AmeriServ Financial, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are to December 31, 2017. The company operates a Pennsylvania community bank, trust and wealth-management businesses, and a captive insurance subsidiary.
Key financial results
Amounts below are in millions unless otherwise noted.
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable period / Dec. 31, 2017 |
|---|---|---|
| Net income | $1.767 | $1.348 in Q1 2017 |
| Diluted EPS | $0.10 | $0.07 in Q1 2017 |
| Net interest income | $8.748 | $8.721 in Q1 2017 |
| Net interest margin | 3.29% | 3.27% in Q1 2017 |
| Provision for loan losses | $0.050 | $0.225 in Q1 2017 |
| Noninterest income / expense | $3.635 / $10.120 | $3.562 / $10.085 in Q1 2017 |
| Effective tax rate | 20.1% | 31.7% in Q1 2017 |
| Assets / shareholders’ equity | $1,151.2 / $95.8 | $1,167.7 / $95.1 at year-end 2017 |
| Loans, net of unearned income / total deposits | $874.9 / $944.2 | $889.6 / $947.9 at year-end 2017 |
| Cash and cash equivalents | $30.6 | $34.2 at year-end 2017 |
| Total borrowed funds | $103.3 | $115.7 at year-end 2017 |
Operating cash flow was $3.6 million; investing activities provided $9.7 million and financing activities used $16.9 million. Cash decreased by $3.6 million during the quarter. Annualized return on average assets was 0.62% and return on average equity was 7.55%, versus 0.47% and 5.74% in Q1 2017.
Material changes and management commentary
- Net income rose 31.1% and diluted EPS increased from $0.07 to $0.10. Management attributed the improvement to lower income taxes following federal tax reform, positive operating leverage, and capital management.
- Interest income increased 4.4%, but interest expense rose 21.8%, limiting net interest income growth to 0.3%. Management cited higher market rates, deposit repricing, and greater borrowing costs; it said the net interest margin improved modestly.
- Average loans declined 0.9% year over year, while average investment securities grew 5.3%. Management said loan pipelines were strong and expected loan-portfolio growth to resume in Q2 2018.
- Nonperforming assets were $2.2 million, or 0.25% of loans and other real estate owned, down from $3.0 million and 0.34% at year-end. Net charge-offs increased to $332,000 (0.15% of loans) from $77,000 (0.04%) in Q1 2017. The allowance was $9.9 million, or 1.14% of loans, and covered nonperforming assets by 460%.
- The company reported bank regulatory capital ratios above “well-capitalized” thresholds: total capital 12.00%, common equity Tier 1 10.85%, Tier 1 capital 10.85%, and Tier 1 leverage 9.09%. The company’s tangible common equity ratio was 7.36%.
Outlook, risks and unusual items
- The board raised the quarterly dividend from $0.015 to $0.02 per share, payable May 21, 2018. The Q1 financial statements report $0.015 per share declared for the quarter. Management stated a strategic goal of 10% year-over-year EPS growth; this is an objective, not formal earnings guidance.
- Management described liquidity as strong, citing $376 million of available overnight FHLB borrowing capacity and $35 million of unsecured correspondent-bank lines. It targeted a loan-to-deposit ratio of 80%–100%; the Q1 average was 91.8%.
- Interest-rate sensitivity analysis showed estimated net interest income changes of +2.1% under a 200-basis-point increase, +1.3% under a 100-basis-point increase, and −1.4% under a 100-basis-point decrease. These are scenario estimates, not forecasts.
- Nonowner-occupied commercial real estate loans were 337% of regulatory capital. The company also cited regional economic conditions, interest rates and prepayments, credit quality, competition, regulation, and execution of new products and services as risks.
- Investment-security sales generated a $148,000 realized loss in Q1 2018, versus a $27,000 gain in Q1 2017. Other income included a $156,000 gain from selling shares in a financial-services provider. Management said unrealized securities losses primarily reflected higher market yields and that it did not intend, or expect to be required, to sell the affected securities before recovery.
- Commitments to extend credit were approximately $180 million, with $10 million of standby letters of credit. Management believed these commitments and routine legal claims would not materially affect the company; the filing reported no material legal proceedings.
- The company completed its authorized repurchase of 945,000 shares; 105,663 shares were bought back in Q1 for $445,000. Management anticipated maintaining strong capital levels through the remainder of 2018.
Important facts for investors to verify
- Whether expected Q2 loan growth materialized, and how loan production, prepayments, and the stated strong pipeline evolved.
- Whether deposit pricing and borrowing costs continued to rise faster than asset yields, affecting net interest margin and earnings.
- Subsequent trends in delinquency, charge-offs, nonperforming assets, criticized commercial loans, and the adequacy of the loan-loss allowance.
- The sustainability of earnings excluding the tax-rate reduction and the $156,000 stock-sale gain, and the impact of securities losses and market-rate changes.
- Capital and liquidity headroom in light of the 337% nonowner-occupied CRE concentration, credit commitments, dividend increase, and future balance-sheet growth.