PEOPLES FINANCIAL SERVICES CORP. Reports Unaudited Second Quarter 2023 Earnings

SCRANTON, Pa., July 25, 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 six months ended June 30, 2023.

Peoples reported net income of $9.4 million, or $1.31 per diluted share for the three months ended June 30, 2023, a 0.8% increase when compared to $9.4 million, or $1.30 per share for the comparable period of 2022. Quarterly net income included lower net interest income of $1.6 million due to higher funding costs, reduced noninterest income of $0.3 million and higher operating expenses of $1.1 million, offset by a lower provision for credit losses of $3.2 million.

The $2.2 million credit to the provision for credit losses in the current period included the impact of various factors such as updated economic assumptions as well as changes in qualitative adjustments, portfolio composition and asset quality. Changes to qualitative factors related to lower loan growth were partially offset by banking industry concerns which resulted in lower expected credit losses.  The year ago period included a provision for credit losses of $1.0 million based on our legacy allowance for credit losses methodology and then current conditions.

For the six months ended June 30, 2023, net income was $17.0 million, or $2.37 per diluted share, a 10.4% decrease when compared to $19.0 million, or $2.63 per diluted share for the comparable period of 2022.  Net interest income for the current period decreased $1.1 million when compared to the six months ended June 30, 2022 as higher interest income due to increased rates was more than offset by increased funding costs.  Lower net interest income combined with higher operating expenses of $3.4 million were partially offset by a $2.2 million decrease to the provision for credit losses. 

FINANCIAL HIGHLIGHTS

• Net income for the six months ended June 30, 2023 was $17.0 million or $2.37 per diluted share.
  
  
• Dividends paid during the first six months ended June 30, 2023 totaled $0.82 per share representing a 5.1% increase from the comparable period in 2022.
  
  
• Net loan growth for the six months ended June 30, 2023 was $113.1 million or 8.4% annualized and consisted primarily of commercial real estate loans.
  
  
• Total deposits grew $182.9 million to $3.2 billion during the first six months of 2023.  Core deposits, excluding brokered deposits, declined $65.1 million or 2.2%. 
  
  
• At June 30, 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 46.2% of total assets and 52.6% of total deposits.
  
  
• At June 30, 2023, total estimated uninsured deposits, were approximately $820.6 million, or approximately 25.4% of total deposits; as compared to approximately $1.1 billion, or 36.9% of total deposits at December 31, 2022.  Included in the uninsured total at June 30, 2023 is $344.6 million of municipal deposits collateralized by letters of credit issued by the Federal Home Loan Bank of Pittsburgh and pledged investment securities, and $1.7 million of affiliate company deposits. 
  
  
• 25,555 shares were purchased during the three months ended June 30, 2023 at an average price per share of $41.89 and retired under the Company's common stock repurchase plan which was restarted in the current three month period.
  
  
• Tangible book value increased 7.0% to $37.64 at June 30, 2023 from $35.19 at December 31, 2022.
  
  
• Asset quality remained strong as nonperforming assets as a percentage of total assets at June 30, 2023 was 0.06%, compared to 0.12% and 0.13% at December 31, 2022 and June 30, 2022.

NOTABLES

• On July 10, 2023, Peoples Security Bank and Trust Company completed the relocation of its North Allegheny, Pennsylvania branch to a newly constructed full-service community office serving the Greater Pittsburgh Market.
  
  
• On July 17, 2023, Peoples Security Bank and Trust Company relocated its King of Prussia, Pennsylvania branch to a larger, more visible full-service location on DeKalb Pike to better serve the Greater Delaware Valley market.

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 ten rate increases, totaling 500 basis points.  There were seven rate hikes in 2022 and three additional increases in 2023 before the FOMC paused at its June 2023 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 June 30, 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 local competition for deposits and the cost of alternative funding.

Calculated on a fully taxable equivalent basis, a non-GAAP measure[1], our net interest margin for the three months ended June 30, 2023 was 2.61%, a decrease of 21 basis points when compared to the 2.82% for the three months ended March 31, 2023 and 45 basis points when compared to 3.06% for the same three month period in 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 15 basis points to 4.31% during the three months ended June 30, 2023 from 4.16% during the three months ended March 31, 2023, and increased 97 basis points when compared to 3.34% for the three months ended June 30, 2022.  Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 45 basis points to 2.29% for the three months ended June 30, 2023 when compared to 1.84% during the three months ended March 31, 2023 and increased 190 basis points compared to 0.39% in the prior year period.  We continued to increase interest rates paid on deposits during the quarter to attract new deposits and retain current balances.  Our cost of interest-bearing deposits increased 54 basis points during the current three month period to 2.21% from 1.67% in the prior three month period ended March 31, 2023.  Our cost of total deposits for the three months ended June 30, 2023 increased 46 basis points to 1.72% from 1.26% during the three months ended March 31, 2023.

On a trailing twelve month basis, our average cost of interest-bearing deposits increased 191 basis points, from 0.30% at June 30, 2022 to 2.21% at June 30, 2023, representing a beta on interest-bearing deposits of approximately 54.6%. Our overall cost of total deposits increased 150 basis points from 0.22% at June 30, 2022 to 1.72%, representing a beta on total deposits of approximately 42.9%. 

Second Quarter 2023 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure¹, for the three months ended June 30, decreased $1.6 million or 6.6% to $22.6 million in 2023 from $24.2 million in 2022. The decrease in tax equivalent net interest income was due to higher tax-equivalent interest income of $10.9 million less elevated interest expense of $12.5 million. 

The higher interest income was the result of an increase in yield and average balance of earning assets.  Average earning assets were $301.8 million higher in the three month period ended June 30, 2023 when compared to the year ago period.  The tax-equivalent yield on the loan portfolio was 4.79% and 3.83% for the three months ended June 30, 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 June 30, 2023 and $2.5 billion for the comparable period in 2022. For the three months ended June 30, the tax-equivalent yield on total investments increased to 1.73% in 2023 from 1.67% in 2022. Average investments totaled $558.1 million in the three months ended June 30, 2023 and $664.2 million in the three months ended June 30, 2022.

The increased interest expense in the three months ended June 30, 2023 was due primarily to higher rates on consumer, business and municipal deposits driven by the higher interest rate environment.  In addition, as part of the Company's strategy to improve on-balance sheet liquidity, $92.2 million of higher-cost brokered deposits were added.  The Company's total cost of deposits increased during the three months ended June 30, 2023 compared to the year ago period by 150 basis points to 1.72%, and the cost of interest-bearing deposits increased 191 basis points to 2.21% from 0.30% in the previous year three month period. Short-term borrowings averaged $16.9 million in the current period and added $0.2 million of interest expense at an average cost of 5.07% compared to $35.0 million in short-term borrowings in the year ago period at an average cost of 1.40%.

Average interest-bearing liabilities increased $331.1 million for the three months ended June 30, 2023, compared to the corresponding period last year due primarily to an increase in non-maturity and brokered certificate of deposits.  Average noninterest-bearing deposits decreased $44.5 million or 5.9% from the prior period and now represent 22.2% of total deposits.

For the three months ended June 30, 2023, a reversal of $2.2 million was posted to the provision for credit losses compared to a provision of $1.0 million in the year ago period.  The current period provision reversal was due to the impact of various factors such as updated economic assumptions as well as changes in qualitative adjustments, portfolio composition and asset quality. Changes to qualitative factors related to lower loan growth were offset by banking industry concerns which resulted in a lower expected credit losses. The year ago period included a provision for credit losses of $1.0 million based on our legacy allowance for credit losses methodology and then current conditions.

Noninterest income for the three months ended June 30, 2023 was $3.6 million, a $0.3 million decrease from the prior year's quarter.  Higher retail and commercial account service charges and a higher FHLB dividend, were offset by lower merchant services and swap related revenue.

Noninterest expense increased $1.1 million or 7.2% to $16.6 million for the three months ended June 30, 2023, from $15.5 million for the three months ended June 30, 2022. Salaries and employee benefits increased $0.6 million or 8.0% due to annual merit increases; new hires; lower deferred loan origination costs; and higher employee benefit costs.  Occupancy and equipment expenses were higher by $0.2 million in the current period due to the increase in transactional costs relating to our expansion market volume. Other expenses increased $0.3 million due primarily to higher FDIC assessments and loan account processing fees. 

The provision for income tax expense was $1.8 million for the three months ended June 30, 2023 and June 30, 2022 with an effective tax rate of 16.1% for each quarter.

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

Our net interest margin, a non-GAAP measure¹, for the six months ended June 30, 2023 was 2.72%, a decrease of 29 basis points over the prior year's period of 3.01%.  Tax-equivalent net interest income, a non-GAAP measure¹ for the six months ended June 30, decreased $1.1 million, or 2.3%, to $46.2 million in 2023 from $47.2 million in 2022.  The decrease in net interest income was the result of higher loan interest income due to increased volume and rates on new loans and those that are repricing, offset by the higher cost of deposit funding. In addition, the 2023 period included $0.2 million in SBA PPP interest and fees, compared to the $1.5 million in the year ago period. Investments decreased $70.3 million compared to June 30, 2022, as the Company engaged in investment sales to, in part, fund loan growth and repay short-term borrowings.  The yield on earning assets was 4.23% for the first half of 2023 compared to 3.28% for the six month period ended June 30, 2022.  The cost of interest bearing liabilities during the six month period ended June 30, 2023 increased 170 basis points to 2.07% from 0.37% for the six months ended June 30, 2022 as the cost of all deposit products and short-term borrowing costs increased.  Furthermore, the Company, as part of its strategy to improve on-balance sheet liquidity, added $259.0 million of brokered certificate of deposits at an average cost of 5.16% during the first six months of 2023.  

For the six months ended June 30, 2023, a credit to the provision for credit losses of $0.9 million was posted due to various factors including updated economic assumptions as well as changes in qualitative factors, portfolio composition and asset quality.

Noninterest income was $7.2 million for the six months ended June 30, 2023 and $7.3 million for the comparable period ended June 30, 2022.  During the period, service charges, fees and commissions increased $0.4 million, due in part to a $0.3 million increase in consumer and commercial deposit service charges, higher revenue related to debit card activity and increased dividends on FHLB stock.  Merchant services income decreased $0.3 million during the six months ended June 30, 2023 compared to the prior year on lower transaction volume incentives.  Interest rate swap revenue decreased $0.4 million on lower origination volume and market value adjustments.

Noninterest expense for the six months ended June 30, 2023, was $33.2 million, an increase of $3.4 million from $29.8 million for the six months ended June 30, 2022.  The increase was due primarily to $1.7 million in higher salaries and benefits expense due to annual merit increases, expansion market investments and lower deferred loan origination costs, which are recorded as a contra-salary expense, of $0.6 million due to lower loan  origination volume compared to the year ago period.  Occupancy and equipment expenses were higher by $0.3 million in the current period due to transaction cost increases. The year ago period included $0.5 million of gains from the sale of other real estate owned, which is included in noninterest expense, with no comparable transaction in the current period.  Other expenses including professional fees, loan account processing fees, Pennsylvania shares tax and FDIC assessments accounted for an increase of $1.0 million.

The provision for income taxes for the six months ended June 30, 2023 decreased $0.4 million and the effective tax rate was 15.8% as compared to 16.0% in the prior period. 

BALANCE SHEET REVIEW

At June 30, 2023, total assets, loans and deposits were $3.7 billion, $2.8 billion and $3.2 billion, respectively. During the six month period, investment sales, deposit growth and FHLB term borrowings were utilized to fund loan growth and repay short-term borrowings.

Loan growth for the six months ended June 30, 2023 was $113.1 million or 8.4% annualized.  Growth slowed during the three months ended June 30, 2023 totaling $25.3 million as compared to loan growth of $88.0 million during the first three months of 2023.  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 June 30, 2023, gross PPP loans remaining totaled $22.1 million and net deferred PPP fees remaining totaled $0.2 million.

Total investments were $484.1 million at June 30, 2023, compared to $569.0 million at December 31, 2022.  At June 30, 2023, the available-for-sale securities totaled $395.9 million and the held-to-maturity securities totaled $88.2 million.  The unrealized losses on the held-to-maturity portfolio totaled $14.2 million and $14.6 million at June 30, 2023 and December 31, 2022, respectively.  During the six month period ended June 30, 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 $182.9 million during the six months ending June 30, 2023.  Noninterest-bearing deposits decreased $59.4 million and interest-bearing deposits increased $242.3 million during the six months ended June 30, 2023.  The increase in deposits was due to a $248.0 million net increase in brokered deposits and a $25.0 million increase in retail and commercial accounts partially offset by a $90.2 million seasonal decrease in municipal deposits.  During the six months ended June 30, 2023, the Company added $259.0 million of longer-term callable brokered CDs to improve its on-balance sheet liquidity position and mitigate risk of higher rates.  The Company has the option to call the CDs after an initial three or six month period.

The deposit base consisted of 43.9% retail accounts, 33.4% commercial accounts, 14.4% municipal relationships and 8.4% brokered deposits at June 30, 2023. At June 30, 2023, total estimated uninsured deposits, were approximately $820.6 million, or approximately 25.4% of total deposits as compared to $1.1 billion, or 36.9% of total deposits at December 31, 2022.  Included in the uninsured total at June 30, 2023 is $344.6 million of municipal deposits collateralized by letters of credit issued by the Federal Home Loan Bank of Pittsburgh and pledged investment securities, and $1.7 million of affiliate company 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 six months ended June 30, 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 $384.8 million of borrowing capacity based on the par value of unencumbered securities available as collateral under this line. At June 30, 2023, we had $1.7 billion in additional liquidity representing 46.2% of total assets, 52.6% of total deposits and 300.4% of uninsured deposits.  For additional information on our deposit portfolio and additional sources of liquidity see the tables on page 15.

The Company maintained its well capitalized position at June 30, 2023.  Stockholders' equity equaled $331.8 million or $46.53 per share at June 30, 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 June 30, 2023 and December 31, 2022 was $47.6 million and $52.0 million, respectively. 

Tangible stockholders' equity, a non-GAAP measure¹, increased to $37.64 per share at June 30, 2023, from $35.19 per share at December 31, 2022.  Dividends declared for the six months ended June 30, 2023 amounted to $0.82 per share, a 5.1% increase from the 2022 period, representing a dividend payout ratio of 34.6% of net income.  During the six months ended June 30, 2023, 42,128 shares were purchased and retired under the Company's common stock repurchase plan at an average price per share of $45.00.  The Company restarted the repurchase plan in the second quarter of 2023, which had been temporarily suspended in response to market volatility and economic uncertainty.

ASSET QUALITY REVIEW

Asset quality metrics remained strong and continued to improve.  Nonperforming assets were $2.1 million or 0.07% of loans, net and foreclosed assets at June 30, 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 0.06% at June 30, 2023 compared to 0.12% at December 31, 2022.  The decrease in nonperforming assets was due to the reclassification of accruing 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 due in part to a $0.5 million principal reduction on a commercial real estate loan.  At June 30, 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 effective January 1, 2023 and the reserve for unfunded commitments was increased $270 thousand to $450 thousand.  The cumulative adjustment, net of tax, was recorded as an adjustment to retained earnings effective January 1, 2023. 

In addition to the transition adjustment during the six month period ended June 30, 2023, a $0.9 million credit to loan losses and net charge-offs of $34 thousand were recorded. The allowance for credit losses equaled $23.2 million or 0.82% of loans, net at June 30, 2023 compared to $27.5 million or 1.01% of loans, net, at December 31, 2022.  Loans charged-off, net of recoveries, for the six months ended June 30, 2023 were minimal at $34 thousand, compared to $0.3 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 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; adverse developments in the financial industry generally, such as recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior 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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