Peoples Financial Services Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022 unless noted. Peoples is a Pennsylvania bank holding company operating Peoples Security Bank and Trust, with 28 community banking offices across Pennsylvania, New Jersey, and New York.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net interest income (GAAP) | $23.0 million | $22.6 million in Q1 2022 |
| Net income; diluted EPS | $7.6 million; $1.05 | $9.6 million; $1.33 in Q1 2022 |
| Net interest margin (tax-equivalent) | 2.81% | 2.97% in Q1 2022 |
| Efficiency ratio (non-GAAP) | 60.6% | 53.6% in Q1 2022 |
| Assets; loans | $3.68 billion; $2.82 billion | Assets up $125.0 million; loans up $87.9 million from year-end |
| Deposits | $3.24 billion | Up $189.4 million from year-end |
| Cash and cash equivalents | $140.6 million | Up $102.7 million from year-end |
| Stockholders’ equity | $328.6 million | $315.4 million at year-end |
| Allowance for credit losses | $25.4 million; 0.90% of loans | $27.5 million; 1.01% at year-end |
- Interest income rose to $34.3 million from $24.6 million year over year, but interest expense increased much faster, to $11.2 million from $1.9 million. Higher deposit and borrowing costs offset much of the benefit from loan growth and higher asset yields.
- Provision for credit losses was $1.3 million, versus $0.3 million in Q1 2022. Noninterest income increased to $3.7 million from $3.4 million; noninterest expense rose to $16.5 million from $14.3 million.
- Operating cash flow was $4.5 million, compared with $9.1 million in Q1 2022. Investing activities used $14.2 million; financing activities provided $112.4 million, primarily reflecting deposit growth. Cash and equivalents ended the quarter at $140.6 million.
- Short-term borrowings were $17.3 million, down from $114.9 million at year-end; long-term debt was $25.0 million, up from $0.6 million. Subordinated debt remained $33.0 million. Total deposits included $757.4 million, or 23.4%, uninsured by the FDIC.
- The Bank’s Tier 1 leverage ratio was 9.66%; Tier 1 and total risk-based capital ratios were 12.00% and 12.88%. The Bank reported that it remained well-capitalized.
Material changes and notable items
- Loans grew, led by commercial real estate, residential real estate, and indirect auto lending. Commercial real estate loans increased $73.1 million during the quarter.
- Deposits rose $189.4 million, including $161.4 million in brokered deposits; interest-bearing deposits increased while noninterest-bearing deposits declined. The company added $166.9 million of callable brokered CDs to strengthen liquidity.
- The company sold $65.6 million par value of investment securities, receiving $67.4 million, and used proceeds to reduce higher-cost short-term borrowings. Available-for-sale securities declined to $418.1 million. Their net unrealized loss was $43.5 million after tax; held-to-maturity securities had $12.6 million of unrealized losses.
- Accumulated other comprehensive loss improved to $49.4 million from $56.3 million at year-end, chiefly as available-for-sale securities’ unrealized losses narrowed. Comprehensive income was $14.5 million, compared with a comprehensive loss of $16.5 million in Q1 2022.
- Effective January 1, 2023, the company adopted CECL. Adoption reduced the loan allowance by approximately $3.3 million and increased equity by $2.4 million net of tax; prior-year results use the previous credit-loss method and are not directly comparable in all respects.
- Nonperforming assets fell to $1.9 million from $4.1 million at year-end. Management attributed the decline partly to accounting changes that removed troubled debt restructurings from that category. Net charge-offs were $9,000 for the quarter.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expected funding costs to continue rising amid rate increases and deposit competition; it also expected asset yields to reprice upward. Management noted that higher mortgage rates were reducing mortgage origination and sale activity.
- Management described the liquidity position as strong: $140.6 million in cash and equivalents, $225.0 million available at the Federal Reserve discount window, $278.2 million of unencumbered available-for-sale securities, and $863.8 million of unused FHLB borrowing capacity. It said it was monitoring deposit flows and liquidity needs following banking-sector failures and volatility.
- Risks include possible deposit outflows, the relatively high uninsured-deposit share, continued increases in funding costs, interest-rate sensitivity, recession and credit deterioration, and potential losses if securities must be sold before recovery. Management noted that a sustained falling-rate scenario presents the greatest longer-term modeled risk to net interest income; simulated exposures were within company policy limits.
- Management said the company does not intend to sell its securities and does not expect to be forced to sell them before recovery. Nonetheless, sales to meet liquidity needs could realize losses and adversely affect capital and results. No material legal proceedings were reported.
- The Board declared a $0.41-per-share second-quarter dividend, payable June 15, 2023. The company temporarily suspended its share repurchase plan on April 27, 2023.
- The company had approximately $7 million in LIBOR-indexed loans not yet transitioned; borrowers had been notified that conversion would occur by June 30, 2023. Disclosure controls were assessed as effective; CECL adoption resulted in new and modified financial-reporting controls.
Important facts for investors to verify
- Whether deposit growth persists without increased reliance on brokered deposits, and how uninsured deposits and customer concentration evolve.
- Whether deposit pricing and other funding costs continue to outpace loan and securities yield increases, and the resulting effect on net interest margin and earnings.
- Credit performance in the growing commercial real estate portfolio, future CECL allowance requirements, and the treatment of delinquent or restructured loans.
- Available liquidity under stress and the potential capital impact of any securities sales; review the duration and unrealized losses in both securities portfolios.
- Progress on LIBOR transition, regulatory or FDIC assessment changes, and any updates to the dividend or suspended share repurchase program.