AmeriServ Financial, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015, with unaudited quarterly results, including the fourth quarter. AmeriServ is a Pennsylvania bank holding company operating a community bank, trust and wealth-management business, and captive insurance subsidiary, primarily in Pennsylvania. The Bank operated 17 locations; trust assets under administration were approximately $2.0 billion and are not included in consolidated assets.
Financial performance and condition
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Net interest income | $35.4 million | $34.0 million | Up 3.9% |
| Non-interest income | $15.3 million | $14.3 million | Up 6.6%; higher BOLI and trust fees were key contributors |
| Non-interest expense | $41.0 million | $43.4 million | Down 5.4%, reflecting cost reductions and no repeat of 2014 goodwill impairment |
| Provision for loan losses | $1.25 million | $375,000 | Higher provision followed energy-sector borrower bankruptcy and loan growth |
| Net income | $6.0 million | $3.0 million | Up 98%; diluted EPS was $0.31 versus $0.15 |
| Net interest margin | 3.49% | 3.52% | Down 3 basis points |
| Total assets | $1.149 billion | $1.089 billion | Up 5.5% |
| Loans, net of unearned income | $881.0 million | $827.1 million | Up 6.5%; commercial lending drove growth |
| Deposits | $903.3 million | $869.9 million | Up 3.8% |
| Borrowed funds | $117.5 million | $94.0 million | Includes $48.0 million FHLB advances and $7.65 million subordinated debt |
| Shareholders’ equity | $119.0 million | $114.4 million | Book value per common share was $5.19 |
- Cash flow and liquidity: Operating cash flow was $9.8 million; investing activities used $49.9 million and financing activities provided $55.7 million. Cash and cash equivalents increased $15.6 million to $48.5 million. The year-end loan-to-deposit ratio was 97.9%. Management reported $350 million of overnight FHLB borrowing availability, $33 million at the Federal Reserve, and $39 million in correspondent-bank lines.
- Capital: The Company reported a 15.55% risk-based capital ratio and an 11.41% leverage ratio and stated it was well capitalized. Tangible common equity to tangible assets was 7.57%.
- Credit quality: Non-performing assets, including performing troubled debt restructurings, were $6.3 million, or 0.71% of loans and OREO, versus $2.9 million, or 0.35%, in 2014. The allowance was $9.9 million, or 1.13% of loans; net charge-offs were $952,000, or 0.11% of average loans.
Material changes versus 2014
- Profit improved substantially as net interest income and non-interest income grew while non-interest expense fell. The company attributed cost savings partly to a 2014 early-retirement program and profitability initiatives.
- Loans increased approximately $52 million and deposits approximately $33 million year over year. The securities portfolio declined as securities cash flows helped fund loan growth; additional FHLB borrowing also supported funding.
- Asset quality weakened from 2014 levels, primarily because a $4.1 million fracking-industry borrower entered bankruptcy and the loan moved to non-accrual status. The company established specific reserves of $865,000 on the water-treatment-plant loan and $469,000 on equipment loans.
- Trust segment net income increased to approximately $1.4 million from $564,000; management cited higher advisory fees and WCCA’s return to profitability. The segment incurred about $300,000 of costs related to a trust operations trading error.
Outlook, risks, contingencies, and unusual items
- Management expected further net interest margin pressure in 2016 from the low-rate environment and intense commercial loan pricing competition. It anticipated continued loan growth, supported by commercial pipelines, and expected positive loan-loss provisions to support growth.
- The company estimated at least $1.4 million in annual savings from its profitability improvement project. Its stated priorities include community banking, revenue growth, expense discipline, and improving trust-business profitability; these are forward-looking expectations, not assurances.
- On January 27, 2016, after year-end, AmeriServ redeemed all $21 million of SBLF preferred stock using proceeds from the $7.65 million subordinated-note issuance and approximately $13.4 million of cash and securities. The notes carry a 6.5% fixed rate, mature in 2025, and are non-callable for five years. Management said redemption avoided the preferred dividend rate rising from 1% to 9% in February 2016.
- Management expected an additional $300,000 to $400,000 of trust-operation trading-error resolution costs in the first quarter of 2016. The filing states that routine asserted and unasserted legal claims were not expected to materially affect financial position, results, or cash flows.
- Key exposures include commercial and commercial real-estate credit, interest-rate changes, regional economic conditions, liquidity and funding, regulation, and competition. A borrower’s frack-water plant collateral value was uncertain; management said potential loss could rise materially if the plant could not be sold as a turnkey operating facility. The 25 largest credits represented 24.0% of loans.
- Auditors gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Track the recovery, collateral disposition, and ultimate loss on the bankrupt energy borrower, alongside non-performing assets, provision expense, and allowance coverage.
- Confirm whether commercial loan growth and deposit funding continue without further margin compression or increased reliance on borrowings.
- Review the results and final costs of the trust operations trading-error matter, and whether trust assets and advisory-fee growth persist.
- Assess the post-redemption capital, liquidity, dividend capacity, and ongoing interest expense on subordinated and trust-preferred debt.
- Compare realized expense savings and earnings with management’s stated $1.4 million annual savings expectation and 2016 outlook.