Peoples Financial Services Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Peoples is a Pennsylvania bank holding company operating Peoples Security Bank and Trust Company, with community banking offices in Pennsylvania and New York. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparison |
|---|---|---|
| Interest income | $23.84 | $22.80 in Q1 2019 |
| Net interest income (GAAP) | $19.56 | $18.30 in Q1 2019 |
| Net interest margin (tax-equivalent) | 3.50% | 3.58% in Q1 2019 |
| Provision for loan losses | $3.50 | $1.05 in Q1 2019 |
| Net income / diluted EPS | $5.28 / $0.71 | $6.41 / $0.87 in Q1 2019 |
| Return on average assets / equity | 0.86% / 7.05% | 1.13% / 9.26% in Q1 2019 |
| Noninterest income / expense | $3.55 / $13.65 | $3.42 / $13.49 in Q1 2019 |
| Assets / loans / deposits | $2,543.8 / $2,023.2 / $2,010.0 | Assets $2,475.3; loans $1,938.2; deposits $1,971.5 at year-end |
| Allowance for loan losses | $25.69; 1.27% of loans | $22.68; 1.17% at year-end |
| Nonperforming assets | $12.09; 0.60% of loans and foreclosed assets | $10.53; 0.54% at year-end |
| Cash and cash equivalents | $35.33 | $31.15 at year-end |
| Stockholders’ equity | $306.06 | $299.01 at year-end |
Tax-equivalent net interest income was $19.91, up from $18.74 a year earlier, while the tax-equivalent spread narrowed to 3.24% from 3.30%. The non-GAAP efficiency ratio improved to 57.9% from 60.0%. Cash provided by operating activities was $10.95; investing activities used $51.94 and financing activities provided $45.16, resulting in a $4.17 increase in cash and cash equivalents.
Total borrowings were $196.40, comprising $164.15 short-term and $32.25 long-term debt. The Bank reported a 9.71% Tier 1 leverage ratio, 11.20% Tier 1 risk-based and common equity Tier 1 ratios, and a 12.43% total risk-based capital ratio; it met requirements and was deemed well-capitalized.
Material changes and drivers
- Net income fell about 18% year over year, principally because the loan-loss provision rose $2.45 million. Management attributed the higher provision to COVID-19-related economic uncertainty and loan growth.
- Loans grew $84.92 million from year-end, led by commercial real estate (+$70.70 million) and commercial lending (+$14.99 million). Consumer loans declined $6.62 million.
- Deposits rose $38.51 million, with $54.11 million added to brokered deposits partly offsetting seasonal retail and public-fund outflows. Short-term borrowings increased $12.00 million to help fund loan growth.
- Investment securities declined $27.85 million, largely after the sale of $26.50 million of low-yielding municipal securities. Other comprehensive income after tax was $6.63 million, lifting accumulated other comprehensive income to $3.43 million from a $3.21 million deficit at year-end.
- Net charge-offs were $0.49 million, or 0.10% of average loans, versus $0.32 million, or 0.07%, a year earlier. Nonaccrual loans increased to $8.62 million from $7.51 million at year-end.
Outlook, COVID-19, and other notable matters
- Management said the pandemic’s duration and ultimate effect on borrowers, collateral values, loan demand, earnings, and capital were uncertain. It identified approximately $1.2 billion, or 73% of the commercial loan portfolio as described in the filing, as loans to businesses categorized as non-life-sustaining and subject to shutdown.
- Through May 6, 2020, the Company had granted payment deferrals on 390 business loans and 451 consumer loans, representing $313.6 million in balances. Deferrals were for up to four months for business borrowers and six months for consumers; loans generally continued to accrue interest unless classified as nonperforming.
- After quarter-end, the Company processed 836 Phase I PPP applications for more than $177.9 million and 455 Phase II applications for more than $24.0 million through May 6. Management estimated approximately $6.6 million of SBA processing fees and expected most PPP loans to be forgiven in the second half of 2020; it characterized this loan growth as temporary. The Company intended to use the Federal Reserve’s PPPLF for liquidity.
- Management expected lower market rates to continue pressuring earning-asset yields and noted that activity beyond PPP could decline. Its interest-rate analysis indicated falling rates posed challenges to net interest income; scenario measures were reported within ALCO policy limits. The Company also had material contracts indexed to USD-LIBOR and was monitoring the proposed transition to SOFR.
- Management described liquidity as strong, citing $35.3 million of cash, $188.5 million of Federal Reserve discount-window availability, $236.5 million of unencumbered available-for-sale securities, and $422.7 million of unused FHLB borrowing capacity at March 31.
- The Board declared a second-quarter dividend of $0.36 per share, payable June 15, 2020. Management said future dividends depend on earnings, financial condition, legal restrictions, and other factors, including COVID-19 effects.
- Management’s qualitative goodwill assessment found no impairment at March 31, but warned that further share-price declines or economic deterioration could lead to future impairment testing and a charge. No material legal proceedings were reported; disclosure controls were deemed effective.
Key facts for investors to verify
- Subsequent-quarter credit quality: deferral performance, delinquencies, nonaccruals, charge-offs, and adequacy of the allowance as pandemic impacts develop.
- Actual PPP balances, SBA fee recognition and forgiveness timing, and the liquidity and funding effects of PPP and brokered deposits.
- Whether loan growth, deposit mix, funding costs, and declining asset yields sustain net interest income and margins.
- Capital and liquidity trends, including regulatory ratios, borrowing availability, and any material changes to dividend plans or repurchases.
- Potential impairment of goodwill or investment securities, and exposure to LIBOR transition, derivative counterparties, and PPP-related litigation or guarantee risk.
- Share repurchases: the Company retired 53,746 shares in Q1 at an average $40.98 per share under a plan authorizing repurchases of up to 225,000 shares.