AMERISERV FINANCIAL INC annual report, FY2023

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AmeriServ Financial, Inc. — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. AmeriServ is a Pennsylvania bank holding company operating community banking and wealth management businesses, primarily in Pennsylvania and Maryland.

Financial performance and condition

  • Scale: Consolidated assets were $1.390 billion, deposits $1.158 billion, loans (net of unearned income) $1.038 billion, and shareholders’ equity $102.3 million at year-end.
  • Earnings: Net loss was $3.346 million, or $0.20 per diluted share, versus net income of $7.448 million, or $0.43 per diluted share, in 2022. Return on average assets was (0.25)% and return on average equity was (3.23)%.
  • Interest income and margins: Interest income rose 24.1% to $60.9 million, but interest expense increased 192.4% to $24.8 million. Net interest income fell 11.2% to $36.0 million; net interest margin compressed to 2.86% from 3.27%.
  • Credit costs and asset quality: Provision for credit losses was $7.429 million, compared with $50,000 in 2022. Net charge-offs were about $3.5 million, or 0.35% of average loans, versus $1.7 million, or 0.17%. Nonperforming assets increased to $12.4 million from $5.2 million, equal to 1.19% of loans versus 0.52%. The loan allowance was $15.1 million, or 1.45% of loans.
  • Other income and expenses: Non-interest income declined 1.8% to $16.4 million; non-interest expense increased 2.8% to $49.4 million. The $2.2 million of activist-investor and proxy-contest legal and professional costs contributed to higher expenses.
  • Cash flow: Operating activities provided $6.3 million, investing activities used $40.0 million, and financing activities provided $24.8 million. Cash and cash equivalents declined $8.9 million to $14.0 million.
  • Debt and liquidity: Borrowed funds totaled $115.6 million, including $44.6 million of FHLB advances and $26.7 million of subordinated debt. Deposits grew 4.5% year over year at period-end; the company does not use brokered deposits. It reported $294 million of FHLB overnight borrowing availability, $40 million at the Federal Reserve, and $35 million in correspondent-bank lines.
  • Capital and shareholder returns: Company regulatory capital ratios included 9.46% CET1, 13.03% total capital, and a 7.80% leverage ratio; management said capital remained above well-capitalized thresholds. Book value was $5.96 per share and tangible book value was $5.16. The quarterly dividend was $0.03 per share; no share-repurchase program was authorized.

Material changes versus 2022

  • The shift from profit to loss primarily reflected sharply higher credit provisions, net interest income pressure from rising deposit and borrowing costs, and increased legal expenses.
  • Loans grew $47.6 million, or 4.8%, and deposits grew $49.8 million, or 4.5%, at year-end. Average deposits were nearly unchanged, while their average cost rose to 2.18% from 0.68%.
  • Non-owner-occupied commercial real estate (CRE) loans increased to 49.3% of total loans from 45.5%. Their balance equaled 375% of regulatory capital, up from 350%.
  • Shareholders’ equity decreased 3.7% to $102.3 million. Net loss and dividends more than offset improved accumulated other comprehensive loss, including pension and available-for-sale securities valuation changes.

Outlook, commentary, risks, and unusual items

  • Management anticipates maintaining strong capital ratios through 2024, continuing the $0.03 quarterly dividend, and expects earnings improvement in 2024; no quantified earnings guidance was provided.
  • Management attributed significant 2023 credit costs to Rite Aid’s bankruptcy. The Bank charged off $2.0 million on two CRE loans where Rite Aid was the sole tenant and exited those credits; it also charged down $804,000 on another CRE loan with Rite Aid as a major tenant, with the remaining loan placed on non-accrual.
  • The company sold $16.8 million of available-for-sale securities, recording a $922,000 loss, and reinvested proceeds in higher-yielding securities. Management estimated about $325,000 of additional interest income in 2024 and a 3.7-year recovery period for the realized loss. It also recognized a $1.748 million gain on Visa Class B shares and a $926,000 credit loss on a subordinated debt investment in failed Signature Bank.
  • Other key risks include CRE concentration and potential property-value or tenant deterioration; funding-cost and interest-rate sensitivity; $384.5 million of estimated uninsured deposits (approximately half tied to collateralized public funds); and an increased share of deposits held by the 25 largest depositors.
  • The company incurred costs and litigation related to an activist investor and proxy contest and could not estimate related 2024 costs. A third-party vendor experienced a MOVEit cybersecurity incident in 2023; the company reported no material cyber incident to its own systems but identified potential legal, remediation, regulatory, and reputational risks related to the vendor event.
  • The company adopted CECL on January 1, 2023, recording a $1.2 million after-tax reduction to retained earnings. The auditor issued an unqualified opinion on the financial statements and identified the allowance for credit losses’ qualitative factors as a critical audit matter. Management assessed internal control over financial reporting as effective; the auditor did not express an opinion on internal-control effectiveness.

Important facts for investors to verify

  • Whether the elevated CRE credit costs, nonperforming assets, and criticized loan balances stabilize, particularly exposures affected by Rite Aid’s bankruptcy.
  • Whether deposit pricing and funding mix allow net interest margin to recover, and whether deposit growth and liquidity capacity persist.
  • The composition and collateral protection of uninsured deposits, and the concentration represented by the largest depositors.
  • Whether the allowance for credit losses remains adequate under CECL assumptions and changing economic conditions.
  • Whether management achieves its stated 2024 earnings-improvement expectation while sustaining capital ratios and the quarterly dividend.
  • Further developments, costs, or claims related to the activist contest and MOVEit vendor incident.