Peoples Financial Services Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company operates a community bank serving Pennsylvania and New York markets.
Financial performance and position
- Q3 earnings: Net income was $6.717 million, up 25.6% from $5.350 million; diluted EPS rose to $0.91 from $0.72. Nine-month net income was $18.528 million, up 17.2%, and diluted EPS was $2.50 versus $2.14.
- Interest income and margins: Q3 net interest income was $17.953 million, up 7.8%; nine-month net interest income was $52.791 million, up 8.6%. On a tax-equivalent basis, net interest margin declined to 3.57% from 3.73% in Q3 and to 3.57% from 3.71% for nine months. Net interest spread also narrowed.
- Noninterest items and costs: Q3 noninterest income was $3.253 million, down 11.1%; nine-month noninterest income fell 24.1% to $10.488 million, chiefly reflecting the prior-year merchant-services sale and related $2.278 million gain. Nine-month noninterest expense increased 0.7% to $39.114 million, including higher compensation and occupancy costs tied to market expansion.
- Assets and lending: Total assets were $2.258 billion at September 30, up 4.1% from year-end 2017. Gross loans were $1.779 billion, up 5.1%; after the $20.413 million allowance, net loans were $1.759 billion. Commercial real estate lending drove growth, while consumer loans declined.
- Credit quality: The allowance was 1.15% of gross loans, compared with 1.12% at year-end. Nine-month net charge-offs were $1.697 million, including a $1.154 million commercial real estate charge-off. Nonperforming assets were $11.502 million, or 0.65% of loans and foreclosed assets, versus $11.578 million and 0.68% at year-end.
- Deposits, debt and liquidity: Deposits increased 6.3% in Q3 and 6.3% from year-end to $1.828 billion. The nine-month increase included $50 million of callable brokered deposits. Short-term borrowings were $99.450 million, down $24.225 million from year-end; long-term debt was $48.461 million. Cash and cash equivalents were $40.595 million. Nine-month operating cash flow was $24.360 million, investing cash outflow $97.349 million, and financing cash inflow $76.096 million.
- Capital and distributions: Stockholders’ equity was $272.971 million. The Bank reported a 9.71% Tier 1 leverage ratio, 11.68% common equity Tier 1 and Tier 1 risk-based ratios, and 12.82% total risk-based capital; management stated the Bank was well-capitalized. Dividends declared were $0.33 per share in Q3 and $0.98 year to date.
Changes, outlook and notable matters
- Compared with Q3 2017, earnings benefited from higher average earning assets and a lower tax burden, partly offset by higher funding costs and lower noninterest income. The effective tax rate was 11.8% for both the three- and nine-month 2018 periods, versus 19.4% and 21.0%, respectively, in 2017, following the reduction in the federal statutory rate to 21%.
- Funding costs increased as rates rose: the nine-month cost of interest-bearing liabilities was 0.81%, versus 0.60%. Management reported a 3.57% tax-equivalent margin for the first nine months, versus 3.71% a year earlier.
- Management said loan growth was meeting projections and described asset quality and liquidity as adequate. Its interest-rate simulation indicated net interest income could increase 0.5% under an instantaneous 100-basis-point increase; the company cautioned that models and static gap analysis have limitations. No formal earnings guidance was provided.
- Unusual or period-specific items included a $0.291 million pretax gain on the 2018 credit-card portfolio sale; the 2017 period included a $2.278 million gain on the merchant-services business sale. Available-for-sale securities had a $4.448 million net unrealized loss in accumulated other comprehensive loss, compared with $0.977 million at year-end, primarily reflecting market-rate movements. Management reported no impairment charge on the securities.
- Key risks identified include interest-rate movements, local economic and real-estate conditions, loan and securities credit quality, deposit flows and competition, regulatory and accounting changes, third-party service-provider performance, and cybersecurity. Management reported no material change in previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether commercial real estate growth and the related concentration and underwriting risks remain manageable.
- Credit trends following the large commercial real estate charge-off, including nonperforming loans, restructurings, charge-offs and allowance adequacy.
- Deposit stability and the cost and renewal terms of brokered and other rate-sensitive funding as market rates change.
- Whether loan yields and asset growth can offset higher deposit and borrowing costs and the narrowing net interest margin.
- The effects of securities valuation changes and adoption of the expected-credit-loss standard, which the company said could significantly affect credit-loss accounting.