AmeriServ Financial, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2018. Amounts below are in millions except per-share data and ratios.
Business context and financial results
AmeriServ is a Pennsylvania-based bank holding company with retail and commercial banking, wealth management, and insurance operations. Its bank operated 16 locations in Pennsylvania and Maryland. The Trust Company administered $2.1 billion in client assets, which are not included on the consolidated balance sheet.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $12.433 | $12.149 | $37.362 | $34.969 |
| Net interest income | $8.764 | $9.109 | $26.482 | $26.715 |
| Net interest margin | 3.18% | 3.31% | 3.24% | 3.29% |
| Noninterest income | $4.095 | $3.586 | $11.357 | $10.902 |
| Noninterest expense | $10.503 | $10.096 | $31.252 | $30.499 |
| Net income | $1.689 | $2.329 | $5.359 | $5.840 |
| Diluted earnings per share | $0.10 | $0.13 | $0.31 | $0.32 |
Balance sheet, cash flow, and capital
- At September 30, total assets were $1,171.4 million, net loans $860.8 million, deposits $970.0 million, and shareholders’ equity $102.5 million. Total loans, including loans held for sale, grew $12.0 million from year-end; deposits increased $20.8 million.
- Cash and cash equivalents were $33.1 million, down $1.8 million from year-end. For the first nine months, operating cash flow was $1.3 million, investing cash flow was $0.3 million, and financing cash flow was negative $3.4 million.
- Total borrowed funds were $91.5 million, versus $108.2 million at December 31, 2018. Short-term borrowings fell to $11.3 million from $41.0 million; FHLB advances increased to $55.6 million from $46.7 million. The balance sheet also included $4.1 million of lease liabilities following lease-accounting adoption.
- The Bank was categorized as well capitalized. Company capital ratios included 13.33% total capital, 10.41% common equity tier 1, and 9.79% Tier 1 leverage. Tangible common equity was 7.81%; tangible book value per share was $5.28.
- Management reported $380 million of immediately available FHLB overnight borrowing capacity and $35 million of unsecured correspondent-bank lines. The third-quarter average loan-to-deposit ratio was 89.4%.
Material changes and management commentary
- Q3 net income declined 27.5% year over year; nine-month net income declined 8.2%. Q3 net interest income fell 3.8%, while the nine-month decline was 0.9%. Management attributed margin pressure to lower interest rates, higher deposit costs, and reduced average loan balances. Deposit expense rose 33.8% in Q3 and 43.5% year to date.
- Noninterest income rose 14.2% in Q3 and 4.2% for the nine-month period. Q3 gains included a $197,000 gain on the guaranteed portion of an SBA loan, $88,000 of investment-security gains, and higher wealth-management and mortgage-related fees.
- Noninterest expense rose 4.0% in Q3 and 2.5% year to date, led by salaries and benefits, staffing for the Hagerstown center, technology costs, and pension expense. FDIC insurance expense declined under the Small Bank Assessment Credit.
- The Q3 loan-loss provision was $225,000, versus zero a year earlier; the first nine months included a $175,000 provision recovery, versus $100,000 expense in 2018. Net charge-offs were $151,000, or 0.02% of loans, year to date, compared with $875,000, or 0.13%, in 2018.
- Nonperforming assets including troubled debt restructurings were $2.0 million, or 0.22% of loans and other real estate owned, versus $1.4 million, or 0.16%, at year-end. The allowance was $8.3 million, 0.95% of loans and 426% of nonperforming assets. Classified loans increased to $7.7 million from $4.3 million at year-end; management cited downgrades of several credits that continued to pay on time.
- Management said the loan pipeline remained strong but originations slowed in Q3 as borrowers awaited possible further rate cuts. It expected the loan-to-deposit ratio to remain relatively stable through the rest of 2019 and anticipated maintaining strong capital ratios. No specific near-term earnings or revenue guidance was provided.
Outlook, risks, and unusual items
- Interest-rate sensitivity analysis estimated net interest income would rise 5.4% under a 200-basis-point increase and 3.4% under a 100-basis-point increase, but fall 4.8% under a 100-basis-point decrease. Management noted the downward-rate scenario’s negative effect; the 200-basis-point decrease scenario was suspended because of low rates.
- Non-owner-occupied commercial real estate loans equaled 336% of regulatory capital. The 25 largest credits represented 24.3% of total loans. Management identified economic conditions, interest rates, credit quality, competition, and regulatory changes as risks.
- Outstanding commitments to extend credit were approximately $227.5 million, with $15.0 million of standby letters of credit. Management did not expect these commitments or routine legal claims to materially adversely affect the company.
- The company adopted lease accounting on January 1, 2019, recognizing right-of-use assets and lease liabilities; there was no opening retained-earnings adjustment. The company was evaluating the expected-credit-loss standard. As a smaller reporting company, it disclosed the expected effective-date deferral to fiscal years beginning after December 15, 2022, and said the adoption impact could not yet be determined.
- Shareholder returns included $2.2 million of repurchases of 511,506 shares during the first nine months and common dividends of $0.07 per share. A new authorization permitted repurchase of up to approximately 526,000 shares; 126,805 remained available at September 30. Management’s stated strategic objective is 10% year-over-year EPS growth and a goal of returning up to 75% of earnings, subject to capital needs.
Important facts for investors to verify
- Whether deposit pricing and funding costs ease enough to stabilize net interest margin after its year-over-year decline.
- Whether loan originations resume and loan growth offsets payoffs, particularly in commercial and commercial real estate lending.
- Whether criticized and classified credits, nonperforming assets, or credit losses increase, and whether the allowance remains adequate.
- How the 336% non-owner-occupied CRE concentration and large-credit exposures perform under weaker economic or property-market conditions.
- Whether buybacks and dividends remain consistent with earnings, liquidity, and regulatory capital requirements.