Peoples Financial Services Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company provides community banking and related financial services through Peoples Security Bank and Trust Company.
Financial performance and position
- Q2 earnings: Net income was $7.14 million, up 19.9% from $5.96 million in Q2 2018; diluted EPS was $0.96 versus $0.81. Six-month net income was $13.56 million, up 14.8%, and diluted EPS was $1.83 versus $1.60.
- Interest income and margins: Q2 net interest income was $18.73 million, up from $17.65 million. On a tax-equivalent basis, net interest income was $19.16 million, up $1.11 million; net interest margin increased to 3.62% from 3.58%, while spread narrowed to 3.32% from 3.39%. For the first half, GAAP net interest income was $37.03 million, up from $34.84 million; tax-equivalent margin was 3.60% versus 3.57%.
- Other income and expenses: Q2 noninterest income increased 13.3% to $4.15 million; noninterest expense rose 6.9% to $14.43 million. First-half noninterest income was $7.57 million, up 4.6%, and expense was $27.92 million, up 5.0%. First-half provision for loan losses declined to $1.40 million from $2.10 million.
- Assets and lending: Total assets were $2.324 billion, up 1.5% from year-end 2018. Loans before the allowance were $1.859 billion, up $35.5 million; growth was concentrated in commercial real estate and commercial and industrial loans, while consumer loans declined. Net loans after the $21.93 million allowance were $1.837 billion.
- Funding and liquidity: Deposits were $1.877 billion, little changed from year-end. Total borrowings increased to $135.68 million from $124.41 million, including $82.70 million short-term and $52.98 million long-term debt. Cash and cash equivalents were $29.96 million. First-half operating cash flow was $16.09 million; cash decreased $2.65 million to period-end.
- Capital and shareholder returns: Stockholders’ equity was $291.58 million, up from $278.61 million at year-end. The Bank reported a 9.98% Tier 1 leverage ratio, 11.85% Tier 1 and common equity Tier 1 risk-based ratios, and a 13.00% total risk-based capital ratio; it remained well-capitalized. First-half dividends declared were $0.68 per share.
Material changes and management commentary
- Management attributed higher earnings principally to asset growth and higher loan yields, lower loan-loss provision, and increased fee income. Higher funding costs and expenses, especially staffing and expansion-related costs, partly offset those gains.
- Loan growth was funded mainly by borrowings and investment cash flows. The company added $16 million of fixed-rate FHLB funding under its Community Lending Program. Interest-bearing deposit costs rose, and the cost of interest-bearing liabilities increased to 1.15% for the first half from 0.78% a year earlier.
- Asset quality weakened: nonperforming assets increased to $12.68 million, or 0.68% of loans and foreclosed assets, from $9.97 million, or 0.55%, at year-end. Nonaccrual loans rose to $9.25 million from $5.89 million. Substandard loans increased, primarily after reclassification of several larger commercial credits. Management said two prominent relationships were well-secured and current at quarter-end; one large commercial relationship was placed on nonaccrual.
- The allowance was $21.93 million, or 1.18% of loans before the allowance, versus $21.38 million, or 1.17%, at year-end. First-half net charge-offs were $0.85 million, down from $1.49 million a year earlier.
- Unusual income items included a $0.22 million recovery on a purchased impaired commercial credit and higher commercial-loan swap fees. Q2 2018 included a $0.29 million gain from a credit-card portfolio sale; the prior-year first half also included $0.37 million of BOLI death-benefit proceeds. These items affect period comparisons.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management said it believes liquidity is adequate to meet obligations and commitments and intends to continue paying cash dividends, subject to results, capital needs, restrictions and other factors.
- Management reported that interest-rate simulation results were within policy limits. Its one-year static gap indicated that falling rates could reduce net interest income; modeled parallel rate changes of +100 basis points were expected to leave 12-month net interest income relatively unchanged. The July 2019 federal funds rate decrease and potential further rate changes were noted.
- Key risks include credit quality, local economic and real-estate conditions, interest-rate and funding changes, deposit flows, competition, regulation, third-party service providers and cybersecurity. The company also has material contracts indexed to USD-LIBOR and was monitoring the proposed transition to SOFR.
- Unused credit commitments and standby letters of credit totaled $401.63 million. Management did not consider these a significant liquidity risk, but actual draws could affect funding needs. Management reported no material legal proceedings and no material changes to previously disclosed risk factors.
- The company adopted lease accounting in 2019, recognizing $6.52 million of right-of-use assets and lease liabilities, with no material income-statement impact. It was evaluating the future expected-credit-loss standard (CECL); adoption timing and financial effect were not yet clear.
Important facts for investors to verify
- Whether higher nonaccrual and substandard commercial exposures stabilize, and whether collateral values and borrower performance support management’s assessment.
- Whether loan growth can continue without further deterioration in asset quality or a material increase in provision and charge-offs.
- Whether deposit pricing, seasonal public-deposit flows and reliance on wholesale borrowings pressure funding costs and margins.
- How recurring earnings compare after considering the prior-year credit-card sale gain and BOLI proceeds, as well as current swap-fee and credit-recovery income.
- The eventual CECL adoption date and allowance impact, and the company’s exposure and transition plans for LIBOR-indexed contracts.