AmeriServ Financial, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company operates a Pennsylvania community bank, trust and financial services businesses, and a captive insurance subsidiary. Unless otherwise noted, dollar amounts are in millions.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue (net interest income plus non-interest income) | $12.022 | $12.096 | $24.079 | $23.954 |
| Net interest income | $8.384 | $8.021 | $16.909 | $16.063 |
| Net interest margin | 3.47% | 3.50% | 3.52% | 3.54% |
| Non-interest income | $3.638 | $4.075 | $7.170 | $7.891 |
| Non-interest expense | $10.620 | $10.442 | $21.358 | $21.064 |
| Net income | $0.979 | $1.070 | $1.909 | $2.126 |
| Net income available to common shareholders | $0.927 | $1.018 | $1.804 | $2.022 |
| Diluted EPS | $0.05 | $0.05 | $0.10 | $0.11 |
Second-quarter return on average assets was 0.37% versus 0.43%; return on average equity was 3.41% versus 3.86%. The first-half effective tax rate was 29.8%, compared with 28.9%.
Financial position, cash flow and capital
- At June 30, assets were $1,063.7 million, net loans $789.8 million, deposits $873.9 million, and shareholders’ equity $115.9 million. Since December 31, 2013, net loans rose $17.9 million and deposits rose $19.4 million.
- Cash and cash equivalents were $28.0 million, down $2.1 million from year-end. First-half operating cash flow was $2.1 million, investing cash outflow $9.1 million, and financing cash inflow $5.0 million.
- Borrowed funds totaled $65.8 million, down from $79.6 million at year-end. This included $18.7 million of short-term borrowings and $34.0 million of FHLB advances. The $13.1 million of guaranteed junior subordinated debentures was unchanged.
- The loan-to-deposit ratio was 92.1%. Management reported $353 million of available overnight FHLB borrowing capacity and $39 million of unsecured correspondent-bank lines.
- The company was classified as well capitalized. Consolidated total risk-based capital was 15.23%, Tier 1 risk-based capital 13.98%, and Tier 1 leverage 11.56%; tangible common equity to tangible assets was 7.83%.
- Common dividends declared were $0.01 per share in Q2; the company announced another $0.01 quarterly dividend payable in August 2014.
Changes, outlook and risks
- Common earnings fell 8.9% year over year in Q2 and 10.8% for the first half. Lower non-interest income and higher expenses outweighed loan-driven net interest income growth. Net interest income rose 4.5% in Q2 and 5.3% year to date, while margins narrowed modestly.
- Non-interest income declined 10.7% in Q2 and 9.1% in the first half. Drivers included weaker mortgage activity, lower bank-owned life insurance revenue versus a prior-year death claim, and Q2 trust-advisory client attrition. Securities-sale gains partly offset these pressures.
- Professional fees increased, primarily from legal costs and recurring expenses for outsourced computer operations and statement processing. Management said an expense-rationalization review was complete, with recommendations expected in Q3; its strategic plan identified approximately $1 million of 2014 non-interest expense savings. No earnings guidance was provided.
- Management emphasized loan and deposit growth, small-business lending, customer service, technology investment, and expense discipline. It cited the low-rate environment and a lackluster economy as continuing headwinds.
- Asset quality remained relatively low-risk by reported measures, but non-performing assets including TDRs increased to $4.5 million, or 0.56% of loans and OREO, from $4.1 million, or 0.52%, at year-end. Non-accrual loans rose to $3.7 million. The allowance was $10.2 million; no loan-loss provision was recorded in the first half.
- The company was in litigation with the former CEO of its WCCA investment-adviser subsidiary over alleged employment-agreement and other violations. The departure and dispute disrupted the client base; a future non-cash goodwill impairment is possible, but its likelihood and amount were undetermined. Management reported goodwill was not impaired at June 30.
- Unfunded commitments to extend credit were $167.6 million and standby letters of credit $13.6 million. Interest-rate sensitivity analysis showed estimated net interest income up 1.4% under a 100-basis-point increase and down 3.7% under a 100-basis-point decrease. Basel III capital rules were scheduled to take effect in 2015; management expected capital to remain adequate.
Important facts for investors to verify
- Whether announced expense savings are achieved and translate into improved earnings per share.
- Loan growth, deposit funding, loan-to-deposit ratio, and the effect of rate changes on net interest margin.
- Trends in non-accrual loans, non-performing assets, criticized credits, and allowance coverage.
- The outcome and costs of the WCCA litigation, client retention, and any resulting goodwill impairment.
- Whether the company maintains strong regulatory capital and liquidity while meeting preferred and common dividend obligations.