PEOPLES FINANCIAL SERVICES CORP. Reports Unaudited Fourth Quarter 2022 Earnings

SCRANTON, Pa., Jan. 26, 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 and twelve months ended December 31, 2022.

Peoples reported net income of $9.1 million, or $1.27 per diluted share for the three months ended December 31, 2022, a 44.3% decrease when compared to $16.4 million, or $2.28 per share for the comparable period of 2021. The decrease in earnings for the three months ended December 31, 2022 was due primarily to an after-tax gain of $9.6 million from the sale of Visa Class B shares in the year ago fourth quarter period and an after-tax loss of $1.6 million on the sale of securities available for sale in the current period. The sale of lower yielding U.S. Treasury bonds and the immediate reinvestment of the proceeds into higher yielding, longer duration mortgage-backed securities is expected to improve net interest income over the near term.  Net interest income for the current period increased $2.8 million on strong loan growth resulting in higher interest income partially offset by increased costs of funds. The current period includes a credit to the provision for loans losses of $2.1 million based on application of our allowance for loan losses methodology that included a decline in historical loss factors and overall improvement to the credit quality of the loan portfolio based on current conditions.  The year ago period included a provision for loan losses of $1.8 million based on our allowance for loan losses methodology and then current conditions.  Noninterest expenses for the three months ended December 31, 2022 increased $2.5 million compared to the prior year's period due to higher salaries, benefits, occupancy and equipment costs in part due to ongoing investment in the Company's market expansion strategy and digital technology upgrade.

Core net income, a non-GAAP measure¹, which we defined as excluding the gain on the sale of the Visa Class B shares and gains or losses from our investment securities portfolio, for the three months ended December 31, totaled $10.7 million and $6.8 million in 2022 and 2021, respectively. Core net income per share, a non-GAAP measure¹, for the three months ended December 31, 2022 was $1.49, a 56.8% increase from $0.95 reported for the same period in 2021. The increase in core net income in the current three month period is due primarily to a $3.9 million decrease to the provision for loan losses, the product of a $2.1 million credit to the provision due to a release from the allowance for loan losses in the current period based on our allowance for loan losses methodology and changes to historical loss factors and improved credit quality of the loan portfolio based on current conditions, and a $1.8 million provision in the year ago period based on our loan losses methodology and then current conditions.  Net interest income for the current period increased $2.8 million on strong loan growth resulting in higher interest income partially offset by increased funding costs.  Noninterest expenses for the current period increased $2.5 million due to higher salaries, benefits, occupancy and equipment costs in part due to ongoing investment in the Company's market expansion strategy and digital technology upgrade.

Net income for the year ended December 31, 2022, totaled $38.1 million or $5.28 per diluted share, a 12.5% decrease over $43.5 million or $6.02 per diluted share in the prior year. The decrease in earnings in the twelve months ended December 31, 2022 is a result of lower noninterest income due to the pre-tax $2.0 million loss on the sale of available for sale securities in the current period and the pre-tax gain of $12.2 million from the sale of Visa Class B shares in the prior year, combined with higher noninterest expenses.  Higher net interest income and a lower provision for loan losses partially offset the declines. Net interest income increased $11.1 million due to $447.5 million in non-PPP loan growth and a higher rate environment, offset in part by higher deposit and borrowing costs. The provision for loan losses decreased from the prior year by $2.2 million due to a lower reserve requirement based on our loan losses methodology that included a reduction in historical losses. Higher noninterest expenses were due to higher salaries and benefits of $3.8 million and higher occupancy and equipment costs of $3.7 million in part due to our continued investment in the market expansion strategy which included a full-year of operations in our newest markets, and our recent digital technology upgrade implemented during the second half of 2021.

¹ See reconciliation of non-GAAP financial measures on p. 18 - 20

Core net income, a non-GAAP measure¹, for the twelve months ended December 31, 2022 was $39.7 million or $5.50 per diluted share, a 17.3% increase when compared to $33.9 million or $4.69 per diluted share for the same period of 2021. The increase in core net income for the current period is due to an increase to net interest income of $11.1 million, a lower provision for loan losses of $2.2 million in the current period and higher noninterest income of $0.3 million in the current twelve month period when excluding the pre-tax gain of $12.2 million from the sale of Visa Class B shares in the year ago period and a pre-tax loss of $2.0 million on the sale of securities available for sale during the current period, partially offset by higher noninterest expense of $7.4 million in the twelve months ended December 31, 2022.

NOTABLES

• Annual earnings of $38.1 million or $5.28 per diluted share. Core earnings of $39.7 million and $5.50 per share.
• Tax-equivalent net interest income, a non-GAAP measure¹, increased $11.5 million or 13.3% to $97.7 million for the twelve months ended December 31, 2022 compared to $86.1 million for the same period in 2021.
• Dividends paid during 2022 totaled $1.58 per share representing a 5.3% increase from 2021.
• Net loan growth for the twelve months ended December 31, 2022, excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, was $447.5 million or 19.8% annualized.
• Deposit growth during the twelve months ended December 31, 2022, excluding brokered deposits, totaled $59.6 million.
• Return on average assets ("ROAA") was 1.04% and 1.12% for the three and twelve months ended December 31, 2022 compared to 1.97% and 1.41% for the comparable periods in 2021.
• Core return on average assets, a non-GAAP measure1, was 1.22% and 1.16% for the three and twelve months ended December 31, 2022 compared to 0.82% and 1.10% for the prior year's periods.
• Return on average equity ("ROE") was 11.79% and 11.87% for the three and twelve months ended December 31, 2022 compared to 19.34% and 13.34% for the comparable periods in 2021.
• Core return on average equity, a non-GAAP measure1, was 13.81% and 12.35% for the three and twelve months ended December 31, 2022 compared to 8.03% and 10.40% for the prior year's periods.
• Return on average tangible equity, a non-GAAP measure1, was 14.87% and 15.01% for the three and twelve months ended December 31, 2022 compared to 23.87% and 16.60% for the comparable periods in 2021.
• Core return on average tangible equity, a non-GAAP measure1, was 17.41% and 15.62% for the three and twelve months ended December 31, 2022 compared to 9.91% and 12.90% for the comparable periods in 2021.
• Nonperforming assets as a percentage of total assets at December 31, 2022 improved to 0.12% as compared to 0.15% at December 31, 2021.
• During the quarter, our Doylestown branch was relocated to a newly constructed full service facility to enhance our commitment to the Bucks County region.

 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 7 rate increases, totaling 425 basis points and additional rate hikes are anticipated in 2023. 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 December 31, 2022, 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 partially mitigated by higher funding costs primarily during the three months ended December 31, 2022, 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 December 31, 2022 was 2.97%, a decrease of 11 basis points when compared to the three months ended September 30, 2022, and an increase of 15 basis points when compared to 2.82% for the same three month period in 2021.  The decrease in net interest margin from the prior three month period was due to higher funding costs offsetting the higher yield and volume of earning assets. The tax-equivalent yield on interest-earning assets increased 25 basis points to 3.84% during the three months ended December 31, 2022 from 3.59% during the three months ended September 30, 2022, and increased 76 basis points when compared to 3.08% for the three months ended December 31, 2021. Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 48 basis points to 1.20% for the three months ended December 31, 2022 when compared to 0.72% during the three months ended September 30, 2022 and increased 83 basis points compared to 0.37% in the prior year period.  Each of these increases was due to the higher costs of deposits and short-term borrowings used to fund loan growth. 

Fourth Quarter 2022 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure¹, for the three months ended December 31, increased $2.9 million or 13.2% to $24.9 million in 2022 from $22.0 million in 2021. The increase in tax equivalent net interest income was due to higher tax-equivalent interest income of $8.1 million less elevated interest expense of $5.2 million. 

The higher interest income was the result of an increase in yield and average volume of earning assets.  Average earning assets were $224.5 million higher in the three month period ended December 31, 2022 when compared to the year ago period.  PPP loans averaged $22.4 million in the three-month period ended December 31, 2022 with interest and net fees totaling approximately $90 thousand compared to average balances of $73.2 million with interest and net fees totaling $808 thousand in the year ago period. The tax-equivalent yield on the loan portfolio was 4.35% and 3.78% for the three months ended December 31, 2022 and 2021. Excluding PPP loans, the tax-equivalent yield of the loan portfolio was 4.38% and 3.76% for the three months ended December 31, 2022 and 2021, respectively.   This increase was due to the higher rates on adjustable and floating rate loans, and new loan originations.  Loans, net averaged $2.7 billion for the three months ended December 31, 2022 and $2.3 billion for the comparable period in 2021. For the three months ended December 31, the tax-equivalent yield on total investments increased to 1.68% in 2022 from 1.65% in 2021. Average investments totaled $640.0 million in 2022 and $551.1 million in 2021.

The increased interest expense in the current three month period is due primarily to higher rates on public funds and non-maturity deposits driven by the higher interest rate environment.  The Company's total cost of deposits increased during the three months ended December 31, 2022 compared to the year ago period by 59 basis points to 0.81%, and the cost of interest-bearing deposits increased to 1.08% from 0.29% 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 $49.4 million in the current period and added $0.5 million of interest expense at an average cost of 4.20% compared to no short-term borrowings in the year ago period.

Average interest-bearing liabilities increased $172.8 million for the three months ended December 31, 2022, compared to the corresponding period last year due to an increase in non-maturity and public fund deposits and short-term borrowings.  Average noninterest-bearing deposits increased $33.5 million or 4.6% from the prior period and now represent 24.8% of total deposits.

For the three months ended December 31, 2022, $2.1 million was released from the allowance for loans losses compared to a provision for loan losses of $1.8 million in the year ago period.  The current period reversal was due to the roll-off of historical losses from the 3 year calculation period.  For the year ago period, the provision for loan losses increased due to $138.1 million in non-PPP loan growth.

Noninterest income for the three months ended December 31, 2022 was $1.2 million, a $14.1 million decrease from the prior year's quarter due primarily to a pre-tax $2.0 million loss on the sale of securities available for sale in the fourth quarter 2022 and the $12.2 million pre-tax gain from the sale of Visa Class B shares in the prior year's quarter.  Noninterest income, excluding the loss on the sale of securities available for sale and the gain from the sale of Visa Class B shares, increased $0.1 million to $3.2 million for the three months ended December 31, 2022. The increase was due to higher service charges, fees and commissions offset in part by reduced interest rate swap revenues which were negatively impacted by interest rate movements.

Noninterest expense increased $2.5 million or 16.7% to $17.2 million for the three months ended December 31, 2022, from $14.8 million for the three months ended December 31, 2021. Salaries and employee benefits increased $1.1 million or 13.6% due to annual merit increases and the addition of lending teams and credit support staff in our newest expansion markets of Piscataway, New Jersey and Pittsburgh, Pennsylvania that opened during the fourth quarter of 2021.  Occupancy and equipment expenses were higher by $1.5 million in the current period due to information technology investments related in part to mobile/digital banking solutions implemented during the second half of 2021.

The provision for income tax expense decreased $2.5 million for the three months ended December 31, 2022 compared to the year ago period due to higher taxable income in the prior year's period due to the Visa Class B shares gain.  The effective tax rate for the quarter ended December 31, 2022 was 15.6% compared to 19.4% in the year ago period.

2022 vs. 2021 Full Year Results

Calculated on a fully taxable equivalent basis ("FTE"), a non-GAAP measure¹, the net interest margin for the twelve months ended December 31, 2022 was 3.02%, an increase of 3 basis points over the prior year's period of 2.99%.   Excluding the impact of PPP loan interest and net fees, the net interest margin increased to 3.00% in the current period from 2.90% in the year ago period.  Tax-equivalent net interest income, a non-GAAP measure¹, for the twelve months ended December 31, increased $11.5 million or 13.4% to $97.7 million in 2022 from $86.1 million in 2021.  The increase in net interest income was driven by an increase in average earning assets of $355.8 million and a higher yield on those assets, partially offset by higher funding costs due to an increase of $264.2 million in average interest-bearing liabilities and higher interest rates.  The 2022 period included $1.8 million in SBA PPP interest and fees, a decrease of $5.3 million compared to the $7.1 million in the year ago period. Average loans increased $302.1 million and investments increased $250.1 million compared to December 31, 2021.  The yield on earning assets was 3.50% for 2022 compared to 3.32% in 2021.  The cost of interest bearing liabilities during the twelve month period rose to 0.68% from 0.46% a year ago. 

For the year ended December 31, 2022, $0.4 million was released from the allowance for loans losses compared to a provision for loan losses of $1.8 million in the year ago period.  The current period release was due to application of our allowance for loan losses methodology that included a decline in historical loss factors and overall improvement to the quality of the loan portfolio based on current conditions.  The provision in the year ago period was due to application of our allowance for loan losses methodology and evaluation of qualitative factors that existed at December 31, 2021.

Noninterest income for the twelve months ended December 31, 2022 was $11.8 million, a $13.8 million decrease from $25.6 million for the twelve months ended December 31, 2021. The prior year's period includes a pre-tax $12.2 million gain on the sale of Visa Class B shares.  Excluding the current year's loss on sale of securities and the prior year's Visa Class B shares gain, noninterest income for the year ended December 31, 2022 increased $0.3 million.  During the year, service charges, fees and commissions increased $0.9 million due in part to the reversal of an accrual of a $0.3 million bank owned life insurance benefit in the year ago period, higher consumer and commercial deposit service charges and higher revenue related to debit card activity.  Mortgage banking income decreased $0.5 million during the twelve months ended December 31, 2022 compared to the prior year on lower sales volumes.

Noninterest expense for the twelve months ended December 31, 2022, was $63.0 million, an increase of $7.4 million from $55.6 million for the prior year's period.  The increase was due primarily to $3.8 million in higher salaries and benefits expense due to annual merit increases, our investment into our newest expansion markets and lower deferred loan origination costs, which are recorded as a contra-salary expense.   Occupancy and equipment expenses were higher by $3.7 million in the current period due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021 and additional costs related to entrance into the Piscataway, New Jersey and Pittsburgh, Pennsylvania  markets.  Other expenses, which include professional, consulting and deposit insurance assessments, accounted for an increase of $0.4 million.

The provision for income taxes for the year ended December 31, 2022 decreased $2.4 million and the effective tax rate was 16.0% as compared to 18.7% in the prior period due to the Visa Class B shares gain in the prior year's period.

 BALANCE SHEET REVIEW

At December 31, 2022, total assets, loans and deposits were $3.6 billion, $2.7 billion and $3.0 billion, respectively. Loan growth for the twelve months ended December 31, 2022, excluding PPP loans, was $447.5 million or 19.8% due to improved loan demand and organic growth in our newest markets.  Loan growth, excluding PPP loans, during the three months ended December 31, 2022 totaled $106.8 million.  Higher interest rates and economic uncertainty may result in lower loan demand and lower growth over the near-term when compared to the year-ended December 31, 2022.  Commercial real estate loans made up the majority of the growth with tax-exempt loans and residential real estate loans also showing increases.  During the twelve months ended December 31, 2022, the SBA forgave PPP loans totaling $46.6 million.  Gross PPP loans remaining at December 31, 2022 total $22.3 million.  Net deferred PPP fees remaining at December 31, 2022 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 $569.0 million at December 31, 2022, compared to $588.7 million at December 31, 2021.  The decrease to the investment portfolio resulted from the unrealized loss on the available for sale portfolio, maturities and pay-downs, offset in part by purchases.  At December 31, 2022, the available for sale portfolio had an unrealized loss of $66.3 million compared to an unrealized loss of $1.8 million at December 31, 2021, which was the result of the rapid increase in interest rates as the FOMC increased rates seven times from March through December 2022 totaling 425 basis points.  During the quarter, $45.5 million in low yielding, shorter term available for sale U.S. Treasury securities were sold at a loss of $2.0 million with the proceeds reinvested into higher yielding, longer term mortgage backed securities.  The loss is expected to be earned back in less than fifteen months based on the approximate 374 basis point increase in yield on the purchased bonds.

Loan growth during the period was funded by federal funds sold, deposit inflows and short-term borrowings.  During the year, the federal funds sold balance decreased from $242.4 million, total deposits increased $83.2 million and short-term borrowing increased to $114.9 million.  Noninterest-bearing deposits increased $35.0 million, or 4.8% and interest-bearing deposits increased $48.2 million, or 2.2% during the twelve months ended December 31, 2022.

Stockholders' equity equaled $315.4 million or $44.06 per share at December 31, 2022, and $340.1 million or $47.44 per share at December 31, 2021. The decrease in stockholders' equity from December 31, 2021 is primarily attributable to a decrease to accumulated other comprehensive loss ("AOCI") resulting from an increase to the unrealized loss on available for sale securities and dividends paid to shareholders, partially offset by net income.  Tangible stockholders' equity decreased to $35.19 per share at December 31, 2022, from $38.54 per share at December 31, 2021. Dividends declared for the twelve months ended December 31, 2022 amounted to $1.58 per share, a 5.3% increase from the 2021 period, representing a dividend payout ratio of 29.9%.  During the three months ended December 31, 2022, 4,732 shares were purchased and retired under the Company's common stock repurchase plan.

ASSET QUALITY REVIEW

Asset quality metrics remained strong and continued to improve.  Nonperforming assets were $4.1 million or 0.15% of loans, net and foreclosed assets at December 31, 2022, compared to $5.0 million or 0.21% of loans, net and foreclosed assets at December 31, 2021.  As a percentage of total assets, nonperforming assets improved to 0.12% at December 31, 2022 compared to 0.15% at December 31, 2021.  The decrease in nonperforming assets was due to the sale of the Company's foreclosed properties which totaled $0.5 million at December 31, 2021 and a $1.1 million decrease to nonaccrual and restructured loans due in part to the sale of a pool of commercial and residential nonaccrual loans with a book balance of $0.9 million, partially offset by a $0.7 million increase to loans past due ninety days and still accruing. At December 31, 2022 the Company had no foreclosed properties.

 The Company's allowance for loan losses decreased $2.3 million to $27.5 million due to net charge-offs of $0.2 million combined with a release of the allowance for loan losses of $2.1 million during the quarter ended December 31, 2022 based on our allowance methodology.  For the twelve months ended December 31, 2022, the allowance decreased $0.9 million, the product of a credit to the provision for loan losses of $0.4 million and net charge-offs of $0.5 million.  The allowance for loan losses equaled $27.5 million or 1.01% of loans, net at December 31, 2022 compared to $28.4 million or 1.22% of loans, net, at December 31, 2021.  Excluding PPP loans which do not carry an allowance for loan losses due to a 100% government guarantee, the ratio equaled 1.01% at December 31, 2022 and 1.26% at December 31, 2021.  Loans charged-off, net of recoveries, for the twelve  months ended December 31, 2022, equaled $0.5 million or 0.02% of average loans, compared to $0.7 million or 0.03% 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 loss on the sale of securities available for sale and gain on the sale of the Visa Class B shares.  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 COVID-19 crisis and the governmental responses to the crisis; 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, real estate values and competition; changes in accounting principles, policies, and guidelines; 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 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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