AmeriServ Financial, Inc. — 2012 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; financial amounts below are in millions of dollars unless noted. AmeriServ operates a Pennsylvania community bank, trust and financial services businesses, and a captive insurer.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $7.921 | $8.086 | $15.979 | $16.052 |
| Non-interest income | $3.733 | $3.454 | $7.407 | $6.559 |
| Total revenue (net interest income plus non-interest income) | $11.654 | $11.540 | $23.386 | $22.611 |
| Non-interest expense | $10.067 | $9.877 | $20.181 | $19.796 |
| Net income | $1.432 | $1.938 | $2.997 | $3.201 |
| Net income available to common shareholders | $1.170 | $1.648 | $2.472 | $2.621 |
| Diluted EPS | $0.06 | $0.08 | $0.12 | $0.12 |
| Net interest margin | 3.59% | 3.71% | 3.64% | 3.71% |
- At June 30, total assets were $997.1 million, net loans $671.5 million, deposits $854.0 million, and shareholders’ equity $110.8 million. Deposits increased $37.6 million from year-end 2011; loans and loans held for sale rose $20.0 million.
- Six-month operating cash flow was $4.1 million, investing cash flow was negative $19.2 million, and financing cash flow was positive $14.3 million. Cash and cash equivalents were $34.0 million, down $0.8 million from year-end.
- Total borrowed funds were $16.1 million, including $13.1 million of junior subordinated debentures and $3.0 million of FHLB advances; short-term borrowings were zero at June 30. The company reported a 16.41% consolidated total risk-based capital ratio, 11.60% Tier 1 leverage ratio, and 7.84% tangible common equity to tangible assets ratio, and was categorized as well capitalized.
- Loan-loss allowance was $13.3 million, or 1.94% of loans. Non-performing assets, including TDRs, were $5.1 million, 0.74% of loans and OREO; allowance coverage of non-performing loans was 315%.
Material changes versus comparable periods
- Q2 net income fell $0.5 million year over year; first-half net income declined $0.2 million. Management attributed the decrease principally to a smaller benefit from negative loan-loss provisions, lower net interest income, and higher expenses, partly offset by higher fee income and lower taxes.
- Interest income declined 6.1% in Q2 and 5.3% for the first half, while interest expense fell 19.6% and 20.6%, respectively. The resulting net interest margin narrowed 12 basis points in Q2 and 7 basis points for the first half, reflecting lower rates, a flatter yield curve, and mortgage-backed security premium amortization.
- Credit provisions were credits of $0.5 million in Q2 and $1.125 million for the first half, versus credits of $1.175 million and $1.775 million in the prior-year periods. The allowance declined from $14.6 million at year-end. Non-performing assets improved from $7.4 million at June 30, 2011, while total classified loans were $21.3 million versus $18.5 million at December 31, 2011.
- Non-interest income increased 8.1% in Q2 and 12.9% for the first half, with mortgage banking and trust fees contributing. Non-interest expense rose 1.9% in both comparisons; higher compensation and new loan-office costs were partly offset by lower FDIC insurance expense.
- During the first half, AmeriServ repurchased 1.638 million common shares for $4.1 million at an average $2.48 per share. Shareholders’ equity decreased $1.5 million from year-end despite earnings, reflecting repurchases and preferred dividends. No common dividends were declared.
Outlook, commentary, and risks
- Management expected net interest margin pressure to persist in the second half of 2012, but cited strong commercial loan pipelines, five consecutive quarters of loan growth, and a focus on small-business lending. It aimed to raise the loan-to-deposit ratio from 80.9% toward its stated 85%–95% operating range.
- Management expected the SBLF preferred dividend rate to fall from 5% to 1% in the fourth quarter of 2012 after qualifying small-business loan growth; it estimated this would increase quarterly income available to common shareholders by $210,000. The $21 million preferred stock is subject to dividend and capital restrictions, including limits on common dividends and repurchases in specified circumstances.
- Liquidity was described as strong: the company reported $306 million of immediately available FHLB borrowing capacity and $39 million of unsecured correspondent-bank federal funds lines. These are facilities, not cash on hand.
- Interest-rate sensitivity analysis indicated net interest income variability of positive 6.2% under a 200-basis-point increase, positive 4.6% under a 100-basis-point increase, and negative 4.1% under a 100-basis-point decrease. Management identified regional economic conditions, interest rates and prepayments, credit risk, regulation, and competition as key uncertainties.
- Credit exposure includes $144.0 million of commitments to extend credit and $11.0 million of standby letters of credit. Management said routine legal matters and these commitments were not expected to have a material adverse effect. The filing reported no material change in previously disclosed risk factors and no material legal proceedings.
- Unusual credit items included the sale of troubled credits and a $305,000 net charge-off on one problem credit; another troubled commercial real-estate property was transferred to OREO. Management reported no other loans it believed needed charge-off or inclusion in disclosed non-performing assets.
Important facts for investors to verify
- Whether subsequent quarters deliver the anticipated SBLF dividend reduction and $210,000 quarterly benefit, and whether qualifying small-business lending continues to grow.
- Whether loan growth supports margin and earnings despite the filing’s expectation of continued margin pressure; monitor funding costs, loan yields, and mortgage prepayments.
- Whether credit quality and reserves remain adequate, particularly given the increase in classified loans since year-end, commercial real-estate exposure, and concentration of the 25 largest credits at 28.8% of loans.
- Whether liquidity and capital remain strong after planned loan growth and completion of the share-repurchase authorization; reconcile repurchases, share count, and tangible book value per share.
- How unrealized securities losses, pension costs, deferred tax assets, and the company’s reliance on estimates for loan-loss allowances and collateral valuations develop.