Business context and reporting period
AmeriServ Financial, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The Pennsylvania-based company operates community banking, commercial banking, trust and investment businesses. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net income | $1.362 | $1.421 | $0.095 | $2.790 |
| Net income available to common | $1.362 | $1.369 | $0.080 | $2.685 |
| Diluted EPS | $0.07 | $0.07 | $0.00 | $0.14 |
| Net interest income | $8.486 | $8.800 | $17.044 | $17.734 |
| Net interest margin | 3.23% | 3.45% | 3.27% | 3.51% |
| Provision for loan losses | $0.250 | $0.200 | $3.350 | $0.450 |
| Non-interest income | $3.742 | $3.692 | $7.179 | $7.404 |
| Non-interest expense | $10.039 | $10.239 | $20.750 | $20.649 |
At June 30, 2016, total assets were $1,142.5, loans net of unearned income were $892.4, deposits were $940.9, and shareholders’ equity was $99.2. The allowance for loan losses was $9.746, or 1.09% of loans. Non-performing assets were $2.230, equal to 0.25% of loans and other real estate owned; allowance coverage of non-performing loans was 437%.
Cash and cash equivalents were $27.0, down $21.5 from year-end. First-half operating cash flow was $4.4; investing activities used $18.0 and financing activities used $7.9. Deposits rose $37.6 from year-end, while total borrowed funds fell $24.1 to $92.9. The Bank was classified as well capitalized: its total capital ratio was 11.39%, common equity Tier 1 ratio 10.25%, and Tier 1 leverage ratio 8.65%. The company reported a 7.72% tangible common equity-to-tangible assets ratio.
Material changes versus comparable periods
- Second-quarter common earnings were broadly stable year over year, while first-half common earnings fell to $0.080 from $2.685, primarily because of the first-quarter credit provision and unusual expenses.
- First-half loan-loss provision increased by $2.9 year over year. A single borrower in the fracking industry moved from Chapter 11 to Chapter 7 bankruptcy; the company increased reserves and recorded substantial charge-offs. First-half net charge-offs were approximately $3.5, versus $0.356 a year earlier.
- Net interest income declined 3.6% in Q2 and 3.9% for the first half as margin compression outweighed loan growth. Management cited a prolonged low-rate environment, loan competition, deposit repricing, and interest on $7.65 of subordinated debt issued in late 2015.
- Period-end loans rose $11.4 from December 2015 and deposits rose $37.6. Non-performing assets declined from $6.297 at year-end to $2.230.
- Shareholders’ equity declined $19.7, principally following redemption of $21.0 of preferred stock on January 27, 2016. The redemption was funded with subordinated debt proceeds and parent-company cash and securities.
Outlook, commentary, risks and contingencies
Management said the second-quarter return to profitability allowed it to refocus on growth and believed first-quarter costs and credit issues were largely behind the company. Its stated priorities include community banking, loan, deposit and fee growth, small-business lending, trust-company profitability and targeted expense control. It estimated approximately $0.750 in annual cost savings from a branch consolidation and executive-office staff reduction. No formal earnings guidance was provided.
After quarter-end, the Board declared a quarterly common dividend of $0.015 per share, a 50% increase from $0.01; it was payable August 22, 2016. Management said it expected to maintain strong capital ratios through the rest of 2016. Interest-rate sensitivity analysis showed net interest income increasing 2.6% under a 100-basis-point rate increase and decreasing 3.1% under a 100-basis-point decrease; management noted exposure to assets repricing downward in a falling-rate scenario.
Key risks include commercial and commercial-real-estate credit quality, borrower and geographic concentration, interest-rate and market changes, competition, economic conditions, and regulatory developments. The 25 largest credits represented 32.5% of loans. Off-balance-sheet exposures included $166.7 of commitments to extend credit and $9.0 of standby letters of credit. Management said ordinary-course claims and these commitments were not expected to have a material adverse effect. No material legal proceedings or new risk factors were reported.
Unusual items included $0.366 of first-quarter expense related to a Trust Company trading/processing error during a technology upgrade, as well as the energy borrower’s bankruptcy-related provision and charge-offs. Management reported effective disclosure controls as of June 30, 2016 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Further developments, recoveries or additional losses related to the energy borrower and the adequacy of the loan-loss allowance.
- Whether the reported return to profitability continues, given margin compression, funding costs and the effect of the subordinated debt.
- Execution and realized savings from the branch and executive-office changes, and resolution of the Trust Company operating issue.
- Deposit growth, liquidity, borrowing capacity and capital ratios following the preferred-stock redemption and dividend increase.
- Performance of large commercial and commercial-real-estate exposures and the impact of future economic or interest-rate changes.