AmeriServ Financial, Inc. — Q3 2017 Form 10-Q
Business context and period: Unaudited consolidated results for the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. AmeriServ is a Pennsylvania-based community bank with retail and commercial banking, trust and wealth-management, and insurance operations. Its Trust Company administered approximately $2.1 billion in off-balance-sheet assets.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $8.94 | $8.51 | $26.56 | $25.55 |
| Net interest margin | 3.28% | 3.15% | 3.27% | 3.23% |
| Provision for loan losses | $0.20 | $0.30 | $0.75 | $3.65 |
| Non-interest income | $3.63 | $3.66 | $10.95 | $10.84 |
| Non-interest expense | $10.11 | $10.36 | $30.52 | $31.11 |
| Net income | $1.55 | $1.07 | $4.29 | $1.16 |
| Diluted earnings per share | $0.08 | $0.06 | $0.23 | $0.06 |
| Annualized return on average assets | 0.53% | 0.37% | 0.49% | 0.14% |
| Annualized return on average equity | 6.37% | 4.27% | 5.98% | 1.54% |
Balance sheet, cash flow and capital
- At September 30, 2017, total assets were $1.171 billion, up 1.5% from year-end 2016. Loans, net of unearned income, were $896.2 million, up 1.4%; total deposits were $966.9 million, down 0.1%.
- Cash and cash equivalents were $28.7 million, down $5.4 million from year-end. For the first nine months, operating activities provided $5.5 million; investing activities used $25.8 million; financing activities provided $14.9 million.
- Borrowed funds totaled $98.0 million, up from $78.6 million at year-end; this included $33.6 million in short-term borrowings and $44.0 million in FHLB advances. Management reported $389 million of available overnight FHLB borrowing capacity and $35 million of unsecured federal-funds lines.
- Shareholders’ equity was $97.1 million. The company reported a 7.35% tangible common equity ratio; the Bank was categorized as well capitalized. Company total capital, common equity tier 1, and tier 1 leverage ratios were 13.08%, 9.92%, and 9.32%, respectively.
- The allowance for loan losses was $10.35 million, or 1.15% of loans. Nine-month net charge-offs were $0.34 million, compared with $3.8 million in 2016.
- Cash dividends were $0.015 per share in Q3. The company repurchased 686,360 shares for $2.8 million in the first nine months under a program authorizing repurchases of up to approximately 945,000 shares.
Material changes and management commentary
- Q3 net income rose 45.6% year over year; nine-month net income increased to $4.29 million from $1.16 million. Management attributed improvement to revenue growth, lower operating expenses, and a much smaller loan-loss provision.
- Q3 net interest income increased 5.1% year over year and margin expanded 13 basis points. Nine-month net interest income increased 3.9%, with margin up four basis points. Higher loan yields and growth in securities income contributed; interest expense also rose, including deposit expense.
- Nine-month provision expense fell by $2.9 million from 2016, when a large energy-sector borrower’s bankruptcy and liquidation drove substantial provision and charge-offs. Management described 2017 credit costs as more typical.
- Non-interest expense declined 1.9% for the first nine months. Management cited lower costs associated with a 2016 trust-operations trading error, branch consolidation, closure of the Harrisonburg loan-production office, and expense-control initiatives. The company said those initiatives were expected to deliver approximately $1.2 million in annual cost savings, fully realized in 2017.
- Management’s strategic priorities include community and small-business lending, revenue and wealth-management growth, expense discipline, and improving profitability toward peer levels. It expected loans to remain relatively flat in Q4 2017 because of anticipated large loan payoffs, while expressing optimism about loan growth in 2018. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Non-performing assets including troubled debt restructurings were $5.37 million, or 0.60% of loans and OREO, versus $1.62 million, or 0.18%, at year-end 2016. The increase included a commercial real-estate credit moved to non-accrual; management said it was well secured with a low loan-to-value ratio. Delinquencies and classified loans were also above year-end levels.
- Commercial real estate concentration is material: non-owner-occupied CRE loans were 354% of regulatory capital. The 25 largest credits represented 27.2% of loans. Management highlighted the regional economy and larger commercial exposures as areas for continued monitoring.
- Investment securities had $1.44 million of unrealized losses at quarter-end. Management attributed these mainly to higher market yields, and said it did not intend, nor expect to be required, to sell the securities before recovery. The share of the portfolio rated below “A” or unrated increased to 12.8% from 10.1% at year-end.
- Interest-rate sensitivity analysis estimated net interest income would increase 2.3% under a 200-basis-point rate increase and decrease 2.0% under a 100-basis-point decline. These are model estimates, not forecasts.
- Off-balance-sheet commitments to extend credit were $169.6 million and standby letters of credit were $10.3 million. The company said routine asserted and unasserted claims were not expected to have a material adverse effect. No material legal proceedings or risk-factor updates were reported.
- Key estimates subject to judgment include the loan-loss allowance, goodwill, income taxes, and investment-security impairment. The company was evaluating several future accounting standards, including expected credit-loss requirements.
Important facts for investors to verify
- Whether elevated non-performing assets, delinquencies, and classified commercial exposures improve or require additional reserves.
- Whether deposit costs continue rising faster than asset yields, and how this affects net interest margin and funding needs.
- Progress on loan growth, expected Q4 payoffs, and the company’s CRE concentration and largest borrower exposures.
- Execution and sustainability of the stated cost savings, strategic-plan initiatives, and trust/wealth-management growth.
- Use of remaining repurchase authorization and the effect of buybacks and dividends on capital and tangible book value.