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| ASRV > SEC Filings for ASRV > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
2009 THIRD QUARTER SUMMARY OVERVIEW…..As this recession continues to lengthen,
it is creating an ever increasing level of stress throughout the economy.
During the third quarter of 2009 its impact increased in Western Pennsylvania.
No community bank is an island, and its fortunes are tied to the health of the
communities which it serves. Therefore it is not a surprise that AmeriServ
experienced a weakening in its performance in the third quarter.
AmeriServ reported a net loss of $2.8 million or $0.15 per share for the third quarter and a net loss of $3.2 million or $0.19 per share for the first nine months of 2009. This was caused primarily by a material provision to our loan loss reserve. Specifically, it reflected the performance of two major shared credits, one an industrial company and one in the restaurant business, as well as performance downgrades of other commercial borrowers. It continues to be our policy to provide specific loan reserves in a very disciplined, realistic way whenever we believe the situation so demands. Experience has taught us that the way to survive in times such as these is to work closely with our borrowers to help them find an appropriate course of action, but to also build reserves sufficiently in the event that no solution can be found. In these troubled times, it is the strong capital and the conservative balance sheet which AmeriServ maintains that makes such necessary actions possible.
During the third quarter we took an additional action to heighten our level of vigilance. Management formed a high level Asset Quality Task Force. This Task Force meets weekly to ensure we are proactive during such stressful times. It will meet regularly with every lending officer to consider in depth the relative health of that officer's portfolio. It is important that we work hard to provide support to any AmeriServ borrower who is under stress, but it is equally important that we are careful to also protect the interests of AmeriServ's stockholders. Our company was fortunate to enter this period with strong capital ratios, which continue, even as the third quarter closed. The $21 million of US Treasury funding received last December has provided an even deeper level of capital strength for AmeriServ during this recession. Our view is that vigilance continues to be the key. Therefore activating the Asset Quality Task Force sends a message to every AmeriServ banker that these are not the times for "business as usual." While increases in our reserves may be appropriate, we must work vigorously to keep actual charge-offs well below industry averages; a level where they have been thus far in 2009.
The well documented troubles over recent years in the equity and real estate markets have also reduced the performance of the Trust Company and West Chester Capital Advisors. These wealth management businesses base their fees on the dollar value of the accounts they manage. Therefore the recession driven decline in market values and stock prices places their fee generation well below the levels achieved in the boom years just past. We do recognize that the Wealth Management business is undergoing changes. Therefore we have contracted with a reputable national consulting firm to perform a total strategic review of these subsidiaries so they can start soon to position themselves for the new shape of the Wealth Management business when the recovery of the economy begins.
During the third quarter AmeriServ's day-to-day operations continue to show strength on many fronts -
·
Loans outstanding, while declining in the third quarter, have still increased by $15.4 million in 2009.
·
Deposits continued to grow as many savers sought the protection provided by a community bank with FDIC deposit insurance. Since January 1, 2009, AmeriServ has grown its deposits by $84 million or 12.1%.
·
Non-interest income remained stable with the most recent quarters in spite of a lower level of fees in the wealth management business.
·
Bank borrowings continued to be low, closing the third quarter at just 4.6% of total assets.
·
Perhaps most important, capital ratios remained above the "well capitalized" levels with the asset leverage ratio at 11.41% and tangible common equity at 8.16%.
AmeriServ continues to support the region by seeking out lending opportunities in our primary markets. Loan originations totaled $46 million in the third quarter of 2009. This was in keeping with the commitment that we made to the US Treasury to do our part in fighting the recession.
This period of economic stress has become a challenge for all of us, from the White House to main street. As we have frequently stated, there will be no search for "quick fixes", no excursions into high risk strategies, no straying from our community banking roots. We will work through this period of economic weakness for our nation and our region and plan to be even more active when the economy improves.
THREE MONTHS ENDED SEPTEMBER 30, 2009 VS. THREE MONTHS ENDED SEPTEMBER 30, 2008
.....PERFORMANCE OVERVIEW.....The following table summarizes some of the
Company's key performance indicators (in thousands, except per share and
ratios).
Three months ended Three months ended
September 30, 2009 September 30, 2008
Net income (loss) $ (2,810) $ 1,149
Diluted earnings (loss) per share (0.15) 0.05
Return on average assets (annualized) (1.15)% 0.52%
Return on average equity (annualized) (9.83)% 4.93%
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The Company reported a net loss of $2.8 million or $0.15 loss per diluted common share for the third quarter of 2009. This represents a decrease of $4.0 million from the third quarter 2008 net income of $1.1 million or $0.05 per diluted common share. An increased provision for loan losses and higher non-interest expense were the primary factors causing the decline in earnings between periods. We appropriately increased our allowance for loan losses to respond to deterioration in asset quality evidenced by higher levels of nonperforming assets and classified loans as the continued recessionary economic environment is clearly impacting our commercial borrowers. This higher provision for loan losses more than offset increased net interest income that resulted from solid loan and deposit growth within our retail bank. Diluted earnings per share also declined by the preferred dividend requirement on the CPP preferred stock in 2009, which amounted to $263,000 and increased the amount of the net loss available to common shareholders.
.....NET INTEREST INCOME AND MARGIN.....The Company's net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities. Net interest income is a primary source of the Company's earnings, and it is affected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities. The following table compares the Company's net interest income performance for the third quarter of 2009 to the third quarter of 2008 (in thousands, except percentages):
Three months ended Three months ended Change % Change September 30, 2009 September 30, 2008
Interest income $ 11,698 $ 11,732 $ (34) (0.3)% Interest expense 3,773 4,501 (728) (16.2) Net interest income $ 7,925 $ 7,231 $ 694 9.6 Net interest margin 3.57% 3.59% (0.02) N/M |
N/M - not meaningful
The Company's net interest income in the third quarter of 2009 increased by
$694,000 or 9.6% from the prior year's third quarter while the net interest
margin declined by two basis points to 3.57% over the same comparative period.
The increased net interest income in 2009 resulted from the Company's ability
to generate a relatively stable net interest margin on a larger earning asset
base. Specifically, total loans averaged $730 million in the third quarter of
2009, an increase of $92 million or 14.5% over the third quarter of 2008. The
loan growth was driven by increased commercial real-estate loan production as
the majority of increased residential mortgage loan production has been sold
into the secondary market. The Company's strong liquidity position has been
supported by total deposits that averaged $785 million in the third quarter of
2009, an increase of $87 million or 12.5% over the same 2008 quarter. We
believe that uncertainties in the financial markets and the economy have
contributed to growth in money market accounts, time deposits, and demand
deposits as consumers have looked for safety in well capitalized community banks
like AmeriServ Financial. Additionally, the Company also benefitted from a
favorable decline in interest expense caused by the more rapid downward
repricing of both deposits and FHLB borrowings due to the market decline in
short-term interest rates. When the Company's third quarter 2009 net interest
margin of 3.57% is compared to the more recent second quarter 2009 net interest
margin of 3.66%, the nine basis point decline was due primarily to the reduced
interest revenue on a higher level of non-accrual loans.
.....COMPONENT CHANGES IN NET INTEREST INCOME..…Regarding the separate
components of net interest income, the Company's total interest income for the
third quarter of 2009 decreased by only $34,000 when compared to the same 2008
quarter. This decrease was due to a 51 basis point decline in the earning asset
yield to 5.29%, that was partially mitigated by an $86 million increase in
average earning assets due to the previously mentioned strong loan growth.
Within the earning asset base, the yield on the total loan portfolio decreased
by 69 basis points to 5.53% while the yield on total investment securities yield
decreased by 41 basis points to 3.99%. Both of these yield drops reflect the
lower interest rate environment in 2009 as the Federal Reserve has taken actions
to reduce interest rates in response to the financial market crisis that hit in
last year's third quarter.
The Company's total interest expense for the third quarter of 2009 decreased by
$728,000 or 16.2% when compared to the same 2008 quarter. This decrease in
interest expense was due to a lower cost of funds as the cost of both deposits
and borrowings repriced downward with the reductions in short-term interest
rates. Specifically, the cost of interest bearing deposits declined by 60 basis
points to 1.96%, while the cost of all FHLB borrowings dropped by 87 basis
points to 1.60%. This decrease in funding costs more than offset the additional
interest expense associated with a $57 million increase in the volume of
interest bearing liabilities due to the previously mentioned deposit growth.
Additionally, the Company's funding mix also benefited from a $3.4 million
increase in non-interest bearing demand deposits.
The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended September 30, 2009 and September 30, 2008 setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) AmeriServ Financial's interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) AmeriServ Financial's net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables, loan balances do include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Additionally, a tax rate of 34% is used to compute tax-equivalent yields.
Three months ended September 30 (In thousands, except percentages)
2009 2008
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Loans and loans held for $730,152 $ 10,256 5.53 % $637,841 $ 10,033 6.22 %
sale,
net of unearned income
Interest bearing deposits 1,746 1 0.23 399 2 1.95
Short-term investment in 7,388 3 0.18 7,983 40 1.96
money
market funds
Federal funds sold 413 - 0.13 32 - 1.90
Investment securities - 131,145 1,295 3.95 135,098 1,437 4.25
AFS
Investment securities - 13,964 152 4.35 17,378 240 5.52
HTM
Total investment 145,109 1,447 3.99 152,476 1,677 4.40
securities
Total interest earning 884,808 11,707 5.29 798,731 11,752 5.80
assets/interest income
Non-interest earning
assets:
Cash and due from banks 14,135 16,574
Premises and equipment 9,052 9,593
Other assets 73,296 68,613
Allowance for loan losses (13,658) (8,088)
TOTAL ASSETS $967,633 $885,423
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing demand $ 62,479 $ 62 0.39 % $ 65,704 $ 151 0.91 %
Savings 72,864 140 0.76 71,520 136 0.75
Money markets 182,735 630 1.37 108,181 572 2.10
Other time 352,584 2,484 2.80 341,455 2,915 3.39
Total interest bearing 670,662 3,316 1.96 586,860 3,774 2.56
deposits
Short-term borrowings:
Federal funds purchased, 29,851 45 0.60 60,635 345 2.23
securities sold under
agreements to
repurchase and other
short-term borrowings
Advances from Federal 13,828 132 3.77 10,258 102 3.94
Home Loan Bank
Guaranteed junior 13,085 280 8.57 13,085 280 8.57
subordinated deferrable
interest debentures
Total interest bearing 727,426 3,773 2.06 670,838 4,501 2.67
liabilities/interest
expense
Non-interest bearing
liabilities:
Demand deposits 114,548 111,136
Other liabilities 12,234 10,763
Shareholders' equity 113,425 92,686
TOTAL LIABILITIES AND $967,633 $885,423
SHAREHOLDERS' EQUITY
Interest rate spread 3.23 3.13
Net interest income/ 7,934 3.57 % 7,251 3.56 %
Net interest margin
Tax-equivalent adjustment (9) (20)
Net Interest Income $ 7,925 $ 7,231
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…..PROVISION FOR LOAN LOSSES..... The Company appropriately strengthened its allowance for loan losses in the third quarter and first nine months of 2009 in response to deterioration in asset quality. Specifically, non-performing assets increased by $9.0 million from $14.7 million or 1.98% of total loans at June 30, 2009 to $23.7 million or 3.28% of total loans at September 30, 2009. (See the loan quality section of this MD&A for more specific discussion on the credits causing the increase.) As a result of this asset quality deterioration, the Company recorded a $6.3 million provision for loan losses in the third quarter of 2009 compared to a $775,000 provision in the third quarter of 2008, or an increase of $5.5 million. When determining the provision for loan losses, the Company considers a number of factors, some of which include periodic credit reviews, non-performing, delinquency and charge-off trends, concentrations of credit, loan volume trends and broader local and national economic trends. In addition to the higher level of non-performing loans, the increased loan loss provision in 2009 was also caused by the Company's decision to strengthen its allowance for loan losses due to the downgrade of the rating classification of several performing commercial loans and uncertainties in the local and national economies. The Company's net charge-offs in the third quarter of 2009 amounted to $651,000 or 0.35% of total loans. This amount was higher than the net charge-offs of $61,000 or 0.04% of total loans experienced in the third quarter of 2008. Overall, the allowance for loan losses provided 94% coverage of non-performing loans and was 2.66% of total loans at September 30, 2009 compared to 264% of non-performing loans and 1.26% of total loans at December 31, 2008.
.....NON-INTEREST INCOME.....Non-interest income for the third quarter of 2009 totaled $3.5 million; a decrease of $313,000 or 8.3% from the third quarter 2008 performance. Factors contributing to this reduced level of non-interest income in 2009 included:
* a $323,000 decline in trust and investment advisory fees due to reductions in the market value of assets managed due to lower equity and real estate values in the third quarter of 2009.
* a $75,000 or 54.3% increase in gains realized on residential mortgage loan sales into the secondary market in the third quarter of 2009 due to increased mortgage purchase and refinance activity in the Company's primary market.
.....NON-INTEREST EXPENSE.....Non-interest expense for the third quarter of 2009 totaled $9.6 million and increased by $782,000 or 8.9% from the prior year's third quarter. Factors contributing to the higher non-interest expense in 2009 included:
* FDIC deposit insurance expense has increased by $281,000 due to higher recurring insurance premiums as a result of the need to nationally strengthen the deposit insurance fund.
* Salaries and benefits expense increased by $356,000 due to greater salary costs as a result of normal merit increases, higher sales related incentive compensation, and increased pension expense.
* Other expenses increased by $245,000 due primarily to greater costs associated with other real estate owned properties and higher telephone expense.
NINE MONTHS ENDED SEPTEMBER 30, 2009 VS. NINE MONTHS ENDED SEPTEMBER 30, 2008
.....PERFORMANCE OVERVIEW.....The following table summarizes some of the
Company's key performance indicators (in thousands, except per share and
ratios).
Nine months ended Nine months ended
September 30, 2009 September 30, 2008
Net income (loss) $ (3,216) $ 3,894
Diluted earnings (loss) per share (0.19) 0.18
Return on average assets (annualized) (0.44)% 0.59%
Return on average equity (annualized) (3.77)% 5.66%
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The Company reported a net loss of $3.2 million or $0.19 per diluted common share for the first nine months of 2009. This represents a decrease of $7.1 million from the first nine months of 2008 net income of $3.9 million or $0.18 per diluted common share. Diluted earnings per share declined more significantly than net income due to the preferred dividend requirement on the CPP preferred stock in 2009, which amounted to $785,000 and reduced the amount of net income available to common shareholders. An increased provision for loan losses, reduced non-interest income, and higher non-interest expenses were the main factors causing the decrease in net income in 2009. These negative items more than offset good growth in net interest income due to increased loans outstanding and effective balance sheet management in a declining interest rate environment.
.....NET INTEREST INCOME AND MARGIN..... The following table compares the Company's net interest income performance for the first nine months of 2009 to the first nine months of 2008 (in thousands, except percentages):
Nine months ended Nine months ended Change % Change September 30, 2009 September 30, 2008
Interest income $ 35,688 $ 35,464 $ 224 0.6% Interest expense 11,451 14,532 (3,081) (21.2) Net interest income $ 24,237 $ 20,932 $ 3,305 15.8 Net interest margin 3.65% 3.49% 0.16 N/M |
N/M - not meaningful
The Company's net interest income in the first nine months of 2009 increased by $3.3 million or 15.8% from the prior year's first nine months and the net interest margin rose by 16 basis points to 3.65% over the same comparative period. The increased net interest income and margin resulted from a combination of good balance sheet growth and the pricing benefits achieved from a steeper positively sloped yield curve. Specifically, total loans averaged $726 million in the first nine months of 2009, an increase of $94 million or 14.8% over the first nine months of 2008. Total deposits averaged $756 million in the first nine months of 2009, an increase of $58 million or 8.3% over the same 2008 period. The Company also benefitted from the cost of funds declining at a faster pace than the earning asset yield in 2009. Specifically, effective balance sheet management strategies caused the cost of funds to decrease by 79 basis points, while the earning asset yield dropped by only 48 basis points.
.....COMPONENT CHANGES IN NET INTEREST INCOME..…Regarding the separate
components of net interest income, the Company's total interest income for the
first nine months of 2009 increased by $224,000 when compared to the same 2008
period. This increase was due to $90 million of growth in earning assets, which
more than offset a 48 basis point decrease in the earning asset yield to 5.40%.
Within the earning asset base, the yield on the total loan portfolio decreased
by 64 basis points to 5.69% and reflects the lower interest rate environment in
2009 as the Federal Reserve has reduced the federal funds rate by approximately
300 basis points since 2008. The total investment securities yield decreased by
eight basis points to 4.12% while the yield on short-term money market funds
dropped by 205 basis points to 0.36%. The yield on both of these products was
also impacted by the lower interest rate environment in 2009.
The $90 million or 11.3% increase in the volume of average earning assets was due to a $94 million or 14.8% increase in average loans, partially offset by an $8 million or 5.3% decrease in average investment securities. This loan growth was driven by increased commercial real estate loans as a result of successful new business development efforts, particularly in the suburban Pittsburgh market. The Company found increased commercial lending opportunities in the Pittsburgh market in the second half of 2008 and first quarter of 2009 due to the retrenchment of several larger competitors as a result of the turmoil in the financial markets. This loan growth caused the Company's loan to deposit ratio to average 96.0% in the first nine months of 2009 compared to 90.5% in the first nine months of 2008. The decline in investment securities was caused by the call of certain agency securities and ongoing cash flow from mortgage-backed securities. The Company has elected to utilize this cash from lower yielding investment securities to fund higher yielding loans in an effort to improve the Company's earning asset yield and net interest margin. The Company, however, does not expect the investment securities portfolio to shrink any further during the remainder of 2009 in order to maintain sufficient security balances for pledging purposes.
The Company's total interest expense for the first nine months of 2009 decreased by $3.1 million or 21.2% when compared to the same 2008 period. This decrease in interest expense was due to a lower cost of funds as the cost of both deposits and borrowings repriced downward with the reductions in short-term interest rates. Specifically, the cost of interest bearing deposits declined by 68 basis points to 2.08%, while the cost of all FHLB borrowings dropped by 181 basis points to 1.16%. This decrease in funding costs more than offset the additional interest expense associated with a $58 million increase in the volume of interest bearing liabilities. Additionally, the Company's funding mix also benefited from a $4.0 million increase in non-interest bearing demand deposits.
The table that follows provides an analysis of net interest income on a tax-equivalent basis for the nine month periods ended September 30, 2009 and September 30, 2008. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 24.
Nine months ended September 30 (In thousands, except percentages)
2009 2008
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Loans and loans held for $725,657 $ 31,169 5.69 % $631,948 $ 30,399 6.33 %
sale,
net of unearned income
Interest bearing deposits 1,762 3 0.23 403 10 3.31
Short-term investment in 9,804 25 0.36 6,922 127 2.41
money
market funds
Federal funds sold 156 - 0.14 152 4 3.39
Investment securities - 131,295 4,030 4.00 136,825 4,302 4.08
AFS
Investment securities - 14,851 490 4.40 17,517 684 5.21
HTM
Total investment 146,146 4,520 4.12 154,342 4,986 4.20
securities
Total interest earning 883,525 35,717 5.40 793,767 35,526 5.88
assets/interest income
Non-interest earning
assets:
Cash and due from banks 14,543 17,188
Premises and equipment 9,207 9,193
Other assets 72,124 69,382
Allowance for loan losses (11,301) (7,582)
TOTAL ASSETS $968,098 $881,948
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing demand $ 62,050 $ 201 0.43 % $ 65,169 $ 527 1.08 %
Savings 72,537 412 0.76 70,388 401 0.76
Money markets 165,065 1,915 1.55 92,907 1,817 2.61
Other time 342,076 7,447 2.91 359,255 9,388 3.48
Total interest bearing 641,728 9,975 2.08 587,719 12,133 2.76
deposits
Short-term borrowings:
Federal funds purchased, 59,037 245 0.55 57,818 1,186 2.69
securities sold under
agreements to
repurchase and other
short-term borrowings
Advances from Federal 13,840 391 3.77 11,266 373 4.42
Home Loan Bank
Guaranteed junior 13,085 840 8.57 13,085 840 8.57
subordinated deferrable
interest debentures
Total interest bearing 727,690 11,451 2.10 669,888 14,532 2.89
liabilities/interest
expense
Non-interest bearing
liabilities:
Demand deposits 114,365 110,366
Other liabilities 12,137 9,836
Shareholders' equity 113,906 91,858
TOTAL LIABILITIES AND $968,098 $881,948
SHAREHOLDERS' EQUITY
. . .
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