AMERISERV FINANCIAL INC annual report, FY2014

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AmeriServ Financial, Inc. — 2014 Form 10-K

Business context and reporting period. AmeriServ is a Pennsylvania bank holding company operating a community bank, wealth-management and trust businesses, and a captive insurance subsidiary. This filing covers the fiscal year ended December 31, 2014; comparisons are primarily with 2013. The bank operated 17 locations in Pennsylvania.

Financial performance and condition

  • Earnings: Net income was $3.0 million, down 41.8% from $5.2 million in 2013. Net income available to common shareholders was $2.8 million, or $0.15 per diluted share, versus $5.0 million, or $0.26, in 2013. Return on average assets was 0.29% and return on average equity was 2.61%.
  • Fourth quarter: Net income was $749,000, or $0.04 per diluted share, compared with $1.84 million and $0.09 per diluted share in fourth-quarter 2013.
  • Revenue and margins: Net interest income increased 3.6% to $34.0 million. Net interest margin declined to 3.52% from 3.56%. Non-interest income fell 9.0% to $14.3 million, while non-interest expense rose 2.7% to $43.4 million. Income before taxes was $4.6 million, versus $7.5 million.
  • Cash flow: Operating activities provided $5.0 million, investing activities used $30.9 million, and financing activities provided $28.7 million. Cash and cash equivalents increased $2.8 million to $32.9 million.
  • Balance sheet and funding: Assets grew 3.2% to $1.089 billion. Loans, including loans held for sale, rose 5.8% to $832.1 million; deposits were $869.9 million, up about 1.8%. Borrowed funds increased to $94.0 million from $79.6 million, including $42.0 million of FHLB advances and $13.1 million of junior subordinated debentures. The loan-to-deposit ratio was 95.7%.
  • Credit quality: Non-performing assets including troubled debt restructurings fell to $2.9 million, or 0.35% of loans and other real estate owned, from $4.1 million, or 0.52%. Net charge-offs were $856,000, or 0.11% of average loans. The allowance for loan losses was $9.6 million, or 1.16% of loans, versus $10.1 million, or 1.29%, a year earlier.
  • Capital and liquidity: AmeriServ reported consolidated total risk-based capital of 14.80%, Tier 1 risk-based capital of 13.62%, and a leverage ratio of 11.34%; the bank was categorized as well capitalized. Management reported $17.6 million of holding-company cash, short-term investments, and securities, plus substantial borrowing availability, including $347 million at the FHLB. Common dividends were $0.04 per share for the year.

Material changes versus 2013

  • Common diluted EPS declined 42.3%. Management attributed the decline principally to a $1.5 million unfavorable year-over-year swing in loan-loss provision, a $1.4 million reduction in non-interest income, and a $1.1 million increase in non-interest expense.
  • Loan growth supported higher net interest income, but asset yields and net interest margin remained under pressure in the low-rate environment. Average loan yield declined 19 basis points to 4.52%.
  • Asset quality improved, but the company recorded a $375,000 loan-loss provision in 2014, compared with a $1.1 million provision credit in 2013.
  • Commercial and real-estate lending drove balance-sheet growth; investment securities declined by approximately $13 million as cash flows helped fund loans.

Outlook, commentary, risks, and unusual items

  • Management said it expects loan growth in 2015, while anticipating continued intense pricing competition and little net interest margin improvement. It expects positive loan-loss provisions to support portfolio growth.
  • A profitability-improvement program had identified more than $1 million in annual expense reductions; management expected at least $1 million in annual savings in 2015. The company also expected meaningful personnel savings after 25 employees accepted a voluntary early-retirement offer. These are management expectations, not formal earnings guidance.
  • Management planned to open a loan-production office in Harrisonburg, Virginia, in 2015. It also said it intended to use a meaningful portion of holding-company cash toward a partial redemption of the $21 million SBLF preferred stock in first-quarter 2016, subject to regulatory approval. Its dividend rate was 1% through February 7, 2016, then scheduled to rise to 9%.
  • Unusual charges included a $669,000 goodwill impairment at West Chester Capital Advisors (WCCA), after the former WCCA CEO’s departure, related litigation, client losses, and lower projected earnings capacity; and a $376,000 pension/termination charge for the early-retirement program. Professional fees also increased due to legal, consulting, and outsourcing costs.
  • Glenn L. Wilson resigned as CEO on January 9, 2015. Former CFO Jeffrey A. Stopko was leading an interim management team. The filing cites economic conditions, interest rates, credit risk, competition, regulation, and the SBLF preferred-stock dividend and redemption as important risks.
  • Outstanding off-balance-sheet commitments included approximately $188.0 million to extend credit and $7.2 million in standby letters of credit. Management did not expect pending or potential legal claims to materially affect the company; the filing describes WCCA-related litigation and other claims in the ordinary course of business.
  • The independent auditor issued an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting.

Important facts for investors to verify

  • Whether forecast cost savings materialize and offset continuing expense and revenue pressures.
  • Whether loan growth can continue without weakening credit quality or requiring materially higher provisions; monitor the allowance ratio and commercial/CRE concentrations.
  • Whether WCCA stabilizes after client attrition and the CEO-related disruption, and whether further goodwill impairment or litigation costs arise.
  • The company’s ability to maintain liquidity and capital while funding growth, paying dividends, and meeting preferred-stock and debt obligations.
  • Regulatory approval and timing for any SBLF preferred-stock redemption before the scheduled dividend-rate increase to 9%.
  • Reconcile reported deposit totals: the consolidated balance sheet reports $869.9 million at year-end, while some narrative passages cite approximately $870 million or a slightly different figure.