AmeriServ Financial, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. AmeriServ is a Pennsylvania-based community banking and financial services company; its subsidiaries include a full-service bank with 15 Pennsylvania locations and a trust company administering approximately $2.2 billion in client assets. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $12.54 | $12.65 | $24.92 | $24.94 |
| Net interest income | $8.86 | $8.90 | $17.61 | $17.62 |
| Net interest margin | 3.28% | 3.27% | 3.28% | 3.27% |
| Net income | $1.74 | $1.39 | $3.51 | $2.74 |
| Diluted EPS | $0.10 | $0.07 | $0.19 | $0.15 |
| Provision for loan losses | $0.05 | $0.33 | $0.10 | $0.55 |
- Q2 net income increased 25.6% year over year; first-half net income rose 28.3%. Annualized return on average assets and equity were 0.60% and 7.30% for Q2, and 0.61% and 7.42% for the first half.
- Revenue was nearly flat. Higher loan and securities interest income was offset by sharply higher funding costs: Q2 interest expense rose 27.6%, while first-half expense rose 24.8%. First-half noninterest income was essentially unchanged at $7.32 million, and noninterest expense increased 0.1% to $20.43 million.
- Effective tax rates declined to 20.0% in Q2 and 20.1% in the first half, versus 31.0% and 31.3% a year earlier, primarily reflecting the Tax Cuts and Jobs Act. Management also cited asset quality and capital management as contributors to improved earnings.
Balance sheet, cash flow, and capital
- At June 30, total assets were $1.181 billion, up 1.1% from year-end 2017. Loans, net of unearned income, were $891.5 million, up modestly from $889.6 million; deposits were $928.2 million, down 2.1% from $947.9 million.
- Cash and cash equivalents were $35.0 million. First-half operating cash flow was $4.0 million; investing activities used $13.9 million and financing activities provided $10.7 million, producing an $0.8 million net increase in cash.
- Total borrowed funds were $147.3 million, compared with $115.7 million at year-end. Short-term borrowings increased to $82.9 million from $49.1 million; FHLB advances were $44.0 million. Shareholders’ equity was $96.9 million, up from $95.1 million.
- The Bank was classified as well capitalized. At June 30, the Company reported a 13.01% total capital ratio, 9.99% common equity Tier 1 ratio, and 9.61% Tier 1 leverage ratio. Tangible common equity to tangible assets was 7.27%.
- Liquidity sources included $314 million of available overnight FHLB borrowing capacity and $35 million of unsecured correspondent-bank lines. The average first-half loan-to-deposit ratio was 92.1%.
Material changes, outlook, and risks
- Nonperforming assets fell to $1.16 million, or 0.13% of loans and other real estate owned, from $3.03 million (0.34%) at year-end. Delinquent loans 30–89 days past due were $3.14 million, down from $8.18 million. First-half net charge-offs nevertheless increased to $0.79 million (0.18% of average loans) from $0.09 million (0.02%), reflecting final workouts of previously reserved problem loans. The allowance was $9.52 million, or 1.07% of loans.
- Management said loan production strengthened late in Q2 and expected loan growth to continue in the second half of 2018; it also expected net charge-offs to decline in the second half. These are expectations, not formal earnings guidance. Management reported loans had grown monthly since March and described the core deposit base as loyal.
- Funding costs are a pressure point: customers shifted some balances from money-market accounts to higher-rate certificates of deposit, while deposit balances declined and short-term borrowing increased. The company also cited exposure to Federal Reserve rate changes, loan prepayments, credit conditions, competition, and regional economic developments.
- Commercial real estate and commercial/industrial loans represented about 72% of the loan portfolio; non-owner-occupied commercial real estate was 345% of regulatory capital. Management said this concentration receives particular oversight. The 25 largest credits represented 26.4% of loans.
- Investment securities had $4.20 million of gross unrealized losses at June 30, versus $1.70 million at year-end, which management attributed primarily to higher market yields and considered temporary. The company said it did not intend, and did not expect to be required, to sell these securities before recovery.
- The Board authorized a new 12-month repurchase program of up to 3% of outstanding shares, approximately 540,000 shares; no shares were repurchased in Q2. The strategic plan targets 10% year-over-year EPS growth and returning up to 75% of earnings through dividends and repurchases, subject to capital needs; these are stated objectives, not guarantees.
- Outstanding commitments to extend credit were approximately $192.5 million, with $10.1 million of standby letters of credit. Management said routine legal matters and funding these commitments were not expected to materially affect financial position, results, or cash flows. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether loan growth in the second half materialized and how deposit trends and borrowing costs affected net interest margin.
- Whether charge-offs declined as management expected, and whether asset-quality improvement persisted despite higher first-half net charge-offs.
- Credit quality and concentration in non-owner-occupied commercial real estate, including the performance of the largest borrower relationships.
- Changes in unrealized securities losses and the company’s ability to hold affected securities through recovery without liquidity pressure.
- Execution and capital impact of the new share-repurchase authorization, alongside dividends and regulatory capital requirements.