AmeriServ Financial, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Interim financial statements are unaudited. Amounts below are in millions except per-share data and ratios.
Business context and financial performance
AmeriServ is a Pennsylvania community banking and financial services company. Its businesses include retail and commercial banking, trust and investment advisory services, and investment/parent activities. The Trust Company administered $2.0 billion in assets not recorded on the company’s balance sheet.
- Earnings: Net loss was $1.267 million; loss available to common shareholders was $1.282 million, or $0.07 per diluted share. Q1 2015 net income was $1.369 million, or $0.07 per diluted share. Annualized return on average assets was (0.45)% and return on average equity was (4.86)%.
- Revenue and margin: Interest income was $10.422 million, down 1.0%; non-interest income was $3.437 million, down 7.4%. Net interest income fell 4.2% to $8.558 million, and net interest margin declined 27 basis points to 3.30%. Higher funding costs and margin compression outweighed loan growth.
- Expenses and taxes: Non-interest expense increased 2.9% to $10.711 million. The company recorded a $0.549 million income tax benefit, versus $0.617 million of tax expense in Q1 2015.
- Cash flow: Operating activities provided $0.404 million and investing activities provided $0.229 million. Financing activities used $25.520 million, including the $21.0 million preferred-stock redemption. Cash and cash equivalents fell $24.887 million to $23.623 million.
- Balance sheet and funding: Total assets were $1.122 billion, down 2.3% from year-end. Loans, net of unearned income, were $879.972 million; deposits were $906.773 million, up $3.479 million. Total borrowed funds were $109.272 million, down from $117.058 million. Average loan-to-deposit ratio was 96.8%.
- Credit quality: The allowance for loan losses was $9.520 million, or 1.08% of loans. Non-performing assets, including TDRs, were $3.007 million, or 0.34% of loans and OREO, compared with $6.297 million and 0.71% at year-end. Q1 net charge-offs were $3.4 million, or an annualized 1.60% of average loans.
- Capital: The Bank was categorized as well capitalized. Company ratios included total capital of 13.11%, common equity Tier 1 of 9.94%, and Tier 1 leverage of 9.28%. Tangible common equity to tangible assets was 7.72%.
Material changes and unusual items
- A $3.1 million loan-loss provision, versus $0.25 million in Q1 2015, drove the quarterly loss. The company attributed it primarily to one fracking-industry borrower whose bankruptcy converted from Chapter 11 reorganization to Chapter 7 liquidation. The company charged off $3.339 million in commercial loans; management described this as its only meaningful direct energy-sector exposure.
- Trust operations incurred $366,000 of additional expenses related to a trading error during a technology upgrade, including $288,000 of non-recurring legal and accounting costs. Management said corrective actions were nearly complete and the system was functioning as expected.
- The company redeemed $21 million of Treasury-held SBLF preferred stock on January 27, 2016, funded with $7.65 million of subordinated debt and cash and securities. The new debt carries a 6.50% fixed rate and contributed to higher interest expense.
- Total shareholders’ equity declined $21.384 million from year-end, primarily reflecting the preferred-stock redemption and the quarterly net loss. The company reported $0.01 per common share in dividends declared.
Outlook, liquidity, and risks
Management expected a return to more typical profitability in Q2 2016, stating that the principal causes of the loss were behind the company. It anticipated maintaining strong capital ratios through 2016 and said it would consider more active shareholder capital returns in the second half, contingent on a return to more typical profitability. The company projected approximately $750,000 in annual savings from branch consolidation and executive realignment.
Management reported $366 million of immediately available FHLB overnight borrowing capacity and $39 million of unsecured correspondent-bank federal funds lines. It said liquidity was strong and expected holding-company cash needs for debt service and common dividends to total approximately $2.4 million over the next 12 months. Outstanding commitments to extend credit were approximately $171.1 million, with $9.0 million of standby letters of credit.
Risks cited include credit losses, regional and national economic conditions, competition, interest-rate changes and prepayment speeds, regulatory changes, and execution and customer-acceptance risks. A 100-basis-point rate decrease was modeled to reduce net interest income by 3.7%; a 100-basis-point increase was modeled to increase it by 1.9%. Management said unrealized securities losses were primarily rate-related and temporary, and it did not intend or expect to be required to sell those securities before recovery. The company reported no material legal proceedings and said it did not expect claims or credit commitments to materially harm its financial position, results, or cash flows.
Most important facts for investors to verify
- Whether credit losses are contained after liquidation of the fracking borrower, and how subsequent charge-offs, delinquencies, and allowance coverage develop.
- Whether the Trust Company’s trading-error remediation is complete and whether the associated expenses are genuinely non-recurring.
- Whether margin pressure persists as funding costs, deposits, and borrowings reprice, particularly given the new subordinated debt and low-rate sensitivity.
- Whether management achieves the forecast return to typical profitability, approximately $750,000 in annual savings, and any contemplated second-half capital returns.
- Whether liquidity and regulatory capital remain adequate after the preferred redemption, planned dividends, and loan growth.