Peoples Financial Services Corp. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 15, 2019. The company is a Pennsylvania bank holding company operating Peoples Security Bank and Trust Company, with 27 full-service community banking offices and a limited-purpose office in Pennsylvania and southern New York. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $84.7 | $74.2 |
| Net interest income | $71.3 | $65.5 |
| Provision for loan losses | $4.2 | $4.8 |
| Noninterest income | $13.7 | $17.2 |
| Noninterest expense | $52.5 | $51.3 |
| Net income | $24.9 | $18.5 |
| Diluted earnings per share | $3.37 | $2.50 |
- Net income rose 35.0%; reported income before taxes was $28.3 million. Return on average assets was 1.12% and return on average equity was 9.21%.
- Net interest margin declined to 3.59% from 3.69% (tax-equivalent basis). Higher earning-asset volumes lifted tax-equivalent net interest income, but rising funding costs more than offset the benefit of improved yields.
- Total assets were $2.289 billion, up 5.5%. Net loans reached $1.802 billion, up 7.7%; deposits were $1.875 billion, up 9.1%. Commercial and commercial real estate lending represented about 76.9% of the loan portfolio, with commercial real estate alone about 49.8%.
- Allowance for loan losses was $21.4 million, or 1.17% of loans, versus $19.0 million, or 1.12%, in 2017. Nonperforming assets declined to $10.0 million (0.55% of loans and foreclosed assets) from $11.6 million (0.68%). Net charge-offs were $1.8 million, or 0.10% of average loans.
- Cash and cash equivalents fell $4.9 million to $32.6 million. Operating activities provided $32.6 million; investing activities used $134.8 million; financing activities provided $97.3 million.
- Year-end deposits included $410.3 million of noninterest-bearing and $1.465 billion of interest-bearing deposits. Short-term borrowings were $86.5 million and long-term debt $37.9 million. Total borrowings were approximately $124.4 million. Net loans were 99.55% of deposits.
- Peoples Bank was categorized as well capitalized. At year-end, its common equity Tier 1, total risk-based capital and leverage ratios were 11.64%, 12.80% and 9.78%, respectively. The company declared dividends of $1.31 per share, a 38.9% payout of net income.
Material changes and unusual items
- 2018 earnings benefited from higher net interest income and a lower federal corporate tax rate. Income tax expense was $3.4 million, compared with $8.2 million in 2017; 2017 included a $2.6 million one-time charge to revalue deferred tax assets following the Tax Cuts and Jobs Act.
- Noninterest income fell 20.5%, largely reflecting the prior-year $2.3 million gain on the sale of the merchant services business and reduced merchant-services revenue. In 2018, the company recorded a $291,000 gain on sale of its credit card loan portfolio.
- Available-for-sale securities had an unrealized loss of $3.3 million before tax ($2.6 million net of tax), compared with $1.2 million before tax in 2017. No other-than-temporary impairment was recorded.
- Fourth-quarter 2018 net income was $6.4 million, or $0.86 per share, versus $2.6 million, or $0.36 per share, in fourth-quarter 2017; the prior-year quarter included the deferred-tax revaluation charge.
Outlook, risks and contingencies
- Management expected strong loan demand and stable liquidity in 2019, with funding from deposit gathering, loan and investment cash flows, and FHLB advances. It also anticipated slower deposits from natural-gas royalties. These are expectations, not guaranteed results; the filing provides no numerical earnings or revenue guidance.
- Management’s interest-rate modeling estimated a 0.4% increase in projected 12-month net interest income under an immediate parallel 100-basis-point rate increase. A separate securities stress test estimated portfolio-value declines of 2.6%, 5.3% and 7.9% for rate increases of 100, 200 and 300 basis points.
- Key exposures include regional economic and real-estate conditions, the concentration in commercial real estate and other business lending, interest-rate and funding-cost changes, deposit competition, and reliance on third-party technology and service providers. Cybersecurity, regulatory, liquidity and pension-funding risks are also disclosed.
- Off-balance-sheet commitments totaled $379.2 million, including commitments to extend credit, unused lines and standby letters of credit; management did not expect resulting losses to materially affect results or financial position. No material pending legal proceedings were reported.
- The company was preparing for the expected 2020 adoption of the current expected credit loss standard (CECL); the financial impact was still under evaluation. It was also monitoring the planned transition from USD-LIBOR to SOFR.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2018.
Important facts for investors to verify
- Whether loan growth and credit quality remain sound, particularly across commercial real estate and other business loans, and whether the allowance remains adequate.
- Whether deposit growth can keep pace with lending without continued reliance on higher-cost or rate-sensitive funding, and how funding costs affect net interest margin.
- How much of 2018’s earnings improvement is sustainable after separating recurring operating performance from tax-rate effects and prior-year unusual items.
- The realized effects of interest-rate movements on earnings, securities values and capital, and the eventual CECL and LIBOR-transition impacts.
- The capacity to maintain dividends while funding growth and meeting regulatory, liquidity and pension obligations.