AMERISERV FINANCIAL INC quarterly report, Q1 FY2021

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AmeriServ Financial, Inc. — Q1 2021 Form 10-Q

Business context and reporting period. This unaudited filing covers the three months ended March 31, 2021, compared primarily with Q1 2020; balance-sheet changes are generally compared with December 31, 2020. AmeriServ operates a Pennsylvania-based community bank and wealth management business. Its trust company administered $2.5 billion of client assets, which are not included in reported assets.

Financial performance and position

Unless stated otherwise, dollar amounts are in millions.

  • Earnings and revenue: Net income was $2.081 million, up 47.7% from $1.409 million; diluted EPS was $0.12 versus $0.08. Total revenue (net interest income plus non-interest income) was $14.306 million, up 13.7%. Annualized return on average assets was 0.65% (0.48% in Q1 2020), and return on average equity was 8.04% (5.69%).
  • Interest income and margins: Net interest income increased 10.8% to $9.692 million. Net interest margin rose to 3.23% from 3.21%. Interest income declined 1.5%, but interest expense fell 35.0%, principally reflecting lower deposit costs. Average deposit cost fell to 0.52% from 1.01%.
  • Non-interest items and expenses: Non-interest income increased 20.4% to $4.614 million, including higher wealth management fees and mortgage-sale gains. Non-interest expense rose 6.3% to $11.305 million, including increased employee costs, professional fees, FDIC insurance and $110,000 in branch-acquisition costs. A $159,000 life-insurance death claim contributed to higher bank-owned life insurance income.
  • Credit costs: Provision for loan losses was $400,000, versus $175,000 in Q1 2020. Net charge-offs were $114,000, or 0.05% of average loans. The allowance was $11.631 million, equal to 1.18% of loans and 274% of non-performing assets.
  • Cash flow and liquidity: Operating activities provided $6.763 million; investing activities used $28.217 million; financing activities provided $27.174 million. Cash and cash equivalents ended at $37.224 million, up $5.720 million from year-end. Deposits rose $62.171 million to $1.117 billion. Average loan-to-deposit ratio was 89.0%; management described liquidity as strong. Available borrowing capacity included $377 million at the FHLB, $33 million at the Federal Reserve and $35 million in correspondent-bank lines.
  • Loans, assets and funding: Total assets were $1.311 billion, up 2.5% from year-end. Loans, net of unearned income, were $985.249 million; PPP loans were $67.253 million. Short-term borrowings fell to zero from $24.702 million; FHLB advances were $55.149 million. Total shareholders’ equity was $105.331 million.
  • Capital and shareholder return: The bank was classified as well capitalized. At March 31, the company reported total capital of 13.03%, common equity Tier 1 of 10.15%, and Tier 1 leverage of 9.30%. Book value per share was $6.17; tangible book value per share was $5.47. The quarterly common dividend was $0.025 per share.

Material changes versus comparable periods

  • Profitability improved year over year, with higher net interest income and non-interest income more than offsetting higher credit provision and operating expenses.
  • Net interest margin improved modestly, while lower rates reduced asset yields. Lower deposit pricing and borrowing costs more than offset that pressure during the quarter.
  • Non-performing assets, including TDRs, increased to $4.245 million (0.43% of loans and other real estate owned) from $3.331 million (0.34%) at year-end. Two commercial relationships moved to non-accrual; management cited an additional healthcare-loan downgrade.
  • COVID-related modified loans totaled $49.632 million at quarter-end, slightly above year-end’s $49.063 million and sharply below the approximately $200 million peak in June 2020. Management reported $1.2 million of accrued interest on modified loans that had not been received.
  • Available-for-sale securities increased to $156.416 million from $144.165 million. Unrealized AFS losses contributed to a $750,000 decline in other comprehensive income; comprehensive income was $1.331 million, versus $2.750 million in Q1 2020.

Outlook, risks and unusual items

  • Management said commercial loan pipelines had returned to pre-COVID levels and residential mortgage production remained strong. It cited uncertainty over how long stimulus-related deposits will remain and the challenge of deploying excess liquidity profitably at low short-term yields.
  • Management expected the bank to remain strongly capitalized through the rest of 2021 and said it believed current earnings and capital supported maintaining the $0.025 quarterly dividend. These are expectations, not guarantees.
  • The bank agreed to acquire branch and deposit customers in Meyersdale and Somerset, Pennsylvania. The approximately $45 million of deposits were to be acquired at a 3.71% premium; closing was scheduled for May 22, 2021. Management projected the deal would be immediately earnings-accretive, with approximately 2% tangible-book-value dilution earned back in less than three years.
  • Key risks include the evolving COVID-19 impact on borrowers, especially commercial real estate and hospitality; interest-rate and prepayment changes; credit concentrations; and the uncertain persistence of unusually high deposits. Non-owner-occupied commercial real estate loans equaled 348% of regulatory capital.
  • Interest-rate sensitivity analysis estimated net interest income would rise 6.0% under a 200-basis-point increase and 3.2% under a 100-basis-point increase, but decline 3.0% under a 100-basis-point decrease. Management noted it had suspended the 200-basis-point downward scenario because rates were already very low.
  • The filing reported no material legal proceedings. Management stated disclosure controls were effective and reported no material quarterly change in internal controls over financial reporting.

Important facts for investors to verify

  • Whether the rise in non-performing assets and the two newly non-accrual commercial relationships lead to additional credit losses or provision expense.
  • Performance and repayment status of the $49.6 million in COVID-modified loans, including the large commercial and CRE exposures, and the realization of accrued interest.
  • How quickly deposits accumulated during stimulus programs remain, and whether the bank can deploy excess liquidity without further margin pressure.
  • Completion and actual economics of the branch acquisition, including deposit retention, integration costs, and the projected earnings and tangible-book-value effects.
  • Whether reported earnings, margins and capital remain resilient as PPP fees, mortgage activity, stimulus-related balances and interest rates change.