PFIS Peoples Financial Services Corporation

SCRANTON, Pa., April 24, 2020 /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 months ended March 31, 2020.  Peoples reported net income of $5.3 million, or $0.72 per share for the three months ended March 31, 2020, a decline of 17.6% when compared to $6.4 million, or $0.87 per share for the comparable period of 2019. Pre-provision net interest income increased $1.3 million when compared to the year ago period, the result of average earning asset growth of $166.7 million.  Noninterest income increased $0.1 million when comparing the three months ended March 31, 2020 to the same period in 2019 and noninterest expenses increased $0.2 million due primarily to continued investment in our market expansion.  The decrease in earnings for the three months ended March 31, 2020 was primarily due to an increase in our provision for loan losses of $2.4 million.  The increase in the provision resulted from the application of our allowance for loan losses methodology, and changes in qualitative factors relating to the adverse impact of the COVID-19 crisis on economic conditions.

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 in this release 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 March 31, totaled $5.2 million and $6.4 million in 2020 and 2019, respectively. Core net income per share for the three months ended March 31, 2020 was $0.70, a decrease from $0.87 for the same period in 2019.  The results in 2020 exclude a $267 thousand gain realized from the sale of a pool of low-yielding available-for-sale municipal bonds partially offset by a pre-tax loss in the value of our equity securities portfolio of $123 thousand. The 2019 results for the three months ended March 31 exclude a $1 thousand gain in the value of our equity securities portfolio.  

NOTABLES

• Loans, net growth of $84.9 million or 17.6% annualized for the three months ended March 31, 2020.
• Deposits grew $38.5 million or 7.9% annualized for the three months ended March 31, 2020.
• Tangible book value per share improved to $32.86 at March 31, 2020 from $31.68 at December 31, 2019, and from $29.61 at March 31, 2019.
• Tax-equivalent net interest income increased $1.2 million or 6.3% to $19.9 million for the three months ended March 31, 2020 compared to $18.7 million for the same period in 2019.
• Provision for loan losses increased $2.4 million or 233.3% to $3.5 million for the three months ended March 31, 2020 from $1.1 million during the year ago period.  The increase is due to a higher qualitative factor related to economic decline resulting from the adverse impact of COVID-19, and, to a lesser extent, the growth of our loan portfolio. 
• Opened a new community banking branch in Doylestown, Bucks County, Pennsylvania on March 9, 2020.

INCOME STATEMENT REVIEW

Calculated on a fully taxable equivalent basis ("FTE"), our tax-equivalent net interest margin for the three months ended March 31 was 3.50% in 2020, compared to 3.58% in 2019. The tax-equivalent yield on earning assets decreased 19 basis points to 4.25% during the three months ended March 31, 2020 from 4.44% during the three months ended March 31, 2019.  The decrease in yield is primarily due to decreases in market rates as the Federal Open Market Committee ('FOMC') cut the federal funds rate three times during the second half of 2019 in response to concerns of slowing economic growth, which affected new originations and refinancing activity, as well as existing adjustable rate loans. During the same period, we experienced lower interest-bearing liability costs due to the decrease in short-term market rates. Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, decreased 13 basis points to 1.01% for the three months ended March 31, 2020 when compared to 1.14% for the three months ended March 31, 2019. In response to the COVID-19 global pandemic and the resulting economic slowdown, the FOMC took aggressive steps to fight a recession by cutting the federal funds rate 100 basis points to a target range of 0.00% to 0.25% during an emergency meeting March 15.  This followed an emergency 50 basis points cut in the funds rate March 3. We expect asset yields and funding costs to continue to reprice lower resulting in further net interest margin compression.

For the quarter ended March 31, the provision for loan losses was $3.5 million in 2020, an increase of $2.4 million from $1.1 million in 2019 due to national and regional economic decline that will have an adverse impact on both consumer and commercial borrowers.

For the three months ended March 31, noninterest income totaled $3.6 million in 2020, a 3.9% increase from $3.4 million in 2019. The largest increases were related to fee income from commercial loan interest rate swap transactions which was higher by $0.2 million and net gains generated from the available-for-sale investment securities portfolio of $0.1 million.  Smaller increases were recognized from revenue generated from wealth management services and life insurance investment income which were offset by decreases in merchant services, fiduciary activities and mortgage banking.

Noninterest expense increased $0.2 million or 1.2% to $13.7 million for the three months ended March 31, 2020, from $13.5 million for the three months ended March 31, 2019. Salaries and employee benefits increased $0.3 million or 3.4% due to annual merit increases and continued investment in our expansion with the opening of two new branches since the year ago period. The opening of the two new branches also contributed to the $0.1 million or 4.0% increase in occupancy and equipment expenses when comparing the three months ending March 31, 2020 and 2019.  Other noninterest expense was lower in the current period by $0.2 million primarily due to an FDIC small bank assessment credit recognized.

BALANCE SHEET REVIEW

At March 31, 2020, total assets, loans and deposits were $2.5 billion, $2.0 billion and $2.0 billion, respectively. Loans, net increased $84.9 million or 17.6% annualized from December 31, 2019. The growth in loans was primarily from commercial real estate and commercial and industrial loans. Total deposits increased $38.5 million or 7.9% annualized from December 31, 2019 due in part to the addition of $54.4 million of brokered deposits which more than offset the seasonal outflow of retail and public funds deposits. Non-interest bearing deposits increased $4.0 million or 3.5% annualized while interest-bearing deposits increased $34.5 million or 9.2% annualized during the three months ended March 31, 2020. Total investments were $310.7 million at March 31, 2020, including $302.9 million securities classified as available-for-sale and $7.5 million classified as held-to-maturity.

Stockholders' equity equaled $306.1 million or $41.68 per share at March 31, 2020, and $299.0 million or $40.47 per share at December 31, 2019. Tangible stockholders' equity improved to $32.86 per share at March 31, 2020, from $31.68 per share at December 31, 2019. Dividends declared for the three months ended March 31, 2020 amounted to $0.36 per share, a 5.9% increase from 2019, representing a dividend payout ratio of 50.0%.

ASSET QUALITY REVIEW

Nonperforming assets were $12.1 million or 0.60% of loans, net and foreclosed assets at March 31, 2020, compared to $10.5 million or 0.54% of loans, net and foreclosed assets at December 31, 2019.  The Company's allowance for loan losses increased $3.0 million or 13.3% in the first quarter of 2020, due largely to the adjustment of qualitative factors in our allowance for loan losses methodology, which reflect current economic decline and expectation of increased credit losses due to COVID-19's adverse impact on economic and business operating conditions. The allowance for loan losses equaled $25.7 million or 1.27% of loans, net at March 31, 2020 compared to $22.7 million or 1.17% of loans, net, at December 31, 2019. Loans charged-off, net of recoveries, for the three months ended March 31, 2020, equaled $0.5 million or 0.10% of average loans, compared to $0.3 million or 0.07% of average loans for the comparable period last year.

COVID-19 PANDEMIC

On March 11, 2020, the World Health Organization declared a coronavirus, identified as COVID-19, a global pandemic.   In the United States, the rapid spread of the COVID-19 virus invoked various Federal and State Authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Reserve System's FOMC to aggressively cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve rolled out various market support programs to ease the stress on financial markets.

As the COVID-19 events unfolded throughout the first quarter of 2020, the Company implemented its pandemic plan and executed various strategies and protocols intended to protect its employees, maintain services for customers, assure the functional continuity of the Company's operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. The Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. The Company also maintained active communications with its primary regulatory agencies and critical vendors in an effort to assure that all mission-critical activities and functions would be performed in line with regulatory expectations and the Company's service standards.

Our Asset Liability Management Committee held an interim meeting in early April to review our capital adequacy and liquidity contingency funding plan due to the high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic. The Company's capital planning and capital management activities, coupled with its historically strong earnings performance and prudent dividend practices, have allowed us to build strong capital reserves. At March 31, 2020, all of the Company's regulatory capital ratios significantly exceeded all well-capitalized standards.

In addition, management believes the Company's liquidity position is strong. At March 31, 2020, the Company's cash and due from banks balances were $35.3 million and we maintained $188.5 million of availability at the Federal Reserve Bank's discount window. The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury and U.S. agency securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities. This portfolio serves as a ready source of liquidity and capital. At March 31, 2020, the Company's available-for-sale investment securities portfolio totaled $302.9 million, $236.5 million of which were unencumbered. Net unrealized gains on the portfolio were $9.2 million. The Bank's unused borrowing capacity at the Federal Home Loan Bank of Pittsburgh at March 31, 2020 was $422.7 million. The Company has also participated in the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Paycheck Protection Program, a $350 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The Paycheck Protection Program ("PPP") provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. Through April 16, 2020, the Company has approved 836 PPP loans totaling $177.9 million. The Company anticipates high levels of customer utilization of the PPP loan program, and intends to utilize the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF") to meet the funding requirements of its borrowers.

From a credit risk and lending perspective, the Company has taken actions to identify and assess its COVID-19 related credit exposures based on asset class and borrower type. With respect to the Company's lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. Through April 20, 2020, the Company granted payment deferral requests for up to four months to 180 business relationships and for up to six months to 320 consumer borrowers, representing $288.1 million of the Company's loan balances. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming.

The COVID-19 crisis is expected to continue to impact the Company's financial results, as well as demand for its products and services during the second quarter of 2020 and potentially beyond. The short and long-term implications of the COVID-19 crisis, and related monetary and fiscal stimulus measures, on our future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are unknown at this time.

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 29 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; the unfolding COVID-19 crisis and the governmental responses to the crisis: 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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