AmeriServ Financial, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise. AmeriServ is a Pennsylvania community bank with retail, commercial banking and wealth-management businesses.
Financial performance and position
- Q2 earnings: Net income was $1.389 million, or $0.07 per diluted share, versus $1.362 million and $0.07 per share in Q2 2016. Annualized return on average assets was 0.48%; return on average equity was 5.81%.
- First-half earnings: Net income was $2.737 million, or $0.15 per diluted share, compared with $0.095 million in H1 2016 ($0.080 million available to common shareholders). Annualized returns on average assets and equity were 0.47% and 5.77%, respectively.
- Revenue and margins: Q2 net interest income rose 4.9% to $8.899 million; net interest margin was 3.27%, up from 3.23%. H1 net interest income rose 3.4% to $17.620 million, while margin remained 3.27%. Q2 total non-interest income was $3.755 million and non-interest expense was $10.317 million. For H1, those figures were $7.317 million and $20.402 million.
- Credit costs: Loan-loss provision was $0.325 million in Q2 and $0.550 million in H1, versus $0.250 million and $3.350 million in the comparable 2016 periods. H1 net charge-offs were $0.091 million, versus $3.5 million in H1 2016.
- Balance sheet at June 30: Assets were $1,171.962 million; loans net of unearned income were $893.246 million (net loans after allowance: $882.855 million); deposits were $956.375 million; cash and cash equivalents were $30.466 million; shareholders’ equity was $96.277 million. Total borrowed funds were $107.512 million.
- Cash flow, H1: Operating activities provided $2.992 million; investing activities used $21.603 million; financing activities provided $15.004 million. Cash and cash equivalents declined $3.607 million to $30.466 million.
- Capital and liquidity: The Bank was categorized as well capitalized. At June 30, Company total capital, Tier 1 capital, common equity Tier 1 and Tier 1 leverage ratios were 13.13%, 11.18%, 9.94% and 9.24%, respectively. Management reported $378 million of available overnight FHLB borrowing capacity and $39 million of unsecured correspondent-bank lines.
Material changes versus comparable periods
- Q2 net income increased modestly year over year, as revenue growth more than offset higher expenses. H1 earnings improved sharply, primarily because H1 2016 included unusually high credit provision and charge-offs related to a single energy-sector borrower whose bankruptcy moved to liquidation.
- At June 30, total assets were up 1.6% from year-end 2016. Loans grew 1.2% and investment securities increased 6.7%; deposits declined 1.2%, while total FHLB borrowings increased $28.8 million from year-end.
- Credit indicators weakened in some areas: 30–89 day accruing delinquencies rose to $14.135 million from $3.278 million at year-end 2016; classified loans increased to $9.897 million from $6.039 million. Non-performing assets, including performing TDRs, were $2.362 million, or 0.26% of loans and OREO, versus $1.624 million, or 0.18%, at year-end.
- The allowance for loan losses rose to $10.391 million, or 1.16% of loans, from $9.932 million, or 1.12%, at year-end. Its coverage of non-performing assets was 440%, down from 612%.
- AmeriServ repurchased 465,956 shares for $1.9 million in H1 under an authorization to repurchase up to approximately 945,000 shares over 18 months. It declared $0.03 per share in H1 dividends.
Outlook, commentary, risks and unusual items
- Management said it would focus on community banking, revenue and loan growth, wealth management, customer service and expense rationalization. It expects to maintain strong capital ratios through the rest of 2017 and stated that loan pipelines and lending initiatives could support further loan growth. No specific earnings or revenue guidance was provided.
- Management said three cost-reduction initiatives—branch consolidation, closure of an unprofitable loan-production office and elimination of an executive position—were expected to generate about $1.2 million in annual savings, fully realized beginning in Q1 2017. It also acknowledged that expenses remain high relative to peers.
- Two larger commercial real estate relationships, each in the $4–$7 million range, were downgraded after delinquency issues. Management cited collateral and low loan-to-value ratios as limiting potential loss exposure, but reported increased criticized loans and higher delinquencies. The 25 largest credits represented 30.2% of loans.
- Q2 non-interest income included a $141,000 increase in bank-owned life insurance income from a death claim. Q2 professional fees rose $223,000 year over year, partly due to legal and technology-related services. These items affect period comparability.
- Interest-rate sensitivity analysis showed net interest income increasing 1.7% under a 100-basis-point rate increase and 2.4% under a 200-basis-point increase; a 100-basis-point decrease reduced modeled net interest income 2.2%. Management cautioned that economic conditions, rates, credit quality, regulation and competition could affect results.
- Off-balance-sheet commitments included $165.1 million to extend credit and $9.4 million of standby letters of credit. The company said routine legal matters and funding these commitments were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether delinquency and criticized-loan increases—especially the two larger CRE relationships—lead to additional non-performing loans, charge-offs or provisions.
- Whether earnings growth persists after accounting for higher deposit and borrowing costs, elevated professional fees and the unusual BOLI claim.
- How deposit trends and increased short-term/FHLB borrowing affect funding costs, liquidity and net interest margin.
- Whether the allowance remains adequate as credit quality changes, and how the lower non-performing-asset coverage compares with future loss experience.
- Progress on the announced expense savings, loan-growth plans, capital targets and share-repurchase program.