PFIS - Peoples Financial Services Corp. Reports Second Quarter 2018 Earnings

SCRANTON, Pa., July 24, 2018 /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, 2018.  Peoples reported net income of $6.0 million, or $0.81 per share for the second quarter of 2018, compared to $5.7 million, or $0.77 per share for the comparable period of 2017. The increase in earnings for the current period is the product of higher net interest income of $1.5 million due to growth in our average earning assets of $172.3 million from the year ago period and a reduction in income taxes due to the Tax Cuts and Jobs Act of 2017, which reduced the corporate tax rate to 21% effective January 1, 2018. These increases were partially offset by lower noninterest income due to the sale of our merchant services business in the second quarter of 2017 and higher noninterest expenses related to our market expansion initiative.

Net income for the six months ended June 30, 2018, totaled $11.8 million or $1.60 per share compared to $10.5 million or $1.41 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 $2.9 million due to our earning asset growth coupled with a reduction in income taxes due to the lower corporate tax rate, offset by lower noninterest income due to the sale of our merchant services business in the year ago period.

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 Tax Cuts and Jobs Act of 2017. 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 $5.7 million and $4.4 million in 2018 and 2017, respectively. Core net income per share for the three months ended June 30, 2018 was $0.78, an increase from $0.59 for the same period in 2017. These results in 2018 exclude a pre-tax $8 thousand gain in the value of our equity investment securities portfolio and a nonrecurring pre-tax $291 thousand gain from the sale of our credit card portfolio while the results for 2017 exclude a pre-tax $2.3 million gain from the sale of our merchant services business.

Core net income for the six months ended June 30, 2018 was $11.6 million or $1.57 per share compared to $9.2 million or $1.24 per share for the same period of 2017. Results for the six months ended June 30, 2018 exclude a nonrecurring pre-tax gain of $291 thousand from the sale of our credit card portfolio. The 2017 results were impacted by the pre-tax gain of $2.3 million from the sale of our merchant services business.

NOTABLES

• Loans, net growth of $60.3 million in the six months ended June 30, 2018 (7.2% annualized rate), with growth of $156.0 million or 9.8% since June 30, 2017.
• Deposits were relatively flat in the first half of 2018 but grew $79.4 million or 4.8% since June 30, 2017.
• Tangible book value per share improved to $27.50 at June 30, 2018 from $26.83 at December 31, 2017 and from $26.56 at June 30, 2017.
• Tax-equivalent net interest income increased to $35.7 million for the six months ended June 30, 2018 compared to $33.6 million for the same period in 2017.
• Return on average assets was 1.08% for the six months ended June 30, 2018 compared to 1.04% for the comparable period in 2017. Return on average equity was 8.90% for the six months ended June 30, 2018 compared to 8.13% for the year ago period.
• Nonperforming assets to loans, net, and foreclosed assets decreased to 0.63% at June 30, 2018, from 0.68% at December 31, 2017 and 0.73% at June 30, 2017.
• The effective tax rate decreased to 11.8% in the first half of 2018 resulting from the tax reform legislation enacted in December 2017. This compares favorably to 21.8% for the same period in 2017.
• Completed the sale of our credit card portfolio to a non-related third party at an after tax gain of $230 thousand.

INCOME STATEMENT REVIEW

The tax-equivalent net interest margin for the three and six months ended June 30 were 3.58% and 3.57% respectively in 2018, compared to 3.68% and 3.71% 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 Tax Cuts and Jobs Act of 2017. The change in tax rate in the current period resulted in an eight basis point reduction to our tax-equivalent yield on earning assets for the three and six months ended June 30, 2018. This coupled with higher interest-bearing liability costs are the factors in the decrease to our net interest margin on a taxable-equivalent basis from the three and six months ended June 30, 2017 to June 30, 2018.

Tax-equivalent net interest income for the six months ended June 30, increased $2.1 million or 6.0% to $35.7 million in 2018 from $33.6 million in 2017. The increase in tax equivalent net interest income was primarily due to a $182.0 million increase in average earning assets for the six months ended June 30, 2018 when compared to the same period in 2017. The tax-equivalent yield on the loan portfolio increased to 4.42% for the six months ended June 30, 2018, compared to 4.38% for the comparable period in 2017. The current period tax-equivalent yield on the loan portfolio would have been 4.48% had it been calculated using the 35% tax rate. Loans, net averaged $1.7 billion for the six months ended June 30, 2018 and $1.6 billion for the comparable period in 2017. For the six months ended June 30, the tax-equivalent yield on total investments decreased to 2.60% in 2018 from 2.87% in 2017. The current period tax-equivalent yield on total investments would have remained level at 2.87% had it been calculated using the 35% tax rate. Average investments totaled $280.9 million in 2018 and $272.9 million in 2017. Average interest-bearing liabilities increased $138.3 million for the six months ended June 30, 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 0.78% in the six months ended June 30, 2018 from 0.59% for the same period of 2017.

The provision for loan losses totaled $2.1 million for the six months ended June 30, 2018 and $2.4 million for the six months ended June 30, 2017. For the quarter ended June 30, the provision for loan losses was $1.1 million in 2018 and $1.2 million in 2017.

For the six months ended June 30, noninterest income totaled $7.2 million in 2018, a decrease from $10.2 million in 2017. The gain on sale of our credit card portfolio was $291 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, and income generated from wealth management services partially offset decreases in revenues from merchant services, income from fiduciary activities, income from mortgage banking activities and life insurance investment income. For the three months ended June 30, noninterest income totaled $3.7 million in 2018, a decrease from $6.4 million in the comparable 2017 period. The largest decrease was to merchant services income due to the sale of our merchant business in the second quarter of 2017.  Increases in service charges, fees and commissions, which include the gain from the sale of our credit card portfolio, were more than offset by decreases in the other components of noninterest income.

Noninterest expense increased $219 thousand or 0.8% to $26.6 million for the six months ended June 30, 2018, from $26.4 million for the six months ended June 30, 2017. Salaries and employee benefits increased $1.0 million or 7.9% 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 first half of 2018 and 2017 as those expenses increased $690 thousand or 14.2%. Offsetting the increase in salaries and occupancy expenses, merchant services related expenses decreased $1.8 million for the six months ended June 30, 2018 due to the sale of our merchant business in the second quarter of 2017. In addition, during the six months ended June 30, 2018, increases to other expenses, which include such items as FDIC insurance and assessments and donations, were only partially offset by decreases in professional fees and outside services and amortization expense recognized. For the second quarter of 2018, noninterest expense decreased to $13.5 million from $14.0 million for the same period in 2017, a decrease of $0.5 million or 3.6%. The sale of our merchant services portfolio resulted in a $1.0 million reduction to expenses. As with the year-to-date results, 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.

BALANCE SHEET REVIEW

At June 30, 2018, total assets, loans and deposits were $2.2 billion, $1.8 billion and $1.7 billion, respectively. Loans, net increased $60.3 million, or 7.2% annualized from December 31, 2017 to June 30, 2018 and increased $156.0 million, or 9.8% from the year ago period. Total deposits grew $79.4 million or 4.8% from June 30, 2017 to June 30, 2018.  Non-interest bearing deposits increased $44.1 million or 12.4% while interest—bearing deposits increased $35.3 million or 2.8% during that period. During the first half of 2018, total deposits have remained relatively flat which resulted in higher short-term borrowings to fund the loan growth. Total investments were $284.1 million at June 30, 2018, including $275.1 million securities classified as available-for-sale and $8.8 million classified as held-to-maturity.

Stockholders' equity equaled $269.5 million or $36.43 per share at June 30, 2018, and $263.5 million or $35.63 per share at June 30, 2017. Tangible stockholders' equity improved to $27.50 per share at June 30, 2018, from $26.56 per share at June 30, 2017. Dividends declared for the six months ended June 30, 2018 amounted to $0.65 per share, a 4.8% increase from the year ago period, representing a dividend payout ratio of 40.6%.

ASSET QUALITY REVIEW

Nonperforming assets were $11.0 million or 0.63% of loans, net and foreclosed assets at June 30, 2018, compared to $11.6 million or 0.68% of loans, net and foreclosed assets at December 31, 2017 and $11.6 million or 0.73% of loans, net and foreclosed assets at June 30, 2017. The allowance for loan losses equaled $19.6 million or 1.12% of loans, net at June 30, 2018 compared to $19.0 million or 1.12% of loans, net, at December 31, 2017 and $17.8 million or 1.11% of loans, net at June 30, 2017. Loans charged-off, net of recoveries, for the six months ended June 30, 2018, equaled $1.5 million or 0.09% of average loans, compared to $559 thousand or 0.04% 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, 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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