Business context and reporting period
AmeriServ Financial, Inc. is a Pennsylvania-based bank holding company with community banking and wealth management businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Amounts below are in millions except per-share data, percentages, and where stated otherwise.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $8.79 | $8.76 | $27.02 | $26.48 |
| Net interest margin | 2.97% | 3.18% | 3.16% | 3.24% |
| Provision for (credit to) loan losses | $0.68 | $0.23 | $1.30 | $(0.18) |
| Non-interest income | $4.30 | $4.10 | $11.90 | $11.36 |
| Non-interest expense | $11.11 | $10.50 | $32.75 | $31.25 |
| Net income | $1.08 | $1.69 | $3.91 | $5.36 |
| Diluted earnings per share | $0.06 | $0.10 | $0.23 | $0.31 |
Q3 pretax income was $1.31 million and income tax expense was $0.24 million. The company reported annualized return on average assets of 0.34% and return on average equity of 4.17% for the quarter.
At September 30, total assets were $1.258 billion, up 7.4% from year-end 2019; total loans, net of unearned income, were $941.8 million, and deposits were $1.042 billion. Shareholders’ equity was $103.4 million. Cash and cash equivalents were $41.2 million, versus $22.2 million at year-end. The allowance for loan losses was $10.3 million, or 1.08% of loans (1.17% excluding PPP loans, a company-reported non-GAAP measure).
For the first nine months, operating cash flow was negative $4.4 million, investing cash flow was negative $60.9 million, and financing cash flow was positive $84.4 million, resulting in a $19.0 million increase in cash and cash equivalents. The filing reports total borrowed funds of $104.7 million, including FHLB advances, short-term borrowings, leases, and subordinated obligations. Short-term borrowings plus FHLB advances were $80.2 million.
Material changes versus comparable periods
- Q3 net income fell 36.2% year over year; nine-month net income fell 27.1%. Higher credit-loss provisions and operating expenses outweighed modestly higher net interest income and non-interest income.
- Q3 net interest income edged up 0.3%, but margin declined 21 basis points. Nine-month net interest income rose 2.0%, while margin declined 8 basis points. Low rates and low-yield PPP loans and liquidity investments pressured asset yields; lower deposit costs partly offset that pressure.
- Q3 non-interest expense increased 5.8%, including higher salaries and benefits, FDIC insurance, and professional fees. Nine-month expense increased 4.8%, with salaries and benefits up $1.19 million, partly offset by lower other expense.
- Deposits rose $81.7 million, or 8.5%, from December 31, 2019; loans grew with PPP participation and increased residential mortgage production. Loans excluding PPP grew about $20 million during Q3.
- Wealth management fees increased, and the company reported trust assets under administration of $2.290 billion, up 6.9% year over year. Mortgage activity also strengthened; management said nine-month mortgage production exceeded the full-year 2019 level.
Outlook, risks, contingencies, and unusual items
- COVID-19 credit risk: Management increased the allowance amid economic uncertainty. It downgraded approximately $29 million of hotel-industry loans to special mention in Q3. Nonperforming assets, including troubled debt restructurings, were $2.6 million, or 0.27% of loans and other real estate owned; net charge-offs were $0.30 million for the first nine months.
- Payment modifications: COVID-related modified loans totaled $144.4 million at September 30, or 16.4% of non-PPP loans, down from $200.0 million at June 30. The company reported $2.4 million of accrued interest on these loans that had not been received. Modified balances fell to $80.9 million by October 31. Management expected a significant number of remaining modified loans to resume normal payments in Q4; this is an expectation, not formal earnings guidance.
- PPP: The company had 469 PPP loans totaling $68.5 million at September 30 and had recorded $1.4 million of related processing-fee and interest income. Approximately $1.1 million of processing fees remained to be recognized as loans stayed outstanding or were forgiven. PPP loans carry a 100% SBA guarantee, subject to program terms.
- Liquidity and funding: Management described liquidity as exceptionally strong, citing deposit growth and an average Q3 loan-to-deposit ratio of 88.6%. It noted difficulty earning attractive returns on excess liquidity as commercial-paper yields fell. Available borrowing capacity included $348 million at the FHLB, $30 million at the Federal Reserve, and $35 million in correspondent-bank federal funds lines.
- Capital and distributions: The Bank was categorized as well capitalized. At September 30, company regulatory ratios included total capital of 13.02%, common equity tier 1 of 10.09%, and tier 1 leverage of 9.39%. Management expected to maintain strong capital through year-end and believed the $0.025 quarterly common dividend could continue. Evaluation of a new share-buyback program was on hold; the prior program was completed in Q1 2020.
- Concentrations and commitments: Non-owner-occupied commercial real estate loans equaled 334% of regulatory capital. The 25 largest credits were 23.2% of total loans; the 25 largest depositors were 20.7% of deposits. Outstanding commitments to extend credit were $235.7 million, with $13.5 million of standby letters of credit.
- Other items: The company dissolved its run-off captive insurer, AmeriServ Life, after approval on September 30. It reported no material legal proceedings and no applicable risk-factor changes. CECL adoption was deferred for the company as a smaller reporting company until fiscal years beginning after December 15, 2022; the implementation impact remains undetermined. LIBOR transition effects also remain uncertain.
Important facts for investors to verify
- Whether COVID-related loan modifications continue to decline and borrowers resume payments, particularly in hotels and other affected commercial sectors.
- Subsequent credit performance, hotel-loan ratings, nonperforming assets, and the adequacy of the allowance as economic conditions evolve.
- How rapidly PPP loans are forgiven or repaid and how remaining processing fees affect reported income.
- Whether deposit growth and excess liquidity persist, and the effect of low asset yields on net interest margin and profitability.
- Capital ratios, CRE concentration, and management’s ability to sustain the dividend while supporting lending needs.
- CECL implementation effects and progress in transitioning LIBOR-linked contracts.