Peoples Financial Services Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Peoples is a Pennsylvania bank holding company operating through Peoples Security Bank and Trust, with community banking offices in Pennsylvania, New Jersey, and New York. Figures below are in millions except per-share data and ratios.
Financial performance and position
- Earnings: Net income was $9.63 million, up 1.6% from $9.48 million in Q1 2021. Diluted EPS rose to $1.33 from $1.31. Return on average assets was 1.17% (1.32% prior year), and return on average equity was 11.82% (12.00%).
- Revenue and margins: Interest income increased to $24.57 million from $23.48 million; interest expense declined to $1.94 million from $2.71 million. Net interest income rose 9.0% to $22.63 million. On a fully tax-equivalent basis, net interest income was $23.08 million, net interest margin was 2.97% versus 3.15%, and net interest spread was 2.87% versus 2.98%. Noninterest income fell 2.7% to $3.42 million.
- Expenses and credit provision: Noninterest expense increased 13.1% to $14.29 million, including higher salaries and benefits and occupancy/equipment costs. The loan-loss provision was $0.30 million, compared with a $0.50 million credit in Q1 2021. The efficiency ratio increased to 53.6% from 50.8%.
- Cash flow: Operating activities provided $9.14 million. Investing activities used $145.39 million, mainly reflecting loan growth and securities purchases; financing activities used $2.18 million. Cash and cash equivalents declined $138.43 million to $141.50 million, primarily as excess cash funded loans and investments.
- Balance sheet and funding: Total assets were $3.35 billion, down from $3.37 billion at year-end 2021. Loans increased $68.51 million to $2.40 billion; excluding Paycheck Protection Program (PPP) balances, management reported growth of $98.72 million. Deposits were broadly stable at $2.96 billion. Stockholders’ equity fell to $320.46 million from $340.13 million, chiefly due to accumulated other comprehensive losses on available-for-sale securities.
- Debt and liquidity: Total borrowings, including subordinated debt, were $35.18 million; this included $33.00 million of subordinated notes and $2.18 million of long-term debt. No short-term borrowings were outstanding. Management characterized liquidity as strong and reported $152.54 million of Federal Reserve discount-window availability and $670.71 million of unused FHLB borrowing capacity. Of $535.48 million in available-for-sale securities, $358.55 million were unencumbered.
- Capital and dividends: The Bank reported a 9.64% Tier 1 leverage ratio, 13.47% Tier 1 risk-based and common equity Tier 1 ratios, and a 14.67% total risk-based capital ratio; it was deemed well-capitalized. The declared dividend was $0.39 per share, versus $0.37 a year earlier. A second-quarter dividend of $0.39 was declared April 29, 2022.
Material changes versus comparable periods
- Earnings increased modestly, supported by higher net interest income and lower income tax expense, but partly offset by higher operating expenses and loan-loss provision.
- Asset yields and funding costs both declined year over year; the decrease in earning-asset yield exceeded the decrease in funding costs, reducing net interest margin.
- The available-for-sale portfolio recorded a $32.61 million fair-value decline during the quarter as market rates rose. Net-of-tax accumulated other comprehensive loss was $31.67 million at quarter-end, versus $5.51 million at year-end. Management attributed the unrealized losses principally to higher market rates and reported no other-than-temporary impairment.
- Nonperforming assets declined to $4.68 million from $4.96 million at year-end, while nonaccrual loans increased to $3.07 million from $2.81 million. The allowance was $28.41 million, or 1.18% of loans, compared with 1.22% at year-end. Net charge-offs were $0.28 million, higher than the prior-year quarter.
Outlook, commentary, and risks
- No specific earnings or revenue guidance was provided. Management expected most remaining PPP loans to be forgiven by year-end 2022 and anticipated loan growth from improving activity and newer markets.
- Management expected rising interest rates to benefit asset yields and net interest income, while warning that faster rate increases could put pressure on deposit costs. Its model showed net interest income within policy limits; a 100-basis-point upward shock was projected to increase 12-month net interest income by 0.2%. A sustained falling-rate environment was identified as the greater earnings exposure.
- Key risks include inflation and rapid rate changes, economic and geopolitical uncertainty including Russia’s war in Ukraine, COVID-19 resurgence, credit and collateral quality, deposit flows, competition, regulation, third-party service providers, and cybersecurity. The filing said risk factors were not materially changed from the 2021 Form 10-K.
- The company was preparing to adopt the current expected credit loss standard (CECL) on January 1, 2023; the filing did not quantify the expected adoption effect. It was also transitioning LIBOR-indexed contracts ahead of the U.S. dollar LIBOR discontinuation.
- Unused loan commitments and standby letters of credit totaled $572.48 million. Management said expected draws could be funded in the normal course. The filing disclosed no material legal proceedings and no material changes to internal control over financial reporting.
Important facts for investors to verify
- How rapidly higher market rates affect deposit pricing, net interest margin, and the fair value of securities; distinguish unrealized AOCI movements from realized losses and regulatory capital effects.
- Whether loan growth is sustained and accompanied by stable credit quality, particularly given higher net charge-offs, changes in criticized loans, and the concentration in commercial real estate.
- Whether deposit growth and available liquidity remain adequate to fund loan commitments and investment activity, including the $572.48 million of off-balance-sheet commitments.
- The eventual CECL transition adjustment and the pace of PPP forgiveness and related fee income runoff.
- Future operating-cost trends, given the 13.1% rise in noninterest expense and deterioration in the efficiency ratio.