AMERISERV FINANCIAL INC quarterly report, Q2 FY2023

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AmeriServ Financial, Inc. — Q2 2023 Form 10-Q

Business context and reporting period: This unaudited quarterly report covers the three and six months ended June 30, 2023. AmeriServ is a Pennsylvania-based community bank and wealth-management company. Unless otherwise stated, financial amounts below are in millions of dollars.

Financial performance and condition

  • Q2 earnings: Net loss was $0.187 million, or $0.01 per diluted share, versus net income of $1.981 million, or $0.12 per share, in Q2 2022. Annualized return on average assets was -0.06% and return on average equity was -0.72%.
  • First-half earnings: Net income was $1.328 million, or $0.08 per diluted share, down from $4.399 million, or $0.26 per share, in the first half of 2022. Return on average assets was 0.20% and return on average equity was 2.55%.
  • Interest income and margin: Q2 interest income rose 29.1% to $14.879 million, but interest expense increased 311.2% to $5.769 million. Net interest income fell 10.0% to $9.110 million, and net interest margin declined 34 basis points to 2.89%. For the first half, net interest income declined 6.3% to $18.632 million and margin fell 23 basis points to 2.96%.
  • Other income and expenses: Q2 non-interest income decreased 6.7% to $3.862 million; non-interest expense increased 8.8% to $13.177 million. First-half non-interest income increased 10.6% to $9.369 million, including a $1.748 million gain on Visa Class B shares; non-interest expense increased 6.6% to $25.140 million.
  • Balance sheet at June 30: Total assets were $1,345.7 million, down 1.3% from year-end 2022. Loans, net of unearned income, were $987.7 million, versus $990.8 million; deposits were $1,127.6 million, up 1.7%. Cash and cash equivalents totaled $17.1 million, compared with $23.0 million at year-end.
  • Borrowings and equity: Borrowed funds totaled $102.6 million, down from $138.4 million at year-end; this included $56.7 million in short-term borrowings, $16.1 million in FHLB advances, and $26.7 million in subordinated debt. Shareholders’ equity was $103.6 million, down from $106.2 million. Tangible common equity was 6.74% of tangible assets; tangible book value was $5.24 per share.
  • Cash flow: In the first half, operating activities provided $2.5 million and investing activities provided $9.2 million; financing activities used $17.6 million. Cash and cash equivalents declined by $5.9 million.
  • Credit quality: The loan allowance was $12.2 million, or 1.24% of loans, and covered non-performing assets by 216%. Non-performing assets increased to $5.65 million from $5.20 million at year-end, equal to 0.57% of loans. First-half net loan charge-offs were $61,000, or 0.01% of average loans.
  • Capital and liquidity: The Bank was categorized as well capitalized. At June 30, its total capital ratio was 12.65%, common equity tier 1 and tier 1 capital ratios were 11.44%, and tier 1 leverage was 9.37%. Management reported $299 million of unused FHLB borrowing capacity, $41 million of Federal Reserve short-term availability, and $35 million of correspondent-bank federal funds lines. The quarterly common dividend was $0.03 per share.

Material changes versus comparable periods

  • Higher loan and securities yields lifted interest income, but rapidly rising deposit and borrowing costs more than offset the increase, compressing net interest income and margin.
  • Q2 included substantially higher legal and professional fees tied primarily to an activist investor’s proxy contest. Management attributed the quarterly loss principally to these costs alongside margin pressure, higher credit provision, and increased expenses.
  • First-half credit-loss expense was $1.222 million versus a $0.725 million provision benefit in 2022. The 2023 amount included a $0.926 million loss allowance for a Signature Bank subordinated debt investment and a higher loan provision.
  • First-half non-interest income benefited from the Visa share sale. Wealth-management fees were lower year over year, reflecting weaker equity and bond markets; assets under administration were $2.4 billion at June 30.
  • First-half 2022 included a $1.014 million pension settlement charge; no settlement charge was recorded in 2023. The company adopted CECL on January 1, 2023, reducing retained earnings by $1.2 million after tax.
  • Available-for-sale securities had $21.6 million of gross unrealized losses at June 30, primarily attributed by management to higher market yields. Accumulated other comprehensive loss increased to $24.4 million.

Outlook, commentary, risks, and unusual items

  • No specific earnings or revenue guidance was provided. Management said it expects to maintain strong capital ratios through the rest of 2023, believes liquidity remains strong, and expects proxy-contest-related costs to decline in the second half, while noting litigation with the activist investor remains ongoing.
  • Management cited continued deposit-pricing competition, possible further declines in stimulus-related deposits, delayed loan fundings amid economic and rate uncertainty, and interest-rate changes as important operating considerations. It stated the loan pipeline remains strong and the average Q2 loan-to-deposit ratio was 85.2%.
  • Commercial real estate is a notable concentration: non-owner-occupied CRE loans were 339% of regulatory capital. Three CRE relationships were downgraded during the first half, contributing to higher classified and criticized loans. Management noted its monitoring of larger credits and collateral values.
  • Estimated uninsured deposits were $343.9 million; approximately half related to public funds required by law to be collateralized. The 25 largest depositors represented 20.7% of deposits. These figures merit attention alongside the company’s reported liquidity resources.
  • A third-party vendor disclosed a MOVEit-related security incident that exposed certain client files containing personal information, including Social Security and account numbers. The company reported no indication of compromise to its own network and no material business interruption, but said it was assessing scope and potential expenses, litigation, and regulatory scrutiny.
  • Other disclosed risks include interest-rate and securities-market volatility, credit losses, deposit retention, competition, cybersecurity and fraud, and potential legal and reputational costs. The company reported effective disclosure controls as of June 30.

Important facts for investors to verify

  • Whether deposit costs and funding competition continue to pressure net interest margin, and how the $60 million deposit-rate hedges perform.
  • Developments in the downgraded CRE relationships, non-accrual loans, classified credits, and allowance adequacy under CECL.
  • The extent and financial impact of the Signature Bank security impairment, proxy-contest litigation, and MOVEit vendor incident.
  • Deposit concentration and uninsured-deposit estimates, available contingent borrowing capacity, and liquidity under stress.
  • Capital ratios, tangible common equity, securities-related accumulated other comprehensive loss, and the sustainability of the $0.03 quarterly dividend.