PEOPLES FINANCIAL SERVICES CORP. Reports Unaudited Third Quarter 2022 Earnings

SCRANTON, Pa., Oct. 20, 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 nine months ended September 30, 2022.

Peoples reported net income of $10.0 million, or $1.38 per diluted share for the three months ended September 30, 2022, a 9.6% increase when compared to $9.1 million, or $1.26 per share for the comparable period of 2021. The increase in earnings for the three months ended September 30, 2022 is due to a $3.0 million increase to net interest income when compared to the year ago period. Partially offsetting the increases were higher noninterest expenses of $1.8 million due to higher salaries and benefits and 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 nine months ended September 30, 2022, totaled $29.0 million or $4.01 per diluted share, a 6.8% increase over $27.1 million or $3.74 per diluted share in the prior year's period.  The increase in earnings in the nine months ended September 30, 2022 is a result of increased net interest income of $8.3 million and an increase of $0.3 million in noninterest income. Partially offsetting the increases were a $1.7 million increase in provision for loan losses and an increase of $5.5 million in noninterest expense.  Strong loan growth resulted in a provision for loan losses of $1.7 million in the current nine month period, as compared to no loan loss provision in the year ago period.  Higher noninterest expenses were mainly due to higher salaries and benefits of $2.7 million and higher occupancy and equipment costs of $2.2 million in part due to our continued investment in the market expansion strategy and our recent digital technology upgrade implemented during the second half of 2021.

NOTABLES

• Record year-to-date earnings of $29.0 million or $4.01 per diluted share.
• Dividends paid during the first nine months of 2022 totaled $1.18 per share representing a 5.4% increase from the same period in 2021.
• Net loan growth for the nine months ended September 30, 2022, excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, was $340.7 million or 20.2% annualized.
• Deposit growth during the three and nine months ended September 30, 2022, excluding brokered deposits, totaled $230.2 million and $127.4 million, respectively.  During the three months ended September 30, 2022, deposit growth enabled the Company to pay-off its short-term borrowings at the Federal Home Loan Bank of Pittsburgh.
• Return on average assets ("ROAA") was 1.14% for the three and nine months ended September 30, 2022 compared to 1.17% and 1.21% for the comparable periods in 2021.
• Return on average equity ("ROE") was 12.69% and 11.93% for the three and nine months ended September 30, 2022 compared to 11.01% and 11.24% for the comparable periods in 2021.
• Return on average tangible equity, a non-GAAP measure¹, was 15.94% and 14.82% for the three and nine months ended September 30, 2022 compared to 13.69% and 14.03% for the comparable periods in 2021.
• Tax-equivalent net interest income, a non-GAAP measure¹, increased $8.6 million or 13.4% to $72.7 million for the nine months ended September 30, 2022 compared to $64.1 million for the same period in 2021.
• Nonperforming assets as a percentage of total assets at September 30, 2022 improved to 0.12% as compared to 0.15% at December 31, 2021, and 0.19% at September 30, 2021.

¹ See reconciliation of non-GAAP financial measures on p.17 and 18

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 5 rate increases, totaling 300 basis points and additional rate hikes are anticipated through year-end. 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 September 30, 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 September 30, 2022, as rate-sensitive depositors are seeking 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 or the cost of alternative funding.

Calculated on a fully taxable equivalent basis ("FTE"), a non-GAAP measure¹, our net interest margin for the three months ended September 30, 2022 was 3.08%, an increase of 2 basis points when compared to the three months ended June 30 2022, and an increase of 1 basis point when compared to 3.07% 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 the volume and yield of earning assets, which offset higher funding costs.  The tax-equivalent yield on interest-earning assets increased 25 basis points to 3.59% during the three months ended September 30, 2022 from 3.34% during the three months ended June 30, 2022, and increased 22 basis points when compared to 3.37% for the three months ended September 30, 2021.  Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 33 basis points to 0.72% for the three months ended September 30, 2022 when compared to 0.39% during the three months ended June 30, 2022 and increased 30 basis compared to 0.42% 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. 

Third Quarter 2022 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure¹, for the three months ended September 30, increased $3.1 million or 13.9% to $25.5 million in 2022 from $22.4 million in 2021. The increase in tax equivalent net interest income was due to higher tax-equivalent interest income of $5.2 million less higher interest expense of $2.1 million. 

The higher interest income was the result of an increase in average earning assets, which offset a negative rate variance due to lower yields on the investment portfolio.  Average earning assets were $391.1 million higher in the three month period ended September 30, 2022 when compared to the year ago period.  PPP loans averaged $27.5 million in the three-month period ended September 30, 2022 with interest and net fees totaling approximately $0.2 million compared to average balances of $122.3 million with interest and net fees totaling $2.5 million in the year ago period. The tax-equivalent yield on the loan portfolio was 4.09% and 4.06% for the three months ended September 30, 2022 and 2021. Excluding PPP loans, the tax-equivalent yield of the loan portfolio was 4.10% and 3.83% at September 30, 2022 and 2021, respectively.   This increase was due to the higher rates on adjustable and floating rate loans, which comprise 49.0% of our portfolio loans, and new loan originations.  Loans, net averaged $2.6 billion for the three months ended September 30, 2022 and $2.2 billion for the comparable period in 2021. For the three months ended September 30, the tax-equivalent yield on total investments decreased to 1.67% in 2022 from 2.01% in 2021. Average investments totaled $656.4 million in 2022 and $365.5 million in 2021.

The increased interest expense in the current three month period is due primarily to higher rates on public funds and customer non-maturity deposits driven by the higher interest rate environment.  The Company's total cost of deposits increased during the three months ended September 30, 2022 compared to the year ago period by 19 basis points to 0.44%, and the cost of interest-bearing deposits increased to 0.59% from 0.34% in the previous year three month period. The Company utilized short-term FHLB borrowings during the current period which added $0.5 million of interest expense at a cost of 2.30% compared to no short-term borrowings in the year ago period.

Average interest-bearing liabilities increased $297.8 million for the three months ended September 30, 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 also increased by 10.8% from the prior period and now represent 25.7% of total deposits.

For the three months ended September 30, 2022, the provision for loan losses was $0.5 million, the result of $62.5 million of non-PPP net loan growth during the quarter.  For the year ago period, the provision for loan losses was $0.4 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 September 30, 2022 was $3.3 million, a $0.1 million decrease from $3.4 million for the three months ended September 30, 2021. The decline was due to reduced wealth management fees, which are based on account valuations and have been negatively impacted by stock market fluctuations, as well as mortgage banking revenue which has declined due to lower originations and volumes of mortgages sold into the secondary market as the interest rates on mortgages have risen.

Noninterest expense increased $1.8 million or 12.6% to $15.9 million for the three months ended September 30, 2022, from $14.1 million for the three months ended September 30, 2021. Salaries and employee benefits increased $0.6 million or 8.2% 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 $0.7 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 increased $0.2 million for the three months ended September 30, 2022 compared to the year ago period due to higher taxable income in the current period.

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

Calculated on a fully taxable equivalent basis ("FTE"), a non-GAAP measure¹, the net interest margin for the nine months ended September 30, 2022 was 3.04%, a decrease of 2 basis points over the prior year's period of 3.06%.   Excluding the impact of PPP loan interest and net fees, the net interest margin increased to 3.00% in the current period from 2.95% in the year ago period.  Tax-equivalent net interest income, a non-GAAP measure¹, for the nine months ended September 30, increased $8.6 million or 13.4% to $72.7 million in 2022 from $64.1 million in 2021.  The increase in net interest income was driven by an increase in average earning assets of $400.0 million, partially offset by a negative rate variance, and higher funding costs due to an increase of $295.0 million in average interest-bearing liabilities and higher interest rates.  The 2022 period included $1.7 million in SBA PPP interest and fees, a decrease of $4.6 million compared to the $6.3 million in the year ago period. Average loans increased $272.4 million and investments increased $304.5 million compared to September 30, 2021.  The yield on earning assets was 3.39% for the first nine months of 2022 compared to 3.41% in 2021.  The cost of interest bearing liabilities during the nine month period fell slightly to 0.49% from 0.50% a year ago. 

For the nine months ended September 30, 2022, the provision for loan losses was $1.7 million, primarily the result of $340.7 million growth of non-PPP loans.  For the nine months ended September 30, 2021, there was no provision for loan losses due to improved credit quality and reversal of COVID related asset quality adjustments made in the prior year's period.

Noninterest income for the nine months ended September 30, 2022 was $10.6 million, a $0.3 million increase from $10.3 million for the nine months ended September 30, 2021. During the period, service charges, fees and commissions increased $0.7 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 $0.4 million during the nine months ended September 30, 2022 compared to the prior year on lower sales volumes.

Noninterest expense for the nine months ended September 30, 2022, was $45.7 million, an increase of $5.5 million from $40.2 million for the prior year's period.  The increase was due primarily to $2.7 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 $2.2 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 loan processing fees, accounted for an increase of $0.4 million.

The provision for income taxes for the nine months ended September 30, 2022 decreased $0.3 million and the effective tax rate was 16.2% as compared to 17.7% 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 September 30, 2022, total assets, loans and deposits were $3.5 billion, $2.6 billion and $3.1 billion, respectively. Loan growth for the nine months ended September 30, 2022, excluding SBA PPP loans, was $340.7 million or 20.2% annualized due to improved loan demand and organic growth in our newest markets.  Loan growth, excluding PPP loans, during the three months ended September 30, 2022 totaled $62.5 million.  Higher interest rates and economic uncertainty may result in lower loan demand and lower growth over the near-term when compared to the first nine months of 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 nine months ended September 30, 2022, the SBA forgave PPP loans totaling $46.2 million.  Gross SBA PPP loans remaining at September 30, 2022 total $22.7 million.  Net deferred SBA PPP fees remaining at September 30, 2022 totaled $0.3 million and are expected to be earned throughout the remainder of 2022 as the remaining SBA PPP loans are forgiven or repaid.  Total investments were $570.5 million at September 30, 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 completed during the first six months of 2022.  At September 30, 2022, the available-for-sale investment portfolio had an unrealized loss of $74.6 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 five times from March through September 2022 totaling 300 basis points.  Our federal funds sold balance decreased $172.8 million to $69.6 million at September 30, 2022 from $242.4 million at December 31, 2021 and was used to fund our loan growth and investment purchases during the period.  Total deposits increased $160.7 million from December 31, 2021 as we experienced an increase of $109.4 million in public fund deposits.  Non-interest bearing deposits increased $32.2 million, or 4.4% and interest-bearing deposits increased $128.5 million, or 5.8% during the nine months ended September 30, 2022. Short-term borrowings used to fund a portion of our loan growth and offset the deposit outflows in the second quarter were repaid in the third quarter from the increase of $212.9 million in deposits, in part due to seasonal inflows of public fund deposits.

Stockholders' equity equaled $301.8 million or $42.14 per share at September 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 $33.26 per share at September 30, 2022, from $38.54 per share at December 31, 2021. Dividends declared for the nine months ended September 30, 2022 amounted to $1.18 per share, a 5.4% increase from the 2021 period, representing a dividend payout ratio of 29.4%.  During the three months ended September 30, 2022, 7,911 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 $4.2 million or 0.16% of loans, net and foreclosed assets at September 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 0.12% at September 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 the Company's foreclosed properties which totaled $0.5 million at December 31, 2021; at September 30, 2022 People's had no foreclosed properties.

The Company's allowance for loan losses increased to $29.8 million as net charge-offs of $0.3 million were offset by a provision for loan losses of $1.7 million.  The allowance for loan losses equaled $29.8 million or 1.14% of loans, net at September 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 1.15% at September 30, 2022.  Loans charged-off, net of recoveries, for the nine months ended September 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.

Co: Peoples Financial Services Corp. 
St: Pennsylvania 
In: Fin 

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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