AmeriServ Financial, Inc. — Q2 2022 Form 10-Q
Business context and period. AmeriServ is a Pennsylvania-based bank holding company with community banking and wealth management businesses. This unaudited filing covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $10.1m | $9.9m | $19.9m | $19.6m |
| Net interest margin | 3.23% | 3.13% | 3.19% | 3.18% |
| Provision for loan losses | $0.325m recovery | $0.100m expense | $0.725m recovery | $0.500m expense |
| Non-interest income | $4.1m | $4.4m | $8.5m | $9.0m |
| Non-interest expense | $12.1m | $12.0m | $23.6m | $23.3m |
| Net income | $2.0m | $1.7m | $4.4m | $3.8m |
| Diluted earnings per share | $0.12 | $0.10 | $0.26 | $0.22 |
- Q2 net income rose 16.0%; first-half net income rose 16.1%. Management attributed the improvement mainly to lower funding costs, higher net interest income, and loan-loss provision recoveries.
- At June 30, total assets were $1.321bn, down $14.2m (1.1%) from year-end. Net loans were $952.8m, down from $972.7m; deposits were $1.143bn, up $3.4m. Cash and cash equivalents were $29.0m, down $12.1m.
- Total shareholders’ equity was $106.4m, down $10.2m. Accumulated other comprehensive loss widened to $20.2m, largely reflecting lower fair values of available-for-sale securities and pension-related changes. Tangible book value per share was $5.41 versus $6.02 at year-end.
- Borrowed funds totaled $64.1m, including $34.0m of FHLB advances and $26.6m of subordinated debt; total borrowings were down $8.7m from year-end. There were no short-term borrowings outstanding at June 30.
- Six-month operating cash flow was $1.0m, versus $9.3m a year earlier. Investing activities used $7.0m and financing activities used $6.2m; cash and cash equivalents decreased $12.1m to $29.0m.
- The Bank was reported as well capitalized. The filing reports company total capital and common equity tier 1 ratios of 14.33% and 10.65%, respectively; its regulatory table reports Bank ratios of 12.87% and 11.69%. The loan-to-deposit ratio averaged 84.0% in Q2.
Material changes and management commentary
- Net interest income increased 2.6% in Q2 and 1.7% in the first half, although interest income declined. Lower deposit and borrowing costs more than offset lower loan interest, including reduced PPP-related income. Q2 net interest margin improved 10 basis points year over year.
- Non-interest income fell 5.9% in Q2 and 6.0% in the first half. Lower mortgage production and loan-sale gains were significant contributors; wealth management fees were affected by market declines in Q2. Non-interest expense increased 0.6% in Q2 and 1.1% in the first half.
- A $1.014m pension settlement charge was recorded in both the second quarter and first half of 2022. Management expects further settlement charges through year-end but says the amounts are difficult to estimate; lump-sum retirements may reduce regular pension expense over time.
- Management said loan growth trailed expectations: elevated payoffs exceeded new production. Excluding PPP loans, average loans were higher year over year, but residential mortgage production declined sharply as rising rates curtailed refinancing. Management cited strong liquidity and expects to continue purchasing securities during the remainder of 2022.
Outlook, risks and contingencies
- Management expected further Federal Reserve rate increases in 2022 and anticipated deposit costs would rise, though it expected repricing to be controlled. Its interest-rate sensitivity analysis showed net interest income increasing 2.4% under a 200-basis-point increase and decreasing 2.1% under a 100-basis-point decrease.
- Credit quality was described as strong, with nonperforming assets of $3.24m, or 0.34% of loans, and allowance coverage of 357% of nonperforming assets. The allowance was $11.6m, or 1.20% of loans. Classified loans rose to $18.8m from $17.0m at year-end.
- Commercial real estate concentration is a key exposure: non-owner-occupied CRE loans were reported at 342% of regulatory capital. The 25 largest credits represented 22.5% of loans. COVID-related payment modifications totaled $5.2m; three commercial borrowers in hospitality and personal care accounted for about $4.9m.
- Outstanding commitments to extend credit were $236.1m and standby letters of credit were $12.1m. Management said liquidity was adequate to fund commitments, citing borrowing availability of $390m at the FHLB, $42m at the Federal Reserve and $35m through correspondent-bank lines.
- Rising rates have reduced the market value of securities: available-for-sale securities had $11.3m of gross unrealized losses at June 30, compared with $1.4m at year-end. Management attributed the losses primarily to higher market yields, said it did not intend or expect to be required to sell the securities before recovery or maturity, and expected scheduled interest and principal collection.
- The company intends to adopt CECL on January 1, 2023. It selected a static-pool methodology; preliminary expected-loss estimates remain subject to change. Management did not expect the HTM securities allowance to be significant, but said the total adoption impact could differ materially from current expectations.
- The company maintained its quarterly common dividend at $0.03 per share and said it expected to maintain strong capital ratios. No material legal proceedings or new risk factors were reported. Management cautioned that forward-looking statements are subject to economic, interest-rate, credit, regulatory, market and pandemic-related risks.
Important facts for investors to verify
- Whether loan payoffs continue to exceed originations, and how loan growth and funding costs affect net interest margin as rates change.
- Trends in commercial real estate concentrations, criticized and classified credits, COVID-modified borrowers, charge-offs and allowance adequacy.
- The drivers of weaker operating cash flow and the company’s capacity to preserve liquidity while meeting loan commitments and maintaining dividends.
- The sensitivity of equity and capital to further securities valuation declines and pension remeasurement, including the timing and size of additional pension settlement charges.
- The eventual CECL opening-equity adjustment and allowance impact when the company adopts the standard in 2023.