AMERISERV FINANCIAL INC quarterly report, Q1 FY2022

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AmeriServ Financial, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Financial statements are unaudited. Unless otherwise noted, dollar amounts are in millions.

Business context and results

AmeriServ is a Pennsylvania-based regional bank and wealth manager. Its bank operated 17 locations, and its wealth-management business administered approximately $2.6 billion in assets not recorded on the balance sheet. Management described Q1 earnings as the company’s best quarterly result in more than 20 years.

  • Net income was $2.418 million, up 16.2% from $2.081 million; diluted EPS was $0.14 versus $0.12.
  • Total revenue, defined in the segment disclosure, was $14.102 million versus $14.306 million, down 1.4%. Net interest income was $9.767 million, up 0.8%; non-interest income was $4.335 million, down 6.0%.
  • Net interest margin was 3.14%, down 9 basis points from 3.23%. Interest income fell 6.3% to $11.028 million, but interest expense fell 39.3% to $1.261 million.
  • Provision for loan losses was a $0.400 million recovery, compared with $0.400 million of expense in Q1 2021. Non-interest expense rose 1.5% to $11.479 million. The effective tax rate was 20.0%.
  • Annualized return on average assets was 0.73% versus 0.65%; return on average equity was 8.48% versus 8.04%.

Financial position, cash flow and credit

  • Total assets were $1.331 billion, down $4.3 million from year-end. Net loans were $966.5 million; total deposits were $1.141 billion, up $1.5 million. Cash and cash equivalents were $32.1 million, down $9.0 million.
  • Shareholders’ equity was $113.7 million, down $2.9 million. A $4.9 million quarterly other comprehensive loss—primarily unrealized losses on available-for-sale securities—more than offset net income and contributed to the decline.
  • Cash flow from operations was $1.8 million; investing activities used $7.2 million and financing activities used $3.6 million. Net cash and cash equivalents declined $9.0 million.
  • Federal Home Loan Bank advances were $37.9 million, down from $42.7 million; subordinated debt was $26.6 million. There were no short-term borrowings at quarter-end.
  • The allowance for loan losses was $11.9 million, or 1.22% of loans, versus $12.4 million, or 1.26%, at year-end. Non-performing assets were $3.4 million, 0.35% of loans; net charge-offs were $76,000, or 0.03% of average loans.
  • Average loan-to-deposit ratio was 84.5%. Management reported strong liquidity and stated the company had $378 million of overnight FHLB borrowing availability, $43 million at the Federal Reserve and $35 million in unsecured correspondent-bank lines.
  • The Bank was classified as well capitalized. Company ratios included total capital of 14.01%, common equity tier 1 of 10.35%, and Tier 1 leverage of 8.32%. Tangible common equity to tangible assets was 7.58%; tangible book value per share was $5.84.

Material changes and management commentary

  • Earnings benefited from the $0.8 million year-over-year favorable shift in loan-loss provision, lower deposit and borrowing costs, and increased wealth-management fees. These gains offset lower mortgage-related income and higher personnel costs.
  • PPP-related income fell as loans were forgiven or repaid: outstanding PPP loans declined to $7.8 million from $17.3 million at year-end. Q1 PPP processing-fee and interest income was $240,000.
  • Wealth-management fees increased 10.2% to $3.165 million. Mortgage gains on loans held for sale declined to $95,000 from $495,000, reflecting lower mortgage production and refinancing activity.
  • Commercial and commercial-real-estate criticized loans shifted in mix: classified loans rose to $20.8 million from $17.0 million at year-end, including a commercial-and-industrial downgrade. Management nevertheless cited improving overall credit quality and loan upgrades.
  • COVID-related payment modifications totaled $7.7 million across 11 loans, down from a peak of about $200 million in June 2020. Five commercial borrowers, primarily in hospitality and personal care, accounted for approximately $7.5 million; management said it continues to monitor these relationships closely.
  • Available-for-sale securities had $6.453 million of gross unrealized losses at quarter-end, versus $1.412 million at year-end. Management attributed the losses primarily to rising market yields, said it expected contractual interest and principal payments, and stated it did not intend or expect to need to sell the securities before recovery or maturity. Portfolio duration increased to 50.5 months from 41.5 months; the stated internal limit is 60 months.

Outlook, risks and contingencies

  • No quantified full-year earnings or revenue guidance was provided. Management expected further Federal Reserve rate increases in 2022, gradual deposit-rate increases, and continued security purchases during Q2; it also expected to maintain strong capital ratios and said it believed the increased $0.03 quarterly dividend was sustainable.
  • The Board increased the quarterly dividend 20% to $0.03 per share, payable May 23, 2022, to shareholders of record May 9. The Q1 dividend declared was $0.025 per share.
  • Interest-rate sensitivity analysis estimated net interest income changes of +3.7% and +1.7% under immediate rate increases of 200 and 100 basis points, respectively, and −4.4% under a 100-basis-point decrease. These are modeled scenarios, not forecasts.
  • Risks cited include economic and inflation uncertainty, interest-rate and securities valuation changes, credit exposure in commercial and real-estate lending, COVID-19 effects, competition, and regulatory or legal developments. Non-owner-occupied commercial real estate loans equaled 340% of regulatory capital.
  • Off-balance-sheet commitments to extend credit were approximately $241.6 million, with $12.1 million of standby letters of credit. The company stated it did not expect routine legal proceedings or funding of these commitments to have a material adverse effect. It reported no material legal proceedings and no material changes in internal control.
  • AmeriServ planned to adopt the current expected credit loss standard (CECL) on January 1, 2023. Management was still refining estimates, so the ultimate adoption impact was not yet clear; it expected the allowance for held-to-maturity securities to be insignificant.

Important facts for investors to verify

  • Whether the provision recovery and improving credit indicators persist, particularly given the increase in classified loans and remaining COVID-related modifications.
  • How rising rates affect net interest margin, deposit costs, loan demand, mortgage activity and the market value of securities.
  • The extent to which unrealized securities losses affect equity or liquidity if securities must be sold before recovery or maturity.
  • CECL implementation estimates and the resulting opening allowance and retained-earnings impact at adoption.
  • Whether earnings, capital and liquidity support the higher $0.03 quarterly dividend through changing economic conditions.