AmeriServ Financial, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a Pennsylvania-based bank holding company; its banking subsidiary operated 17 Pennsylvania locations. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $9.035 | $8.403 | $26.769 | $25.312 |
| Net interest margin | 3.52% | 3.42% | 3.52% | 3.48% |
| Provision for loan losses | $0.300 | — | $0.750 | — |
| Non-interest income | $4.015 | $3.593 | $11.419 | $10.763 |
| Non-interest expense | $10.219 | $11.243 | $30.868 | $32.601 |
| Net income | $1.833 | $0.365 | $4.623 | $2.274 |
| Net income available to common shareholders | $1.781 | $0.312 | $4.466 | $2.116 |
| Diluted EPS | $0.09 | $0.02 | $0.24 | $0.11 |
| Annualized return on average assets | 0.66% | 0.14% | 0.56% | 0.29% |
| Annualized return on average equity | 6.15% | 1.25% | 5.29% | 2.64% |
- Balance sheet at September 30: Assets were $1,110.8, up 2.0% from December 31, 2014. Net loans were $855.5, up $38.1 million; deposits were $869.9, essentially unchanged. Shareholders’ equity was $119.4, up $5.0 million since year-end.
- Cash flow, nine months: Operating activities provided $6.6; investing activities used $27.0; financing activities provided $19.3. Cash and cash equivalents declined $1.1 to $31.7.
- Borrowings: Total borrowed funds were $114.1, up $20.1 million from year-end. This included $53.0 million of short-term borrowings and $48.0 million of FHLB advances; the company also had $13.1 million of subordinated debentures.
- Credit quality: Allowance for loan losses was $9.8, or 1.13% of loans. Non-performing assets, including TDRs, were $2.3, or 0.27% of loans and OREO, down from $2.9 at year-end and $3.9 a year earlier. Classified loans fell to $6.1 from $11.2 at year-end. Net charge-offs were $0.6 for the first nine months.
- Capital and liquidity: The bank was reported as well capitalized. Consolidated common equity Tier 1, Tier 1, total capital and Tier 1 leverage ratios were 10.08%, 13.60%, 14.77% and 11.40%, respectively. Average loan-to-deposit ratio was 96.1%. Available overnight FHLB borrowing capacity was $348 million, with $39 million in unsecured correspondent-bank lines.
Material changes and management commentary
- Common EPS increased to $0.09 for Q3 and $0.24 year to date. Management attributed improvement to loan growth, a modestly higher net interest margin, higher trust and investment advisory fees, BOLI income, and cost reductions.
- Q3 net interest income grew 7.5%; average loans rose 6.2% year over year to $859 million. Management cited commercial and owner-occupied commercial real estate lending, prepayment fees and an increased FHLB dividend. Deposit pricing kept funding costs controlled, while increased borrowings raised borrowing expense.
- Non-interest expense fell 9.1% in Q3 and 5.3% year to date. Savings included fewer employees following a late-2014 early retirement program and lower professional fees. The Q3 2014 comparison also included a $0.669 million goodwill impairment charge at the wealth-management subsidiary WCCA; no such charge was recorded in 2015.
- BOLI income benefited from two death claims in Q3 and three during the first nine months. Management said higher trust fees reflected assets under management and business development; mortgage-related fees and loan-sale gains were lower with reduced refinancing activity.
- Management described the regional “Rust Belt” economy as continuing to struggle, while stating that it maintained credit standards and had improved asset quality. It highlighted ten consecutive quarters of record loan balances and an expense-to-revenue ratio below 80% in Q3.
- Management’s stated priorities are community-bank revenue growth, trust-company profitability, customer service and targeted expense rationalization. It expected strong capital ratios through the rest of 2015 and cited commercial lending pipelines as support for future growth; no numerical earnings guidance was provided.
Outlook, risks and unusual items
- The $21 million SBLF preferred stock dividend rate was 1% through February 7, 2016 and was scheduled to rise to 9% beginning February 8, 2016. Management planned to retain excess cash and pursue a subordinated-debt offering in Q4 2015 to help fund a possible redemption, subject to regulatory approval. The filing does not state that redemption or the offering was completed.
- Interest-rate sensitivity estimates showed net interest income increasing 0.5% with a 100-basis-point rate rise and 1.0% with a 200-basis-point rise, but declining 3.2% with a 100-basis-point fall. Management noted that a low-rate environment could pressure earnings.
- Commitments to extend credit were approximately $193.6 million and standby letters of credit $7.6 million. The company stated that routine asserted and unasserted claims, and expected funding of commitments, were not believed to have a material adverse effect. No material legal proceedings were reported.
- Key risks include regional and national economic conditions, interest rates and prepayment speeds, commercial and real-estate credit exposures, competition, regulation, and the ability to redeem SBLF preferred stock before its higher dividend rate applies. The 25 largest credits represented 25.3% of loans.
- Unrealized investment-security losses were attributed primarily to market-yield increases; management considered them temporary and said it did not intend, or expect to be required, to sell the securities before recovery. The 2015 nine-month provision for loan losses was $0.750 million, which management said supported loan growth and covered net charge-offs.
Investor facts to verify
- Whether loan growth continues without weakening criticized-credit, delinquency and non-performing-asset trends, and whether the allowance remains adequate.
- Whether core deposits can fund growth while limiting reliance on short-term and FHLB borrowings, and how higher market rates affect margin and funding costs.
- Whether the planned subordinated-debt offering and any SBLF preferred-stock redemption proceed before the dividend rate rises to 9%, including regulatory approval and funding terms.
- How much reported earnings growth is sustained by core operations versus BOLI death-claim income, loan prepayment fees and the prior-year goodwill impairment comparison.
- Whether trust-fee growth, expense savings and management’s profitability objectives are sustained, and whether any material changes arise in credit commitments or contingencies.