KBRA assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to Peoples Financial Services Corp. (NASDAQ:PFIS)("Peoples" or "the company"). Additionally, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to its subsidiary, Peoples Security Bank and Trust Company. The Outlook for all long-term ratings is Stable.
Peoples' ratings are supported by its strong funding profile that is primarily comprised of core deposits, which reflects a favorable mix, and, in turn, slightly below peer average funding costs (2.58% during 1Q25). The attractive funding base has historically helped to support a respectable NIM despite below average loan yields, which, combined with prudent expense management and negligible credit costs, in part, due to credit quality outperformance over a long period of time, has resulted in solid earnings capacity over the years. While profitability was weakened in 2022 and 2023, due to the impact of the higher interest rate environment, which negatively affected NIM (tracking between 2.25%-2.50%), the recent acquisition of FNCB in 3Q24 has provided meaningful benefits to the margin through purchase accounting accretion (added 32 bps to NIM in 1Q25), balance sheet remixing (selling securities and de-leveraging borrowings) and expected cost-savings (30% of legacy FNCB's expense base). As such, management anticipates ROA to return to a more normalized level in the low-to-mid 1.0% range throughout 2025 (1.19% for 1Q25), which is considered solid within the rating category. PFIS' outperformance in asset quality through multiple credit cycles is supported by management's prudent and conservative underwriting standards as well as deep understanding of local operating markets. As such, NPAs and NCOs have averaged 0.28% and 0.06%, respectively, over the last five years. Furthermore, PFIS largely outperformed peers during the GFC with a peak NCO ratio of 0.43%. The recent uptick in NPAs as of 1Q25 is primarily related to loans acquired from FNCB, though it remains well contained at 0.55%. We recognize that the company carries a slightly higher concentration in CRE at 311% of total risk-based capital, though exposure to investor office is limited at 6% of total loans. While PFIS has historically managed capital in line with peers, the FNCB acquisition resulted in the consolidated CET1 ratio to fall to 10.6% as of 1Q25. Management has noted a key focus on rebuilding capital metrics, and we expect capital metrics to return closer to pre-acquisition levels through 2025 benefiting from the combined institution's improved earnings profile, slower loan growth, and no share repurchases. The company's strong funding profile is 93% core deposit funded (including jumbo time deposits) with a minimal reliance on wholesale funding sources, representing 8% of total funding. Additionally, PFIS maintains a solid liquidity position with a loan to deposit ratio that tracks in the high 80% to low 90% range, providing a degree of funding flexibility.
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Methodologies
- Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
- ESG Global Rating Methodology
Disclosures
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan's Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.
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