Peoples Financial Services Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited consolidated results. Peoples is a Pennsylvania bank holding company operating through Peoples Security Bank and Trust Company. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
- Q3 earnings: Net income was $8.3 million, up 16.3% from $7.1 million; diluted EPS was $1.14 versus $0.96. Nine-month net income was $21.2 million, up 2.2%, with diluted EPS of $2.87 versus $2.79.
- Revenue and net interest: Net interest income was $19.9 million in Q3, up from $19.2 million; nine-month net interest income was $60.0 million, up from $56.3 million. Noninterest income was $4.9 million in Q3 and $11.9 million year to date. Q3 and nine-month gains included investment-security sales of $0.5 million and $0.7 million, respectively.
- Margins: Tax-equivalent net interest margin fell to 3.19% in Q3 from 3.61% a year earlier, and to 3.35% for nine months from 3.60%. Lower asset yields outweighed lower funding costs. The nine-month tax-equivalent loan yield decreased to 4.25% from 4.75%.
- Credit costs: Provision for loan losses was $1.1 million in Q3 versus $0.7 million; nine-month provision rose to $6.4 million from $2.1 million. The allowance was $26.6 million, or 1.21% of loans (1.35% excluding PPP loans), versus $22.7 million, or 1.17%, at year-end 2019. Nine-month net charge-offs were $2.4 million versus $1.1 million.
- Expenses and returns: Noninterest expense decreased 0.7% in Q3 and 2.7% year to date. The reported efficiency ratio improved to 55.94% in Q3 from 59.65% and to 55.93% for nine months from 60.28%. Q3 ROA was 1.21% and ROE 10.58%; nine-month ROA was 1.07% and ROE 9.20%.
- Balance sheet and liquidity: Total assets were $2,805.7 million, up from $2,475.3 million at December 31, 2019. Loans were $2,188.5 million, including $217.5 million of PPP loans; excluding PPP, loan growth was $32.7 million. Deposits increased to $2,356.9 million from $1,971.5 million. Cash and equivalents were $166.2 million. Nine-month operating cash flow was $3.6 million versus $27.3 million; cash increased $135.1 million to $166.2 million.
- Debt and capital: Short-term borrowings were $50.0 million and long-term debt $20.3 million, down from $152.2 million and $32.7 million, respectively, at year-end. The company issued $33.0 million of 2030 subordinated notes at 5.375% for the first five years. Stockholders’ equity was $313.6 million, up from $299.0 million. The Bank reported a 10.43% Tier 1 leverage ratio, 13.24% Tier 1 risk-based ratio and 14.49% total risk-based ratio, and was deemed well-capitalized.
Material changes and notable items
- Q3 earnings benefited from lower funding costs, higher commercial-loan swap fees and a securities-sale gain; higher loan-loss provision and income taxes partly offset these benefits. Year-to-date earnings growth also reflected higher net interest income and lower expenses, partly offset by the increased credit provision.
- PPP lending supported reported loan growth and generated approximately $7.0 million of SBA processing fees to be recognized over loan lives or accelerated at forgiveness; $1.5 million had been recognized in loan interest and fees by September 30. Management expected most PPP loans to be forgiven during late 2020 and early 2021.
- By October 30, remaining payment deferrals had fallen to $23.7 million from $330.1 million at June 30; the remaining balance was 1.2% of loans excluding PPP. Most borrowers had resumed regular payments.
- Available-for-sale securities declined to $247.4 million from $330.5 million, including sales and maturities; their net unrealized gain increased to $8.1 million after tax. Three branches were permanently closed and consolidated in Q3; management expected approximately $0.5 million of annual expense savings.
- The company repurchased 154,477 shares for $5.9 million during the first nine months and declared dividends of $1.08 per share. A fourth-quarter dividend of $0.36 per share was declared October 30, payable December 15, 2020.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management expected asset yields to remain under pressure in the low-rate environment, while deposit costs could decline as time deposits mature and reprice. It described loan activity excluding PPP as potentially improving modestly, while emphasizing continuing uncertainty.
- COVID-19 remains the principal uncertainty. Management warned of possible borrower repayment problems, collateral-value declines, weaker loan demand and fee income, and elevated credit losses. Retail, hospitality, restaurant and food-service exposures were identified as vulnerable. Management considered the allowance adequate at September 30, but actual losses could differ materially.
- Nonperforming assets were $11.4 million, or 0.52% of loans net of allowance plus foreclosed assets, versus $10.5 million, or 0.54%, at year-end. Nonaccrual loans were $7.7 million; troubled debt restructurings were $3.0 million. Management reported new or downgraded commercial credits and a $0.9 million partial write-down of a nonaccrual relationship.
- Interest-rate risk remains material: falling rates can compress asset yields and net interest income. The company’s simulation estimated a 2.2% increase in 12-month net interest income under an immediate 100-basis-point increase; results were within company policy limits. The company also has LIBOR-linked contracts and is monitoring the planned transition to SOFR.
- Other risks include PPP forgiveness or SBA-guarantee deficiencies, utilization of $430.7 million in unfunded commitments and standby letters of credit, operational and cybersecurity risks from remote work and third-party dependencies, and possible PPP-related litigation. Management reported no legal proceedings expected to materially affect results, liquidity or financial position.
Important facts for investors to verify
- Whether deferred borrowers continue to resume payments and whether COVID-related downgrades, nonaccruals and charge-offs require further reserve increases.
- The pace and timing of PPP forgiveness, remaining fee recognition and any exposure to SBA guarantee challenges.
- Whether deposit costs can offset continued pressure on loan yields and net interest margin as rates remain low.
- How much reported loan and deposit growth is temporary or attributable to PPP, public-fund flows and other unusual pandemic-related balances.
- The sustainability of noninterest income, including swap fees and securities-sale gains, and the realization of branch-closure savings.
- Regulatory capital, liquidity and dividend capacity under more adverse credit and economic conditions.