Peoples Financial Services (PFIS) risk factors, FY2024 10-K

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1. 01Board of Director Oversight
2. 02Our corporate headquarters is located at 102 East Drinker Street, Dunmore, Pennsylvania, which houses executive offices, human resources and investor services divisions. Our operations division is located at 82 Franklin Avenue, Hallstead, Pennsylvania
3. 03Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
4. 04There were no repurchases of our common stock during the three months ended December 31, 2024
5. 05Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis 2024 versus 2023 contained in this Annual Report on Form 10-K
6. 06Total assets, loans and deposits were $5.1 billion, $4.0 billion and $4.4 billion, respectively, at December 31, 2024. Assets, loans and deposits acquired at the completion of the FNCB merger on July 1, 2024 were $1.8 billion, $1.2 billion and $1.4 billion, respectively
7. 07classified as held to maturity, and $2.4 million in equity securities. Total deposits consisted of $935.5 million in noninterest-bearing deposits and $3.5 billion in interest-bearing deposits at December 31, 2024
8. 08The average life of the investment portfolio decreased to 5.6 years at December 31, 2024 from 6.1 years at year end 2023, while the effective duration of the investment portfolio increased to 4.8 years at December 31, 2024 from 4.4 years at December 31, 2023
9. 09At December 31, 2024 and 2023, there were no securities of any individual issuer, except for U.S. government agency mortgage-backed securities, that exceeded 10.0 percent of stockholders’ equity
10. 10In an attempt to limit IRR and improve liquidity, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. Fixed-rate loans represented 50.6 percent of the loan portfolio at December 31, 2024, compared to floating or adjustable-rate loans at 49.4 percent
11. 11Nonperforming assets as a percentage of total assets
12. 12Total individually evaluated
13. 13At December 31, 2024 and 2023, the Company had $1.4 billion and $0.9 billion in uninsured deposits in excess of the FDIC insurance limit of $250,000
14. 14On June 1, 2020, the Company sold $33.0 million aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are treated as Tier 2 capital for regulatory capital purposes
15. 15Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar proceeding by or against the Company
16. 16We will continue to monitor our IRR position in 2025 and anticipate employing deposit and loan pricing strategies and directing the reinvestment of loan and investment payments and prepayments in order to maintain our target IRR position
17. 17Commitments to extend credit are the Company's most significant commitment in both the under and over one-year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon
18. 18Twelve Months Ended December 31
19. 19Efficiency ratio (non-GAAP)
20. 20While the FOMC has decelerated rate reductions in its efforts to curb inflationary pressures, we and our competitors focus on building on-balance sheet liquidity while alternative funding sources become more expensive
21. 21Net interest margin (Non-GAAP)
22. 22Amortization of intangible assets totaled $3.4 million in 2024 compared to $105 thousand and $363 thousand in 2023 and 2022, respectively. The increase was due primarily to amortization of the core deposit intangible created at the merger
23. 23We utilize loans and investments in tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. The tax benefit of tax-exempt income was 14.6 percent of pre-tax income in 2024 and 3.3 percent in 2023
24. 24Total assets, loans and deposits were $3.7 billion, $2.8 billion and $3.3 billion, respectively, at December 31, 2023. Total assets, loans and deposits grew 5.3 percent, 4.4 percent and 7.6 percent, respectively, compared to 2022 year-end balances
25. 25Total loan growth was primarily attributable to increases in our commercial real estate portfolio which grew $153.3 million in 2023 due to continued success of our strategy to expand in larger markets with strong growth potential, and strong organic growth in our legacy markets
26. 26Residential real estate loans increased $30.1 million, or 9.1 percent during 2023 due to increased home equity loan activity, the aforementioned reclassification from consumer loans and a higher percentage of loans not eligible to be sold into the secondary market, including jumbo loans
27. 27Total time deposits increased $334.8 million to $626.7 million at December 31, 2023 from $291.9 million at December 31, 2022. The increase was due to the addition of callable brokered CDs during 2023 to improve on-balance sheet liquidity
28. 28Volatile deposits, time deposits $100 thousand or more, averaged $200.7 million in 2023, an increase of $37.7 million or
29. 29portfolio increasing 10 basis points to 1.77 percent in 2023 from 1.67 percent in 2022, interest income increased $0.6 million. The tax-equivalent yield on the loan portfolio increased 77 basis points to 4.81 percent in 2023 from 4.04 percent in 2022 and resulted in an increase to interest income of $20.5 million
30. 30Noninterest expense was $67.8 million for the year ended December 31, 2023 compared to $62.7 million for the year ended December 31, 2022
31. 31Acquisition related expenses totaled $1.8 million in 2023. There were no comparable expenses in 2022 and 2021
32. 32We also utilize loans and investments in tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. The tax benefit of tax-exempt income was 3.3 percent of pre-tax income in 2023 and 3.1 percent in 2022
33. 33Item 7A. Quantitative and Qualitative Disclosures About Market Risk
34. 34Opinions on the Financial Statements and Internal Control over Financial Reporting
35. 35Definition and Limitations of Internal Control over Financial Reporting
36. 36As described in Note 1 to the consolidated financial statements, the Company accounts for credit losses under ASC 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date
37. 37o Management’s review of the relevance and reliability of data used in determination of the qualitative factors
38. 38o Evaluation of the relevance and reliability of data used in the valuation of merger date fair value of certain acquired loans
39. 39Stock compensation, including tax effects and expenses
40. 40NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41. 41Peoples Financial Services Corp. and the Bank are subject to regulations of certain federal and state regulatory agencies and undergo periodic examinations
42. 42The Company has evaluated events and transactions occurring subsequent to December 31, 2024, the balance sheet date, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued
43. 43On February 28, 2025, the Company executed a lease for a new corporate headquarters in Moosic, PA. The lease has a fifteen year term expiring March 31, 2040 with two five year renewal options
44. 44using the effective yield method if the nonaccrual loan is returned to performing status. A nonaccrual loan is returned to performing status when the loan is current as to principal and interest and has performed according to the contractual terms for a minimum of six months
45. 45Effective January 1, 2023, the Company adopted the provisions of ASC 326 and modified its accounting policy for the ACL on loans
46. 46The Company has elected to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio
47. 47Adoption of New Accounting Standard
48. 48Recently Issued But Not Yet Effective Accounting Pronouncements
49. 49ASU 2024-02 “Codification Improvements” (“ASU 2024-02”) amends the Codification to remove references to various
50. 50As a result of the integration of operations of FNCB, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to FNCB since the Acquisition Date, as FNCB’s results cannot be separately identified
51. 51Measurement period adjustments
52. 52The estimated fair value of short-term borrowings was determined to approximate the stated value. Subordinated debentures were valued using a discounted cash flow approach incorporating a discount rate that incorporated similar terms, maturity and credit rating
53. 53Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties
54. 54Securities with a carrying value of $441.5 million and $322.4 million at December 31, 2024 and 2023, respectively, were pledged to secure public deposits and certain other deposits as required or permitted by law; and pledged to the Discount Window at the Federal Reserve
55. 55Securities Held to Maturity
56. 56Equity Securities without Readily Determinable Fair Values
57. 57The amount of residential loans in the formal process of foreclosure totaled $0.2 million at December 31, 2024 and $0.3 million at December 31, 2023
58. 58Credit Quality Indicators
59. 59There were no modifications of accruing loans in 2024 or 2023
60. 60For the Year Ended December 31, 2024
61. 61There were no loans made to borrowers experiencing financial difficulty that were modified during the twelve months ended December 31, 2023
62. 62ACL on off balance sheet commitments
63. 63In conducting its business, Peoples has engaged in, and intends to continue to engage in, banking and financial transactions with directors, executive officers and their related parties. Balances at December 31, 2024 include those acquired due to the FNCB merger
64. 64The aggregate principal amount of the Company’s Subordinated Notes due 2030 held by directors, executive officers and their related parties was $3.0 million at December 31, 2024, and $0 at December 31, 2023
65. 65Total core deposit intangible
66. 66The aggregate amortization expense was $3.4 million and $0.1 million for the twelve months ended December 31, 2024 and December 31, 2023, respectively
67. 67(2) Interest rate swaps balance represents the fair value of our commercial loan back-to-back swaps
68. 68The aggregate amount of deposits reclassified as loans was $0.7 million at December 31, 2024, and $0.2 million at December 31, 2023. Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation for credit losses
69. 69In 2024, the Company assumed short-term borrowings in the aggregate of $139.7 million as a result of the merger with FNCB which included $25.0 million in Bank Term Funding Program advances and FHLB overnight borrowings
70. 70On June 1, 2020, the Company sold $33.0 million aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes qualify as Tier 2 capital for regulatory capital purposes
71. 71Investment securities: The fair values of marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model and quoted market prices
72. 72Individually evaluated loans: Fair values for individually evaluated loans are estimated using underlying collateral values, where applicable
73. 73U.S. government-sponsored enterprises
74. 74Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal
75. 75Risk Management Objective of Using Derivatives
76. 76Cash Flow Hedges of Interest Rate Risk
77. 77Fair Value Hedges of Interest Rate Risk
78. 78For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income
79. 79Fair Values of Derivative Instruments on the Balance Sheet
80. 80Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income and Comprehensive Income (Loss)
81. 81Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income (Loss)
82. 82Credit-risk-related Contingent Features
83. 83awards that had been granted under the FNCB 2023 Equity Incentive Plan after September 27, 2023, the date of the Merger Agreement. These awards will be expensed over the remaining life of 57 months
84. 84In 2024, the Company granted 8,895 time based restricted stock awards, under the 2023 Plan. In 2023, the Company granted 18,222 performance based restricted stock units and 5,206 time based restricted stock awards, under the 2023 Plan
85. 85The Company sponsors a separate ESOP and Retirement Profit Sharing 401(k) Plan. The Company also maintains SERPs and an employees’ pension plan, which is currently frozen
86. 86The increase in the SERP was due to the Company’s assumption of FNCB’s $2.0 million SERP liability in the merger July 1, 2024. Additional expense associated with the plan totaled $0.1 million for the year ended December 31, 2024
87. 87The accumulated benefit obligation for the defined benefit pension plan was $12.7 million and $13.8 million at December 31, 2024 and 2023, respectively
88. 88Amortization of unrecognized net loss
89. 89The expected long-term return on plan assets was determined using average historical returns of the Company’s plan assets
90. 90Cash and cash equivalents
91. 91The accounting policies of the single business unit are the same as provided in Note 1 - "Summary of Significant Accounting Policies" and our segment assets are the same as assets presented in the Consolidated Balance Sheets
92. 92Although subject to the aforementioned regulatory restrictions, the Company’s consolidated retained earnings at December 31, 2024 and 2023 were not restricted under any borrowing agreement as to payment of dividends or reacquisition of common stock
93. 93(2) Represents amounts reclassified out of accumulated comprehensive income (loss) and included in the computation of net periodic pension expense. Refer to Note 18 included in these consolidated financial statements
94. 94Evaluation of Disclosure Controls and Procedures
95. 95MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
96. 96Furthermore, due to changes in conditions, the effectiveness of internal controls may vary over time. Our internal auditor reviews, evaluates and makes recommendations on policies and procedures, which serves as an integral, but independent, component of our internal control
97. 97Based on its assessment, management believes that our internal control over financial reporting was effective as of December 31, 2024
98. 98Changes in Internal Control Over Financial Reporting
99. 99Item 9B.Other Information
100. 100Directors, Executive Officers and Corporate Governance
101. 101Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
102. 102Certain Relationships and Related Transactions, and Director Independence
103. 103Principal Accountant Fees and Services
104. 104Exhibits, Financial Statement Schedules
105. 105Report of Independent Registered Public Accounting Firm (PCAOB ID: 23)
106. 106Peoples Financial Services Corp. Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the registrant’s Form 10-K filed with the Commission on March 17, 2014)
107. 107Consent of Baker Tilly US, LLP
108. 108Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)