ASRV AmeriServ Financial Inc

JOHNSTOWN, Pa., Oct. 15, 2019 /PRNewswire/ -- AmeriServ Financial, Inc. (NASDAQ: ASRV) reported third quarter 2019 net income of $1,689,000, or $0.10 per diluted common share. This earnings performance represented a $640,000, or 27.5%, decrease from the third quarter of 2018 when net income totaled $2,329,000, or $0.13 per diluted common share. Note that the Company's third quarter 2018 earnings were favorably impacted by a $264,000 income tax benefit that is discussed later in this release. For the nine-month period ended September 30, 2019, the Company reported net income of $5,359,000, or $0.31 per diluted common share. This represents a 3.1% decrease in earnings per share when compared to the first nine months of 2018 when net income totaled $5,840,000, or $0.32 per diluted common share. The following table highlights the Company's financial performance for both the three and nine month periods ended September 30, 2019 and 2018:

Jeffrey A. Stopko, President and Chief Executive Officer, commented on the 2019 financial results: "AmeriServ Financial Inc. was able to return 85% of third quarter 2019 earnings to our shareholders through accretive common stock buybacks and an increased cash dividend. This strategic focus on active capital management continues to favorably impact both earnings per share and tangible book value⁽¹⁾ per share. Additionally, we have also achieved solid deposit growth this year due, in part, to the success of our financial banking center in Hagerstown, Maryland that was opened in December 2018."

The Company's net interest income in the third quarter of 2019 decreased by $345,000, or 3.8%, from the prior year's third quarter and, for the first nine months of 2019, decreased by $233,000, or 0.9%, when compared to the first nine months of 2018. The Company's net interest margin of 3.18% for the third quarter of 2019 and 3.24% for the nine-month timeframe was 13 basis points lower than the third quarter of 2018 and 5 basis points lower than the nine-month period of 2018. The decrease in net interest income in 2019 is the result of net interest margin compression caused by a combination of the lower interest rates that exist in the economy and a decrease in the balance of total average loans. Overall, the U.S. Treasury Yield Curve has shifted downward, flattened and became inverted in certain segments, particularly in the third quarter of 2019. Slightly offsetting these unfavorable items was an increase in the average balance of total investment securities in both time periods as well as a favorable shift experienced in the mix of total average interest bearing liabilities as total interest bearing deposits increased and resulted in less reliance on higher cost borrowings to fund interest earning assets.

Total loans averaged $875 million in the first nine months of 2019 which is $10.0 million, or 1.1%, lower than the $885 million average for the first nine months of 2018. The lower balance of total average loans reflects the high level of loan payoffs received during the fourth quarter of 2018 and, again, during the third quarter of 2019 which exceeded the level of new loan originations during both time periods. In 2019, after a first quarter in which total average loans remained relatively consistent, loan growth returned during the second quarter as loan originations exceeded loan payoffs. However, during the third quarter, although loan pipelines remained strong, loan originations began to slow and trailed loan payoffs resulting in the 2019 third quarter average total loan portfolio balance falling short of the 2018 third quarter average balance. The decrease between years occurred primarily in the commercial real estate and commercial & industrial loan portfolios as potential new loan customers delayed their decision to obtain loans given the Federal Reserve's action to decrease interest rates late in July and September 2019 and the sentiment in national credit markets that additional interest rate reductions may occur this year. Even though loan balances are lower for both time periods in 2019, loan interest income increased by $1.6 million, or 5.2%, between the first nine months of 2019 and last year's first nine months. The higher loan interest income primarily reflects the Federal Reserve increasing the target federal funds interest rate in 2018. This resulted in new loans originating at higher yields throughout 2018 and during the first half of 2019 and also caused the upward repricing of certain loans tied to LIBOR or the prime rate as both of these indices moved up with the federal funds rate 2018 increases. Also, included in this increase was a higher level of loan fee income by $65,000, due primarily to prepayment fees collected on certain early loan pay-offs.

Total investment securities averaged $197 million in the first nine months of 2019 which is $15.2 million, or 8.4%, higher than the $182 million average for the first nine months of 2018. The growth in the investment securities portfolio occurred primarily during 2018 and is the result of management taking advantage of the rising interest rate environment experienced during 2018 which provided an attractive market for additional security purchases. Purchases primarily focused on federal agency mortgage backed securities due to the ongoing cash flow that these securities provide. Also, management continued its portfolio diversification strategy through purchases of high quality corporate and taxable municipal securities. Investment security purchase activity slowed significantly during the second and third quarters of 2019 as the interest rate market was less favorable. Interest income on investments increased between the third quarter of 2019 and the third quarter of 2018 by $154,000, or 10.0%, and increased in the first nine months of 2019 from the first nine months of 2018 by $794,000, or 18.0%. Overall, total interest income increased by $2.4 million, or 6.8%, between years.

Total interest expense for the first nine months of 2019 increased by $2.6 million, or 31.8%, when compared to 2018, due to higher levels of both deposit and borrowing interest expense. Deposit interest expense in 2019 was higher by $2.6 million, or 43.5%, for the first nine months of the year which reflects the higher level of total average interest bearing deposits and certain indexed money market accounts repricing upward due to the impact of the Federal Reserve increasing interest rates during 2018. The Company did begin to experience deposit pricing relief to a small degree during the third quarter of 2019 because of the Federal Reserve easing interest rates late in July and September 2019. However, the Company continues to experience competitive market pressure to retain existing deposit customers and attract new customer deposits. Customer product preference changed as well in 2019 resulting in movement of funds from non-interest bearing demand deposit accounts and lower yielding money market accounts into higher yielding certificates of deposits. Overall, total deposits continued to grow for a fifth consecutive quarter and averaged $978 million for the first nine months of 2019, which was $20.6 million, or 2.1%, higher than the 2018 nine-month average. The Company's loan to deposit ratio averaged 89.4% in the third quarter of 2019, which we believe indicates that the Company has ample capacity to grow its loan portfolio.

Even though total average borrowings decreased between years, the Company experienced a $52,000, or 2.2%, increase in the interest cost for borrowings in the first nine months of 2019 due to the impact that the 2018 increases in the federal funds rate had on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. Also, due to a new accounting pronouncement that became effective January 1, 2019, the Company recognized additional interest expense on its financing property leases. However, and specific to the third quarter of 2019, the total average term advance borrowings balance increased by approximately $12.0 million, or 27.3%, when compared to the third quarter of 2018. This increase is due to the inversion demonstrated by the U.S. Treasury Yield Curve in 2019 and resulted in certain term advances costing less than overnight borrowed funds. As a result of this and the Federal Reserve decreasing the federal funds rate late in July and, to a lesser extent, the middle of September, the interest cost of borrowings decreased in the third quarter of 2019 by $102,000, or 11.6%, when compared to the third quarter of 2018. Overall, the 2019 nine-month average of FHLB borrowed funds was $65.1 million, which represented a decrease of $14.1 million, or 17.8%, due to the increase in total average deposits.

The Company did record a $225,000 provision for loan losses in the third quarter of 2019 as compared to a zero provision in the third quarter of 2018. For the first nine months of 2019, the Company recorded a $175,000 provision recovery for loan losses compared to a $100,000 provision expense recorded in first nine months of 2018. The third quarter 2019 provision expense follows the first two quarters of 2019 in which a provision recovery and no provision expense was recognized. The recognition of a $225,000 provision expense in the third quarter primarily reflects an increase in criticized loan totals. For the nine months of 2019, the $175,000 provision recovery reflects our overall strong asset quality, limited loan growth, and low level of net loan charge-offs. Specifically, the Company experienced net loan charge-offs of only $152,000, or 0.02% of total loans, in the first nine months of 2019 compared to net loan charge-offs of $875,000, or 0.13% of total loans, in the first nine months of 2018. Overall, nonperforming assets totaled $2.0 million, or only 0.22% of total loans, at September 30, 2019. In summary, the allowance for loan losses provided 426% coverage of non-performing assets, and 0.95% of total loans, at September 30, 2019, compared to 629% coverage of non-performing assets, and 1.00% of total loans, at December 31, 2018.

Total non-interest income in the third quarter of 2019 increased by $509,000, or 14.2%, from the prior year's third quarter, and increased for the nine months by $455,000, or 4.2%. For the third quarter, net realized gains on loans held for sale increased by $229,000, primarily due to the sale of the guaranteed portion of a Small Business Administration loan that resulted in a $197,000 gain. The remainder of the net gain was due to increased residential mortgage loan sales in the secondary market as the lower interest rate environment in the third quarter of 2019 has resulted in a greater level of residential mortgage loan production. Likewise, the increased residential mortgage loan production resulted in the associated level of mortgage fee income improving by $43,000. Other income increased by $86,000, or 16.0%, due to a higher level of letter of credit fees and increased revenue from check supply sales due to a favorable vendor contract renegotiation. Wealth management fees increased by $72,000, or 3.1%, as the Company benefitted from a continuing increase in market values for assets under management. The Company did recognize an $88,000 investment security sale gain in the third quarter of 2019 as the opportunity existed to capture gains on certain securities that demonstrated higher than typical market appreciation in this low interest rate environment. For the nine-month period, similar comparisons for the same line items resulted in the favorable variance when comparing 2019 to 2018. Favorable comparisons included net realized gains on loans held for sale by $181,000, or 46.1%, other income by $71,000, or 4.0%, and mortgage related fees by $53,000, or 32.1%. Additionally, the Company recognized a net investment security sale gain of $118,000 through nine months of 2019 compared to a $148,000 net loss in 2018 after the Company sold a portion of low balance, low yielding securities at a loss in 2018 to reposition the investment portfolio for stronger future returns. These favorable items more than offset a $118,000 or 11.1% decrease in service charges on deposit accounts due to reduced overdraft fees.

The Company's total non-interest expense in the third quarter of 2019 increased by $407,000, or 4.0%, when compared to the third quarter of 2018, and increased in the first nine months of 2019 by $753,000, or 2.5%, when compared to 2018. The increase in the third quarter of 2019 was due to a higher level of salaries & benefits expense by $509,000, or 8.8%, and a greater level of other expense by $71,000, or 3.7%. These increases more than offset a reduction to FDIC deposit insurance expense by $140,000, or 100.0% and professional fees by $45,000, or 3.4%. Within salaries & benefits, higher salaries expense was due to annual merit increases, the addition of several employees to address management succession planning, four additional employees at our new financial banking center in Hagerstown, Maryland, and higher health care costs. The increase to other expense reflects our increased investment in technology as evidenced by higher website costs and additional telecommunications expense. The Company did not recognize FDIC deposit insurance expense in the third quarter of 2019. As part of the application of the Small Bank Assessment Credit regulation, the FDIC awarded community banks under $10 billion an assessment credit because the banking industry reserve ratio exceeded its 1.38% target. For the first nine months of 2019, salaries & benefits expense is $847,000, or 4.7%, higher for similar reasons as the quarterly variance. Other expenses are higher by $325,000, or 6.3%, also for similar reasons as the quarterly variance in addition to a higher level of funding for the unfunded commitment reserve by $107,000 due to increased loan approvals in 2019. Slightly offsetting these unfavorable comparisons are lower FDIC deposit insurance expense by $297,000, or 65.0%, and lower professional fees by $112,000, or 3.0%, due to lower legal fees and other professional fees.

The Company recorded an income tax expense of $442,000, or an effective tax rate of 20.7%, in the third quarter of 2019. This compares to an income tax expense of $270,000, or an effective tax rate of 10.4%, for the third quarter of 2018. The lower effective tax rate and income tax expense in the third quarter of 2018 reflected the benefits of corporate tax reform as a result of the enactment of the "Tax Cuts and Jobs Act" which allowed the Company to contribute additional funds to our pension plan in 2018 in order to achieve a greater income tax benefit. The tax benefit of this additional pension contribution favorably reduced income tax expense by $264,000 in the third quarter of 2018. Similarly, for the first nine months of 2019, the Company recorded income tax expense of $1,403,000, or an effective tax rate of 20.7%, compared to income tax expense of $1,178,000 in 2018, or an effective tax rate of 16.8%.

The Company had total assets of $1.17 billion, shareholders' equity of $102.5 million, a book value of $5.98 per common share and a tangible book value⁽¹⁾ of $5.28 per common share at September 30, 2019. In accordance with the common stock buyback program announced on April 16, 2019, the Company returned an additional $1.7 million of capital to its shareholders through the repurchase of 399,195 shares of its common stock in the second and third quarters of 2019. Overall in 2019, this latest common stock buyback program, combined with the first quarter completion of the previously authorized common stock buyback program, resulted in the Company returning $2.2 million to its shareholders through the repurchase of 511,506 shares of its common stock in the first nine months of 2019. When including the increased cash dividend payments on our common stock, total capital returned to our shareholders exceeded 63% of net income for the first nine months of 2019. The Company continued to maintain strong capital ratios that exceed the regulatory defined well capitalized status.

This news release may contain forward-looking statements that involve risks and uncertainties, as defined in the Private Securities Litigation Reform Act of 1995, including the risks detailed in the Company's Annual Report and Form 10-K to the Securities and Exchange Commission. Actual results may differ materially.

⁽¹⁾ Non-GAAP Financial Information. See "Reconciliation of Non-GAAP Financial Measures" at end of release.

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SOURCE AmeriServ Financial, Inc.