Peoples Financial Services Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a Pennsylvania bank holding company operating through Peoples Security Bank and Trust Company. Amounts below are in millions of dollars unless noted; financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2021 / September 30, 2021 | Comparison |
|---|---|---|
| Net income | $9.10; diluted EPS $1.26 | Q3 2020: $8.31; $1.14 diluted EPS |
| Net interest income | $21.99 | Q3 2020: $19.92 |
| Net interest margin, tax-equivalent | 3.07% | Q3 2020: 3.19% |
| Noninterest income | $3.45 | Q3 2020: $4.94 |
| Noninterest expense | $14.29 | Q3 2020: $13.97 |
| Total assets | $3,233.5 | December 31, 2020: $2,883.8 |
| Loans / deposits | $2,205.7 / $2,840.9 | December 31, 2020: $2,178.0 / $2,437.1 |
| Cash and cash equivalents | $360.6 | December 31, 2020: $228.2 |
| Total borrowings | $36.2 | December 31, 2020: $97.8 |
| Stockholders’ equity | $327.7 | December 31, 2020: $316.9 |
- For the first nine months, net income was $27.11 versus $21.17 million; diluted EPS was $3.74 versus $2.87. Net interest income was $63.04 million versus $59.99 million.
- Nine-month tax-equivalent net interest margin declined to 3.06% from 3.35%. The lower margin reflected earning-asset yield pressure, partly offset by reduced funding costs.
- Nine-month provision for loan losses was zero, compared with $6.35 million in 2020. Q3 2021 provision was $0.40 million, versus $1.05 million a year earlier. The allowance was $26.69 million, or 1.21% of loans (1.26% excluding PPP loans).
- Nonperforming assets were $6.12 million, 0.19% of total assets, down from $10.50 million and 0.36% at year-end 2020. Nonaccrual loans were $3.00 million versus $6.98 million.
- Nine-month cash flows: operating activities provided $25.71 million; investing activities used $225.52 million; financing activities provided $332.20 million. Cash and cash equivalents increased $132.40 million.
Material changes and drivers
- Deposits grew $403.8 million from year-end, driven by core deposit growth, public funds and stimulus-related inflows. Cash and federal funds sold increased substantially, while the company paid off short-term borrowings and a maturing long-term borrowing.
- Loans increased $27.7 million overall; excluding PPP balances, management reported growth of $133.9 million, or 9.0% annualized. Commercial real estate and residential loans grew; consumer loans declined.
- Investment securities increased $191.1 million from year-end. The available-for-sale portfolio’s net unrealized gain fell to $1.02 million from $7.66 million, primarily reflecting higher market rates; accumulated other comprehensive income moved from $2.15 million to a $4.51 million loss.
- Q3 noninterest income fell $1.49 million year over year, mainly due to lower interest-rate-swap revenue and the absence of prior-year securities-sale gains. Nine-month noninterest income fell $1.55 million.
- Nine-month noninterest expense declined $0.42 million. Lower compensation costs were partly offset by higher occupancy, technology, state tax and FDIC expenses.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management expects the majority of remaining PPP loans to be forgiven over the next six months. PPP balances were $83.5 million at September 30, with $2.3 million of unamortized fees.
- Management describes liquidity as strong: cash and cash equivalents were $360.6 million; available-for-sale securities were $461.4 million, including $275.7 million unencumbered; and unused FHLB borrowing capacity was $502.6 million. Unused loan commitments and standby letters of credit totaled $647.3 million.
- Management expects asset yields to continue repricing lower and is reducing deposit rates to mitigate margin pressure. The filing identifies interest rates, COVID-19 and economic conditions, credit quality, deposit flows, competition, regulation, real estate collateral values and cybersecurity among key risks.
- Interest-rate sensitivity modeling showed estimated net interest income rising 3.7% under an instantaneous +100-basis-point shock and falling 3.6% under a -100-basis-point shock. The reported economic value of equity change in the -100-basis-point scenario was -23.8%, against a stated -10.0% policy limit; investors should reconcile this with the filing’s broader statement that modeled exposures remained within tolerance.
- After quarter-end, the Bank completed the sale of its Visa Class B shares for $12.2 million. The company expects an after-tax gain of $9.6 million in Q4 2021 and cautions that it is not indicative of ongoing results. The Board declared a Q4 dividend of $0.38 per share.
- All COVID-related payment deferrals had ended by September 30, 2021. Management reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether reported loan growth excluding PPP is sustainable, and how quickly PPP balances and deferred fees run off.
- Whether deposit growth persists and how the large cash and federal funds sold position affects margins and earnings.
- The economic-value-of-equity sensitivity result of -23.8% under a 100-basis-point rate decline and its relationship to the stated policy limit.
- Credit quality, allowance adequacy and the impact of future economic conditions on nonperforming loans and charge-offs.
- The Q4 accounting, tax and capital effects of the Visa share sale, keeping its one-time gain separate from recurring performance.