10-Q 1 pfis-20240331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2024

or

Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from

001-36388

(Commission File Number)

PEOPLES FINANCIAL SERVICES CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2391852

(State of

incorporation)

(IRS Employer

ID Number)

150 North Washington Avenue, Scranton, PA

18503

(Address of principal executive offices)

(Zip code)

(570) 346-7741

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common stock, $2.00 par value

PFIS

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes      No  

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 7,057,258 at April l, 2024.

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

For the Quarter Ended March 31, 2024

Contents

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

Financial Statements

Consolidated Balance Sheets at March 31, 2024 (Unaudited) and December 31, 2023 (Unaudited)

3

Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2024 and 2023 (Unaudited)

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2024 and 2023 (Unaudited)

5

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2024 and 2023 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

Item 4.

Controls and Procedures

56

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

56

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

57

Item 6.

Exhibits

57

Signatures

58

2

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

    

March 31, 2024

    

December 31, 2023

 

Assets:

Cash and cash equivalents

Cash and due from banks

$

32,009

$

33,524

Interest-bearing deposits in other banks

8,259

9,141

Federal funds sold

 

69,700

 

144,700

Total cash and cash equivalents

109,968

187,365

 

Investment securities:

Available for sale: Amortized cost of $448,381 and $450,454, respectively, net of allowance for credit losses of $0 at March 31, 2024 and December 31, 2023

 

394,413

 

398,927

Equity investments carried at fair value

91

98

Held to maturity: Fair value of $69,989 and $71,698, respectively, net of allowance for credit losses of $0 at March 31, 2024 and December 31, 2023

 

83,306

 

84,851

Total investment securities

 

477,810

 

483,876

Loans

 

2,858,412

 

2,849,897

Less: allowance for credit losses

 

22,597

 

21,895

Net loans

 

2,835,815

 

2,828,002

Loans held for sale

300

250

Goodwill

 

63,370

 

63,370

Premises and equipment, net

 

59,097

 

61,276

Bank owned life insurance

49,673

49,397

Deferred tax assets

14,241

13,770

Accrued interest receivable

 

13,565

 

12,734

Other assets

 

45,299

 

42,249

Total assets

$

3,669,138

$

3,742,289

Liabilities:

Deposits:

Noninterest-bearing

$

623,408

$

644,683

Interest-bearing

 

2,580,530

 

2,634,354

Total deposits

 

3,203,938

 

3,279,037

Short-term borrowings

 

20,260

 

17,590

Long-term debt

 

25,000

 

25,000

Subordinated debt

33,000

33,000

Accrued interest payable

 

5,327

 

5,765

Other liabilities

 

41,621

 

41,475

Total liabilities

 

3,329,146

 

3,401,867

Stockholders’ equity:

Common stock, par value $2.00, authorized 25,000,000 shares, issued and outstanding 7,057,258 shares at March 31, 2024 and 7,040,852 shares at December 31, 2023

 

14,122

 

14,093

Capital surplus

 

122,162

 

122,130

Retained earnings

 

249,123

 

248,550

Accumulated other comprehensive loss

 

(45,415)

 

(44,351)

Total stockholders’ equity

 

339,992

 

340,422

Total liabilities and stockholders’ equity

$

3,669,138

$

3,742,289

See notes to unaudited consolidated financial statements

3

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,

    

2024

    

2023

Interest income:

Interest and fees on loans:

Taxable

$

34,041

$

30,049

Tax-exempt

 

1,418

 

1,389

Interest and dividends on investment securities:

Taxable

 

1,918

 

2,124

Tax-exempt

 

371

 

457

Dividends

 

2

 

2

Interest on interest-bearing deposits in other banks

 

120

 

14

Interest on federal funds sold

 

1,127

 

243

Total interest income

 

38,997

 

34,278

Interest expense:

Interest on deposits

 

18,704

 

9,678

Interest on short-term borrowings

 

262

 

1,086

Interest on long-term debt

 

270

 

27

Interest on subordinated debt

443

443

Total interest expense

 

19,679

 

11,234

Net interest income

 

19,318

 

23,044

Provision for credit losses

 

708

 

1,264

Net interest income after provision for credit losses

 

18,610

 

21,780

Noninterest income:

Service charges, fees, commissions and other

 

2,036

 

1,965

Merchant services income

 

115

 

118

Commission and fees on fiduciary activities

 

551

 

557

Wealth management income

 

361

 

398

Mortgage banking income

 

92

 

103

Increase in cash surrender value of life insurance

 

279

 

258

Interest rate swap (loss) gain

(24)

223

Net losses on equity investment securities

(8)

 

(29)

Net gains on sale of investment securities available for sale

 

 

81

Total noninterest income

 

3,402

 

3,674

Noninterest expense:

Salaries and employee benefits expense

 

8,839

 

9,080

Net occupancy and equipment expense

 

4,725

 

4,103

Acquisition related expenses

 

486

 

Amortization of intangible assets

 

 

29

Professional fees and outside services

688

619

FDIC insurance and assessments

594

501

Donations

409

397

Other expenses

 

2,327

 

1,757

Total noninterest expense

 

18,068

 

16,486

Income before income taxes

 

3,944

 

8,968

Provision for income tax expense

 

478

 

1,389

Net income

 

3,466

 

7,579

Other comprehensive (loss) income:

Unrealized (loss) gain on investment securities available for sale

 

(2,441)

 

10,836

Reclassification adjustment for net gain on sales included in net income

 

 

(81)

Change in derivative fair value

1,079

(1,970)

Other comprehensive (loss) income

 

(1,362)

8,785

Income tax (benefit) expense related to other comprehensive (loss) income

 

(298)

 

1,891

Other comprehensive (loss) income, net of income tax (benefit) expense

 

(1,064)

 

6,894

Comprehensive income

$

2,402

$

14,473

Per share data:

Net income:

Basic

$

0.49

$

1.06

Diluted

$

0.49

$

1.05

Weighted average common shares outstanding:

Basic

 

7,052,912

 

7,157,553

Diluted

 

7,102,112

 

7,198,970

Dividends declared

$

0.41

$

0.41

See notes to unaudited consolidated financial statements

4

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

    

    

    

    

Accumulated

Other

Common

Capital

Retained

Comprehensive

    

Stock  

    

Surplus  

    

Earnings  

    

Loss

    

Total

Balance, January 1, 2024

$

14,093

$

122,130

$

248,550

$

(44,351)

$

340,422

Net income

 

3,466

3,466

Other comprehensive loss, net of tax

(1,064)

(1,064)

Cash dividends declared: $0.41 per common share

 

(2,893)

(2,893)

Stock compensation, including tax effects and expenses

61

61

Restricted stock issued: 14,434 shares

29

(29)

Balance, March 31, 2024

$

14,122

$

122,162

$

249,123

$

(45,415)

$

339,992

    

    

    

    

Accumulated

Other

Common

Capital

Retained

Comprehensive

    

Stock  

    

Surplus  

    

Earnings  

    

Loss

    

Total

Balance, January 1, 2023

$

14,321

$

126,850

$

230,515

$

(56,336)

$

315,350

Cumulative impact of adoption of ASC 326, net of tax

2,364

2,364

Net income

 

7,579

7,579

Other comprehensive income, net of tax

 

6,894

6,894

Cash dividends declared: $0.41 per common share

 

(2,936)

(2,936)

Stock compensation, including tax effects and expenses

 

209

209

Restricted stock issued: 17,640 shares.

35

(35)

Share retirement: 16,573 shares

(33)

(793)

(826)

Balance, March 31, 2023

$

14,323

$

126,231

$

237,522

$

(49,442)

$

328,634

5

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,

    

2024

    

2023

Cash flows from operating activities:

Net income

$

3,466

$

7,579

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of premises and equipment

 

749

 

703

Amortization of right-of-use lease asset

140

124

Amortization of deferred loan fees, net

 

164

150

Amortization of intangibles

 

 

29

Amortization of low income housing partnerships

125

121

Provision for credit losses

 

708

 

1,264

Net unrealized loss on equity investment securities

8

29

Loans originated for sale

 

(300)

(1,244)

Proceeds from sale of loans originated for sale

 

252

1,245

Net gain on sale of loans originated for sale

 

(2)

(1)

Net amortization of investment securities

 

218

 

290

Net gain on sale of investment securities available for sale

(81)

Loss (gain) on sale of premises and equipment

 

9

 

(14)

Increase in cash surrender value of life insurance

 

(279)

 

(258)

Deferred income tax (benefit) expense

 

(174)

 

183

Stock compensation, including tax effects and expenses

 

61

 

209

Net change in:

Accrued interest receivable

 

(831)

 

37

Other assets

 

(1,450)

 

(3,019)

Accrued interest payable

 

(438)

 

1,401

Other liabilities

 

800

 

(4,198)

Net cash provided by operating activities

 

3,226

 

4,549

Cash flows from investing activities:

Proceeds from sales of investment securities available for sale

 

 

67,362

Proceeds from repayments of investment securities:

Available for sale

 

1,881

 

2,791

Held to maturity

 

1,520

 

1,446

Net redemption of restricted equity securities

 

199

 

4,743

Net increase in loans

 

(8,685)

 

(88,086)

Purchases of premises and equipment

 

(216)

 

(2,506)

Proceeds from the sale of premises and equipment

 

14

Net cash used in investing activities

 

(5,301)

 

(14,236)

Cash flows from financing activities:

Net (decrease) increase in deposits

 

(75,099)

 

189,369

Proceeds from long-term debt

25,000

Repayment of long-term debt

 

 

(555)

Net increase (decrease) in short-term borrowings

 

2,670

 

(97,650)

Retirement of common stock

 

(826)

Cash dividends paid

 

(2,893)

 

(2,936)

Net cash (used in) provided by financing activities

 

(75,322)

 

112,402

Net (decrease) increase in cash and cash equivalents

 

(77,397)

 

102,715

Cash and cash equivalents at beginning of period

 

187,365

 

37,868

Cash and cash equivalents at end of period

$

109,968

$

140,583

6

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,

    

2024

    

2023

Supplemental disclosures:

Cash paid during the period for:

Interest

$

20,117

$

9,833

Income taxes

 

24

 

47

Noncash items:

Cumulative effect of adoption of ASC 326 on retained earnings, net of tax

2,364

Transfers of fixed assets to other real estate

1,497

Initial recognition of right-of-use assets

(785)

Initial recognition of lease liability

(820)

See notes to unaudited consolidated financial statements

7

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

1. Summary of significant accounting policies:

Nature of operations

Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company (“Peoples Bank”), collectively, the “Company” or “Peoples”. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within Allegheny, Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna and Wyoming Counties of Pennsylvania, Middlesex County of New Jersey and Broome County of New York.

Basis of presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the consolidated operating results or financial position of the Company. The consolidated operating results and financial position of the Company for the three months ended and as of March 31, 2024, are not necessarily indicative of the results of consolidated operations and financial position that may be expected in the future.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for credit losses, fair value of financial instruments, the valuation of deferred tax assets, and impairment of goodwill. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2023.

Pending Merger with FNCB Bancorp, Inc.

On September 27, 2023, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with FNCB Bancorp, Inc. (FNCB), a Pennsylvania corporation and the parent company of FNCB Bank, pursuant to which FNCB will merge with and into the Company, with the Company as the surviving entity. Immediately after such merger, FNCB Bank will merge with and into Peoples Bank, with Peoples Bank as the surviving bank and a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, shareholders of FNCB will be entitled to receive a fixed exchange ratio of 0.1460 shares of the Company's common stock for each share of the FNCB’s common stock. The shareholders of both Peoples and FNCB approved the merger at their respective special shareholders’ meetings held of March 22, 2024. On October 27, 2023, the Company and FNCB jointly filed a Federal Deposit Insurance Corporation ("FDIC") Interagency Bank Merger Application with the FDIC New York Regional Office and the Company filed a Pennsylvania Bank Merger Application with the Pennsylvania Department of Banking. Completion of the merger remains subject to customary closing conditions, including receipt of all required regulatory approvals.

The Merger Agreement provides certain termination rights for both the Company and FNCB and further provides that a termination fee of $4.8 million will be payable by either the Company or FNCB, as applicable, upon termination of the Merger Agreement under certain circumstances. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Merger Agreement filed by the Company as Exhibit 2.1 to this Quarterly

8

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

Report on Form 10-Q. Pending regulatory approval, the Company expects the merger to be consummated in the second half of 2024, however, there can be no assurance that the transaction will be consummated by such date, or at all.

Second Quarter Dividend Declaration

On April 26, 2024, the Board of Directors declared a second quarter dividend of $0.41 per share. The dividend is payable on June 14, 2024 to shareholders of record as of May 31, 2024.

Recent accounting standards

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the required effective dates. The following should be read in conjunction with "Note 1 Summary of significant accounting policies" of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2023.

Unless otherwise discussed, management believes the impact of any recently issued standards, including those issued but not yet effective, will not have a material impact on the Company’s consolidated financial statements.

ASU 2024-01, “Compensation – Stock Compensation (Topic 718) – Scope Application of Profits Interest and Similar Awards” (ASU 2024-01) clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a significant impact on the consolidated financial statements.

ASU 2024-02 “Codification Improvements” (“ASU 2024-02”) amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on the financial statements.

2. Other comprehensive (loss) income:

The components of other comprehensive loss (income) and their related tax effects are reported in the consolidated statements of income and comprehensive income. The accumulated other comprehensive loss included in the consolidated balance sheets relates to net unrealized gains and losses on investment securities available for sale, benefit plan adjustments and adjustments to derivative fair values.

9

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

The components of accumulated other comprehensive loss included in stockholders’ equity at March 31, 2024 and December 31, 2023 are as follows:

(Dollars in thousands)

    

March 31, 2024

    

December 31, 2023

 

Net unrealized loss on investment securities available for sale

$

(53,968)

$

(51,527)

Income tax benefit

 

(11,804)

 

(11,270)

Net of income taxes

 

(42,164)

 

(40,257)

Benefit plan adjustments

 

(4,370)

 

(4,370)

Income tax benefit

 

(956)

 

(956)

Net of income taxes

 

(3,414)

 

(3,414)

Derivative adjustments

 

208

 

(871)

Income tax expense (benefit)

 

45

 

(191)

Net of income taxes

 

163

 

(680)

Accumulated other comprehensive loss

$

(45,415)

$

(44,351)

3. Earnings per share:

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three months ended March 31, 2024 and 2023:

(Dollars in thousands, except per share data)

2024

2023

For the Three Months Ended March 31,

    

Basic  

    

Diluted  

    

Basic  

    

Diluted  

Net income

    

$

3,466

    

$

3,466

    

$

7,579

    

$

7,579

Average common shares outstanding

 

7,052,912

 

7,102,112

 

7,157,553

 

7,198,970

Earnings per share

$

0.49

$

0.49

$

1.06

$

1.05

10

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

4. Investment securities:

The amortized cost and fair value of investment securities aggregated by investment category at March 31, 2024 and December 31, 2023 are summarized as follows:

March 31, 2024

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

 

(Dollars in thousands)

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available for sale:

U.S. Treasury securities

$