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ASRV > SEC Filings for ASRV > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for AMERISERV FINANCIAL INC /PA/

Form 10-Q for AMERISERV FINANCIAL INC /PA/


8-Aug-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("M.D.& A.")

.....2014 SECOND QUARTER SUMMARY OVERVIEW..... AmeriServ Financial, Inc. (AmeriServ or the Company) reported net income available to common shareholders of $927,000 or $0.05 per share for the second quarter of 2014. This was $91,000 less than the second quarter of 2013, but $50,000 higher than the first quarter of 2014. Each of these three quarters produced diluted earnings per share of $0.05.

We have previously discussed the negative impact of the Federal Reserve Zero Interest Rate policy on the revenue of financial institutions such as AmeriServ. Therefore it has been our considered strategy to seek increased revenues from other sources as well as our normal earnings on lending activities, which is already benefiting from our increased emphasis on loan originations. For example, for the period ended June 30, 2014, AmeriServ reported an increase in net loans outstanding in the second quarter of $15 million which was an increase of $53 million since June 30, 2013. This growth has permitted AmeriServ to announce a new record of loans outstanding at the close of each of the last five quarters.

Not to be outdone, the growth in deposits has also been solid, increasing by almost $34 million between June 30, 2014 and June 30, 2013. It has been encouraging to note that many of our new borrowing customers have also chosen to make AmeriServ their bank for their business operating accounts.

However, in economic times like these it is also important that the AmeriServ Trust Company seek revenue growth. The equity markets have been strong and the AmeriServ investment strategies have surpassed many wealth management benchmarks. This has again resulted in an increase in Trust Company revenue for the first six months of 2014 and, therefore, is projected to be the fourth consecutive year of revenue growth by the Trust Company.

This data indicates that the strategy to increase revenue is progressing well in spite of Federal Reserve policies and a lackluster economy. Yet, as we noted previously, earnings per share has yet to show a similar growth pattern. Our analysis indicates that overall expenses have also been growing. Therefore, during the second quarter of 2014, we invited a team of experts in the area of expense rationalization to AmeriServ. This team has performed similar analyses in over 400 other companies in the past. They were given complete access to every function of the Company. Their analysis is now complete, and during the third quarter of 2014 they will make their recommendations to the Board and to management. Our goal is to be able to continue to increase revenues but with a lesser rate of increase in expenses. It is our opinion that over the next few years the nation will continue to pursue an easy money policy with low rates and a less than healthy overall economy. Therefore it is necessary that, in a manner of speaking, we watch every dollar carefully as it comes in the door. But we have high hopes for this emphasis on cost rationalization enabling us to translate more of this revenue growth into earnings per share growth.

The issue of technology in the world of financial services is becoming even more pervasive every day. The process of miniaturization lies at the heart of this. At one time the computer was so large, expensive and complex that only the largest companies and super-rich individuals could possess them. But today virtually every capability possessed by the largest bank in our nation is also available to AmeriServ, and to any other technically proficient smaller company. It is our intent to maintain our very personal service tradition but to combine it with a full menu of the best technological assists. For example, in the third quarter AmeriServ's Trust Company is installing a whole new technology package that promises more efficiency but also better information and new client service capabilities.

AmeriServ has now been profitable in seven of the last eight years. It continues to set new quarter end records in the basic blocking and tackling of financial services. But it is also committed to search out new technologies and new ideas that will improve earnings per share. Just as in most businesses, we believe that the growth in customer generated revenue is just the first challenge. The next challenge is to find ways to report more of that increased revenue as increased earnings per share. Today that is the focus of our Board, it is the focus of our management team and it is the focus of every AmeriServ banker.


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THREE MONTHS ENDED JUNE 30, 2014 VS. THREE MONTHS ENDED JUNE 30, 2013

.....PERFORMANCE OVERVIEW.....The following table summarizes some of the
Company's key performance indicators (in thousands, except per share and
ratios).

[[Image Removed]]                          [[Image Removed]]      [[Image Removed]]
                                            Three months ended     Three months ended
                                              June 30, 2014           June 30, 2013
Net income                                 $          979         $         1,070
Net income available to common
shareholders                                          927                   1,018
Diluted earnings per share                           0.05                    0.05
Return on average assets (annualized)                0.37 %                  0.43 %
Return on average equity (annualized)                3.41 %                  3.86 %

The Company reported second quarter 2014 net income available to common shareholders of $927,000 or $0.05 per diluted common share. Net income available to common shareholders in the second quarter of 2014 declined by $91,000, or 8.9%, from the prior year second quarter due primarily to reduced non-interest revenue and higher non-interest expense in 2014. These negative items more than offset a 4.5% increase in net interest income in the second quarter of 2014 due to the previously mentioned loan growth and a $150,000 reduction in the provision for loans losses. Finally, diluted earnings per share was consistent between periods as total shares outstanding were lower in 2014 due to the success of the Company's common stock repurchase program which was completed in the second quarter of 2013.

.....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 second quarter of 2014 to the second quarter of 2013 (in thousands, except percentages):

[[Image Removed]]     [[Image Removed]]       [[Image Removed]]       [[Image Removed]]       [[Image Removed]]
                       Three months ended      Three months ended               $                      %
                          June 30, 2014           June 30, 2013              Change                  Change
Interest income       $         9,983         $         9,627         $           356                    3.7 %
Interest expense                1,599                   1,606                      (7 )                 (0.4 )
Net interest income   $         8,384         $         8,021         $           363                    4.5
Net interest margin              3.47 %                  3.50 %                 (0.03 )                  N/M


[[Image Removed]]

N/M - not meaningful

The Company's net interest income in the second quarter of 2014 increased by $363,000 or 4.5% when compared to the second quarter of 2013. The Company's net interest margin of 3.47% for the second quarter of 2014 was three basis points lower than the net interest margin of 3.50% for the second quarter 2013. This demonstrates that the recent pace of net interest margin contraction has slowed from the pace of margin decline experienced over the previous two years. The Company has been able to mitigate this net interest margin pressure and increase net interest income by both growing its earning assets and reducing its cost of funds. Specifically, the earning asset growth has occurred in the loan portfolio as total loans averaged $795 million in the second quarter of 2014 which is $67 million, or 9.2%, higher than the $728 million average for the second quarter of 2013. This loan growth reflects the successful results of the Company's more intensive sales calling efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans, which qualify as Small Business Lending Fund (SBLF) loans, particularly through its loan production offices. As a result of this growth in SBLF qualified loans, the Company has locked in the lowest preferred dividend rate available under the program of 1% until the first quarter of 2016. Interest income in 2014 has also benefitted from reduced premium amortization on mortgage backed securities due to slower mortgage prepayment speeds. Due largely to this reduced premium amortization, the yield on the total securities portfolio increased by 22 basis points to 2.65% in the second quarter of 2014.


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Total interest expense for the second quarter of 2014 declined by $7,000 from the 2013 second quarter due to the Company's proactive efforts to reduce deposit costs. Even with this reduction in deposit costs, the Company still experienced growth in deposits which reflects the loyalty of our core deposit base and ongoing efforts to cross sell new loan customers into deposit products. Specifically, total deposits averaged $877 million for the second quarter of 2014 which is $35 million, or 4.2%, higher than the $842 million average in the second quarter of 2013. The Company's loan to deposit ratio has increased to 92.1% at June 30, 2014 from 88.6% at June 30, 2013.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended June 30, 2014 and June 30, 2013 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) the Company'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) the Company'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 June 30 (In thousands, except percentages)

[[Image Removed]]   [[Image Removed]]     [[Image Removed]]       [[Image Removed]]      [[Image Removed]]     [[Image Removed]]       [[Image Removed]]
                                                   2014                                                                 2013
                                            Interest Income/                                                     Interest Income/
                      Average Balance            Expense               Yield/Rate          Average Balance            Expense               Yield/Rate
Interest earning
assets:
Loans and loans
held for sale,
net of unearned
income              $        795,233      $             8,945               4.47 %       $        728,189      $             8,596               4.69 %
Interest bearing
deposits                       7,512                        1               0.04                    9,511                        3               0.13
Short-term
investment in
money market
funds                          2,296                        2               0.47                    5,702                        4               0.40
Investment
securities - AFS             138,417                      905               2.62                  151,609                      907               2.39
Investment
securities - HTM              18,931                      136               2.87                   17,873                      123               2.75
Total investment
securities                   157,348                    1,041               2.65                  169,482                    1,030               2.43
Total interest
earning
assets/interest
income                       962,389                    9,989               4.14                  912,884                    9,633               4.21
Non-interest
earning assets:
Cash and due from
banks                         15,267                                                               16,470
Premises and
equipment                     13,194                                                               12,799
Other assets                  69,538                                                               75,924
Allowance for
loan losses                  (10,122 )                                                            (10,989 )
TOTAL ASSETS        $      1,050,266                                                     $      1,007,088
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand              $        100,249      $                50               0.20 %       $         74,721      $                35               0.19 %
Savings                       89,871                       36               0.16                   88,919                       35               0.16
Money markets                229,626                      196               0.34                  208,050                      180               0.36
Time deposits                304,022                      958               1.26                  309,318                    1,038               1.35
Total interest
bearing deposits             723,768                    1,240               0.69                  681,008                    1,288               0.76


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[[Image Removed]]      [[Image Removed]]     [[Image Removed]]             [[Image Removed]]      [[Image Removed]]     [[Image Removed]]             [[Image Removed]]
                                                         2014                                                                       2013
                         Average Balance      Interest Income/ Expense          Yield/Rate          Average Balance      Interest Income/ Expense          Yield/Rate
Short-term
borrowings:
Other short-term
borrowings                         7,249                       5                     0.28                    12,067                       8                     0.27
Advances from
Federal Home Loan
Bank                              30,378                      74                     0.96                    16,000                      30                     0.76
Guaranteed junior
subordinated
deferrable interest
debentures                        13,085                     280                     8.57                    13,085                     280                     8.57
Total interest
bearing
liabilities/interest
expense                          774,480                   1,599                     0.83                   722,160                   1,606                     0.89
Non-interest bearing
liabilities:
Demand deposits                  152,976                                                                    160,773
Other liabilities                  7,582                                                                     12,860
Shareholders' equity             115,228                                                                    111,295
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY                 $       1,050,266                                                          $       1,007,088
Interest rate spread                                                                 3.31                                                                       3.32
Net interest
income/Net interest
margin                                                     8,390                     3.47 %                                           8,027                     3.50 %
Tax-equivalent
adjustment                                                    (6 )                                                                       (6 )
Net Interest Income                          $             8,384                                                        $             8,021

.....PROVISION FOR LOAN LOSSES.....The Company did not record a provision for loan losses in the second quarter of 2014 as compared to a $150,000 provision recorded in the second quarter of 2013. The Company continued to maintain outstanding asset quality in the second quarter of 2014. At June 30, 2014, non-performing assets totaled $4.5 million, or 0.56%, of total loans, which is comparable with the level they have averaged for the past six quarters. The Company also experienced net loan recoveries in both the second quarters of 2014 and 2013. When determining the provision for loan losses, the Company considers a number of factors some of which include periodic credit reviews, non-performing assets, loan delinquency and charge-off trends, concentrations of credit, loan volume trends and broader local and national economic trends. In summary, the allowance for loan losses provided a strong 256% coverage of non-performing loans, at June 30, 2014, compared to 327% of non-performing loans at December 31, 2013.

.....NON-INTEREST INCOME.....Non-interest income for the second quarter of 2014 totaled $3.6 million and decreased $437,000, or 10.7%, from the second quarter 2013 performance. Factors contributing to this lower level of non-interest income for the quarter included:

* Reduced revenue from residential mortgage banking activities was caused by lower refinance activity due to higher mortgage rates in 2014. As a result, gains realized on residential mortgage loan sales into the secondary market declined by $70,000 and mortgage related fees dropped by $68,000 due largely to lower mortgage origination and underwriting fees.

* a $204,000, or 52.6%, decrease in bank owned life insurance revenue due to the receipt of a death claim in the prior year.

* a $51,000, or 2.6%, decrease in trust and investment advisory fees resulting from client attrition at our registered investment advisor subsidiary (WCCA) due to the departure of a former CEO in that business.


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* a $120,000 gain realized on the sale of investment securities in the second quarter of 2014 as the Company took advantage of market opportunities to sell certain rapidly prepaying mortgage backed securities.

* a $127,000 decrease in other income due largely to a $78,000 loss realized on the sale of an other real estate owned property in the second quarter of 2014.

.....NON-INTEREST EXPENSE.....Non-interest expense for the second quarter of 2014 totaled $10.6 million and increased by $178,000, or 1.7%, from the prior year's second quarter. Factors contributing to the higher non-interest expense in the quarter included:

* a $314,000 increase in professional fees due to higher legal costs and new recurring costs related to outsourcing our computer operations and statement processing to a third party vendor. The increased legal costs related to litigation with the former CEO of our registered investment advisor subsidiary for violations of the non-solicitation, non-competition, and other provisions included in his employment agreement as well as other statutory and common law claims.

* a $69,000 decrease in salaries and employee benefits due to lower pension expense and incentive compensation expense.

SIX MONTHS ENDED JUNE 30, 2014 VS. SIX MONTHS ENDED JUNE 30, 2013

.....PERFORMANCE OVERVIEW.....The following table summarizes some of the
Company's key performance indicators (in thousands, except per share and
ratios).

[[Image Removed]]                         [[Image Removed]]       [[Image Removed]]
                                            Six months ended        Six months ended
                                              June 30, 2014           June 30, 2013
Net income                                $         1,909         $         2,126
Net income available to common
shareholders                                        1,804                   2,022
Diluted earnings per share                           0.10                    0.11
Return on average assets (annualized)                0.37 %                  0.43 %
Return on average equity (annualized)                3.35 %                  3.86 %

The Company reported net income available to common shareholders of $1,804,000 or $0.10 per diluted common share for the first six months of 2014. When compared to the first six months of 2013, net income available to common shareholders was down by $218,000, or 10.8%, due primarily to reduced non-interest revenue and higher non-interest expense in 2014. These negative items more than offset a 5.3% increase in net interest income in the first half of 2014 due to the previously mentioned strong loan growth the Company has achieved over the past year.

.....NET INTEREST INCOME AND MARGIN.....The following table compares the Company's net interest income performance for the first six months of 2014 to the first six months of 2013 (in thousands, except percentages):

[[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]       [[Image Removed]]
                           Six months             Six months
                             ended                  ended                     $                      %
                         June 30, 2014          June 30, 2013              Change                  Change
Interest income       $        20,078        $        19,329        $           749                    3.9 %
Interest expense                3,169                  3,266                    (97 )                 (3.0 )
Net interest income   $        16,909        $        16,063        $           846                    5.3
Net interest margin              3.52 %                 3.54 %                (0.02 )                  N/M


[[Image Removed]]

N/M - not meaningful


TABLE OF CONTENTS

The Company's net interest income in the first six months of 2014 increased by $846,000 or 5.3% when compared to the first six months of 2013. The Company's net interest margin of 3.52% for the first six months of 2014 was two basis points lower than the net interest margin of 3.54% for the first half of 2013. The lower net interest margin demonstrates the impact of Federal Reserve low interest rate policies which have pressured interest revenue. The Company has been able to mitigate this net interest margin pressure and to increase net interest income by both growing its earning assets and reducing its cost of funds. Specifically, the earning asset growth has occurred in the loan portfolio as total loans averaged $791 million in the first half of 2014 which is $63 million, or 8.7%, higher than the $728 million average for the first half of 2013. Interest income in 2014 has also benefitted from reduced premium amortization on mortgage backed securities due to slower mortgage prepayment speeds which has caused the yield on the total securities portfolio to increase by 11 basis points to 2.63% in the first six months of 2014. The size of the total securities portfolio and short term investments has decreased on average by $10 million in 2014 as the Company has utilized cash flow from these instruments to help fund the previously mentioned loan growth.

Total interest expense for the first six months of 2014 declined by $97,000 from the first six months of 2013 due to the Company's proactive efforts to reduce deposit costs. Even with this reduction in deposit costs, the Company still experienced growth in deposits which reflects the loyalty of our core deposit base and ongoing efforts to cross sell new loan customers into deposit products. Specifically, total deposits averaged $866 million for the first half of 2014 which is $28 million, or 3.3%, higher than the $839 million average in the first half of 2013. The Company has also utilized term advances from the FHLB, with maturities ranging between three and five years, to help fund its earning asset growth and manage interest rate risk over the past year. The average balance of FHLB term advances has increased by $13 million while the average cost of these advances has increased by 25 basis points to 0.94%.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the six month periods ended June 30, 2014 and June 30, 2013. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 35-36.

Six months ended June 30 (In thousands, except percentages)

[[Image Removed]]   [[Image Removed]]     [[Image Removed]]       [[Image Removed]]      [[Image Removed]]     [[Image Removed]]       [[Image Removed]]
                                                   2014                                                                 2013
                                            Interest Income/                                                     Interest Income/
                      Average Balance            Expense               Yield/Rate          Average Balance            Expense               Yield/Rate
Interest earning
assets:
Loans and loans
held for sale,
net of unearned
income              $        791,270      $            17,983               4.53 %       $        727,846      $            17,231               4.72 %
Interest bearing
deposits                       6,749                        2               0.06                    8,324                        4               0.11
Short-term
investment in
money market
funds                          3,231                        4               0.25                    5,057                        6               0.23
Investment
securities - AFS             141,236                    1,829               2.59                  149,598                    1,863               2.49
Investment
securities - HTM              18,833                      272               2.89                   16,961                      238               2.81
Total investment
securities                   160,069                    2,101               2.63                  166,559                    2,101               2.52
Total interest
earning
assets/interest
income                       961,319                   20,090               4.18                  907,786                   19,342               4.27
Non-interest
earning assets:
Cash and due from
banks                         15,618                                                               16,845
Premises and
equipment                     13,171                                                               12,475
Other assets                  69,689                                                               78,961
. . .
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