AmeriServ Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. AmeriServ is a Pennsylvania bank holding company with community banking and wealth management operations. The interim financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Prior comparable period / year-end |
|---|---|---|
| Net income; diluted EPS | $1.515 million; $0.09 | Q1 2022: $2.418 million; $0.14 |
| Net interest income; net interest margin | $9.522 million; 3.03% | Q1 2022: $9.767 million; 3.14% |
| Total assets | $1.346 billion | Dec. 31, 2022: $1.364 billion |
| Total deposits | $1.132 billion | Dec. 31, 2022: $1.109 billion |
| Net loans; loan allowance | $968.3 million; $12.1 million | Dec. 31, 2022: $980.0 million; $10.7 million |
| Cash and cash equivalents | $22.2 million | Dec. 31, 2022: $23.0 million |
| Total shareholders’ equity | $105.9 million | Dec. 31, 2022: $106.2 million |
- Interest income rose 32.2% to $14.6 million, but interest expense increased 300.6% to $5.1 million, primarily as deposit and overnight funding costs rose. Net interest income fell 2.5%.
- Non-interest income was $5.5 million, up 27.0%, including a $1.748 million gain on the sale of Visa Class B shares. Non-interest expense rose 4.2% to $12.0 million.
- Provision for credit losses was $1.179 million, versus a $400,000 credit in Q1 2022. Pretax income was $1.887 million; income tax expense was $372,000, for a 19.7% effective tax rate.
- Operating cash flow was $1.8 million; investing cash flow was $13.9 million; financing cash flow was negative $16.5 million. Cash decreased $795,000 during the quarter.
- Total borrowings were $99.0 million, down from $138.4 million at year-end. Short-term borrowings plus FHLB advances totaled $69.1 million at March 31.
- The Bank was reported as well capitalized: total capital ratio 12.73%, common equity tier 1 ratio 11.52%, and tier 1 leverage ratio 9.33%. Company-level ratios were 14.17%, 10.52%, and 8.46%, respectively.
Material changes and notable items
- Net income declined 37.3% year over year, reflecting lower net interest income, higher credit-loss provision, and increased expenses, partly offset by higher non-interest income.
- The company adopted CECL on January 1, 2023. The transition reduced retained earnings by $1.2 million net of tax and increased the opening loan allowance by $1.204 million. The quarter-end loan allowance was 1.24% of loans, compared with 1.08% at year-end.
- A $926,000 allowance was recorded against a subordinated debt investment in Signature Bank following its March 2023 closure. The security was placed on non-accrual and approximately $17,000 of previously accrued interest was reversed.
- The $1.748 million Visa gain was a one-time item: the shares had no carrying value. Professional fees increased by $678,000, including $599,000 of additional costs related to an ongoing activist-shareholder proxy contest.
- Accumulated other comprehensive loss was $22.7 million. AFS securities had $18.4 million of gross unrealized losses, which management primarily attributed to higher market yields; the company stated it did not intend, and did not expect to be required, to sell those securities before recovery or maturity.
Outlook, management commentary, and risks
- No specific earnings or revenue guidance was provided. Management said it expects delayed loan fundings to increase in Q2, aims to maintain strong capital ratios through the rest of 2023, and believes it can sustain the current $0.03 quarterly dividend. No share repurchase program is currently in place.
- Management described liquidity and the core deposit base as strong. Deposits increased 2.1% from year-end, despite industry deposit volatility. The company reported $340.7 million of estimated uninsured deposits; about half related to public funds that are required to be collateralized. It cited $318 million of FHLB overnight borrowing availability, $42 million at the Federal Reserve, and $35 million of correspondent-bank lines.
- Interest-rate and funding-cost pressure remain central risks. Management noted stronger deposit competition and rising deposit costs; a $50 million interest-rate hedge was entered into to stabilize costs on certain rate-indexed deposits. The average loan-to-deposit ratio was 85.8%.
- Non-performing assets were $4.6 million, or 0.47% of loans and related assets, down from $5.2 million at year-end. Classified loans increased to $26.5 million, primarily after a commercial real estate loan downgrade. Non-owner-occupied CRE loans were 340% of regulatory capital; the 25 largest credits represented 22.2% of loans.
- Other stated risks include economic and interest-rate changes, credit quality, deposit behavior, securities valuation and prepayments, regulation and bank failures, and costs or reputational effects from the proxy contest. The company reported effective disclosure controls and no material legal proceedings.
Important facts for investors to verify
- Whether deposit growth persists and how the $340.7 million estimate of uninsured deposits and depositor concentrations change.
- Whether deposit and borrowing costs continue to outpace asset-yield increases, and the effect of the $50 million hedge on future net interest income.
- Credit quality trends, including CRE classified loans, delinquencies, CECL assumptions, and allowance adequacy.
- Recovery prospects and accounting treatment for the Signature Bank security, as well as the extent of further securities valuation changes.
- The duration and total cost of the proxy contest, and whether the current dividend remains supported by earnings and capital.