Peoples Financial Services Corp. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 15, 2023. Peoples is a Pennsylvania bank holding company operating Peoples Security Bank and Trust Company, with 28 community banking offices across Pennsylvania, New Jersey, and New York. Figures below are in U.S. dollars; amounts are rounded where appropriate.
Financial performance and condition
| Metric | 2022 | 2021 / change |
|---|---|---|
| Net income | $38.1 million | $43.5 million; down 12.5% |
| Diluted EPS | $5.28 | $6.02 |
| Net interest income (GAAP) | $95.7 million | $84.6 million |
| Net interest income, tax-equivalent (non-GAAP) | $97.7 million | $86.1 million |
| Net interest margin | 3.02% | 2.99% |
| Noninterest income | $11.8 million | $25.6 million |
| Noninterest expense | $62.7 million | $55.0 million |
| Return on average assets / equity | 1.12% / 11.86% | Not stated here for direct comparison |
| Total assets | $3.55 billion | $3.37 billion; up 5.5% |
| Loans, gross | $2.73 billion | $2.33 billion; up 17.2% |
| Deposits | $3.05 billion | $2.96 billion; up 2.8% |
| Stockholders’ equity | $315.4 million; $44.06/share | $340.1 million; $47.44/share |
- Loan growth excluding Paycheck Protection Program (PPP) loans was $447.5 million, or 19.8%, led by commercial real estate (CRE), which grew $366.3 million. Commercial, construction, and CRE loans represented about 84.6% of the portfolio; CRE alone was 62.6%.
- Credit quality improved: nonperforming assets were $4.1 million, or 0.12% of assets, versus $5.0 million, or 0.15%, in 2021. Net charge-offs were $0.5 million, or 0.02% of average loans. The allowance for loan losses was $27.5 million, or 1.01% of loans, versus $28.4 million, or 1.22%, in 2021.
- Cash and cash equivalents fell $242.1 million to $37.9 million, primarily as loan growth outpaced deposit growth. Operating activities provided $42.4 million; investing activities used $467.8 million; financing activities provided $183.4 million.
- Year-end debt included $114.9 million of short-term borrowings, $0.6 million of long-term debt, and $33.0 million of subordinated debt. The Bank had $100.4 million of overnight FHLB advances outstanding; available FHLB borrowing capacity was approximately $1.2 billion, subject to collateral and existing usage.
- Peoples Bank was well capitalized. Its common equity Tier 1, total capital, and leverage ratios were 12.27%, 13.26%, and 9.69%, respectively. The consolidated equity-to-assets ratio declined to 8.9% from 10.1%.
Material changes and unusual items
- Net income fell despite higher net interest income, primarily because 2021 included a $12.2 million pretax gain on the sale of Visa Class B shares, while 2022 included a $2.0 million pretax loss on available-for-sale (AFS) securities sales. Higher operating expenses also weighed on earnings; a $0.4 million credit to the loan-loss provision partly offset these factors.
- Noninterest expense rose 13.9%, to $62.7 million, reflecting higher salaries, staffing and occupancy costs in expansion markets, and technology investment. Salaries and benefits increased 12.8%; occupancy and equipment costs rose 29.0%.
- Higher rates drove AFS securities’ unrealized losses to $66.3 million pretax and $52.0 million after tax at year-end, compared with $1.8 million pretax and $1.4 million after tax in 2021. The resulting accumulated other comprehensive loss contributed to the $24.7 million decline in equity and the negative $12.7 million of comprehensive income. Management reported no other-than-temporary impairment and said it did not expect to need to sell the securities before recovery.
- In December 2022, the Company sold $45.5 million of shorter-duration Treasury securities and reinvested the proceeds in longer-duration mortgage-backed securities, recognizing a $2.0 million loss; management expected higher interest income to recoup the loss over approximately 15 months. In February 2023, it sold municipal and mortgage-backed securities at a $0.1 million gain and used proceeds to repay higher-cost overnight borrowings.
Outlook, risks, and contingencies
- Management anticipated continued loan demand and planned to fund growth through deposit gathering, loan and investment repayments, and FHLB advances. It expected deposit competition and funding costs to rise in 2023, alongside potential net interest margin pressure; no specific earnings or revenue guidance was provided.
- Liquidity measures weakened: the basic liquidity surplus ratio declined to 6.5% from 14.6%, while net noncore funding dependence increased to 9.6% from negative 3.0%. The Company reported approximately $1.2 billion of uninsured deposits and $92.7 million of time deposits above $250,000 at year-end.
- Interest-rate exposure is material. Modeling indicated a 2.8% decrease in projected 12-month net interest income under an immediate parallel 100-basis-point rate increase; the broader simulation showed a 6.2% decrease under a 200-basis-point increase. These are model estimates, not forecasts.
- Other key risks include concentrated CRE and regional lending, collateral values and borrower repayment capacity, deposit outflows and funding costs, cyber and third-party service-provider disruption, regulatory changes, and the transition from LIBOR. The Company said it was transitioning LIBOR-linked contracts, with remediation planned by June 30, 2023.
- The Company adopted the expected-credit-loss standard (CECL) on January 1, 2023. Management estimated an initial $2.5–$3.0 million decrease in the allowance and a $2.1–$2.5 million after-tax increase to retained earnings.
- The FDIC’s assessment-rate increase was expected to add about $0.7 million to 2023 expense. Management also anticipated approximately $755,000 of housing-program tax credits in 2023. No material pending legal proceedings were reported.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The allowance’s qualitative-factor estimates were identified as a critical audit matter.
Important facts for investors to verify
- Whether deposit growth and liquidity recover as loan growth continues, and how uninsured and large time deposits behave.
- Subsequent AFS securities valuations, realized sales, and the effect of accumulated unrealized losses on capital and dividend flexibility.
- CRE portfolio performance, concentrations, delinquencies, charge-offs, and the CECL allowance after adoption.
- Changes in net interest margin and deposit costs as rates and competition evolve; compare actual results with management’s stated expectations.
- Execution and costs of the LIBOR transition, and whether the 2023 FDIC assessment increase and other operating-cost pressures match management estimates.
- Dividend sustainability: 2022 dividends were $1.58 per share, a 29.9% payout ratio; the Board declared a $0.41-per-share first-quarter 2023 dividend, subject to earnings, capital, liquidity, and regulatory constraints.