MANAGEMENT REPORT | MarketScreener


(in thousands of dollars, except per share data)

Item 2. Management report and analysis of the financial situation and operating results

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, 2021.

Caution 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 COVID-19 crisis and the governmental
responses to the crisis; the effects of any recession in the United States; the
impact on financial markets from geopolitical conflicts such as the military
conflict between Russia and Ukraine; 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, 2021, in Part II, Item 1A of this report and in reports we
file with the Securities and Exchange Commission from time to time.

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

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, 2021  , which is incorporated herein by reference. Some
of these policies are particularly sensitive requiring significant judgments,
estimates and assumptions.

Operating Environment:

During the second quarter of 2022, restrictive measures related to the COVID-19
pandemic continued to ease, both on a national level and more specifically in
the Company's market area. Most businesses have reopened at full capacity, that
has improved commercial and consumer activity which is begininning to return to
pre-pandemic levels. Risk of further

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(in thousands of dollars, except per share data)

resurgence and possible reimplementation of restrictions remains.  If there is a
resurgence in the virus, the Company could experience adverse effects on its
business, financial condition, results of operations and cash flows.

From a lending perspective, loan growth, excluding our PPP loan transactions,
continued to improve during the second quarter as momentum from our entrance in
two new markets continues and overall economic activity improved in all our
markets.  PPP loans declined to $27,036 at June 30, 2022 and we expect the
majority of these loans to be forgiven by year-end. From a deposit perspective,
competition for funding has increased as excess liquidity held by banks has been
deployed into loans.

During the second quarter, high inflation continued, interest rates increased
and the likelihood of a recession remained. As a result, the level of loan
growth experienced in the first half of the year may not be experienced in the
second half of 2022.

Inflation rose in the first half of 2022 to levels well above
Federal Open Market Committee

("FOMC") long-term desired 2% level for items other than food and energy. Core
inflation, as measured by the Consumer Price Index ("CPI"), excluding items
known for their volatility such as food and energy, was 5.9% for the 12 months
ending June 30, 2022. When including food and energy, CPI was 9.1% due primarily
to higher energy costs.

Concerns over the high inflation rate have resulted in central bankers in the
U.S. and abroad adjusting interest rates. The FOMC has increased rates three
times through June 30, 2022 beginning with a 25 basis point increase in March, a
50 basis point increase in May and a 75 basis point increase in June. In
addition there was another 75 basis point increase in July.

Gross domestic product ("GDP") decreased for the second consecutive quarter. It
decreased at an annual rate of 0.9% for the second quarter and 1.6% for the
first quarter compared to an increase of 6.9% in the fourth quarter of 2021 on
reduced exports, federal spending, private investment and state/local government
spending. Business investment, which accounts for approximately 15% of GDP, has
ramped up investment since the initial impact of the pandemic; however,
investment is unsteady as noted by a decrease in investment in office buildings
and retail space (which is driven by increased online shopping and working from
home) investment in equipment and intellectual property expanding during the
pandemic and continues to be strong.

Per the U.S Bureau of Economic Analysys ("BEA"), the personal consumption index
("PCE"), which represents 70% of economic output, for June increased 6.8% from
one year ago, reflecting increases in both goods and services. Excluding food
and energy the PCE price index for June increased 4.8% from one year ago.

Home sales fell 8.1% from a year ago after two years of increased activity and are back to pre-pandemic levels and will likely be hit by rising interest rates.

Goodwill:

The Company has goodwill with a net carrying value of $63,370 at June 30, 2022
and December 31, 2021. The Company's policy is to test goodwill for impairment
annually on December 31 or on an interim basis if an event triggering impairment
may have occurred. If a reporting unit's carrying amount exceeds its fair value,
an entity will record an impairment charge based on that difference. At June 30,
2022, we evaluated whether any events occurred or circumstances changed that
would more likely than not reduce the Company's fair value below its carrying
value. We noted no such matters. There is no assurance that changes in events or
circumstances in the future will not result in impairment.

Review of the financial situation:

Total assets increased $52,056 or 3.1% annualized, to $3,421,539 at June 30,
2022, from $3,369,483 at December 31, 2021. The increase in assets during the
six months was due to loan and investment growth, funded primarily with our

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(in thousands of dollars, except per share data)

federal funds sold balances and short-term borrowings. Total loans increased to
$2,565,579 at June 30 2022, compared to $2,329,173 at December 31, 2021, an
increase of $236,406. Excluding PPP loans and a net decrease of $41,857 to PPP
loan balances, loan growth during the first six months of 2022 totaled $278,263,
or 24.8% annualized.  Investments increased $19,804 or 6.8% annualized as the
purchase of higher yielding investment securities with a portion of our lower
earning excess cash position during the first three months of 2022 offset the
reduction to the fair value of the available-for-sale investment portfolio due
to higher market rates.  Federal funds sold balances decreased $242,425 to $0 at
June 30, 2022 from $242,425 at December 31, 2021. Deposits decreased $52,114 to
$2,911,283 at June 30, 2022 from $2,963,397. Interest-bearing deposits decreased
$61,916 while noninterest-bearing deposits increased $9,802. Total short-term
borrowings at June 30, 2021 totaled $129,170.  Total stockholders' equity
decreased $28,229 or 8.3%, from $340,126 at year-end 2021 to $311,897 at
June 30, 2022 as net income was offset by a decrease to accumulated other
comprehensive income ("AOCI"), resulting from an increase to the unrealized loss
on investment securities, and dividends paid to shareholders. For the six months
ended June 30, 2022, total assets averaged $3,344,220, an increase of $388,696
from $2,955,524 for the same period of 2021.

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 $513,911 at June 30,
2022, a decrease of $3,410, or 0.7% from $517,321 at December 31, 2021. The
decrease was due to a decline in the market value of the available-for-sale
portfolio of $51,281 since December 31, 2021, due to the rapid increase of
market rates, and principal received from mortgage-backed securities and
maturing bonds, partially offset by the purchase of U.S. Treasury notes, taxable
and tax-exempt municipal bonds and mortgage-backed securities as we deployed a
portion of excess cash into higher earning assets primarily during the three
months ended March 31. Investment securities held-to-maturity totaled $94,446 at
June 30, 2022, an increase of $23,233 from $71,213 at December 31, 2021 as a
portion of newly purchased low coupon securities were classified as
held-to-maturity to mitigate market value risk.

For the six months ended June 30, 2022, the investment portfolio averaged
$649,110, an increase of $311,369 or 92.2% compared to $337,741 for the same
period last year. Average tax-exempt municipal bonds have increased $35,402 or
47.0% to $110,768 for the six months ended June 30, 2022 from $75,366 during the
comparable period of 2021. The increase in tax-exempt municipal bonds is due to
purchases during the last twelve months with a portion of excess liquidity. The
tax-equivalent yield on the investment portfolio decreased 47 basis points to
1.67% for the six months ended June 30, 2022, from 2.14% for the comparable
period of 2021. The decrease in yield is due to lower reinvestment rates for
cash flow from matured and called bonds.

Securities available-for-sale are carried at fair value, with unrealized gains
or losses net of deferred income taxes reported in the AOCI component of
stockholders' equity. We reported net unrealized losses, included as a separate
component of stockholders' equity of $41,927 net of deferred income taxes of
$11,145 at June 30, 2022, and net unrealized losses of $1,415, net of deferred
income taxes of $376, at December 31, 2021.

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 2022.

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.

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(in thousands of dollars, except per share data)

Loan portfolio:

Total loans increased to $2,565,579 at June 30, 2022 from $2,329,173 at December
31, 2021, an increase of $236,406.  Our recent entrance into the Greater
Pittsburgh market and Piscataway, New Jersey via community banking offices has
resulted in positive loan opportunities and has contributed to the overall loan
growth since yearend.

Our loan growth is due to increases in commercial real estate loans and tax-free
commercial loans, offset by a reduction in PPP loan balances. At June 30, 2022,
we had 16 loans totaling $13,115 remaining from PPP loans originated during 2020
and 67 loans totaling $13,921 remaining from the second PPP program, and we
expect the majority to be forgiven during 2022. Excluding the PPP loans, total
loans have increased $278,263 or 24.8% annually. Commercial real estate loans
increased $226,119 or 33.9% annualized, to $1,569,657 at June 30, 2022 compared
to $1,343,539 at December 31, 2021 due to increased activity in all our markets.
Commercial and industrial loans, excluding PPP, increased $25,539 to $569,773 at
June 30, 2022 compared to $544,234 at December 31, 2021 due to growth of
tax-exempt loans. We continue to actively pursue commercial and industrial loans
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 increased $6,557, or 17.7% on an annualized basis, to $81,440 at
June 30, 2022 compared to $74,883 at December 31, 2021. The increase in consumer
loans was due to dealer indirect auto loan origination and other consumer loan
volumes.

Residential real estate loans increased $20,048, or 13.6% on an annualized
basis, to $317,672 at June 30, 2022 compared to $297,624 at December 31, 2021.
The increase in residential mortgages is due to increased refinance and purchase
activity prior to the recent increase to mortgage rates, increased home equity
loan activity, and a higher percentage of loans not eligible to be sold into the
secondary market, including jumbo mortgages.

For the six months ended June 30, 2022, total loans excluding PPP loans,
averaged $2,369,330, an increase of $363,432 or 18.1% compared to $2,005,898 for
the same period of 2021. The PPP loans averaged $40,079 for the six months ended
June 30, 2022 and yielded 7.45% due to the acceleration of unamortized net fees
and interest earned. The tax-equivalent yield on the entire loan portfolio was
3.84% for the six months ended June 30, 2022, a 12 basis point decrease from the
comparable period last year. The decrease in yield is primarily due to lower
levels of PPP fees and interest earned along with lower rates on new loan
origination.

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

Unused commitments at June 30, 2022, totaled $676,636, consisting of $617,371 in
unfunded commitments of existing loan facilities and $59,265 in standby letters
of credit. Due to fixed maturity dates, specified conditions within these
instruments, and the ultimate needs of our customers, many will expire without
being drawn upon. We believe that amounts actually drawn upon can be funded in
the normal course of operations and therefore, do not represent a significant
liquidity risk to us. In comparison, unused commitments at December 31, 2021
totaled $553,373, consisting of $495,119 in unfunded commitments of existing
loans and $58,254 in standby letters of credit.

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(in thousands of dollars, except per share data)

Asset quality:

Breakdown of non-performing assets

                                                       June 30, 2022      December 31, 2021
Nonaccrual loans                                     $         2,919    $  

2,811

Troubled debt restructured loans (including
nonaccrual TDR)                                                1,468       

1,649

Accruing loans past due 90 days or more:                         190       
             13
Total nonperforming loans                                      4,577                  4,473
Foreclosed assets                                                                       488
Total nonperforming assets                           $         4,577    $             4,961
Loans modified in a troubled debt restructuring
(TDR):
Performing TDR loans                                 $         1,468    $             1,649
Total TDR loans                                      $         1,468    $             1,649
Total loans held for investment                      $     2,565,579    $  

2,329,173

Nonaccrual loans as a percentage of loans held for
investment                                                      0.11 %                 0.12 %
Allowance for loan losses                                     29,374       

28,383

Allowance for loan losses as a percentage of loans
held for investment                                             1.14 %                 1.22 %
Allowance for loan losses as a percentage of
nonaccrual loans                                             1006.30 %              1009.71 %
Nonperforming loans as a percentage of loans, net               0.18 %                 0.19 %


We experienced improved asset quality during the first six months of 2022 as
evidenced by a decrease of $384 in nonperforming assets. Nonperforming assets
totaled $4,577 or 0.14% of total assets at June 30, 2022, a decrease from $4,961
or 0.15% of total assets at December 31, 2021. This was the result of the sale
of foreclosed assets during the first quarter 2022.

Loans on nonaccrual status, excluding troubled debt restructured nonaccrual
loans, increased $108 to $2,919 at June 30, 2022 from $2,811 at December 31,
2021. The increase to nonaccrual loans since year-end is due primarily to the
increase of $134 to the indirect auto portfolio.  Restructured loans decreased
$181 to $1,468 at June 30, 2022 from $1,649 at December 31, 2021 due to payments
received. Foreclosed assets decreased $488. There were no foreclosed properties
at June 30, 2022 compared to three properties at December 31, 2021.

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

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

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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 Company's allowance for loan losses increased $991 or 3.49% during the first
six months of 2022. The allowance for loan losses equaled $29,374 or 1.14% of
loans, net at June 30, 2022 compared to $28,383 or 1.22% of loans, net, at
December 31, 2021. Excluding PPP loans that do not carry an allowance for loan
losses due to a 100% government guarantee, the ratio equaled 1.16% at June 30,
2022. Loans charged-off, net of recoveries, for the six months ended June 30,
2022, equaled $259 or 0.02% of average loans, compared to $205 or 0.02% of
average loans for the comparable period last year. The increase to charge-offs
in the current period is due to the delinquency status of one commercial
relationship and subsequent net charge-off of $139.

Deposits:

We attract the majority of our deposits from within our market area through the
offering of various deposit instruments including demand deposit accounts, NOW
accounts, money market deposit accounts, savings accounts, and time deposits,
including certificates of deposit and IRAs. For the six months ended June 30,
2022, total deposits decreased $52,114 or 1.76% to $2,911,283 from $2,963,397 at
December 31, 2021.  The decrease was the result of outflows of public fund NOW
accounts and reductions to high balance time deposits as these customers are
price sensitive. Brokered deposits increased $25,300 during the three months
ended June 30, 2022 to offset a portion of the deposit outflow.

Interest-bearing deposits decreased $61,916 while noninterest-bearing deposits
increased $9,802.  Interest-bearing transaction accounts, including NOW and
money market accounts decreased by $93,945, or 6.5%, to $1,345,386 at June 30,
2022, from $1,439,331 at December 31, 2021, savings accounts increased $26,350
to $518,146 as of June 30, 2022 from $491,796 at December 31, 2021.  Time
deposits less than $250 increased $15,971, or 7.8%, to $219,690 at June 30,
2022, from $203,719 at December 31, 2021 partially due to the addition of
$25,317 of brokered certificates of deposit.  Time deposits $250 or more
decreased $10,292, or 11.3% to $80,503 at June 30, 2022 from $90,795 at year end
2021.

For the six months ended June 30, interest-bearing deposits averaged $2,189,477
in 2022 compared to $1,877,950 in 2021, an increase of $311,527 or 16.6%. The
cost of interest-bearing deposits was 0.28% in 2022 compared to 0.43% 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 0.37% in
2022 and 0.54% in 2021. The lower costs are due primarily to our actions to
lower deposit rates to mitigate net interest margin compression. We intend to
monitor deposit rates; the FOMC increased the federal funds target rate three
times for a total of 150 basis points through June 30, 2022 and another 75 basis
points on July 27, 2022 with the expectation that the FOMC will continue to move
to increase the federal funds rate to combat inflation. The volume and velocity
of the rate increases will place pressure on our deposit costs.

Loans:

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.

Overall, total borrowings at June 30, 2022, totaled $163,816, including
long-term and subordinated debt, compared to $35,711 at December 31, 2021, an
increase of $128,105. Total short-term borrowings at June 30, 2022 were $129,170
as compared to no short-term borrowings outstanding at December 31, 2021. The
increase in short-term borrowings was due primarily to fund a portion of loan
growth and replace deposit outflows during the three months ended June 30, 2022,
as overnight borrowings with the FHLB were $117,950 at June 30, 2022.  Other
borrowings, which include cash collateral pledged by derivative counterparties
to offset interest rate exposure, totaled $11,220 and increased due to

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rise in market interest rates. Long-term debt was $1,646 at June 30, 2022
compared to $2,711 end of 2021. Outstanding debt subordinated to June 30, 2022 and December 31, 2021 has been $33,000.

Sensitivity to market risk:

Market risk is the risk to our earnings or financial position resulting from
adverse changes in market rates or prices, such as interest rates, foreign
exchange rates or equity prices. Our exposure to market risk is primarily
interest rate risk ("IRR") associated with our lending, investing and
deposit-gathering activities. During the normal course of business, we are not
exposed to foreign exchange risk or commodity price risk. Our exposure to IRR
can be explained as the potential for change in our reported earnings and/or the
market value of our net worth. Variations in interest rates affect earnings by
changing net interest income and the level of other interest-sensitive income
and operating expenses. Interest rate changes also affect the underlying
economic value of our assets, liabilities and off-balance sheet items. These
changes arise because the present value of future cash flows, and often the cash
flows themselves, change with interest rates. The effects of the changes in
these present values reflect the change in our underlying economic value and
provide a basis for the expected change in future earnings related to interest
rates. IRR is inherent in the role of banks as financial intermediaries.
However, a bank with a high degree of IRR may experience lower earnings,
impaired liquidity and capital positions, and most likely, a greater risk of
insolvency. Therefore, banks must carefully evaluate IRR to promote safety and
soundness in their activities.

Due to the decreases to short-term market rates at the onset of the pandemic,
economic uncertainty and more recently the increase in market rates and
anticipation of the FOMC to aggressively move the federal funds rate higher to
mitigate inflation, 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 1.12% at June 30, 2022, a decrease
from 1.16% at December 31, 2021. As previously mentioned, a positive gap
indicates that if interest rates increase, our earnings would likely be
favorably impacted. Given the current economic conditions and outlook, and the
action by the FOMC to increase the federal funds rate 225 basis points from
March 1, 2022 to date and an expectation the FOMC will continue to increase the
federal funds rate to mitigate inflation, we should experience increased net
interest income. The overall focus of ALCO is to maintain a well-balanced
interest rate risk position in order to safeguard future earnings. The current
position at June 30, 2022, indicates that the amount of RSA repricing within one
year would exceed that of RSL, thereby causing net interest income to increase
as market rates increase. However, these forward-looking statements are
qualified in the aforementioned section entitled "Cautionary Note Regarding
Forward-Looking Statements" in this Management's Discussion and Analysis.

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

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, 2022, 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 2022 and endeavor to
employ deposit and loan pricing strategies and direct the reinvestment of loan
and investment repayments in order to manage our IRR position.

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

Liquidity:

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

? Funding of new and existing loan commitments;

? Payment of deposits at sight or at their contractual maturity;

? Reimbursement of loans at maturity;

? Payment of rental obligations; and

? Payment of operating costs.


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 due to their stability and lower cost, in general, than other types of funding. Prepayments and prepayments of loans and investments and the ability to sell both available-for-sale securities and held-for-sale mortgages provide additional sources of funds.

Our ALCO generally meets quarterly, and most recently met in May, to review our
interest rate risk profile, capital adequacy and liquidity.  Management believes
the Company's liquidity position is strong. At June 30, 2022, the Company's cash
and due from banks balances were $47,733 and we maintained $224,916 of
availability at the Federal Reserve Bank's discount window. 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, 2022, the Company's available-for-sale investment securities portfolio
totaled $513,911, $348,501 of which were unencumbered. Net unrealized losses on
the portfolio were $53,072. The Bank's unused borrowing capacity at the FHLB at
June 30, 2022 was $614,895.

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(in thousands of dollars, except per share data)

We employ a number of analytical techniques in assessing the adequacy of our
liquidity position. One such technique is the use of ratio analysis to determine
the extent of our reliance on noncore funds to fund our investments and loans
maturing after June 30, 2022. Our noncore funds at June 30, 2022, 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, 2022, our net noncore funding dependence ratio, the difference between
noncore funds and short-term investments to long-term assets, was 10.0%, while
our net short-term noncore funding dependence ratio, noncore funds maturing
within one-year, less short-term investments to long-term assets equaled 6.4%.
Comparatively, our overall noncore dependence ratio at year-end 2021 was
negative 3.0% and our net short-term noncore funding dependence ratio was
negative 5.6%, indicating that our reliance on noncore funds has increased both
in the short-term and overall due to our relatively static deposit balances and
use of our federal funds sold to fund loan and investment growth.

The Consolidated Statements of Cash Flows present the changes in cash and cash
equivalents from operating, investing and financing activities. Cash and cash
equivalents, consisting of cash on hand, cash items in the process of
collection, deposit balances with other banks and federal funds sold, decreased
$232,200 during the six months ended June 30, 2022. Cash and cash equivalents
increased $19,859 for the same period last year. For the six months ended
June 30, 2022, net cash inflows of $69,751 from financial activities and $18,738
from operating activities were offset by net cash outflows of $320,689 from
investing activities. For the same period of 2021, net cash inflows of $13,001
from operating activities and $107,461 from financing activities were partially
offset by net cash outflows of $100,603 from investing activities.

Operating activities provided net cash of $18,738 for the six months ended
June 30, 2022, and $13,001 for the corresponding six months of 2021. 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
$320,689 for the six months ended June 30, 2022, compared to using net cash of
$100,603 for the same period of 2021. The combination of purchases of investment
securities and an increase in lending activities were the primary factors
causing the net cash outflow from investing activities in both periods.

Financing activities provided net cash of $69,751 for the six months ended
June 30, 2022, and provided net cash of $107,461 for the corresponding six
months of 2021. In 2022, short term borrowings provided the predominant
financing activity of $129,170, partially offset by a decrease of $52,114 in
deposits. During 2021, deposit gathering was our predominant financing activity.
Deposits provided cash of $174,653 for the six months ended June 30, 2021 while
short term borrowings declined $50,000. We continue to seek deposits from new
markets and customers as well as existing customers, including municipalities
and school districts.

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

Capital:

Stockholders' equity totaled $311,897 or $43.50 per share at June 30, 2022,
compared to $340,126 or $47.44 per share at December 31, 2021. Stockholders'
equity was reduced during the six month period ended June 30, 2022 by cash
dividends declared of $5,594, a decrease to AOCI of $41,060 primarily due to an
increase to the unrealized loss on investment securities from higher market
rates, and the repurchase of 13,567 common shares totaling $646. Net income of
$18,983 for the six months ended June 30, 2022 was added to our capital position
during the period.

Higher market rates since year end resulted in a mark-to-market impact on the
available for sale portfolio of $40,512, which runs through AOCI and affects our
book value, but not our regulatory capital ratios.

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Peoples Financial Services Corp.

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(in thousands of dollars, except per share data)

Dividends declared equaled $0.78 per share through the six months ended June 30,
2022 and $0.74 per share for the same period of 2021. The dividend payout ratio
was 29.5% for the six months ended June 30, 2022 and 29.7% for the same period
of 2021. 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 29, 2022 a
third quarter dividend of $0.40 per share payable on September 15, 2022 to
shareholders of record as of August 31, 2022. Further dividends, however, must
necessarily depend upon earnings, financial condition, appropriate legal
restrictions and other factors relevant at the time the Board of Directors
considers payment of dividends.

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

The adequacy of capital is reviewed on an ongoing basis with reference to the
size, composition and quality of resources and regulatory guidelines. We seek to
maintain a level of capital sufficient to support existing assets and
anticipated asset growth, maintain favorable access to capital markets, and
preserve high quality credit ratings. At June 30, 2022, the Bank's Tier 1
capital to total average assets was 9.78% as compared to 9.58% at December 31,
2021. The Bank's Tier 1 capital to risk weighted asset ratio was 12.81% and the
total capital to risk weighted asset ratio was 13.97% at June 30, 2022. These
ratios were 13.76% and 15.01% at December 31, 2021. The Bank's common equity
Tier 1 to risk weighted asset ratio was 12.81% at June 30, 2022 compared to
13.76% at December 31, 2021. The Bank met all capital adequacy requirements and
was deemed to be well-capitalized under regulatory standards at June 30, 2022.

Financial performance review:

Peoples reported net income of $9,353, or $1.30 per diluted share for the three
months ended June 30, 2022, a 10.2% increase when compared to $8,531, or $1.18
per share for the comparable period of 2021. The increase in earnings for the
three months ended June 30, 2022 is due to a $3,417 increase to net interest
income and $494 increase in noninterest income during the current three month
period when compared to the year ago period. Partially offsetting the increases
were a $850 increase in provision for loan losses due to strong loan growth in
the current period, and higher noninterest expenses of $2,035 due to higher
salaries and benefits and occupancy and equipment costs in part due to our
investment in our market expansion strategy and digital technology upgrade.

Peoples reported net income of $18,983, or $2.63 per diluted share for the six
months ended June 30, 2022, an increase of 5.6% when compared to $18,009, or
$2.49 per diluted share for the comparable period of 2021. The increase in
earnings in the six months ended June 30, 2022 is a result of increased net
interest income of $5,280 and an increase of $398 in noninterest income.
Partially offsetting the increases were a $1,650 increase in provision for loan
losses and an increase of $3,695 to noninterest expense. Strong loan growth
resulted in a provision for loan losses of $1,250 in the current six month
period, as compared to a credit to the loan loss provision of $400 in the year
ago period. Higher noninterest expenses were mainly due to higher salaries and
benefits of $2,071 and higher occupancy and equipment costs of $1,461 in part
due to our investment in our market expansion strategy and digital technology
upgrade which commenced during the final six months of 2021.

Return on average assets ("ROA") measures our net income in relation to total
assets. Our ROA was 1.12% for the second quarter of 2022 compared to 1.14% for
the same period of 2021. Return on average equity ("ROE") indicates how
effectively we can generate net income on the capital invested by stockholders.
Our ROE was 11.71% for the second quarter of 2022 compared to 10.71% for the
comparable period in 2021.

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(in thousands of dollars, except per share data)

Non-GAAP Financial Measures:

The following are non-GAAP financial measures which provide useful insight to
the reader of the consolidated financial statements but should be supplemental
to GAAP used to prepare Peoples' consolidated financial statements and should
not be read in isolation or relied upon as a substitute for GAAP measures. In
addition, Peoples' non-GAAP measures may not be comparable to non-GAAP measures
of other companies. The tax rate used to calculate the fully-taxable equivalent
(FTE) adjustment was 21% for 2022 and 2021.

The following table reconciles non-GAAP financial measures of ETP net interest income for the three and six months ended June 30, 2022 and 2021:

Three months ended June 30                          2022        2021
Interest income (GAAP)                            $ 25,892    $ 22,763
Adjustment to FTE                                      461         366

Interest income adjusted in FTE (non-GAAP) 26,353 23,129 Interest expense

                                     2,185       2,473

Adjusted net interest income in FTE (non-GAAP) $24,168 $20,656

Six months ended June 30                            2022        2021
Interest income (GAAP)                            $ 50,463    $ 46,240
Adjustment to FTE                                      905         701

Interest income adjusted in FTE (non-GAAP) 51,368 46,941 Interest expense

                                     4,125       5,182

Adjusted net interest income in FTE (non-GAAP) $47,243 $41,759

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(in thousands of dollars, except per share data)

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, 2022 and 2021:

Three months ended June 30                                        2022        2021
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)                                      $ 15,493    $ 13,458
Less: amortization of intangible assets expense                       97   

125

Noninterest expense adjusted for amortization of assets
expense (non-GAAP)                                                15,396      13,333

Net interest income (GAAP)                                        23,707      20,290
Plus: taxable equivalent adjustment                                  461   

366

Noninterest income (GAAP)                                          3,881   

3,387

Net interest income (FTE) plus noninterest income (non-GAAP)    $ 28,049    $ 24,043

Efficiency ratio (non-GAAP)                                         54.9 %      55.5 %

Six months ended June 30                                          2022        2021
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)                                      $ 29,782    $ 26,157
Less: amortization of intangible assets expense                      193   

250

Noninterest expense adjusted for amortization of assets
expense (non-GAAP)                                                29,589      25,907

Net interest income (GAAP)                                        46,338      41,058
Plus: taxable equivalent adjustment                                  905   

701

Noninterest income (GAAP)                                          7,302   

6,904

Net interest income (FTE) plus noninterest income (non-GAAP)    $ 54,545    $ 48,663

Efficiency ratio (non-GAAP)                                         54.3 %      53.2 %


Net Interest Income:

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

? Changes in the volume, rate and composition of productive assets and

interest-bearing liabilities;

? Changes in general market rates; and

? The level of non-performing 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

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Peoples Financial Services Corp.

MANAGEMENT REPORT

(in thousands of dollars, except per share data)

comparable and tax-exempt income and returns are presented here on a tax-equivalent basis using the effective federal statutory tax rate of 21.0% in 2022 and 2021.

For the three months ended June 30, tax-equivalent net interest income increased
$3,512 to $24,168 in 2022 from $20,656 in 2021. The net interest spread
increased to 2.95% for the three months ended June 30, 2022 from 2.81% for the
three months ended June 30, 2021 as the earning asset yield increased 2 basis
points while the average rate paid on interest bearing liabilities decreased 11
basis points. The tax-equivalent net interest margin increased to 3.06% for the
second quarter of 2022 from 2.96% for the comparable period of 2021.

For the three months ended June 30, tax-equivalent interest income, a non-GAAP
measure, on earning assets increased $3,224, to $26,353 in 2022 as compared to
$23,129 in 2021. The overall yield on earning assets, on a fully tax-equivalent
basis, increased 2 basis points for the three months ended June 30, 2022 to
3.34% as compared to 3.32% for the three months ended June 30, 2021. The
increase to tax-equivalent interest income is due to the higher earning asset
base of $367,654. The higher volume is partially offset by the earning assets
repricing downward and new loan originations and investment purchases being
added at lower portfolio rates. PPP loan interest income and net fees totaled
$440 and the yield was 5.2% during the current quarter. Excluding the PPP loans,
the loan yield was 3.81%. The overall yield earned on investments decreased 46
basis points in the second quarter of 2022 to 1.67% from 2.13% for the second
quarter of 2021 as investment cashflow from high yielding matured and
pre-refunded municipal bonds are deployed into lower yielding bonds.  Average
investment balances were $321,205 higher when comparing the current and year ago
quarter. Average federal funds sold decreased $196,327 to $23,920 for the three
months ended June 30, 2022 and yielded 0.37%, as compared to $220,247 and yield
of 0.10% in the year ago period.  We recognized the negative impact to the
overall net interest margin due to the high federal funds sold balances and
invested a portion into the investment portfolio during the current three month
period to improve interest income and asset yield. We expect asset yields to
move upward as asset cash flow reprice higher due to the recent increase to the
federal funds rate by the FOMC and expectation of further rate increases by the
FOMC to combat inflation.

Total interest expense decreased $288 to $2,185 for the three months ended
June 30, 2022 from $2,473 for the three months ended June 30, 2021. The total
cost of funds decreased 11 basis points for the three months ended June 30, 2022
to 0.39% as compared to 0.50% in the year ago period. The decrease in costs was
due to lower rates on interest bearing deposits partially offset by higher
average balances. The average rate paid on deposits declined as we decreased
deposit rates throughout 2021 and early in 2022 to mitigate margin compression
during a historically low rate environment. We expect our cost of funds to come
under pressure over the remaining months of 2022 as market rates have risen
rapidly since year end as the FOMC aggressively increases interest rates in
an
attempt to curb inflation.

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(in thousands of dollars, except per share data)

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

                                             2022 vs 2021
                                         Increase (decrease)
                                           attributable to
                                   Total         Rate       Volume
Interest income:
Loans:
Taxable                           $   1,933    $ (1,901)    $  3,834
Tax-exempt                              688        (908)       1,596
Investments:
Taxable                               1,515      (1,652)       3,167
Tax-exempt                              284        (353)         637
Interest-bearing deposits                16           18         (2)
Federal funds sold                      (9)          144       (153)
Total interest income                 4,427      (4,652)       9,079
Interest expense:
Money market accounts                 (266)    $   (606)    $    340
NOW accounts                           (96)        (840)         744
Savings accounts                        (1)         (47)          46
Time deposits less than $100          (154)        (147)         (7)
Time deposits $100 or more            (451)        (356)        (95)
Short-term borrowings                    45          120        (75)
Long-term debt                        (134)          205       (339)
Subordinated debt
Total interest expense              (1,057)      (1,671)         614

Net interest income – non-GAAP $5,484 $(2,981) $8,465

Tax-equivalent net interest income, a non-GAAP measure, was $47,243 in the six
months ended June 30, 2022 and $41,759 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 $8,465. A rate variance resulted in a decrease in net
interest income of $2,981.

Average earning assets increased $404,072 to $3,161,391 for the six months ended
June 30, 2022 from $2,757,319 for the six months ended June 30, 2021 and
accounted for a $9,079 increase in interest income. Average loans increased
$207,270, which caused interest income to increase $5,430. Specifically, average
PPP loans totaled $40,079 and generated $1,481 of interest and net fees in the
current period compared to average PPP loans of $196,240 and $3,811 of interest
and fees in the prior period. Average taxable investments increased $275,967
comparing 2022 and 2021, which resulted in increased interest income of $3,167
while average tax-exempt investments increased $35,402, which resulted in an
increase to interest income of $637. Average federal funds sold decreased
$113,375 for the six months ended June 30, 2022 which resulted in a decrease of
$153 to interest income.

Average interest-bearing liabilities rose $291,323 to $2,243,797 for the six
months ended June 30, 2022 from $1,952,474 for the six months ended June 30,
2021 resulting in a net increase in interest expense of $614. Interest-bearing
transaction accounts, including money market, NOW and savings accounts grew
$335,934, which in aggregate caused a $1,130 increase in interest expense. In
addition, large denomination time deposits averaged $23,235 less in the current
period and caused interest expense to decrease $95. A decrease of $1,173 in
average time deposits less than $100 thousand decreased interest expense by $7.
In addition, short-term borrowings averaged $9,631 lower and decreased interest
expense $75 while long-term debt averaged $10,572 lower and decreased interest
expense by $339 comparing the first six months of 2022 and 2021.

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MANAGEMENT REPORT

(in thousands of dollars, except per share data)

An unfavorable rate variance occurred, as the tax-equivalent yield on earning
assets decreased 15 basis points while there was a 17 basis point decrease in
the cost of funds. As a result, tax-equivalent net interest income decreased
$2,981 comparing the six months ended June 30, 2022 and 2021. The tax-equivalent
yield on earning assets was 3.28% in the 2022 period compared to 3.43% in 2021
resulting in a decrease in interest income of $4,652. The yield on the taxable
investment portfolio decreased 44 basis points to 1.53% during the six months
ended June 30, 2022 from 1.97% in the year ago period, resulting in a decrease
of $1,652. The yield on the tax exempt investment portfolio decreased 35 basis
points to 2.36% during the six months ended June 30, 2022 from 2.71% in the year
ago period, resulting in a decrease of $353. The tax-equivalent yield on the
loan portfolio decreased 12 basis points to 3.84% in 2022 from 3.96% in 2021 and
resulted in a decrease to interest income of $2,809.

PPP loans yielded 7.45% during the six months ended June 30, 2022 compared to
3.92% in the year ago period. The decrease resulted from the higher interest
income versus PPP loan forgiveness and the accretion of deferred fees.

A favorable rate variance was experienced in the cost of funds as incremental
deposit rate reductions have been completed to mitigate the effect of low market
rates to our net interest income. We experienced decreases in the rates paid on
most of the major categories of interest-bearing liabilities. The cost of
deposits declined 15 basis points and resulted in a $1,996 reduction in interest
expense with the largest decreases being our money market and NOW account
products. The deposit interest expense declines were partially offset by an 83
basis point increase in the cost of borrowings that increased interest expense
$325.

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MANAGEMENT REPORT

(in thousands of dollars, 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, 2022                                  June 30, 2021
                                        Average       Interest Income/     Yield/      Average       Interest Income/     Yield/
                                       Balance            Expense          Rate       Balance            Expense          Rate
Assets:
Earning assets:
Loans:
Taxable                               $ 2,254,405    $           22,009      3.92 %  $ 2,075,808    $           20,029      3.87 %
Tax-exempt                                211,885                 1,541      2.92        148,747                 1,222      3.30
Total loans                             2,466,290                23,550      3.83      2,224,555                21,251      3.83
Investments:
Taxable                                   553,078                 2,110      1.53        264,490                 1,301      1.97
Tax-exempt                                111,138                   652      2.35         78,521                   520      2.66
Total investments                         664,216                 2,762      1.67        343,011                 1,821      2.13
Interest-bearing deposits                  10,694                    18      0.68          9,653                     2      0.08
Federal funds sold                         23,920                    22      0.37        220,247                    55      0.10
Total earning assets                    3,165,120                26,353      3.34 %    2,797,466                23,129      3.32 %
Less: allowance for loan losses            28,839                          
              27,163
Other assets                              210,739                                        226,245
Total assets                          $ 3,347,020    $           26,353              $ 2,996,548    $           23,129
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Money market accounts                 $   588,222    $              448      0.31 %  $   542,600    $              533      0.39 %
NOW accounts                              782,501                   577      0.30        609,283                   561      0.37
Savings accounts                          518,847                    99      0.08        465,916                    96      0.08
Time deposits less than $100              125,653                   306      0.98        128,037                   373      1.17
Time deposits $100 or more                152,346                   167      0.44        175,918                   378      0.86
Total interest-bearing deposits         2,167,569                 1,597    
 0.30      1,921,754                 1,941      0.41
Short-term borrowings                      34,953                   122      1.40          7,300                     6      0.33
Long-term debt                              1,901                    23      4.85         11,025                    82      2.98
Subordinated debt                          33,000                   443      5.38         33,000                   444      5.38
Total borrowings                           69,854                   588      3.38         51,325                   532      0.69
Total interest-bearing liabilities      2,237,423                 2,185    
 0.39      1,973,079                 2,473      0.50
Noninterest-bearing deposits              756,226                                        680,431
Other liabilities                          33,079                                         23,420
Stockholders' equity                      320,292                                        319,618
Total liabilities and
stockholders' equity                  $ 3,347,020                 2,185              $ 2,996,548                 2,473
Net interest income/spread                           $           24,168      2.95 %                 $           20,656      2.82 %
Net interest margin                                                          3.06 %                                         2.96 %
Tax-equivalent adjustments:
Loans                                                $              324                             $              257
Investments                                                         137                                            109
Total adjustments                                    $              461                             $              366


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(in thousands of dollars, except per share data)

                                                                       Six months ended
                                                 June 30, 2022                                  June 30, 2021
                                    Average       Interest Income/     Yield/      Average       Interest Income/     Yield/
                                   Balance            Expense          Rate       Balance            Expense          Rate
Assets:
Earning assets:
Loans:
Taxable                           $ 2,201,621    $           42,862      3.93 %  $ 2,065,024    $           40,929      4.00 %
Tax-exempt                            207,788                 3,011      2.92        137,114                 2,323      3.42
Total loans                         2,409,409                45,873      3.84      2,202,138                43,252      3.96
Investments:
Taxable                               538,342                 4,082      1.53        262,375                 2,567      1.97
Tax-exempt                            110,768                 1,298      2.36         75,366                 1,014      2.71
Total investments                     649,110                 5,380      1.67        337,741                 3,581      2.14
Interest-bearing deposits              10,185                    20      0.40         11,378                     4      0.07
Federal funds sold                     92,687                    95      0.21        206,062                   104      0.10
Total earning assets                3,161,391                51,368      3.28 %    2,757,319                46,941      3.43 %
Less: allowance for loan
losses                                 28,779                                         27,426
Other assets                          211,608                                        225,631
Total assets                      $ 3,344,220    $           51,368              $ 2,955,524    $           46,941
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Money market accounts             $   592,085    $              833      0.28 %  $   523,557    $            1,099      0.42 %
NOW accounts                          801,155                 1,064      0.27        590,418                 1,160      0.40
Savings accounts                      512,367                   192      0.08        455,698                   193      0.09
Time deposits less than $100          126,626                   608      0.97        127,799                   762      1.20
Time deposits $100 or more            157,243                   368      0.47        180,478                   819      0.92
Total interest-bearing
deposits                            2,189,476                 3,065      0.28      1,877,950                 4,033      0.43
Short-term borrowings                  19,135                   122      1.29         28,766                    77      0.54
Long-term debt                          2,186                    51      4.70         12,758                   185      2.92
Subordinated debt                      33,000                   887      5.42         33,000                   887      5.38
Total borrowings                       54,321                 1,060      3.94         74,524                 1,149      3.11
Total interest-bearing
liabilities                         2,243,797                 4,125      0.37      1,952,474                 5,182      0.54
Noninterest-bearing deposits          745,348                                        657,744
Other liabilities                      30,816                                         25,385
Stockholders' equity                  324,259                                        319,921
Total liabilities and
stockholders' equity              $ 3,344,220                 4,125              $ 2,955,524                 5,182
Net interest income/spread                       $           47,243      2.91 %                 $           41,759      2.89 %
Net interest margin                                                      3.01 %                                         3.05 %
Tax-equivalent adjustments:
Loans                                            $              632                             $              488
Investments                                                     273                                            213
Total adjustments                                $              905                             $              701


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  Table of Contents

Peoples Financial Services Corp.

MANAGEMENT REPORT

(in thousands of dollars, except per share data)

Allowance for loan losses:

We evaluate the adequacy of the allowance for loan losses account on a quarterly
basis utilizing our systematic analysis in accordance with procedural
discipline. We take into consideration certain factors such as composition of
the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs,
prevailing economic conditions and other relevant factors when determining the
adequacy of the allowance for loan losses account. We generally 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, 2022.

For the three months ended June 30, 2022, the provision for loan losses
increased $850 to $950 from $100 in the year ago period due to improving credit
trends.  The provision for loan losses in the three month period ended June 30,
2022 is the result of growth of non-PPP loans and improved credit quality.

The provision for loan losses was $1,250 for the six months ended June 30, 2022,
an increase of $1,650 from a credit of $400 for the comparable period of 2021.
The higher provision in the six month period ended June 30, 2022 is the result
of $278,263 in loan growth during the period. The credit in the prior year
period was due to improved credit quality and the reversal of COVID related
asset quality adjustments.

Non-interest income:

Noninterest income for the three months ended June 30, 2022 was $3,881, an
increase of $494 or 14.6% from $3,387 in 2021. The increase was primarily due to
higher revenue from commercial loan interest rate swaps and services charges,
fees, commissions and other, partially offset by reduced mortgage banking fees.
Commercial loan interest rate swap income increased $416 due to higher credit
value adjustment in the quarter compared to a year ago. Services charges, fees,
commissions and other were higher in the current period by $136 due to higher
service charges on consumer and commercial deposit accounts. Mortgage banking
revenue declined $80 in the three month period ended June 30, 2022 due to lower
volumes of mortgage loans being sold into the secondary market.

Noninterest income for the six months ended June 30, 2022 was $7,302, an
increase of $398 or 5.8% from $6,904 in the year ago period.  During the period,
service charges, fees, commissions and other increased $644 due in part to the
reversal of an accrual of a $335 bank owned life insurance benefit in the year
ago period, an increase in consumer and commercial deposit service charges and
higher revenue related to debit card activity. Mortgage banking income decreased
$248 during the six months ended June 30, 2022 compared to the prior year on
lower sales volume.

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.

Noninterest expense increased $2,035 or 15.1% to $15,493 for the three months
ended June 30, 2022, from $13,458 for the three months ended June 30, 2021.
Salaries and employee benefits increased $601 or 8.3% due to annual merit
increases and the the addition of lending teams and credit support staff in our
newest expansion markets of Piscataway, New Jersey and Pittsburgh, Pennsylvania
that opened during the fourth quarter of 2021. Occupancy and equipment expenses
were higher by $903 in the current period due to information technology
investments related to mobile/digital banking solutions implemented during the
second half of 2021. Professional and consulting fees increased $197 and other
expenses, which includes account processing and advertising, increased $353.

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  Table of Contents

Peoples Financial Services Corp.

MANAGEMENT REPORT

(in thousands of dollars, except per share data)

For the six months ended June 30, noninterest expense increased $3,695 or 14.2%
to $29,782 in 2022 from $26,087 in 2021. During the six months ended June 30,
2022, salaries and employee benefits expense totaled $15,891, an increase of
$2,071 or 15.0% when compared to $13,820 for the same period of 2021 due
primarily to annual merit increases, our investment into our newest markets and
lower deferred loan origination costs, which are recorded as a contra-salary
expense. Occupancy and equipment expense increased $1,461 or 23.1% to $7,775 in
the six month period due to information technology investments related to
mobile/digital banking solutions implemented during the second half of 2021 and
additional costs related to entrance into the Piscataway, New Jersey and
Pittsburgh, Pennsylvanita markets. Other expenses included professional,
consulting and loan account processing fees.

Income taxes:

We recorded income tax expense of $1,792 or 16.1% of pre-tax income, and $3,625
or 16.0% of pre-tax income for the three and six months ended June 30, 2022,
respectively. This compares to the three and six month periods ended June 30,
2021 in which we recorded tax expense of $1,588 or 15.7% of pre-tax income, and
$4,266 or 18.9% of pre-tax income, respectively. The current year to date period
benefited from a higher level of tax-exempt income while the prior year included
a $621 deferred tax adjustment. Excluding this adjustment, the effective tax
rate would have been 16.1% for the six month period ended June 30, 2021.

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Contents

Peoples Financial Services Corp.

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