AmeriServ Financial, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
AmeriServ is a Pennsylvania-based community banking and financial services company, with community banking, wealth management and investment/parent activities. This unaudited filing covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019. Financial amounts below are in millions unless otherwise noted.
Key financial results and position
- Q2 earnings: Net income was $1.419 million, or $0.08 per diluted share, versus $1.792 million, or $0.10, in Q2 2019. Annualized return on assets was 0.46% and return on equity was 5.63%.
- First-half earnings: Net income was $2.828 million, or $0.17 per diluted share, versus $3.670 million, or $0.21, in the first half of 2019.
- Revenue and margins: Q2 net interest income was $9.473 million, up 4.5%; net interest margin was 3.30%, unchanged year over year. Non-interest income was $3.767 million, up 3.0%. First-half net interest income was $18.224 million, up 2.9%, while margin eased to 3.26% from 3.27%; non-interest income was $7.599 million, up 4.6%.
- Credit costs and expenses: Q2 provision for loan losses was $450,000, compared with none in Q2 2019. First-half provision was $625,000 versus a $400,000 recovery in 2019. Non-interest expense rose 5.3% in Q2 to $11.006 million and 4.3% in the first half to $21.639 million.
- Assets and funding: Total assets were $1.242 billion, up 6.1% from year-end. Loans, net of unearned income, were $920.2 million; deposits were $1.033 billion, up $72.5 million. Cash and cash equivalents rose to $46.7 million from $22.2 million. Total borrowed funds were $94.3 million, down from $100.6 million; shareholders’ equity was $102.6 million.
- Cash flow: In the first half, operating activities used $1.4 million, investing activities used $39.3 million, and financing activities provided $65.3 million, producing a $24.6 million increase in cash and cash equivalents.
- Capital and liquidity: The Bank was categorized as well capitalized. Company total capital, common equity tier 1, and tier 1 leverage ratios were 13.19%, 10.26%, and 9.54%, respectively. The company reported a 7.37% tangible common equity ratio. Q2 loan-to-deposit ratio was 89.9% at period-end.
Material changes versus comparable periods
- Q2 net income declined 20.8% year over year; first-half net income declined 22.9%. Management attributed the lower earnings principally to increased loan-loss provisioning amid COVID-19 uncertainty.
- Lower interest rates reduced loan yields and interest income, but lower deposit and borrowing costs more than offset the decline, supporting net interest income. Management estimated Q2 margin would have been approximately 3.10% excluding PPP lending income and related government-stimulus deposit effects; this is a company-presented non-GAAP measure.
- Loans grew by about $40.8 million from year-end, including $66.9 million of PPP loans. Deposits increased by $72.5 million, while cash and short-term investments also rose substantially.
- Mortgage production was particularly strong: first-half production exceeded $55 million, up 155% year over year, supporting loan-sale gains and mortgage fees. Wealth management fees also increased.
- Q2 non-performing assets rose to $3.1 million, or 0.34% of loans and OREO, from $2.3 million, or 0.26%, at year-end. The allowance was $9.7 million, equal to 1.04% of loans and 311% of non-performing assets.
Outlook, risks and unusual items
- Management said it expects to maintain strong capital ratios through the remainder of 2020 and believes it can continue the current quarterly common dividend of $0.025 per share. No specific earnings or revenue guidance was provided.
- COVID-19 is the central uncertainty: its duration and economic effects on borrowers, employment, markets and customers remain unclear. Management emphasized monitoring borrowers receiving payment relief and strengthening qualitative credit-loss assumptions.
- COVID-related modifications covered $200.0 million of non-PPP loans at June 30, 2020, or 23.2% of non-PPP loans: $190.3 million commercial/CRE, $5.9 million home equity/consumer and $3.8 million residential mortgage. These included 383 loans; most received interest-only payments or full payment deferrals.
- The company originated 437 PPP loans totaling $66.9 million and recognized $1.0 million of PPP processing-fee and interest income. PPP loans carry a 100% SBA guarantee, subject to program requirements.
- Commercial real estate concentration is material: non-owner-occupied CRE was 323% of regulatory capital. Management also cited exposure to hospitality, retail, restaurants and other sectors affected by the pandemic.
- Other pressures included higher pension expense as discount rates fell, additional COVID-related protective-equipment costs, and reduced deposit-service-charge income during the shutdown. The prior share-repurchase program was completed; evaluation of a new program is on hold.
- Off-balance-sheet commitments included $237.7 million to extend credit and $13.7 million of standby letters of credit. Management stated that ordinary-course legal matters and funding these commitments were not expected to have a material adverse effect.
Important facts for investors to verify
- Subsequent loan performance, delinquencies, risk-rating changes and losses among the $200.0 million of COVID-modified loans and pandemic-sensitive commercial borrowers.
- Whether deposit growth and elevated liquidity persist as stimulus effects fade, and the effect of redeploying low-yielding cash on net interest margin.
- The sustainability of mortgage volumes, PPP fee recognition and wealth-management results, and the impact of lower rates on future earnings and pension costs.
- Allowance adequacy and the timing and effect of CECL adoption; the filing says the eventual allowance adjustment cannot yet be determined.
- Capital and dividend capacity, including the CRE concentration and the outcome of any future share-repurchase decision.