Peoples Financial Services Corp. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023, compared primarily with FY2022. This is an annual filing; the supplied filing text does not provide a distinct fourth-quarter-only results summary.
Business context
Peoples is a Pennsylvania bank holding company operating Peoples Security Bank and Trust Company, with 28 community banking offices in Pennsylvania, New Jersey and New York. Lending is concentrated in commercial real estate and other business loans. The company also provides consumer banking, trust and wealth management, and merchant services.
Key financial metrics
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Total assets | $3.742 billion | $3.554 billion |
| Loans held for investment | $2.850 billion; up 4.4% | $2.730 billion |
| Total deposits | $3.279 billion; up 7.6% | $3.047 billion |
| Net interest income (GAAP) | $86.8 million | $95.7 million |
| Net interest margin | 2.54% (tax-equivalent) | 3.02% (tax-equivalent) |
| Net income | $27.4 million | $38.1 million |
| Diluted earnings per share | $3.83 | $5.28 |
| Noninterest income / expense | $14.1 million / $67.8 million | $11.8 million / $62.7 million |
| Operating cash flow / ending cash and equivalents | $33.3 million / $187.4 million | $42.4 million / $37.9 million |
| Stockholders’ equity | $340.4 million; 9.1% of assets | $315.4 million; 8.9% of assets |
| Allowance for credit losses | $21.9 million; 0.77% of loans | $27.5 million; 1.01% of loans |
Net interest income on a fully tax-equivalent basis was $88.7 million, down from $97.7 million. Interest income rose, but funding costs increased faster: interest expense climbed to $63.1 million from $15.6 million, chiefly as deposit rates repriced. Return on average assets was 0.74% and return on equity was 8.32%. The company declared $1.64 per share in dividends, a 42.8% payout of net income.
At year-end, cash and cash equivalents were $187.4 million. Borrowings included $17.6 million of short-term borrowings, $25.0 million of long-term FHLB debt and $33.0 million of subordinated notes. The company reported approximately $1.63 billion in available future liquidity sources, including borrowing capacity and other sources. Peoples Bank was categorized as well capitalized; its common equity Tier 1, total capital and leverage ratios were 13.30%, 14.12% and 9.34%, respectively.
Material changes versus FY2022
- Net income declined 28.1%, and tax-equivalent net interest margin fell 48 basis points as deposit and borrowing costs outpaced asset-yield gains.
- Deposits grew, but noninterest-bearing deposits fell $128.1 million; interest-bearing deposits rose $360.5 million. Brokered deposits reached $261.0 million, or about 8% of deposits.
- Commercial real estate loans grew $153.3 million and represented 65.4% of gross loans. Residential real estate loans rose 9.1%; consumer loans fell 8.9%.
- Net charge-offs increased to $2.9 million from $0.5 million, primarily reflecting a partial charge-off on a commercial real estate loan. Nonperforming assets rose to $4.9 million from $4.1 million.
- Available-for-sale securities had $51.5 million of gross unrealized losses at year-end, compared with $66.3 million in 2022; the after-tax accumulated loss was $40.3 million.
- Noninterest expense increased $5.1 million, including $1.8 million of merger-related costs and higher FDIC assessments. Noninterest income increased $2.3 million, partly because 2022 included a $2.0 million securities-sale loss.
Outlook, risks and unusual items
- Pending FNCB merger: Announced September 27, 2023, the transaction provides FNCB shareholders 0.1460 Peoples shares per FNCB share. Regulatory and shareholder approvals remain necessary. Management expected completion in Q3 2024, without assurance; a $4.8 million termination fee may apply in specified circumstances.
- Management outlook: The company anticipated continued margin pressure and rising funding costs in 2024, though deposit-cost increases were expected to slow. It planned to prioritize liquidity and moderate loan growth, including given possible economic weakness or commercial real estate stress.
- Credit and funding risks: Approximately 84.5% of loans were business loans, and commercial real estate exposure is significant. Management reported approximately 14% of deposits were uninsured and uncollateralized. Deposit outflows, competitive pricing, weaker collateral values and higher defaults could affect liquidity and earnings.
- Interest-rate and securities risks: A 100-basis-point parallel rate increase was modeled to reduce 12-month net interest income by 0.8%; larger shocks could further affect earnings or securities values. The company stated it did not intend to sell securities, but a forced sale to meet liquidity needs could realize losses. The Federal Reserve’s Bank Term Funding Program ended March 11, 2024; Peoples intended to move eligible pledged securities to the discount window.
- Accounting item: Peoples adopted CECL on January 1, 2023, reducing the loan allowance by $3.3 million at transition and increasing the reserve for unfunded commitments by $270,000. It also identified an immaterial Q1 2023 allowance overstatement of $1.5 million; the cumulative $1.1 million adjustment was recorded in FY2023, with no prior-period restatement.
- Audit and legal matters: The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- Progress of required merger approvals, closing timing, integration costs and expected benefits.
- Deposit mix, uninsured deposit levels, brokered-deposit reliance and deposit pricing trends.
- Commercial real estate borrower performance, large exposures, collateral values and subsequent charge-offs.
- Whether the allowance for credit losses remains adequate as portfolio conditions and forecasts change.
- Realized versus unrealized securities losses, liquidity availability after the BTFP ended, and the trajectory of net interest margin.