AmeriServ Financial, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The filing is unaudited.
Business context and results
AmeriServ is a Pennsylvania community bank with retail and commercial banking, trust and wealth-management, and insurance operations. The bank operates 18 Pennsylvania locations. Trust assets administered of approximately $1.4 billion are off balance sheet.
- Q2 net income: $1.938 million, or $0.08 per diluted common share, versus $0.477 million and $0.01 in Q2 2010. Net income available to common shareholders was $1.648 million; preferred dividends and discount accretion were $0.290 million.
- First-half net income: $3.201 million, or $0.12 per diluted share, versus a $0.441 million net loss and a $0.05 loss per share in first-half 2010. Net income available to common shareholders was $2.621 million after $0.580 million of preferred dividends and accretion.
- Q2 annualized return on average assets was 0.81% and return on average equity was 7.11%; first-half figures were 0.67% and 5.96%, respectively.
Financial position, earnings drivers and liquidity
- Net interest income and margin: Q2 net interest income was $8.086 million, down 1.5% year over year; net interest margin was 3.71%, versus 3.83%. First-half net interest income was $16.052 million, down 1.7%, with a 3.71% margin versus 3.81%.
- Credit provision: The company recorded a $1.175 million provision credit in Q2 and a $1.775 million provision credit for the first half, versus provisions of $1.2 million and $4.25 million in the comparable 2010 periods. Q2 had $0.108 million of net recoveries; first-half net charge-offs were $1.032 million.
- Other income and costs: Q2 non-interest income was $3.454 million, up 1.9%; non-interest expense was $9.877 million, up 0.9%. First-half non-interest income was $6.559 million, down 1.9%, and expense was $19.796 million, up 1.3%. First-half income tax expense was $1.389 million, compared with a $0.342 million tax benefit a year earlier.
- Assets and funding at June 30: Total assets were $954.9 million, compared with $949.0 million at year-end 2010. Deposits were $810.1 million, up $8.9 million; net loans were $637.4 million, down from $651.0 million. Cash and cash equivalents were $22.7 million, versus $19.3 million at year-end.
- Debt and capital: Borrowed funds totaled $22.8 million, including $9.7 million of FHLB advances and $13.1 million of junior subordinated debentures; short-term borrowings were nil at quarter-end. The company reported consolidated total risk-based capital of 17.04%, Tier 1 risk-based capital of 15.77%, and Tier 1 leverage of 11.60%, and was categorized as well capitalized. Tangible common equity to tangible assets was 8.29%.
- Cash flow, first half: Operating activities provided $10.2 million; investing activities used $9.0 million; financing activities provided $2.2 million. Cash and equivalents increased $3.4 million. These cash-flow totals include working-capital and other adjustments and are not the same as earnings.
- The loan-to-deposit ratio was 81.1%, below management’s stated target range of 85%–95%. Management described liquidity as strong. Deposits funded a reduction in short-term borrowings, while loan repayments were substantially reinvested in securities.
Changes, outlook and material risks
- Management attributed the earnings improvement chiefly to better asset quality and lower credit provisions, with higher trust and advisory fees also helping. Lower average loan balances and yields reduced net interest income; expense growth and taxes partly offset the improvement.
- Non-performing assets, including TDRs, fell to $7.433 million from $14.364 million at year-end 2010 and $19.815 million in June 2010. The NPA ratio was 1.13%, versus 2.12% at year-end. Classified loans were $28.4 million, down from $39.6 million at year-end, but management said they remained elevated relative to longer-term historical levels. Commercial real estate was a significant portfolio exposure; the 25 largest credits represented 33% of loans.
- Management reported loans outstanding had increased for three consecutive months and expected possible modest loan growth in the second half of 2011. A Board-supervised strategic-planning effort was developing a 2012–2015 plan focused on revenue growth, business development, expense discipline and trust-business profitability. The filing gives no quantified earnings or revenue guidance.
- The company sold $16.5 million of available-for-sale securities in the first half and recognized a $0.358 million loss, explaining that the repositioning was intended to improve future portfolio yields and shorten duration. Most unrealized losses were attributed to market-rate changes; management said it did not intend, and did not expect to be required, to sell the affected securities before recovery.
- Management cited economic weakness, interest-rate and prepayment changes, credit risk, regulation and competition as risks. Its interest-rate analysis showed estimated net-interest-income sensitivity of +5.0% for a 200-basis-point increase, +3.6% for a 100-basis-point increase and −8.9% for a 100-basis-point decrease. These are modeled sensitivities, not forecasts.
- Outstanding off-balance-sheet commitments were approximately $106.6 million to extend credit and $11.5 million of standby letters of credit. Management said pending or threatened routine legal matters and funding these commitments were not expected to have a material adverse effect.
- The $21 million Treasury CPP preferred investment carries a 5% dividend through December 19, 2013 and 9% thereafter. Common-stock repurchases and dividends require Treasury consent during the stated three-year restriction period ending December 19, 2011. The company said it would use proceeds from a Small Business Lending Fund participation to refinance CPP preferred stock if approved; participation was not assured.
Important facts for investors to verify
- Whether the improvement in credit quality and the large provision credits are sustainable, particularly given commercial real-estate concentration and still-elevated classified loans.
- Future loan growth, asset yields and deposit pricing, and their effects on net interest margin and earnings.
- The adequacy of the allowance: the filing reports $16.958 million, or 2.58% of loans, but gives different coverage figures in its discussion (including 228.16% and 235%) and in its ratio table (245.45% of non-accrual loans and 218.87% of non-performing assets). Confirm the intended measures and denominators.
- Progress and terms, if any, regarding Small Business Lending Fund participation and repayment or refinancing of the CPP preferred stock; also confirm the timing and effect of Treasury restrictions on common dividends and repurchases.
- Performance of the securities portfolio and assumptions underlying modeled interest-rate sensitivity, including the risk of lower earnings if rates fall.