PEOPLES FINANCIAL SERVICES CORP. Reports Unaudited First Quarter 2023 Earnings

SCRANTON, Pa., April 27, 2023 /PRNewswire/ -- Peoples Financial Services Corp. ("Peoples") (NASDAQ: PFIS), the bank holding company for Peoples Security Bank and Trust Company, today reported unaudited financial results at and for the three months ended March 31, 2023.

Peoples reported net income of $7.6 million, or $1.05 per diluted share for the three months ended March 31, 2023, a 21.3% decrease when compared to $9.6 million, or $1.33 per share for the comparable period of 2022. The decrease in earnings for the three months ended March 31, 2023 was due to a higher provision for credit losses and higher operating expenses which more than offset an increase in net interest income and noninterest income. 

Net interest income for the current period increased $0.4 million when compared to the three months ended March 31, 2022 on strong loan growth resulting in higher interest income partially offset by increased costs of funds. The provision for credit losses increased $1.0 million due to loan growth and our Current Expected Credit Losses (CECL) related model impact from updated forecasted economic conditions.  The year ago period included a provision for credit losses of $0.3 million based on our allowance for credit losses methodology and then current conditions. Noninterest expenses for the three months ended March 31, 2023 increased $2.2 million compared to the prior year's period due to higher salaries and benefits, other expenses, including an increase in FDIC assessments and loan account processing fees, and gains on other real estate owned in the year ago period.

During the quarter ended March 31, 2023, $65.6 million in securities were sold at a net gain of $81 thousand as part of our strategy to add liquidity and reduce short-term borrowings.  Core net income, a non-GAAP measure¹, which we defined as excluding the gains or losses from sales of our investment securities portfolio, for the three months ended March 31, totaled $7.5 million and $9.6 million in 2023 and 2022, respectively. Core net income per share, a non-GAAP measure¹, for the three months ended March 31, 2023 was $1.04, a 21.8% decrease from $1.33 reported for the same period in 2022.

FINANCIAL HIGHLIGHTS

• Net income for the three months ended March 31, 2023 was $7.6 million or $1.05 per diluted share.
• Dividends paid during the three months ended March 31, 2023 totaled $0.41 per share representing a 5.1% increase from 2022.
• Sold $65.6 million of investment securities, including U.S. Treasury bonds, tax-exempt municipals and mortgage-backed securities at a net gain of $81 thousand. The proceeds were used to pay-down higher cost short-term borrowings.
• Adopted the CECL accounting standard effective January 1, 2023, which resulted in a decrease to the Allowance for Credit Losses (ACL) of $3.3 million and an increase to the reserve for unfunded commitments of $0.3 million. The adoption also resulted in an increase to retained earnings of $2.3 million, net of tax.
• Net loan growth for the three months ended March 31, 2023 was $90.0 million or 13.5% annualized and consisted primarily of commercial real estate loans.
• The provision for credit losses was $1.3 million for the three months ended March 31, 2023 due to loan growth and CECL related model impact from updated forecasted economic conditions.
• Core deposit growth for the three months ended March 31, 2023 totaled $28.0 million. In addition, to improve on-balance sheet liquidity, brokered deposits were increased $161.4 million, which included $166.9 million of longer-term Callable CDs at a weighted average cost of 5.18%. Overall, total deposits grew by $189.4 million to $3.2 billion.
• At March 31, 2023, the Company had $1.7 billion in additional liquidity available in the form of lines of credit at the Federal Reserve Bank and Federal Home Loan Bank of Pittsburgh (FHLB), brokered deposit capacity and unencumbered securities that may be pledged as collateral, representing 45.7% of total assets and 51.9% of total deposits.
• At March 31, 2023, the Company was well capitalized as evidenced by the following capital ratios: leverage ratio of 9.66%, common equity tier 1 capital ratio of 12.00% , tier 1 capital ratio of 12.00% and total capital ratio of 12.88%
• 16,573 shares were purchased at an average price per share of $49.79 and retired under the Company's common stock repurchase plan. The Company, in response to market volatility and economic uncertainty caused by the two large bank failures, has temporarily suspended its stock repurchase plan to preserve capital.
• Asset quality remained strong as nonperforming assets as a percentage of total assets at March 31, 2023 was 0.05%, compared to 0.12% and 0.14% at December 31, 2022 and March 31, 2022.

¹ See reconciliation of non-GAAP financial measures on p. 16 - 17

INCOME STATEMENT REVIEW

In March 2022, the Federal Open Market Committee ("FOMC") began increasing the federal funds rate in an attempt to curb inflation.   Since then, there have been nine rate increases, totaling 475 basis points.  There were seven rate hikes in 2022, two increases during the first three months of 2023 and an additional rate hike is anticipated at the May 2023 FOMC meeting. These increases directly impact our core source of income, net interest income through yields on investments and loans and the cost of funding via deposits and borrowings.  Through March 31, 2023, we have realized higher rates on our existing adjustable and variable rate loans and new originations.  The benefit of higher asset yields however, has been offset by higher funding costs as rate-sensitive depositors seek higher rates.  We anticipate that funding costs will continue to increase in the future as a result of the FOMC rate adjustments, local competition for deposits and the cost of alternative funding.

Calculated on a fully taxable equivalent basis, a non-GAAP measure¹, our net interest margin for the three months ended March 31, 2023 was 2.81%, a decrease of 16 basis points when compared to the 2.97% for the three months ended December 31, 2022 and March 31, 2022.  The decrease in net interest margin from the prior three month period and year ago period was due to higher funding costs offsetting the increased yield and balance of earning assets. The tax-equivalent yield on interest-earning assets increased 32 basis points to 4.16% during the three months ended March 31, 2023 from 3.84% during the three months ended December 31, 2022, and increased 94 basis points when compared to 3.22% for the three months ended March 31, 2022. Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 65 basis points to 1.85% for the three months ended March 31, 2023 when compared to 1.20% during the three months ended December 31, 2022 and increased 150 basis points compared to 0.35% in the prior year period.  We continued to increase interest rates paid on deposits during the quarter in order to pay competitive rates to attract new deposits and retain current balances.  Our cost of interest-bearing deposits increased 60 basis points during the current three month period to 1.68% from 1.08% in the prior three month period ended December 31, 2022.  Our cost of total deposits for the three months ended March 31, 2023 increased 46 basis points to 1.27% from 0.81% during the three months ended December 31, 2022.

On a trailing twelve month basis, our average cost of interest-bearing deposits increased 141 basis points, from 0.27% at March 31, 2022 to 1.68% at March 31, 2023, representing a beta on interest-bearing deposits of approximately 31.3%. Our overall cost of total deposits increased 107 basis points from 0.20% at March 31, 2022 to 1.27%, representing a beta on total deposits of approximately 23.8%.  Each of these increases was due to the higher costs of deposits and short-term borrowings used to fund loan growth. 

First Quarter 2023 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure¹, for the three months ended March 31, increased $0.4 million or 2.0% to $23.5 million in 2023 from $23.1 million in 2022. The increase in tax equivalent net interest income was due to higher tax-equivalent interest income of $9.7 million less elevated interest expense of $9.3 million. 

The higher interest income was the result of an increase in yield and average balance of earning assets.  Average earning assets were $236.6 million higher in the three month period ended March 31, 2023 when compared to the year ago period.  PPP loans averaged $22.2 million in the three-month period ended March 31, 2023 with interest and net fees totaling approximately $73 thousand compared to average balances of $49.0 million with interest and net fees totaling $1.0 million in the year ago period. The tax-equivalent yield on the loan portfolio was 4.66% and 3.85% for the three months ended March 31, 2023 and 2022. Excluding PPP loans, the tax-equivalent yield of the loan portfolio was 4.68% and 3.75% for the three months ended March 31, 2023 and 2022, respectively.   This increase was due to the higher rates on adjustable and floating rate loans, and new loan originations.  Loans, net averaged $2.8 billion for the three months ended March 31, 2023 and $2.4 billion for the comparable period in 2022. For the three months ended March 31, the tax-equivalent yield on total investments increased to 1.83% in 2023 from 1.68% in 2022. Average investments totaled $599.7 million in the first three months of 2023 and $633.7 million in the first three months of 2022.

The increased interest expense in the three months ended March 31, 2023 was due primarily to higher rates on consumer, business and municipal deposits driven by the higher interest rate environment.  The Company's total cost of deposits increased during the three months ended March 31, 2023 compared to the year ago period by 107 basis points to 1.27%, and the cost of interest-bearing deposits increased 141 basis points to 1.68% from 0.27% in the previous year three month period. Short-term FHLB borrowings were utilized in the current period to fund loan growth; short term borrowings averaged $91.5 million in the current period and added $1.1 million of interest expense at an average cost of 4.81% compared to no short-term borrowings in the year ago period.

Average interest-bearing liabilities also increased $217.9 million for the three months ended March 31, 2023, compared to the corresponding period last year due to an increase in non-maturity and brokered deposits and short-term borrowings.  Average noninterest-bearing deposits increased $10.5 million or 1.4% from the prior period and now represent 24.2% of total deposits.

For the three months ended March 31, 2023, the provision for credit losses was $1.3 million compared to $0.3 million in the year ago period.  The current period provision increase was due to loan growth and the impact of the economic forecast on portfolio loss rates.   

Noninterest income for the three months ended March 31, 2023 was $3.7 million, a $0.3 million increase from the prior year's quarter due primarily to higher retail and commercial account service charges, increased debit card interchange revenue and a higher FHLB dividend, partially offset by lower swap related revenue.

Noninterest expense increased $2.2 million or 15.4% to $16.5 million for the three months ended March 31, 2023, from $14.3 million for the three months ended March 31, 2022. Salaries and employee benefits increased $1.0 million or 12.9% due to annual merit increases; new hires; lower deferred loan origination costs; and higher employee benefit costs.  Occupancy and equipment expenses were higher by $0.3 million in the current period due to the increase in transactional costs relating to our expansion market volume. Other expenses increased $0.5 million due primarily to higher FDIC assessments and loan account processing fees.  The year ago period included gains on the sale of other real estate owned of $0.5 million which we classify in noninterest expense; the current year period included no gains. 

The provision for income tax expense decreased $0.4 million for the three months ended March 31, 2023 compared to the year ago period due to lower taxable income in the current year's period.  The effective tax rate for the quarter ended March 31, 2023 was 15.5% compared to 16.0% in the year ago period.

BALANCE SHEET REVIEW

At March 31, 2023, total assets, loans and deposits were $3.7 billion, $2.8 billion and $3.2 billion, respectively. During the quarter, investment sales, deposit growth and FHLB term borrowings were utilized to fund loan growth and repay short-term borrowings.

Loan growth for the three months ended March 31, 2023, excluding PPP loans, was $88.0 million or 13.1% annualized.  This represents a reduction in growth compared to the three months ended December 31, 2022, in which loan growth was $106.4 million.  Higher interest rates and economic uncertainty may result in lower loan demand and lower growth over the near-term.  Commercial real estate loans made up the majority of the growth with residential real estate loans also increasing.  At March 31, 2023, gross PPP loans remaining totaled $22.2 million and net deferred PPP fees remaining totaled $0.2 million and are expected to be earned during 2023 as the remaining SBA PPP loans are forgiven or repaid. 

Total investments were $507.9 million at March 31, 2023, compared to $569.0 million at December 31, 2022.  At March 31, 2023, the available-for-sale securities totaled $418.1 million and the held-to-maturity securities totaled $89.7 million and comprised 82.3% and 17.7% of the overall portfolio, respectively.  The unrealized losses on the held-to-maturity portfolio totaled $12.6 million and $14.6 million at March 31, 2023 and December 31, 2022, respectively.     During the three month period ended March 31, 2023, $65.6 million in U.S. Treasury, tax-exempt municipals and mortgage-backed securities were sold at a net gain of $81 thousand.  The proceeds were used to pay-down higher cost short-term borrowings.  

Total deposits increased $189.4 million during the three months ending March 31, 2023.  Noninterest-bearing deposits decreased $26.7 million and interest-bearing deposits increased $216.0 million during the three months ended March 31, 2023.  The increase in deposits was due to a $161.4 million net increase in brokered deposits and a $123.3 million increase in retail and commercial accounts partially offset by a $95.3 million seasonal decrease in municipal deposits.  During the three months ended March 31, 2023, the Company utilized a portion of its contingency funding sources and added $166.9 million of longer-term callable brokered CDs to improve its on-balance sheet liquidity position and mitigate risk to higher rates.  The Company has the option to call the CDs after an initial three or six month period.

The deposit base consisted of 48.6% retail accounts, 33.2% commercial accounts, 12.5% municipal relationships and 5.7% brokered deposits at March 31, 2023.  At March 31, 2023, 76.6% of deposits were fully insured by the FDIC while $757.4 million or 23.4% of total deposits were not insured by the FDIC.  In addition, at March 31, 2023 $292.0 million in letters of credit were pledged as collateral for municipal deposits.  As an additional resource to our uninsured depositors, we offer all depositors access to IntraFi's CDARS and ICS programs which allows deposit customers to obtain full FDIC deposit insurance while maintaining their relationship with our Bank.

During the three months ended March 31, 2023, the Company utilized a portion of its available line at the FHLB  and increased its long-term debt $25.0 million due to favorable pricing on the borrowings versus alternative funding sources. 

In addition to deposit gathering and our current long term borrowings, we have additional sources of liquidity available such as overnight borrowings from the FHLB, the Federal Reserve's Discount Window and Borrower-in-Custody (BIC) program, correspondent bank lines of credit, brokered deposit capacity and unencumbered securities.  Although we do not plan to access the Federal Reserve's Bank Term Funding Program (BTFP), we have $391.0 million of borrowing capacity based on the par value of unencumbered securities available as collateral under this line. At March 31, 2023, we had $1.7 billion in additional liquidity representing 45.7% of total assets and 51.9% of total deposits.  For additional information on our deposit portfolio and additional sources of liquidity see the tables on page 14.

The Company maintained its well capitalized position at March 31, 2023.  Stockholders' equity equaled $328.6 million or $45.96 per share at March 31, 2023, and $315.4 million or $44.06 per share at December 31, 2022. The increase in stockholders' equity from December 31, 2022 is primarily attributable to net income and a decrease to accumulated other comprehensive loss ("AOCI") resulting from a reduction in the unrealized loss on available for sale securities.  The net after tax unrealized loss on available for sale securities included in AOCI at March 31, 2023 and December 31, 2022 was $43.5 million and $52.0 million, respectively. 

Tangible stockholders' equity, a non-GAAP measure¹, increased to $37.09 per share at March 31, 2023, from $35.19 per share at December 31, 2022.  Dividends declared for the three months ended March 31, 2023 amounted to $0.41 per share, a 5.1% increase from the 2022 period, representing a dividend payout ratio of 39.0%.  During the three months ended March 31, 2023, 16,573 shares were purchased and retired under the Company's common stock repurchase plan at an average price per share of $49.79.  In response to market volatility and economic uncertainty, the Company has temporarily suspended its stock repurchase plan to preserve capital. 

ASSET QUALITY REVIEW

Asset quality metrics remained strong and continued to improve.  Nonperforming assets were $1.9 million or 0.07% of loans, net and foreclosed assets at March 31, 2023, compared to $4.1 million or 0.15% of loans, net and foreclosed assets at December 31, 2022.  As a percentage of total assets, nonperforming assets improved to 0.05% at March 31, 2023 compared to 0.12% at December 31, 2022.  The decrease in nonperforming assets was due to the reclassification of troubled debt restructurings due to a change in accounting guidance, reduced levels of loans 90 days or more past due and still accruing, collection activities, and a decline in nonaccrual loans as a result of a sizable principal reduction on a commercial real estate loan.  At March 31, 2023 the Company had no foreclosed properties.

Effective January 1, 2023, the Company transitioned to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326), commonly referred to as CECL.  As a result of the transition to CECL, the allowance for credit losses was reduced $3.3 million to $24.2 million and the reserve for unfunded commitments was increased $270 thousand to $450 thousand.  The cumulative adjustment, net of tax, was offset to retained earnings.  In addition to the transition adjustment, a $1.3 million provision and net charge-offs of $9 thousand were applied. The allowance for credit losses equaled $25.4 million or 0.90% of loans, net at March 31, 2023 compared to $27.5 million or 1.01% of loans, net, at December 31, 2022. Loans charged-off, net of recoveries, for the three  months ended March 31, 2023 were minimal at $9 thousand, compared to $0.3 million or 0.05% of average loans for the comparable period last year.

About Peoples:

Peoples Financial Services Corp. is the parent company of Peoples Security Bank and Trust Company, a community bank serving Allegheny, Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Schuylkill, Susquehanna, and Wyoming Counties in Pennsylvania, Middlesex County in New Jersey and Broome County in New York through 28 offices. Each office, interdependent with the community, offers a comprehensive array of financial products and services to individuals, businesses, not-for-profit organizations and government entities. Peoples' business philosophy includes offering direct access to senior management and other officers and providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures and consistently applied credit policies.

In addition to evaluating its results of operations in accordance with U.S. generally accepted accounting principles ("GAAP"), Peoples routinely supplements its evaluation with an analysis of certain non-GAAP financial measures, such as tangible stockholders' equity and core net income ratios.  The reported results included in this release contain items, which Peoples considers non-core, namely the gain or loss on the sale of securities available for sale.  Peoples believes the reported non-GAAP financial measures provide information useful to investors in understanding its operating performance and trends.  Where non-GAAP disclosures are used in this press release, a reconciliation to the comparable GAAP measure is provided in the accompanying tables.  The non-GAAP financial measures Peoples uses may differ from the non-GAAP financial measures of other financial institutions.

Safe Harbor Forward-Looking Statements:

We make statements in this press release, and we may from time to time make other statements regarding our outlook or expectations for future financial or operating results and/or other matters regarding or affecting Peoples Financial Services Corp. and Peoples Security Bank and Trust Company (collectively, "Peoples") that are considered "forward-looking statements" as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend" and "potential." For these statements, Peoples claims the protection of the statutory safe harbors for forward-looking statements.

Peoples cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement.  Such factors include, but are not limited to: prevailing economic and political conditions, particularly in our market area; the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine; credit risk associated with our lending activities; changes in interest rates, loan demand, deposit flows, real estate values and competition; changes in customer behaviors, including consumer spending, borrowing and savings habits;  changes in accounting principles, policies, and guidelines including our adoption of Current Expected Credit Losses (CECL) methodology, and any potential volatility in the Company's operating results due to application of the CECL methodology; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; our ability to identify and address cyber-security risks and other economic, competitive, governmental, regulatory and technological factors affecting Peoples' operations, pricing, products and services; the soundness of other financial institutions and any indirect exposure related to the closings of Silicon Valley Bank ("SVB"), Signature Bank and Silvergate Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank and Silvergate Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships  and other factors that may be described in Peoples' Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q as filed with the Securities and Exchange Commission from time to time.

In addition to these risks, acquisitions and business combinations present risks other than those presented by the nature of the business acquired. Acquisitions and business combinations may be substantially more expensive to complete than originally anticipated, and the anticipated benefits may be significantly harder-or take longer-to achieve than expected.  As regulated financial institutions, our pursuit of attractive acquisition and business combination opportunities could be negatively impacted by regulatory delays or other regulatory issues.  Regulatory and/or legal issues related to the pre-acquisition operations of an acquired or combined business may cause reputational harm to Peoples following the acquisition or combination, and integration of the acquired or combined business with ours may result in additional future costs arising as a result of those issues.

The forward-looking statements are made as of the date of this release, and, except as may be required by applicable law or regulation, Peoples assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

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