UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the period ended June 30, 2012
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transaction period from to
Commission File Number 0-11204
AmeriServ Financial, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania | 25-1424278 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
Main & Franklin Streets, P.O. Box 430, Johnstown, PA | 15907-0430 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at August 1, 2012 | |
Common Stock, par value $0.01 | 19,284,521 |
INDEX
2
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, 2012 | December 31, 2011 | |||||||
ASSETS |
||||||||
Cash and due from depository institutions |
$ | 19,817 | $ | 26,938 | ||||
Interest bearing deposits |
10,310 | 1,716 | ||||||
Short-term investments in money market funds |
3,848 | 6,129 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
33,975 | 34,783 | ||||||
Investment securities: |
||||||||
Available for sale |
176,896 | 182,923 | ||||||
Held to maturity (fair value $15,457 on June 30, 2012 and $12,914 on December 31, 2011) |
14,895 | 12,280 | ||||||
Loans held for sale |
6,009 | 7,110 | ||||||
Loans |
685,323 | 664,189 | ||||||
Less: Unearned income |
517 | 452 | ||||||
Allowance for loan losses |
13,317 | 14,623 | ||||||
|
|
|
|
|||||
Net loans |
671,489 | 649,114 | ||||||
Premises and equipment, net |
10,885 | 10,674 | ||||||
Accrued interest income receivable |
3,159 | 3,216 | ||||||
Goodwill |
12,613 | 12,613 | ||||||
Bank owned life insurance |
35,779 | 35,351 | ||||||
Net deferred tax asset |
11,364 | 12,681 | ||||||
Federal Home Loan Bank stock |
5,317 | 5,891 | ||||||
Federal Reserve Bank stock |
2,125 | 2,125 | ||||||
Prepaid federal deposit insurance |
1,614 | 1,814 | ||||||
Other assets |
10,982 | 8,501 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 997,102 | $ | 979,076 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Non-interest bearing deposits |
$ | 155,797 | $ | 141,982 | ||||
Interest bearing deposits |
698,220 | 674,438 | ||||||
|
|
|
|
|||||
Total deposits |
854,017 | 816,420 | ||||||
|
|
|
|
|||||
Short-term borrowings |
| 15,765 | ||||||
Advances from Federal Home Loan Bank |
3,000 | 6,000 | ||||||
Guaranteed junior subordinated deferrable interest debentures |
13,085 | 13,085 | ||||||
|
|
|
|
|||||
Total borrowed funds |
16,085 | 34,850 | ||||||
|
|
|
|
|||||
Other liabilities |
16,190 | 15,454 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES |
886,292 | 866,724 | ||||||
|
|
|
|
|||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock, no par value; $1,000 per share liquidation preference; 2,000,000 shares authorized; 21,000 shares issued and outstanding on June 30, 2012 and December 31, 2011. |
21,000 | 21,000 | ||||||
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,398,540 shares issued and 19,284,521 outstanding on June 30, 2012; 26,397,040 shares issued and 20,921,021 outstanding on December 31, 2011 |
264 | 264 | ||||||
Treasury stock at cost, 7,114,019 shares on June 30, 2012 and 5,476,019 shares on December 31, 2011 |
(73,302 | ) | (69,241 | ) | ||||
Capital surplus |
145,070 | 145,061 | ||||||
Retained earnings |
21,400 | 18,928 | ||||||
Accumulated other comprehensive loss, net |
(3,622 | ) | (3,660 | ) | ||||
|
|
|
|
|||||
TOTAL SHAREHOLDERS EQUITY |
110,810 | 112,352 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 997,102 | $ | 979,076 | ||||
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | 8,552 | $ | 8,804 | $ | 17,281 | $ | 17,887 | ||||||||
Interest bearing deposits |
5 | | 6 | | ||||||||||||
Short-term investments in money market funds |
7 | 2 | 10 | 5 | ||||||||||||
Federal funds sold |
| 3 | | 7 | ||||||||||||
Investment securities: |
||||||||||||||||
Available for sale |
1,210 | 1,617 | 2,489 | 3,028 | ||||||||||||
Held to maturity |
111 | 104 | 223 | 199 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Interest Income |
9,885 | 10,530 | 20,009 | 21,126 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
1,668 | 2,106 | 3,430 | 4,400 | ||||||||||||
Short-term borrowings |
| 1 | 4 | 2 | ||||||||||||
Advances from Federal Home Loan Bank |
16 | 57 | 36 | 112 | ||||||||||||
Guaranteed junior subordinated deferrable interest debentures |
280 | 280 | 560 | 560 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Interest Expense |
1,964 | 2,444 | 4,030 | 5,074 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INTEREST INCOME |
7,921 | 8,086 | 15,979 | 16,052 | ||||||||||||
Provision (credit) for loan losses |
(500 | ) | (1,175 | ) | (1,125 | ) | (1,775 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES |
8,421 | 9,261 | 17,104 | 17,827 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NON-INTEREST INCOME |
||||||||||||||||
Trust fees |
1,628 | 1,617 | 3,325 | 3,173 | ||||||||||||
Investment advisory fees |
177 | 198 | 370 | 396 | ||||||||||||
Net realized gains (losses) on investment securities |
12 | | 12 | (358 | ) | |||||||||||
Net gains on sale of loans |
251 | 155 | 527 | 417 | ||||||||||||
Service charges on deposit accounts |
517 | 549 | 1,052 | 1,021 | ||||||||||||
Bank owned life insurance |
212 | 218 | 427 | 435 | ||||||||||||
Other income |
936 | 717 | 1,694 | 1,475 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-Interest Income |
3,733 | 3,454 | 7,407 | 6,559 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NON-INTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
5,976 | 5,574 | 11,962 | 11,074 | ||||||||||||
Net occupancy expense |
702 | 742 | 1,431 | 1,499 | ||||||||||||
Equipment expense |
473 | 411 | 924 | 840 | ||||||||||||
Professional fees |
937 | 911 | 1,860 | 1,891 | ||||||||||||
Supplies, postage and freight |
200 | 220 | 433 | 459 | ||||||||||||
Miscellaneous taxes and insurance |
355 | 331 | 710 | 680 | ||||||||||||
Federal deposit insurance expense |
114 | 460 | 243 | 922 | ||||||||||||
Other expense |
1,310 | 1,228 | 2,618 | 2,431 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-Interest Expense |
10,067 | 9,877 | 20,181 | 19,796 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
PRETAX INCOME |
2,087 | 2,838 | 4,330 | 4,590 | ||||||||||||
Provision for income tax expense |
655 | 900 | 1,333 | 1,389 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INCOME |
1,432 | 1,938 | 2,997 | 3,201 | ||||||||||||
Preferred stock dividends and accretion of preferred stock discount |
262 | 290 | 525 | 580 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS |
$ | 1,170 | $ | 1,648 | $ | 2,472 | $ | 2,621 | ||||||||
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|
|
|
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|||||||||
PER COMMON SHARE DATA: |
||||||||||||||||
Basic: |
||||||||||||||||
Net income |
$ | 0.06 | $ | 0.08 | $ | 0.12 | $ | 0.12 | ||||||||
Average number of shares outstanding |
19,584 | 21,208 | 20,132 | 21,208 | ||||||||||||
Diluted: |
||||||||||||||||
Net income |
$ | 0.06 | $ | 0.08 | $ | 0.12 | $ | 0.12 | ||||||||
Average number of shares outstanding |
19,652 | 21,236 | 20,186 | 21,233 | ||||||||||||
Cash dividends declared |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 |
See accompanying notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
COMPREHENSIVE INCOME |
||||||||||||||||
Net income |
$ | 1,432 | $ | 1,938 | $ | 2,997 | $ | 3,201 | ||||||||
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|
|
|
|
|
|
|
|||||||||
Other comprehensive income, before tax: |
||||||||||||||||
Pension obligation change for defined benefit plan |
254 | 201 | (148 | ) | 506 | |||||||||||
Income tax effect |
(86 | ) | (68 | ) | 50 | (172 | ) | |||||||||
Unrealized holding gains on available for sale securities arising during period |
281 | 2,161 | 218 | 1,661 | ||||||||||||
Income tax effect |
(97 | ) | (735 | ) | (74 | ) | (565 | ) | ||||||||
Reclassification adjustment for losses (gains) on available for sale securities included in net income |
(12 | ) | | (12 | ) | 358 | ||||||||||
Income tax effect |
4 | | 4 | (123 | ) | |||||||||||
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|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
344 | 1,559 | 38 | 1,665 | ||||||||||||
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|
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|
|
|||||||||
Comprehensive income |
$ | 1,776 | $ | 3,497 | $ | 3,035 | $ | 4,866 | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended | ||||||||
June 30, 2012 | June 30, 2011 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 2,997 | $ | 3,201 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision (credit) for loan losses |
(1,125 | ) | (1,775 | ) | ||||
Depreciation expense |
766 | 743 | ||||||
Net amortization of investment securities |
533 | 301 | ||||||
Net realized (gains) losses on investment securities available for sale |
(12 | ) | 358 | |||||
Net gains on sale of loans |
(527 | ) | (417 | ) | ||||
Amortization of deferred loan fees |
(86 | ) | (134 | ) | ||||
Origination of mortgage loans held for sale |
(39,517 | ) | (23,964 | ) | ||||
Sales of mortgage loans held for sale |
41,145 | 29,300 | ||||||
Decrease (increase) in accrued interest income receivable |
57 | (461 | ) | |||||
Decrease in accrued interest expense payable |
(492 | ) | (976 | ) | ||||
Earnings on bank owned life insurance |
(427 | ) | (435 | ) | ||||
Deferred income taxes |
1,247 | 2,205 | ||||||
Stock based compensation expense |
9 | 11 | ||||||
Decrease in prepaid Federal Deposit Insurance |
200 | 872 | ||||||
Net (increase) decrease in other assets |
(1,698 | ) | 3,141 | |||||
Net increase (decrease) in other liabilities |
1,077 | (1,745 | ) | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
4,147 | 10,225 | ||||||
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|
|
|
|||||
INVESTING ACTIVITIES |
||||||||
Purchases of investment securities available for sale |
(27,237 | ) | (63,412 | ) | ||||
Purchases of investment securities held to maturity |
(3,583 | ) | (1,991 | ) | ||||
Proceeds from sales of investment securities available for sale |
4,221 | 16,518 | ||||||
Proceeds from maturities of investment securities available for sale |
28,730 | 22,693 | ||||||
Proceeds from maturities of investment securities held to maturity |
964 | 710 | ||||||
Proceeds from redemption of regulatory stock |
574 | 705 | ||||||
Long-term loans originated |
(124,086 | ) | (58,217 | ) | ||||
Principal collected on long-term loans |
103,653 | 77,660 | ||||||
Loans purchased or participated |
(10,000 | ) | (3,500 | ) | ||||
Loans sold or participated |
8,500 | | ||||||
Sale of other real estate owned |
24 | 588 | ||||||
Purchases of premises and equipment |
(977 | ) | (803 | ) | ||||
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|
|
|||||
Net cash used in investing activities |
(19,217 | ) | (9,049 | ) | ||||
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|
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FINANCING ACTIVITIES |
||||||||
Net increase in deposit balances |
37,613 | 7,317 | ||||||
Net decrease in other short-term borrowings |
(15,765 | ) | (4,550 | ) | ||||
Principal repayments on advances from Federal Home Loan Bank |
(3,000 | ) | (28 | ) | ||||
Purchases of treasury stock |
(4,061 | ) | | |||||
Preferred stock dividends |
(525 | ) | (525 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
14,262 | 2,214 | ||||||
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|
|||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(808 | ) | 3,390 | |||||
CASH AND CASH EQUIVALENTS AT JANUARY 1 |
34,783 | 19,337 | ||||||
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|
|||||
CASH AND CASH EQUIVALENTS AT JUNE 30 |
$ | 33,975 | $ | 22,727 | ||||
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service Bank with 18 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $1.4 billion that are not recognized on the Companys balance sheet at June 30, 2012. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.
In addition, the Parent Company is an administrative group that provides support in such areas as audit, finance, investments, loan review, general services, and marketing. Significant intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements.
2. | Basis of Preparation |
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting only of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.
For further information, refer to the consolidated financial statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
3. | Accounting Policies |
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Additional disclosures have been provided in Note 16.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders equity was eliminated. The amendments require that all non-owner changes in stockholders equity be presented either in a
7
single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments in this Update should be applied retrospectively, and early adoption is permitted. The Company has elected to provide the separate statement disclosure.
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entitys financial statements for the most recent annual or interim period have not yet been issued. This ASU is not expected to have a significant impact on the Companys financial statements.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. This ASU is not expected to have a significant impact on the Companys financial statements.
4. | Earnings Per Common Share |
Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. Options and warrants to purchase 244,083 common shares, at exercise prices ranging from $2.75 to $6.10, and 1,478,417 common shares, at exercise prices ranging from $2.20 to $6.10, were outstanding as of June 30, 2012 and 2011, respectively,
8
but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Dividends and accretion of discount on preferred shares are deducted from net income in the calculation of earnings per common share.
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 1,432 | $ | 1,938 | $ | 2,997 | $ | 3,201 | ||||||||
Preferred stock dividends and accretion of preferred stock discount |
262 | 290 | 525 | 580 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common shareholders |
$ | 1,170 | $ | 1,648 | $ | 2,472 | $ | 2,621 | ||||||||
|
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|
|||||||||
Denominator: |
||||||||||||||||
Weighted average common shares outstanding (basic) |
19,584 | 21,208 | 20,132 | 21,208 | ||||||||||||
Effect of stock options/warrants |
68 | 28 | 54 | 25 | ||||||||||||
|
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|
|||||||||
Weighted average common shares outstanding (diluted) |
19,652 | 21,236 | 20,186 | 21,233 | ||||||||||||
|
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|
|||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.06 | $ | 0.08 | $ | 0.12 | $ | 0.12 | ||||||||
Diluted |
0.06 | 0.08 | 0.12 | 0.12 |
5. | Consolidated Statement of Cash Flows |
On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits, federal funds sold and short-term investments in money market funds. The Company made $35,000 in income tax payments in the first six months of 2012 as compared to $19,000 for the first six months of 2011. The Company made total interest payments of $4,522,000 in the first six months of 2012 compared to $6,050,000 in the same 2011 period. The Company had non-cash transfers to other real estate owned (OREO) in the amounts of $770,000 and $58,000 in the first six months of 2012 and 2011, respectively.
6. | Investment Securities |
The cost basis and fair values of investment securities are summarized as follows (in thousands):
Investment securities available for sale (AFS):
June 30, 2012 | ||||||||||||||||
Cost Basis |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
U.S. Agency |
$ | 7,248 | $ | 70 | $ | (1 | ) | $ | 7,317 | |||||||
U.S. Agency mortgage- backed securities |
156,701 | 6,960 | (26 | ) | 163,635 | |||||||||||
Corporate bonds |
5,991 | | (47 | ) | 5,944 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 169,940 | $ | 7,030 | $ | (74 | ) | $ | 176,896 | |||||||
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|
9
Investment securities held to maturity (HTM):
June 30, 2012 | ||||||||||||||||
Cost Basis |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U.S. Agency mortgage- backed securities |
$ | 10,895 | $ | 638 | $ | | $ | 11,533 | ||||||||
Other securities |
4,000 | | (76 | ) | 3,924 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 14,895 | $ | 638 | $ | (76 | ) | $ | 15,457 | |||||||
|
|
|
|
|
|
|
|
Investment securities available for sale (AFS):
December 31, 2011 | ||||||||||||||||
Cost Basis |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U.S. Agency |
$ | 10,689 | $ | 48 | $ | (28 | ) | $ | 10,709 | |||||||
U.S. Agency mortgage- backed securities |
165,484 | 6,737 | (7 | ) | 172,214 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 176,173 | $ | 6,785 | $ | (35 | ) | $ | 182,923 | |||||||
|
|
|
|
|
|
|
|
Investment securities held to maturity (HTM):
December 31, 2011 | ||||||||||||||||
Cost Basis |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U.S. Agency mortgage- backed securities |
$ | 9,280 | $ | 643 | $ | | $ | 9,923 | ||||||||
Other securities |
3,000 | | (9 | ) | 2,991 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 12,280 | $ | 643 | $ | (9 | ) | $ | 12,914 | |||||||
|
|
|
|
|
|
|
|
Maintaining investment quality is a primary objective of the Companys investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moodys Investors Service or Standard & Poors rating of A. At June 30, 2012, 94.6% of the portfolio was rated AAA as compared to 98.4% at December 31, 2011. 1.1% of the portfolio was either rated below A or unrated at June 30, 2012. The Company has no exposure to subprime mortgage loans in the investment portfolio. At June 30, 2012, the Companys consolidated investment securities portfolio had a modified duration of approximately 1.47 years. Total proceeds from the sale of AFS securities were $4.2 million for the second quarter and first six months of 2012. The Company had $59,000 of gross investment security gains and $47,000 of gross investment security losses in the second quarter and first six months of 2012 compared to no gross investment security gains or losses in the second quarter of 2011 and $358,000 of gross investment security losses for the first six months of 2011.
The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits, and certain Federal Home Loan Bank borrowings was $95,922,000 at June 30, 2012 and $83,235,000 at December 31, 2011.
The following tables present information concerning investments with unrealized losses as of June 30, 2012 and December 31, 2011 (in thousands):
Investment securities available for sale:
June 30, 2012 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
U.S. Agency |
$ | 1,248 | $ | (1 | ) | $ | | $ | | $ | 1,248 | $ | (1 | ) | ||||||||||
U.S. Agency mortgage-backed securities |
10,066 | (21 | ) | 469 | (5 | ) | 10,535 | (26 | ) | |||||||||||||||
Corporate bonds |
5,944 | (47 | ) | | | 5,944 | (47 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 17,258 | $ | (69 | ) | $ | 469 | $ | (5 | ) | $ | 17,727 | $ | (74 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
10
Investment securities held to maturity:
June 30, 2012 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
Other securities |
$ | 2,924 | $ | (76 | ) | $ | | $ | | $ | 2,924 | $ | (76 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,924 | $ | (76 | ) | $ | | $ | | $ | 2,924 | $ | (76 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
December 31, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
U.S. Agency |
$ | 3,161 | $ | (28 | ) | $ | | $ | | $ | 3,161 | $ | (28 | ) | ||||||||||
U.S. Agency mortgage-backed securities |
613 | (7 | ) | | | 613 | (7 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,774 | $ | (35 | ) | $ | | $ | | $ | 3,774 | $ | (35 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity:
December 31, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
Other securities |
$ | 1,991 | $ | (9 | ) | $ | | $ | | $ | 1,991 | $ | (9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,991 | $ | (9 | ) | $ | | $ | | $ | 1,991 | $ | (9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 15 positions that are considered temporarily impaired at June 30, 2012. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.
Contractual maturities of securities at June 30, 2012, are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.
Investment securities available for sale:
June 30, 2012 | ||||||||||||||||
Cost Basis |
U. S. Agency | U.S. Agency Mortgage- Backed Securities |
Corporate Bonds |
Total Investment Securities Available For Sale |
||||||||||||
After 1 year but within 5 years |
$ | 7,248 | $ | | $ | 5,991 | $ | 13,239 | ||||||||
After 5 years but within 10 years |
| 14,006 | | 14,006 | ||||||||||||
After 10 years but within 15 years |
| 73,138 | | 73,138 | ||||||||||||
Over 15 years |
| 69,557 | | 69,557 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 7,248 | $ | 156,701 | $ | 5,991 | $ | 169,940 | ||||||||
|
|
|
|
|
|
|
|
11
June 30, 2012 | ||||||||||||||||
Fair Value |
U.S. Agency | U.S. Agency Mortgage- Backed Securities |
Corporate Bonds |
Total Investment Securities Available For Sale |
||||||||||||
After 1 year but within 5 years |
$ | 7,317 | $ | | $ | 5,944 | $ | 13,261 | ||||||||
After 5 years but within 10 years |
| 14,881 | | 14,881 | ||||||||||||
After 10 years but within 15 years |
| 76,219 | | 76,219 | ||||||||||||
Over 15 years |
| 72,535 | | 72,535 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 7,317 | $ | 163,635 | $ | 5,944 | $ | 176,896 | ||||||||
|
|
|
|
|
|
|
|
Investment securities held to maturity:
June 30, 2012 | ||||||||||||
Cost Basis |
U.S. Agency Mortgage- Backed Securities |
Other Securities |
Total Investment Securities Held To Maturity |
|||||||||
Within 1 year |
$ | | $ | 1,000 | $ | 1,000 | ||||||
After 1 year but within 5 years |
| 3,000 | 3,000 | |||||||||
Over 15 years |
10,895 | | 10,895 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 10,895 | $ | 4,000 | $ | 14,895 | ||||||
|
|
|
|
|
|
June 30, 2012 | ||||||||||||
Fair Value |
U.S. Agency Mortgage- Backed Securities |
Other Securities |
Total Investment Securities Held To Maturity |
|||||||||
Within 1 year |
$ | | $ | 1,000 | $ | 1,000 | ||||||
After 1 year but within 5 years |
| 2,924 | 2,924 | |||||||||
Over 15 years |
11,533 | | 11,533 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 11,533 | $ | 3,924 | $ | 15,457 | ||||||
|
|
|
|
|
|
7. | Loans |
The loan portfolio of the Company consists of the following (in thousands):
June 30, 2012 | December 31, 2011 | |||||||
Commercial |
$ | 95,444 | $ | 83,124 | ||||
Commercial loans secured by real estate |
357,810 | 349,778 | ||||||
Real estate mortgage |
214,110 | 212,663 | ||||||
Consumer |
17,442 | 18,172 | ||||||
|
|
|
|
|||||
Loans, net of unearned income |
$ | 684,806 | $ | 663,737 | ||||
|
|
|
|
Loan balances at June 30, 2012 and December 31, 2011 are net of unearned income of $517,000 and $452,000, respectively. Real estate-construction loans comprised 2.2%, and 1.9% of total loans, net of unearned income, at June 30, 2012 and December 31, 2011, respectively. The Company has no exposure to subprime mortgage loans in the loan portfolio.
12
8. | Allowance for Loan Losses |
The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three month periods ending June 30, 2012 and 2011 (in thousands).
Balance at March 31, 2012 |
Charge- Offs |
Recoveries | Provision (Credit) |
Balance at June 30, 2012 |
||||||||||||||||
Commercial |
$ | 2,483 | $ | | $ | 90 | $ | (221 | ) | $ | 2,352 | |||||||||
Commercial loans secured by real estate |
8,555 | (31 | ) | 170 | (316 | ) | 8,378 | |||||||||||||
Real estate- mortgage |
1,250 | (99 | ) | 5 | 50 | 1,206 | ||||||||||||||
Consumer |
166 | (107 | ) | 11 | 85 | 155 | ||||||||||||||
Allocation for general risk |
1,324 | | | (98 | ) | 1,226 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 13,778 | $ | (237 | ) | $ | 276 | $ | (500 | ) | $ | 13,317 | ||||||||
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
Charge- Offs |
Recoveries | Provision (Credit) |
Balance at June 30, 2011 |
||||||||||||||||
Commercial |
$ | 5,687 | $ | (243 | ) | $ | 364 | $ | (1,254 | ) | $ | 4,554 | ||||||||
Commercial loans secured by real estate |
9,108 | | 65 | 54 | 9,227 | |||||||||||||||
Real estate- mortgage |
1,250 | (29 | ) | 2 | 71 | 1,294 | ||||||||||||||
Consumer |
198 | (77 | ) | 26 | 46 | 193 | ||||||||||||||
Allocation for general risk |
1,782 | | | (92 | ) | 1,690 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 18,025 | $ | (349 | ) | $ | 457 | $ | (1,175 | ) | $ | 16,958 | ||||||||
|
|
|
|
|
|
|
|
|
|
The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the six month periods ending June 30, 2012 and 2011(in thousands).
Balance at December 31, 2011 |
Charge- Offs |
Recoveries | Provision (Credit) |
Balance at June 30, 2012 |
||||||||||||||||
Commercial |
$ | 2,365 | $ | (99 | ) | $ | 112 | $ | (26 | ) | $ | 2,352 | ||||||||
Commercial loans secured by real estate |
9,400 | (172 | ) | 200 | (1,050 | ) | 8,378 | |||||||||||||
Real estate- mortgage |
1,270 | (139 | ) | 29 | 46 | 1,206 | ||||||||||||||
Consumer |
174 | (134 | ) | 22 | 93 | 155 | ||||||||||||||
Allocation for general risk |
1,414 | | | (188 | ) | 1,226 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 14,623 | $ | (544 | ) | $ | 363 | $ | (1,125 | ) | $ | 13,317 | ||||||||
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
Charge- Offs |
Recoveries | Provision (Credit) |
Balance at June 30, 2011 |
||||||||||||||||
Commercial |
$ | 3,851 | $ | (942 | ) | $ | 524 | $ | 1,121 | $ | 4,554 | |||||||||
Commercial loans secured by real estate |
12,717 | (638 | ) | 66 | (2,918 | ) | 9,227 | |||||||||||||
Real estate- mortgage |
1,117 | (40 | ) | 26 | 191 | 1,294 | ||||||||||||||
Consumer |
206 | (110 | ) | 82 | 15 | 193 | ||||||||||||||
Allocation for general risk |
1,874 | | | (184 | ) | 1,690 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 19,765 | $ | (1,730 | ) | $ | 698 | $ | (1,775 | ) | $ | 16,958 | ||||||||
|
|
|
|
|
|
|
|
|
|
The credit provision for loan losses reflects the Companys sustained asset quality improvements. The provision also benefited from lower historical loss factors and a decrease in certain qualitative factors to recognize the Companys improved asset quality.
The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).
At June 30, 2012 | ||||||||||||||||||||
Commercial | Commercial Loans Secured by Real Estate |
Real Estate- Mortgage |
Consumer | Total | ||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 3,053 | $ | | $ | | $ | 3,053 | ||||||||||
Collectively evaluated for impairment |
95,444 | 354,757 | 214,110 | 17,442 | 681,753 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 95,444 | $ | 357,810 | $ | 214,110 | $ | 17,442 | $ | 684,806 | ||||||||||
|
|
|
|
|
|
|
|
|
|
13
At June 30, 2012 | ||||||||||||||||||||||||
Commercial | Commercial Loans Secured by Real Estate |
Real Estate- Mortgage |
Consumer | Allocation for General Risk |
Total | |||||||||||||||||||
Specific reserve allocation |
$ | | $ | 891 | $ | | $ | | $ | | $ | 891 | ||||||||||||
General reserve allocation |
2,352 | 7,487 | 1,206 | 155 | 1,226 | 12,426 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance for loan losses |
$ | 2,352 | $ | 8,378 | $ | 1,206 | $ | 155 | $ | 1,226 | $ | 13,317 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011 | ||||||||||||||||||||
Commercial | Commercial Loans Secured by Real Estate |
Real Estate- Mortgage |
Consumer | Total | ||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 3,870 | $ | | $ | | $ | 3,870 | ||||||||||
Collectively evaluated for impairment |
83,124 | 345,908 | 212,663 | 18,172 | 659,867 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans |
$ | 83,124 | $ | 349,778 | $ | 212,663 | $ | 18,172 | $ | 663,737 | ||||||||||
|
|
|
|
|
|
|
|
|
|
At December 31, 2011 | ||||||||||||||||||||||||
Commercial | Commercial Loans Secured by Real Estate |
Real Estate- Mortgage |
Consumer | Allocation for General Risk |
Total | |||||||||||||||||||
Specific reserve allocation |
$ | | $ | 968 | $ | | $ | | $ | | $ | 968 | ||||||||||||
General reserve allocation |
2,365 | 8,432 | 1,270 | 174 | 1,414 | 13,655 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance for loan losses |
$ | 2,365 | $ | 9,400 | $ | 1,270 | $ | 174 | $ | 1,414 | $ | 14,623 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The segments of the Companys loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The loan categories used are consistent with the internal reports evaluated by the Companys management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The overall risk profile for the commercial loan segment is driven by non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, as the majority of the commercial portfolio is centered in these types of accounts. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.
Management evaluates for possible impairment any individual loan in the commercial segment with a loan balance in excess of $100,000 that is in nonaccrual status or classified as a Troubled Debt Restructure (TDR). Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a TDR.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loans effective interest rate; (b) the loans observable market price; or (c) the fair value of the collateral less selling costs for collateral dependant loans. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need
14
and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Companys policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
The need for an updated appraisal on collateral dependent loans is determined on a case by case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Banks internal Assigned Risk Department to support the value of the property.
When reviewing an appraisal associated with an existing collateral real estate dependent transaction, the Banks internal Assigned Risk Department must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:
| the passage of time; |
| the volatility of the local market; |
| the availability of financing; |
| natural disasters; |
| the inventory of competing properties; |
| new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank; |
| changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or |
| environmental contamination. |
The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Assigned Risk Department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Banks Assigned Risk Department personnel rests with the Assigned Risk Department and not the originating account officer.
15
The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).
June 30, 2012 | ||||||||||||||||||||
Impaired Loans with Specific Allowance |
Impaired Loans with no Specific Allowance |
Total Impaired Loans | ||||||||||||||||||
Recorded Investment |
Related Allowance |
Recorded Investment |
Recorded Investment |
Unpaid Principal Balance |
||||||||||||||||
Commercial loans secured by real estate |
$ | 2,553 | $ | 891 | $ | 500 | $ | 3,053 | $ | 3,260 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$ | 2,553 | $ | 891 | $ | 500 | $ | 3,053 | $ | 3,260 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||
Impaired Loans with Specific Allowance |
Impaired Loans with no Specific Allowance |
Total Impaired Loans | ||||||||||||||||||
Recorded Investment |
Related Allowance |
Recorded Investment |
Recorded Investment |
Unpaid Principal Balance |
||||||||||||||||
Commercial loans secured by real estate |
$ | 2,836 | $ | 968 | $ | 1,034 | $ | 3,870 | $ | 4,844 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$ | 2,836 | $ | 968 | $ | 1,034 | $ | 3,870 | $ | 4,844 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Average loan balance: |
||||||||||||||||
Commercial |
$ | | $ | 1,424 | $ | 17 | $ | 2,344 | ||||||||
Commercial loans secured by real estate |
3,350 | 4,435 | 3,506 | 6,821 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Average investment in impaired loans |
$ | 3,350 | $ | 5,859 | $ | 3,523 | $ | 9,165 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest income recognized: |
||||||||||||||||
Commercial |
$ | | $ | | $ | | $ | 20 | ||||||||
Commercial loans secured by real estate |
| | | 153 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest income recognized on a cash basis on impaired loans |
$ | | $ | | $ | | $ | 173 | ||||||||
|
|
|
|
|
|
|
|
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five Pass categories are aggregated, while the Pass 6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the
16
Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Companys commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Companys internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2012 requires review of a minimum 55% of the commercial loan portfolio.
In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $1,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Companys Loan Loss Reserve Committee on a quarterly basis.
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands).
June 30, 2012 | ||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Total | ||||||||||||||||
Commercial |
$ | 95,088 | $ | 67 | $ | 289 | $ | | $ | 95,444 | ||||||||||
Commercial loans secured by real estate |
316,310 | 21,701 | 19,446 | 353 | 357,810 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 411,398 | $ | 21,768 | $ | 19,735 | $ | 353 | $ | 453,254 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Total | ||||||||||||||||
Commercial |
$ | 80,175 | $ | 2,186 | $ | 763 | $ | | $ | 83,124 | ||||||||||
Commercial loans secured by real estate |
305,066 | 28,138 | 16,244 | 330 | 349,778 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 385,241 | $ | 30,324 | $ | 17,007 | $ | 330 | $ | 432,902 | ||||||||||
|
|
|
|
|
|
|
|
|
|
It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolios (in thousands).
17
June 30, 2012 | ||||||||
Performing | Non-Performing | |||||||
Real estate- mortgage |
$ | 212,437 | $ | 1,673 | ||||
Consumer |
17,442 | | ||||||
|
|
|
|
|||||
Total |
$ | 229,879 | $ | 1,673 | ||||
|
|
|
|
December 31, 2011 | ||||||||
Performing | Non-Performing | |||||||
Real estate- mortgage |
$ | 211,458 | $ | 1,205 | ||||
Consumer |
18,172 | | ||||||
|
|
|
|
|||||
Total |
$ | 229,630 | $ | 1,205 | ||||
|
|
|
|
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).
June 30, 2012 | ||||||||||||||||||||||||||||
Current | 30-59 Days Past Due |
60-89 Days Past Due |
90 Days Past Due |
Total Past Due |
Total Loans |
90 Days Past Due and Still Accruing |
||||||||||||||||||||||
Commercial |
$ | 95,058 | $ | 386 | $ | | $ | | $ | 386 | $ | 95,444 | $ | | ||||||||||||||
Commercial loans secured by real estate |
356,850 | | | 960 | 960 | 357,810 | | |||||||||||||||||||||
Real estate- mortgage |
211,325 | 2,502 | 223 | 60 | 2,785 | 214,110 | | |||||||||||||||||||||
Consumer |
17,398 | 38 | 6 | | 44 | 17,442 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 680,631 | $ | 2,926 | $ | 229 | $ | 1,020 | $ | 4,175 | $ | 684,806 | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||||||||||
Current | 30-59 Days Past Due |
60-89 Days Past Due |
90 Days Past Due |
Total Past Due |
Total Loans |
90 Days Past Due and Still Accruing |
||||||||||||||||||||||
Commercial |
$ | 83,124 | $ | | $ | | $ | | $ | | $ | 83,124 | $ | | ||||||||||||||
Commercial loans secured by real estate |
347,671 | 650 | | 1,457 | 2,107 | 349,778 | | |||||||||||||||||||||
Real estate- mortgage |
209,060 | 2,133 | 629 | 841 | 3,603 | 212,663 | | |||||||||||||||||||||
Consumer |
18,115 | 57 | | | 57 | 18,172 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 657,970 | $ | 2,840 | $ | 629 | $ | 2,298 | $ | 5,767 | $ | 663,737 | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An allowance for loan losses (ALL) is maintained to absorb losses from the loan portfolio. The ALL is based on managements continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.
Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.
18
The Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: 1) an allowance established on specifically identified problem loans, 2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors which include delinquency, non-performing and TDR loans, loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and 3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Companys loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Companys management to establish allocations which accommodate each of the listed risk factors.
Pass rated credits are segregated from Criticized and Classified credits for the application of qualitative factors.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
9. | Non-performing Assets Including Troubled Debt Restructurings (TDR) |
The following table presents information concerning non-performing assets including TDR (in thousands, except percentages):
June 30, 2012 | December 31, 2011 | |||||||
Non-accrual loans |
||||||||
Commercial |
$ | | $ | | ||||
Commercial loans secured by real estate |
2,466 | 3,870 | ||||||
Real estate-mortgage |
1,673 | 1,205 | ||||||
|
|
|
|
|||||
Total |
4,139 | 5,075 | ||||||
|
|
|
|
|||||
Past due 90 days and still accruing |
||||||||
Real estate-mortgage |
| | ||||||
|
|
|
|
|||||
Total |
| | ||||||
|
|
|
|
|||||
Other real estate owned |
||||||||
Commercial loans secured by real estate |
697 | 20 | ||||||
Real estate-mortgage |
153 | 104 | ||||||
|
|
|
|
|||||
Total |
850 | 124 | ||||||
|
|
|
|
|||||
TDRs not in non-accrual |
88 | | ||||||
|
|
|
|
|||||
Total non-performing assets including TDR |
$ | 5,077 | $ | 5,199 | ||||
|
|
|
|
|||||
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned |
0.74 | % | 0.78 | % |
Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrowers financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Banks objective in offering a troubled debt restructure is to increase the probability of repayment of the borrowers loan.
19
To be considered a TDR, both of the following criteria must be met:
| the borrower must be experiencing financial difficulties; and |
| the Bank, for economic or legal reasons related to the borrowers financial difficulties, grants a concession to the borrower that would not otherwise be considered. |
Factors that indicate a borrower is experiencing financial difficulties include, but are not limited to:
| the borrower is currently in default on their loan(s); |
| the borrower has filed for bankruptcy; |
| the borrower has insufficient cash flows to service their loan(s); and |
| the borrower is unable to obtain refinancing from other sources at a market rate similar to rates available to a non-troubled debtor. |
Factors that indicate that a concession has been granted include, but are not limited to:
| the borrower is granted an interest rate reduction to a level below market rates for debt with similar risk; or |
| the borrower is granted a material maturity date extension, or extension of the amortization plan to provide payment relief. For purposes of this policy, a material maturity date extension will generally include any maturity date extension, or the aggregate of multiple consecutive maturity date extensions, that exceed 120 days. A restructuring that results in an insignificant delay in payment, i.e. 120 days or less, is not necessarily a TDR. Insignificant payment delays occur when the amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value, and will result in an insignificant shortfall in the originally scheduled contractual amount due, and/or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the original maturity or the original amortization. |
The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the modification. No single factor is determinative of whether a restructuring is a TDR. An overall general decline in the economy or some deterioration in a borrowers financial condition does not automatically mean that the borrower is experiencing financial difficulty. Accordingly, determination of whether a modification is a TDR involves a large degree of judgment.
Any loan modification where the borrowers aggregate exposure is at least $250,000 and where the loan currently maintains a criticized or classified risk rating, i.e. Special Mention, Substandard or Doubtful, or where the loan will be assigned a criticized or classified rating after the modification is evaluated to determine the need for TDR classification.
The following table details the TDRs at June 30, 2012 (dollars in thousands).
Loans in accrual status |
# of Loans | Current Balance | Concession Granted | |||||||
Commercial loan secured by real estate |
1 | $ | 88 | Extension of maturity date |
Loans in non-accrual status |
# of Loans | Current Balance | Concession Granted | |||||||
Commercial loan secured by real estate |
2 | $ | 1,504 | Extension of maturity date |
20
The following table details the TDRs at December 31, 2011 (dollars in thousands).
Loans in non-accrual status |
# of Loans | Current Balance | Concession Granted | |||||||
Commercial loan secured by real estate |
5 | $ | 2,870 | Extension of maturity date |
In all instances where loans have been modified in troubled debt restructurings the pre- and post-modified balances are the same.
Once a loan is classified as a TDR, this classification will remain until documented improvement in the financial position of the account supports confidence that all principal and interest will be paid according to terms. Additionally, the customer must have re-established a track record of timely payments according to the restructured contract terms for a minimum of six consecutive months prior to consideration for removing the loan from TDR status. However, a loan will continue to be on non-accrual status until, consistent with our policy, the borrower has made a minimum of six consecutive payments in accordance with the terms of the loan.
During the first six months of 2012, the Company had one restructured commercial real-estate loan, that was transferred during the past 12 months into non-accrual status, that subsequently defaulted, and was sold to an independent party for $275,000. The Company charged down the loan by $32,000 to facilitate the sale. A second TDR loan with a balance of $398,000 was also sold to an independent party in the second quarter of 2012. Overall, the Company realized a net-charge-off of $305,000 on this problem credit when compared to its original balance of $703,000. The Company also took ownership of another TDR commercial real-estate property with a balance of approximately $600,000 (after a previous $386,000 charge-down in 2011) and moved the property into other real estate owned in the second quarter of 2012.
The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above. Other real estate owned is recorded at fair value minus estimated costs to sell.
The following table sets forth, for the periods indicated, (1) the gross interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period, (2) the amount of interest income actually recorded on such loans, and (3) the net reduction in interest income attributable to such loans (in thousands).
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest income due in accordance with original terms |
$ | 55 | $ | 94 | $ | 118 | $ | 229 | ||||||||
Interest income recorded |
| | | (173 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net reduction in interest income |
$ | 55 | $ | 94 | $ | 118 | $ | 56 | ||||||||
|
|
|
|
|
|
|
|
21
10. | Federal Home Loan Bank Borrowings |
Total Federal Home Loan Bank (FHLB) borrowings and advances consist of the following (in thousands, except percentages):
At June 30, 2012 | ||||||||||
Type |
Maturing | Amount | Weighted Average Rate |
|||||||
Open Repo Plus |
Overnight | $ | | | % | |||||
Advances |
2012 | 3,000 | 1.97 | |||||||
|
|
|||||||||
Total advances |
3,000 | 1.97 | ||||||||
|
|
|||||||||
Total FHLB borrowings |
$ | 3,000 | 1.97 | % | ||||||
|
|
At December 31, 2011 | ||||||||||
Type |
Maturing | Amount | Weighted Average Rate |
|||||||
Open Repo Plus |
Overnight | $ | 15,765 | 0.34 | % | |||||
Advances |
2012 | 6,000 | 1.30 | |||||||
|
|
|||||||||
Total advances |
6,000 | 1.30 | ||||||||
|
|
|||||||||
Total FHLB borrowings |
$ | 21,765 | 0.60 | % | ||||||
|
|
The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance.
11. | Preferred Stock |
SBLF:
On August 11, 2011, pursuant to the Small Business Lending Fund (SBLF), the Company issued and sold to the US Treasury 21,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E Preferred Stock) for the aggregate proceeds of $21 million. The SBLF is a voluntary program sponsored by the US Treasury that encourages small business lending by providing capital to qualified community banks at favorable rates. The interest rate on the Series E Preferred Stock had been initially set at 5% per annum and may be decreased to as low as 1% per annum if growth thresholds are met for qualified outstanding small business loans. The Company used the proceeds from the Series E Preferred Stock issued to the US Treasury to repurchase all 21,000 shares of its outstanding preferred shares previously issued to the US Treasury under the TARP Capital Purchase Program.
The Series E Preferred Stock has an aggregate liquidation preference of approximately $21 million and qualifies as Tier 1 Capital for regulatory purposes. The terms of the Series E Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The dividend rate, as a percentage of the liquidation amount, may fluctuate while the Series E Preferred Stock is outstanding based upon changes in the level of qualified small business lending (QSBL) by the Bank from its average level of QSBL at each of the four quarter ends leading up to June 30, 2010 (the Baseline) as follows:
22
Dividend Period Annualized |
||||||
Beginning |
Ending |
Annualized Dividend Rate |
||||
August 11, 2011 |
December 31, 2011 | 5.0 | % | |||
January 1, 2012 |
December 31, 2013 | 1.0% to 5.0 | % | |||
January 1, 2014 |
February 7, 2016 | 1.0% to 7.0 | %(1) | |||
February 8, 2016 |
Redemption | 9.0 | %(2) |
(1) | Between January 1, 2014 and February 7, 2016, the dividend rate will be fixed at a rate in such range based upon the level of percentage change in QSBL between September 30, 2013 and the Baseline. |
(2) | Beginning on February 8, 2016, the dividend rate will be fixed at nine percent (9%) per annum. |
In addition to the applicable dividend rates described above, beginning on January 1, 2014 and on all dividend payment dates thereafter ending on April 1, 2016, if we fail to increase our level of QSBL compared to the Baseline, we will be required to pay a quarterly lending incentive fee of 0.5% of the liquidation value. As of June 30, 2012, the Company had increased its QSBL to a level that permits the dividend rate to drop to 1% beginning October 1, 2012.
As long as shares of Series E Preferred Stock remain outstanding, we may not pay dividends to our common shareholders (nor may we repurchase or redeem any shares of our common stock) during any quarter in which we fail to declare and pay dividends on the Series E Preferred Stock and for the three successive quarters following such failure. In addition, under the terms of the Series E Preferred Stock, we may only declare and pay dividends on our common stock (or repurchase shares of our common stock), if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least ninety percent (90%) of Tier 1 capital as of June 30, 2011, excluding any charge-offs and redemptions of the Series E Preferred Stock (the Tier 1 Dividend Threshold). The Tier 1 Dividend Threshold is subject to reduction, beginning January 1, 2014, based upon the extent by which, if at all, the QSBL at September 30, 2013 has increased over the Baseline.
We may redeem the Series E Preferred Stock at any time at our option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, subject to the approval of our federal banking regulator.
12. | Regulatory Capital |
The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Companys assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements.
23
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of June 30, 2012, the Federal Reserve categorized the Company as Well Capitalized under the regulatory framework for prompt corrective action. The Company believes that no conditions or events have occurred that would change this conclusion. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Companys tangible common equity ratio was 7.84% at June 30, 2012 (in thousands, except ratios).
At June 30, 2012 | ||||||||||||||||||||||||
Actual | For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 120,616 | 16.41 | % | $ | 58,813 | 8.00 | % | $ | 73,516 | 10.00 | % | ||||||||||||
AmeriServ Financial Bank |
102,812 | 14.09 | 58,378 | 8.00 | 72,973 | 10.00 | ||||||||||||||||||
Tier 1 Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
111,366 | 15.15 | 29,406 | 4.00 | 44,109 | 6.00 | ||||||||||||||||||
AmeriServ Financial Bank |
93,629 | 12.83 | 29,189 | 4.00 | 43,784 | 6.00 | ||||||||||||||||||
Tier 1 Capital (To Average Assets) |
||||||||||||||||||||||||
Consolidated |
111,366 | 11.60 | 38,400 | 4.00 | 48,000 | 5.00 | ||||||||||||||||||
AmeriServ Financial Bank |
93,629 | 9.96 | 37,596 | 4.00 | 46,996 | 5.00 |
At December 31, 2011 | ||||||||||||||||||||||||
Actual | For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Amount | Ratio | Amount | |||||||||||||||||||
Total Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 120,315 | 17.60 | % | $ | 54,702 | 8.00 | % | $ | 68,377 | 10.00 | % | ||||||||||||
AmeriServ Financial Bank |
101,406 | 14.96 | 54,231 | 8.00 | 67,789 | 10.00 | ||||||||||||||||||
Tier 1 Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
111,683 | 16.33 | 27,351 | 4.00 | 41,026 | 6.00 | ||||||||||||||||||
AmeriServ Financial Bank |
92,847 | 13.70 | 27,116 | 4.00 | 40,673 | 6.00 | ||||||||||||||||||
Tier 1 Capital (To Average Assets) |
||||||||||||||||||||||||
Consolidated |
111,683 | 11.66 | 38,317 | 4.00 | 47,896 | 5.00 | ||||||||||||||||||
AmeriServ Financial Bank |
92,847 | 9.90 | 37,498 | 4.00 | 46,872 | 5.00 |
13. | Segment Results |
The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. The Companys major business units include retail banking, commercial lending, trust, and investment/parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.
24
Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Commercial banking to businesses includes commercial loans, and commercial real-estate loans. The trust segment contains our wealth management businesses which includes the Trust Company, West Chester Capital Advisors, our registered investment advisory firm and financial services. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on guaranteed junior subordinated deferrable interest debentures, and centralized interest rate risk management. Inter-segment revenues were not material.
The contribution of the major business segments to the Consolidated Results of Operations for the three and six months ended June 30, 2012 and 2011 were as follows (in thousands):
Three months ended June 30, 2012 |
Six months ended June 30, 2012 |
June 30, 2012 |
||||||||||||||||||
Total revenue | Net income (loss) | Total revenue | Net income (loss) | Total assets | ||||||||||||||||
Retail banking |
$ | 6,697 | $ | 786 | $ | 13,400 | $ | 1,627 | $ | 336,726 | ||||||||||
Commercial banking |
3,650 | 1,301 | 7,244 | 2,547 | 464,209 | |||||||||||||||
Trust |
1,975 | 246 | 3,952 | 498 | 4,376 | |||||||||||||||
Investment/Parent |
(668 | ) | (901 | ) | (1,210 | ) | (1,675 | ) | 191,791 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 11,654 | $ | 1,432 | $ | 23,386 | $ | 2,997 | $ | 997,102 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2011 |
Six months ended June 30, 2011 |
June 30, 2011 |
||||||||||||||||||
Total revenue | Net income (loss) | Total revenue | Net income (loss) | Total assets | ||||||||||||||||
Retail banking |
$ | 6,438 | $ | 405 | $ | 12,737 | $ | 592 | $ | 315,310 | ||||||||||
Commercial banking |
3,641 | 1,992 | 6,989 | 3,550 | 436,561 | |||||||||||||||
Trust |
1,905 | 262 | 3,724 | 445 | 4,252 | |||||||||||||||
Investment/Parent |
(444 | ) | (721 | ) | (839 | ) | (1,386 | ) | 198,770 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 11,540 | $ | 1,938 | $ | 22,611 | $ | 3,201 | $ | 954,893 | ||||||||||
|
|
|
|
|
|
|
|
|
|
14. | Commitments and Contingent Liabilities |
The Company had various outstanding commitments to extend credit approximating $144.0 million and standby letters of credit of $11.0 million as of June 30, 2012. The Companys exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.
Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Companys consolidated financial position, results of operation or cash flows.
25
15. | Pension Benefits |
The Company has a noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year. The participants shall have a vested interest in their accrued benefit after five full years of service. The benefits of the plan are based upon the employees years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. Plan assets are primarily debt securities (including US Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plans assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three and six months ended June 30, 2012 and 2011 were as follows (in thousands):
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Components of net periodic benefit cost |
||||||||||||||||
Service cost |
$ | 373 | $ | 303 | $ | 746 | $ | 606 | ||||||||
Interest cost |
299 | 301 | 598 | 602 | ||||||||||||
Expected return on plan assets |
(406 | ) | (393 | ) | (812 | ) | (786 | ) | ||||||||
Amortization of prior year service cost |
(5 | ) | 2 | (10 | ) | 4 | ||||||||||
Amortization of transition asset |
(4 | ) | (4 | ) | (8 | ) | (8 | ) | ||||||||
Recognized net actuarial loss |
262 | 203 | 524 | 406 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic pension cost |
$ | 519 | $ | 412 | $ | 1,038 | $ | 824 | ||||||||
|
|
|
|
|
|
|
|
16. | Disclosures About Fair Value Measurements |
The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined within this hierarchy are as follows:
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things.
26
The fair value of the swap asset and liability is based on an external derivative valuation model using data inputs as of the valuation date and classified Level 2.
The following tables present the assets reported on the consolidated balance sheets at their fair value as of June 30, 2012 and December 31, 2011, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Assets and Liability Measured on a Recurring Basis
Assets and liability measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements at June 30, 2012 Using | ||||||||||||||
Total | (Level 1) | (Level 2) |
(Level 3) | |||||||||||
U.S. Agency securities |
$ | 7,317 | $ | | $7,317 | $ | | |||||||
U.S. Agency mortgage-backed securities |
163,635 | | 163,635 | | ||||||||||
Corporate bonds |
5,944 | | 5,944 | | ||||||||||
Fair value of swap asset |
266 | | 266 | | ||||||||||
Fair value of swap liability |
266 | | 266 | |
Fair Value Measurements at December 31, 2011 Using | ||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
U.S. Agency securities |
$ | 10,709 | $ | | $ | 10,709 | $ | | ||||||||
U.S. Agency mortgage-backed securities |
172,214 | | 172,214 | | ||||||||||||
Fair value of swap asset |
346 | | 346 | | ||||||||||||
Fair value of swap liability |
346 | | 346 | |
Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At June 30, 2012, impaired loans with a carrying value of $3.1 million were reduced by a specific valuation allowance totaling $891,000 resulting in a net fair value of $2.2 million. At December 31, 2011, impaired loans with a carrying value of $3.9 million were reduced by a specific valuation allowance totaling $968,000 resulting in a net fair value of $2.9 million.
Other real estate owned (OREO) is measured at fair value based on appraisals, less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.
Assets Measured on a Non-recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):
27
Fair Value Measurements at June 30, 2012 Using | ||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans |
$ | 2,162 | $ | | $ | | $ | 2,162 | ||||||||
Other real estate owned |
850 | | | 850 | ||||||||||||
Fair Value Measurements at December 31, 2011 Using | ||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans |
$ | 2,902 | $ | | $ | | $ | 2,902 | ||||||||
Other real estate owned |
124 | | | 124 |
June 30, 2012 | Quantitative Information About Level 3 Fair Value Measurements | |||||||||
Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range | |||||||
Impaired loans |
$ | 2,162 | Appraisal of collateral(1) |
Appraisal adjustments(2) Liquidation expenses(2) |
1% to -35% 1% to -15% | |||||
Other real estate owned |
850 | Appraisal of collateral (1), (3) |
1% to -20% |
(1) | Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable. |
(2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. |
(3) | Includes qualitative adjustments by management and estimated liquidation expenses. |
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Companys financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.
Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded book balances at June 30, 2012 and December 31, 2011, were as follows (in thousands):
28
June 30, 2012 | ||||||||||||||||||||
Carrying Value |
Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
FINANCIAL ASSETS: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 33,975 | $ | 33,975 | $ | 33,975 | $ | | $ | | ||||||||||
Investment securities |
191,791 | 192,353 | | 188,429 | 3,924 | |||||||||||||||
Regulatory stock |
7,442 | 7,442 | 7,442 | | | |||||||||||||||
Loans held for sale |
6,009 | 6,099 | 6,099 | | | |||||||||||||||
Loans, net of allowance for loan loss and unearned income |
671,489 | 680,394 | | | 680,394 | |||||||||||||||
Accrued income receivable |
3,159 | 3,159 | 3,159 | | | |||||||||||||||
Bank owned life insurance |
35,779 | 35,779 | 35,779 | | | |||||||||||||||
Fair value swap asset |
266 | 266 | | 266 | | |||||||||||||||
FINANCIAL LIABILITIES: |
||||||||||||||||||||
Deposits with no stated maturities |
$ | 517,930 | $ | 517,930 | $ | 517,930 | $ | | $ | | ||||||||||
Deposits with stated maturities |
336,087 | 341,718 | | | 341,718 | |||||||||||||||
All other borrowings |
16,085 | 21,035 | | | 21,035 | |||||||||||||||
Accrued interest payable |
2,031 | 2,031 | 2,031 | | | |||||||||||||||
Fair value swap liability |
266 | 266 | | 266 | |
December 31, 2011 | ||||||||
Carrying Value |
Fair Value | |||||||
FINANCIAL ASSETS: |
||||||||
Cash and cash equivalents |
$ | 34,783 | $ | 34,783 | ||||
Investment securities |
195,203 | 195,837 | ||||||
Regulatory stock |
8,016 | 8,016 | ||||||
Loans held for sale |
7,110 | 7,195 | ||||||
Loans, net of allowance for loan loss and unearned income |
649,114 | 655,357 | ||||||
Accrued income receivable |
3,216 | 3,216 | ||||||
Bank owned life insurance |
35,351 | 35,351 | ||||||
Fair value swap asset |
346 | 346 | ||||||
FINANCIAL LIABILITIES: |
||||||||
Deposits with no stated maturities |
$ | 482,859 | $ | 482,859 | ||||
Deposits with stated maturities |
333,561 | 338,683 | ||||||
Short-term borrowings |
15,765 | 15,765 | ||||||
All other borrowings |
19,085 | 23,606 | ||||||
Accrued interest payable |
2,523 | 2,523 | ||||||
Fair value swap liability |
346 | 346 |
The fair value of cash and cash equivalents, regulatory stock, accrued income receivable, short-term borrowings, and accrued interest payable are equal to the current carrying value.
The fair value of investment securities is equal to the available quoted market price for similar securities. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things. The Level 3 security is valued by discounted cash flows using the US Treasury rate for the remaining term of the security.
Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment with an investor. All loans in the held for sale account conform to Fannie Mae underwriting guidelines, with the specific intent of the loan being purchased by an investor at the predetermined rate structure. Loans in the held for sale account have specific delivery dates that must be executed to protect the pricing commitment (typically a 30, 45, or 60 day lock period).
29
The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.
The fair value of bank owned life insurance is based upon the cash surrender value of the underlying policies and matches the book value.
Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.
The fair value of all other borrowings is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.
The fair values of the swaps used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Companys remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (M.D.& A.)
.2012 SECOND QUARTER SUMMARY OVERVIEW . AmeriServ Financial, Inc. reported net income of $1,432,000 or $0.06 per diluted common share for the second quarter of 2012. This level of net income reflected a reduction of $506,000 or $0.02 per diluted common share from the second quarter of 2011. This decline was the result of a lower negative provision from AmeriServs still strong loan loss reserve. But on an operational basis, it was another good quarter. The key elements of our business lines continue to be positive as we execute our 2012-2015 Strategic Plan.
During the second quarter we repurchased 1,183,000 common shares at a price of just $2.52, contributing to an increase in the tangible book value of every remaining share from $3.84 to $4.00. When combined with the previous share repurchases in 2011 and the first quarter of 2012, the gain in the tangible book value of every remaining common share has increased by 32 cents or 8.7% since June 30, 2011. We believe this program, along with the improved performance of the Company, are the primary reasons for the 44.6% increase in the market price of AmeriServs common shares over the past 12 months.
In spite of the continuation of a lackluster economy, the Company increased its net loans for the
30
fifth consecutive quarter. The $19.5 million increase in the second quarter of 2012 is reminiscent of the pre-recessionary years of 2007 and 2008. This loan growth in such a lackluster economy is a real tribute to the hard working AmeriServ Commercial Relationship Officers. These gains result from their relentless business development efforts throughout the entire region served by AmeriServ, including from our new loan production offices.
Concurrent with this net loan growth, the deposit base of the Company has also grown. The Company recorded a record level of deposits on the last day of the second quarter with a gain of $37 million since January 1, 2012. These gains, which began in 2011, could reflect a continued flight to quality caused by the gloomy economic forecasts of the media. We are very pleased that AmeriServ is viewed as a safe repository for funds by our customers.
It has been our pledge to pursue a careful containment of risk during these volatile times. As evidence of this, at the end of the second quarter
| AmeriServ capital well exceeded every regulatory guideline |
| AmeriServ liquidity was so deep during the quarter that it has become a frequent seller of overnight funds in the open market |
| AmeriServ asset quality remained strong and was buttressed by loan loss reserve coverage of 315% of non-performing loans, irrespective of the value of pledged collateral. |
We are especially pleased with our residential mortgage lending team. Thus far in 2012, AmeriServ has originated $52 million of residential mortgage loans to families throughout the region. This represents a 52.6% increase over the origination volumes in the first 6 months of 2011. As dictated by our policies, the majority of these new mortgages conform to governmental standards and are sold immediately into the governmental secondary market.
The AmeriServ Trust and Financial Services Company concluded the second quarter of 2012 more than 25% ahead of the first 6 months of 2011 in reported net income. This reflects a growth of Trust revenues of over 7% while expenses grew by 4%. This subsidiary continues to post a dramatic recovery from the financial crisis which has done such harm to so many investors.
It is a fact that the road ahead is not without challenges. Unemployment in the region is still too high, and growth in the economy too hard to find. We worry about the disturbing headlines concerning the missteps of the Too Big to Fail megabanks. These tales have become a continuing challenge for the regulatory agencies both in the U.S. and abroad. There is also the worrisome issue of the debt crisis in Europe, and the confusion surrounding this nations fiscal policy. We do express our concern on these issues to our regulators, but we realize that it is our responsibility to always remember that the safety of this franchise is our responsibility and no one elses.
It is sometimes interesting to look back at the recent history of AmeriServ. It was necessary in 2004 and 2005 to restructure a balance sheet which contained too much risk for a company the size of AmeriServ. But now, since 2006, AmeriServ has reported positive earnings in 5 of the last 6 years. In 2009, we experienced a serious loss, but this was the price of building the necessary balance sheet strength while the depth of the recession threatened the entire financial services industry. However, as of the close of the second quarter 2012, it is apparent that AmeriServ is more than just a survivor. The challenge now is to continue to improve revenue and earnings while always carefully managing risk. We all recognize that banking is a risk business, but it is our responsibility to receive payment for bearing the risks which we are willing to accept and to refuse to accept risks that we believe could harm the franchise.
31
Previously, we commented about the U.S. Treasury designating AmeriServ as a participant in its Small Business Lending Fund. The Treasury provided $21 million in capital to AmeriServ in return for issuance of an equal amount of preferred stock at an annual interest rate of just 5%. However, the Treasury also promised that if AmeriServ increased its loans to small businesses the Treasury would reduce that 5% interest rate as a reward. We are pleased to announce that based on our small business loan growth since the program began in August 2011, AmeriServ is scheduled to receive the maximum interest rate reduction of 4% effective in the 4th quarter of 2012. We intend to work hard to continue to grow these small business loans and keep the dividend on this $21 million of Treasury Funds at the SBLF program minimum of 1%.
While the road ahead is not clear, we believe that AmeriServ has not just weathered the storm but is poised to continue its improvement. It does appear that the turnaround is over and AmeriServ is now ready to be measured against similar sized community banks in the industry. AmeriServ is not perfect, but we believe our company grows stronger every day.
THREE MONTHS ENDED JUNE 30, 2012 VS. THREE MONTHS ENDED JUNE 30, 2011
.....PERFORMANCE OVERVIEW.....The following table summarizes some of the Companys key performance indicators (in thousands, except per share and ratios).
Three months ended June 30, 2012 |
Three months ended June 30, 2011 |
|||||||
Net income |
$ | 1,432 | $ | 1,938 | ||||
Diluted earnings per share |
0.06 | 0.08 | ||||||
Return on average assets (annualized) |
0.59 | % | 0.81 | % | ||||
Return on average equity (annualized) |
5.19 | % | 7.11 | % |
The Company reported its ninth consecutive profitable quarter in the second quarter of 2012 by reporting net income of $1,432,000 or $0.06 per diluted common share. This represents a decrease of $506,000, or $0.02 per diluted common share from the second quarter 2011. The improvements in asset quality continued to result in a credit provision for loan losses in the second quarter of 2012, but at a lesser level than in the second quarter of 2011. Second quarter 2012 net income was also negatively impacted by reduced net interest income and a modest increase in non-interest expense. These negative items were partially offset by higher non-interest income and reduced income tax expense.
Diluted earnings per share in the second quarter of 2012 were negatively impacted by the preferred stock dividend related to the US Treasury SBLF program which amounted to $262,000 and reduced the amount of net income available to common shareholders. However, during the second quarter of 2012, the Company did experience strong loan growth in loan categories that qualify for the SBLF. As a result of this loan growth, the dividend rate that AmeriServ currently pays on the SBLF preferred stock will drop from 5% to 1%the lowest rate available under the SBLF program. This lower preferred dividend rate will increase quarterly net income available to common shareholders by $210,000 beginning in the fourth quarter of 2012.
.....NET INTEREST INCOME AND MARGIN.....The Companys 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 Companys earnings, and
32
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 Companys net interest income performance for the second quarter of 2012 to the second quarter of 2011 (in thousands, except percentages):
Three months ended June 30, 2012 |
Three months ended June 30, 2011 |
$ Change | % Change | |||||||||||||
Interest income |
$ | 9,885 | $ | 10,530 | $ | (645 | ) | (6.1 | )% | |||||||
Interest expense |
1,964 | 2,444 | (480 | ) | (19.6 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Net interest income |
$ | 7,921 | $ | 8,086 | $ | (165 | ) | (2.0 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Net interest margin |
3.59 | % | 3.71 | % | (0.12 | ) | N/M |
N/Mnot meaningful
The Companys net interest income in the second quarter of 2012 decreased by $165,000, or 2.0%, when compared to the second quarter of 2011. The second quarter 2012 net interest margin of 3.59% was 12 basis point lower than the 3.71% margin for last years second quarter. The decreased net interest income and net interest margin in 2012 reflects the challenges of a flatter yield curve which has caused interest revenue to decrease to greater extent than interest expense. Also, the second quarter 2012 net interest margin was negatively impacted by a build-up in short-term liquidity as the Company positioned its balance sheet for strong loan fundings that occurred late in the quarter. Specifically, total loans outstanding have increased for five consecutive quarters and now are $34.0 million, or 5.2%, higher than they were at June 30, 2011. This loan growth reflects the successful results of the Companys more intensive sales calling efforts with an emphasis on generating commercial loans and owner occupied commercial real estate loans which qualify as SBLF loans, particularly through its new loan production offices. Strong commercial loan pipelines suggest that the Company should be able to continue to grow the loan portfolio during the second half of 2012.
Despite this growth in loans, total interest revenue dropped by $645,000 between years and reflects the lower interest rate environment and flatter yield curve. Interest revenue has also been negatively impacted by increased premium amortization on mortgage backed securities due to faster mortgage prepayment speeds. However, careful management of funding costs has allowed the Company to mitigate a significant portion of this drop in interest revenue during the past year. Specifically, interest expense in the second quarter of 2012 declined by $480,000 from the same prior year quarter due to the Companys proactive efforts to reduce deposit and borrowing costs. Even with this reduction in deposit costs, the Company still experienced solid growth in deposits which increased by $44 million or 5.4% over the past 12 months.
The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended June 30, 2012 and June 30, 2011 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 Companys 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 Companys 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.
33
Three months ended June 30 (In thousands, except percentages)
2012 | 2011 | |||||||||||||||||||||||
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
|||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Loans and loans held for sale, net of unearned income |
$ | 669,307 | $ | 8,558 | 5.08 | % | $ | 651,036 | $ | 8,812 | 5.38 | % | ||||||||||||
Interest bearing deposits |
7,359 | 5 | 0.27 | 1,701 | | 0.01 | ||||||||||||||||||
Short-term investment in money market funds |
13,775 | 7 | 0.20 | 3,243 | 2 | 0.28 | ||||||||||||||||||
Federal funds sold |
| | | 9,173 | 3 | 0.10 | ||||||||||||||||||
Investment securities AFS |
176,258 | 1,210 | 2.75 | 199,010 | 1,617 | 3.25 | ||||||||||||||||||
Investment securities HTM |
13,676 | 111 | 3.25 | 8,965 | 104 | 4.64 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total investment securities |
189,934 | 1,321 | 2.78 | 207,975 | 1,721 | 3.31 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest earning assets/interest income |
880,375 | 9,891 | 4.49 | 873,128 | 10,538 | 4.84 | ||||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
16,072 | 15,012 | ||||||||||||||||||||||
Premises and equipment |
10,928 | 10,494 | ||||||||||||||||||||||
Other assets |
81,557 | 79,008 | ||||||||||||||||||||||
Allowance for loan losses |
(13,839 | ) | (18,061 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
TOTAL ASSETS |
$ | 975,093 | $ | 959,581 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Interest bearing deposits: |
||||||||||||||||||||||||
Interest bearing demand |
$ | 59,441 | $ | 28 | 0.19 | % | $ | 57,237 | $ | 31 | 0.21 | % | ||||||||||||
Savings |
85,406 | 50 | 0.24 | 81,898 | 63 | 0.31 | ||||||||||||||||||
Money markets |
206,443 | 225 | 0.44 | 192,072 | 271 | 0.57 | ||||||||||||||||||
Other time |
334,128 | 1,365 | 1.64 | 351,153 | 1,741 | 1.99 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest bearing deposits |
685,418 | 1,668 | 0.98 | 682,360 | 2,106 | 1.24 | ||||||||||||||||||
Short-term borrowings: |
||||||||||||||||||||||||
Other short-term borrowings |
440 | | 0.25 | 869 | 1 | 0.64 | ||||||||||||||||||
Advances from Federal Home Loan Bank |
4,140 | 16 | 1.59 | 9,729 | 57 | 2.29 | ||||||||||||||||||
Guaranteed junior subordinated deferrable interest debentures |
13,085 | 280 | 8.57 | 13,085 | 280 | 8.57 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest bearing liabilities/interest expense |
703,083 | 1,964 | 1.12 | 706,043 | 2,444 | 1.39 | ||||||||||||||||||
Non-interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
145,738 | 132,578 | ||||||||||||||||||||||
Other liabilities |
15,375 | 11,583 | ||||||||||||||||||||||
Shareholders equity |
110,897 | 109,377 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 975,093 | $ | 959,581 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest rate spread |
3.37 | 3.45 | ||||||||||||||||||||||
Net interest income/ Net interest margin |
7,927 | 3.59 | % | 8,094 | 3.71 | % | ||||||||||||||||||
Tax-equivalent adjustment |
(6 | ) | (8 | ) | ||||||||||||||||||||
|
|
|
|
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Net Interest Income |
$ | 7,921 | $ | 8,086 | ||||||||||||||||||||
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.PROVISION FOR LOAN LOSSES..... Sustained improvements in asset quality evidenced by low levels of non-performing assets, net charge-offs, and classified loans allowed the Company to again reverse a portion of the allowance for loan losses into earnings in the second quarter of 2012 while still maintaining strong coverage ratios. At June 30, 2012, non-performing assets totaled $5.1 million or 0.74% of total loans. This represents the fourth consecutive quarter where non-performing assets have been near the $5 million level. Criticized and classified loans also
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dropped by $12 million or 21.3% during the past twelve months. Actual credit losses realized through net charge-offs have also remained low in 2012 with the Company even experiencing net loan recoveries of $39,000 in the second quarter of 2012 which was comparable with the net recoveries of $108,000 collected in the 2011 second quarter. As a result of this sustained asset quality improvement, the Company recorded a negative provision for loan losses of $500,000 in the second quarter of 2012 compared to a credit provision of $1,175,000 in the second quarter of 2011. When determining the provision for loan losses, the Company considers a number of factors some of which include periodic credit reviews, non-performing asset, 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 315% coverage of non-performing loans at June 30, 2012, compared to 288% coverage of non-performing loans at December 31, 2011.
.....NON-INTEREST INCOME..... Non-interest income for the second quarter of 2012 totaled $3.7 million and increased $279,000, or 8.1%, from the second quarter 2011 performance. Factors contributing to this higher level of non-interest income in 2012 included:
| a $96,000 increase in gains realized on residential mortgage loan sales into the secondary market due to increased mortgage loan production in the second quarter of 2012. The lower long term interest rate environment, resulting from the Federal Reserves Operation Twist policies, has contributed to increased mortgage purchase and refinance activity in 2012. |
| a $219,000 increase in other income again reflecting higher revenue from residential mortgage banking activities such as underwriting and documentation preparation fees. Also, an $83,000 increase in revenue from financial services (annuity and mutual funds sales) was another item contributing to the higher level of other income in the second quarter of 2012. |
.....NON-INTEREST EXPENSE..... Non-interest expense for the second quarter of 2012 totaled $10.1 million and increased by $190,000, or 1.9%, from the prior years second quarter. Factors contributing to the higher non-interest expense in 2012 included:
| a $402,000 increase in salaries and employee benefits expense due to higher salaries expense, incentive compensation and pension expense in the second quarter of 2012. The 2012 personnel expenses also reflect the staffing costs associated with new loan production offices in Altoona and Harrisburg, Pennsylvania, and Hagerstown, Maryland. |
| a $346,000 decrease in FDIC deposit insurance expense due to a change in the calculation methodology which took effect in the second half of 2011 and the Companys improved risk profile which is evidenced by better asset quality and increased profitability. |
| an $82,000 increase in other expense due to an increase in the reserve for unfunded loan commitments as a result of increased commercial loan origination activity in the second quarter of 2012. |
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SIX MONTHS ENDED JUNE 30, 2012 VS. SIX MONTHS ENDED JUNE 30, 2011
.....PERFORMANCE OVERVIEW..... The following table summarizes some of the Companys key performance indicators (in thousands, except per share and ratios).
Six months ended June 30, 2012 |
Six months ended June 30, 2011 |
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Net income |
$ | 2,997 | $ | 3,201 | ||||
Diluted earnings per share |
0.12 | 0.12 | ||||||
Return on average assets (annualized) |
0.62 | % | 0.67 | % | ||||
Return on average equity (annualized) |
5.40 | % | 5.96 | % |
For the six month period ended June 30, 2012, the Company reported net income of $2,997,000 or $0.12 per diluted common share. Net income for the 2012 six month period was down by $204,000 or 6.4% while diluted earnings per share did not change due to the success of the Companys common stock repurchase program. The improvements in asset quality continued to result in a credit provision for loan losses in the first half of 2012, but at a lesser level than in the first half of 2011. The Companys 2012 net income was also negatively impacted by a modest reduction in net interest income and a controlled 1.9% increase in non-interest expense. These negative items were partially offset by sharply higher non-interest income and reduced income tax expense in the first half of 2012.
.....NET INTEREST INCOME AND MARGIN..... The following table compares the Companys net interest income performance for the first half of 2012 to the first half of 2011 (in thousands, except percentages):
Six months ended June 30, 2012 |
Six months ended June 30, 2011 |
$ Change | % Change | |||||||||||||
Interest income |
$ | 20,009 | $ | 21,126 | $ | (1,117 | ) | (5.3 | )% | |||||||
Interest expense |
4,030 | 5,074 | (1,044 | ) | (20.6 | ) | ||||||||||
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Net interest income |
$ | 15,979 | $ | 16,052 | $ | (73 | ) | (0.5 | ) | |||||||
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Net interest margin |
3.64 | % | 3.71 | % | (0.07 | ) | N/M |
N/Mnot meaningful
The Companys net interest income in the first six months of 2012 decreased modestly by $73,000 or 0.5%, when compared to the first six months of 2011. The first half 2012 net interest margin of 3.64% was down seven basis points when compared to the 3.71% net interest margin for last years first six months. The decreased net interest income and net interest margin in 2012 reflects the challenges of a lower interest rate environment and flatter yield curve which has caused interest revenue to decrease to greater extent than interest expense. The Company expects this net interest margin pressure to persist in the second half of 2012.
.....COMPONENT CHANGES IN NET INTEREST INCOME. Regarding the separate components of net interest income, the Companys total interest income for the first six months of 2012 decreased by $1.1 million or 5.3% when compared to the same 2011 period. This decrease was due to a 32 basis point decline in the earning asset yield to 4.57%. Within the earning asset base, the yield on the total loan portfolio decreased by 29 basis points to 5.15% while the yield on total investment securities dropped by 44 basis points to 2.82%. In the current interest rate environment, new investment securities and loans that are being booked typically have yields that are below the rate on the maturing instruments that they are replacing. Despite a $12 million or 1.8% increase in total average loans, total loan interest revenue dropped by $606,000 between years and reflects the impact of this lower interest rate environment. Investment securities interest revenue has also been negatively impacted by increased premium amortization on mortgage backed securities due to faster mortgage prepayment speeds.
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The Companys total interest expense for the first six months of 2012 decreased by $1.0 million or 20.6% when compared to the same 2011 period. This decrease in interest expense was due to a lower cost of funds as the cost of interest bearing liabilities declined by 29 basis points to 1.16%. Managements decision to further reduce interest rates paid on all deposit categories has not had a negative impact on deposit growth as consumers and businesses have sought the safety and liquidity provided by well capitalized banks like AmeriServ Financial. This decrease in funding costs was aided by a drop in interest expense associated with a $5.1 million decrease in the volume of interest bearing liabilities. Specifically, the average balance of interest bearing deposits declined by $3.4 million, and was complemented by a $1.7 million decrease in all FHLB borrowings (wholesale borrowings averaged only 0.9% of total assets in 2012). The Company also favorably replaced these interest bearing liabilities with non-interest bearing demand deposits which increased by $11.1 million on average for the first six months of 2012.
The table that follows provides an analysis of net interest income on a tax-equivalent basis for the six month periods ended June 30, 2012 and June 30, 2011. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 33.
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Six months ended June 30 (In thousands, except percentages)
2012 | 2011 | |||||||||||||||||||||||
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Yield/ Rate |
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Interest earning assets: |
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Loans and loans held for sale, net of unearned income |
$ | 667,941 | $ | 17,292 | 5.15 | % | $ | 656,048 | $ | 17,903 | 5.44 | % | ||||||||||||
Interest bearing deposits |
10,691 | 6 |