AmeriServ Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and financial results
AmeriServ is a Pennsylvania community bank and wealth-management provider. The Bank operated 17 locations in Pennsylvania and Maryland; the Trust Company administered $2.3 billion in client assets not recorded on the balance sheet.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $10.5 | $9.2 | $30.4 | $28.8 |
| Net interest margin | 3.35% | 2.85% | 3.24% | 3.07% |
| Non-interest income | $4.3 | $4.4 | $12.8 | $13.4 |
| Non-interest expense | $11.7 | $11.5 | $35.3 | $34.9 |
| Net income | $2.1 | $1.4 | $6.5 | $5.2 |
| Diluted earnings per share | $0.12 | $0.08 | $0.38 | $0.31 |
Q3 net income increased 46.9%; nine-month net income increased 24.5%. Management attributed the improvement primarily to higher net interest income, lower funding costs following 2021 financing actions, and improved nine-month credit-loss provision results. Q3 annualized return on average assets was 0.62% and return on average equity was 7.81%.
Balance sheet, cash flow, debt and liquidity
- At September 30, total assets were $1.350 billion, deposits $1.153 billion, net loans $968.8 million and shareholders’ equity $101.6 million. Compared with year-end 2021, assets rose $14.5 million, deposits rose $13.4 million, and net loans declined $3.9 million.
- Cash and cash equivalents were $28.5 million, down $12.6 million from year-end. Nine-month operating cash flow was $1.9 million, investing cash flow was negative $38.6 million and financing cash flow was positive $24.1 million.
- Borrowings included $26.3 million of short-term borrowings, $28.5 million of FHLB advances and $26.6 million of subordinated debt. Total borrowed funds on the balance sheet were $84.8 million, including lease liabilities.
- Management described liquidity as strong. The Q3 average loan-to-deposit ratio was 84.2%; disclosed available borrowing capacity included $355 million at the FHLB, $42 million at the Federal Reserve and $35 million in correspondent-bank lines.
- The Bank was categorized as well capitalized. At September 30, Company regulatory capital ratios included total capital of 13.92%, common equity tier 1 of 10.44% and tier 1 leverage of 8.56%. Non-GAAP tangible common equity was 6.57%, down from 7.78% at year-end.
Material changes and credit quality
- Higher rates and increased securities holdings lifted Q3 interest income 11.7% year over year; net interest income rose 14.1%. Deposit costs were rising, but lower borrowing expense largely offset the Q3 increase in deposit expense.
- Nine-month provision for loan losses was a $0.225 million recovery, versus $0.850 million of expense in 2021. In Q3, the Company recorded $0.5 million of provision expense and a partial charge-down on one commercial real-estate relationship, which moved to non-accrual status.
- Non-performing assets increased to $4.6 million, or 0.47% of loans and related assets, from $3.3 million, or 0.34%, at year-end. The allowance was $10.7 million, equal to 1.09% of loans and 232% of non-performing assets. Nine-month net charge-offs were $1.5 million, compared with $0.071 million in 2021.
- Wealth-management assets declined $422 million, or 15.6%, from year-end to $2.3 billion, reflecting weaker equity and bond markets. Wealth-management fees declined 10.3% in Q3; lower mortgage production also reduced loan-sale gains and mortgage fees.
- Rising market yields drove substantial unrealized securities losses: AFS securities had $19.2 million of gross unrealized losses and HTM securities $6.8 million at quarter-end. Management said it expected scheduled principal and interest, did not intend to sell the affected securities and did not expect to be required to sell before recovery or maturity. Accumulated other comprehensive loss reached $26.7 million, contributing to the decline in equity.
Outlook, risks and unusual items
- Management expected economic conditions to remain challenging and market volatility to continue into Q4 2022 and 2023. It anticipated further Federal Reserve rate increases and expected deposit costs to rise; it also expected to remain active in securities purchases. No specific earnings or revenue guidance was provided.
- The company maintained a $0.03 quarterly common dividend and said it believed capital and earnings supported that rate. Management reported an approximate 3% current dividend yield.
- Management estimated the January 1, 2023 CECL adoption allowance at $11 million–$13 million based on preliminary parallel calculations, while warning the estimate could change. It did not expect a significant impact overall or a significant HTM securities allowance.
- Credit risks include commercial real-estate exposure and concentration: non-owner-occupied CRE loans equaled 360% of regulatory capital. COVID-related modified loans totaled $4.2 million; management identified approximately $3.9 million across two commercial borrowers in hospitality and personal care.
- Other sensitivities include interest-rate and securities-market movements, pension assumptions and lump-sum settlement charges. Pension settlement charges were $1.2 million for nine months, and management anticipated additional charges through year-end but said amounts were difficult to estimate.
- Off-balance-sheet commitments to extend credit were $239.5 million, with $12.0 million of standby letters of credit. Management said routine legal matters were not material; disclosure controls were deemed effective and no material internal-control changes were reported.
Important facts for investors to verify
- Whether net interest margin gains persist as deposit repricing accelerates and the rate environment changes.
- Credit performance of the charged-down commercial real-estate relationship, the $4.6 million of non-performing assets and concentrated CRE exposures.
- Final CECL allowance and retained-earnings impact at adoption, compared with the preliminary $11 million–$13 million estimate.
- Further securities fair-value losses, tangible-equity effects and the Company’s ability to maintain its dividend and capital buffers.
- Realized impact of weaker wealth-management markets and reduced mortgage refinancing and production on fee income.