PFIS Peoples Financial Services Corporation

SCRANTON, Pa., Nov. 5, 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 nine months ended September 30, 2024.

Peoples reported a net loss of $4.3 million, or $0.43 per diluted share for the three months ended September 30, 2024, compared to net income of $6.7 million, or $0.95 per diluted share for the comparable period of 2023. Quarterly net income decreased primarily due to the non-recurring charges related to the July 1, 2024 merger of FNCB Bancorp, Inc. into Peoples and the merger of FNCB Bank into Peoples Security Bank and Trust Company (collectively referred to as the "FNCB merger").  Net interest income increased $18.0 million to $39.2 million and the tax-equivalent net interest margin ("NIM") increased 97 basis points to 3.26% due to the combined higher level of earning assets and the $3.7 million net accretion impact of purchase accounting marks on loans, deposits, and borrowings acquired and assumed in the FNCB merger which added 30 basis points of tax-equivalent NIM¹, a non-GAAP measure.  Non-recurring charges, including a $14.3 million provision for credit losses on non-purchase credit deteriorated ("non-PCD") loans acquired in the FNCB merger and acquisition related expenses of $9.6 million, more than offset the higher level of net interest income.

Core net income and core earnings per share¹, non-GAAP measures, exclude non-recurring transactions of $24.0 million and $0.9 million incurred during the three months ended September 30, 2024 and 2023 and totaled $16.5 million or $1.64 per diluted share for the three months ended September 30, 2024 compared to $7.5 million, or $1.05 per diluted share for the comparable period of 2023.

Core pre-provision net revenue (PPNR) and core PPNR per share¹, non-GAAP measures, which exclude 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 September 30, 2024 was $18.3 million or $1.83 per diluted share.  The core PPNR and core PPNR diluted earnings per share for the corresponding prior year period was $8.8 million or $1.23 per diluted share. 

For the nine months ended September 30, 2024, net income was $2.4 million, or $0.30 per diluted share, compared to $23.8 million, or $3.31 per diluted share for the comparable period of 2023.  Net income for the current period decreased $21.4 million when compared to the nine months ended September 30, 2023 due to $25.5 million of non-recurring charges, including $11.2 million of acquisition expenses and a $14.3 million provision for credit losses on non-PCD loans, which were partially offset by higher interest income due to increased levels of earning assets.

Core net income and core earnings per share¹, non-GAAP measures, totaled $25.6 million or $3.17 per diluted share for the nine months ended September 30, 2024 compared to $24.5 million, or $3.42 per share for the comparable period of 2023. 

Core pre-provision net revenue (PPNR) and core PPNR per share¹, non-GAAP measures, for the nine months ended September 30, 2024 were $29.1 million or $3.60 per diluted share.  The core PPNR and core PPNR diluted earnings per share for the corresponding prior year period was $28.0 million or $3.90 per diluted share.

Merger with FNCB

Peoples acquired FNCB and its wholly-owned subsidiary FNCB Bank by merger on July 1 2024. The merger and acquisition method of accounting was used to account for the transaction with Peoples as the acquirer. The Company recorded the assets and liabilities of FNCB at their respective fair values as of July 1, 2024. The transaction was valued at approximately $133.7 million.  Primary reasons for the merger included: expansion of the branch network and commanding market share positions in northeastern Pennsylvania; attractive low-cost funding base; strong cultural alignment and a deep commitment to shareholders, customers, employees, and communities served by Peoples and FNCB, meaningful value creation to shareholders; and increased trading liquidity for both companies and increased dividends for Peoples shareholders.

At the time of the merger, FNCB contributed, after fair value purchase accounting adjustments, approximately $1.8 billion in assets, $421.9 million in investments, $1.2 billion in loans, $1.4 billion in deposits, $226.3 million in FHLB advances and other borrowings, and $8.0 million in subordinated debt and trust preferred debentures. The excess of the merger consideration over the fair value of the net FNCB assets acquired and liabilities assumed resulted in $13.6 million of goodwill.  The FNCB merger also resulted in a core deposit intangible valued at $36.6 million or 5.1% of core deposits.

Subsequent to the FNCB merger, through September 30, 2024, the Company sold $271.2 million par value of the available for sale securities portfolio acquired for net proceeds of $241.2 million and used $189.0 million of the proceeds to repay short-term overnight FHLB advances.

The Company incurred non-recurring expenses of $24.0 million and $25.5 million for the three and nine months ended September 30, 2024, respectively, related to merger and acquisition costs, and an increased allowance for credit losses related to the acquisition of non-PCD loans acquired in the FNCB merger.

The Company's financial results for any periods ended prior to July 1, 2024 reflect Peoples results only on a standalone basis. As a result of this factor and the below listed adjustments related to the FNCB merger, the Company's financial results for the third quarter of 2024 may not be directly comparable to prior reported periods. The following schedule highlights specific merger related activity for the three and nine months ended September 30, 2024:

Schedule of Merger & Acquisition Cost and Non-Recurring Merger Related Activity (Unaudited)

NOTABLES IN THE QUARTER

• Allowance for credit losses to loans, net increased to 0.97% at September 30, 2024 from 0.81% and 0.80% at June 30, 2024 and September 30, 2023, respectively.
• Return on average equity for the three months ended September 30, 2024 was negative 3.58% compared to 8.05% for the three months ended September 30, 2023; excluding the non-recurring charges, core return on average equity1, a non-GAAP measure, was 13.61% for the three months ended September 30, 2024 compared to 8.91% for the three months ended September 30, 2023.
• Return on average assets for the three months ended September 30, 2024 was negative 0.33% compared to 0.72% for the three months ended September 30, 2023; excluding the non-recurring charges, core return on average assets¹, a non-GAAP measure, was 1.24% for the three months ended September 30, 2024 compared to 0.79% for the three months ended September 30, 2023.
• Tangible book value per common share¹, a non-GAAP measure, decreased to $36.24 per share at September 30, 2024 compared to $39.31 per share at June 30, 2024; this decrease was primarily due to the impact of loan marks associated with the FNCB merger and the net loss incurred for the third quarter of 2024.
• At September 30, 2024, the Company had $285.5 million in cash and cash equivalents, an increase of $98.1 million from December 31, 2023. Additional contingent sources of available liquidity total $2.2 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 47.2% of total assets and 54.5% of total deposits.
• At September 30, 2024, estimated total insured deposits were approximately $3.1 billion, or 66.2% of total deposits. Included in the uninsured total at September 30, 2024 is $372.5 million of municipal deposits collateralized by letters of credit issued by the FHLB and pledged investment securities, and $1.7 million of affiliate company deposits. Total insured and collateralized deposits represent 74.3% of total deposits at September 30, 2024.

INCOME STATEMENT REVIEW 

• NIM, calculated on a fully taxable equivalent basis, a non-GAAP measure¹, for the three months ended September 30, 2024 was 3.26%, an increase of 97 basis points compared to 2.29% for the prior quarter and an increase of 82 basis points when compared to 2.44% for the corresponding three month period in 2023. The increase in tax-equivalent NIM from the year ago period was primarily from a higher volume of earning assets and the net accretion impact of purchase accounting marks on loans, deposits and borrowings acquired and assumed in the FNCB merger, which totaled $3.7 million of net interest income, and represented 30 basis points of tax-equivalent NIM.
• The tax-equivalent yield on interest-earning assets, a non-GAAP measure² , increased 105 basis points to 5.63% during the three months ended September 30, 2024 from 4.58% during the three months ended June 30, 2024, and increased 123 basis points when compared to 4.40% for the three months ended September 30, 2023.
• The cost of funds, which represents the average rate paid on total interest-bearing liabilities, decreased 12 basis points to 2.89% for the three months ended September 30, 2024 when compared to 3.01% during the three months ended June 30, 2024 and increased 28 basis points compared to 2.61% in the prior year period.
• The cost of interest-bearing deposits decreased 16 basis points during the three months ended September 30, 2024 to 2.76% from 2.92% in the three months ended June 30, 2024, and increased 23 basis points compared to 2.53% for the three months ended September 30, 2023.
• The cost of total deposits for the three months ended September 30, 2024 was 2.33%, a decrease of 1 basis point from 2.34% for the three months ended June 30, 2024, an increase of 33 basis points compared to 2.00% for the three months ended September 30, 2023.

Third Quarter 2024 Results – Comparison to Prior-Year Quarter

Tax-equivalent net interest income, a non-GAAP measure³, for the three months ended September 30, increased $18.2 million or 83.7% to $40.0 million in 2024 from $21.8 million in 2023.  The increase in tax-equivalent net interest income was due to a $29.8 million increase in tax-equivalent interest income that was offset by a $11.6 million increase in interest expense.

Higher interest income was the result of increases in the volume of earning assets due to the FNCB merger and net accretion from purchase accounting loan marks which totaled $4.7 million.  Average loans, net, increased $1.2 billion when comparing the three months ended September 30, 2024 to the corresponding three month period in 2023.  Average investments totaled $700.6 million in the three months ended September 30, 2024 and $542.5 million in the three months ended September 30, 2023.  Average federal funds sold decreased $42.4 million to $92.2 million for the three months ended September 30, 2024.

The increase in interest expense in the three months ended September 30, 2024 was $11.6 million due primarily to higher rates paid on consumer, business and municipal deposits coupled with the increased balances contributed by the FNCB merger.  The increase in interest expense included $1.0 million in amortization of purchase accounting marks on deposits and borrowings acquired and assumed in the FNCB merger.  The Company's total cost of deposits increased 33 basis points to 2.33% during the three months ended September 30, 2024 compared to the year ago period and the cost of interest-bearing deposits increased 23 basis points to 2.76% from 2.53% in the corresponding period of the prior year.  Short-term borrowings averaged $43.9 million in the current period at an average cost of 5.53% compared to $21.8 million in short-term borrowings at an average cost of 5.31% in the corresponding period of the prior year.

Average interest-bearing liabilities increased $1.3 billion for the three months ended September 30, 2024, compared to the corresponding period last year primarily due to the FNCB merger.  Average noninterest-bearing deposits increased $25.5 million or 3.7% from the corresponding period of the prior year, due in part to a shift to interest-bearing accounts, and represented 15.8% of total average deposits in the three months ended September 30 2024 as compared to 21.0% in the corresponding period of the prior year.

For the three months ended September 30, 2024, $14.5 million was recorded to the provision for credit losses compared to a credit of $0.2 million in the year ago period.  The current period provision included a non-recurring provision of $14.3 million for non-PCD loans acquired in the FNCB merger.  Excluding the impact of the FNCB merger, the provision for credit losses for the three months ended September 30, 2024 was $0.2 million.

Noninterest income for the three months ended September 30, 2024 and 2023 was $5.7 million and $3.7 million, respectively.  The increase was primarily due to the FNCB merger and consisted of higher levels of service charges, fees, commissions and other income, wealth management fees and increased cash surrender value of life insurance.  These increases were partially offset by lower interest rate swap revenue due to reduced origination volume.

Noninterest expense increased $18.4 million to $35.5 million for the three months ended September 30, 2024, from $17.1 million for the three months ended September 30, 2023.  Acquisition related expenses, including legal and consulting, core system de-conversion fees and advisory fees, totaled $9.7 million.  Salaries and employee benefits were $4.4 million higher due to the addition of 195 full time equivalent employees.  Occupancy and equipment expenses increased $2.2 million in the current period due to higher information technology (IT) expense and higher facilities costs from inflationary price pressure and the additional branches from the FNCB merger. 

The income tax benefit was $0.7 million or 13.2% of pre-tax loss for the three months ended September 30, 2024 compared to income tax expense of $1.3 million or 16.5% of pre-tax income for the three months ended September 30, 2023, a change of $2.0 million due to lower taxable income.

Nine-Month Results – Comparison to Prior Year First Nine months

The tax-equivalent NIM, a non-GAAP measure⁴, for the nine months ended September 30, 2024 was 2.69%, an increase of 7 basis points over the prior year's period of 2.62%.  Tax-equivalent net interest income, a non-GAAP measure¹ for the nine months ended September 30, increased $11.2 million, or 16.5%, to $79.1 million in 2024 from $67.9 million in 2023.  The increase in tax-equivalent net interest income was primarily the result of higher loan interest income due to increased volume and rates on new loans acquired through the FNCB merger and an additional $4.7 million from accretion of purchase accounting marks on loans. Average investments increased $22.2 million compared to September 30, 2023, as the Company engaged in investment sales subsequent to the FNCB merger to repay short-term borrowings.  The tax-equivalent yield on earning assets was 5.01% for the first nine months of 2024 compared to 4.29% for the nine months ended September 30, 2023.  The cost of interest bearing liabilities during the nine month period ended September 30, 2024 increased 68 basis points to 2.94% from 2.26% for the nine months ended September 30, 2023 as the cost of interest-bearing deposit products and short-term borrowing costs increased. The net impact of the purchase accounting accretion and amortization of the loan, deposit and borrowing marks acquired and assumed in the FNCB merger was $3.7 million and contributed 13 basis points to the NIM.  

For the nine months ended September 30, 2024, a provision for credit losses of $15.8 million was recorded and included a $14.3 million day-one provision for non-PCD loans acquired in the FNCB merger.  The balance includes adjustments through September 30, 2024 for individually evaluated and pooled loans. 

Noninterest income was $12.7 million for the nine months ended September 30, 2024 and $10.9 million for the comparable period ended September 30, 2023.  During the period, service charges and fees increased $1.5 million , wealth management income increased $0.3 million, bank owned life insurance cash surrender value increased $0.3 million and gains on equity securities increased $0.2 million while interest rate swap revenue decreased $0.5 million on lower loan origination volume and market value adjustments.

Noninterest expense for the nine months ended September 30, 2024, was $71.7 million, an increase of $21.5 million from $50.2 million for the nine months ended September 30, 2023.  The increase was due primarily to higher acquisition related expenses, and higher expenses due to additional full time equivalent employees and facilities due to the FNCB merger. Salaries and employee benefits expenses increased $4.1 million compared to the year ago period due to the addition of 195 full time equivalent employees from the FNCB merger.  Occupancy and equipment expenses were higher by $3.1 million in the current period due to increased technology costs related to system integration and increased account and transaction volumes, and higher facilities costs.  Acquisition related expenses totaled $11.2 million compared to $1.0 million a year ago.  The provision for income taxes for the nine months ended September 30, 2024 decreased $4.3 million and the effective tax rate was 9.1% as compared to 16.0% in the prior period.

BALANCE SHEET REVIEW

At September 30, 2024, total assets, loans and deposits were $5.4 billion, $4.1 billion and $4.6 billion, respectively.

Loan growth for the nine months ended September 30, 2024 was $1.2 billion or 42.8%, due primarily to the $1.2 billion in loans acquired in the FNCB merger.  Commercial loans made up the majority of the growth with residential real estate loans also increasing.

Total investments were $647.1 million at September 30, 2024, compared to $483.9 million at December 31, 2023.  At September 30, 2024, the available for sale securities totaled $563.3 million and the held to maturity securities totaled $79.9 million.  The unrealized loss on the available for sale securities decreased $12.7 million from $51.5 million at December 31, 2023 to $38.8 million at September 30, 2024.  The unrealized losses on the held to maturity portfolio totaled $10.8 million and $13.2 million at September 30, 2024 and December 31, 2023, respectively. 

Total deposits increased $1.4 billion during the nine months ended September 30, 2024 due primarily to the $1.4 billion in deposits acquired in the FNCB merger.  Noninterest-bearing deposits increased $72.9 million and interest-bearing deposits increased $1.3 billion during the nine months ended September 30, 2024. The Company had $391.6 million and $261.0 million of longer-term callable brokered CDs at September 30, 2024 and December 31, 2023, respectively.  Of the balance at September 30, 2024, the Company has the option to call $248.9 million of the brokered CDs at any time.  Subsequent to quarter-end the Company called $100.7 million of its higher cost brokered CDs in order to reduce its cost of funds.

The Company's deposit base consisted of 38.6% retail accounts, 33.3% commercial accounts, 19.7% municipal relationships and 8.4% brokered deposits at September 30, 2024.  At September 30, 2024, total estimated uninsured deposits, were $1.6 billion, or approximately 33.8% of total deposits.  Included in the uninsured total at September 30, 2024 is $372.5 million of municipal deposits collateralized by letters of credit issued by the FHLB and pledged investment securities, and $1.7 million of affiliate company deposits.  We also offer customers access to IntraFi's CDARS and ICS programs through which their deposits may be allocated to separate FDIC-insured institutions, while they are able to maintain their relationship with the bank.

In addition to deposit gathering and current long-term debt, 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 September 30, 2024, the Company had $97.1 million in cash and cash equivalents, an increase of $63.6 million from December 31, 2023.  At September 30, 2024, we had $2.2 billion in available additional liquidity representing 41.8% of total assets, 48.4% of total deposits and 143.1% of uninsured deposits.  For additional information on the deposit portfolio and additional sources of liquidity, see the tables on page 17.

The Company maintained its well capitalized position at September 30, 2024.  Stockholders' equity equaled $475.1 million or $47.53 per share at September 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 to the FNCB merger, net income less dividends to shareholders, partially offset by a $9.8 million decrease to accumulated other comprehensive loss ("AOCL") resulting from a reduction in the unrealized loss on available for sale securities.  The net after tax unrealized loss on available for sale securities included in AOCL at September 30, 2024 and December 31, 2023 was $28.6 million and $40.3 million, respectively. 

Tangible book value⁵, a non-GAAP measure, decreased to $36.24 per share at September 30, 2024, from $39.35 per share at December 31, 2023.  Dividends declared for the nine months ended September 30, 2024 amounted to $1.4375 per share.  

ASSET QUALITY REVIEW

Nonperforming assets were $21.5 million or 0.53% of loans, net and foreclosed assets at September 30, 2024, compared to $4.9 million or 0.17% of loans, net and foreclosed assets at December 31, 2023.  Nonperforming assets at September 30, 2024 included $7.6 million of loans acquired in the FNCB merger. As a percentage of total assets, nonperforming assets totaled 0.41% at September 30, 2024 compared to 0.13% at December 31, 2023.  At September 30, 2024, the Company had one foreclosed property recorded at $27 thousand.

During the nine months ended September 30, 2024, net charge-offs were $158 thousand and the provision for credit losses totaled $15.8 million.  The provision for credit losses included a $14.3 million FNCB merger related adjustment for non-PCD loans. The allowance for credit losses equaled $39.3 million or 0.97% of loans, net, at September 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 September 30, 2024 were $82 thousand, compared to $42 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 39 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 its subsidiaries (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; the possibility that Peoples may be unable to achieve the expected synergies and operating efficiencies of the FNCB merger within the expected timeframes or at all; the possibility that Peoples may be unable to successfully integrate operations of FNCB or that the integration 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 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.

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