AmeriServ Financial, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. AmeriServ operates a Pennsylvania-based community bank and wealth-management business. Dollar amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue (net interest income plus non-interest income) | $13.642 | $13.095 | $42.214 | $38.918 |
| Net interest income | $9.226 | $8.791 | $28.785 | $27.015 |
| Net income | $1.431 | $1.078 | $5.220 | $3.906 |
| Diluted earnings per share | $0.08 | $0.06 | $0.31 | $0.23 |
| Net interest margin | 2.85% | 2.97% | 3.07% | 3.16% |
- Q3 net income increased 32.7%; nine-month net income increased 33.6%. Annualized return on average assets/equity was 0.41%/5.07% for Q3 and 0.52%/6.48% for the nine months.
- Q3 non-interest income was $4.416 million, including wealth-management fees of $3.137 million. Nine-month non-interest income rose 12.8% to $13.429 million, led by wealth-management fees, which increased 18.4% to $9.031 million.
- Non-interest expense rose 3.7% in Q3 to $11.520 million and 6.5% for the nine months to $34.863 million. Higher costs included pension settlement charges and branch-acquisition expenses.
- Provision for loan losses was $0.350 million in Q3 and $0.850 million for the nine months, down from $0.675 million and $1.300 million, respectively, in 2020.
Balance sheet and liquidity at September 30, 2021: Assets were $1.339 billion; net loans were $983.9 million; deposits were $1.144 billion; cash and cash equivalents were $36.0 million; and shareholders’ equity was $113.7 million. Deposits increased 8.5% from year-end 2020. Total borrowed funds were $73.9 million, down from $114.1 million at year-end; there were no short-term borrowings and FHLB advances were $43.7 million. The Bank was reported as well capitalized. Company total capital ratio was 13.61%, common equity tier 1 ratio 9.95%, and tier 1 leverage ratio 7.87%.
For the first nine months, operating cash flow was $7.6 million, investing cash flow was negative $8.6 million, and financing cash flow was $5.5 million. Cash and cash equivalents increased $4.5 million to $36.0 million. Management reported $344 million of overnight FHLB borrowing availability, $33 million of Federal Reserve availability, and $35 million of unsecured correspondent-bank lines.
Material changes versus comparable periods
- Q3 net interest income increased 4.9%, while net interest margin declined 12 basis points year over year; the nine-month margin declined 9 basis points. Lower deposit and borrowing costs and loan growth supported income, offset by lower earning-asset yields.
- Loans grew from year-end, with commercial real estate and residential mortgage growth partly offset by PPP forgiveness. Excluding PPP loans, management reported loan growth of approximately $85.9 million, or 9.7%, since September 2020.
- On May 21, 2021, AmeriServ acquired Meyersdale branch operations and Somerset County deposit customers, including approximately $42.4 million of deposits, for a 3.71% premium ($1.6 million). The acquisition added $1.7 million of goodwill; acquired-business results were not material.
- On August 26, the company issued $27 million of fixed-to-floating subordinated notes. It used approximately $20 million to retire higher-cost subordinated debt and trust preferred securities. The new notes bear 3.75% interest through September 2026, then reset to three-month SOFR plus 3.11%. Management expects approximately $500,000 in annual debt-service savings beginning in Q4 2021.
- Shareholders’ equity increased 8.9% from year-end. Book value per share was $6.66 and tangible book value per share was $5.85 at September 30.
Outlook, commentary, risks and unusual items
- Management said the debt refinancing and loan growth position net interest margin to expand in Q4 2021. It expects strong capital ratios through the rest of 2021 and believes the current $0.025 quarterly common dividend is sustainable; these are forward-looking statements, not guarantees.
- Management described 2021 mortgage production as likely the second strongest in five years. Approximately 78% of residential mortgage production was retained in the loan portfolio for the nine-month period, versus approximately 30% in 2020. Management also expected most remaining unamortized PPP fees to be recognized in Q4.
- COVID-related payment modifications declined to $15.7 million, or 1.6% of non-PPP loans, from $49.1 million at year-end 2020 and a peak of approximately $200 million in June 2020. The remaining modifications mainly involve five commercial borrowers, primarily in hospitality. The pandemic, its variants, and economic effects remain uncertain.
- Non-performing assets were $3.1 million, or 0.31% of loans and related assets, versus $3.3 million, or 0.34%, at year-end. Net charge-offs were low, but classified loans rose to $13.9 million from $11.8 million at year-end, including downgrades of two commercial real estate relationships. The allowance was $12.1 million, or 1.22% of loans.
- Commercial real estate concentration is a key exposure: non-owner-occupied CRE loans equaled 352% of Bank regulatory capital. The 25 largest credits represented 21.5% of loans. Outstanding commitments to extend credit were $265.5 million, with $13.4 million of standby letters of credit.
- The company recorded $1.1 million of pension settlement charges in the first nine months, including $269,000 in Q3, due to retirees electing lump-sum distributions. Additional Q4 settlement charges were anticipated, but management said the amount was difficult to estimate. Pension revaluation and an $8.0 million contribution also affected balance-sheet presentation.
- Unrealized securities losses were attributed mainly to higher market yields; management said it did not intend, and did not expect to be required, to sell the affected securities before recovery or maturity. Interest-rate sensitivity, deposit retention, and credit conditions remain relevant risks.
- The company is evaluating the expected-credit-loss standard (CECL), effective for it in fiscal 2023; the filing does not provide a clear estimate of the adoption impact. Management is also assessing LIBOR transition exposure.
Important facts for investors to verify
- Whether loan growth, deposit levels, and the expected Q4 margin improvement materialized, particularly after the large institutional deposit matured.
- Actual savings and ongoing interest expense from the subordinated-debt refinancing, including the Q4 transition costs and future SOFR-based rate exposure.
- Trends in criticized and classified CRE credits, COVID-modified borrowers, non-performing assets, and allowance adequacy.
- Further pension settlement charges and their effect on earnings and the pension asset or liability.
- The eventual CECL adoption adjustment, and the effects of interest rates and liquidity deployment on margins and securities values.