Peoples Financial Services Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company 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. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparison |
|---|---|---|
| Net income | $6.7; diluted EPS $0.95 | Down 32.3% from $10.0 and $1.38 per diluted share in Q3 2022 |
| Nine-month net income | $23.8; diluted EPS $3.31 | Down 17.5% from $29.0 and $4.01 in 2022 |
| Net interest income | $21.3 GAAP; $21.8 fully tax-equivalent (FTE) | FTE down from $25.5 in Q3 2022 |
| Net interest margin | 2.44% FTE | 3.08% in Q3 2022 |
| Noninterest income / expense | $3.7 / $17.1 | Income up $0.4; expense up $1.1 year over year |
| Assets / loans | $3,825.8 / $2,871.0 | Assets up $272.3 and loans up $140.9 from December 31, 2022 |
| Deposits / cash and equivalents | $3,365.1 / $254.5 | Deposits up $318.5 from year-end |
| Borrowings / equity | $85.0 total borrowings; $324.4 equity | Borrowings down $63.5; equity up $9.0 from year-end |
- For the first nine months, GAAP net interest income was $66.5, versus $71.3 in 2022. Interest income rose, but higher funding costs more than offset it: interest expense increased to $43.3 from $8.4. The nine-month FTE net interest margin was 2.62%, versus 3.04%.
- Q3 annualized return on average assets was 0.72%, versus 1.14% a year earlier; return on average equity was 8.05%, versus 12.69%. The non-GAAP efficiency ratio was 63.5%, compared with 54.9%.
- Nine-month operating cash flow was $24.3, investing cash outflow was $48.1, and financing cash inflow was $240.4. Cash and cash equivalents increased $216.7 during the period, primarily reflecting deposit growth and other financing inflows.
- The allowance for credit losses was $23.0, or 0.80% of loans, versus $27.5, or 1.01%, at year-end 2022. Nonperforming loans were $3.8 (0.13% of loans), compared with $4.1 at year-end; nonaccrual loans increased to $3.1 from $2.0.
- The Bank reported a 13.00% Tier 1 risk-based capital ratio, 13.85% total risk-based capital ratio and 9.47% Tier 1 leverage ratio, and was categorized as well-capitalized.
Material changes and notable items
- Deposit mix and funding costs: Interest-bearing deposits rose $400.2, while noninterest-bearing deposits declined $81.7 from year-end. Brokered deposits increased $248.0; they represented 8.1% of deposits at quarter-end. Estimated uninsured deposits were $955.9, or 28.4% of deposits, down from 36.9% at year-end. The nine-month cost of interest-bearing deposits rose to 2.15% from 0.39%.
- Liquidity actions: The company held $205.7 of federal funds sold at quarter-end and reported $254.5 of cash and cash equivalents. It used $67.4 of proceeds from securities sales to reduce higher-cost short-term borrowings. Available FHLB borrowing capacity was $828.3; management described liquidity as strong. The company also reported $266.5 available at the Federal Reserve discount window and $4.0 through the Bank Term Funding Program.
- Investment marks: Available-for-sale securities were $382.2, with $71.0 of gross unrealized losses and $55.7 of net unrealized losses after tax. Held-to-maturity securities had $17.4 of unrealized losses and a fair value of $68.8 versus $86.2 amortized cost. Management said it did not intend to sell and did not believe it would be required to sell these securities before recovery; a forced sale could crystallize losses.
- Credit accounting: The company adopted CECL on January 1, 2023, reducing the loan allowance by $3.0 and increasing equity by $2.4 after tax. It also disclosed an immaterial prior-period error: the March 2023 allowance had been overstated by $1.5; the company corrected it in Q2 and did not amend the prior filing.
- Shareholder returns: The company declared dividends of $1.23 per share through September, versus $1.18 in the comparable 2022 period, and repurchased 131,686 shares for $5.8. The repurchase plan was terminated following the announced merger. A $0.41 fourth-quarter dividend was declared, payable December 15, 2023.
Outlook, risks and contingencies
- Management cited inflation, elevated interest rates, industry-wide banking volatility, competition for deposits and potential recession as important uncertainties. It said loan growth had moderated and was being intentionally restrained to build liquidity and capital. Management expected deposit funding costs to continue increasing, though possibly at a slower pace.
- Management’s interest-rate simulations indicated exposures within internal policy limits. Its sensitivity analysis projected a 0.6% reduction in 12-month net interest income under an instantaneous 100-basis-point rate increase; a sustained falling-rate environment was identified as a greater longer-term NII risk.
- Pending FNCB merger: Under the September 27 agreement, FNCB would merge into Peoples and FNCB Bank into Peoples’ bank subsidiary. FNCB shareholders would receive 0.1460 Peoples shares per FNCB share. Regulatory and shareholder approvals are required; the companies filed regulatory applications in October and expected closing in the first half of 2024, with no assurance of completion. Certain termination circumstances carry a $4.8 termination fee. Management projected a combined company with nearly $5.5 billion in assets, 59% accretion to Peoples’ estimated 2025 EPS including synergies, and a 51% dividend increase; these are transaction projections, not guaranteed results.
- Merger risks include approval delays or failure, integration costs and execution, loss of customers or key personnel, management distraction, litigation, and possible termination expenses. Broader risks include deposit outflows, uninsured-deposit sensitivity, unrealized securities losses, higher regulatory and FDIC assessment costs, credit deterioration, rate changes, cyber risk and economic weakness.
- Management reported no legal proceedings expected to have a material effect on results, liquidity or financial position. Disclosure controls were assessed as effective; the company reported no material control changes other than controls implemented for CECL.
Important facts for investors to verify
- Track deposit composition, brokered and uninsured deposit levels, deposit pricing, and whether liquidity remains adequate as funding costs change.
- Review the FNCB merger’s regulatory and shareholder approvals, final proxy/prospectus disclosures, closing conditions, costs, and whether projected synergies and accretion remain achievable.
- Monitor securities portfolio fair values and unrealized losses, including any liquidity needs that could require securities sales.
- Assess loan growth, commercial real estate concentrations, nonaccrual trends and the allowance methodology, including the effects of the CECL transition and prior-period correction.
- Compare future net interest margin, earnings, efficiency and interest-rate sensitivity with management’s expectations; the filing does not provide conventional company earnings guidance.