PFIS Peoples Financial Services Corporation

SCRANTON, Pa., July 25, 2024 /PRNewswire/ -- Peoples Financial Services Corp. ("Peoples" or the "Company") (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, 2024.

Peoples reported net income of $3.3 million, or $0.46 per diluted share for the three months ended June 30, 2024, a 65.2% decrease when compared to $9.4 million, or $1.31 per diluted share for the comparable period of 2023. Quarterly net income included lower net interest income of $3.2 million due primarily to higher deposit costs, a higher provision for credit losses of $2.8 million and higher operating expenses of $1.5 million, which included $1.1 million of acquisition related expenses.

Core net income¹, a non-GAAP measure, excludes acquisition related expenses from the strategic combination with FNCB Bancorp, Inc. completed July 1, 2024 and further discussed below of $1.1 million and $0.1 million incurred during the three months ended June 30, 2024 and 2023. Core net income¹ totaled $4.2 million or $0.59 per diluted share for the three months ended June 30, 2024 compared to $9.5 million, or $1.33 per share for the comparable period of 2023. 

Core pre-provision net revenue (PPNR)¹, a non-GAAP measure, which excludes acquisition related expenses, the provision for credit losses and the provision for credit losses on unfunded commitments from income before taxes, for the three months ended June 30, 2024 was $5.2 million or $0.73 per diluted share.  The PPNR for the corresponding prior year period was $9.0 million or $1.25 per diluted share.

For the six months ended June 30, 2024, net income was $6.7 million, or $0.95 per diluted share, a 60.3% decrease when compared to $17.0 million, or $2.37 per diluted share for the comparable period of 2023.  Net interest income for the current period decreased $7.0 million when compared to the six months ended June 30, 2023 as higher interest income due to increased loan rates was more than offset by increased funding costs.  Lower net income was due to the reduction in net interest income combined with higher operating expenses of $3.1 million, which included $1.6 million in acquisition related expenses, and a $2.2 million increase in the provision for credit losses.

Core net income¹, a non-GAAP measure, totaled $8.1 million or $1.14 per diluted share for the six months ended June 30, 2024 compared to $17.0 million, or $2.37 per share for the comparable period of 2023. 

Core pre-provision net revenue (PPNR)¹, a non-GAAP measure, for the six months ended June 30, 2024 was $10.8 million or $1.52 per diluted share.  The PPNR for the corresponding prior year period was $19.0 million or $2.65 per diluted share.

STRATEGIC COMBINATION WITH FNCB BANCORP, INC.

On July 1, 2024, Peoples completed its previously announced merger with FNCB Bancorp, Inc. ("FNCB"), pursuant to which FNCB merged with and into Peoples, and FNCB Bank merged with and into Peoples Security Bank and Trust Company (the "FNCB merger"). The reported results do not include the results of FNCB or reflect the completion of the FNCB merger.  As of the date of completion, the combined organization is expected to have approximately $5.5 billion in assets with approximately $4.0 billion in loans and $4.7 billion in deposits throughout its operations spanning Pennsylvania, New York and New Jersey.  All branches of the combined organization will operate under the Peoples Security Bank and Trust Company banner after the integration is completed.

NOTABLES IN THE QUARTER

• Core net income² for the three months ended June 30, 2024 was $4.2 million or $0.59 per diluted share. For the six months ended June 30, 2024, Core net income1 was $8.1 million or $1.14 per diluted share.
• For the six months ended June 30, 2024, loans, net grew $19.7 million or 1.4% annualized and consisted primarily of growth in commercial loans.
• Asset quality remained strong as nonperforming assets as a percentage of total assets at June 30, 2024 was 0.20%, compared to 0.13% at December 31, 2023.
• Total deposits decreased $214.1 million to $3.1 billion during 2024 due in part to seasonal outflows of municipal deposits.
• At June 30, 2024, the Company had $50.0 million in cash and cash equivalents, a decrease of $137.4 million from December 31, 2023. Additional contingent sources of available liquidity total $1.6 billion and include 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. The Company's cash and cash equivalents balance and available liquidity represent 45.4% of total assets and 53.5% of total deposits.
• At June 30, 2024, estimated total insured deposits were approximately $2.3 billion, or 75.7% of total deposits; as compared to approximately $2.4 billion, or 73.1% of total deposits at December 31, 2023. Included in the uninsured total at June 30, 2024 is $239.5 million of municipal deposits collateralized by letters of credit issued by the FHLB and pledged investment securities, and $0.7 million of affiliate company deposits. Total insured and collateralized deposits represent 85.3% of total deposits at June 30, 2024.

INCOME STATEMENT REVIEW 

• Calculated on a fully taxable equivalent basis, a non-GAAP measure¹, our net interest margin for the three months ended June 30, 2024 was 2.29%, consistent with the prior quarter and a decline of 32 basis points when compared to 2.61% for the same three month period in 2023. The decrease in net interest margin from the 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 2 basis points to 4.58% during the three months ended June 30, 2024 from 4.56% during the three months ended March 31, 2024, and increased 27 basis points when compared to 4.31% for the three months ended June 30, 2023.
• Our cost of funds, which represents our average rate paid on total interest-bearing liabilities, increased 5 basis points to 3.01% for the three months ended June 30, 2024 when compared to 2.96% during the three months ended March 31, 2024 and increased 72 basis points compared to 2.29% in the prior year period.
• Our cost of interest-bearing deposits increased 2 basis points during the current three month period to 2.92% from 2.90% in the prior three month period ended March 31, 2024, and increased 71 basis points compared to 2.21% for the three months ended June 30, 2023.
• Our cost of total deposits for the three months ended June 30, 2024 and March 31, 2024 was 2.34%, and increased 62 basis points compared to 1.72% for the three months ended June 30, 2023.

Second Quarter 2024 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure1, for the three months ended June 30, decreased $3.2 million or 14.1% to $19.4 million in 2024 from $22.6 million in 2023.  The decrease in tax-equivalent net interest income was due to a $1.6 million increase in tax-equivalent interest income that was offset by a $4.8 million increase in interest expense.

The higher interest income was the result of increases in the yield of earning assets.  The tax-equivalent yield on the loan portfolio was 5.09% and 4.79% for the three months ended June 30, 2024 and 2023, respectively.  This increase was due to the higher rates on adjustable and floating rate loans, and new loan originations.  Average loans, net, increased $19.0 million when comparing the three months ended June 30, 2024 to the same three month period in 2023.  For the three months ended June 30, the tax-equivalent yield on total investments increased to 1.80% in 2024 from 1.73% in 2023.  Average investments totaled $529.6 million in the three months ended June 30, 2024 and $558.1 million in the three months ended June 30, 2023.  Average federal funds sold decreased $48.4 million to $12.7 million for the three months ended June 30, 2024.

The increased interest expense in the three months ended June 30, 2024 was due primarily to higher rates on consumer, business and municipal deposits driven by the higher interest rate environment.  The Company's total cost of deposits increased during the three months ended June 30, 2024 compared to the year ago period by 62 basis points to 2.34%, and the cost of interest-bearing deposits increased 71 basis points to 2.92% from 2.21% in the corresponding period of the prior year.  Short-term borrowings averaged $45.4 million in the current period at an average cost of 5.61% compared to $16.9 million in short-term borrowings at an average cost of 5.07% in the corresponding period of the prior year.

Average interest-bearing liabilities increased $31.1 million for the three months ended June 30, 2024, compared to the corresponding period last year.  Average noninterest-bearing deposits decreased $91.5 million or 12.9% from the corresponding period of the prior year, due in part to a shift to interest-bearing accounts, and represented 19.3% of total average deposits in the three months ended June 30 2024 as compared to 21.7% in the corresponding period of the prior year.

For the three months ended June 30, 2024, $0.6 million was recorded to the provision for credit losses compared to a credit of $2.2 million in the year ago period.  The current period provision was due to a higher calculated allowance for credit losses.  The higher calculated allowance was due to the establishment of a $0.4 million specific reserve for an individually evaluated commercial real estate loan along with higher pooled loan reserves; additional reserves were required due to loan growth. The prior period credit 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 in the year ago period related to lower loan growth were partially offset by banking industry concerns which resulted in lower expected credit losses.

Noninterest income for the three months ended June 30, 2024 and 2023 was $3.5 million.

Noninterest expense increased $1.5 million or 9.3% to $18.2 million for the three months ended June 30, 2024, from $16.6 million for the three months ended June 30, 2023.  Acquisition related expenses, including legal and consulting and advisory fees, totaled $1.1 million.  Salaries and employee benefits were $8.5 million in both periods.  Occupancy and equipment expenses increased $0.3 million in the current period due to higher information technology (IT) expense and higher facilities costs from inflationary price pressure.  Other expenses increased $0.4 million due primarily to a partial write-down of the former East Stroudsburg branch property.

The provision for income tax expense was $0.4 million or 11.4% of pre-tax income for the three months ended June 30, 2024 and $1.8 million or 16.1% of pre-tax income for the three months ended June 30, 2023, a decrease of $1.4 million due to lower taxable income.

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

Our net interest margin, a non-GAAP measure³, for the six months ended June 30, 2024 was 2.29%, a decrease of 43 basis points over the prior year's period of 2.72%.  Tax-equivalent net interest income, a non-GAAP measure¹ for the six months ended June 30, decreased $7.0 million, or 15.2%, to $39.2 million in 2024 from $46.2 million in 2023.  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.  Average investments decreased $47.1 million compared to June 30, 2023, as the Company engaged in investment sales in the year ago period to, in part, fund loan growth and repay short-term borrowings.  The yield on earning assets was 4.57% for the first half of 2024 compared to 4.23% for the six month period ended June 30, 2023.  The cost of interest bearing liabilities during the six month period ended June 30, 2024 increased 92 basis points to 2.99% from 2.07% for the six months ended June 30, 2023 as the cost of interest-bearing 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, 2024, a provision for credit losses of $1.3 million was recorded due to the establishment of a $0.4 million specific reserve for an individually evaluated commercial real estate loan along with higher pooled loan reserves.  Pooled loan reserves increased due to loan growth and a higher model loss rate that was primarily attributed to the loan portfolio comparing favorably to peer performance and new originations.  For the comparable prior year period, a credit to the provision for credit losses of $0.9 million was recorded due to various factors including updated economic assumptions as well as changes in qualitative factors, portfolio composition and asset quality.

Noninterest income was $6.9 million for the six months ended June 30, 2024 and $7.2 million for the comparable period ended June 30, 2023.  During the period, interest rate swap revenue decreased $0.2 million on lower loan origination volume and market value adjustments.  The prior year's period included $0.1 million gains on the sale of investment securities.

Noninterest expense for the six months ended June 30, 2024, was $36.2 million, an increase of $3.0 million from $33.2 million for the six months ended June 30, 2023.  The increase was due primarily to acquisition related expenses, occupancy and equipment expenses and other expenses, partially offset by reduced salary and benefits expenses.  Salaries and employee benefits expenses decreased $0.3 million compared to the year ago period due to lower benefit costs.  Occupancy and equipment expenses were higher by $0.9 million in the current period due to increased technology costs related to system upgrades and increased account and transaction volumes, and higher facilities costs.  Acquisition related expenses totaled $1.6 million compared to $0.1 million a year ago.  Other expenses increased $1.0 million due primarily to a $0.4 million partial write-down of the former East Stroudsburg branch property and an increase to the provision for unfunded commitments of $0.6 million resulting from a provision of $0.3 million in the current period and a credit of $0.3 million in the year ago period. 

The provision for income taxes for the six months ended June 30, 2024 decreased $2.3 million and the effective tax rate was 11.8% as compared to 15.8% in the prior period. 

BALANCE SHEET REVIEW

At June 30, 2024, total assets, loans and deposits were $3.6 billion, $2.9 billion and $3.1 billion, respectively. During the six month period, federal funds sold were utilized to fund loan growth and seasonal deposit outflows.  

Loan growth for the six months ended June 30, 2024 was $19.7 million or 1.4%, which is consistent with the Company's current balance sheet strategy to slow loan growth.  Commercial loans made up the majority of the growth with residential real estate loans also increasing.

Total investments were $466.9 million at June 30, 2024, compared to $483.9 million at December 31, 2023.  At June 30, 2024, the available for sale securities totaled $385.2 million and the held to maturity securities totaled $81.6 million.  The unrealized loss on the available for sale securities increased $2.4 million from $51.5 million at December 31, 2023 to $53.9 million at June 30, 2024.  The unrealized losses on the held to maturity portfolio totaled $13.4 million and $13.2 million at June 30, 2024 and December 31, 2023, respectively. 

Total deposits decreased $214.1 million during the six months ended June 30, 2024.  Noninterest-bearing deposits decreased $23.7 million and interest-bearing deposits decreased $190.4 million during the six months ended June 30, 2024.  The decrease in deposits was due to a $121.3 million decrease in municipal deposits, $48.1 million decrease in retail deposits and a $32.6 million decrease in commercial deposits.  The Company had $248.9 million and $261.0 million of longer-term callable brokered CDs at June 30, 2024 and December 31, 2023, respectively.  The Company at any time has the option to call the majority of the CDs.  Deposits declined due in part to seasonal outflows of municipal deposits and commercial depositors drawing down their noninterest-bearing balances.

The deposit base consisted of 42.8% retail accounts, 34.7% commercial accounts, 14.4% municipal relationships and 8.1% brokered deposits at June 30, 2024.  At June 30, 2024, total estimated uninsured deposits, were $744.7 million, or approximately 24.3% of total deposits as compared to $883.5 million, or 26.9% of total deposits at December 31, 2023.  Included in the uninsured total at June 30, 2024 is $239.5 million of municipal deposits collateralized by letters of credit issued by the FHLB and pledged investment securities, and $0.7 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.

In addition to deposit gathering and our current long term borrowings, we have additional sources of liquidity available such as cash and cash equivalents, overnight borrowings from the FHLB, the Federal Reserve's Discount Window and Borrower-in-Custody program, correspondent bank lines of credit, brokered deposit capacity and unencumbered securities.  At June 30, 2024, the Company had $50.0 million in cash and cash equivalents, a decrease of $137.4 million from December 31, 2023.  At June 30, 2024, we had $1.6 billion in available additional liquidity representing 45.4% of total assets, 53.5% of total deposits and 220.4% 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, 2024.  Stockholders' equity equaled $340.8 million or $48.29 per share at June 30, 2024, and $340.4 million or $48.35 per share at December 31, 2023. The increase in stockholders' equity from December 31, 2023 is primarily attributable net income less dividends to shareholders, partially offset by a $0.9 million increase to accumulated other comprehensive loss ("AOCI") resulting from an increase 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, 2024 and December 31, 2023 was $42.1 million and $40.3 million, respectively. 

Tangible stockholders' equity, a non-GAAP measure⁴, decreased to $39.31 per share at June 30, 2024, from $39.35 per share at December 31, 2023.  Dividends declared for the six months ended June 30, 2024 amounted to $0.82 per share, representing a dividend payout ratio of 86.3% of net income.  

ASSET QUALITY REVIEW

Asset quality metrics remained strong.  Nonperforming assets were $7.1 million or 0.25% of loans, net and foreclosed assets at June 30, 2024, compared to $4.9 million or 0.17% of loans, net and foreclosed assets at December 31, 2023.  As a percentage of total assets, nonperforming assets totaled 0.20% at June 30, 2024 compared to 0.13% at December 31, 2023.  The increase in nonaccrual loans was primarily due to downgrading one loan totaling $2.65 million to nonaccrual.  This loan also carries a 70% government agency guaranty.  At June 30, 2024, the Company had one foreclosed property recorded at $27 thousand.

During the six month period ended June 30, 2024, net charge-offs were $76 thousand and our provision for credit losses totaled $1.3 million.  The allowance for credit losses equaled $23.1 million or 0.81% of loans, net, at June 30, 2024 compared to $21.9 million or 0.77% of loans, net, at December 31, 2023.  Loans charged-off, net of recoveries, for the three months ended June 30, 2024 were $69 thousand, compared to $25 thousand 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, Susquehanna, Wayne and Wyoming Counties in Pennsylvania, Middlesex County in New Jersey and Broome County in New York through 44 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, core net income and pre-provision revenue ratios, among others.  The reported results included in this release contain items, which Peoples considers non-core, namely acquisition related expenses and 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") and other statements that are not historical facts 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 undue reliance should not be placed on forward-looking statements and 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: macroeconomic trends, including interest rates and inflation; the effects of any recession in the United States; the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine and the conflict in Israel; risks associated with business combinations, the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the FNCB merger within the expected timeframes or at all and to successfully integrate operations of FNCB and those of Peoples, which may be more difficult, time consuming or costly than expected; the FNCB merger may divert management's attention from ongoing business operations and opportunities; effects of the completion of the FNCB merger on our ability to retain customers and retain and hire key personnel and maintain relationships with our vendors, and on our operating results and business generally; the dilution caused by Peoples' issuance of additional shares of its capital stock in connection with the FNCB merger; the outcome of any legal proceedings that may be threatened or instituted against Peoples; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; adverse developments in the financial industry generally, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; inability of third party service providers to perform; our ability to prevent, detect and respond to cyberattacks; and other factors that may be described in our 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 and, specifically, the FNCB merger 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, if they are achieved at all.  As a regulated financial institution, 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.

 [TABULAR MATERIAL FOLLOWS]