# AmeriServ Financial Q2 net income 40% better

Staff writer ▼ |AmeriServ Financial Q2 net income $1,369,000

AmeriServ Financial continued its positive earnings momentum in the second quarter of 2015 by reporting net income available to common shareholders of $1,369,000, or $0.07 per diluted common share.

For the six month period ended June 30, 2015, the company reported net income available to common shareholders of $2,685,000, or $0.14 per diluted share. This also represented a 40% increase in earnings per share from the first half of 2014 where net income available to common shareholders totaled $1,804,000, or $0.10 per diluted common share.

The company's net interest income in the second quarter of 2015 increased by $416,000, or 5.0%, from the prior year's second quarter and for the first six months of 2015 increased by $825,000, or 4.9%, when compared to the first six months of 2014.

The company's net interest margin of 3.51% for the first six months of 2015 was only one basis point lower than the net interest margin of 3.52% for the first half of 2014.

There was a similar modest net interest margin decline of two basis points when the second quarter of 2015 is compared to the prior year second quarter.

The company has been able to increase net interest income given the modest decline in its net interest margin by both growing its earning assets and controlling its cost of funds through disciplined deposit pricing. Specifically, the earning asset growth has occurred in the loan portfolio as total loans averaged $849 million in the first half of 2015 which is $58 million, or 7.4%, higher than the $791 million average for the first half of 2014.

This loan growth reflects the successful results of the company's sales calling efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans particularly through its loan production offices. Interest income in 2015 has also benefitted from an increased dividend from the FHLB of Pittsburgh.

Overall, total interest income has increased by $854,000, or 4.3%, in the first half of 2015. Total interest expense for the first half of 2015 has been well controlled as it increased by only $29,000, or 0.9%, due to the company's proactive efforts to reduce deposit costs.

Total deposit interest expense decreased by $106,000, or 4.3%, in the first six months of 2015 from the same timeframe in 2014. Even with this reduction in deposit costs, the company continues to have a strong loyal core deposit base and success in cross-selling new loan customers into deposit products.

Specifically, total deposits averaged $894 million for the first half of 2015 which is $27 million, or 3.2%, higher than the $866 million average for the first half of 2014.

The company is pleased that a meaningful portion of this deposit growth occurred in non-interest bearing demand deposit accounts.

This decreased interest expense for deposits has been offset by a $135,000 increase in the interest cost for borrowings as the company has utilized more FHLB term advances to extend borrowings and provide protection against rising interest rates.

The company recorded a $200,000 provision for loan losses in the second quarter of 2015 compared to no provision for loan losses in the second quarter of 2014. For the six month period in 2015, the company recorded a $450,000 provision for loan losses compared to no provision for loan losses in the first six months of 2014.

The provision recorded in 2015 was needed to support the continuing growth of the loan portfolio and cover net loan charge-offs. The company experienced net loan charge-offs of $172,000, or 0.08%, of total loans in the second quarter of 2015 and recognized a net loan recovery of $40,000 in the second quarter of 2014.

For the six month periods, there were net loan charge-offs of $356,000, or 0.08%, of total loans in first half of 2015 compared to net loan recoveries of $46,000 in 2014.

Overall, the company continued to maintain outstanding asset quality in the first half of 2015. At June 30, 2015, non-performing assets totaled $2.6 million, or only 0.30% of total loans, and is $1.9 million lower than the June 30, 2014 level.

When determining the provision for loan losses, the company considers a number of factors, some of which include periodic credit reviews, non-performing assets, loan delinquency and charge-off trends, concentrations of credit, loan volume trends and broader local and national economic trends.

In summary, the allowance for loan losses provided a strong 399% coverage of non-performing loans, and 1.13% of total loans, at June 30, 2015, compared to 400% coverage of non-performing loans, and 1.16% of total loans, at December 31, 2014.

Total non-interest income in the second quarter of 2015 increased by $54,000, or 1.5%, from the prior year's second quarter and for the first six months of 2015 increased by $234,000, or 3.3%, when compared to the first six months of 2014.

Increased revenue from trust and investment advisory fees and mortgage loan sales were two factors contributing to both the quarterly and six month non-interest income increase.

Specifically, trust and investment advisory fees increased by $187,000, or 9.6%, for the quarter and $211,000, or 5.3%, for the six month period due to increased assets under management which reflects successful new business development activities, as well as due to market forces and effective management of customer accounts.

Gains realized on residential mortgage loan sales into the secondary market increased by $54,000 for the quarter and $144,000 for the six month period due to both increased purchase and refinance activity in 2015.

Revenue from bank owned life insurance also increased by $162,000 for the six month period due to the receipt of a death claim in the first quarter of 2015. These increases were partially offset by a reduction in deposit service charges of $72,000 for the quarter and $131,000 for the six month period due to fewer overdraft fees.

Additionally, gains realized on investment security transactions declined by $92,000 for the quarter and $149,000 for the six month period as the company executed fewer security sale transactions in the first half of 2015.

Total non-interest expense in the second quarter of 2015 decreased by $381,000, or 3.6%, from the prior year's second quarter and for the first six months of 2015 decreased by $709,000, or 3.3%, when compared to the first six months of 2014.

Salaries and employee benefits were down by $163,000, or 2.7%, in the second quarter and by $404,000, or 3.3%, in the first half of 2015, due to 27 fewer full time equivalent employees as certain employees who elected to participate in an early retirement program in late 2014 were not replaced in order to achieve efficiencies identified as part of a profitability improvement program.

Professional fees declined by $189,000 in the second quarter of 2015 and by $286,000 in the first six month period due to lower legal fees, director's fees and recruitment costs in the first half of 2015. The remainder of the key non-interest expense categories were relatively consistent between years reflecting the company's focus on reducing and controlling costs.

Finally, the company recorded an income tax expense of $1,249,000, or an effective tax rate of 30.9%, in the first six months of 2015 which is higher when compared to the income tax expense of $812,000, or an effective tax rate of 29.8%, for the first six months of 2014.

The higher income tax expense and effective tax rate is due to the company's increased earnings in the first half of 2015.

The company had total assets of $1.1 billion, shareholders' equity of $117 million, a book value of $5.11 per common share and a tangible book value of $4.47 per common share at June 30, 2015.

The company continued to maintain strong capital ratios that exceed the regulatory defined well capitalized status and had a tangible common equity to tangible assets ratio of 7.66% at June 30, 2015. ■

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