AmeriServ Financial, Inc. — Q3 2013 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2013. AmeriServ is a Pennsylvania community bank holding company with banking, trust and wealth-management, and captive insurance operations. The Trust Company administered $1.6 billion of off-balance-sheet assets.
Financial performance and position
| Metric | Q3 2013 / Sep. 30, 2013 | Comparable period / prior date |
|---|---|---|
| Net income | $1.226 million for Q3; $3.352 million for nine months | $1.307 million and $4.304 million, respectively, in 2012 |
| Net income available to common shareholders; diluted EPS | $1.173 million; $0.06 for Q3. $3.195 million; $0.17 for nine months | $1.056 million; $0.05 for Q3 2012. $3.528 million; $0.18 for nine months 2012 |
| Net interest income; net interest margin | $8.200 million; 3.46% for Q3. $24.263 million; 3.52% for nine months | $8.142 million; 3.59% for Q3 2012. $24.121 million; 3.63% for nine months 2012 |
| Non-interest income / expense | $3.986 million / $10.413 million for Q3; $11.877 million / $31.477 million for nine months | $3.649 million / $10.087 million for Q3 2012; $11.056 million / $30.268 million for nine months 2012 |
| Annualized return on average assets / equity | 0.47% / 4.44% for Q3; 0.44% / 4.05% for nine months | 0.52% / 4.66% for Q3 2012; 0.59% / 5.15% for nine months 2012 |
| Total assets; net loans | $1.038 billion; $749.7 million | $1.001 billion; $708.6 million at Dec. 31, 2012 |
| Deposits; borrowed funds | $852.2 million; $65.2 million | $835.7 million; $41.7 million at Dec. 31, 2012 |
| Cash and cash equivalents | $28.7 million | $26.8 million at Dec. 31, 2012 |
| Shareholders’ equity | $110.4 million | $110.5 million at Dec. 31, 2012 |
All dollar amounts are in U.S. dollars. Income-statement and cash-flow amounts are consolidated.
Material changes and management commentary
- Quarterly earnings: Common earnings and diluted EPS improved year over year, although total net income declined. The lower preferred dividend charge—$53,000 versus $251,000 in Q3 2012—helped lift earnings available to common shareholders. For the first nine months, common earnings and EPS declined year over year.
- Revenue and margin: Q3 net interest income rose 0.7% despite a 13-basis-point margin decline. For nine months, net interest income rose 0.6%, while the margin fell 11 basis points. Management attributed pressure to the low-rate environment; lower funding costs and loan growth partly offset lower asset yields.
- Growth and expenses: Loans increased $39.7 million from year-end, and deposits increased $16.5 million. Nine-month non-interest income rose 7.4%, led by trust and advisory fees, mortgage loan-sale gains, securities gains, and bank-owned life insurance income. Nine-month non-interest expense rose 4.0%, including higher compensation, pension expense, and professional fees.
- Credit quality: The allowance for loan losses was $11.2 million, or 1.47% of loans, compared with $12.6 million, or 1.74%, at year-end. Non-performing assets including TDRs fell to $5.0 million (0.66% of loans and OREO) from $7.2 million (1.00%). Nine-month net charge-offs increased to $1.3 million from $469,000 in 2012; the filing attributes much of the increase to resolution of a previously reserved commercial real-estate loan. The company recorded no Q3 provision and a $100,000 credit for loan losses for the first nine months.
- Cash flow and funding: Nine-month operating cash flow was $12.6 million, investing cash use was $48.8 million, and financing cash flow was $38.1 million. Financing included $16.4 million of deposit growth and a $23.4 million net increase in FHLB borrowings. The loan-to-deposit ratio was reported as 89.3% in the liquidity discussion; elsewhere MD&A cites 89.6%, so investors should check the calculation and source measure.
- Capital and securities: The company was classified as well capitalized. Consolidated total risk-based capital was 15.35%, Tier 1 risk-based capital 14.10%, and Tier 1 leverage 11.44%; tangible common equity to tangible assets was 7.48%. Higher market yields reduced the value of available-for-sale securities, contributing to a $1.8 million nine-month other comprehensive loss and an increase in accumulated other comprehensive loss to $7.2 million.
Outlook, risks and unusual items
- Management identified revenue growth, community banking, trust-company profitability, and expense rationalization as priorities. It set a goal of identifying $1 million of non-interest expense savings in 2014; this is a target, not earnings guidance.
- Management expected to maintain strong capital ratios through the remainder of 2013. The company had $343 million of available overnight FHLB borrowing capacity and $39 million of unsecured correspondent-bank federal funds lines.
- Interest-rate sensitivity analysis showed modeled net interest income changes of +0.2% for a 200-basis-point increase, +0.7% for a 100-basis-point increase, and −4.2% for a 100-basis-point decrease. Management noted greater downward-rate sensitivity given already-low rates.
- The $21 million SBLF preferred stock had a 1% dividend rate through February 7, 2016, following growth in qualified small-business lending. Management said this reduced preferred dividends by about $200,000 per quarter and saved $619,000 in the first nine months of 2013. The filing also describes potential future rate increases and lending-incentive fees under the program terms.
- Basel III-related capital rules were scheduled to take effect beginning January 1, 2015, with certain buffer requirements phasing in later. Management was still assessing their effects.
- Key risks cited include economic conditions, interest rates and prepayment speeds, credit risk—particularly commercial and real estate lending—regulatory changes, competition, and execution of new products and growth initiatives. The 25 largest credits represented 30.1% of loans.
- The filing reports no material legal proceedings and says management did not expect routine claims or credit commitments to materially affect financial position, results, or cash flows. Outstanding commitments to extend credit were approximately $156.0 million, with $12.7 million of standby letters of credit.
Most important facts for investors to verify
- Whether loan growth and commercial real-estate concentration can be sustained without weakening delinquencies, criticized credits, charge-offs, or reserve adequacy.
- Whether management achieves the $1 million 2014 expense-savings goal while funding growth initiatives, and how pension costs evolve.
- Whether margin pressure continues as rates and funding costs change, including the effects on securities values and modeled interest-rate sensitivity.
- Whether trust, mortgage, and other fee income growth continues, and how much reported income reflects securities-sale gains or other nonrecurring items.
- The precise loan-to-deposit ratio and the basis for the filing’s differing 89.3% and 89.6% figures.
- Future SBLF preferred dividend terms, any effect of the program on common dividends or repurchases, and the company’s capital position under the new regulatory rules.