Peoples Financial Services Corp. Reports Second Quarter 2019 Earnings

SCRANTON, Pa., July 23, 2019 /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, 2019.  Peoples reported net income of $7.1 million, or $0.96 per share for the three months ended June 30, 2019, compared to $6.0 million, or $0.81 per share for the comparable period of 2018. The increase in earnings for the three months ended June 30, 2019 is the product of higher net interest income of $1.1 million due to growth in our average earning assets of $102.3 million from the year ago period and a decrease to the provision for loan losses of $0.7 million when comparing the three months ended June 30, 2019 to the same period in 2018, partially offset by an increase of $0.9 million in noninterest expenses in the current period.

Net income for the six months ended June 30, 2019, totaled $13.6 million or $1.83 per share, a 14.8% increase when compared to $11.8 million or $1.60 per share for the same period last year.  The increase in earnings in the current period is the result of higher net interest income of $2.2 million due to our earning asset growth coupled with a reduction in the provision for loan losses which resulted in a decrease to the provision of $0.7 million when comparing the six months ended June 30, 2019 to the same period in 2018.

In addition to evaluating its results of operations in accordance with 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 herein contain items, which Peoples considers non-core, namely gains and losses incurred within the investment securities portfolio and gains on the sale of other business lines. 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.

Core net income, which we have defined to exclude losses or gains on investment securities and gains from other nonrecurring sources, for the three months ended June 30, totaled $7.1 million and $5.7 million in 2019 and 2018, respectively. Core net income per share for the three months ended June 30, 2019 was $0.96, an increase from $0.77 for the same period in 2018. These results in 2019 exclude a pre-tax $23 thousand gain on the sale of debt securities and a $9 thousand unrealized loss on our equity investment portfolio while the results for 2018 exclude a pre-tax $8 thousand gain in the value of our equity investment securities portfolio and a pre-tax $291 thousand gain from the sale of our credit card portfolio. 

Core net income for the six months ended June 30, 2019 was $13.5 million or $1.83 per share, an increase of 16.9% compared to $11.6 million or $1.57 per share for the same period of 2018. Results for the six months ended June 30, 2019 exclude a pre-tax gain of $23 thousand on the sale of debt securities and a $8 thousand unrealized loss on our equity investment securities portfolio. The 2018 results were impacted by the pre-tax gain of $291 thousand from the sale of our credit card portfolio.

NOTABLES

• Loans, net growth of $105.4 million or 6.0% since June 30, 2018, with growth of $35.5 million or 3.9% annualized for the six months ended June 30, 2019.
  
  
• Deposits have grown $157.9 million or 9.2% compared to June 30, 2018. Deposits increased $1.8 million or 0.2% annualized for the six months ended June 30, 2019.
  
  
• Tangible book value per share improved to $30.58 at June 30, 2019 from $28.78 at December 31, 2018 and from $27.50 at June 30, 2018.
  
  
• Tax-equivalent net interest income increased $2.2 million or 6.3% to $37.9 million for the six months ended June 30, 2019 compared to $35.7 million for the same period in 2018.
  
  
• Return on average assets was 1.18% and return on average equity was 9.63% for the six months ended June 30, 2019 compared to 1.08% and 8.90%, respectively for the six months ended June 30, 2018.
  
  
• The allowance for loan losses to loans, net was 1.18% at June 30, 2019, an increase from 1.17% at December 31, 2018 and 1.12% at June 30, 2018.
  
  
• Opened our newest office in Lebanon County in June of 2019 servicing portions of Central Pennsylvania.

INCOME STATEMENT REVIEW

Calculated on a fully taxable equivalent basis ("FTE"), our tax-equivalent net interest margin for the three and six months ended June 30 were 3.62% and 3.60% respectively in 2019, compared to 3.58% and 3.57% respectively for the same periods in 2018. The tax-equivalent yield on earning assets increased 29 basis points to 4.49% and 4.46% for the three and six months ended June 30, 2019 from 4.20% and 4.17% during the corresponding periods of 2018. At the same time, we experienced higher interest-bearing liability costs due to increases in short-term market rates. Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 36 and 37 basis points to 1.17% and 1.15% respectively for the three and six months ended June 30, 2019 when compared to 0.81% and 0.78% respectively for the same periods in 2018. Although the Federal Open Market Committee (FOMC) has maintained the federal funds rate in a range of 2.25% to 2.50% through the first half of 2019, the short end of the yield curve has remained elevated resulting in higher deposit costs.

Tax-equivalent net interest income for the six months ended June 30, increased $2.2 million or 6.3% to $37.9 million in 2019 from $35.7 million in 2018. The increase in tax equivalent net interest income was primarily due to a $117.3 million increase in average loans for the six months ended June 30, 2019 when compared to the same period in 2018. The tax-equivalent yield on the loan portfolio increased to 4.75% for the six months ended June 30, 2019, compared to 4.42% for the comparable period in 2018. Loans, net averaged $1.8 billion for the six months ended June 30, 2019 and $1.7 billion for the comparable period in 2018. For the six months ended June 30, the tax-equivalent yield on total investments decreased to 2.53% in 2019 from 2.60% in 2018. Average investments totaled $274.2 million in 2019 and $280.9 million in 2018. Average interest-bearing liabilities increased $54.8 million for the six months ended June 30, 2019, compared to the corresponding period last year.

The provision for loan losses totaled $1.4 million for the six months ended June 30, 2019 and $2.1 million for the six months ended June 30, 2018.  For the quarter ended June 30, the provision for loan losses was $0.4 million in 2019 and $1.1 million in 2018.

For the six months ended June 30, noninterest income totaled $7.6 million in 2019, an increase from $7.2 million in 2018. Fee income generated by commercial loan interest rate swap transactions totaled $0.8 million in the six months ended June 30, 2019 compared to $0.1 million during the corresponding period of 2018. In the year ago period, a gain on the sale of our credit card portfolio of $291 thousand and the accrual of bank owned life insurance income of $365 thousand were recognized. Increases in revenues from merchant services, income from fiduciary activities, and income generated from wealth management services, more than offset a slight decrease in income from mortgage banking activities. For the three months ended June 30, noninterest income totaled $4.2 million in 2019, an increase from $3.7 million in 2018.  The increase was due to higher service charges, fees and commissions related to fee income generated from commercial loan interest rate swap transactions, increases in revenues from merchant services, income from fiduciary activities, and income generated from wealth management services, partially offset by a slight decrease in income from mortgage banking activities.

Noninterest expense increased $1.3 million or 5.1% to $27.9 million for the six months ended June 30, 2019, from $26.6 million for the six months ended June 30, 2018. Salaries and employee benefits increased $1.3 million or 9.0% due to annual merit increases and continued investment in our expansion markets in the Lehigh Valley, King of Prussia and Central Pennsylvania.  Occupancy and equipment expenses also increased due to our market expansion when comparing the first half of 2019 and 2018 as those expenses increased $0.3 million or 5.0%. In addition, during the six months ended June 30, 2019, increases to other expenses and donations, were more than offset by decreases in professional fees and outside services, amortization expense recognized and FDIC insurance premiums and assessments. Noninterest expense increased $0.9 million or 6.9% to $14.4 million for the three months ended June 30, 2019, from $13.5 million for the three months ended June 30, 2018. Salaries and employee benefits increased $0.6 million or 8.8% due to annual merit increases and continued investment in our expansion. Occupancy and equipment expenses also increased due to our market expansion when comparing the three months ending June 30, 2019 and 2018 as those expenses increased $0.1 million or 4.7%. In the other noninterest expense categories, increases in professional fees and outside services, donations and other expenses were partially offset by decreases in amortization expense recognized and FDIC insurance and assessments.

BALANCE SHEET REVIEW

At June 30, 2019, total assets, loans and deposits were $2.3 billion, $1.9 billion and $1.9 billion, respectively. Loans, net increased $35.5 million or 3.9% annualized from December 31, 2018. The growth in loans was primarily from commercial real estate and commercial and industrial loans. Total deposits increased $1.8 million or 0.2% annualized from December 31, 2018. Non-interest bearing deposits increased $9.7 million or 4.8% annualized while interest-bearing deposits decreased $7.9 million or 1.1% annualized during the six months ended June 30, 2019. To fund balance sheet growth, long-term borrowings increased $15.1 million. Total investments were $269.9 million at June 30, 2019, including $261.7 million securities classified as available-for-sale and $8.0 million classified as held-to-maturity.

Stockholders' equity equaled $291.6 million or $39.41 per share at June 30, 2019, and $278.6 million or $37.66 per share at December 31, 2018. Tangible stockholders' equity improved to $30.58 per share at June 30, 2019, from $28.78 per share at December 31, 2018. Dividends declared for the six months ended June 30, 2019 amounted to $0.68 per share, a 4.6% increase from the year ago period, representing a dividend payout ratio of 37.2%.

ASSET QUALITY REVIEW

Nonperforming assets were $12.7 million or 0.68% of loans, net and foreclosed assets at June 30, 2019, compared to $10.0 million or 0.55% of loans, net and foreclosed assets at December 31, 2018. The increase in nonperforming assets was primarily due to placing a large commercial credit on non-accrual. The allowance for loan losses equaled $21.9 million or 1.18% of loans, net at June 30, 2019 compared to $21.4 million or 1.17% of loans, net, at December 31, 2018. Loans charged-off, net of recoveries, for the six months ended June 30, 2019, equaled $0.8 million or 0.09% of average loans, compared to $1.5 million or 0.17% 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 Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Schuylkill, Susquehanna, Wayne and Wyoming Counties in Pennsylvania 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.

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., Peoples Security Bank and Trust Company, and its subsidiaries (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; 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.