AmeriServ Financial, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Amounts are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
AmeriServ is a Pennsylvania-based bank holding company with retail and commercial banking, wealth management, and insurance operations. Its bank operated 16 locations in Pennsylvania and Maryland. The Trust Company administered $2.2 billion of customer assets not recorded on the balance sheet.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Interest income | $12.164 | $11.217 |
| Interest expense | $3.507 | $2.469 |
| Net interest income | $8.657 | $8.748 |
| Net interest margin | 3.24% | 3.29% |
| Noninterest income | $3.605 | $3.635 |
| Noninterest expense | $10.293 | $10.120 |
| Pretax income | $2.369 | $2.213 |
| Net income | $1.878 | $1.767 |
| Diluted earnings per share | $0.11 | $0.10 |
Net income increased 6.3% year over year. Annualized return on average assets was 0.66% (0.62% in Q1 2018), and return on average equity was 7.84% (7.55%).
Balance sheet, cash flow, debt and liquidity
- Total assets were $1.168 billion, up $7.0 million from year-end. Net loans were $854.4 million; total deposits were $957.8 million, up $8.6 million. Shareholders’ equity was $99.1 million.
- Cash and cash equivalents ended at $29.7 million, down $5.2 million from year-end. Operating activities provided $1.7 million; investing activities used $6.5 million; financing activities used $0.4 million.
- Total borrowed funds were $104.1 million, down $4.0 million from year-end. This included $30.9 million in short-term borrowings and $48.6 million in FHLB advances. The company reported $12.9 million of junior subordinated debentures and $7.5 million of subordinated debt.
- Management reported an average loan-to-deposit ratio of 88.8% and stated that the company had $354 million of available overnight FHLB borrowing capacity and $35 million of unsecured correspondent-bank lines.
- The Bank was categorized as well capitalized. Company capital ratios included 13.37% total capital, 10.44% common equity tier 1, and 9.87% tier 1 leverage. Tangible common equity to tangible assets was 7.54%.
Changes versus comparable periods
- Net interest income declined $91,000 and net interest margin fell five basis points, despite interest income rising 8.4%. Interest expense rose 42.0%, chiefly from higher deposit costs and borrowing costs.
- Average loans fell 2.4% year over year, while average investment securities rose 12.0%. Higher loan yields and securities income partly offset the smaller average loan balance.
- The company recorded a $400,000 loan-loss provision recovery, compared with a $50,000 provision expense in Q1 2018. Net charge-offs were $164,000, or 0.08% of loans, versus $332,000, or 0.15%.
- Noninterest income decreased 0.8%; noninterest expense increased 1.7%. Salaries and benefits and other expense increased, partly offset by lower FDIC insurance and professional fees.
- Nonperforming assets were $1.168 million, or 0.14% of loans and other real estate owned, versus $1.378 million, or 0.16%, at year-end. The allowance was $8.107 million, or 0.94% of loans, compared with $8.671 million, or 1.00%, at year-end.
Outlook, commentary, risks and unusual items
- Management said it expects the loan-to-deposit ratio to grow moderately during the rest of 2019 and anticipates maintaining strong capital ratios. It identified a strategic goal of 10% year-over-year EPS growth; this is a stated objective, not formal quarterly guidance.
- Management cited a flattening yield curve, which at times inverted, competitive pressure to retain and attract deposits, and higher deposit and overnight borrowing costs. It described interest-rate sensitivity as near neutral in upward-rate scenarios but negative for net interest income and portfolio equity under a 100-basis-point rate decrease.
- The Bank’s non-owner-occupied commercial real estate concentration was 335% of regulatory capital. Management said it monitors the portfolio given its relatively large commercial and commercial real estate credits.
- Outstanding commitments to extend credit were approximately $214.0 million, with $16.5 million of standby letters of credit. Management did not expect these commitments or routine legal claims to materially adversely affect the company.
- Adoption of lease accounting on January 1, 2019 added approximately $4.2 million of right-of-use assets and lease liabilities, with no opening retained-earnings adjustment. The company was evaluating the expected-credit-loss standard due in 2020; the size of any adoption adjustment was not yet known.
- The company completed a prior repurchase program, buying back 540,000 shares for $2.38 million over nine months. A new program announced April 16 authorized repurchases of up to approximately 526,000 shares over 12 months. The quarterly dividend was raised 25% to $0.025 per share.
- Unrealized securities losses were attributed mainly to market yields; management said it did not intend, and did not expect to be required, to sell the affected securities before recovery or maturity. The filing reported no material legal proceedings and no applicable risk-factor updates.
Important facts for investors to verify
- Whether deposit repricing and funding costs continue to pressure net interest margin and earnings.
- Whether loan growth resumes, and how the CRE concentration and credit-quality trends evolve.
- The allowance adequacy and the assumptions behind the Q1 provision recovery, particularly ahead of adoption of the expected-credit-loss standard.
- Execution of the new share-repurchase authorization and the sustainability of the increased dividend relative to earnings and capital needs.
- Interest-rate exposure, available borrowing capacity, and the effect of changes in rates or liquidity on funding costs and securities values.