AmeriServ Financial, Inc. — 2017 Form 10-K
Business context and reporting period. AmeriServ is a Pennsylvania bank holding company with community banking, commercial lending, trust and wealth-management, and insurance operations. This filing covers the fiscal year ended December 31, 2017; the annual results include a fourth-quarter tax charge. The Bank operated 15 Pennsylvania locations. Consolidated assets were $1.168 billion at year-end.
Financial performance and condition
- Earnings: Net income was $3.293 million, or $0.18 per diluted share, versus $2.310 million and $0.12 in 2016. Pretax income was $8.640 million. Return on average assets was 0.28%; return on average equity was 3.42%.
- Revenue and margins: Interest income was $44.356 million and net interest income was $35.561 million, up 4.2% from 2016. Net interest margin improved six basis points to 3.32%. Non-interest income was $14.645 million, essentially unchanged year over year; non-interest expense declined 2.0% to $40.766 million.
- Credit costs and asset quality: Provision for loan losses fell to $0.800 million from $3.950 million; net charge-offs were $0.518 million versus $3.939 million. The allowance was $10.214 million, or 1.15% of loans. Non-performing assets rose to $3.034 million (0.34% of loans and OREO) from $1.624 million (0.18%); loans 30–89 days past due increased to $8.178 million from $3.278 million.
- Balance sheet and funding: Loans, net of unearned income, were $889.633 million, up 0.7%; deposits were $947.945 million, down from $967.786 million. Total borrowed funds increased to $115.701 million from $78.645 million, including $49.084 million of short-term borrowings. Shareholders’ equity was $95.102 million versus $95.395 million.
- Cash flow and liquidity: Operating cash flow was $7.681 million, investing cash use was $20.225 million, and financing cash provided was $12.659 million. Cash and cash equivalents ended at $34.188 million, little changed from $34.073 million. The loan-to-deposit ratio was 91.5%; management said liquidity was strong and cited $371 million of FHLB overnight borrowing availability, $34 million at the Federal Reserve, and $35 million in correspondent-bank lines.
- Capital and shareholder returns: The Company reported a 13.21% risk-based capital ratio and a 9.32% leverage ratio and was categorized as well capitalized. It repurchased 839,337 shares for $3.404 million in 2017 and declared $0.06 per common share in dividends.
Material changes versus 2016
- Net income improved 43% and diluted EPS rose from $0.12 to $0.18, despite the tax-related charge described below.
- Net interest income and margin improved as earning assets grew and yields increased. Interest expense also rose 13.7%, reflecting higher deposit and borrowing costs.
- The lower loan-loss provision and charge-offs primarily reflect the absence of the unusually large 2016 energy-sector credit resolution. Non-performing assets nevertheless increased year over year.
- Year-end deposits declined by $19.8 million while borrowed funds increased by $37.1 million. Total assets increased 1.2% to $1.168 billion.
Outlook, commentary, risks, and unusual items
- Tax Act charge: The December 2017 tax-law change reduced the federal corporate rate from 35% to 21%. Revaluation of deferred tax assets produced a one-time $2.624 million income-tax expense, taking the reported effective tax rate to 61.9% and reducing fourth-quarter and full-year diluted EPS by $0.14. Management’s illustrative result excluding this charge was net income of $5.917 million, or $0.32 per share; this is not reported GAAP earnings. Management expects an effective tax rate of approximately 20% in 2018.
- Management outlook: Management expected 2018 net interest income growth, continued moderate margin improvement, loan growth supported by commercial pipelines, and a typical loan-loss provision. It noted intense pricing pressure on new commercial loans and aims to reduce expenses through productivity and technology initiatives.
- Principal risks: Credit concentrations and commercial/CRE loan performance, regional economic conditions, interest-rate and funding-cost changes, competition, regulatory changes, and execution of growth and cost-control plans. The 25 largest credits represented 26.4% of loans. Management also noted that the Johnstown market continued to have relatively high unemployment and a declining population.
- Other items: The Trust Company administered approximately $2.186 billion of assets at year-end, up 9.7%. Outstanding commitments to extend credit were approximately $165.1 million and standby letters of credit were $10.0 million. Management reported no expected material adverse effect from ordinary-course legal claims. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $2.624 million one-time tax expense, the deferred-tax-asset reduction, and management’s illustrative earnings excluding the charge.
- Track the increase in non-performing assets and past-due loans, and assess allowance coverage and commercial/CRE credit exposure.
- Assess the sustainability of margin improvement and loan growth against rising deposit and borrowing costs and the shift toward short-term borrowings.
- Review the effect of share repurchases and dividends on capital, liquidity, and per-share results; confirm remaining authorization under the repurchase plan.
- Evaluate whether the expected lower tax rate, operating efficiencies, and trust-business growth translate into improved recurring profitability.