AMERISERV FINANCIAL INC quarterly report, Q3 FY2023

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AmeriServ Financial, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; comparative periods are the same periods in 2022 unless noted. Unaudited consolidated results. Dollar figures are in millions unless otherwise stated.

Business context and financial performance

AmeriServ is a Pennsylvania-based community bank and wealth management company. Its bank operated 17 locations in Pennsylvania and Maryland; its trust and wealth management businesses administered $2.4 billion in client assets, which are not recorded as company assets.

  • Q3 revenue: Interest income was $15.44 million, up 21.6%; non-interest income was $4.26 million, down 1.6%. Net interest income fell 16.4% to $8.80 million.
  • Q3 earnings: Net income was $647,000, or $0.04 per diluted share, versus $2.10 million, or $0.12 per share. Annualized return on assets was 0.19% and return on equity 2.49%.
  • Nine-month results: Interest income rose 27.3% to $44.89 million, but net interest income declined 9.8% to $27.43 million. Net income was $1.98 million, or $0.12 per diluted share, versus $6.50 million, or $0.38 per share.
  • Margins: Net interest margin was 2.76% in Q3, down 59 basis points year over year; for the first nine months it was 2.89%, down 35 basis points.
  • Expenses and credit costs: Q3 non-interest expense rose 3.1% to $12.10 million. Nine-month expense rose 5.4% to $37.24 million. The nine-month provision for credit losses was $1.41 million, versus a $225,000 recovery in 2022.
  • Cash flow: Nine-month operating cash flow was $5.18 million, investing cash use was $6.44 million, and financing cash use was $3.68 million. Cash and cash equivalents declined $4.93 million to $18.03 million.

Balance sheet, funding and capital

  • Total assets were $1.362 billion at September 30, down $2.1 million from year-end 2022. Loans were $1.002 billion, up $11.5 million, or 1.2%, since year-end and above $1 billion for the first time.
  • Deposits were $1.129 billion, up $20.8 million, or 1.9%, since year-end. Non-interest-bearing deposits declined while interest-bearing deposits increased. Management reported an average Q3 loan-to-deposit ratio of 86.5%.
  • Total borrowed funds were $115.5 million, down from $138.4 million at year-end. At September 30, short-term borrowings were $63.5 million, FHLB advances $22.1 million, and subordinated debt $26.7 million.
  • Shareholders’ equity was $101.3 million, down 4.6%. The tangible common equity ratio was 6.50%, down from 6.85%; tangible book value was $5.11 per share, down from $5.40.
  • The Bank was categorized as well capitalized. Company regulatory ratios included total capital of 13.72%, common equity Tier 1 of 10.17%, and Tier 1 leverage of 8.41%.
  • Management described liquidity as strong, citing $288 million of FHLB overnight borrowing availability, $42 million of Federal Reserve short-term availability, and $35 million of correspondent-bank lines. The company does not use brokered deposits.

Material changes and notable items

  • Higher market rates lifted loan and securities yields, but deposit and borrowing costs rose faster. Q3 interest expense more than tripled year over year, and the average total deposit cost rose to 1.95% from 0.59%.
  • Management executed $60 million of interest-rate hedges during 2023 to fix the cost of certain rate-sensitive deposits. It estimates approximately $668,000 of hedge gains will be reclassified to reduce interest expense over the 12 months after September 30, subject to rate changes.
  • Professional fees included about $2.0 million in nine-month legal and professional costs related primarily to an activist investor and the 2023 proxy contest. Management said the fourth-quarter level was uncertain following renewed activist activity.
  • The company recognized a $1.75 million gain from selling its Visa Class B shares in Q1. It also recorded a $926,000 credit loss allowance on a subordinated debt security issued by Signature Bank, which regulators closed in March 2023.
  • CECL accounting was adopted January 1, 2023. The transition reduced retained earnings by $1.2 million, net of tax, and increased the opening loan allowance by $1.2 million; prior-year results use the former incurred-loss method.
  • Unrealized losses on available-for-sale securities contributed to accumulated other comprehensive loss of $26.75 million, compared with $22.52 million at year-end. Management attributed most portfolio losses to higher market yields and said it did not intend, and did not expect to be required, to sell the securities before recovery or maturity.

Credit, risks and outlook

  • Non-performing assets rose to $6.19 million from $5.20 million at year-end, or 0.62% of loans and related assets. The loan allowance was $12.31 million, or 1.23% of loans, providing about 199% coverage of non-performing assets. Classified loans increased to $25.3 million.
  • Management attributed higher classified and non-accrual activity partly to commercial real estate downgrades. Criticized urban office commitments totaled $11.6 million across three loans, including a $7.0 million mixed-use property loan and loans with weak or declining occupancy.
  • Estimated uninsured deposits were $351.9 million; approximately half related to public funds collateralized by securities or FHLB letters of credit. The 25 largest depositors represented 22.6% of deposits, up from 18.8% at year-end.
  • A third-party vendor MOVEit security incident exposed certain client files containing personal information. The company reported no material interruption to operations and expected costs to be non-material, but noted uncertainty, possible litigation and regulatory scrutiny.
  • Management expects to maintain strong capital ratios through the remainder of 2023 and said it believes it can continue the $0.03 quarterly common dividend. It also expects deposits related to government stimulus programs to continue declining. No numerical earnings guidance was provided.
  • Interest-rate sensitivity analysis showed modeled net interest income declining 2.2% under an immediate 200-basis-point increase and increasing 1.3% under a 200-basis-point decrease. Management identified economic conditions, rates, deposit retention, credit quality, activist-related costs, and cybersecurity among key risks.

Most important facts for investors to verify

  • Whether deposit pricing and mix changes continue to compress net interest margin, and whether deposit balances and liquidity remain resilient.
  • Developments in criticized CRE and office loans, classified assets, non-performing assets, and the adequacy of the credit-loss allowance.
  • Future legal and professional costs associated with the activist investor, and any outcomes from the proxy contest.
  • The scope, costs, and any litigation or regulatory consequences of the MOVEit vendor incident.
  • Changes in available-for-sale securities values, tangible capital, and the company’s ability to sustain the dividend while supporting loan growth.