PEOPLES FINANCIAL SERVICES CORP. Reports Unaudited Second Quarter 2022 Earnings

SCRANTON, Pa., July 21, 2022 /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 six months ended June 30, 2022.

Peoples reported net income of $9.4 million, or $1.30 per diluted share for the three months ended June 30, 2022, a 10.2% increase when compared to $8.5 million, or $1.18 per share for the comparable period of 2021. The increase in earnings for the three months ended June 30, 2022 is due to a $3.4 million increase to net interest income and $0.5 million increase in noninterest income when compared to the year ago period. Partially offsetting the increases were a $0.9 million increase in provision for loan losses due to $179.5 million in non-PPP loan growth in the current period, and higher noninterest expenses of $2.0 million due to higher salaries and benefits and occupancy and equipment costs in part due to our investment in our market expansion strategy and digital technology upgrade.

Net income for the six months ended June 30, 2022, totaled $19.0 million or $2.63 per diluted share, a 5.6% increase over $18.0 million or $2.49 per diluted share in the prior year's period.  The increase in earnings in the six months ended June 30, 2022 is a result of increased net interest income of $5.3 million and an increase of $0.4 million in noninterest income. Partially offsetting the increases were a $1.7 million increase in provision for loan losses and an increase of $3.6 million to noninterest expense.  Strong loan growth resulted in a provision for loan losses of $1.3 million in the current six month period, as compared to a credit to the loan loss provision of $0.4 million in the year ago period.  Higher noninterest expenses were mainly due to higher salaries and benefits of $2.1 million and higher occupancy and equipment costs of $1.5 million in part due to our continued investment in our market expansion strategy and our recent digital technology upgrade which commenced during the final six months of 2021.

NOTABLES

• Record first half earnings of $19.0 million or $2.63 per diluted share.
• Dividends paid during the first six month of 2022 totaled $0.78 per share representing a 5.4% increase from the same period in 2021.
• Net loan growth for the six months ended June 30, 2022, excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, was $278.3 million or 24.8% annualized.
• Return on average assets ("ROAA") was 1.12% and 1.14% for the three and six months ended June 30, 2022 compared to 1.14% and 1.23% for the comparable periods in 2021.
• Return on average equity ("ROE") was 11.71% and 11.81% for the three and six months ended June 30, 2022 compared to 10.72% and 11.35% for the comparable periods in 2021.
• Return on average tangible equity was 14.62% and 14.69% for the three and six months ended June 30, 2022 compared to 13.39% and 14.19% for the comparable periods in 2021.
• Tax-equivalent net interest income, a non-GAAP measure, increased $5.5 million or 13.1% to $47.2 million for the six months ended June 30, 2022 compared to $41.8 million for the same period in 2021.
• Nonperforming assets as a percentage of loans and foreclosed assets at June 30, 2022 improved to 0.18% from 0.21% at December 31, 2021, and from 0.33% at June 30, 2021.

  INCOME STATEMENT REVIEW

During the first half of 2022, the Federal Open Market Committee ("FOMC") began increasing the federal funds rate in an attempt to curb inflation.   Since March 2022, there have been 3 rate increases, totaling 150 basis points and additional rate hikes are anticipated. 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 June 30, 2022, we have realized higher rates on our existing adjustable rate loans and new originations.  In addition, we have been able to hold our funding costs relatively stable despite the 150 basis point rate hike.  However, our funding costs may increase in the future as a result of the FOMC rate adjustments and local competition for deposits.

Calculated on a fully taxable equivalent basis ("FTE"), a non-GAAP measure[1], our net interest margin for the three months ended June 30, 2022 was 3.06%, an increase of 9 basis points when compared to the three months ended March 31, 2022, and an increase of 10 basis points when compared to 2.96% for the same three month period in 2021.  The increase in net interest margin from the prior three month period was due to an increase in earning assets, redeployment of excess liquidity into higher yielding loans and investment securities and stable funding costs.  The tax-equivalent yield on interest-earning assets increased 12 basis points to 3.34% during the three months ended June 30, 2022 from 3.22% during the three months ended March 31, 2022, and increased 2 basis points when compared to 3.32% for the three months ended June 30, 2021.  Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 4 basis points to 0.39% for the three months ended June 30, 2022 when compared to 0.35% during the three months ended March 31, 2022 due to a 3 basis point increase to the cost of deposits and the addition of higher-costing short-term borrowings to fund a portion of loan growth.  Our cost of funds fell 11 basis points to 0.39% for the three months ended June 30, 2022 compared to 0.50% in the prior year period due primarily to an 11 basis points decrease to the cost of interest-bearing deposits, the result of our efforts to reduce deposit rates during 2021 and the first three months of 2022.

Second Quarter 2022 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure, for the three months ended June 30, increased $3.5 million or 17.0% to $24.2 million in 2022 from $20.7 million in 2021. The increase in tax equivalent net interest income was due to higher tax-equivalent interest income of $3.2 million coupled with lower interest expense of $0.3 million.  The higher interest income was the result of an increase in average earning assets, which offset a negative rate variance.  Average earning assets were $367.7 million higher in the three month period ended June 30, 2022 when compared to the year ago period.  PPP loans averaged $34.1 million in the three-month period ended June 30, 2022 with interest and net fees totaling approximately $0.4 million compared to average balances of $197.1 million with interest and net fees totaling $1.3 million in the year ago period. The tax-equivalent yield on the loan portfolio was stable at 3.83% for the three months ended June 30, 2022 and 2021. Excluding PPP loans, the tax-equivalent yield of the loan portfolio was 3.81% and 3.94% at June 30, 2022 and 2021, respectively.  Loans, net averaged $2.5 billion for the three months ended June 30, 2022 and $2.2 billion for the comparable period in 2021. For the three months ended June 30, the tax-equivalent yield on total investments decreased to 1.67% in 2022 from 2.13% in 2021. Average investments totaled $664.2 million in 2022 and $343.0 million in 2021. Average interest-bearing liabilities increased $264.3 million for the three months ended June 30, 2022, compared to the corresponding period last year due to an increase in non-maturity and public fund deposits and short-term borrowings.

For the three months ended June 30, 2022, the provision for loan losses was $1.0 million, the result of $179.5 million of non-PPP net loan growth.  For the year ago period, the provision for loan losses was $0.1 million due to loan growth,  improved credit quality and the reversal of previous COVID-related asset quality qualitative adjustments.

Noninterest income for the three months ended June 30, 2022 was $3.9 million, a $0.5 million increase from $3.4 million for the three months ended June 30, 2021.  Revenue from commercial loan interest rate swap transactions was $0.4 million higher in the current period due to the higher credit value adjustment in the period.  The increase in service charges, fees and commissions was due in part to higher service charges on consumer and commercial deposit accounts of $0.1 million.  Mortgage banking revenue was $0.1 million lower in the current period due to lower volumes of mortgages sold into the secondary market. 

Noninterest expense increased $2.0 million or 15.1% to $15.5 million for the three months ended June 30, 2022, from $13.5 million for the three months ended June 30, 2021. Salaries and employee benefits increased $0.6 million or 8.3% 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 $0.9 million in the current period due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021.

The provision for income tax expense increased $0.2 million for the three months ended June 30, 2022 compared to the year ago period due to higher taxable income in the current period.

Six-Month Results – Comparison to Prior Year First Six Months

Our net interest margin, a non-GAAP measure, for the six months ended June 30, 2022 was 3.01%, a decrease of 4 basis points over the prior year's period of 3.05%.   Excluding the impact of PPP loan interest and net fees, the net interest margin was relatively stable at 2.96% in the current period compared to 2.95% in the year ago period.  Tax-equivalent net interest income non-GAAP measure for the six months ended June 30, increased $5.5 million or 13.1% to $47.2 million in 2022 from $41.8 million in 2021.  The increase in net interest income was driven by an increase in loans and investments, partially offset by lower rates on new loans originated and investments purchased, and a lower cost of funds.  In addition, the 2022 period included $1.5 million in SBA PPP interest and fees, a decrease of $2.3 million compared to the $3.8 million in the year ago period. Average loans increased $207.3 million and investments increased $311.4 million compared to June 30, 2021.  The yield on earning assets was 3.28% for the first half of 2022 compared to 3.43% in 2021.  The cost of interest bearing liabilities during the six month period fell 17 basis points to 0.37% from 0.54% as the cost of all deposit products fell while borrowing costs increased as we used short-term borrowings to fund loan growth. 

For the six months ended June 30, 2022, the provision for loan losses was $1.3 million, the result of $278.3 million growth of non-PPP loans.  For the year ago, the provision for loan losses was a credit of $0.4 million due to improved credit quality and reversal of COVID related asset quality adjustments made in the prior year's period.

Noninterest income for the six months ended June 30, 2022 was $7.3 million, a $0.4 million increase from $6.9 million for the six months ended June 30, 2021. During the period, service charges, fees and commissions increased $0.6 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, a $0.1 million increase in consumer and commercial deposit service charges and higher revenue related to debit card activity.  Mortgage banking income decreased $0.2 million during the six months ended June 30, 2022 compared to the prior year on lower sales volumes.

Noninterest expense for the six months ended June 30, 2022, was $29.8 million, an increase of $3.6 million from $26.2 million for the six months ended June 30, 2021.  The increase was due primarily to $2.1 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, of $0.6 million due to the origination of PPP loans during the year ago period.  Occupancy and equipment expenses were higher by $1.5 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 including professional and consulting and loan account processing fees accounted for an increase of $0.6 million.

The provision for income taxes for the six months ended June 30, 2022 decreased $0.4 million and the effective tax rate was 16.0% as compared to 18.9% in the prior period.  The lower effective tax rate in 2022 was due to a $0.6 million deferred tax adjustment recorded in 2021 and higher levels of tax-exempt income in the current period.

 BALANCE SHEET REVIEW

At June 30, 2022, total assets, loans and deposits were $3.4 billion, $2.6 billion and $2.9 billion, respectively. Loan growth for the six months ended June 30, 2022, excluding SBA PPP loans, was $278.3 million or 24.8% annualized due to improved loan demand and organic growth in our newest markets.  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 six months ended June 30, 2022, the SBA forgave PPP loans totaling $41.9 million.  Gross SBA PPP loans remaining at June 30, 2022 total $27.0 million.  Net deferred SBA PPP fees remaining at June 30, 2022 totaled $0.4 million and are expected to be earned throughout the remainder of 2022.  Total investments were $608.5 million at June 30, 2022, compared to $588.7 million at December 31, 2021.  The increase to the investment portfolio resulted from reinvesting a portion of our low-yielding federal funds balance into higher-yielding U.S. Treasury securities.  At June 30, 2022, the available-for-sale investment portfolio had an unrealized loss of $53.1 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 three times from March through June 2022 totaling 150 basis points.  Our federal funds sold balance of $242.4 million at December 31, 2021 was used to fund our loan growth and investment purchases during the period.  Total deposits decreased $52.1 million from December 31, 2021 as we experienced an outflow of public fund deposits.  Non-interest bearing deposits increased $9.8 million, or 1.3% and interest-bearing deposits decreased $61.9 million, or 2.8% during the six months ended June 30, 2022. Short-term borrowings were used to fund a portion of our loan growth and offset the deposit outflows and at June 30, 2022 totaled $129.2 million.

Stockholders' equity equaled $311.9 million or $43.50 per share at June 30, 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 income ("AOCI") resulting from an increase to the unrealized loss on investment securities and dividends paid to shareholders, partially offset by net income.  Tangible stockholders' equity decreased to $34.62 per share at June 30, 2022, from $38.54 per share at December 31, 2021. Dividends declared for the six months ended June 30, 2022 amounted to $0.78 per share, a 5.4% increase from the 2021 period, representing a dividend payout ratio of 29.5%.  During the three months ended June 30, 2022, 6,853 shares were purchased and retired under the Company's common stock repurchase plan.

ASSET QUALITY REVIEW

Nonperforming assets were $4.6 million or 0.18% of loans, net and foreclosed assets at June 30, 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 0.13% at June 30, 2022 compared to 0.15% at December 31, 2021.  The decrease in non-performing assets from the end of the year was primarily due to the sale in the current period of our foreclosed properties which totaled $0.5 million at December 31, 2021; at June 30, 2022 we have no foreclosed properties.

 The Company's allowance for loan losses increased to $29.4 million as net charge-offs of $0.3 million were offset by a provision for loan losses of $1.3 million.  The allowance for loan losses at June 30, 2022 continued to reflect the provisions added during 2020 from our adjustment of qualitative factors in our allowance for loan losses methodology, due to economic decline and expectation of increased credit losses from COVID-19's adverse impact on economic and business operating conditions. The allowance for loan losses equaled $29.4 million or 1.14% of loans, net at June 30, 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 1.16% at June 30, 2022.  Loans charged-off, net of recoveries, for the six months ended June 30, 2022, equaled $0.3 million or 0.02% of average loans, compared to $0.2 million or 0.02% 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 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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