AmeriServ Financial, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, with quarterly comparisons where provided. AmeriServ is a Pennsylvania bank holding company operating a community bank and wealth management business, principally in Pennsylvania and Maryland. It reported 17 bank branches and administered approximately $2.7 billion in trust assets not recorded on its balance sheet.
Financial performance and condition
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net income | $7.072 million | $4.598 million | +53.8% |
| Diluted EPS | $0.41 | $0.27 | +51.9% |
| Net interest income | $39.083 million | $36.367 million | +7.5% |
| Net interest margin | 3.15% | 3.19% | -4 basis points |
| Provision for loan losses | $1.100 million | $2.375 million | -$1.275 million |
| Non-interest income | $17.761 million | $16.275 million | +9.1% |
| Non-interest expense | $46.970 million | $44.455 million | +5.7% |
| Return on average assets / equity | 0.52% / 6.48% | 0.37% / 4.52% | Improved |
- Revenue and earnings drivers: Lower funding costs, loan growth, stronger wealth management fees, and a lower loan-loss provision lifted earnings. Interest income edged down 0.5%, while interest expense fell 27.9%. Wealth management fees rose 17.4% to $11.986 million; wealth management contributed $2.868 million of net income.
- Quarterly result: Fourth-quarter 2021 net income was $1.852 million, or $0.11 per diluted share, compared with $692,000, or $0.04 per share, in fourth-quarter 2020.
- Balance sheet at year-end: Total assets were $1.336 billion, up 4.1%; deposits were $1.139 billion, up 8.0%; net loans were $972.7 million; and shareholders’ equity was $116.5 million, up 11.6%. The loan-to-deposit ratio was 86.5%.
- Liquidity and cash flow: Cash and cash equivalents increased to $41.1 million from $31.5 million. Operating activities provided $9.939 million; investing activities used $488,000; and financing activities provided $146,000. Management reported $365 million of available overnight FHLB borrowing capacity, $32 million at the Federal Reserve, and $35 million in correspondent-bank lines.
- Debt and capital: Total borrowed funds were $72.837 million, versus $114.080 million a year earlier. The company issued $27 million of 10-year subordinated notes at a 3.75% fixed rate through September 2026, then floating at three-month SOFR plus 3.11%; proceeds refinanced approximately $20 million of higher-cost debt and trust preferred securities. The company’s total risk-based capital ratio was 14.04% and leverage ratio 8.17%; the Bank’s corresponding ratios were 12.66% and 9.12%. The Bank was categorized as well capitalized.
- Margins and asset quality: Net interest margin slipped to 3.15% as earning-asset yields declined, despite lower funding costs. The allowance for loan losses rose to $12.398 million, or 1.26% of loans, from $11.345 million, or 1.16%. Net charge-offs were $47,000. Non-performing assets were $3.323 million, or 0.34% of loans, broadly stable year over year.
Material changes versus the prior year
- Deposits increased $84.5 million, including approximately $42 million acquired in the May 2021 purchase of Meyersdale branch and Somerset deposit customers; the acquisition was completed for a 3.71% deposit premium, approximately $1.6 million.
- Loans grew modestly overall: year-end loans excluding PPP loans increased approximately $48.7 million, or 5.3%. PPP balances fell to $17.3 million from $58.3 million as loans were forgiven.
- Borrowings declined as excess liquidity enabled repayment of short-term and FHLB funding. The new subordinated notes are expected by management to reduce annual debt interest expense by approximately $588,000.
- Non-interest expense included a $1.7 million defined-benefit pension settlement charge and $389,000 of branch-acquisition costs. The pension plan’s funded status increased to $20.145 million from $3.586 million, including an $8 million employer contribution and favorable asset returns/revaluation effects.
- Available-for-sale securities had $1.648 million of gross unrealized losses at year-end, versus $247,000 a year earlier; management attributed the losses primarily to higher market yields and said it did not intend or expect to need to sell the securities before recovery or maturity.
Outlook, commentary, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management said it expects to maintain strong capital ratios through 2022 and believes it can continue the quarterly common dividend at $0.025 per share. It anticipated a pension contribution of approximately $5 million in 2022.
- Management described economic conditions as improving but highlighted continuing uncertainty from COVID-19 and variants, inflation, supply-chain constraints, interest rates, and changing customer behavior. It also cited local economic challenges, including persistently higher unemployment and population decline in the Johnstown market.
- Credit risks include commercial real estate exposure and pandemic-sensitive hospitality and personal-care borrowers. Five commercial borrowers had approximately $7.5 million of COVID-related payment modifications at year-end, down sharply from $49.1 million in 2020 and a peak near $200 million in June 2020. Classified loans increased to $17.0 million, principally from commercial real estate downgrades. Non-owner-occupied commercial real estate loans equaled 347% of Bank regulatory capital.
- Interest-rate exposure is material: management’s model showed net interest income sensitivity of +4.5% for a 200-basis-point increase and -5.1% for a 100-basis-point decrease. The company also cited uncertainty around inflation, prepayments, and transition from LIBOR to alternative rates.
- Off-balance-sheet commitments to extend credit were $216.6 million and standby letters of credit were $13.1 million. Management stated that legal claims and these commitments were not expected to have a material adverse effect. The independent auditor issued an unqualified opinion; the allowance for loan losses’ qualitative factors were identified as a critical audit matter.
Important facts for investors to verify
- Whether loan quality and criticized commercial real estate exposures remain stable, especially in hospitality and personal care, and whether the allowance remains adequate.
- Whether deposit growth persists as stimulus-related balances recede, and how the bank deploys excess liquidity without materially reducing returns.
- Actual interest-cost savings from the debt refinancing, and the effect of rate changes on net interest income, securities values, and deposit pricing.
- Progress integrating the acquired deposits and branches, and whether the acquisition delivers the expected funding and earnings benefits.
- Future pension funding needs and expense, including the expected 2022 contribution, and the sustainability of the dividend amid regulatory and capital requirements.