AmeriServ Financial, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company operates a Pennsylvania community bank, trust and financial services business, and captive insurance subsidiary.
Financial performance and condition
- Q3 earnings: Net income was $2.329 million, up 50.2% from $1.551 million; diluted EPS was $0.13 versus $0.08. Annualized return on average assets was 0.79% and return on average equity was 9.54%.
- Nine-month earnings: Net income was $5.840 million, up 36.2% from $4.288 million; diluted EPS was $0.32 versus $0.23. Annualized ROAA was 0.67% and ROAE was 8.14%.
- Revenue and margins: Q3 interest income was $12.149 million and noninterest income $3.586 million; nine-month amounts were $34.969 million and $10.902 million, respectively. Net interest income rose 1.9% in Q3 to $9.109 million and 0.6% year to date to $26.715 million. Net interest margin was 3.31% for Q3 and 3.29% year to date, versus 3.28% and 3.27% in 2017.
- Costs and credit provision: Noninterest expense was $10.114 million in Q3 and $30.544 million year to date, essentially unchanged from 2017. Loan-loss provision was zero in Q3 and $0.100 million for nine months, compared with $0.200 million and $0.750 million in 2017.
- Balance sheet: Total assets were $1.169 billion, up $1.2 million from year-end 2017. Net loans were $873.9 million, down $5.5 million; deposits were $944.2 million, down $3.7 million. Cash and cash equivalents were $31.2 million, down $3.0 million.
- Funding and debt: Total borrowed funds were $124.2 million, up $8.5 million since year-end; short-term borrowings rose $12.2 million while FHLB advances declined $3.7 million. Average deposits fell year over year, while deposit and borrowing interest costs increased. Q3 average loan-to-deposit ratio was 93.0%.
- Cash flows: Nine-month operating cash flow was $3.8 million, investing cash outflow $8.8 million, and financing cash inflow $2.1 million, resulting in a $3.0 million decrease in cash and cash equivalents.
- Capital and liquidity: Shareholders’ equity was $97.2 million. The Bank was categorized as well capitalized; company total capital, common equity tier 1, and tier 1 leverage ratios were 13.13%, 10.10%, and 9.57%. Tangible common equity ratio was 7.37%. Management reported $351 million of FHLB overnight borrowing capacity and $35 million of unsecured correspondent-bank lines.
Material changes versus comparable periods
- Higher loan and securities yields helped lift interest income, but rising deposit and borrowing costs absorbed much of the increase. Loan balances and average deposits declined; the investment securities portfolio grew.
- Lower income taxes were a major contributor to earnings growth: Q3 tax expense was $0.252 million (9.8% effective rate), versus $0.701 million (31.1%) in Q3 2017. Nine-month tax expense was $1.133 million (16.2%), versus $1.949 million (31.2%).
- Wealth management fees increased to $2.359 million in Q3 and $7.232 million year to date. Total noninterest income was slightly lower year over year, partly reflecting weaker securities-sale results, deposit fees, and mortgage-related income.
- Nonperforming assets fell to $1.067 million, or 0.12% of loans and OREO, from $3.034 million, or 0.34%, at year-end 2017. The allowance was $9.439 million, 1.07% of loans; nine-month net charge-offs increased to $0.875 million from $0.336 million.
Outlook, commentary, risks, and unusual items
- Management expected modest loan portfolio growth in Q4 2018 and expected the loan-to-deposit ratio to remain near 92%. It expected the effective tax rate to return to 20% in Q4. These are management expectations, not guarantees.
- Q3 tax expense benefited from a $2.5 million additional pension contribution and a favorable $264,000 combined tax effect related to that contribution and the final reconciliation of 2017 deferred taxes. The lower corporate tax rate under the Tax Cuts and Jobs Act also reduced tax expense. This makes reported earnings growth less directly indicative of underlying operating growth.
- Management described asset quality as strong and said the lower loan-loss provision reflected successful workouts and reduced loan balances. However, net charge-offs rose year to date, and commercial real estate exposure is significant: non-owner-occupied commercial real estate loans equaled 335% of regulatory capital.
- Available-for-sale securities had $4.012 million of gross unrealized losses at September 30, 2018; total investment securities had $5.440 million of unrealized losses. Management attributed these mainly to higher market yields and said it did not intend, and did not expect to be required, to sell the securities before recovery. Portfolio duration increased to 48.2 months from 44.3 months at year-end.
- Interest-rate sensitivity analysis showed modeled net interest income changes of +0.2% and +0.5% under +200 and +100 basis-point shocks, respectively, and -1.4% under a -100 basis-point shock. Forward-looking results depend on assumptions and market conditions.
- The company repurchased 279,679 shares for $1.263 million during Q3 under a new program authorizing repurchase of up to approximately 540,000 shares over 12 months. Management’s strategic plan states an objective of returning up to 75% of earnings through dividends and repurchases, subject to capital needs. The filing reports commitments to extend credit of $207.9 million and standby letters of credit of $9.7 million; management did not expect routine legal claims or funding these commitments to have a material adverse effect.
- Management identified economic conditions, interest rates, loan credit risk, regulation, competition, and customer behavior among factors that could cause actual results to differ from forward-looking statements. No material legal proceedings or risk-factor changes were reported.
Most important facts for investors to verify
- How much earnings improvement is sustainable after separating operating performance from lower tax expense and the pension-related tax benefit.
- Whether deposit outflows, deposit repricing, and greater short-term borrowing continue to pressure funding costs and net interest margin.
- Whether charge-offs, delinquency trends, and commercial real estate concentration warrant changes to the allowance despite low reported nonperforming assets.
- How rising rates affect the value, liquidity, and realized results of the securities portfolio, including its unrealized losses and longer duration.
- Whether planned loan growth, capital levels, dividends, and share repurchases remain consistent with liquidity and the stated shareholder-return objectives.