Peoples Financial Services Corp. — Q3 2022 Form 10-Q
Business and period: Pennsylvania-based bank holding company operating Peoples Security Bank and Trust Company. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with 2021 unless stated otherwise. Dollar amounts below are in millions unless indicated.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $25.0 | $22.0 | $71.3 | $63.0 |
| Noninterest income | $3.3 | $3.4 | $10.6 | $10.4 |
| Net income | $10.0 | $9.1 | $29.0 | $27.1 |
| Diluted earnings per share | $1.38 | $1.26 | $4.01 | $3.74 |
| Tax-equivalent net interest margin | 3.08% | 3.07% | 3.04% | 3.06% |
| Efficiency ratio (non-GAAP) | 54.9% | 54.3% | 54.5% | 53.5% |
- Q3 net income rose 9.6%; nine-month net income increased 6.8%. Quarterly return on average assets was 1.14% (1.17% prior year) and return on average equity was 12.69% (11.01%).
- At September 30, total assets were $3.517 billion, loans $2.624 billion, deposits $3.124 billion and stockholders’ equity $301.8 million. Loans grew $294.5 million from year-end; excluding PPP loan balances, growth was $340.7 million, or 20.2% annualized.
- Allowance for loan losses was $29.8 million, or 1.14% of loans (1.15% excluding PPP loans). Nonperforming loans were $4.2 million, 0.16% of loans; nonaccrual loans were 0.10% of loans.
- Nine-month operating cash flow was $30.2 million; investing activities used $361.5 million and financing activities provided $164.3 million. Cash and cash equivalents declined $166.9 million to $113.0 million.
- Equity declined $38.3 million from year-end, principally reflecting a $58.1 million after-tax increase in accumulated other comprehensive loss, partly offset by earnings. Available-for-sale securities had $74.6 million of gross unrealized losses; the filing attributes these mainly to higher market interest rates and reports no impairment loss.
- Debt included $14.7 million of short-term borrowings, $1.1 million of long-term debt and $33.0 million of subordinated debentures. The Bank reported regulatory capital ratios of 12.48% CET1 and Tier 1 risk-based capital, 13.60% total risk-based capital and 9.63% Tier 1 leverage, and remained well-capitalized.
Changes, outlook and risks
- Higher loan balances and yields supported earnings growth, while quarterly net interest income increased $3.0 million year over year. Higher interest expense and noninterest expense partly offset that benefit. Nine-month provision for loan losses was $1.7 million, versus none in 2021, reflecting loan growth.
- Noninterest expense rose 12.6% in Q3 and 13.6% year to date, including higher compensation, occupancy and technology costs associated in part with market expansion and digital banking investment. Q3 noninterest income fell 3.8%, with lower mortgage banking and wealth management income.
- Management said strong loan growth continued despite rising rates, but mortgage originations and sales weakened as mortgage rates rose and housing activity cooled. Deposit competition and funding costs were increasing; management expected further pressure as rates rose.
- Management’s rate-sensitivity model estimated a 1.5% decline in net interest income under an instantaneous parallel 100-basis-point rate increase and a 6.7% decline under a 400-basis-point increase; results were within stated policy limits. Management also identified sustained falling rates as the greatest modeled longer-term NII risk. These are model scenarios, not earnings guidance.
- Liquidity resources included $323.7 million of unencumbered available-for-sale securities, $231.4 million available at the Federal Reserve discount window and $715.8 million of unused FHLB capacity. Management described liquidity as strong, while noting increased reliance on noncore funding.
- Credit items to monitor include a $7.8 million commercial borrower downgraded to special mention for insufficient cash flow and $1.7 million of commercial real estate loans downgraded to substandard for repayment uncertainty. Management reported improved overall nonperforming assets, which fell to $4.2 million.
- Unfunded loan commitments and standby letters of credit totaled $568.0 million. Derivative agreements contain default and well-capitalized-status provisions that could require settlement; the reported termination value of derivatives in a net liability position subject to these provisions was $2.2 million.
- The company was preparing for CECL adoption effective January 1, 2023 and had not stated the expected financial impact. LIBOR transition work was underway ahead of the June 2023 discontinuation of U.S. dollar LIBOR settings. No specific earnings guidance was provided. Management cited inflation, recession risk, rate changes, geopolitical developments, credit quality, deposit flows, competition and cybersecurity among factors that could affect results.
- The Board declared a fourth-quarter dividend of $0.40 per share, payable December 15, 2022. Management reported no material legal proceedings or material changes to previously disclosed risk factors; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether deposit pricing and funding costs rise faster than loan and securities yields, and how that affects net interest margin.
- Whether strong loan growth is sustained without deterioration in commercial real estate and other credit exposures; track criticized loans, delinquencies, charge-offs and allowance adequacy.
- The duration and potential capital or liquidity implications of available-for-sale securities’ unrealized losses, including management’s ability to avoid forced sales.
- The eventual CECL adoption adjustment and any resulting changes to credit-loss estimates.
- How deposit retention, brokered funding and available borrowing capacity evolve as rate competition and loan funding needs increase.