PFIS Peoples Financial Services Corporation

SCRANTON, Pa., Jan. 29, 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 twelve months ended December 31, 2018.  Peoples reported net income of $6.4 million, or $0.86 per share for the fourth quarter of 2018, compared to $2.6 million, or $0.36 per share for the comparable period of 2017. The increase in earnings for the three months ended December 31, 2018 is the product of higher net interest income of $1.6 million due to growth in our average earning assets of $138.5 million from the year ago period and a reduction in income taxes due to the Tax Cuts and Jobs Act of 2017 (TCJA), which reduced the Company's statutory federal tax rate from 35% to 21% effective January 1, 2018 and resulted in a one-time tax charge of $2.6 million, or $0.35 per share for the three months ending December 31, 2017.

Net income for the twelve months ended December 31, 2018, totaled $24.9 million or $3.37 per share, a 35.0% increase compared to $18.5 million or $2.50 per share for the same period last year.  The increase in earnings for the twelve months ended December 31, 2018 is the result of higher net interest income of $5.8 million due to our earning asset growth coupled with the $4.8 million reduction in income taxes due to the lower corporate tax rate. These increases were partially offset by lower noninterest income in the amount of $3.5 million due in part to the sale of our merchant services business in the second quarter of 2017.

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 investment securities available-for-sale, gains on the sale of other business lines and the non-recurring tax provision related to the TCJA. 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 gains or losses on investment securities and gains from other nonrecurring sources, for the three months ended December 31, totaled $6.4 million and $5.3 million in 2018 and 2017, respectively. Core net income per share for the three months ended December 31, 2018 was $0.86, an increase from $0.71 for the same period in 2017. Core net income in 2017 excludes the one-time tax charge in the amount of $2.6 million resulting from the revaluation of the Company's net deferred tax asset related to the TCJA.

Core net income for the twelve months ended December 31, 2018 was $24.7 million or $3.34 per share, a 24.8% increase compared to $19.8 million or $2.67 per share for the same period of 2017. Results for the twelve months ended December 31, 2018 exclude a pre-tax $14 thousand gain in the value of our equity investment securities portfolio and a nonrecurring pre-tax gain of $291 thousand from the sale of our credit card portfolio during the second quarter. The 2017 results were impacted by the pre-tax gain of $2.3 million from the sale of our merchant services business which was offset by an additional one-time federal income tax expense in the amount of $2.6 million related to the TCJA.

NOTABLES

• Loans, net growth of $130.2 million or 7.7% for the twelve months ended December 31, 2018.
                                               
• Deposits grew $156.0 million or 9.1% for the twelve months ended December 31, 2018.
                                        
• Tangible book value per share improved to $28.84 at December 31, 2018 from $27.99 at September 30, 2018 and from $26.83 at December 31, 2017.
                                          
• Tax-equivalent net interest income increased $4.1 million or 6.0% to $73.0 million for the twelve months ended December 31, 2018 compared to $68.9 million for the same period in 2017.
                                              
• Return on average assets was 1.12% for the three and twelve months ended December 31, 2018.
                                            
• Nonperforming assets to loans, net, and foreclosed assets decreased to 0.55% at December 31, 2018, from 0.65% at September 30, 2018 and 0.68% at December 31, 2017.
                                             
• The effective tax rate decreased to 12.0% for the twelve months ended December 31, 2018 resulting from the tax reform legislation enacted in December 2017. This compares favorably to 30.7% for the same period in 2017.
                                             
• We opened a limited purpose banking office in Orwigsburg, Schuylkill County, Pennsylvania in the fourth quarter of 2018.

INCOME STATEMENT REVIEW

Our tax-equivalent net interest margin for the three and twelve months ended December 31 were 3.63% and 3.59% respectively in 2018, compared to 3.63% and 3.69% respectively for the same periods in 2017. Yields and interest income on our tax-exempt loans and investment securities were computed on a taxable-equivalent basis assuming a 21% tax rate in 2018 and a 35% tax rate in 2017, reflecting the 21% statutory tax rate that became effective for Peoples on January 1, 2018, under the TCJA of 2017. The tax-equivalent yield on earning assets increased 25 basis points and 8 basis points respectively for the three and twelve months ended December 31, 2018 from the corresponding period of 2017. At the same time, we experienced higher interest-bearing liability costs due to increases in short-term market rates. The 33 basis point and 25 basis point increase, respectively to our cost of funds, which represents our average rate paid on total interest-bearing liabilities, for the three and twelve months ended December 31, 2018 when compared to those same periods in 2017 caused the tax-equivalent net interest margin to remain level for the quarter while the increase in cost of funds for the twelve month period more than offset increases to the yield on earning assets causing the decrease for the annual period.

Tax-equivalent net interest income for the twelve months ended December 31, increased $4.1 million or 6.0% to $73.0 million in 2018 from $68.9 million in 2017. The increase in tax equivalent net interest income was primarily due to a $170.4 million increase in average earning assets for the twelve months ended December 31, 2018 when compared to the same period in 2017. The tax-equivalent yield on the loan portfolio increased to 4.51% for the twelve months ended December 31, 2018, compared to 4.39% for the comparable period in 2017. The tax-equivalent yield on the loan portfolio for the twelve months ended December 31, 2018 would have been 4.56% had it been calculated using the 35% tax rate. Loans, net averaged $1.8 billion for the twelve months ended December 31, 2018 and $1.6 billion for the comparable period in 2017. For the twelve months ended December 31, the tax-equivalent yield on total investments decreased to 2.60% in 2018 from 2.84% in 2017. The tax-equivalent yield on total investments would have increased to 2.86% for the twelve months ended December 31, 2018 had it been calculated using the 35% tax rate. Average investments totaled $281.7 million in 2018 and $272.4 million in 2017. Average interest-bearing liabilities increased $127.2 million for the twelve months ended December 31, 2018, compared to the corresponding period last year. The cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased to 0.86% in the twelve months ended December 31, 2018 from 0.61% for the same period of 2017 due to increases in short-term interest rates, the result of the Federal Open Market Committee's (FOMC) actions to increase the federal funds rate 100 basis points in 2018.

For the twelve months ended December 31, noninterest income totaled $13.7 million in 2018, a decrease from $17.2 million in 2017. The gain on sale of our credit card portfolio was $291 thousand and gains on investment securities were $14 thousand in 2018 compared to a gain on the sale of our merchant services portfolio of $2.3 million in 2017. Otherwise, increases in service charges, fees and commissions, which included bank owned life insurance ("BOLI") proceeds and higher dividend income received on Federal Home Loan Bank ("FHLB") stock, and income generated from wealth management services partially offset decreases in revenues from merchant services, income from fiduciary activities, revenues generated from interest rate swap transactions, income from mortgage banking activities and life insurance investment income. For the three months ended December 31, noninterest income totaled $3.2 million in 2018, a decrease from $3.4 million in the comparable 2017 period. Decreases in service charges, fees and commissions was due to lower revenue generated from interest rate swap transactions during the three months ended December 31, 2018 when compared to the corresponding year ago period.

Noninterest expense increased $1.2 million or 2.3% to $52.5 million for the twelve months ended December 31, 2018, from $51.3 million for the twelve months ended December 31, 2017. Salaries and employee benefits increased $1.7 million or 6.5% due to merit increases and continued investment in our expansion markets in the Lehigh Valley and King of Prussia. Occupancy and equipment expenses also increased due to our market expansion when comparing the twelve months ending December 31, 2018 and 2017 as those expenses increased $922 thousand or 9.2%. Offsetting the increase in salaries and occupancy expenses, merchant services related expenses decreased $1.8 million for the twelve months ended December 31, 2018 due to the sale of our merchant business in the second quarter of 2017. Rounding out the twelve months ended December 31, 2018, decreases to other expenses and amortization of intangibles expense were more than offset by increases in FDIC insurance and assessments, professional fees and outside services and donations. For the fourth quarter of 2018, noninterest expense increased to $13.4 million compared $12.5 million for the same period in 2017. As with the results for the twelve months ended December 31, 2018, the buildout of our expansion plan led to increases in salaries and employee benefit expense as well as occupancy expenses when comparing the two periods. Also increasing were professional fees and outside services, FDIC insurance and assessments, donation and other expenses with only minimal decreases to merchant services costs and amortization expense.

BALANCE SHEET REVIEW

At December 31, 2018, total assets, loans and deposits were $2.3 billion, $1.8 billion and $1.9 billion, respectively. Loans, net increased $130.2 million, or 7.7% from December 31, 2017. The growth in loans was primarily from commercial real estate. Total deposits grew $156.0 million, or 9.1% from December 31, 2017, including $50 million in callable brokered certificates of deposit.  Non-interest bearing deposits increased $29.5 million or 7.8% while interest–bearing deposits increased $126.5 million or 9.5% during the twelve months ended December 31, 2018. Short-term borrowings decreased $37.2 million in conjunction with the increase in deposits. Total investments were $278.3 million at December 31, 2018, including $269.7 million securities classified as available-for-sale and $8.4 million classified as held-to-maturity.

Stockholders' equity equaled $279.1 million or $37.72 per share at December 31, 2018, and $265.0 million or $35.82 per share at December 31, 2017. Tangible stockholders' equity improved to $28.84 per share at December 31, 2018, from $26.83 per share at December 31, 2017. Dividends declared for the twelve months ended December 31, 2018 amounted to $1.31 per share, a 4.0% increase from the year ago period, representing a dividend payout ratio of 38.9%.

ASSET QUALITY REVIEW

Nonperforming assets were $10.0 million or 0.55% of loans, net and foreclosed assets at December 31, 2018, compared to $11.6 million or 0.68% of loans, net and foreclosed assets at December 31, 2017. The allowance for loan losses equaled $21.4 million or 1.17% of loans, net at December 31, 2018 compared to $19.0 million or 1.12% of loans, net, at December 31, 2017. Loans charged-off, net of recoveries, for the twelve months ended December 31, 2018, equaled $1.8 million or 0.10% of average loans, compared to $1.8 million or 0.11% 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, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Schuylkill, Susquehanna, Wayne and Wyoming Counties in Pennsylvania and Broome County in New York through 27 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.

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