Peoples Financial Services Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited and compare with Q1 2017. The company provides community banking through Peoples Security Bank and Trust, operating 27 offices in Pennsylvania and New York.
Financial performance and condition
Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest income | $17.187 | $15.843 in Q1 2017 |
| Noninterest income | $3.572 | $3.782 in Q1 2017 |
| Net income | $5.854; $0.79 per diluted share | $4.800; $0.65 per diluted share |
| Net interest margin, tax-equivalent | 3.57% | 3.73% in Q1 2017 |
| Return on average assets / equity | 1.08% / 8.89% | 0.97% / 7.51% in Q1 2017 |
| Total assets | $2,190.388 | $2,169.031 at Dec. 31, 2017 |
| Gross loans / allowance for loan losses | $1,725.781 / $19.718 | $1,693.065 / $18.960 at Dec. 31, 2017 |
| Deposits | $1,720.018 | $1,719.018 at Dec. 31, 2017 |
| Short-term borrowings / long-term debt | $142.500 / $49.265 | $123.675 / $49.734 at Dec. 31, 2017 |
| Cash and cash equivalents | $26.775 | $37.488 at Dec. 31, 2017 |
| Stockholders’ equity | $266.624 | $264.976 at Dec. 31, 2017 |
- Net interest income increased 8.5%. Higher average earning-asset volumes added to interest income, but higher funding costs contributed to a narrower tax-equivalent spread and margin.
- Pre-tax income was $6.628, up from $6.069. Income tax expense fell to $0.774 from $1.269; the effective tax rate declined to 11.7% from 20.9%, primarily following the federal corporate tax rate reduction to 21% effective January 1, 2018.
- Operating cash flow was $9.885, versus $7.536 in Q1 2017. Investing activities used $37.588, principally reflecting loan growth; financing activities provided $16.990. Cash declined $10.713 during the quarter.
- Gross loans grew $32.716 from year-end, led by commercial real estate lending. Deposit growth was only $1.000, so short-term borrowings rose $18.825 to help fund loan growth.
- Nonperforming assets rose to $12.403, or 0.72% of loans and foreclosed assets, from $11.577, or 0.68%, at year-end. Nonaccrual loans increased to $8.678; other real estate owned increased to $0.685. The allowance rose to $19.718; Q1 net charge-offs were $0.292.
- The Bank reported Tier 1 leverage of 9.52%, Tier 1 and common equity Tier 1 risk-based capital ratios of 10.87%, and total risk-based capital of 11.93%; management stated the Bank was well-capitalized and met fully phased-in Basel III capital requirements.
Material changes and unusual items
- Noninterest income decreased 5.6%, chiefly because merchant services income fell to $0.250 from $1.015 following the sale of that business in Q2 2017. Service charges, fees and commissions rose to $2.088 and included $0.365 of accrued bank-owned life insurance death-benefit proceeds.
- Noninterest expense increased 5.9% to $13.081. Salaries and benefits rose 10.8% and occupancy/equipment costs rose 17.5%, reflecting expansion-related costs, merit increases and higher health insurance costs. Merchant services expense fell substantially after the business sale.
- Available-for-sale securities recorded an after-tax unrealized loss of $1.875 in Q1, contributing to accumulated other comprehensive loss of $8.090 at March 31. Management attributed securities losses primarily to rising market rates and said it did not consider them other-than-temporary impairment.
- The company adopted revenue recognition guidance and ASU 2016-01 on January 1, 2018. It reported no material impact from revenue guidance; ASU 2016-01 changed the treatment of equity-security fair-value changes and resulted in a $2 reclassification.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said loan growth exceeded projections, described ongoing market expansion, and expected to continue managing interest-rate exposure through pricing and balance-sheet strategies.
- The company’s one-year cumulative rate-sensitive asset/liability ratio was reported as 1.42. Its model projected net interest income to increase 0.1% under an immediate parallel 100-basis-point rate rise; management said modeled results were within ALCO policy limits. These are model estimates, not guidance.
- Management considered liquidity adequate, while noting reliance on noncore funding had increased overall. Risks include interest-rate changes, credit quality and collateral values, deposit flows, competition, economic conditions, regulation, third-party service providers and cybersecurity.
- Unused commitments totaled $382.685, including $354.585 of unfunded loan commitments and $28.100 of standby letters of credit. Management said expected draws could be funded in the normal course of operations.
- The company disclosed no legal proceedings considered materially adverse, no material change to previously reported risk factors, and no material change in internal control over financial reporting. Adoption of the expected-credit-loss standard was still under evaluation; management expected it to significantly affect loan and securities credit-loss accounting, with adoption scheduled for 2020.
Important facts for investors to verify
- Track whether commercial real estate growth and the increase in nonaccrual loans and foreclosed assets persist, and whether the allowance remains adequate.
- Assess funding costs, deposit trends and increased short-term borrowing as loan growth continues.
- Separate recurring fee income from the $0.365 BOLI death-benefit accrual and consider the effect of the merchant-services sale on year-over-year comparisons.
- Review interest-rate sensitivity and the effect of market-rate changes on securities values, net interest margin and funding costs.
- Reconcile the MD&A’s stated $21.324 increase in total assets with the balance-sheet amounts, which imply a $21.357 increase from December 31, 2017.