nonaccrual residential real estate loans of $64 and corresponding increase to foreclosed assets of $453 was largely due to the foreclosure of one property totaling $398 which had been on nonaccrual at December 31, 2019. Restructured loans increased $975 to $3,168 at June 30, 2020 from $2,193 at December 31, 2019

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Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

due to two credit relationships totaling $1,073 which were unable to pay contractual terms. The need for concessions was accelerated due to COVID-19. Other real estate owned comprised ten properties at June 30, 2020 and seven properties at December 31, 2019, respectively.

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

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended December 13, 2006, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310, “Receivables,” for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, credit administration identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. We consistently use loss experience from the latest twelve quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements to this Quarterly Report.

The allowance for loan losses increased $4,280 or 18.9% in 2020, due largely to the adjustment of qualitative factors in our allowance for loan losses methodology, which reflect current economic decline and expectation of increased credit losses due to COVID-19’s adverse impact on economic and business operating conditions. The allowance for loan losses equaled $26,957 or 1.24% of loans at June 30, 2020 compared to $22,677 or 1.17% of loans at December 31, 2019. Excluding PPP loans that do not carry an allowance for losses due to a 100% government guarantee, the ratio equaled 1.36%. Loans charged-off, net of recoveries, for the six months ended June 30, 2020, equaled $1,020 or 0.10% of average loans, compared to $849 or 0.09% of average loans for the comparable period last year. Commercial loan net charge-offs increased $610 partially due to the charge-off of two loans totaling $853, offset by a recovery of $200 on an unrelated commercial credit.  Partially offsetting the higher net charge-offs was a decrease in commercial real estate charge-offs of $302 during 2020.

Deposits:

We attract the majority of our deposits from within our market area that stretches from Montgomery County in southeastern Pennsylvania to Broome County in the Southern Tier of New York State to Lebanon County in Central Pennsylvania through the offering of various deposit instruments including demand deposit accounts, NOW accounts, money market deposit accounts, savings accounts, and time deposits, including certificates of deposit and IRA’s. For the six months ended June 30, 2020, total deposits increased $238,635 or 12.1% to $2,210,124 from $1,971,489 at December 31, 2019. The growth in deposits occurred primarily from proceeds of PPP loans retained on deposit by our commercial borrowers, stimulus payments received and retained by our customers, organic growth of customer relationships and $26,291 of brokered deposits. Commercial borrowers who have PPP loans added $133,903 to their deposit balances from month end February. Interest-bearing deposits increased $126,667 and noninterest-bearing deposits increased $111,968. Interest-bearing transaction accounts, including NOW and money market accounts increased by $106,368, or 27.8% annualized, to $874,830 at June 30, 2020, from $768,462 at December 31, 2019, savings accounts increased $33,770 to $404,040 as of June 30, 2020 from $370,270 at December 31, 2019 and time deposits less than $250 increased $19,671, or 17.1% annualized, to $251,121 at June 30, 2020, from $231,450 at December 31, 2019 due to the addition of brokered deposits which have maturities of six months or less. Time deposits

44

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

$250 or more decreased $33,142, or 24.0% to $104,927 at June 30, 2020 from $138,069 at year end 2019 due primarily to the redemption of a few large municipal accounts.

For the six months ended June 30, interest-bearing deposits averaged $1,565,053 in 2020 compared to $1,447,773 in 2019, an increase of $117,280, or 8.1%. The cost of interest-bearing deposits was 0.82% in 2020 compared to 0.99% for the same period last year. For the first six months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.88% in 2020 and 1.15% in 2019. The lower costs are due primarily to a decrease in short-term market rates, the result of the FOMC’s action to cut the federal funds rate three times during the second half of 2019 in response to concerns of slowing economic growth and, during March 2020, its aggressive actions to fight a recession by cutting the federal funds rate 150 basis points in response to the COVID-19 global pandemic and economic slowdown. We expect our cost of interest-bearing liabilities to continue to move lower as market rates are expected to remain at historical lows for some time.  

Borrowings:

The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB. In addition, the Bank may borrow from the Federal Reserve utilizing the Discount Window, or the recently created Paycheck Protection Program Liquidity Facility (“PPPLF”) using Paycheck Protection Program loans as collateral.

Overall, total borrowings at June 30, 2020, totaled $110,938 compared to $184,883 at December 31, 2019, a decrease of $73,945. Short-term borrowings outstanding at June 30, 2020 was $50,000 compared to $152,150 at December 31, 2019 a decrease of $102,150 as deposit growth, asset cash flows and proceeds from a $33,000 subordinated debt offering were used to paydown borrowings. Long-term debt was $60,938 at June 30, 2020 which included $40,175 of borrowings under the PPPLF, compared to $32,733 at year end 2019.

Subordinated Debt:

On June 1, 2020, the Company sold $33,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are intended to be treated 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 the benchmark rate, 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 will be 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 law of the Company or the Bank.

Market Risk Sensitivity:

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”) associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and off-balance sheet items. These

45

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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.

Due to economic uncertainty and the recent dramatic decreases to short-term market rates and the expectation of historically low rates for the foreseeable future, it has become challenging to manage IRR. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by our board of directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.

The ALCO, comprised of members of our board of directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

Our cumulative one-year RSA/RSL ratio equaled 1.45% at June 30, 2020. Given the action by the FOMC to lower the targeted federal funds rate 75 basis points during the second half of 2019, and its latest actions to cut rates another 150 basis points during March 2020 to combat economic slowdown and recessionary fears, the focus of ALCO has been to create a balanced static gap position. With regard to RSA, we predominantly offer medium-term, fixed-rate loans as well as adjustable rate loans. With respect to RSL, we are offering short term certificates of deposit and keeping our borrowings short-term in an attempt to decrease duration. The current position at June 30, 2020, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to decrease as market rates decrease. However, these forward-looking statements are qualified in the aforementioned section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Management’s Discussion and Analysis.

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

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at June 30, 2020, 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 2020 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.

46

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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 Asset Liability Management Committee met in May to review our capital adequacy and liquidity contingency funding plan due to the high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic. Management believes the Company’s liquidity position is strong. At June 30, 2020, the Company’s cash and due from banks balances were $51.9 million and we maintained $158.1 million of availability at the Federal Reserve Bank’s discount window. We may also utilize the Federal Reserve’s PPPLF which provides us, as an eligible depository institution, an available liquidity facility on a non-recourse basis, taking only PPP loans as collateral. Our potential maximum borrowing capacity under the PPPLF at June 30, is $201.3 million, of which $40.2 million was outstanding. The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury and U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities. This portfolio serves as a ready source of liquidity and capital. At June 30, 2020, the Company’s available-for-sale investment securities portfolio totaled $287.7 million, $233.3 million of which were unencumbered. Net unrealized gains on the portfolio were $11.3 million. The Bank’s unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at June 30, 2020 was $599.4 million.

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, 2020. Our noncore funds at June 30, 2020, were comprised of time deposits in denominations of $100 or more and other borrowings. These funds are not considered to be a strong source of liquidity because they are very interest rate sensitive and are considered to be highly volatile. At June 30, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 12.6%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 6.9%. Comparatively, our overall noncore dependence ratio at year-end 2019 was 17.8% and our net short-term noncore funding dependence ratio was 14.4%, indicating that our reliance on noncore funds has decreased both in the short-term and overall.

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection,

47

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

deposit balances with other banks and federal funds sold, increased $20,781 during the six months ended June 30, 2020. Cash and cash equivalents decreased $2,654 for the same period last year. For the six months ended June 30, 2020, net cash inflows of $19,652 from operating activities and $189,817 from financing activities were partially offset by net cash outflows of $188,688 from investing activities. For the same period of 2019, net cash inflows of $16,089 from operating activities and $7,853 from financing activities were more than offset by net cash outflows of $26,596 from investing activities.

Operating activities provided net cash of $19,652 for the six months ended June 30, 2020, and $16,089 for the corresponding six months of 2019. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for loan losses, is the primary source of funds from operations.

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $188,688 for the six months ended June 30, 2020, compared to using net cash of $26,596 for the same period of 2019. In 2020 and 2019, an increase in lending activities was the primary factor causing the net cash outflow from investing activities.

 Financing activities provided net cash of $189,817 for the six months ended June 30, 2020, and provided net cash of $7,853 for the corresponding six months of 2019. Deposit gathering is our predominant financing activity. Deposits provided cash of $238,635 for the six months ended June 30, 2020. Comparatively, deposits provided $1,777 for the same period of 2019. We continue to seek deposits from new markets and customers as well as existing customers, including municipalities and school districts. In the event that loan growth should exceed the growth in deposits, short-term and long-term borrowings provide additional funding. Short term borrowings decreased $102,150 in the six months ended June 30, 2020 compared to a decrease of $3,800 for the comparable period in 2019. Long term borrowings, including term borrowings from the Federal Reserve Bank’s PPPLF and the issuance of subordinated debt provided $61,205 in the six months ended June 30, 2020. Comparatively, long term borrowings provided $15,074 of funding for the comparable period in 2019.

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 $312,044 or $42.55 per share at June 30, 2020, compared to $299,010 or $40.47 per share at December 31, 2019. Net income of $12,857 for the six months ended June 30, 2020 and other comprehensive income of $7,859 resulting from market value fluctuations in the investment portfolio and changes to the fair value of derivatives were the primary factors leading to the improved capital position. Stockholders’ equity was also affected by cash dividends declared of $5,305.

Dividends declared equaled $0.72 per share through the six months ended June 30, 2020 and $0.68 per share for the same period of 2019. The dividend payout ratio was 41.3% for the six months ended June 30, 2020 and 37.1% for the same period of 2019. The Company has paid cash dividends since its formation as a bank holding company in 1986. It is the present intention of the Board of Directors to continue this dividend payment policy. The Board declared on July 31, 2020 a third quarter dividend of $0.36 per share payable September 15, 2020. Further dividends, however, must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant, including the adverse impact of COVID-19,  at the time the Board of Directors considers payment of dividends.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The final rules call for the following capital requirements: (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%; (ii) a minimum ratio of tier 1 capital to risk-weighted assets of 6%; (iii) a minimum ratio of total capital to risk-weighted assets of 8%; and (iv) a minimum leverage ratio of 4%. In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital

48

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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, 2020, the Bank’s Tier 1 capital to total average assets was 10.47% as compared to 9.91% at December 31, 2019. The Bank’s Tier 1 capital to risk weighted asset ratio was 13.33% and the total capital to risk weighted asset ratio was 14.58% at June 30, 2020. These ratios were 11.64% and 12.78% at December 31, 2019. The Bank’s common equity Tier 1 to risk weighted asset ratio was 13.33% at June 30, 2020 compared to 11.64% at December 31, 2019. The increase in the Bank’s capital ratios was due to $30.0 million downstreamed from the Company from proceeds of a $33.0 million subordinated debt issuance. The Bank met all capital adequacy requirements and was deemed to be well-capitalized under regulatory standards at June 30, 2020.

Review of Financial Performance:

Net income for the three months ended June 30, 2020 reflect the impact of $201.3 million of loans originated through the PPP and COVID-19 related impacts. Peoples reported net income of $7,576, or $1.03 per diluted share for the three months ended June 30, 2020, an increase of 6.0% when compared to $7,144, or $0.96 per diluted share for the comparable period of 2019. The increase in earnings for the three months ended June 30, 2020 is the product of an increase in pre-provision net interest income of $1,779, due primarily to lower funding costs of $1,259, and lower noninterest expenses of $1,187 primarily from deferred loan origination cost benefit related to the PPP loans originated in the second quarter. Partially offsetting the increase was a higher provision for loan losses of $1,450 resulting from the application of our allowance for loan losses methodology, and changes to qualitative factors relating to the adverse impact of the COVID-19 crisis. Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.13% for the second quarter of 2020 compared to 1.24% for the same period of 2019. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 9.87% for the second quarter of 2020 compared to 9.98% for the comparable period in 2019.

Net income for the six months ended June 30, 2020, totaled $12,857 or $1.74 per diluted share, a 5.2% decrease when compared to $13,556 or $1.83 per diluted share for the same period last year. The decrease in earnings in the 2020 six month period is the result of an increase to our provision for loan losses of $3,900, primarily due to changes to the qualitative factors included in our allowance for loan losses methodology relating to the impact of COVID-19, and lower noninterest income of $596. Partially offsetting the decline were increases in our pre-provision net interest income of $3,043, or 8.2%, which were the result of average earning asset growth of $268,204 and lower funding costs of $1,482, and lower noninterest expenses of $1,026. Our ROA and ROE were 1.00% and 8.48% through six months in 2020 compared to 1.18% and 9.63% for the same period of 2019.

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’ 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 2020 and 2019.

49

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

The following table reconciles the non-GAAP financial measures of FTE net interest income for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30	2020		2019
Interest income (GAAP)	$	23,852	$	23,332
Adjustment to FTE		329		434
Interest income adjusted to FTE (non-GAAP)		24,181		23,766
Interest expense		3,345		4,604
Net interest income adjusted to FTE (non-GAAP)	$	20,836	$	19,162
Six months ended June 30	2020		2019
Interest income (GAAP)	$	47,694	$	46,133
Adjustment to FTE		682		875
Interest income adjusted to FTE (non-GAAP)		48,376		47,008
Interest expense		7,626		9,108
Net interest income adjusted to FTE (non-GAAP)	$	40,750	$	37,900

The efficiency ratio is noninterest expenses, less amortization of intangible assets, as a percentage of FTE net interest income plus noninterest income less gains on equity securities and gains on sale of assets. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30	2020			2019
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)	$	13,242		$	14,429
Less: amortization of intangible assets expense		154			182
Noninterest expense adjusted for amortization of assets expense (non-GAAP)		13,088			14,247
Net interest income (GAAP)		20,507			18,728
Plus: taxable equivalent adjustment		329			434
Noninterest income (GAAP)		3,422			4,152
Less: net (losses) gains on equity securities		39			(9)
Less: net gains on sale of assets					23
Net interest income (FTE) plus noninterest income (non-GAAP)	$	24,219		$	23,300
Efficiency ratio (non-GAAP)		54.0	%		61.1	%
Six months ended June 30	2020			2019
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)	$	26,893		$	27,919
Less: amortization of intangible assets expense		308			374
Noninterest expense adjusted for amortization of assets expense (non-GAAP)		26,585			27,545
Net interest income (GAAP)		40,068			37,025
Plus: taxable equivalent adjustment		682			875
Noninterest income (GAAP)		6,972			7,568
Less: net (losses) gains on equity securities		(84)			(8)
Less: net gains on sale of assets		267			23
Net interest income (FTE) plus noninterest income (non-GAAP)	$	47,539		$	45,453
Efficiency ratio (non-GAAP)		55.9	%		60.6	%

50

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

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

● Changes in general market rates; and

● The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 21.0% in 2020 and 2019.

For the three months ended June 30, tax-equivalent net interest income increased $1,674 to $20,836 in 2020 from $19,162 in 2019. The net interest spread decreased to 3.15% for the three months ended June 30, 2020 from 3.32% for the three months ended June 30, 2019 as the earning asset yield decreased 59 basis points while the average rate paid on interest bearing liabilities decreased 42 basis points. The tax-equivalent net interest margin decreased to 3.36% for the second quarter of 2020 from 3.62% for the comparable period of 2019.

For the three months ended June 30, tax-equivalent interest income, a non-GAAP measure, on earning assets increased $415, to $24,181 in 2020 as compared to $23,766 in 2019. The overall yield on earning assets, on a fully tax-equivalent basis, decreased 59 basis points for the three months ended June 30, 2020 to 3.90% as compared to 4.49% for the three months ended June 30, 2019. The decrease in yield on earning assets resulted from a 62 basis point decrease in loan yields, 4.16% for the second quarter of 2020 compared to 4.78% for the same period last year. Loan yields decreased due to lower rates on new loan originations during 2020, coupled with adjustable and variable rate loans repricing into a lower rate environment as the FOMC cut the federal funds rate three times during the second half of 2019 in response to concerns of slowing economic growth. PPP loan interest income totaled $1,071 and the yield was 2.64% during the current quarter. Exclduing the PPP loans, the loan yield was 4.29%. The overall yield earned on investments decreased 10 basis points in the second quarter of 2020 to 2.41% from 2.51% for the second quarter of 2019 as investment cashflow from high yielding matured and pre-refunded municipal bonds are deployed into lower yielding bonds and federal funds sold.  Average investment balances were $31,796 higher when comparing the current and year ago quarter. We expect asset yields to continue to move downward due to the FOMC’s actions to cut the federal funds rate 150 basis points during March 2020 to combat the economic slowdown resulting from the COVID-19 pandemic.  

Total interest expense decreased $1,259 to $3,345 for the three months ended June 30, 2020 from $4,604 for the three months ended June 30, 2019. The total cost of funds decreased 42 basis points for the three months ended June 30, 2020 to 0.75% as compared to 1.17% in the year ago period. The decrease in costs was due to lower rates on interest bearing liabilities partially offset by higher average balances. The average rate paid on deposits declined as we decreased deposit rates in response to the FOMC’s decision to decrease the target federal funds rate 225 basis points from July 2019 to March 2020. We expect our cost of funds to continue to decline as time deposits mature and reinvest into lower rates and we continue to lower all our interest-bearing deposit rates to mitigate compression to our net interest margin.

51

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Net interest income changes due to rate and volume

	2020 vs 2019
	Increase (decrease)
Six months ended June 30	attributable to
	Total		Rate		Volume
Interest income:
Loans:
Taxable	$	1,333	$	(8,346)	$	9,679
Tax-exempt		(299)		(80)		(219)
Investments:
Taxable		940		65		875
Tax-exempt		(618)		105		(723)
Interest-bearing deposits		6		(64)		70
Federal funds sold		6				6
Total interest income		1,368		(8,320)		9,688
Interest expense:
Money market accounts		(416)		(1,192)		776
NOW accounts		84		(42)		126
Savings accounts		1		(2)		3
Time deposits less than $100		228		(78)		306
Time deposits $100 or more		(654)		(621)		(33)
Short-term borrowings		(733)		(1,165)		432
Long-term debt		(140)		(490)		350
Subordinated debt		148				148
Total interest expense		(1,482)		(3,590)		2,108
Net interest income - non-GAAP	$	2,850	$	(4,730)	$	7,580

Tax-equivalent net interest income, a non-GAAP measure, was $40,750 in the six months ended June 30, 2020 and $37,900 in the comparable period last year. There was a positive volume variance that was partially offset by a negative rate variance. The growth in average earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income, a non-GAAP measure, of $7,580. A rate variance resulted in a decrease in net interest income of $4,730.

Average earning assets increased $268,204 to $2,392,190 for the six months ended June 30, 2020 from $2,123,986 for the six months ended June 30, 2019 and accounted for a $9,688 increase in interest income. Average loans increased $215,135, which caused interest income to increase $9,460. Average taxable investments increased $76,179 comparing 2020 and 2019, which resulted in increased interest income of $875 while average tax-exempt investments decreased $40,484, which resulted in a decrease to interest income of $723.

Average interest-bearing liabilities rose $147,359 to $1,740,231 for the six months ended June 30, 2020 from $1,592,872 for the six months ended June 30, 2019 resulting in a net increase in interest expense of $2,108. Large denomination time deposits averaged $2,919 less in the current period and caused interest expense to decrease $33. An increase of $36,799 in average time deposits less than $100 thousand increased interest expense by $306. In addition, interest-bearing transaction accounts, including money market, NOW and savings accounts grew $83,400, which in aggregate caused a $905 increase in interest expense. Short-term borrowings averaged $12,502 higher and increased interest expense $432 while long-term debt averaged $12,040 higher and increased interest expense by $350 comparing the first six months of 2020 and 2019.

An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets decreased 39 basis points while there was a 27 basis point decrease in the cost of funds. As a result, tax-equivalent net interest income decreased $4,730 comparing the six months ended June 30, 2020 and 2019. The tax-equivalent yield on earning assets was 4.07% in the 2020 period compared to 4.46% in 2019 resulting in a decrease in interest income of $8,320. The yield on the taxable investment portfolio increased 7 basis points to 2.30% during the six months ended June 30, 2020 from 2.23% in the

52

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

year ago period, resulting in an increase of $65. The tax-equivalent yield on the loan portfolio decreased 41 basis points to 4.34% in 2020 from 4.75% in 2019 and resulted in a decrease to interest income of $8,426.

A favorable rate variance was experienced in the cost of funds. We experienced decreases in the rates paid on most of the major categories of interest-bearing liabilities. We did, however, add subordinated debt at a fixed rate of 5.375% which will adversely impact our cost of funds. The cost of money market accounts decreased 40 basis points comparing the six months ended June 30, 2020 and 2019. The decrease resulted in a decrease in interest expense of $1,192. The cost of savings accounts remained level at 13 basis points and had no significant change in interest expense. With regard to time deposits, the average rate paid for time deposits less than $100 thousand decreased 4 basis points while time deposits $100 thousand or more decreased 60 basis points, which together resulted in a $699 decrease in interest expense. The average rate paid on short-term borrowings decreased 155 basis points in the 2020 period when compared to the year ago period, causing a $1,165 decrease in interest expense. Interest expense decreased $490 from a 123 basis point decrease in the average rate paid on long-term debt.

53

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

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

	Three months ended
	June 30, 2020						June 30, 2019
	Average		Interest Income/		Yield/		Average		Interest Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Earning assets:
Loans:
Taxable	$	2,032,852	$	21,160	4.19	%	$	1,707,730	$	20,641	4.85	%
Tax-exempt		127,624		1,191	3.75			142,310		1,404	3.96
Total loans		2,160,476		22,351	4.16			1,850,040		22,045	4.78
Investments:
Taxable		260,160		1,445	2.23			189,265		1,045	2.21
Tax-exempt		43,466		374	3.46			82,565		659	3.20
Total investments		303,626		1,819	2.41			271,830		1,704	2.51
Interest-bearing deposits		12,595		5	0.16			2,554		17	2.67
Federal funds sold		17,480		6	0.14
Total earning assets		2,494,177		24,181	3.90	%		2,124,424		23,766	4.49	%
Less: allowance for loan losses		26,000						22,341
Other assets		236,017						212,924
Total assets	$	2,704,194	$	24,181			$	2,315,007	$	23,766
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts	$	402,705	$	614	0.61	%	$	325,555	$	1,058	1.30	%
NOW accounts		436,020		827	0.76			383,276		702	0.73
Savings accounts		397,267		122	0.12			385,995		124	0.13
Time deposits less than $100		174,271		552	1.27			137,613		498	1.45
Time deposits $100 or more		195,578		749	1.54			217,226		1,331	2.46
Short-term borrowings		93,447		102	0.44			88,792		595	2.69
Long-term debt		82,117		231	1.13			41,948		296	2.83
Subordinated debt		11,074		148	5.38
Total interest-bearing liabilities		1,792,479		3,345	0.75			1,580,405		4,604	1.17
Noninterest-bearing deposits		574,194						426,791
Other liabilities		28,798						20,773
Stockholders’ equity		308,723						287,038
Total liabilities and stockholders’ equity	$	2,704,194		3,345			$	2,315,007		4,604
Net interest income/spread			$	20,836	3.15	%			$	19,162	3.32	%
Net interest margin					3.36	%					3.62	%
Tax-equivalent adjustments:
Loans			$	250					$	295
Investments				79						139
Total adjustments			$	329					$	434

54

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

	Six months ended
	June 30, 2020						June 30, 2019
	Average		Interest Income/		Yield/		Average		Interest Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Earning assets:
Loans:
Taxable	$	1,931,653	$	42,077	4.38	%	$	1,704,750	$	40,744	4.82	%
Tax-exempt		131,442		2,496	3.82			143,210		2,795	3.94
Total loans		2,063,095		44,573	4.34			1,847,960		43,539	4.75
Investments:
Taxable		263,669		3,016	2.30			187,490		2,076	2.23
Tax-exempt		46,256		752	3.27			86,740		1,370	3.19
Total investments		309,925		3,768	2.44			274,230		3,446	2.53
Interest-bearing deposits		11,272		29	0.52			1,796		23	2.58
Federal funds sold		7,898		6	0.15
Total earning assets		2,392,190		48,376	4.07	%		2,123,986		47,008	4.46	%
Less: allowance for loan losses		24,572						22,005
Other assets		220,927						211,072
Total assets	$	2,588,545	$	48,376			$	2,313,053	$	47,008
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts	$	383,203	$	1,673	0.88	%	$	328,382	$	2,089	1.28	%
NOW accounts		413,565		1,493	0.73			387,135		1,409	0.73
Savings accounts		386,490		244	0.13			384,341		243	0.13
Time deposits less than $100		173,619		1,191	1.38			136,820		963	1.42
Time deposits $100 or more		208,176		1,766	1.71			211,095		2,420	2.31
Short-term borrowings		117,784		675	1.15			105,282		1,408	2.70
Long-term debt		51,857		436	1.69			39,817		576	2.92
Subordinated debt		5,537		148	5.38
Total interest-bearing liabilities		1,740,231		7,626	0.88			1,592,872		9,108	1.15
Noninterest-bearing deposits		518,351						416,817
Other liabilities		24,947						19,383
Stockholders’ equity		305,016						283,981
Total liabilities and stockholders’ equity	$	2,588,545		7,626			$	2,313,053		9,108
Net interest income/spread			$	40,750	3.19	%			$	37,900	3.31	%
Net interest margin					3.43	%					3.60	%
Tax-equivalent adjustments:
Loans			$	524					$	587
Investments				158						288
Total adjustments			$	682					$	875

Provision for Loan Losses:

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. With this in mind and due to the adverse impact of the COVID-19 crisis on economic conditions, the application of our allowance for loan losses methodology, and changes in qualitative factors resulted in higher provisioning for the three months ended June 30, 2020

55

Peoples Financial Services Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

when compared to the year ago periods. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2020.

Provision for loan losses increased $3,900 or 278.6% to $5,300 for the six months ended June 30, 2020 from $1,400 during the year ago period. The increase is due to the higher qualitative factors related to economic decline resulting from the adverse impact of COVID-19 and, to a lesser extent, the growth of our loan portfolio. For the three months ended June 30, the provision for loan losses was $1,800 in 2020 and $350 in 2019. The increase to the provision in the 2020 period results from the application of our loan losses methodology which includes monitoring of our asset quality and the general economic environment to assure the allowance for loan losses is adequate to cover estimated credit losses in the loan portfolio. Changes to the qualitative factors related to economic decline resulting from the adverse impact of the COVID-19 crisis was the primary reason for the higher provision.

Noninterest Income:

Noninterest income for the three months ended June 30, totaled $3,422 in 2020, a decrease of $730 or 17.6%, from $4,152 in 2019. The decrease was due to lower service charges, fees and commissions of $548 or 27.7% as the volume of consumer and commercial service charge activity significantly fell, and a $216 recovery in the year ago period of a purchased impaired commercial credit, the balance of which had previously been charged-off to a specific credit mark set-up at time of acquisition under purchase accounting. Wealth management income also decreased in the current period by $139 or 37.6% due to the prevailing COVID-19 environment, and fee income generated from commercial loan interest rate swap transactions also decreased in the 2020 period in the amount of $260 or 51.1%. Increased mortgage banking revenue of $175 or 127.7% resulting from an increase in sold mortgage production volumes partially offset the decreases.

Noninterest income for the six months ended June 30, totaled $6,972 in 2020, a decrease of $596 or 7.9% from $7,568 in 2019. Service charges, fees, and commissions totaled $3,038 in the six months ended June 30, 2020 compared to $3,700 during the corresponding period of 2019 as the volume of consumer and commercial service charge activity fell. Included in service charges, fees and commissions in the year ago period is a recovery of $216 on a purchased impaired commercial credit, the balance of which had previously been charged-off to a specific credit mark set-up at time of acquisition under purchase accounting. Merchant services decreased $69 or 10.5%, and wealth management income decreased $129 or 17.3%, largely due to lower transaction volumes in the COVID-19 environment. Mortgage banking revenue increased $164 as sold mortgage production volumes increased due to low interest rates, and net gains on the sale of investment securities were higher by $244 in the 2020 period.

The adverse impact of COVID-19 may result in a decrease of our noninterest income. Service charges on deposits may continue to decline due to waived overdraft fees and lower volumes. The restrictions put in place related to seating capacities by state governmental authorities could cause a decrease to our merchant services revenue and debit card interchange income. Also, our wealth management revenue may decline due to financial market turmoil and lower transaction volumes.

Noninterest Expenses:

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, including FDIC assessment, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

For the second quarter, noninterest expense decreased $1,187 or 8.2% to $13,242 in 2020 from $14,429 in 2019. For the six months ended June 30, noninterest expense decreased $1,026 or 3.7% to $26,893 in 2020 from $27,919 in 2019. Personnel costs decreased 12.3%, net occupancy and equipment costs increased 6.8%, and all other expense categories which include, professional fees and outside services, FDIC insurance and assessments, donations and other miscellaneous expenses decreased 11.0% comparing the three months ended June 30, 2020 and 2019.  During the six months ended June 30, 2020, personnel costs were 4.7% lower, occupancy and equipment costs 5.4% higher and other expenses were 9.4% lower. 

Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled $7,048 for the second quarter of 2020, a decrease of $989 or 12.3% when compared to the second quarter of 2019. Salaries and employee benefits expense totaled $14,904 for the six months ending June 30, 2020, a decrease of $728 or 4.7% when compared to $15,632 for the same period of 2019. The decrease in the current three and six month periods is due primarily to deferred loan origination cost benefit of $1,488 related to the origination of PPP loans during the 2020 second quarter. Partially offsetting the cost benefit are annual merit increases and additional lenders and support staff related to our market expansion initiative in Lebanon, PA, with a new branch which opened in the 2019 second quarter and our newest branch in Doylestown, PA which opened during the 2020 first quarter.

We experienced a $193 or 6.8% increase in net occupancy and equipment expense comparing the second quarter of 2020 at $3,042 and 2019 at $2,849. The six months ended June 30, 2019 resulted in a $311 or 5.4% increase to $6,121 in net occupancy and equipment expense compared to $5,810 for the same period in 2019. Additional depreciation expense related to the remodeling of two of our legacy branch offices, investment in our global information technology systems, and investment into our newest markets was the primary reason for the increase. In general, as we expand and increase our presence in new markets, depreciation expenses and technology costs associated with the implementation and maintenance of new infrastructure within those markets increases. 

For the second quarter, all other expense categories decreased $391 or 11.0% to $3,152 from $3,543 comparing 2020 to 2019.  Marketing and travel expenses decreased $171 in the current period due in part to the COVID-19 environment. For the six months ended June 30, all other expense categories decreased $609 or 9.4% to $5,868 in 2020 compared to $6,477 in 2019. Amortization expense related to intangible assets declined $66; FDIC assessments decreased $137, or 25.0% when comparing the six months ended June 30, 2020 to the same period in 2019 due to FDIC small bank assessment credit recognized in the current period. Advertising expenses decreased $185 or 43.4% due in part to the COVID-19 environment and event cancellations.

We recognize total noninterest expenses could increase as we incur additional costs related to office and branch cleaning, computer and technology capabilities and other items needed to address the effects of COVID-19. Additionally, legal and professional expenses may increase related to our loan portfolio and possible losses incurred due to economic hardships resulting from the pandemic. We expect, however, the closure of three of our branch offices during the third quarter of 2020 to result in an annual savings of $500 of noninterest expenses.

Income Taxes:

We recorded income tax expense of $1,311 or 14.8% of pre-tax income, and $1,990 or 13.4% of pre-tax income for the three and six months ended June 30, 2020, respectively. In the year ago period, we recorded income tax expense of $957 or 11.8% of pre-tax income, and $1,718 or 11.2 % of pre-tax income for those same periods. The three and six months ended June 30, 2020 includes the benefit of before tax investment tax credits totaling $273 and $546 compared to before tax investment tax credits and other credits of $390 and $778 for the same period last year. Tax-exempt income decreased $393 and $724, respectively in the three and six month periods ended June 30, 2020 compared to the year ago periods due in part to the sale of $26.5 million of municipal bonds in February of 2020.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

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

Interest rate risk is the risk of loss to future earnings due to changes in interest rates.  The Asset Liability Committee (“ALCO”) is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk.  Generally quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the Company’s board of directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Company’s liquidity, capital adequacy, growth, risk and profitability goals and are within policy limits.

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

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

The ALCO reviews simulation results to determine whether the Company’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure.  As of June 30, 2020 and December 31, 2019, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Company. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Company’s balance sheet remain stable for a 60-month period.  In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

Model results at June 30, 2020 indicated a lower starting level of net interest income (“NII”) compared to December 31, 2019 as the balance sheet spread contracted 29 basis points due primarily to lower asset yields. As the simulation

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progresses, reductions to assumed asset replacement rates relative to the December analysis erodes the benefit to NII. Our interest rate profile depicts a relatively well matched position in the near term. As the simulation progresses, a benefit to rising rates emerges while falling rates present challenges to the annual run rate of NII. This position at June 30, 2020 was similar to the position indicated by simulation as of December 31, 2019. 

The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve as well as parallel changes in interest rates of up to 400 basis points.  Because income simulations assume that the Company’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at June 30, 2020, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:

	June 30, 2020
	% Change in
Changes in Interest Rates (basis points)	Net Interest Income		Economic Value of Equity
	Metric	Policy	Metric	Policy
+400	5.6	(20.0)	20.4	(40.0)
+300	4.2	(20.0)	17.9	(30.0)
+200	2.7	(10.0)	13.9	(20.0)
+100	1.4	(10.0)	8.8	(10.0)
Static
(100)	2.0	(10.0)	(22.0)	(10.0)

Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending June 30, 2020, would increase 1.4% 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, 2019, 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.

With rates having fallen materially in 2020, the down 100 basis point scenario would result in market rates reaching floored values which can produce a distorted view of interest rate risk metrics.

In response to the economic disruption and uncertainty brought on by the COVID-19 pandemic, the FOMC lowered the federal funds target rate a total of 150 basis points in two emergency actions during March 2020 with an expectation that the Committee will maintain a low interest rate environment for the foreseeable future. Given the Company's current asset/liability position, the significantly lower market interest rates may have a negative impact on our earning asset yields and variable-rate loans indexed to prime and LIBOR.

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

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At June 30, 2020, 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, 2020, were effective to provide reasonable assurance

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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 made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company during the six-months ended June 30, 2020 and through the date of this quarterly report on Form 10-Q.

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K) describes market, credit, and business operations risk factors that could affect our business, results of operations or financial condition including, among other things, outbreaks of highly infectious or contagious diseases. On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. As conditions and circumstances related to the COVID-19 pandemic have evolved subsequent to our 2019 Form 10-K filing, the following supplements the risk factors described in our 2019 Form 10-K.

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the national and regional economies and to the lives of individuals throughout our market. Governments, businesses, and the public have taken unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described in more detail below.

Credit Risk

Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity

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could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like now, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program (“PPP”) under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

Strategic Risk

Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs or decrease our asset yields, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions had been directed toward curtailing household and business activity to contain COVID-19. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of non-essential businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating of loans.

Operational Risk

Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers. Moreover, we rely on many third parties in our business operations, including appraisers of real property collateral, vendors that supply essential services such as providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

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Interest Rate Risk

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

As a participating lender in the SBA PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.

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

On February 28, 2020, our board of directors reauthorized a common stock repurchase plan whereby we are authorized to repurchase up to 225,000 shares of our outstanding common stock through open market purchases.

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The following purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a)(3), of the Company’s common stock during each of the months for the quarter ended June 30, 2020.

				Total Number of	Maximum Number
				Shares Purchased	of Shares that may
				as Part of Publicly	yet be Purchased
	Total Number of		Average Price	Announced	Under the
Month Ending	Shares Purchased		Paid Per Share	Programs	Programs
April 30, 2020		$			171,254
May 31, 2020		$			171,254
June 30, 2020	10,383	$	35.03		160,871

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Item Number	Description	Page
3.1	Articles of Incorporation of Peoples Financial Services Corp., as amended and restated as of November 18, 2013 (Incorporated by reference to Exhibit 3.1 to registrant’s annual report on Form 10-K filed with the Commission on March 17, 2014)
3.2	Articles of Amendment to the Articles of Incorporation of Peoples Financial Services Corp., effective as of May 19, 2020
4.1	Form of 5.375% Fixed-to-Floating Subordinated Notes due 2030 (Incorporated by reference to Exhibit A of Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the Commission on June 2, 2020) (a).
4.2	The registrant agrees to furnish to the Commission upon request copies of all instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries.
10.1	Second Amendment to Employment Agreement among Peoples Security Bank and Trust Company, Peoples Financial Services Corp. and Timothy H. Kirtley
10.2	Peoples Security Bank and Trust Company Executive Cash Bonus Plan, amended and restated as of May 8, 2020 (Incorporated by reference to Exhibit 10.1 attached to the registrant’s current report on Form 8-K filed with the Commission on May 12, 2020)
10.3	Subordinated Note Purchase Agreement dated June 1, 2020, by and among Peoples Financial Services Corp. and the initial purchasers of the Notes (Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the Commission on June 2, 2020) (a).
31.1	CEO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).	66
31.2	CFO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a). (a).	67
32	CEO and CFO Certifications Pursuant to Section 1350.	68
101	The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended June 30, 2020, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATURES

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

	Peoples Financial Services Corp.
	(Registrant)
Date: August 10, 2020	/s/ Craig W. Best
	Craig W. Best
	Chief Executive Officer
	(Principal Executive Officer)
Date: August 10, 2020	/s/ John R. Anderson, III
	John R. Anderson, III
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

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EX-3.2

Exhibit 3.2

ARTICLES OF AMENDMENT

In compliance with the requirements of the applicable provisions (relating to articles of amendment), the undersigned, desiring to amend its articles, hereby states that:

1.The name of the corporation is: Peoples Financial Services Corp.

2.The address of this corporation’s current registered office in this Commonwealth is: 150 North Washington Avenue, Scranton, Pennsylvania 18503 Lackawanna County

3.The statute by or under which it was incorporated: Pennsylvania Business Corporation Law of 1933

4.The date of its incorporation: 02/06/1986

5.The amendment shall be effective upon filing these Articles of Amendment in the Department of State.

6.The amendment was adopted by the shareholders or members pursuant to 15 Pa.C.S. § 1914(a) and (b) or§ 5914(a).

7.The amendment adopted by the corporation is set forth in full in Exhibit A attached hereto and made a part hereof.

IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer thereof this 19 day of May, 2020

Peoples Financial Services Corp.

/s/ Craig W. Best

CEO

EXHIBIT A

TO THE ARTICLES OF AMENDMENT OF

PEOPLES FINANCIAL SERVICES CORP.

A new Article 12 shall be added to the Articles of Incorporation and shall read as follows:

Article 12.Each director of the Corporation elected by the shareholders shall be elected by a majority of the votes cast with respect to such director’s election at any meeting of the shareholders called for the purpose of the election of directors and at which a quorum is present, provided that if the number of director nominees exceeds the number of directors to be elected at such meeting, the directors elected at such meeting shall be elected by a plurality of the votes cast in such election of directors. For the purposes of this Article 12, a “majority of the votes cast” means that the number of shares voted “for” the election of a director must exceed the number of votes “against” the election of that director.

EX-10.1

Exhibit 10.1

Second Amendment
To
Employment Agreement

THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (“Second Amendment”), dated as of May 8, 2020, is made and entered into by and between Peoples Security Bank and Trust Company, a Pennsylvania state chartered bank (the “Bank”), Peoples Financial Services Corp., a Pennsylvania corporation (“Parent”), and Timothy H. Kirtley (the “Executive”).

Recitals

WHEREAS, the Bank and the Executive are parties to that certain Employment Agreement, dated as of September 30, 2016 (the “Original Agreement” and, as amended, changed and modified, the “Agreement”), as amended by that certain First Amendment to Employment Agreement, dated as of December 5, 2017 (the “First Amendment”), which sets forth the terms and conditions of the Executive’s employment by the Bank;

WHEREAS, pursuant to Section 5.9 of the Original Agreement, the Agreement may be changed or modified by an agreement in writing signed by the Executive, the Bank and the Parent; and

WHEREAS, the Executive, the Bank and the Parent desire to execute and deliver this Second Amendment to confirm their written agreement to change and modify the Agreement as set forth herein.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows:

1.Definitions. Capitalized terms used in this Second Amendment and not otherwise defined herein shall have the respective meanings ascribed to them in the Original Agreement.

2.Amendment of Section 2.5. Section 2.5 of the Agreement is hereby amended by deleting the existing Section 2.5 set forth in the Original Agreement in its entirety and inserting in lieu thereof the following new Section 2.5:

“Change in Control Termination” means the termination of Executive’s employment under this Agreement by the Bank or its successor or assignee without Cause, or by Executive for Good Reason, which occurs within twenty-four (24) months following a Change in Control.

3.Amendment of Section 2.11. Section 2.11 of the Agreement is hereby amended by deleting the existing Section 2.11 set forth in the Original Agreement in its entirety and inserting in lieu thereof the following new Section 2.11:

“Good Reason” means either of the following, without Executive’s prior consent: (i) a reduction in Base Salary of 5% or more; or (ii) Executive being required to relocate to a principal place of employment more than 50 miles from Scranton, Pennsylvania. The events or conditions described in this Section 2.11 will not constitute Good Reason unless: (a) the Executive provides the Company with written objection to the event or condition within 30 days of the first occurrence of such event or condition, (b) the Company does not reverse or otherwise cure the event or condition within 30 days of receiving that written objection and (c) the Executive resigns his employment within 30 days following the expiration of such cure period.

4.No Other Amendments. Except as expressly amended hereby, the provisions of the Original Agreement, as amended by the First Amendment, are and will remain in full force and effect and, except as expressly provided herein, nothing in this Second Amendment will be construed as a waiver of any of the rights or obligations of the parties under the Agreement.

5.Governing Law. This Second Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the principles of conflicts of laws rules of any state. Any legal proceeding arising out of or relating to the Agreement (including, without limitation, this Second Amendment) will be instituted in a state or federal court in the Commonwealth of Pennsylvania, and each of the Executive, the Bank and the Parent hereby consent to the personal and exclusive jurisdiction of such court(s) and hereby waive any objection(s) that they may have to personal jurisdiction, the laying of venue of any such proceeding and any claim or defense of inconvenient forum.

7.Counterparts and Facsimiles. This Amendment may be executed, including execution by facsimile signature, in one or more counterparts, each of which will be deemed an original, and all of which together will be deemed to be one and the same instrument.

[signature page follows]

-2-

IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment on the date first written above.

PEOPLES SECURITY BANK AND TRUST COMPANY
By:	/s/	Craig W. Best	05-08-2020
Name:		Craig W. Best	Date
Title:		CEO
PEOPLES FINANCIAL SERVICES CORP.
By:	/s/	Craig W. Best	05-08-2020
Name:		Craig W. Best	Date
Title:		CEO
EXECUTIVE
/s/ Timothy H. Kirtley			5/11/2020
Timothy H. Kirtley			Date

-3-

EX-31.1

Peoples Financial Services Corp.

Exhibit 31.1

CERTIFICATION

I, Craig W. Best, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2020, 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 10, 2020

66

EX-31.2

Peoples Financial Services Corp.

Exhibit 31.2

CERTIFICATION

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

1. I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2020, 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 10, 2020

67

EX-32

Peoples Financial Services Corp.

Exhibit 32

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report on Form 10-Q of Peoples Financial Services Corp. (the “Company”) for the period ended June 30, 2020, 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:

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

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

/s/ Craig W. Best

Chief Executive Officer

(Principal Executive Officer)

Date: August 10, 2020

/s/ John R. Anderson, III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: August 10, 2020

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.

68

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Jul. 31, 2020
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Jun. 30, 2020
Document Transition Report	false
Entity Registrant Name	PEOPLES FINANCIAL SERVICES CORP.
Entity File Number	001-36388
Entity Incorporation, State or Country Code	PA
Entity Tax Identification Number	23-2391852
Entity Address, Address Line One	150 North Washington Avenue
Entity Address, City or Town	Scranton
Entity Address, State or Province	PA
Entity Address, Postal Zip Code	18503
City Area Code	570
Local Phone Number	346-7741
Title of 12(b) Security	Common stock, $2.00 par value
Trading Symbol	PFIS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		7,284,209
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Entity Central Index Key	0001056943
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Cash and due from banks:
Cash and due from banks	$ 27,146	$ 26,943
Interest-bearing deposits in other banks	14,788	4,210
Federal funds sold	10,000
Total cash and due from banks	51,934	31,153
Investment securities:
Available-for-sale	287,709	330,478
Equity investments carried at fair value	338	423
Held-to-maturity: Fair value June 30, 2020, $7,717; December 31, 2019, $7,889	7,401	7,656
Total investment securities	295,448	338,557
Loans	2,181,909	1,938,240
Less: allowance for loan losses	26,957	22,677
Net loans	2,154,952	1,915,563
Loans held for sale	1,939	986
Premises and equipment, net	48,378	47,932
Accrued interest receivable	8,368	6,981
Goodwill	63,370	63,370
Intangible assets, net	1,257	1,565
Other assets	74,778	69,220
Total assets	2,700,424	2,475,327
Deposits:
Noninterest-bearing	575,206	463,238
Interest-bearing	1,634,918	1,508,251
Total deposits	2,210,124	1,971,489
Short-term borrowings	50,000	152,150
Long-term debt	60,938	32,733
Subordinated debentures	33,000
Accrued interest payable	872	1,277
Other liabilities	33,446	18,668
Total liabilities	2,388,380	2,176,317
Stockholders' equity:
Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,332,856 shares at June 30, 2020 and 7,388,480 shares at December 31, 2019	14,649	14,777
Capital surplus	133,002	135,251
Retained earnings	159,739	152,187
Accumulated other comprehensive income (loss)	4,654	(3,205)
Total stockholders' equity	312,044	299,010
Total liabilities and stockholders' equity	$ 2,700,424	$ 2,475,327

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Statement of Financial Position
Held-to-maturity, Fair value	$ 7,717	$ 7,889
Common stock, par value	$ 2.00	$ 2.00
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	7,332,856	7,388,480
Common stock, shares outstanding	7,332,856	7,388,480

XML

Consolidated Statements of Income and Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Interest and fees on loans:
Taxable	$ 21,160	$ 20,641	$ 42,077	$ 40,744
Tax-exempt	941	1,109	1,972	2,208
Interest and dividends on investment securities:
Taxable	1,420	1,025	2,968	2,035
Tax-exempt	295	520	594	1,082
Dividends	25	22	48	41
Interest on interest-bearing deposits in other banks	5	15	29	23
Interest on federal funds sold	6		6
Total interest income	23,852	23,332	47,694	46,133
Interest expense:
Interest on deposits	2,864	3,713	6,367	7,124
Interest on short-term borrowings	102	595	675	1,408
Interest on long-term debt	231	296	436	576
Interest on subordinated debt	148		148
Total interest expense	3,345	4,604	7,626	9,108
Net interest income	20,507	18,728	40,068	37,025
Provision for loan losses	1,800	350	5,300	1,400
Net interest income after provision for loan losses	18,707	18,378	34,768	35,625
Noninterest income:
Mortgage banking income	312	137	449	285
Bank owned life insurance income	193	192	380	378
Interest rate swap revenue	249	509	719	789
Net gains (losses) on equity investment securities	39	(9)	(84)	(8)
Net gains on sale of investment securities available-for-sale		23	267	23
Total noninterest income	3,422	4,152	6,972	7,568
Noninterest expense:
Salaries and employee benefits expense	7,048	8,037	14,904	15,632
Net occupancy and equipment expense	3,042	2,849	6,121	5,810
Amortization of intangible assets	154	182	308	374
Professional fees and outside services	611	525	976	856
FDIC insurance and assessments	336	288	410	547
Donations	341	359	679	691
Other expenses	1,710	2,189	3,495	4,009
Total noninterest expense	13,242	14,429	26,893	27,919
Income before income taxes	8,887	8,101	14,847	15,274
Income tax expense	1,311	957	1,990	1,718
Net income	7,576	7,144	12,857	13,556
Other comprehensive income:
Unrealized gain on investment securities available-for-sale	2,094	2,611	9,723	5,050
Reclassification adjustment for net gain on sales included in net income		(23)	(267)	(23)
Change in derivative fair value	(543)	443	493	506
Other comprehensive income	1,551	3,031	9,949	5,533
Income tax expense	325	636	2,090	1,162
Other comprehensive income, net of income taxes	1,226	2,395	7,859	4,371
Comprehensive income	$ 8,802	$ 9,539	$ 20,716	$ 17,927
Net income:
Basic	$ 1.03	$ 0.96	$ 1.75	$ 1.83
Diluted	$ 1.03	$ 0.96	$ 1.74	$ 1.83
Average common shares outstanding:
Basic	7,341,636	7,399,302	7,360,517	7,399,178
Diluted	7,376,700	7,413,114	7,391,202	7,410,558
Dividends declared	$ 0.36	$ 0.34	$ 0.72	$ 0.68
Service charges, fees and commissions
Noninterest income:
Revenue from contracts with customers	$ 1,433	$ 1,981	$ 3,038	$ 3,700
Merchant services income
Noninterest income:
Revenue from contracts with customers	472	457	586	655
Commission and fees on fiduciary activities
Noninterest income:
Revenue from contracts with customers	493	492	999	999
Wealth management income
Noninterest income:
Revenue from contracts with customers	$ 231	$ 370	$ 618	$ 747

XML

Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Capital Surplus	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Balance at Dec. 31, 2018	$ 14,798	$ 135,310	$ 136,582	$ (8,076)	$ 278,614
Net income			6,412		6,412
Other comprehensive income (loss), net of income taxes				1,976	1,976
Dividends declared			(2,516)		(2,516)
Stock based compensation		83			83
Balance at Mar. 31, 2019	14,798	135,393	140,478	(6,100)	284,569
Balance at Dec. 31, 2018	14,798	135,310	136,582	(8,076)	278,614
Net income					13,556
Other comprehensive income (loss), net of income taxes					4,371
Balance at Jun. 30, 2019	14,798	135,384	145,106	(3,705)	291,583
Balance at Mar. 31, 2019	14,798	135,393	140,478	(6,100)	284,569
Net income			7,144		7,144
Other comprehensive income (loss), net of income taxes				2,395	2,395
Dividends declared			(2,516)		(2,516)
Stock based compensation		157			157
Share retirement	(8)	(158)			(166)
Common stock grants awarded, net of unearned compensation	8	(8)
Balance at Jun. 30, 2019	14,798	135,384	145,106	(3,705)	291,583
Balance at Dec. 31, 2019	14,777	135,251	152,187	(3,205)	299,010
Net income			5,281		5,281
Other comprehensive income (loss), net of income taxes				6,633	6,633
Dividends declared			(2,662)		(2,662)
Stock based compensation		5			5
Share retirement	(107)	(2,097)			(2,204)
Balance at Mar. 31, 2020	14,670	133,159	154,806	3,428	306,063
Balance at Dec. 31, 2019	14,777	135,251	152,187	(3,205)	299,010
Net income					12,857
Other comprehensive income (loss), net of income taxes					7,859
Balance at Jun. 30, 2020	14,649	133,002	159,739	4,654	312,044
Balance at Mar. 31, 2020	14,670	133,159	154,806	3,428	306,063
Net income			7,576		7,576
Other comprehensive income (loss), net of income taxes				1,226	1,226
Dividends declared			(2,643)		(2,643)
Stock based compensation		186			186
Share retirement	(21)	(343)			(364)
Balance at Jun. 30, 2020	$ 14,649	$ 133,002	$ 159,739	$ 4,654	$ 312,044

XML

Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Jun. 30, 2020	Mar. 31, 2020	Jun. 30, 2019
Statement of Stockholders' Equity
Dividends declared (in dollars per share)	$ 0.36	$ 0.36	$ 0.34
Common stock grants awarded, net of unearned compensation			$ 164
Common stock grants awarded, net of unearned compensation (in shares)			3,854
Repurchase and retirement, shares	10,383	53,476	3,830

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash flows from operating activities:
Net income	$ 12,857	$ 13,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	1,458	1,227
Amortization of right-of-use lease asset	209	187
Amortization of deferred loan costs	(665)	(156)
Amortization of intangibles	308	374
Amortization of low income housing partnerships	262	238
Provision for loan losses	5,300	1,400
Net unrealized loss on equity investment securities	85	8
Net gain (loss) on sale of other real estate owned	(4)	20
Loans originated for sale	(16,215)	(5,848)
Proceeds from sale of loans originated for sale	15,148	5,813
Net gain on sale of loans originated for sale	(156)	(47)
Net amortization of investment securities	553	895
Net gain on sale of investment securities available-for-sale	(267)	(23)
Bank owned life insurance income	(380)	(378)
Deferred income tax expense	619
Stock based compensation	191	240
Net change in:
Accrued interest receivable	(1,387)	(188)
Other assets	(11,445)	(4,114)
Accrued interest payable	(405)	(137)
Other liabilities	13,586	3,022
Net cash provided by operating activities	19,652	16,089
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale	26,502	9,677
Proceeds from repayments of investment securities:
Available-for-sale	34,520	24,651
Held-to-maturity	253	387
Purchases of investment securities:
Available-for-sale	(9,080)	(22,151)
Net redemption (purchase) of restricted equity securities	4,849	(371)
Net increase in lending activities	(244,675)	(36,380)
Purchases of premises and equipment	(1,214)	(2,541)
Proceeds from the sale of premises and equipment		21
Proceeds from sale of other real estate owned	157	111
Net cash used in investing activities	(188,688)	(26,596)
Cash flows from financing activities:
Net increase in deposits	238,635	1,777
Proceeds from long-term debt		16,000
Repayment of long-term debt	(11,970)	(926)
Net decrease in short-term borrowings	(102,150)	(3,800)
Retirement of common stock	(2,568)	(166)
Cash dividends paid	(5,305)	(5,032)
Net cash provided by financing activities	189,817	7,853
Net increase (decrease) in cash and cash equivalents	20,781	(2,654)
Cash and cash equivalents at beginning of period	31,153	32,616
Cash and cash equivalents at end of period	51,934	29,962
Cash paid during the period for:
Interest	8,031	9,245
Income taxes		2,200
Noncash items:
Transfers of loans to other real estate	730	172
Right-of-use assets	899	6,523
Lease liabilities for operating leases	899	$ 6,523
Paycheck Protection Program Liquidity Facility
Cash flows from financing activities:
Proceeds from long-term debt	103,650
Repayment of long-term debt	(63,475)
Subordinated Debentures
Cash flows from financing activities:
Proceeds from long-term debt	$ 33,000

XML

Summary of significant accounting policies

6 Months Ended

Jun. 30, 2020

Summary of significant accounting policies

Summary of significant accounting policies

1. Summary of significant accounting policies:

Nature of operations:

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

In June, we notified our customers and primary state and federal regulators of our intent to permanently close the Duryea, Gouldsboro, and South Scranton branch offices during the third quarter of 2020.

Basis of presentation:

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the six months ended and as of June 30, 2020, are not necessarily indicative of the results of consolidated operations and financial position that may be expected in the future.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, determination of other-than-temporary impairment losses on securities, and impairment of goodwill. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

Significant events: COVID-19

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

As the COVID-19 events unfolded throughout the first six months of 2020, the Company implemented its pandemic plan and executed various strategies and protocols intended to protect its employees, maintain services for customers, assure

the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. The Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. We follow the recommendations of our state and local governments as to conducting business and have opened the lobbies of the majority of our branches while maintaining safety protocols. The Company also maintained active communications with its primary regulatory agencies and critical vendors in an effort to keep all mission-critical activities and functions performing in line with regulatory expectations and the Company’s service standards.

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

The full impact of COVID-19 is unknown and continues to evolve. It has caused substantial disruption in U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves, including retail, hospitality and restaurants and food and service. During March, the Company reviewed its commercial loan and commercial real estate portfolios and determined approximately $1.2 billion or 73% is categorized as non-life sustaining and were subject to shutdown at the onset of the pandemic. Based on management’s application of its allowance for loan losses methodology and primarily changes to the economic qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions and the increased inherent risk in the loan portfolio, our provision for loan and lease losses for the first six months on 2020 was $5.3 million. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the Financial Accounting Standards Board (“FASB”) staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of July 30, 2020, the Company granted payment deferral requests for up to six months to a total of 481 commercial loans with outstanding loan balances of $306.9 million and to 505 consumer loans with outstanding balances of $23.3 million. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

The Company has also participated as a lender in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a $349 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Paycheck Protection Program

(“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. The Company began accepting and processing applications for loans under the PPP on April 3, 2020.  Through July 30, 2020, the Company processed 1,417 applications from existing and new customers providing over $216.2 million in loans with an average loan amount of $153 thousand furthering Peoples’ commitment to support small businesses.  Funding these loans will generate approximately $6.9 million of SBA processing fees.   The processing fee income is deferred and amortized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. During the three months ended June 30, 2020, $0.7 million was recognized in interest and fees on loans in the unaudited Consolidated Statements of Income. The Company utilized the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) and an increase of in-market deposits to replace liquidity used to fund PPP loans.

The Company also has goodwill with a net carrying value of $63.4 million at June 30, 2020 and December 31, 2019. The Company completes a goodwill impairment analysis at least annually, or more often if events and circumstances indicate that there may be impairment. In connection with the emergence of COVID-19 as a global pandemic and the decline in our stock price during 2020, management retained a financial advisory firm to assist in the preparation of a quantitative assessment for potential goodwill impairment. To arrive at the fair value of the Company, management utilized an income and market approach and applied weighting factors to each result and concluded the fair value of the Company was in excess of its carrying value, including goodwill and, as such, no impairment exists at June 30, 2020. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods with no assurance that the future impairment assessments or tests will not result in a charge to earnings.

Recent accounting standards:

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

●	The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
●	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.
●	This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignificant
	amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.
●	In November 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

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

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

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for the Company on January 1, 2021. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.

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

The Company adopted the amendments in ASU 2020-04 as of the March 12, 2020 issuance date, on a prospective basis. The adoption did not have an immediate direct impact to our financial statements. As contracts are modified through December 2022, we will assess the impact based on this guidance. We do not expect there will be a material impact to our financial statements.

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Other comprehensive income (loss)

6 Months Ended

Jun. 30, 2020

Other comprehensive income (loss)

Other comprehensive income (loss)

2. Other comprehensive income (loss):

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

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at June 30, 2020 and December 31, 2019 are as follows:

		June 30, 2020		December 31, 2019
Net unrealized gain on investment securities available-for-sale	$	11,291	$	1,835
Income tax		2,371		385
Net of income taxes		8,920		1,450
Benefit plan adjustments		(6,579)		(6,579)
Income tax		(1,382)		(1,382)
Net of income taxes		(5,197)		(5,197)
Derivative adjustments		1,180		687
Income tax		248		144
Net of income taxes		932		543
Accumulated other comprehensive income (loss)	$	4,654	$	(3,205)

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Earnings per share

6 Months Ended

Jun. 30, 2020

Earnings per share

Earnings per share

3. Earnings per share:

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

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, 2020 and 2019:

	2020				2019
For the Three Months Ended June 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,576	$	7,576	$	7,144	$	7,144
Average common shares outstanding		7,341,636		7,376,700		7,399,302		7,413,114
Earnings per share	$	1.03	$	1.03	$	0.96	$	0.96
	2020				2019
For the Six Months Ended June 30	Basic		Diluted		Basic		Diluted
Net income	$	12,857	$	12,857	$	13,556	$	13,556
Average common shares outstanding		7,360,517		7,391,202		7,399,178		7,410,558
Earnings per share	$	1.75	$	1.74	$	1.83	$	1.83

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Investment securities

6 Months Ended

Jun. 30, 2020

Investment securities

Investment securities

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at June 30, 2020 and December 31, 2019 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2020	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	21,473	$	604			$	22,077
U.S. government-sponsored enterprises		79,473		1,628				81,101
State and municipals:
Taxable		31,694		1,467				33,161
Tax-exempt		35,617		2,408				38,025
Residential mortgage-backed securities:
U.S. government agencies		5,717		154	$	4		5,867
U.S. government-sponsored enterprises		89,787		4,057		7		93,837
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,657		984				13,641
Total	$	276,418	$	11,302	$	11	$	287,709
Held-to-maturity:
Tax-exempt state and municipals	$	6,850	$	294	$		$	7,144
Residential mortgage-backed securities:
U.S. government agencies		26						26
U.S. government-sponsored enterprises		525		22				547
Total	$	7,401	$	316	$		$	7,717

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,966	$	162			$	24,128
U.S. government-sponsored enterprises		87,156		181	$	227		87,110
State and municipals:
Taxable		35,418		295		815		34,898
Tax-exempt		59,127		1,056		20		60,163
Residential mortgage-backed securities:
U.S. government agencies		8,368		112		10		8,470
U.S. government-sponsored enterprises		101,914		1,011		77		102,848
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,694		171		4		12,861
Total	$	328,643	$	2,988	$	1,153	$	330,478
Held-to-maturity:
Tax-exempt state and municipals	$	6,852	$	208	$		$	7,060
Residential mortgage-backed securities:
U.S. government agencies		31						31
U.S. government-sponsored enterprises		773		25				798
Total	$	7,656	$	233	$		$	7,889

Equity Securities

Our equity securities portfolio consists of stock of two other financial institutions. At June 30, 2020 and December 31, 2019, we had $338 and $423 respectively, in equity securities recorded at fair value. At June 30, 2020, the fair value of

our equity portfolio exceeded the cost basis by $61. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30 2020 (in thousands):

Three Months Ended June 30,		2020		2019
Net gain (loss) recognized during the period on equity securities	$	39	$	(9)
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$	39	$	(9)
For the Six Months Ended June 30,		2020		2019
Net loss recognized during the period on equity securities	$	(84)	$	(8)
Less: Net gains (loss) recognized during the period on equity securities sold during the period
Unrealized loss recognized during the reporting period on equity securities still held at the reporting date	$	(84)	$	(8)

Restricted Investment In Stock

Restricted investment in stock includes FHLB with a carrying cost of $5,311 and $10,159 at June 30, 2020 and December 31, 2019, respectively, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $42, and VISA Class B stock with a carrying cost of $0 at June 30, 2020 and December 31, 2019, are included in other assets in the consolidated balance sheets. FHLB and ACBB stock was issued as a requirement to facilitate participation in borrowing and other banking services. The investment in FHLB stock may fluctuate, as it is based on the member bank’s use of FHLB’s services. The decrease in FHLB stock from December 31, 2019 is due to a decrease in short term borrowings at FHLB.

The Company owns 44,982 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Company’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6228 as of June 30, 2020), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B stock. Due to the lack of orderly trades and public information of such trades, Visa Class B stock has no readily determinable fair value.

These restricted investments are carried at cost and evaluated for other-than-temporary impairment (“OTTI”) periodically. As of June 30, 2020, there was no OTTI associated with these investments.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2020, is summarized as follows:

	Fair
June 30, 2020	Value
Within one year	$	34,156
After one but within five years		76,757
After five but within ten years		19,411
After ten years		40,631
		170,955
Mortgage-backed and other amortizing securities		116,754
Total	$	287,709

 The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at June 30, 2020, is summarized as follows:

	Amortized		Fair
June 30, 2020	Cost		Value
After ten years	$	6,850	$	7,144
		6,850		7,144
Mortgage-backed securities		551		573
Total	$	7,401	$	7,717

Securities with a carrying value of $131,913 and $157,047 at June 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At June 30, 2020 and December 31, 2019, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. government agencies and sponsored enterprises, that exceeded 10.0 percent of stockholders’ equity.

The fair value and gross unrealized losses of investment securities with unrealized losses for which an OTTI has not been recognized at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2020	Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed securities:
U.S. government agencies	$	747	$	2	$	571	$	2	$	1,318	$	4
U.S. government-sponsored enterprises		1,197		4		561		3		1,758		7
Total	$	1,944	$	6	$	1,132	$	5	$	3,076	$	11

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. government-sponsored enterprises	$	13,695	$	149	$	36,070	$	78	$	49,765	$	227
State and municipals:
Taxable		23,929		815						23,929		815
Tax-exempt		2,684		19		1,098		1		3,782		20
Residential mortgage-backed securities:
U.S. government agencies		992		1		2,362		9		3,354		10
U.S. government-sponsored enterprises		36,939		51		3,751		30		40,690		81
Total	$	78,239	$	1,035	$	43,281	$	118	$	121,520	$	1,153

Management, from a credit risk perspective, has taken action to identify and assess its COVID-19 related credit exposures based on asset class. No specific COVID-19 related credit impairment was identified within our investment securities portfolio, including our municipal securities, during the second quarter of 2020. The Company had 15 mortgage-backed securities that were in unrealized loss positions at June 30, 2020. Of these securities, eight were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does

not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2020. There was no OTTI recognized for the three or six months ended June 30, 2020 and 2019.

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Loans, net and allowance for loan losses

6 Months Ended

Jun. 30, 2020

Loans, net and allowance for loan losses

Loans, net and allowance for loan losses

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2020 and December 31, 2019 are summarized as follows. The Company had net deferred loan origination fees of $3,508 at June 30, 2020 due to the origination of $201.3 million of PPP loans and $6.6 million of SBA processing fees during the 2020 second quarter. At December 31, 2019, we had net deferred loan costs of $908.

		June 30, 2020		December 31, 2019
Commercial	$	694,551	$	522,957
Real estate:
Commercial		1,099,818		1,011,423
Residential		297,880		301,378
Consumer		89,660		102,482
Total	$	2,181,909	$	1,938,240

The PPP loans are included in the commercial loan classification and had an outstanding balance at June 30, 2020 of $201,274. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. The outstanding balance is considered current at June 30, 2020.

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2020 and 2019 are summarized as follows:

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2020	$	7,969	$	13,007	$	3,624	$	1,086	$	25,686
Charge-offs		(335)		(47)		(81)		(154)		(617)
Recoveries		31				3		54		88
Provisions		822		895		21		62		1,800
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2019	$	5,955	$	11,074	$	3,880	$	1,196	$	22,105
Charge-offs		(10)		(343)		(143)		(80)		(576)
Recoveries		2				12		37		51
Provisions		195		311		(134)		(22)		350
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2020	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Charge-offs		(985)		(47)		(135)		(248)		(1,415)
Recoveries		298				13		84		395
Provisions		2,286		2,406		463		145		5,300
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Charge-offs		(87)		(349)		(302)		(212)		(950)
Recoveries		10				16		75		101
Provisions		703		655		9		33		1,400
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930

The Company's allowance for loan losses increased $4.3 million or 18.9% in 2020, due largely to the adjustment of qualitative factors in our allowance for loan losses methodology, which reflect current economic decline due to COVID-19's adverse impact on economic and business operating conditions.

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2020 and December 31, 2019 is summarized as follows:

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
Ending balance: individually evaluated for impairment		1,339		239		163				1,741
Ending balance: collectively evaluated for impairment	$	7,148	$	13,616	$	3,404	$	1,048	$	25,216
Loans receivable:
Ending balance	$	694,551	$	1,099,818	$	297,880	$	89,660	$	2,181,909
Ending balance: individually evaluated for impairment		5,408		4,490		1,925		160		11,983
Ending balance: collectively evaluated for impairment	$	689,143	$	1,095,328	$	295,955	$	89,500	$	2,169,926

			Real estate
December 31, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Ending balance: individually evaluated for impairment		363		279		135				777
Ending balance: collectively evaluated for impairment	$	6,525	$	11,217	$	3,091	$	1,067	$	21,900
Loans receivable:
Ending balance	$	522,957	$	1,011,423	$	301,378	$	102,482	$	1,938,240
Ending balance: individually evaluated for impairment		4,658		3,048		2,153		261		10,120
Ending balance: collectively evaluated for impairment	$	518,299	$	1,008,375	$	299,225	$	102,221	$	1,928,120

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

● Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

● Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

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

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

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

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2020 and December 31, 2019:

			Special
June 30, 2020	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	677,234	$	10,915	$	6,402	$	$	694,551
Real estate:
Commercial		1,083,864		6,606		9,348			1,099,818
Residential		294,627				3,253			297,880
Consumer		89,483				177			89,660
Total	$	2,145,208	$	17,521	$	19,180	$	$	2,181,909

			Special
December 31, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	513,994	$	3,837	$	5,126	$	$	522,957
Real estate:
Commercial		993,645		2,508		15,270			1,011,423
Residential		298,449		597		2,332			301,378
Consumer		102,145				337			102,482
Total	$	1,908,233	$	6,942	$	23,065	$	$	1,938,240

The increase in special mention loans from December 31, 2019 to June 30, 2020 is primarily associated with the reclassification of one large commercial real estate credit and two large commercial credits. The commercial real estate credit totaled $3.8 million and was downgraded to special mention due to the loss of major tenants. The commercial credits relate to a $6.8 million relationship which is experiencing short-term cash flow issues while the other credit totaling $2.1 million has experienced financial difficulties directly related to COVID-19. The decrease to substandard loans resulted from the payoff of a $5.1 million commercial real estate construction loan that had experienced significant construction delays.

Information concerning nonaccrual loans by major loan classification at June 30, 2020 and December 31, 2019 is summarized as follows:

		June 30, 2020		December 31, 2019
Commercial	$	5,443	$	3,336
Real estate:
Commercial		3,109		2,765
Residential		1,135		1,148
Consumer		160		261
Total	$	9,847	$	7,510

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

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
June 30, 2020	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	329	$	351	$	5,468	$	6,148	$	688,403	$	694,551	$	25
Real estate:
Commercial		575		234		3,149		3,958		1,095,860		1,099,818		40
Residential		80		150		1,361		1,591		296,289		297,880		226
Consumer		229		66		160		455		89,205		89,660
Total	$	1,213	$	801	$	10,138	$	12,152	$	2,169,757	$	2,181,909	$	291

The Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. Through June 30, 2020, the Company granted payment deferral requests for up to six months on 479 commercial loans with outstanding balances of $306,770 and on 512 consumer loans with outstanding balances of $23,349. In accordance with Section 4013 of the CARES Act and the interagency statement, we have not accounted for such loans as TDRs, nor have we designated them as past due or nonaccrual.

The increase in the greater than 90 day category was due to an increase in nonaccrual loans which are included in the category. Three large commercial loans were added to non-accrual. All three loans have been individually measured for impairment and have specific reserves allocated.

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	75			$	3,036	$	3,111	$	519,846	$	522,957
Real estate:
Commercial		926	$	175		2,765		3,866		1,007,557		1,011,423
Residential		2,164		1,227		1,526		4,917		296,461		301,378	$	378
Consumer		523		123		261		907		101,575		102,482
Total	$	3,688	$	1,525	$	7,588	$	12,801	$	1,925,439	$	1,938,240	$	378

The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2020 and June 30, 2019, and as of and for the year ended December 31, 2019 by major loan classification:

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2020	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	2,921	$	3,480			$	3,314	$	9	$	3,422	$	25
Real estate:
Commercial		2,042		2,606				2,153		17		2,074		22
Residential		1,115		1,273				1,122		5		1,321		10
Consumer		160		178				181				207
Total		6,238		7,537				6,770		31		7,024		57
With an allowance recorded:
Commercial		2,487		2,516		1,339		2,222				1,821		6
Real estate:
Commercial		2,448		2,774		239		1,856				1,614
Residential		810		878		163		758		3		650		7
Consumer
Total		5,745		6,168		1,741		4,836		3		4,085		13
Total impaired loans
Commercial		5,408		5,996		1,339		5,536		9		5,243		31
Real estate:
Commercial		4,490		5,380		239		4,009		17		3,688		22
Residential		1,925		2,151		163		1,880		8		1,971		17
Consumer		160		178				181				207
Total	$	11,983	$	13,705	$	1,741	$	11,606	$	34	$	11,109	$	70

							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2019	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	3,638	$	4,175			$	3,907	$	63
Real estate:
Commercial		1,918		2,205				2,385		38
Residential		1,718		2,060				1,362		25
Consumer		261		274				233
Total		7,535		8,714				7,887		126
With an allowance recorded:
Commercial		1,020		1,038		363		1,012		32
Real estate:
Commercial		1,130		1,811		279		1,050		10
Residential		435		450		135		1,408		29
Consumer								20
Total		2,585		3,299		777		3,490		71
Total impaired loans
Commercial		4,658		5,213		363		4,919		95
Real estate:
Commercial		3,048		4,016		279		3,435		48
Residential		2,153		2,510		135		2,770		54
Consumer		261		274				253
Total	$	10,120	$	12,013	$	777	$	11,377	$	197

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

 Loan Modifications/Troubled Debt Restructurings/COVID-19

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $3,168 at June 30 2020, $2,193 at December 31, 2019 and $2,677 at June 30, 2019.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

● Rate Modification - A modification in which the interest rate is changed to a below market rate.

● Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

● Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

● Combination Modification - Any other type of modification, including the use of multiple categories above.

The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:

		2020
	For the Three Months Ended June 30,					For the Six Months Ended June 30,
			Pre-Modification	Post-Modification				Pre-Modification		Post-Modification
	Number	Recorded		Recorded		Number		Recorded		Recored
	of Loans	Investment		Investment		of Loans		Investment		Investment
Commercial real estate	3	$	1,073	$	1,073	3	$	1,073	$	1,073
Commercial and industrial	1		12		12	1		12		12
Total	4	$	1,085	$	1,085	4	$	1,085	$	1,085

		2019
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
			Pre-Modification	Post-Modification			Pre-Modification		Post-Modification
	Number	Recorded		Recorded	Number		Recorded		Recored
	of Loans	Investment		Investment	of Loans		Investment		Investment
Commercial real estate					1	$	340	$	300
Total		$		$	1	$	340	$	300

During the six months ended June 30, 2020, there was one payment default on a residential real estate loan in the amount of $52 and there were no payment defaults on troubled debt restructurings. During the three and six months ended June 30, 2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off. 

The Company has received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and has agreed to many such deferrals or are in the process of doing so. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019, will be considered current for COVID-19 modifications. A financial institution can then use FASB agreed upon temporary changes to GAAP for loan modifications related to

COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR), and suspend any determination of a loan modified as a result of COVID-19 being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

Beginning in March 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. As of June 30, 2020, the Company had 479 commercial loan and 512 consumer loan temporary modifications with principal balances totaling $330,119. As of July 30, 2020, 481 commercial loans and 505 consumer loans were on deferral with principal balances of $330,135.

The following table provides information as of June 30, 2020 with respect to the Company’s payment deferrals granted on commercial loans by North American Industry Classification System (“NAICS”) categories:

NAICS category	Number of Loans		Balance	Percentage of Total Loan Portfolio		Percentage of Tier 1 Capital (Bank)
Lessors of Nonresidential Buildings	65	$	71,899	3.3	%	26.9	%
Lessors of Residential Buildings and Dwellings	64		53,564	2.5		19.9
Hotels and Motels	27		39,261	1.8		14.5
Full-Service Restaurants	33		27,783	1.3		10.3
Limited-Service Restaurants	8		11,829	0.5		4.4
Gasoline Stations with Convenience Stores	18		12,422	0.6		4.6
Construction and Mining	13		9,718	0.4		3.6
Assisted Living Facilities for the Elderly	2		6,319	0.3		2.3
Colleges, Universities, and Professional Schools	1		6,301	0.3		2.3
All Others	248		67,674	3.1		24.9
	479	$	306,770	14.1	%	113.7	%

XML

Other assets

6 Months Ended

Jun. 30, 2020

Other assets

Other assets

6. Other assets:

The components of other assets at June 30, 2020, and December 31, 2019 are summarized as follows:

		June 30, 2020		December 31, 2019
Other real estate owned	$	964	$	450
Investment in low income housing partnership		6,639		6,901
Mortgage servicing rights		772		738
Bank owned life insurance		35,412		35,041
Restricted equity securities (FHLB and other)		5,353		10,201
Net deferred tax asset		1,272		3,362
Interest rate floor		2,019		944
Interest rate swaps		15,985		4,728
Other assets		6,362		6,855
Total	$	74,778	$	69,220

XML

Fair value estimates

6 Months Ended

Jun. 30, 2020

Fair value estimates

Fair value estimates

7. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

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

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

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

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

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

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

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

During the periods ended June 30, 2020 and December 31, 2019 there were no significant transfers between Level 1 and Level 2 and no transfers in or out of Level 3.

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

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

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

Interest rate swaps 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, 2020 and December 31, 2019 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2020	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	22,077	$	22,077			$
U.S. government-sponsored enterprises		81,101			$	81,101
State and municipals:
Taxable		33,161				33,161
Tax-exempt		38,025				38,025
Mortgage-backed securities:
U.S. government agencies		5,867				5,867
U.S. government-sponsored enterprises		107,478				107,478
Common equity securities		338		338
Loan held for sale		1,939				1,939
Interest rate floor-other assets		2,019				2,019
Interest rate swap-other assets		15,912				15,912
Interest rate swap-other liabilities		(16,005)				(16,005)
Total	$	291,912	$	22,415	$	269,497	$

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,128	$	24,128			$
U.S. government-sponsored enterprises		87,110			$	87,110
State and municipals:
Taxable		34,898				34,898
Tax-exempt		60,163				60,163
Mortgage-backed securities:
U.S. government agencies		8,470				8,470
U.S. government-sponsored enterprises		115,709				115,709
Common equity securities		423		423
Loan held for sale		986				986
Interest rate floor-other assets		944				944
Interest rate swap-other assets		4,728				4,728
Interest rate swap-other liabilities		(4,680)				(4,680)
Total	$	332,879	$	24,551	$	308,328	$

Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2020 and December 31, 2019 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2020	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	4,004			$	4,004
Other real estate owned	$	588			$	588

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	1,808			$	1,808
Other real estate owned	$	283			$	283

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

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2020	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	4,004	Appraisal of collateral	Appraisal adjustments	5.0% to 97.0%  (57.2)%
				Liquidation expenses	3.0% to 6.0% (5.6)%
Other real estate owned	$	588	Appraisal of collateral	Appraisal adjustments	18.4% to 63.5%  (40.6)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	1,808	Appraisal of collateral	Appraisal adjustments	8.6% to 97.0%  (54.4)%
				Liquidation expenses	3.0% to 6.0% (5.2)%
Other real estate owned	$	283	Appraisal of collateral	Appraisal adjustments	20.0% to 63.6%  (43.7)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

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

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

The carrying and fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019 and their placement within the fair value hierarchy are as follows:

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2020	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	51,934	$	51,934	$	51,934
Investment securities:
Available-for-sale		287,709		287,709		22,077	$	265,632
Common equity securities		338		338		338
Held-to-maturity		7,401		7,717				7,717
Loans held for sale		1,939		1,939				1,939
Net loans		2,154,952		2,132,783					$	2,132,783
Accrued interest receivable		8,368		8,368				8,368
Mortgage servicing rights		772		1,359				1,359
Restricted equity securities (FHLB and other)		5,353		5,353				5,353
Interest rate floor		2,019		2,019				2,019
Interest rate swaps		15,912		15,912				15,912
Total	$	2,536,697	$	2,515,431
Financial liabilities:
Deposits	$	2,210,124	$	2,214,974			$	2,214,974
Long-term debt		60,938		61,453				61,453
Subordinated debentures		33,000		33,201				33,201
Accrued interest payable		872		872				872
Interest rate swaps		16,005		16,005				16,005
Total	$	2,320,939	$	2,326,505

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	31,153	$	31,153	$	31,153
Investment securities:
Available-for-sale		330,478		330,478		24,128	$	306,350
Common equity securities		423		423		423
Held-to-maturity		7,656		7,889				7,889
Loans held for sale		986		986				986
Net loans		1,915,563		1,881,658					$	1,881,658
Accrued interest receivable		6,981		6,981				6,981
Mortgage servicing rights		738		1,444				1,444
Restricted equity securities (FHLB and other)		10,201		10,201				10,201
Interest rate floor		944		944				944
Interest rate swaps		4,728		4,728				4,728
Total	$	2,309,851	$	2,276,885
Financial liabilities:
Deposits	$	1,971,489	$	1,972,084			$	1,972,084
Long-term debt		32,733		33,075				33,075
Accrued interest payable		1,277		1,277				1,277
Interest rate swaps		4,680		4,680				4,680
Total	$	2,010,179	$	2,011,116

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Employee benefit plans

6 Months Ended

Jun. 30, 2020

Employee benefit plans

Employee benefit plans

8. Employee benefit plans:

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

For the three and six months ended June 30, salaries and employee benefits expense includes approximately $353 and $660 in 2020 and $415 and $755 in 2019 relating to the employee benefit plans.

	Pension Benefits
Three Months Ended June 30,	2020		2019
Components of net periodic pension benefit:
Interest cost	$	163	$	192
Expected return on plan assets		(371)		(325)
Amortization of unrecognized net gain		65		68
Net periodic benefit	$	(143)	$	(65)
	Pension Benefits
Six Months Ended June 30,	2020		2019
Components of net periodic pension cost:
Interest cost	$	217	$	320
Expected return on plan assets		(494)		(542)
Amortization of unrecognized net gain		87		113
Net periodic benefit cost	$	(190)	$	(109)

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

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

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

● Determine the type, size and term of awards.

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

● Accelerate the vesting or excercisability of an award.

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

As of June 30, 2020, there were 54,506 shares of the Company’s common stock available for grant as awards pursuant to the 2017 Plan. The 2008 Plan expired in January 2018 but remained in effect in accordance with its terms to govern outstanding awards under that plan. If any outstanding awards under the 2017 Plan are forfeited by the holder or canceled by the Company, the underlying shares would be available for regrant to others.

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

For the six months ended June 30, 2020 and 2019, the Company granted awards of restricted stock and restricted stock units under the 2017 Plan, with an aggregate of 16,269 shares and 17,345 shares underlying such awards, respectively.

The non-performance restricted stock grants made in 2020, 2019 and 2018 vest equally over three years from the grant date. 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 equity that determines the number of restricted stock units that may vest.

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

The Company recognized net compensation costs of $186 and $191 for the three and six months ended June 30, 2020 for awards granted under the 2017 Plan. The Company recognized compensation expense of $157 and $240 for the three and six months ended June 30, 2019 for awards granted under the 2017 Plan. As of June 30, 2020, the Company had $769 of unrecognized compensation expense associated with restricted stock awards. The remaining cost is expected to be recognized over a weighted average vesting period of just under 2 years.

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Derivatives and hedging activities

6 Months Ended

Jun. 30, 2020

Derivatives and hedging activities

Derivatives and hedging activities

9. Derivatives and hedging activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core

business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets.  

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income/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. During 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets and issuances of debt.

The Company executed an interest rate swap to reduce its exposure to variability in the interest rate associated with floating-rate borrowings. 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 Income and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income 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 2020, the Company estimates that an additional $134 will be reclassified as an increase to interest expense and an additional $531 will be reclassified as an increase to interest income. 

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2020, the Company had 52 interest rate swaps with an aggregate notional amount of $254,598 related to this program.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30 2020 and December 31, 2019.

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of June 30, 2020			As of December 31, 2019 (1)			As of June 30, 2020			As of December 31, 2019 (2)
		Notional	Balance Sheet			Balance Sheet			Balance Sheet			Balance Sheet
		Amount	Location	Fair Value		Location	Fair Value		Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Floor	$	25,000	Other Assets	$	2,019	Other Assets	$	944
Cash Flow Swap	$	50,000							Other Liabilities		510
Total derivatives designated as hedging instruments				$	2,019		$	944			510
Derivatives not designated as hedging instruments
Interest Rate Swaps (3)	$	254,598	Other Assets	$	15,912	Other Assets	$	4,728	Other Liabilities	$	16,005	Other Liabilities	$	4,680
Total derivatives not designated as hedging instruments				$	15,912		$	4,728		$	16,005		$	4,680

(1) Assets amount does not include accrued interest receivable of $195.

(2) Liabilities amount does not include accrued interest payable of $195.

(3) Notional amount of interest rate swaps at June 30, 2019 $123,351.

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

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income (loss) as of June 30, 2020 and June 30, 2019.

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Loss

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2020

Income

June 30, 2020

Derivatives in Cash Flow Hedging Relationships

Cash Flow Swap

$

(510)

$

(510)

$

Interest Expense

$

73

$

73

$

Interest Rate Floor (*)

$

150

$

151

$

(1)

Interest Income

$

110

$

126

$

(16)

Total

$

(360)

$

(359)

$

(1)

$

183

$

199

$

(16)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

474

$

827

$

(353)

Interest Income

$

(31)

$

$

(31)

* Amounts disclosed are gross and not net of taxes.

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

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2020 and June 30, 2019.

		Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging
		Relationships
		2020		2020		2019	2019
		Interest Income		Interest Expense		Interest Income	Interest Expense
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	$	110	$	73	$	(31)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	110	$	73	$	(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component		126	$	73
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component	$	(16)			$	(31)

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2020 and 2019.

		Amount of Loss		Amount of Loss		Amount of Loss		Amount of Loss
		Recognized in		Recognized in		Recognized in		Recognized in
	Location of Gain or (Loss)	Income		Income		Income		Income
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	June 30, 2020		June 30, 2020		June 30, 2019		June 30, 2019
Interest Rate Swaps	Other non-interest income	$	(10)	$	(141)	$	(236)	$	(346)
Fee Income	Other income	$	259	$	860	$	744	$	1,136

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, 2020 and December 31, 2019. 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, 2020
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	17,930	$	$	17,930	$		$	17,930
Offsetting of Derivative Liabilities
as of June 30, 2020
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	16,515	$	$	16,515	$		$	16,515
Offsetting of Derivative Assets
as of December 31, 2019
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	5,672	$	$	5,672	$		$	5,672
Offsetting of Derivative Liabilities
as of December 31, 2019
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	4,680	$	$	4,680	$		$	4,680

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, 2020, 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 $93. As of December 31, 2019, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $48. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $14,690 against its obligations under these agreements as of June 30, 2020, compared to having posted collateral of $4,140 with counterparties at December 31, 2019. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.

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Deposits

6 Months Ended

Jun. 30, 2020

Deposits.

Deposits

10. Deposits

The major components of interest-bearing and noninterest-bearing deposits at June 30, 2020 and December 31, 2019 are summarized as follows:

At the period end	June 30, 2020		December 31, 2019
Interest-bearing deposits:
Money market accounts	$	434,628	$	365,463
Now accounts		440,202		402,999
Savings accounts		404,040		370,270
Time deposits less than $250		251,121		231,450
Time deposits $250 or more		104,927		138,069
Total interest-bearing deposits		1,634,918		1,508,251
Noninterest-bearing deposits		575,206		463,238
Total deposits	$	2,210,124	$	1,971,489

The growth in deposits occurred primarily in non-maturity deposits due to proceeds of PPP loans retained on deposit by our commercial borrowers. Time deposits $250 thousand or more decreased due to the maturity of a few large public fund certificates of deposit.

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Borrowings

6 Months Ended

Jun. 30, 2020

Borrowings

Borrowings

11. Borrowings

Short-term borrowings consists of FHLB advances representing overnight borrowings or with stated original terms of less than twelve months. The table below outlines short-term borrowings at June 30, 2020 and December 31, 2019:

			At and for the six months ended June 30, 2020
									Weighted
					Maximum		Weighted		Average
	Ending		Average		Month-End		Average		Rate at
	Balance		Balance		Balance		Rate		June 30, 2020
FHLB advances	$	50,000	$	117,784	$	164,150	1.15	%	0.67	%

	At and for the year ended December 31, 2019
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
	Balance		Balance		Balance		the Year		of the Year
FHLB advances	$	152,150	$	62,941	$	152,150	2.61	%	1.84	%

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, 2020, the maximum borrowing capacity was $808,312 of which $70,762 was outstanding in borrowings and $137,600 was used to issue standby letters of credit to collateralize public fund deposits. At December 31, 2019, the maximum borrowing capacity was $723,608 of which $184,883 was outstanding in borrowings and $185,750 was used to issue standby letters of credit to collateralize public fund deposits. Short-term borrowings were used to fund a portion of our loan growth during the first six months of 2020.  Advances with the FHLB are secured under terms of a blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral, such as investments and mortgage-backed securities and mortgage loans. Interest accrues daily on the FHLB advances based on rates of the FHLB discount notes. The short-term borrowing rate resets each day.

Long-term debt consisting of advances from the FHLB and from the Federal Reserve Bank under the PPPLF with, generally, maturities of twenty-four months, at June 30, 2020 and December 31, 2019 are as follows:

	Interest Rate
Due	Fixed			June 30, 2020		December 31, 2019
June 2020	1.74	%			$	5,000
June 2020	2.22					6,000
December 2020	1.84		$	5,000		5,000
June 2021	1.99			10,000		10,000
April 2022	0.35			40,175
March 2023	4.69			5,763		6,733
			$	60,938	$	32,733

Maturities of long-term debt, by contractual maturity, for the remainder of 2020 and subsequent years are as follows:

2020	$	5,992
2021		12,058
2022		42,333
2023		555
	$	60,938

None of the advances from the FHLB totaling $20,763 are convertible. The advances under the PPPLF due in April 2022 with an outstanding balance of $40,175 may be prepaid without penalty prior to maturity whether or not the PPP loans collateralizing the advances have matured.

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Subordinated debt

6 Months Ended

Jun. 30, 2020

Subordinated debt

Subordinated debt

12. Subordinated debt

On June 1, 2020, the Company sold $33,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are intended to be treated 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 the benchmark rate, 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 will be 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 law of the Company or the Bank.

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Income taxes

6 Months Ended

Jun. 30, 2020

Income taxes

Income taxes

13. Income taxes

The effective tax rate of the Company was 14.8% and 13.4% for the three and six months ended June 30, 2020 compared to 11.8% and 11.2% for the three and six months ended June 30, 2019. The three and six months ended June 30, 2020 includes before tax investment tax credits of $273 and $546 compared to before tax investment tax credits and other credits of $390 and $778 for the same period last year.

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Summary of significant accounting policies (Policies)

6 Months Ended

Jun. 30, 2020

Summary of significant accounting policies

Nature of operations

Nature of operations:

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

In June, we notified our customers and primary state and federal regulators of our intent to permanently close the Duryea, Gouldsboro, and South Scranton branch offices during the third quarter of 2020.

Basis of presentation

Basis of presentation:

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the six months ended and as of June 30, 2020, are not necessarily indicative of the results of consolidated operations and financial position that may be expected in the future.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, determination of other-than-temporary impairment losses on securities, and impairment of goodwill. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

Significant events: COVID-19

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

As the COVID-19 events unfolded throughout the first six months of 2020, the Company implemented its pandemic plan and executed various strategies and protocols intended to protect its employees, maintain services for customers, assure

the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. The Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. We follow the recommendations of our state and local governments as to conducting business and have opened the lobbies of the majority of our branches while maintaining safety protocols. The Company also maintained active communications with its primary regulatory agencies and critical vendors in an effort to keep all mission-critical activities and functions performing in line with regulatory expectations and the Company’s service standards.

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

The full impact of COVID-19 is unknown and continues to evolve. It has caused substantial disruption in U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves, including retail, hospitality and restaurants and food and service. During March, the Company reviewed its commercial loan and commercial real estate portfolios and determined approximately $1.2 billion or 73% is categorized as non-life sustaining and were subject to shutdown at the onset of the pandemic. Based on management’s application of its allowance for loan losses methodology and primarily changes to the economic qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions and the increased inherent risk in the loan portfolio, our provision for loan and lease losses for the first six months on 2020 was $5.3 million. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the Financial Accounting Standards Board (“FASB”) staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of July 30, 2020, the Company granted payment deferral requests for up to six months to a total of 481 commercial loans with outstanding loan balances of $306.9 million and to 505 consumer loans with outstanding balances of $23.3 million. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

The Company has also participated as a lender in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a $349 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Paycheck Protection Program

(“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. The Company began accepting and processing applications for loans under the PPP on April 3, 2020.  Through July 30, 2020, the Company processed 1,417 applications from existing and new customers providing over $216.2 million in loans with an average loan amount of $153 thousand furthering Peoples’ commitment to support small businesses.  Funding these loans will generate approximately $6.9 million of SBA processing fees.   The processing fee income is deferred and amortized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. During the three months ended June 30, 2020, $0.7 million was recognized in interest and fees on loans in the unaudited Consolidated Statements of Income. The Company utilized the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) and an increase of in-market deposits to replace liquidity used to fund PPP loans.

The Company also has goodwill with a net carrying value of $63.4 million at June 30, 2020 and December 31, 2019. The Company completes a goodwill impairment analysis at least annually, or more often if events and circumstances indicate that there may be impairment. In connection with the emergence of COVID-19 as a global pandemic and the decline in our stock price during 2020, management retained a financial advisory firm to assist in the preparation of a quantitative assessment for potential goodwill impairment. To arrive at the fair value of the Company, management utilized an income and market approach and applied weighting factors to each result and concluded the fair value of the Company was in excess of its carrying value, including goodwill and, as such, no impairment exists at June 30, 2020. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods with no assurance that the future impairment assessments or tests will not result in a charge to earnings.

Recent accounting standards

Recent accounting standards:

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

●	The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current GAAP in that current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
●	The amendments in the ASU retain many of the disclosure requirements related to credit quality in current  GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the ASU requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.
●	This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased investment securities available-for-sale with a more-than-insignificant
	amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other investment securities available-for-sale; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.
●	In November 2019, the FASB voted to defer the adoption date for smaller reporting companies from 2020 to 2023. The Company qualifies as a smaller reporting company and therefore guidance is effective for the Company in 2023. The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

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

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

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for the Company on January 1, 2021. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.

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

The Company adopted the amendments in ASU 2020-04 as of the March 12, 2020 issuance date, on a prospective basis. The adoption did not have an immediate direct impact to our financial statements. As contracts are modified through December 2022, we will assess the impact based on this guidance. We do not expect there will be a material impact to our financial statements.

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Other comprehensive income (loss) (Tables)

6 Months Ended

Jun. 30, 2020

Other comprehensive income (loss)

Schedule of components of accumulated other comprehensive loss

		June 30, 2020		December 31, 2019
Net unrealized gain on investment securities available-for-sale	$	11,291	$	1,835
Income tax		2,371		385
Net of income taxes		8,920		1,450
Benefit plan adjustments		(6,579)		(6,579)
Income tax		(1,382)		(1,382)
Net of income taxes		(5,197)		(5,197)
Derivative adjustments		1,180		687
Income tax		248		144
Net of income taxes		932		543
Accumulated other comprehensive income (loss)	$	4,654	$	(3,205)

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Earnings per share (Tables)

6 Months Ended

Jun. 30, 2020

Earnings per share

Schedule of earnings per share

	2020				2019
For the Three Months Ended June 30,	Basic		Diluted		Basic		Diluted
Net Income	$	7,576	$	7,576	$	7,144	$	7,144
Average common shares outstanding		7,341,636		7,376,700		7,399,302		7,413,114
Earnings per share	$	1.03	$	1.03	$	0.96	$	0.96
	2020				2019
For the Six Months Ended June 30	Basic		Diluted		Basic		Diluted
Net income	$	12,857	$	12,857	$	13,556	$	13,556
Average common shares outstanding		7,360,517		7,391,202		7,399,178		7,410,558
Earnings per share	$	1.75	$	1.74	$	1.83	$	1.83

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Investment securities (Tables)

6 Months Ended

Jun. 30, 2020

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2020	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	21,473	$	604			$	22,077
U.S. government-sponsored enterprises		79,473		1,628				81,101
State and municipals:
Taxable		31,694		1,467				33,161
Tax-exempt		35,617		2,408				38,025
Residential mortgage-backed securities:
U.S. government agencies		5,717		154	$	4		5,867
U.S. government-sponsored enterprises		89,787		4,057		7		93,837
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,657		984				13,641
Total	$	276,418	$	11,302	$	11	$	287,709
Held-to-maturity:
Tax-exempt state and municipals	$	6,850	$	294	$		$	7,144
Residential mortgage-backed securities:
U.S. government agencies		26						26
U.S. government-sponsored enterprises		525		22				547
Total	$	7,401	$	316	$		$	7,717

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost		Gains		Losses		Value
Available-for-sale:
U.S. Treasury securities	$	23,966	$	162			$	24,128
U.S. government-sponsored enterprises		87,156		181	$	227		87,110
State and municipals:
Taxable		35,418		295		815		34,898
Tax-exempt		59,127		1,056		20		60,163
Residential mortgage-backed securities:
U.S. government agencies		8,368		112		10		8,470
U.S. government-sponsored enterprises		101,914		1,011		77		102,848
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises		12,694		171		4		12,861
Total	$	328,643	$	2,988	$	1,153	$	330,478
Held-to-maturity:
Tax-exempt state and municipals	$	6,852	$	208	$		$	7,060
Residential mortgage-backed securities:
U.S. government agencies		31						31
U.S. government-sponsored enterprises		773		25				798
Total	$	7,656	$	233	$		$	7,889

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

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2020	Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed securities:
U.S. government agencies	$	747	$	2	$	571	$	2	$	1,318	$	4
U.S. government-sponsored enterprises		1,197		4		561		3		1,758		7
Total	$	1,944	$	6	$	1,132	$	5	$	3,076	$	11

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2019	Value		Losses		Value		Losses		Value		Losses
U.S. government-sponsored enterprises	$	13,695	$	149	$	36,070	$	78	$	49,765	$	227
State and municipals:
Taxable		23,929		815						23,929		815
Tax-exempt		2,684		19		1,098		1		3,782		20
Residential mortgage-backed securities:
U.S. government agencies		992		1		2,362		9		3,354		10
U.S. government-sponsored enterprises		36,939		51		3,751		30		40,690		81
Total	$	78,239	$	1,035	$	43,281	$	118	$	121,520	$	1,153

Summary of unrealized and realized gains and losses

Three Months Ended June 30,		2020		2019
Net gain (loss) recognized during the period on equity securities	$	39	$	(9)
Less: Net gains recognized during the period on equity securities sold during the period
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$	39	$	(9)
For the Six Months Ended June 30,		2020		2019
Net loss recognized during the period on equity securities	$	(84)	$	(8)
Less: Net gains (loss) recognized during the period on equity securities sold during the period
Unrealized loss recognized during the reporting period on equity securities still held at the reporting date	$	(84)	$	(8)

Available-for-Sale Securities.

Schedule of maturity distribution of fair value

	Fair
June 30, 2020	Value
Within one year	$	34,156
After one but within five years		76,757
After five but within ten years		19,411
After ten years		40,631
		170,955
Mortgage-backed and other amortizing securities		116,754
Total	$	287,709

Held-to-maturity Securities.

Schedule of maturity distribution of fair value

	Amortized		Fair
June 30, 2020	Cost		Value
After ten years	$	6,850	$	7,144
		6,850		7,144
Mortgage-backed securities		551		573
Total	$	7,401	$	7,717

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Loans, net and allowance for loan losses (Tables)

6 Months Ended

Jun. 30, 2020

Loans, net and allowance for loan losses

Schedule of major classifications of loans outstanding

		June 30, 2020		December 31, 2019
Commercial	$	694,551	$	522,957
Real estate:
Commercial		1,099,818		1,011,423
Residential		297,880		301,378
Consumer		89,660		102,482
Total	$	2,181,909	$	1,938,240

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

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2020 and 2019 are summarized as follows:

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2020	$	7,969	$	13,007	$	3,624	$	1,086	$	25,686
Charge-offs		(335)		(47)		(81)		(154)		(617)
Recoveries		31				3		54		88
Provisions		822		895		21		62		1,800
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2019	$	5,955	$	11,074	$	3,880	$	1,196	$	22,105
Charge-offs		(10)		(343)		(143)		(80)		(576)
Recoveries		2				12		37		51
Provisions		195		311		(134)		(22)		350
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2020	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Charge-offs		(985)		(47)		(135)		(248)		(1,415)
Recoveries		298				13		84		395
Provisions		2,286		2,406		463		145		5,300
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
			Real estate
June 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Charge-offs		(87)		(349)		(302)		(212)		(950)
Recoveries		10				16		75		101
Provisions		703		655		9		33		1,400
Ending balance	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930

The Company's allowance for loan losses increased $4.3 million or 18.9% in 2020, due largely to the adjustment of qualitative factors in our allowance for loan losses methodology, which reflect current economic decline due to COVID-19's adverse impact on economic and business operating conditions.

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2020 and December 31, 2019 is summarized as follows:

			Real estate
June 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
Ending balance: individually evaluated for impairment		1,339		239		163				1,741
Ending balance: collectively evaluated for impairment	$	7,148	$	13,616	$	3,404	$	1,048	$	25,216
Loans receivable:
Ending balance	$	694,551	$	1,099,818	$	297,880	$	89,660	$	2,181,909
Ending balance: individually evaluated for impairment		5,408		4,490		1,925		160		11,983
Ending balance: collectively evaluated for impairment	$	689,143	$	1,095,328	$	295,955	$	89,500	$	2,169,926

			Real estate
December 31, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Ending balance: individually evaluated for impairment		363		279		135				777
Ending balance: collectively evaluated for impairment	$	6,525	$	11,217	$	3,091	$	1,067	$	21,900
Loans receivable:
Ending balance	$	522,957	$	1,011,423	$	301,378	$	102,482	$	1,938,240
Ending balance: individually evaluated for impairment		4,658		3,048		2,153		261		10,120
Ending balance: collectively evaluated for impairment	$	518,299	$	1,008,375	$	299,225	$	102,221	$	1,928,120

Schedule of major classification of loans portfolio summarized by credit quality

			Special
June 30, 2020	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	677,234	$	10,915	$	6,402	$	$	694,551
Real estate:
Commercial		1,083,864		6,606		9,348			1,099,818
Residential		294,627				3,253			297,880
Consumer		89,483				177			89,660
Total	$	2,145,208	$	17,521	$	19,180	$	$	2,181,909

			Special
December 31, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	513,994	$	3,837	$	5,126	$	$	522,957
Real estate:
Commercial		993,645		2,508		15,270			1,011,423
Residential		298,449		597		2,332			301,378
Consumer		102,145				337			102,482
Total	$	1,908,233	$	6,942	$	23,065	$	$	1,938,240

Schedule of information concerning nonaccrual loans by major loan classification

		June 30, 2020		December 31, 2019
Commercial	$	5,443	$	3,336
Real estate:
Commercial		3,109		2,765
Residential		1,135		1,148
Consumer		160		261
Total	$	9,847	$	7,510

Schedule of major classifications of loans by past due status

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
June 30, 2020	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	329	$	351	$	5,468	$	6,148	$	688,403	$	694,551	$	25
Real estate:
Commercial		575		234		3,149		3,958		1,095,860		1,099,818		40
Residential		80		150		1,361		1,591		296,289		297,880		226
Consumer		229		66		160		455		89,205		89,660
Total	$	1,213	$	801	$	10,138	$	12,152	$	2,169,757	$	2,181,909	$	291

The increase in the greater than 90 day category was due to an increase in nonaccrual loans which are included in the category. Three large commercial loans were added to non-accrual. All three loans have been individually measured for impairment and have specific reserves allocated.

					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	75			$	3,036	$	3,111	$	519,846	$	522,957
Real estate:
Commercial		926	$	175		2,765		3,866		1,007,557		1,011,423
Residential		2,164		1,227		1,526		4,917		296,461		301,378	$	378
Consumer		523		123		261		907		101,575		102,482
Total	$	3,688	$	1,525	$	7,588	$	12,801	$	1,925,439	$	1,938,240	$	378

Summarized information concerning impaired loans

							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2020	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	2,921	$	3,480			$	3,314	$	9	$	3,422	$	25
Real estate:
Commercial		2,042		2,606				2,153		17		2,074		22
Residential		1,115		1,273				1,122		5		1,321		10
Consumer		160		178				181				207
Total		6,238		7,537				6,770		31		7,024		57
With an allowance recorded:
Commercial		2,487		2,516		1,339		2,222				1,821		6
Real estate:
Commercial		2,448		2,774		239		1,856				1,614
Residential		810		878		163		758		3		650		7
Consumer
Total		5,745		6,168		1,741		4,836		3		4,085		13
Total impaired loans
Commercial		5,408		5,996		1,339		5,536		9		5,243		31
Real estate:
Commercial		4,490		5,380		239		4,009		17		3,688		22
Residential		1,925		2,151		163		1,880		8		1,971		17
Consumer		160		178				181				207
Total	$	11,983	$	13,705	$	1,741	$	11,606	$	34	$	11,109	$	70

							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2019	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	3,638	$	4,175			$	3,907	$	63
Real estate:
Commercial		1,918		2,205				2,385		38
Residential		1,718		2,060				1,362		25
Consumer		261		274				233
Total		7,535		8,714				7,887		126
With an allowance recorded:
Commercial		1,020		1,038		363		1,012		32
Real estate:
Commercial		1,130		1,811		279		1,050		10
Residential		435		450		135		1,408		29
Consumer								20
Total		2,585		3,299		777		3,490		71
Total impaired loans
Commercial		4,658		5,213		363		4,919		95
Real estate:
Commercial		3,048		4,016		279		3,435		48
Residential		2,153		2,510		135		2,770		54
Consumer		261		274				253
Total	$	10,120	$	12,013	$	777	$	11,377	$	197

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

Summary loans whose terms have been modified resulting in troubled debt restructurings

		2020
	For the Three Months Ended June 30,					For the Six Months Ended June 30,
			Pre-Modification	Post-Modification				Pre-Modification		Post-Modification
	Number	Recorded		Recorded		Number		Recorded		Recored
	of Loans	Investment		Investment		of Loans		Investment		Investment
Commercial real estate	3	$	1,073	$	1,073	3	$	1,073	$	1,073
Commercial and industrial	1		12		12	1		12		12
Total	4	$	1,085	$	1,085	4	$	1,085	$	1,085

		2019
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
			Pre-Modification	Post-Modification			Pre-Modification		Post-Modification
	Number	Recorded		Recorded	Number		Recorded		Recored
	of Loans	Investment		Investment	of Loans		Investment		Investment
Commercial real estate					1	$	340	$	300
Total		$		$	1	$	340	$	300

Schedule of payment deferrals granted on commercial loans

NAICS category	Number of Loans		Balance	Percentage of Total Loan Portfolio		Percentage of Tier 1 Capital (Bank)
Lessors of Nonresidential Buildings	65	$	71,899	3.3	%	26.9	%
Lessors of Residential Buildings and Dwellings	64		53,564	2.5		19.9
Hotels and Motels	27		39,261	1.8		14.5
Full-Service Restaurants	33		27,783	1.3		10.3
Limited-Service Restaurants	8		11,829	0.5		4.4
Gasoline Stations with Convenience Stores	18		12,422	0.6		4.6
Construction and Mining	13		9,718	0.4		3.6
Assisted Living Facilities for the Elderly	2		6,319	0.3		2.3
Colleges, Universities, and Professional Schools	1		6,301	0.3		2.3
All Others	248		67,674	3.1		24.9
	479	$	306,770	14.1	%	113.7	%

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Other assets (Tables)

6 Months Ended

Jun. 30, 2020

Other assets

Schedule of components of other assets

		June 30, 2020		December 31, 2019
Other real estate owned	$	964	$	450
Investment in low income housing partnership		6,639		6,901
Mortgage servicing rights		772		738
Bank owned life insurance		35,412		35,041
Restricted equity securities (FHLB and other)		5,353		10,201
Net deferred tax asset		1,272		3,362
Interest rate floor		2,019		944
Interest rate swaps		15,985		4,728
Other assets		6,362		6,855
Total	$	74,778	$	69,220

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Fair value estimates (Tables)

6 Months Ended

Jun. 30, 2020

Fair value estimates

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

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2020	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	22,077	$	22,077			$
U.S. government-sponsored enterprises		81,101			$	81,101
State and municipals:
Taxable		33,161				33,161
Tax-exempt		38,025				38,025
Mortgage-backed securities:
U.S. government agencies		5,867				5,867
U.S. government-sponsored enterprises		107,478				107,478
Common equity securities		338		338
Loan held for sale		1,939				1,939
Interest rate floor-other assets		2,019				2,019
Interest rate swap-other assets		15,912				15,912
Interest rate swap-other liabilities		(16,005)				(16,005)
Total	$	291,912	$	22,415	$	269,497	$

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2019	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	24,128	$	24,128			$
U.S. government-sponsored enterprises		87,110			$	87,110
State and municipals:
Taxable		34,898				34,898
Tax-exempt		60,163				60,163
Mortgage-backed securities:
U.S. government agencies		8,470				8,470
U.S. government-sponsored enterprises		115,709				115,709
Common equity securities		423		423
Loan held for sale		986				986
Interest rate floor-other assets		944				944
Interest rate swap-other assets		4,728				4,728
Interest rate swap-other liabilities		(4,680)				(4,680)
Total	$	332,879	$	24,551	$	308,328	$

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

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2020	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	4,004			$	4,004
Other real estate owned	$	588			$	588

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2019	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	1,808			$	1,808
Other real estate owned	$	283			$	283

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2020	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	4,004	Appraisal of collateral	Appraisal adjustments	5.0% to 97.0%  (57.2)%
				Liquidation expenses	3.0% to 6.0% (5.6)%
Other real estate owned	$	588	Appraisal of collateral	Appraisal adjustments	18.4% to 63.5%  (40.6)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2019	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	1,808	Appraisal of collateral	Appraisal adjustments	8.6% to 97.0%  (54.4)%
				Liquidation expenses	3.0% to 6.0% (5.2)%
Other real estate owned	$	283	Appraisal of collateral	Appraisal adjustments	20.0% to 63.6%  (43.7)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

Schedule of carrying and fair values of financial instruments

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2020	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	51,934	$	51,934	$	51,934
Investment securities:
Available-for-sale		287,709		287,709		22,077	$	265,632
Common equity securities		338		338		338
Held-to-maturity		7,401		7,717				7,717
Loans held for sale		1,939		1,939				1,939
Net loans		2,154,952		2,132,783					$	2,132,783
Accrued interest receivable		8,368		8,368				8,368
Mortgage servicing rights		772		1,359				1,359
Restricted equity securities (FHLB and other)		5,353		5,353				5,353
Interest rate floor		2,019		2,019				2,019
Interest rate swaps		15,912		15,912				15,912
Total	$	2,536,697	$	2,515,431
Financial liabilities:
Deposits	$	2,210,124	$	2,214,974			$	2,214,974
Long-term debt		60,938		61,453				61,453
Subordinated debentures		33,000		33,201				33,201
Accrued interest payable		872		872				872
Interest rate swaps		16,005		16,005				16,005
Total	$	2,320,939	$	2,326,505

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2019	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	31,153	$	31,153	$	31,153
Investment securities:
Available-for-sale		330,478		330,478		24,128	$	306,350
Common equity securities		423		423		423
Held-to-maturity		7,656		7,889				7,889
Loans held for sale		986		986				986
Net loans		1,915,563		1,881,658					$	1,881,658
Accrued interest receivable		6,981		6,981				6,981
Mortgage servicing rights		738		1,444				1,444
Restricted equity securities (FHLB and other)		10,201		10,201				10,201
Interest rate floor		944		944				944
Interest rate swaps		4,728		4,728				4,728
Total	$	2,309,851	$	2,276,885
Financial liabilities:
Deposits	$	1,971,489	$	1,972,084			$	1,972,084
Long-term debt		32,733		33,075				33,075
Accrued interest payable		1,277		1,277				1,277
Interest rate swaps		4,680		4,680				4,680
Total	$	2,010,179	$	2,011,116

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Employee benefit plans (Tables)

6 Months Ended

Jun. 30, 2020

Employee benefit plans

Schedule of components of net periodic benefit cost

	Pension Benefits
Three Months Ended June 30,	2020		2019
Components of net periodic pension benefit:
Interest cost	$	163	$	192
Expected return on plan assets		(371)		(325)
Amortization of unrecognized net gain		65		68
Net periodic benefit	$	(143)	$	(65)
	Pension Benefits
Six Months Ended June 30,	2020		2019
Components of net periodic pension cost:
Interest cost	$	217	$	320
Expected return on plan assets		(494)		(542)
Amortization of unrecognized net gain		87		113
Net periodic benefit cost	$	(190)	$	(109)

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Derivatives and hedging activities (Tables)

6 Months Ended

Jun. 30, 2020

Derivatives and hedging activities

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

			Asset Derivatives			Asset Derivatives			Liability Derivatives			Liability Derivatives
			As of June 30, 2020			As of December 31, 2019 (1)			As of June 30, 2020			As of December 31, 2019 (2)
		Notional	Balance Sheet			Balance Sheet			Balance Sheet			Balance Sheet
		Amount	Location	Fair Value		Location	Fair Value		Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Floor	$	25,000	Other Assets	$	2,019	Other Assets	$	944
Cash Flow Swap	$	50,000							Other Liabilities		510
Total derivatives designated as hedging instruments				$	2,019		$	944			510
Derivatives not designated as hedging instruments
Interest Rate Swaps (3)	$	254,598	Other Assets	$	15,912	Other Assets	$	4,728	Other Liabilities	$	16,005	Other Liabilities	$	4,680
Total derivatives not designated as hedging instruments				$	15,912		$	4,728		$	16,005		$	4,680

(1) Assets amount does not include accrued interest receivable of $195.

(2) Liabilities amount does not include accrued interest payable of $195.

(3) Notional amount of interest rate swaps at June 30, 2019 $123,351.

Schedule of effect of fair value and cash flow hedge accounting on accumulated other comprehensive income

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Loss

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2020

Income

June 30, 2020

Derivatives in Cash Flow Hedging Relationships

Cash Flow Swap

$

(510)

$

(510)

$

Interest Expense

$

73

$

73

$

Interest Rate Floor (*)

$

150

$

151

$

(1)

Interest Income

$

110

$

126

$

(16)

Total

$

(360)

$

(359)

$

(1)

$

183

$

199

$

(16)

Location of

Amount of

Amount of

Amount of

Amount of

Amount of

Gain or (Loss)

Amount of

Gain

Loss

Loss

Gain

Gain

Recognized from

Loss

Reclassified

Reclassified

Recognized in

Recognized in

Recognized in

Accumulated

Reclassified

from Accumulated

from Accumulated

Derivatives in

OCI on

OCI Included

OCI Excluded

Other Comprehensive

from Accumulated

OCI into Income

OCI into Income

Hedging

Derivative

Component

Component

Income into

OCI into Income

Included Component

Excluded Component

Relationships

June 30, 2019

Income

June 30, 2019

Derivatives in Cash Flow Hedging Relationships

Interest Rate Floor (*)

$

474

$

827

$

(353)

Interest Income

$

(31)

$

$

(31)

* Amounts disclosed are gross and not net of taxes.

Schedule of effect of derivative financial instruments on Income Statement

		Location and Amount of Gain or (Loss) Recognized in
		Income on Fair Value and Cash Flow Hedging
		Relationships
		2020		2020		2019	2019
		Interest Income		Interest Expense		Interest Income	Interest Expense
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	$	110	$	73	$	(31)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	110	$	73	$	(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component		126	$	73
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component	$	(16)			$	(31)

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

		Amount of Loss		Amount of Loss		Amount of Loss		Amount of Loss
		Recognized in		Recognized in		Recognized in		Recognized in
	Location of Gain or (Loss)	Income		Income		Income		Income
	Recognized in Income on	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
Derivatives Not Designated as Hedging Instruments	Derivative	June 30, 2020		June 30, 2020		June 30, 2019		June 30, 2019
Interest Rate Swaps	Other non-interest income	$	(10)	$	(141)	$	(236)	$	(346)
Fee Income	Other income	$	259	$	860	$	744	$	1,136

Schedule of offsetting derivatives

Offsetting of Derivative Assets
as of June 30, 2020
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	17,930	$	$	17,930	$		$	17,930
Offsetting of Derivative Liabilities
as of June 30, 2020
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	16,515	$	$	16,515	$		$	16,515
Offsetting of Derivative Assets
as of December 31, 2019
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	5,672	$	$	5,672	$		$	5,672
Offsetting of Derivative Liabilities
as of December 31, 2019
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial	Cash Collateral	Net
	Assets		Balance Sheet	Balance Sheet		Instruments	Received	Amount
Derivatives	$	4,680	$	$	4,680	$		$	4,680

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Deposits (Tables)

6 Months Ended

Jun. 30, 2020

Deposits.

Summary of major components of interest-bearing and noninterest-bearing deposits

At the period end	June 30, 2020		December 31, 2019
Interest-bearing deposits:
Money market accounts	$	434,628	$	365,463
Now accounts		440,202		402,999
Savings accounts		404,040		370,270
Time deposits less than $250		251,121		231,450
Time deposits $250 or more		104,927		138,069
Total interest-bearing deposits		1,634,918		1,508,251
Noninterest-bearing deposits		575,206		463,238
Total deposits	$	2,210,124	$	1,971,489

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Borrowings (Tables)

6 Months Ended

Jun. 30, 2020

Borrowings

Summary of short-term borrowings

			At and for the six months ended June 30, 2020
									Weighted
					Maximum		Weighted		Average
	Ending		Average		Month-End		Average		Rate at
	Balance		Balance		Balance		Rate		June 30, 2020
FHLB advances	$	50,000	$	117,784	$	164,150	1.15	%	0.67	%

	At and for the year ended December 31, 2019
							Weighted		Weighted
					Maximum		Average		Average
	Ending		Average		Month-End		Rate for		Rate at End
	Balance		Balance		Balance		the Year		of the Year
FHLB advances	$	152,150	$	62,941	$	152,150	2.61	%	1.84	%

Schedule of long-term debt consisting of advances

	Interest Rate
Due	Fixed			June 30, 2020		December 31, 2019
June 2020	1.74	%			$	5,000
June 2020	2.22					6,000
December 2020	1.84		$	5,000		5,000
June 2021	1.99			10,000		10,000
April 2022	0.35			40,175
March 2023	4.69			5,763		6,733
			$	60,938	$	32,733

Schedule of maturities of long-term debt

2020	$	5,992
2021		12,058
2022		42,333
2023		555
	$	60,938

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Summary of significant accounting policies (Details) $ in Thousands	1 Months Ended		3 Months Ended		4 Months Ended	6 Months Ended
	Jul. 31, 2020 USD ($) customer	Mar. 31, 2020 USD ($)	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jul. 31, 2020 USD ($) item	Jun. 30, 2020 USD ($) customer Office	Jun. 30, 2019 USD ($)	Dec. 31, 2019 USD ($)
Number of full-service community banking offices | Office						26
Commercial loan and commercial real estate portfolio deemed non-life sustaining		$ 1,200,000
Commercial loan and commercial real estate portfolio deemed non-life sustaining percentage		73.00%
Provision for loan losses			$ 1,800	$ 350		$ 5,300	$ 1,400
Maximum loan receivable deferred period	6 months					6 months
Loan receivable balances where payment deferrals were granted	$ 330,135		330,119		$ 330,135	$ 330,119
Interest and fees on loans			700
PPP loan applications number | item					1,417
PPP total loan amount	216,200				$ 216,200
PPP average loan amount	$ 153				153
SBA processing fees					6,900	6,600
Goodwill			63,370			$ 63,370		$ 63,370
Commercial loans
Number of business loans with payment deferrals granted | customer	481					479
Loan receivable balances where payment deferrals were granted	$ 306,900		306,770		306,900	$ 306,770
Consumer Loan
Number of business loans with payment deferrals granted | customer	505					512
Loan receivable balances where payment deferrals were granted	$ 23,300		$ 23,349		$ 23,300	$ 23,349

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Other comprehensive income (loss) - Components of Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Other comprehensive income (loss)
Net unrealized gain on investment securities available-for-sale	$ 11,291	$ 1,835
Income tax	2,371	385
Net of income taxes	8,920	1,450
Benefit plan adjustments	(6,579)	(6,579)
Income tax	1,382	1,382
Net of income taxes	(5,197)	(5,197)
Derivative adjustment	1,180	687
Income tax	248	144
Net of income taxes	932	543
Accumulated other comprehensive income (loss)	$ 4,654	$ (3,205)

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Earnings per share - Schedule of Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Earnings per share
Net income, Basic	$ 7,576	$ 7,144	$ 12,857	$ 13,556
Average common shares outstanding, Basic	7,341,636	7,399,302	7,360,517	7,399,178
Earnings per share, Basic	$ 1.03	$ 0.96	$ 1.75	$ 1.83
Net income, Diluted			$ 12,857	$ 13,556
Average common shares outstanding, Diluted	7,376,700	7,413,114	7,391,202	7,410,558
Earnings per share, Diluted	$ 1.03	$ 0.96	$ 1.74	$ 1.83

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Investment securities - Amortized Cost and Fair Value of Investment Securities Aggregated by Investment Category (Details) $ in Thousands	Jun. 30, 2020 USD ($) company	Dec. 31, 2019 USD ($)
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	$ 276,418	$ 328,643
Available-for-sale, Gross Unrealized Gains	11,302	2,988
Available-for-sale, Gross Unrealized Losses	11	1,153
Available-for-sale, Fair Value	287,709	330,478
Held-to-maturity, Amortized Cost	7,401	7,656
Held-to-maturity, Gross Unrealized Gains	316	233
Held-to-maturity, Fair value	7,717	7,889
Equity investments carried at fair value	$ 338	423
Number of equity securities portfolio consisting of stock of other financial institutions | company	2
Fair value of equity portfolio in excess of cost basis	$ 61
Mortgage-backed Securities, U.S. government agencies
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	5,717	8,368
Available-for-sale, Gross Unrealized Gains	154	112
Available-for-sale, Gross Unrealized Losses	4	10
Available-for-sale, Fair Value	5,867	8,470
Held-to-maturity, Amortized Cost	26	31
Held-to-maturity, Fair value	26	31
Mortgage-backed Securities, U.S. government-sponsored enterprises
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	89,787	101,914
Available-for-sale, Gross Unrealized Gains	4,057	1,011
Available-for-sale, Gross Unrealized Losses	7	77
Available-for-sale, Fair Value	93,837	102,848
Held-to-maturity, Amortized Cost	525	773
Held-to-maturity, Gross Unrealized Gains	22	25
Held-to-maturity, Fair value	547	798
Commercial mortgage-backed Securities, U.S. government-sponsored enterprises
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	12,657	12,694
Available-for-sale, Gross Unrealized Gains	984	171
Available-for-sale, Gross Unrealized Losses		4
Available-for-sale, Fair Value	13,641	12,861
U.S. government-sponsored enterprises state and municipals
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	79,473	87,156
Available-for-sale, Gross Unrealized Gains	1,628	181
Available-for-sale, Gross Unrealized Losses		227
Available-for-sale, Fair Value	81,101	87,110
U.S. Treasuries
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	21,473	23,966
Available-for-sale, Gross Unrealized Gains	604	162
Available-for-sale, Fair Value	22,077	24,128
Common equity securities.
Schedule of Trading Securities and Other Trading Assets
Equity investments carried at fair value	338	423
State and Municipals, Taxable
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	31,694	35,418
Available-for-sale, Gross Unrealized Gains	1,467	295
Available-for-sale, Gross Unrealized Losses		815
Available-for-sale, Fair Value	33,161	34,898
State and Municipals, Tax-exempt
Schedule of Trading Securities and Other Trading Assets
Available-for-sale, Amortized Cost	35,617	59,127
Available-for-sale, Gross Unrealized Gains	2,408	1,056
Available-for-sale, Gross Unrealized Losses		20
Available-for-sale, Fair Value	38,025	60,163
Held-to-maturity, Amortized Cost	6,850	6,852
Held-to-maturity, Gross Unrealized Gains	294	208
Held-to-maturity, Fair value	$ 7,144	$ 7,060

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Investment securities - Unrealized and realized gains and losses (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Investment securities
Net gain (loss) recognized during the period on equity securities	$ 39	$ (9)	$ (84)	$ (8)
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$ 39	$ (9)	$ (84)	$ (8)

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Investment securities - Restricted Investment In Stock (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2020 USD ($) security	Jun. 30, 2019 USD ($)
Available-for-sale and Held-to-maturity securities
Proceeds from sales of investment securities available-for-sale			$ 26,502	$ 9,677
Number of securities in continuous unrealized loss position | security			15
Other-than-temporary impairments recognized			$ 0
U.S. government-sponsored enterprises state and municipals
Available-for-sale and Held-to-maturity securities
Other-than-temporary impairments recognized	$ 0	$ 0	$ 0	$ 0
Mortgage-backed Securities, U.S. government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
Number of securities in continuous unrealized loss positions 12 months or longer | security			8

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Investment securities - Maturity Distribution of Debt Securities Classified as Available-for-Sale (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Investment securities
Within one year	$ 34,156
After one but within five years	76,757
After five but within ten years	19,411
After ten years	40,631
Available for sale securities	170,955
Mortgage-backed securities	116,754
Total	$ 287,709	$ 330,478

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Investment securities - Summary of Amortized Cost and Fair Value of Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Amortized Cost of Held-to-maturity Securities
Amortized Cost, After ten years, Held to maturity	$ 6,850
Amortized Cost, Held to maturity	6,850
Amortized Cost, Mortgage-backed securities, Held to maturity	551
Held-to-maturity, Amortized Cost	7,401	$ 7,656
Fair Value of Held-to-maturity Securities
Fair Value, After ten years, Held to maturity	7,144
Fair Value, Held to maturity	7,144
Fair Value, Mortgage-backed securities, Held to maturity	573
Held to maturity, Fair Value	$ 7,717	$ 7,889

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Investment securities - Pledged Securities (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Available-for-sale and Held-to-maturity securities
Carrying value of securities pledged	us-gaap:AssetPledgedAsCollateralMember	us-gaap:AssetPledgedAsCollateralMember
Collateral Pledged
Available-for-sale and Held-to-maturity securities
Carrying value of securities pledged	$ 131,913	$ 157,047

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Investment securities - Fair Value and Unrealized Losses of Investment Securities in Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	$ 1,944	$ 78,239
12 Months or More, Fair Value	1,132	43,281
Less Than 12 Months, Unrealized Losses	6	1,035
12 Months or More, Unrealized Losses	5	118
Total, Fair Value	3,076	121,520
Total, Unrealized Losses	11	1,153
State and Municipals, Taxable
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		23,929
Less Than 12 Months, Unrealized Losses		815
Total, Fair Value		23,929
Total, Unrealized Losses		815
State and Municipals, Tax-exempt
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		2,684
12 Months or More, Fair Value		1,098
Less Than 12 Months, Unrealized Losses		19
12 Months or More, Unrealized Losses		1
Total, Fair Value		3,782
Total, Unrealized Losses		20
U.S. government-sponsored enterprises state and municipals
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		13,695
12 Months or More, Fair Value		36,070
Less Than 12 Months, Unrealized Losses		149
12 Months or More, Unrealized Losses		78
Total, Fair Value		49,765
Total, Unrealized Losses		227
Mortgage-backed Securities, U.S. government agencies
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	747	992
12 Months or More, Fair Value	571	2,362
Less Than 12 Months, Unrealized Losses	2	1
12 Months or More, Unrealized Losses	2	9
Total, Fair Value	1,318	3,354
Total, Unrealized Losses	4	10
Commercial mortgage-backed Securities, U.S. government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value	1,197
12 Months or More, Fair Value	561
Less Than 12 Months, Unrealized Losses	4
12 Months or More, Unrealized Losses	3
Total, Fair Value	1,758
Total, Unrealized Losses	$ 7
Mortgage-backed Securities, U.S. government-sponsored enterprises
Available-for-sale and Held-to-maturity securities
Less Than 12 Months, Fair Value		36,939
12 Months or More, Fair Value		3,751
Less Than 12 Months, Unrealized Losses		51
12 Months or More, Unrealized Losses		30
Total, Fair Value		40,690
Total, Unrealized Losses		$ 81

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Investment securities - Additional Information (Details) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020 USD ($) shares	Dec. 31, 2019 USD ($)
Value of common stock	$ 14,649	$ 14,777
Visa Class A stock
Conversion ratio of common stock	1.6228
Visa Class B stock
Shares held | shares	44,982
Value of common stock	$ 0	0
Federal Home Loan Bank of Pittsburgh (FHLB)
Value of common stock	5,311	10,159
Atlantic Community Bankers Bank (ACBB)
Value of common stock	$ 42	$ 42
U.S. government-sponsored enterprises state and municipals
Maximum percentage of stockholders' equity exceeded for securities of any individual issuer	10.00%	10.00%

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Loans, net and allowance for loan losses - Net Deferred Loan Costs (Details) - USD ($) $ in Thousands	4 Months Ended	6 Months Ended
	Jul. 31, 2020	Jun. 30, 2020	Dec. 31, 2019
Net deferred loan costs		$ 3,508	$ 908
Loans		2,181,909	1,938,240
SBA processing fees	$ 6,900	6,600
Commercial
Loans		694,551	522,957
Real estate Commercial
Loans		1,099,818	1,011,423
Real estate Residential
Loans		297,880	301,378
Real estate Residential
Loans		297,880	301,378
Consumer
Loans		89,660	$ 102,482
PPP
Loans		$ 201,274

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Loans, net and allowance for loan losses - Major Classifications of Loans Outstanding (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Accounts, Notes, Loans and Financing Receivable
Loans	$ 2,181,909	$ 1,938,240
Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	694,551	522,957
Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	1,099,818	1,011,423
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans	297,880	301,378
Consumer
Accounts, Notes, Loans and Financing Receivable
Loans	$ 89,660	$ 102,482

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Loans, net and allowance for loan losses - Changes in Allowance for Loan Losses Account by Major Classification of Loans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Dec. 31, 2019
Allowance for loan losses:
Beginning Balance	$ 25,686	$ 22,105	$ 22,677	$ 21,379
Charge-offs	(617)	(576)	(1,415)	(950)
Recoveries	88	51	395	101
Provisions	1,800	350	5,300	1,400
Ending balance	26,957	21,930	26,957	21,930
Beginning Balance	25,686	22,105	22,677	21,379
Ending balance: individually evaluated for impairment					$ 1,741	$ 777
Charge-offs	(617)	(576)	(1,415)	(950)
Ending balance: collectively evaluated for impairment					25,216	21,900
Recoveries	88	51	395	101
Ending balance: loans acquired with deteriorated credit quality	26,957	21,930	22,677	21,379	26,957	22,677
Provisions	1,800	350	$ 5,300	1,400
Allowance for credit losses increase (decrease)	4,300
Allowance for credit losses increase (decrease) percentage			18.90%
Loans receivable:
Total Loans					2,181,909	1,938,240
Ending balance: individually evaluated for impairment					11,983	10,120
Ending balance: collectively evaluated for impairment					2,169,926	1,928,120
Total Loans					2,181,909	1,938,240
Ending balance	26,957	21,930	$ 26,957	21,930
Ending balance: individually evaluated for impairment					11,983	10,120
Ending balance: collectively evaluated for impairment					2,169,926	1,928,120
Commercial
Allowance for loan losses:
Beginning Balance	7,969	5,955	6,888	5,516
Charge-offs	(335)	(10)	(985)	(87)
Recoveries	31	2	298	10
Provisions	822	195	2,286	703
Ending balance	8,487	6,142	8,487	6,142
Beginning Balance	7,969	5,955	6,888	5,516
Ending balance: individually evaluated for impairment					1,339	363
Charge-offs	(335)	(10)	(985)	(87)
Ending balance: collectively evaluated for impairment					7,148	6,525
Recoveries	31	2	298	10
Ending balance: loans acquired with deteriorated credit quality	8,487	6,142	6,888	5,516	8,487	6,888
Provisions	822	195	2,286	703
Loans receivable:
Total Loans					694,551	522,957
Ending balance: individually evaluated for impairment					5,408	4,658
Ending balance: collectively evaluated for impairment					689,143	518,299
Total Loans					694,551	522,957
Ending balance	8,487	6,142	8,487	6,142
Ending balance: individually evaluated for impairment					5,408	4,658
Ending balance: collectively evaluated for impairment					689,143	518,299
Real estate Commercial
Allowance for loan losses:
Beginning Balance	13,007	11,074	11,496	10,736
Charge-offs	(47)	(343)	(47)	(349)
Provisions	895	311	2,406	655
Ending balance	13,855	11,042	13,855	11,042
Beginning Balance	13,007	11,074	11,496	10,736
Ending balance: individually evaluated for impairment					239	279
Charge-offs	(47)	(343)	(47)	(349)
Ending balance: collectively evaluated for impairment					13,616	11,217
Ending balance: loans acquired with deteriorated credit quality	13,855	11,042	11,496	10,736	13,855	11,496
Provisions	895	311	2,406	655
Loans receivable:
Total Loans					1,099,818	1,011,423
Ending balance: individually evaluated for impairment					4,490	3,048
Ending balance: collectively evaluated for impairment					1,095,328	1,008,375
Total Loans					1,099,818	1,011,423
Ending balance	13,855	11,042	13,855	11,042
Ending balance: individually evaluated for impairment					4,490	3,048
Ending balance: collectively evaluated for impairment					1,095,328	1,008,375
Real estate Residential
Allowance for loan losses:
Beginning Balance	3,624	3,880	3,226	3,892
Charge-offs	(81)	(143)	(135)	(302)
Recoveries	3	12	13	16
Provisions	21	(134)	463	9
Ending balance	3,567	3,615	3,567	3,615
Beginning Balance	3,624	3,880	3,226	3,892
Ending balance: individually evaluated for impairment					163	135
Charge-offs	(81)	(143)	(135)	(302)
Ending balance: collectively evaluated for impairment					3,404	3,091
Recoveries	3	12	13	16
Ending balance: loans acquired with deteriorated credit quality	3,567	3,615	3,226	3,892	3,567	3,226
Provisions	21	(134)	463	9
Loans receivable:
Total Loans					297,880	301,378
Ending balance: individually evaluated for impairment					1,925	2,153
Ending balance: collectively evaluated for impairment					295,955	299,225
Total Loans					297,880	301,378
Ending balance	3,567	3,615	3,567	3,615
Ending balance: individually evaluated for impairment					1,925	2,153
Ending balance: collectively evaluated for impairment					295,955	299,225
Real estate Residential
Loans receivable:
Total Loans					297,880	301,378
Total Loans					297,880	301,378
Consumer
Allowance for loan losses:
Beginning Balance	1,086	1,196	1,067	1,235
Charge-offs	(154)	(80)	(248)	(212)
Recoveries	54	37	84	75
Provisions	62	(22)	145	33
Ending balance	1,048	1,131	1,048	1,131
Beginning Balance	1,086	1,196	1,067	1,235
Charge-offs	(154)	(80)	(248)	(212)
Ending balance: collectively evaluated for impairment					1,048	1,067
Recoveries	54	37	84	75
Ending balance: loans acquired with deteriorated credit quality	1,048	1,131	1,067	1,235	1,048	1,067
Provisions	62	(22)	145	33
Loans receivable:
Total Loans					89,660	102,482
Ending balance: individually evaluated for impairment					160	261
Ending balance: collectively evaluated for impairment					89,500	102,221
Total Loans					89,660	102,482
Ending balance	$ 1,048	$ 1,131	$ 1,048	$ 1,131
Ending balance: individually evaluated for impairment					160	261
Ending balance: collectively evaluated for impairment					$ 89,500	$ 102,221

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Loans, net and allowance for loan losses - Allocation of Allowance for Loan Losses and Related Loans by Major Classification of Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018
Allowance for loan losses:
Ending balance	$ 26,957	$ 25,686	$ 22,677	$ 21,930	$ 22,105	$ 21,379
Ending balance: individually evaluated for impairment	1,741		777
Ending balance: collectively evaluated for impairment	25,216		21,900
Loans receivable:
Ending balance	2,181,909		1,938,240
Ending balance: individually evaluated for impairment	11,983		10,120
Ending balance: collectively evaluated for impairment	2,169,926		1,928,120
Commercial
Allowance for loan losses:
Ending balance	8,487	7,969	6,888	6,142	5,955	5,516
Ending balance: individually evaluated for impairment	1,339		363
Ending balance: collectively evaluated for impairment	7,148		6,525
Loans receivable:
Ending balance	694,551		522,957
Ending balance: individually evaluated for impairment	5,408		4,658
Ending balance: collectively evaluated for impairment	689,143		518,299
Real estate Commercial
Allowance for loan losses:
Ending balance	13,855	13,007	11,496	11,042	11,074	10,736
Ending balance: individually evaluated for impairment	239		279
Ending balance: collectively evaluated for impairment	13,616		11,217
Loans receivable:
Ending balance	1,099,818		1,011,423
Ending balance: individually evaluated for impairment	4,490		3,048
Ending balance: collectively evaluated for impairment	1,095,328		1,008,375
Real estate Residential
Allowance for loan losses:
Ending balance	3,567	3,624	3,226	3,615	3,880	3,892
Ending balance: individually evaluated for impairment	163		135
Ending balance: collectively evaluated for impairment	3,404		3,091
Loans receivable:
Ending balance	297,880		301,378
Ending balance: individually evaluated for impairment	1,925		2,153
Ending balance: collectively evaluated for impairment	295,955		299,225
Consumer
Allowance for loan losses:
Ending balance	1,048	$ 1,086	1,067	$ 1,131	$ 1,196	$ 1,235
Ending balance: collectively evaluated for impairment	1,048		1,067
Loans receivable:
Ending balance	89,660		102,482
Ending balance: individually evaluated for impairment	160		261
Ending balance: collectively evaluated for impairment	$ 89,500		$ 102,221

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Loans, net and allowance for loan losses - Major Classification of Loans Portfolio Summarized by Credit Quality (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Accounts, Notes, Loans and Financing Receivable
Loans	$ 2,181,909	$ 1,938,240
Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	694,551	522,957
Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	1,099,818	1,011,423
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans	297,880	301,378
Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans	297,880	301,378
Consumer
Accounts, Notes, Loans and Financing Receivable
Loans	89,660	102,482
Pass
Accounts, Notes, Loans and Financing Receivable
Loans	2,145,208	1,908,233
Pass | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	677,234	513,994
Pass | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	1,083,864	993,645
Pass | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans	294,627	298,449
Pass | Consumer
Accounts, Notes, Loans and Financing Receivable
Loans	89,483	102,145
Special Mention
Accounts, Notes, Loans and Financing Receivable
Loans	17,521	6,942
Special Mention | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	10,915	3,837
Special Mention | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	6,606	2,508
Special Mention | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans		597
Substandard
Accounts, Notes, Loans and Financing Receivable
Loans	19,180	23,065
Substandard | Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	6,402	5,126
Substandard | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Loans	9,348	15,270
Substandard | Real estate Residential
Accounts, Notes, Loans and Financing Receivable
Loans	3,253	2,332
Substandard | Consumer
Accounts, Notes, Loans and Financing Receivable
Loans	$ 177	$ 337

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Loans, net and allowance for loan losses - Reclassification of Commercial Credits Category (Details) $ in Millions	6 Months Ended
	Jun. 30, 2020 USD ($) loan
Commercial
Accounts, Notes, Loans and Financing Receivable
Change in category	$ 2.1
Special Mention | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Number of loans reclassified | loan	1
Change in category	$ 3.8
Special Mention | Commercial
Accounts, Notes, Loans and Financing Receivable
Number of loans reclassified | loan	2
Change in category	$ 6.8
Substandard | Real estate Commercial
Accounts, Notes, Loans and Financing Receivable
Change in category due to construction delays	$ 5.1

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Loans, net and allowance for loan losses - Information Concerning Nonaccrual Loans by Major Loan Classification (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	$ 9,847	$ 7,510
Commercial
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	5,443	3,336
Real estate Commercial
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	3,109	2,765
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	1,135	1,148
Consumer
Financing Receivable, Recorded Investment, Past Due
Nonaccrual loans, Total	$ 160	$ 261

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Loans, net and allowance for loan losses - Major Classification of Loans by Past Due Status (Details) $ in Thousands	1 Months Ended	6 Months Ended
	Jul. 31, 2020 USD ($) customer	Jun. 30, 2020 USD ($) loan customer	Dec. 31, 2019 USD ($)
Financing Receivable, Recorded Investment, Past Due
Total Past Due		$ 12,152	$ 12,801
Current		2,169,757	1,925,439
Total Loans		2,181,909	1,938,240
Loans > 90 Days and Accruing		$ 291	378
Maximum loan receivable deferred period	6 months	6 months
Loan receivable balances where payment deferrals were granted	$ 330,135	$ 330,119
Commercial loans
Financing Receivable, Recorded Investment, Past Due
Number of business loans with payment deferrals granted | customer	481	479
Loan receivable balances where payment deferrals were granted	$ 306,900	$ 306,770
Consumer Loan
Financing Receivable, Recorded Investment, Past Due
Number of business loans with payment deferrals granted | customer	505	512
Loan receivable balances where payment deferrals were granted	$ 23,300	$ 23,349
30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		1,213	3,688
60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		801	1,525
Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due		10,138	7,588
Commercial
Financing Receivable, Recorded Investment, Past Due
Total Past Due		6,148	3,111
Current		688,403	519,846
Total Loans		694,551	522,957
Loans > 90 Days and Accruing		$ 25
Loans added to non-accrual | loan		3
Loans individually evaluated for impairment | loan		3
Commercial | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		$ 329	75
Commercial | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		351
Commercial | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due		5,468	3,036
Real estate Commercial
Financing Receivable, Recorded Investment, Past Due
Total Past Due		3,958	3,866
Current		1,095,860	1,007,557
Total Loans		1,099,818	1,011,423
Loans > 90 Days and Accruing		40
Real estate Commercial | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		575	926
Real estate Commercial | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		234	175
Real estate Commercial | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due		3,149	2,765
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Total Loans		297,880	301,378
Real estate Residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due		1,591	4,917
Current		296,289	296,461
Total Loans		297,880	301,378
Loans > 90 Days and Accruing		226	378
Real estate Residential | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		80	2,164
Real estate Residential | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		150	1,227
Real estate Residential | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due		1,361	1,526
Consumer
Financing Receivable, Recorded Investment, Past Due
Total Past Due		455	907
Current		89,205	101,575
Total Loans		89,660	102,482
Consumer | 30-59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		229	523
Consumer | 60-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due		66	123
Consumer | Greater than 90 Days
Financing Receivable, Recorded Investment, Past Due
Total Past Due		$ 160	$ 261

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Loans, net and allowance for loan losses - Summarized Information in Concerning to Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	$ 6,238	$ 8,322	$ 6,238	$ 8,322	$ 7,535
Unpaid Principal Balance, With no related allowance, Total	7,537	9,196	7,537	9,196	8,714
Average Recorded Investment, With no related allowance, Total	6,770	8,797	7,024	7,748	7,887
Interest Income Recognized, With no related allowance, Total	31	31	57	68	126
Recorded Investment, With an allowance recorded, Total	5,745	3,991	5,745	3,991	2,585
Unpaid Principal Balance, With an allowance recorded, Total	6,168	4,552	6,168	4,552	3,299
Related Allowance, With an allowance recorded, Total	1,741	1,126	1,741	1,126	777
Average Recorded Investment, With an allowance recorded, Total	4,836	4,202	4,085	4,130	3,490
Interest Income Recognized, With an allowance recorded, Total	3	17	13	40	71
Recorded Investment, Total	11,983	12,313	11,983	12,313	10,120
Unpaid Principal Balance, Total	13,705	13,748	13,705	13,748	12,013
Related Allowance, With an allowance recorded, Total	1,741	1,126	1,741	1,126	777
Average Recorded Investment, Total	11,606	12,999	11,109	11,878	11,377
Interest Income Recognized, Total	34	48	70	108	197
Commercial
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	2,921	4,495	2,921	4,495	3,638
Unpaid Principal Balance, With no related allowance, Total	3,480	4,931	3,480	4,931	4,175
Average Recorded Investment, With no related allowance, Total	3,314	5,284	3,422	4,043	3,907
Interest Income Recognized, With no related allowance, Total	9	17	25	34	63
Recorded Investment, With an allowance recorded, Total	2,487	1,420	2,487	1,420	1,020
Unpaid Principal Balance, With an allowance recorded, Total	2,516	1,432	2,516	1,432	1,038
Related Allowance, With an allowance recorded, Total	1,339	615	1,339	615	363
Average Recorded Investment, With an allowance recorded, Total	2,222	1,180	1,821	1,012	1,012
Interest Income Recognized, With an allowance recorded, Total		5	6	12	32
Recorded Investment, Total	5,408	5,915	5,408	5,915	4,658
Unpaid Principal Balance, Total	5,996	6,363	5,996	6,363	5,213
Related Allowance, With an allowance recorded, Total	1,339	615	1,339	615	363
Average Recorded Investment, Total	5,536	6,464	5,243	5,055	4,919
Interest Income Recognized, Total	9	22	31	46	95
Real estate Commercial
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	2,042	2,957	2,042	2,957	1,918
Unpaid Principal Balance, With no related allowance, Total	2,606	3,116	2,606	3,116	2,205
Average Recorded Investment, With no related allowance, Total	2,153	2,528	2,074	2,341	2,385
Interest Income Recognized, With no related allowance, Total	17	10	22	23	38
Recorded Investment, With an allowance recorded, Total	2,448	910	2,448	910	1,130
Unpaid Principal Balance, With an allowance recorded, Total	2,774	1,380	2,774	1,380	1,811
Related Allowance, With an allowance recorded, Total	239	216	239	216	279
Average Recorded Investment, With an allowance recorded, Total	1,856	1,174	1,614	1,166	1,050
Interest Income Recognized, With an allowance recorded, Total		5		10	10
Recorded Investment, Total	4,490	3,867	4,490	3,867	3,048
Unpaid Principal Balance, Total	5,380	4,496	5,380	4,496	4,016
Related Allowance, With an allowance recorded, Total	239	216	239	216	279
Average Recorded Investment, Total	4,009	3,702	3,688	3,507	3,435
Interest Income Recognized, Total	17	15	22	33	48
Real estate Residential
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	1,115	619	1,115	619	1,718
Unpaid Principal Balance, With no related allowance, Total	1,273	888	1,273	888	2,060
Average Recorded Investment, With no related allowance, Total	1,122	740	1,321	1,150	1,362
Interest Income Recognized, With no related allowance, Total	5	4	10	11	25
Recorded Investment, With an allowance recorded, Total	810	1,661	810	1,661	435
Unpaid Principal Balance, With an allowance recorded, Total	878	1,740	878	1,740	450
Related Allowance, With an allowance recorded, Total	163	295	163	295	135
Average Recorded Investment, With an allowance recorded, Total	758	1,848	650	1,932	1,408
Interest Income Recognized, With an allowance recorded, Total	3	7	7	18	29
Recorded Investment, Total	1,925	2,280	1,925	2,280	2,153
Unpaid Principal Balance, Total	2,151	2,628	2,151	2,628	2,510
Related Allowance, With an allowance recorded, Total	163	295	163	295	135
Average Recorded Investment, Total	1,880	2,588	1,971	3,082	2,770
Interest Income Recognized, Total	8	11	17	29	54
Consumer
Financing Receivable, Impaired
Recorded Investment, With no related allowance, Total	160	251	160	251	261
Unpaid Principal Balance, With no related allowance, Total	178	261	178	261	274
Average Recorded Investment, With no related allowance, Total	181	245	207	214	233
Average Recorded Investment, With an allowance recorded, Total				20	20
Recorded Investment, Total	160	251	160	251	261
Unpaid Principal Balance, Total	178	261	178	261	274
Average Recorded Investment, Total	$ 181	$ 245	$ 207	$ 234	$ 253

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Loans, net and allowance for loan losses - Loans Modified Resulting in Troubled Debt Restructurings (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2020 USD ($) contract	Jun. 30, 2019 USD ($) contract	Jun. 30, 2020 USD ($) contract	Jun. 30, 2019 USD ($) contract	Dec. 31, 2019 USD ($)
Number of loans modified | contract	4	4		1
Pre-Modification Outstanding Recorded Investment	$ 1,085,000	$ 1,085,000		$ 340,000
Post-Modification Outstanding Recorded Investment	1,085,000	1,085,000		300,000
Loans receivable, related parties, considered as nonaccrual, past due or restructured or potential credit risk	$ 3,168,000	$ 2,677,000	$ 3,168,000	$ 2,677,000	$ 2,193,000
Real estate Commercial
Number of loans modified | contract	3	3		1
Pre-Modification Outstanding Recorded Investment	$ 1,073,000	$ 1,073,000		$ 340,000
Post-Modification Outstanding Recorded Investment	$ 1,073,000	1,073,000		300,000
Recorded Investment		335,000		335,000
Number of defaults on loans restructured		$ 2		$ 2
Commercial and Industrial
Number of loans modified | contract	1	1
Pre-Modification Outstanding Recorded Investment	$ 12,000	$ 12,000
Post-Modification Outstanding Recorded Investment	12,000	$ 12,000
Real estate Residential
Number of defaults on loans restructured | contract			1
Recorded Investment	$ 52,000		$ 52,000
Number of defaults on loans restructured			$ 0

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Loans, net and allowance for loan losses - Schedule of Payment Deferrals Granted on Commercial Loans (Details) - Commercial - Loan Deferrals $ in Thousands	6 Months Ended
	Jun. 30, 2020 USD ($) loan
Number of Loans | loan	479
Balance | $	$ 306,770
Percentage of Total Loan Portfolio	14.10%
Percentage of Tier 1 Capital (Bank)	113.70%
Lessors of Nonresidential Buildings
Number of Loans | loan	65
Balance | $	$ 71,899
Percentage of Total Loan Portfolio	3.30%
Percentage of Tier 1 Capital (Bank)	26.90%
Lessors of Residential Buildings and Dwellings
Number of Loans | loan	64
Balance | $	$ 53,564
Percentage of Total Loan Portfolio	2.50%
Percentage of Tier 1 Capital (Bank)	19.90%
Hotels and Motels
Number of Loans | loan	27
Balance | $	$ 39,261
Percentage of Total Loan Portfolio	1.80%
Percentage of Tier 1 Capital (Bank)	14.50%
Full-Service Restaurants
Number of Loans | loan	33
Balance | $	$ 27,783
Percentage of Total Loan Portfolio	1.30%
Percentage of Tier 1 Capital (Bank)	10.30%
Limited-Service Restaurants
Number of Loans | loan	8
Balance | $	$ 11,829
Percentage of Total Loan Portfolio	0.50%
Percentage of Tier 1 Capital (Bank)	4.40%
Gasoline Stations with Convenience Stores
Number of Loans | loan	18
Balance | $	$ 12,422
Percentage of Total Loan Portfolio	0.60%
Percentage of Tier 1 Capital (Bank)	4.60%
Construction and Mining
Number of Loans | loan	13
Balance | $	$ 9,718
Percentage of Total Loan Portfolio	0.40%
Percentage of Tier 1 Capital (Bank)	3.60%
Assisted Living Facilities for the Elderly
Number of Loans | loan	2
Balance | $	$ 6,319
Percentage of Total Loan Portfolio	0.30%
Percentage of Tier 1 Capital (Bank)	2.30%
Colleges, Universities, and Professional Schools
Number of Loans | loan	1
Balance | $	$ 6,301
Percentage of Total Loan Portfolio	0.30%
Percentage of Tier 1 Capital (Bank)	2.30%
All Others
Number of Loans | loan	248
Balance | $	$ 67,674
Percentage of Total Loan Portfolio	3.10%
Percentage of Tier 1 Capital (Bank)	24.90%

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Other assets - Components of Other Assets (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Other real estate owned	$ 964	$ 450
Investment in low income housing partnership	6,639	6,901
Mortgage servicing rights	772	738
Bank owned life insurance	35,412	35,041
Restricted equity securities (FHLB and other)	5,353	10,201
Net deferred tax asset	1,272	3,362
Interest rate floor and swaps	17,930	5,672
Other assets	6,362	6,855
Total	74,778	69,220
Interest Rate Floor
Interest rate floor and swaps	2,019	944
Interest Rate Swaps
Interest rate floor and swaps	$ 15,985	$ 4,728

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Fair value estimates - Transfers Between Levels (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Fair value estimates
Fair value of assets transfers from level 1 to level 2	$ 0	$ 0
Fair value of assets transfers from level 2 to level 1	0	0
Fair value of liabilities transfers from level 1 to level 2	0	0
Fair value of liabilities transfers from level 2 to level 1	0	0
Fair value of assets transfers into level 3	0	0
Fair value of assets transfers out of level 3	0	0
Fair value of liabilities transfers into level 3	0	0
Fair value of liabilities transfers out of level 3	$ 0	$ 0

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Fair value estimates - Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - Recurring Basis - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	$ 291,912	$ 332,879
U.S. Treasuries
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	22,077	24,128
U.S. government-sponsored enterprises state and municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	81,101	87,110
State and Municipals, Taxable
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	33,161	34,898
State and Municipals, Tax-exempt
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	38,025	60,163
Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	5,867	8,470
Mortgage-backed Securities, U.S. government-sponsored enterprises
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	107,478	115,709
Common equity securities.
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	338	423
Loan held for sale
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	1,939	986
Interest rate floor - other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	2,019	944
Interest rate swap-other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	15,912	4,728
Interest rate swap-other liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Liabilities measured at fair value	(16,005)	(4,680)
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	22,415	24,551
Level 1 | U.S. Treasuries
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	22,077	24,128
Level 1 | Common equity securities.
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	338	423
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	269,497	308,328
Level 2 | U.S. government-sponsored enterprises state and municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	81,101	87,110
Level 2 | State and Municipals, Taxable
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	33,161	34,898
Level 2 | State and Municipals, Tax-exempt
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	38,025	60,163
Level 2 | Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	5,867	8,470
Level 2 | Mortgage-backed Securities, U.S. government-sponsored enterprises
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	107,478	115,709
Level 2 | Loan held for sale
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	1,939	986
Level 2 | Interest rate floor - other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	2,019	944
Level 2 | Interest rate swap-other assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets, Fair Value Estimate	15,912	4,728
Level 2 | Interest rate swap-other liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Liabilities measured at fair value	$ (16,005)	$ (4,680)

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Fair value estimates - Schedule of Assets and Liabilities Measured at Fair Value on Nonrecurring Basis (Details) - Nonrecurring Basis - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Impaired loans	$ 4,004	$ 1,808
Other real estate owned	588	283
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Impaired loans	4,004	1,808
Other real estate owned	$ 588	$ 283

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Fair value estimates - Additional Quantitative Information about Assets Measured at Fair Value on Nonrecurring Basis (Details) - Level 3 - Nonrecurring Basis - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Other real estate owned
Fair Value Inputs, Assets, Quantitative Information
Assets, Fair Value Estimate	$ 588	$ 283
Range and weighted average of appraisal adjustments	40.60%	43.70%
Range and weighted average of liquidation expenses	5.00%	5.00%
Other real estate owned | Minimum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	18.40%	20.00%
Range and weighted average of liquidation expenses	3.00%	3.00%
Other real estate owned | Maximum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	63.50%	63.60%
Range and weighted average of liquidation expenses	6.00%	6.00%
Impaired loans
Fair Value Inputs, Assets, Quantitative Information
Assets, Fair Value Estimate	$ 4,004	$ 1,808
Range and weighted average of appraisal adjustments	57.20%	54.40%
Range and weighted average of liquidation expenses	5.60%	5.20%
Impaired loans | Minimum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	5.00%	8.60%
Range and weighted average of liquidation expenses	3.00%	3.00%
Impaired loans | Maximum
Fair Value Inputs, Assets, Quantitative Information
Range and weighted average of appraisal adjustments	97.00%	97.00%
Range and weighted average of liquidation expenses	6.00%	6.00%

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Fair value estimates - Carrying and Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Investment securities:
Available-for-sale	$ 287,709	$ 330,478
Common equity securities	338	423
Held-to-maturity	7,717	7,889
Loans held for sale	1,939	986
Mortgage servicing rights	772	738
Other assets	74,778	69,220
Financial liabilities:
Subordinated debentures	33,000
Carrying Value
Financial assets:
Cash and cash equivalents	51,934	31,153
Investment securities:
Available-for-sale	287,709	330,478
Common equity securities	338	423
Held-to-maturity	7,401	7,656
Loans held for sale	1,939	986
Net loans	2,154,952	1,915,563
Accrued interest receivable	8,368	6,981
Mortgage servicing rights	772	738
Restricted equity securities (FHLB and other)	5,353	10,201
Interest rate floor	2,019	944
Interest rate swaps	15,912	4,728
Total assets	2,536,697	2,309,851
Financial liabilities:
Deposits	2,210,124	1,971,489
Long-term debt	60,938	32,733
Subordinated debentures	33,000
Accrued interest payable	872	1,277
Interest rate swap	16,005	4,680
Total liabilities	2,320,939	2,010,179
Fair Value
Financial assets:
Cash and cash equivalents	51,934	31,153
Investment securities:
Available-for-sale	287,709	330,478
Common equity securities	338	423
Held-to-maturity	7,717	7,889
Loans held for sale	1,939	986
Net loans	2,132,783	1,881,658
Accrued interest receivable	8,368	6,981
Mortgage servicing rights	1,359	1,444
Restricted equity securities (FHLB and other)	5,353	10,201
Interest rate floor	2,019	944
Interest rate swaps	15,912	4,728
Total assets	2,515,431	2,276,885
Financial liabilities:
Deposits	2,214,974	1,972,084
Long-term debt	61,453	33,075
Subordinated debentures	33,201
Accrued interest payable	872	1,277
Interest rate swap	16,005	4,680
Total liabilities	2,326,505	2,011,116
Level 1
Financial assets:
Cash and cash equivalents	51,934	31,153
Investment securities:
Available-for-sale	22,077	24,128
Common equity securities	338	423
Level 2
Investment securities:
Available-for-sale	265,632	306,350
Held-to-maturity	7,717	7,889
Loans held for sale	1,939	986
Accrued interest receivable	8,368	6,981
Mortgage servicing rights	1,359	1,444
Restricted equity securities (FHLB and other)	5,353	10,201
Interest rate floor	2,019	944
Interest rate swaps	15,912	4,728
Financial liabilities:
Deposits	2,214,974	1,972,084
Long-term debt	61,453	33,075
Subordinated debentures	33,201
Accrued interest payable	872	1,277
Interest rate swap	16,005	4,680
Level 3
Investment securities:
Net loans	$ 2,132,783	$ 1,881,658

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Employee benefit plans - Components of Net Periodic Benefit Cost (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Net periodic pension benefit:
Labor and Related Expense	$ 7,048	$ 8,037	$ 14,904	$ 15,632
Pension Benefits
Net periodic pension benefit:
Labor and Related Expense	353	415	660	755
Interest cost	163	192	217	320
Expected return on plan assets	(371)	(325)	(494)	(542)
Amortization of unrecognized net gain	65	68	87	113
Net periodic benefit	$ (143)	$ (65)	$ (190)	$ (109)

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Employee benefit plans - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Salaries and employee benefits expense	$ 186	$ 157	$ 191	$ 240
Common stock available for grant as awards	54,506		54,506
Non-Performance-based restricted stock | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Shares or units vesting period			3 years
Performance-based restricted stock units | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Shares or units vesting period			3 years
Cumulative diluted earnings per share period used for conditions for vesting of performance-based restricted stock units			3 years
Average return on equity period used for conditions for vesting of performance-based restricted stock units			3 years
Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award
Weighted average vesting period			2 years
Restricted Stock | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Granted shares			16,269
Unrecognized compensation expense	$ 769		$ 769
Restricted stock units (RSUs) | 2017 Plan
Share-based Compensation Arrangement by Share-based Payment Award
Granted shares				17,345

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Derivatives and hedging activities - Fair Values of Derivative Instruments on the Balance Sheet (Details) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020 USD ($) security	Dec. 31, 2020 USD ($)	Dec. 31, 2019 USD ($)	Jun. 30, 2019 USD ($)
Derivatives, Fair Value
Asset Derivatives	$ 17,930		$ 5,672
Liability Derivatives	16,515		4,680
Interest Receivable	8,368		6,981
Interest Payable	872		1,277
Net Amounts of Assets presented in the Balance Sheet	16,515		4,680
Interest expense
Derivatives, Fair Value
Amount of gain or (loss) reclassified as a increase to interest income (expense)	73
Interest income
Derivatives, Fair Value
Amount of gain or (loss) reclassified as a increase to interest income (expense)	126
Interest Rate Floor
Derivatives, Fair Value
Asset Derivatives	2,019		944
Interest Rate Swaps
Derivatives, Fair Value
Asset Derivatives	15,985		4,728
Credit-risk contract
Derivatives, Fair Value
Posted collateral	14,690		4,140
Net Amounts of Assets presented in the Balance Sheet	93		48
Derivatives designated as hedging instruments
Derivatives, Fair Value
Asset Derivatives	2,019		944
Liability Derivatives	510
Derivatives designated as hedging instruments | Interest Rate Floor
Derivatives, Fair Value
Notional amount	25,000
Derivatives designated as hedging instruments | Interest Rate Floor | Other Assets.
Derivatives, Fair Value
Asset Derivatives	2,019		944
Derivatives not designated as hedging instruments
Derivatives, Fair Value
Asset Derivatives	15,912		4,728
Liability Derivatives	$ 16,005		4,680
Derivatives not designated as hedging instruments | Interest Rate Swaps
Derivatives, Fair Value
Number of instruments held | security	52
Notional amount	$ 254,598			$ 123,351
Interest Receivable			195
Interest Payable			195
Derivatives not designated as hedging instruments | Interest Rate Swaps | Other Assets.
Derivatives, Fair Value
Asset Derivatives	15,912		4,728
Derivatives not designated as hedging instruments | Interest Rate Swaps | Other Liabilities.
Derivatives, Fair Value
Liability Derivatives	16,005		$ 4,680
Cash Flow Hedge | Derivatives designated as hedging instruments
Derivatives, Fair Value
Notional amount	50,000
Cash Flow Hedge | Derivatives designated as hedging instruments | Other Liabilities.
Derivatives, Fair Value
Liability Derivatives	$ 510
Forecast | Cash Flow Hedge | Interest expense
Derivatives, Fair Value
Amount of gain or (loss) reclassified as a increase to interest income (expense)		$ 134
Forecast | Cash Flow Hedge | Interest income
Derivatives, Fair Value
Amount of gain or (loss) reclassified as a increase to interest income (expense)		$ 531

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Derivatives and hedging activities - Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Details) - USD ($) $ in Thousands	6 Months Ended		12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Gain Recognized in OCI Included Component	$ 1,180		$ 687
Amount of Loss Reclassified from Accumulated OCI into Income		$ (31)
Interest expense
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Reclassified from Accumulated OCI into Income	73
Interest income
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Reclassified from Accumulated OCI into Income	110
Cash Flow Hedge
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Recognized in OCI on Derivative	(360)
Amount of Gain Recognized in OCI Included Component	(359)
Amount of Gain Recognized in OCI Excluded Component	(1)
Amount of Loss Reclassified from Accumulated OCI into Income	183
Amount of Gain Reclassified from Accumulated OCI into Income Included Component	199
Amount of Loss Reclassified from Accumulated OCI into Income Excluded Component	(16)
Cash Flow Hedge | Interest expense
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Recognized in OCI on Derivative	(510)
Amount of Gain Recognized in OCI Included Component	(510)
Amount of Loss Reclassified from Accumulated OCI into Income	73
Amount of Gain Reclassified from Accumulated OCI into Income Included Component	73
Cash Flow Hedge | Interest Rate Floor | Interest income
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Loss Recognized in OCI on Derivative	150	474
Amount of Gain Recognized in OCI Included Component	151	827
Amount of Gain Recognized in OCI Excluded Component	(1)	(353)
Amount of Loss Reclassified from Accumulated OCI into Income	110	(31)
Amount of Gain Reclassified from Accumulated OCI into Income Included Component	126
Amount of Loss Reclassified from Accumulated OCI into Income Excluded Component	$ (16)	$ (31)

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Derivatives and hedging activities - Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Derivative Instruments, Gain (Loss)
Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded	$ (543)	$ 443	$ 493	$ 506
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income				(31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component				(31)
Interest income
Derivative Instruments, Gain (Loss)
Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded			110	$ (31)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income			110
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component			126
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component			(16)
Interest expense
Derivative Instruments, Gain (Loss)
Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded			73
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income			73
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component			$ 73

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Derivatives and hedging activities - Effect of Other Derivative Instruments on the Income Statement (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Fee Income | Other income/(expense)
Derivative Instruments, Gain (Loss)
Amount of Gain Recognized in Income	$ 259	$ 744	$ 860	$ 1,136
Derivatives not designated as hedging instruments | Interest Rate Swaps | Other non-interest income
Derivative Instruments, Gain (Loss)
Amount of Gain Recognized in Income	$ (10)	$ (236)	$ (141)	$ (346)

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Derivatives and hedging activities - Offsetting Derivatives (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Offsetting of Derivative Assets
Gross Amounts of Recognized Assets	$ 17,930	$ 5,672
Net Amounts of Assets presented in the Balance Sheet	17,930	5,672
Net Amount	17,930	5,672
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities	16,515	4,680
Net Amounts of Assets presented in the Balance Sheet	16,515	4,680
Net Amount	$ 16,515	$ 4,680

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Deposits - Components of Interest-bearing and Noninterest-bearing Deposits (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Deposits.
Money market accounts	$ 434,628	$ 365,463
Now accounts	440,202	402,999
Savings accounts	404,040	370,270
Time deposits less than $250	251,121	231,450
Time deposits $250 or more	104,927	138,069
Total interest-bearing deposits	1,634,918	1,508,251
Noninterest-bearing deposits	575,206	463,238
Total deposits	$ 2,210,124	$ 1,971,489

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Borrowings - Summary of Short-term Borrowings (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Short-term Debt
Ending Balance	$ 50,000	$ 152,150
FHLB advances
Short-term Debt
Ending Balance	50,000	152,150
Average Balance	117,784	62,941
Maximum Month-End Balance	$ 164,150	$ 152,150
Weighted Average Rate for	1.15%	2.61%
Weighted Average Rate at	0.67%	1.84%

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Borrowings - Additional Information (Details) - Peoples Bank - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Short-term Debt
Maximum borrowing capacity	$ 808,312	$ 723,608
Outstanding amount in borrowings	70,762	184,883
Amount of credit facility used to issue standby letters of credit to collateralize public fund deposits	$ 137,600	$ 185,750

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Borrowings - Long-term debt advances (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Debt Instrument
Long-term debt	$ 60,938	$ 32,733
Long-term 1.74% fixed rate debt due June 2020
Debt Instrument
Long-term debt		5,000
Fixed interest rate (as a percent)	1.74%
Long-term 2.22% fixed rate debt due June 2020
Debt Instrument
Long-term debt		6,000
Fixed interest rate (as a percent)	2.22%
Long-term 1.84% fixed rate debt due December 2020
Debt Instrument
Long-term debt	$ 5,000	5,000
Fixed interest rate (as a percent)	1.84%
Long-term 1.99% fixed rate debt due June 2021
Debt Instrument
Long-term debt	$ 10,000	10,000
Fixed interest rate (as a percent)	1.99%
Long-term 0.35% fixed rate debt due April 2022
Debt Instrument
Long-term debt	$ 40,175
Fixed interest rate (as a percent)	0.35%
Long-term 4.69% fixed rate debt due March 2023
Debt Instrument
Long-term debt	$ 5,763	$ 6,733
Fixed interest rate (as a percent)	4.69%

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Borrowings - Maturities of long-term debt (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Long-term debt.
2020	$ 5,992
2021	12,058
2022	42,333
2023	555
Total long-term debt	$ 60,938	$ 32,733

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Borrowings - Fixed and adjustable rate information (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Debt Instrument
FHLB long-term advances	$ 20,763
Long-term debt	60,938	$ 32,733
Long-term 0.35% fixed rate debt due April 2022
Debt Instrument
Long-term debt	$ 40,175

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Subordinated debt (Details) - 2020 Notes - USD ($) $ in Thousands	Jun. 01, 2020	Jan. 01, 2020
Debt Instrument [Line Items]
Aggregate principal amount	$ 33,000
Rate of interest for first five years	5.375%
Duration interest rate in effect		5 years
Percentage of debt redeemed	100.00%
Minimum
Debt Instrument [Line Items]
Floated interest rate	4.75%
Number of days notice to redeem debt	10 days

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Income taxes (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Income taxes
Federal statutory rate	14.80%	11.80%	13.40%	11.20%
Investment and other tax credits	$ 273	$ 390	$ 546	$ 778