Company Overview and History
Peoples Financial Services Corp. (PFIS) is a bank holding company that provides a full range of financial services primarily in Northeastern Pennsylvania and New York. The company's history dates back to 1987 when it was founded as a bank holding company for Peoples Security Bank and Trust Company. Over the years, Peoples Financial has grown both organically and through strategic acquisitions, solidifying its position as a community banking leader in its markets.
Peoples Financial Services Corp. has a rich history that spans over 150 years. The company was formed in 1986 as the bank holding company for Peoples Security Bank and Trust Company, which traces its roots back to 1870 when it was originally founded as the Peoples Savings Bank of Scranton. Throughout its long history, Peoples Financial has demonstrated a commitment to growth and expansion, establishing a strong presence in Northeastern Pennsylvania through both organic growth and strategic acquisitions.
Strategic Growth and Acquisitions
In July 2024, Peoples Financial made a transformative move by acquiring FNCB Bancorp, Inc. in a deal valued at $133.7 million. This merger significantly expanded Peoples' footprint, adding 39 full-service community banking offices across 12 counties in Pennsylvania, New Jersey, and New York. The acquisition was a testament to Peoples' commitment to strategic growth and its ability to navigate challenges, as it integrated FNCB's operations and client relationships seamlessly.
The integration of FNCB presented some operational challenges for Peoples, as the company had to evaluate and adjust internal controls over financial reporting related to the acquired business. Peoples also incurred significant one-time merger-related expenses, including severance, system integration, and advisory fees. Despite these short-term headwinds, the strategic rationale for the FNCB merger remained compelling, as it positioned Peoples for long-term growth and value creation.
The primary reasons for the merger with FNCB Bancorp, Inc. included expansion of the branch network and commanding market share positions in northeastern Pennsylvania, attractive low-cost funding base, strong cultural alignment and a deep commitment to shareholders, customers, employees, and communities served by Peoples and FNCB, meaningful value creation to shareholders, increased trading liquidity and increased dividends for Peoples shareholders.
Business Focus and Management
Throughout its history, Peoples has maintained a focus on providing high-quality banking services to its retail and commercial customers. The company has navigated various economic cycles and regulatory changes, drawing on its experienced management team and conservative risk management practices to deliver consistent financial performance.
Financials
Peoples Financial's financial performance has been resilient, even in the face of the recent economic volatility. For the nine months ended September 30, 2024, the company reported net income of $2.4 million, or $0.30 per diluted share. This represented a decrease of 89.9% compared to the same period in 2023, primarily due to a higher provision for credit losses of $15.8 million, which included a $14.3 million provision for non-PCD loans acquired in the FNCB merger, and higher merger-related expenses of $10.2 million.
Despite the challenges, Peoples Financial has maintained a strong financial position. As of September 30, 2024, the company had total assets of $5.4 billion, a 57.8% annualized increase from December 31, 2023, largely driven by the FNCB merger. The company's loan portfolio grew to $4.1 billion, a 57.2% annualized increase, while deposits reached $4.6 billion, a 55.4% annualized increase.
For the most recent quarter, Peoples Financial reported revenue of $65,803,000 and net income of $6,087,000. The company's operating cash flow (OCF) for the quarter was $25,637,000, while free cash flow (FCF) stood at $21,325,000. The increase in revenue, net income, OCF, and FCF was primarily attributed to the merger with FNCB Bancorp, Inc. on July 1, 2024.
Capital and Asset Quality
Peoples Financial's capital position remains strong, with Peoples Bank, the company's banking subsidiary, meeting all capital adequacy requirements and being well-capitalized under regulatory standards as of September 30, 2024. The bank's Tier 1 capital to total average assets ratio was 8.23%, and its Tier 1 capital to risk-weighted assets ratio was 10.68%.
The company's asset quality has remained relatively stable, with nonperforming assets increasing to $21.5 million, or 0.40% of total assets, as of September 30, 2024, compared to $4.9 million, or 0.13% of total assets, at the end of 2023. The increase was primarily due to the addition of $7.6 million in nonperforming loans from the FNCB merger.
Liquidity
Peoples Financial's liquidity position is also solid, with the company maintaining a diverse funding base and access to various sources of liquidity, including the Federal Home Loan Bank and the Federal Reserve's Discount Window. As of September 30, 2024, the company's cash and cash equivalents totaled $285.5 million, a significant increase from $187.4 million at the end of 2023.
The company has an agreement with the Federal Home Loan Bank (FHLB) which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At September 30, 2024, the maximum borrowing capacity was $1.4 billion, of which $112.1 million was outstanding in borrowings and $364.5 million was used to issue standby letters of credit to collateralize public fund deposits.
Net Interest Margin and Performance Metrics
The company's net interest margin (NIM), a key metric for banks, increased to 3.26% for the third quarter of 2024, up from 2.44% in the same period of 2023. This improvement was primarily driven by the higher volume of earning assets and the net accretion impact of purchase accounting marks on loans, deposits, and borrowings acquired in the FNCB merger.
Product Segments and Portfolio Composition
Peoples Financial Services Corp. operates through several key product segments:
Loans: The company's loan portfolio comprises various categories, including commercial and industrial loans, commercial real estate loans, residential real estate loans, consumer loans, and equipment financing loans. As of September 30, 2024, the total loan portfolio stood at $4.07 billion, representing a significant increase of $1.2 billion or 57.2% annualized from December 31, 2023. This growth was primarily driven by the merger with FNCB Bancorp, Inc.
The commercial and industrial loan category increased by $346.4 million to $890.1 million, while commercial real estate loans grew by $446.5 million to $2.3 billion. Residential real estate loans increased by $189.8 million to $550.6 million, and consumer loans rose by $63.7 million to $146.0 million. The merger with FNCB also added a new equipment financing portfolio, which totaled $173.5 million as of September 30, 2024.
Investments: Peoples Financial's investment portfolio, primarily classified as available-for-sale, totaled $562.5 million as of September 30, 2024, an increase of $163.6 million, or 41.0%, from December 31, 2023. This increase was largely due to the addition of $177.9 million in investments from the FNCB merger, as well as an increase in fair value adjustments. The held-to-maturity investment portfolio decreased by $5.0 million, or 5.0%, to $79.9 million during the same period.
Deposits: Total deposits increased by $1.4 billion, or 55.4% annualized, to $4.6 billion as of September 30, 2024, primarily due to the FNCB merger. Interest-bearing deposits grew by $1.3 billion to $3.9 billion, while noninterest-bearing deposits increased by $72.9 million to $717.6 million. The deposit base consisted of 38.6% retail accounts, 33.3% commercial accounts, 19.7% municipal relationships, and 8.4% brokered deposits as of September 30, 2024.
Borrowings: Total borrowings, including short-term borrowings, long-term debt, and subordinated debt, increased by $114.3 million to $189.9 million as of September 30, 2024, again largely due to the FNCB merger. Short-term borrowings increased by $19.8 million to $37.3 million, while long-term debt grew by $86.5 million to $111.5 million. The company also assumed $8.0 million in junior subordinated debt as a result of the FNCB acquisition.
Management and Future Outlook
Peoples Financial's management team has a proven track record of prudent risk management and strategic decision-making. The company's recent acquisition of FNCB Bancorp, Inc. is a testament to its ability to identify and execute value-enhancing opportunities, even in challenging market conditions.
Looking ahead, Peoples Financial is well-positioned to continue its growth trajectory and navigate the evolving banking landscape. The company's strong capital, liquidity, and asset quality, combined with its commitment to serving its local communities, make it a resilient and reliable banking partner for its customers.
Despite the near-term pressure on earnings due to the merger-related expenses and credit loss provisions, Peoples Financial's long-term outlook remains favorable. The company's experienced management team, diversified revenue streams, and focus on organic growth and strategic acquisitions position it for continued success in the years to come.
The key drivers of Peoples Financial's performance during the recent period were the successful completion of the FNCB merger, which significantly expanded the company's asset base, loan portfolio, deposit base, and borrowings. The integration of FNCB's operations has been a primary focus for the company, as it seeks to capture the anticipated synergies and growth opportunities presented by the combined entity.