Peoples Financial Services Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results. Peoples operates a community bank serving markets in Pennsylvania and New York.
Key financial results
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $22.8 | $23.9 | $46.2 | $47.7 |
| Net interest income | $20.3 | $20.5 | $41.1 | $40.1 |
| Provision (credit) for loan losses | $0.1 | $1.8 | ($0.4) | $5.3 |
| Noninterest income | $3.4 | $3.4 | $6.9 | $7.0 |
| Noninterest expense | $13.5 | $13.2 | $26.2 | $26.9 |
| Net income | $8.5 | $7.6 | $18.0 | $12.9 |
| Diluted EPS | $1.18 | $1.03 | $2.49 | $1.74 |
| Net interest margin, tax-equivalent | 2.96% | 3.36% | 3.05% | 3.43% |
Financial position, liquidity and capital
- At June 30, total assets were $3.00 billion, up $113.9 million from year-end 2020. Loans were $2.24 billion, up $58.8 million; excluding PPP loans and their net balance reduction, management reported loan growth of $94.1 million, or 9.5% annualized.
- Deposits rose $174.7 million, or 7.2%, to $2.61 billion. Cash and due from banks totaled $248.1 million. Available-for-sale securities were $336.4 million, including $161.9 million unencumbered, according to management.
- Total borrowings declined to $3.8 million from $64.8 million at year-end; no short-term borrowings were outstanding at quarter-end. Subordinated debentures remained $33.0 million.
- Six-month operating cash flow was $13.0 million; investing activities used $100.6 million and financing activities provided $107.5 million. Cash and cash equivalents increased $19.9 million to $248.1 million.
- Stockholders’ equity was $324.9 million. The Bank reported a 13.63% common equity Tier 1 risk-based capital ratio and a 14.88% total risk-based capital ratio; it stated it met requirements to be considered well-capitalized.
- The declared dividend was $0.37 per share for each quarter in the first half. On July 30, the board declared a third-quarter dividend of $0.38 per share, payable September 15, 2021.
Changes and drivers
- Six-month net income increased 40.1% year over year. Management attributed the improvement principally to lower funding costs, a $5.7 million reduction in loan-loss provision versus 2020, and lower six-month noninterest expense. The comparison also reflects the prior-year COVID-related credit reserve build.
- Q2 net interest income declined $0.2 million year over year, and tax-equivalent net interest margin fell 40 basis points to 2.96%. Lower earning-asset yields outweighed the benefit of reduced funding costs.
- Six-month net interest income increased $1.0 million, while tax-equivalent net interest margin declined 38 basis points to 3.05%. Management cited loan and deposit growth as volume benefits, partly offset by lower yields and rates.
- Nonperforming assets declined to $7.3 million, or 0.24% of assets, from $10.5 million, or 0.36%, at year-end. Nonaccrual loans were $4.6 million. The allowance for loan losses was $26.7 million, or 1.20% of loans (1.28% excluding PPP loans), versus $27.3 million, or 1.26%, at year-end.
- PPP loans outstanding were $154.4 million at June 30. The Bank originated $121.6 million of new PPP loans in the first half, while $156.9 million of loans were forgiven during that period.
- Accumulated other comprehensive income moved from $2.1 million at year-end to a $1.9 million loss, primarily reflecting reduced unrealized gains on securities as market rates rose.
Outlook, commentary and risks
- No formal earnings or financial guidance is provided. Management expected most remaining PPP balances to be forgiven during 2021 and intended to continue lowering deposit rates, while noting that asset yields could continue to decline as cash flows reprice.
- Management described liquidity as strong and said available funding sources were expected to meet obligations. It also reported unused FHLB borrowing capacity of $567.6 million and Federal Reserve discount-window availability of $146.7 million.
- COVID-19 restrictions had eased and most businesses had reopened at full capacity, but management warned that a resurgence, including the Delta variant, could bring renewed restrictions and adversely affect results, credit quality and cash flows. Four consumer loans totaling approximately $69,000 remained on deferral; two, totaling $32,000, were nonperforming.
- Interest-rate risk remains material. The filing’s simulation indicated that a 100-basis-point rate decline would reduce modeled net interest income by 2.0%, while a 100-basis-point increase would raise it by 3.5%; a 100-basis-point decline was also associated with a 24.4% reduction in economic value of equity. Management cautioned that models rely on assumptions and rates near floors can distort results.
- Other stated risks include local economic and real-estate conditions, credit quality, deposit flows, competition, regulatory and accounting changes, cyberattacks, third-party service-provider performance and the transition away from USD-LIBOR. The company was monitoring the proposed transition to SOFR.
- The filing reports $513.6 million of unused commitments, including unfunded loan facilities and standby letters of credit. Management stated expected draws could be funded in the normal course. Management reported no material legal proceedings and no material changes to previously disclosed risk factors.
- A $621,000 deferred-tax adjustment related to prior periods and the frozen pension plan increased the six-month effective tax rate; excluding it, management calculated a 16.1% rate versus 13.4% a year earlier.
Important facts for investors to verify
- Whether improving credit quality and low charge-offs persist, and whether the allowance remains adequate as pandemic-related support and deferrals wind down.
- How PPP forgiveness and loan growth affect future interest income, asset mix and reported loan growth.
- Whether margin compression continues as loan and securities yields reprice, and how deposit costs respond to changing rates.
- Whether elevated deposits remain stable and whether liquidity and capital remain strong as commitments are drawn and balance-sheet growth continues.
- The effect of the one-time $621,000 tax adjustment, securities valuation changes and interest-rate sensitivity on future earnings and equity.