AmeriServ Financial, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; comparisons are with the same periods in 2020 unless noted. AmeriServ operates community banking and wealth management businesses, primarily in Pennsylvania and Maryland.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $9.87 million | $9.47 million | $19.56 million | $18.22 million |
| Provision for loan losses | $0.10 million | $0.45 million | $0.50 million | $0.63 million |
| Non-interest income | $4.40 million | $3.77 million | $9.01 million | $7.60 million |
| Non-interest expense | $12.04 million | $11.01 million | $23.34 million | $21.64 million |
| Net income | $1.71 million | $1.42 million | $3.79 million | $2.83 million |
| Diluted earnings per share | $0.10 | $0.08 | $0.22 | $0.17 |
| Net interest margin | 3.13% | 3.30% | 3.18% | 3.26% |
Q2 net income increased 20.4%; first-half net income rose approximately 34.0%, while diluted EPS increased 29.4%. Return on average assets and equity were 0.51% and 6.46% in Q2 (0.46% and 5.63% a year earlier); first-half returns were 0.58% and 7.24% (0.47% and 5.66%).
Interest income declined despite higher average earning assets, but lower deposit and borrowing costs lifted net interest income. Wealth management fees and other income also grew. These improvements more than offset higher operating costs, including a pension settlement charge and acquisition expenses.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.361 billion, up 6.3% from year-end 2020. Deposits were $1.169 billion, up 10.8%; loans, net of unearned income, were $992.7 million. Shareholders’ equity was $111.3 million.
- Cash and cash equivalents were $60.2 million, compared with $31.5 million at year-end. First-half operating cash flow was $9.3 million, investing cash flow was negative $9.5 million, and financing cash flow was positive $28.9 million.
- Borrowed funds totaled $72.4 million, down from $114.1 million at year-end. The company had no short-term borrowings outstanding; FHLB advances were $48.1 million, versus $65.0 million at year-end. The balance of borrowed funds also includes lease liabilities and subordinated obligations.
- Management described liquidity as exceptionally strong; Q2 average loan-to-deposit ratio was 85.1%. At June 30, AmeriServ reported $388 million of overnight FHLB borrowing availability, $33 million at the Federal Reserve and $35 million in correspondent-bank lines.
- The Bank was categorized as well capitalized. Company ratios included 9.94% common equity tier 1, 11.05% tier 1 capital, 12.79% total capital and 8.89% tier 1 leverage.
Material changes and notable items
- On May 21, the Bank acquired two Somerset County branch customer bases with approximately $42.4 million of deposits, paying a 3.71% premium, or about $1.6 million. The acquisition added $1.7 million of goodwill and a $177,000 core deposit intangible; reported acquisition expenses were $303,000 in the first half.
- Nonperforming assets, including troubled debt restructurings, increased to $3.7 million, or 0.38% of loans, from $3.3 million, or 0.34%, at year-end. The allowance for loan losses was $11.8 million, 1.18% of loans and 315% of nonperforming assets. First-half net charge-offs were $93,000.
- COVID-related payment modifications declined to $26.7 million across 46 loans from $49.1 million at year-end and a peak of approximately $200 million in June 2020. Most remaining commercial modifications involved 11 borrowers, primarily in hospitality. The company reported $1.1 million of accrued interest on modified loans that had not been received.
- The defined benefit pension plan generated an $851,000 settlement charge in Q2. Management anticipated additional settlement charges through year-end, though the amounts were difficult to estimate; lump-sum retirements are expected to reduce normal pension expense in the future.
- The company declared common dividends of $0.025 per share per quarter. First-half cash dividends were $853,000.
Outlook, commentary and risks
The filing provides no formal earnings guidance. Management said it was well positioned for the second half of 2021 and expected to maintain strong capital ratios and the current quarterly common dividend. It expected to use about $33 million of acquired deposits to replace institutional deposits costing 2.95% during Q3, reducing future interest expense. Management also cited continued loan and mortgage activity and strong wealth management performance, while noting that excess liquidity is challenging to deploy profitably and its persistence depends on customer behavior.
Key risks include COVID-19’s uncertain economic effects; credit quality, particularly in commercial real estate, hospitality and other affected industries; interest-rate and securities valuation sensitivity; and the company’s ability to deploy large deposit inflows. Non-owner-occupied commercial real estate loans equaled 364% of regulatory capital. Interest-rate modeling indicated net interest income would rise 6.8% under a 200-basis-point increase and fall 3.1% under a 100-basis-point decrease. Outstanding commitments to extend credit were approximately $246.2 million, with $13.4 million of standby letters of credit. Management said routine legal matters and these commitments were not expected to have a material adverse effect.
The company is preparing for the expected 2023 adoption of the current expected credit loss standard (CECL); it could not yet estimate the adoption adjustment or overall impact. It is also assessing the LIBOR transition. Management reported effective disclosure controls and no material proceedings.
Important facts for investors to verify
- Whether the deposit inflows persist and whether the planned replacement of higher-cost institutional funding produces the expected interest savings.
- Progress and credit performance of remaining COVID-modified loans, especially hospitality and commercial real estate exposures.
- Future pension settlement charges and the effect of the branch acquisition on expenses, deposits and profitability.
- Whether margin pressure, excess liquidity and interest-rate changes affect earnings and securities values.
- The eventual CECL transition impact and the Bank’s capital position relative to its substantial commercial real estate concentration.