UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
----------
FORM
Washington, D.C. 20549
Form 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
| (MARK ONE) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934 | |
| FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE TRANSITION PERIOD FROM TO | ||
COMMISSION FILE NUMBER 0-11204
AMERISERV FINANCIAL, INC.
(Exact
(Exact name of registrant as specified in its charter)
(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, PENNSYLVANIA (Address of principal executive offices) | 15907-0430 (Zip Code) |
Registrant’s telephone number, including area code
(814) 533-5300
(814) 533-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Securities registered pursuant to Section 12(g) of the Act:
| COMMON STOCK, $2.50 PAR VALUE | SHARE PURCHASE RIGHTS | |
(Title of class) | (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X]o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X]o No NOTE - Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those sections.
þ
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 [ ]þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. |X|
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of "accelerated“large accelerated filer,” “accelerated filer” and large accelerated filer"“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). [ ] Yes [X]o No The aggregate market value was $99,109,895 as of June 30, 2005. Excluding
affiliates, the aggregate market value was higher than $75 million.
þ
State the aggregate market value of the voting stockand non-voting common equity held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to the price at which the stockcommon equity was last sold, or the average bid and asked prices of such stock,common equity, as of a specified date within 60 days prior to the datebusiness day of filing.
(See definition of affiliate in Rule 405.) $94,978,069.44 as of January 31,
2006.
NOTE -- If a determination as to whether a particular person or entity is
an affiliate cannot be made without involving unreasonable effort and expense,
the registrant’s most recently completed second fiscal quarter. The aggregate market value was $97,535,834 as of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
Applicable only to registrants involved in bankruptcy proceedings during
the preceding five years: Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
(Applicable only to corporate registrants) June 30, 2007.
Indicate the number of shares outstanding of each of the registrant'sregistrant’s classes of common stock, as of the latest practicable date. 22,114,435There were 22,178,335 shares were outstanding as of January 31, 2006.
2008.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the Part of theForm 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
Portions of the annual shareholders'shareholders’ report for the year ended December 31, 2005,2007, are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders'shareholders’ meeting are incorporated by reference in Part III.
Exhibit Index is located on page 79.
================================================================================
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88.
FORM 10-K INDEX
1
PART I
ITEM 1. BUSINESS
| ITEM 1. | BUSINESS |
GENERAL
AmeriServ Financial, Inc. (the Company) is a bank holding company, organized under the Pennsylvania Business Corporation Law. The Company became a holding company upon acquiring all of the outstanding shares of AmeriServ Financial Bank (the Bank) on January 5, 1983. The Company'sCompany’s other wholly owned subsidiaries include AmeriServ Trust and Financial Services Company (the Trust Company) formed in October 1992, and AmeriServ Life Insurance Company (AmeriServ Life) formed in October 1987, and AmeriServ Associates, Inc. (AmeriServ
Associates), formed in January 1997.
1987.
The Company'sCompany’s principal activities consist of owning and operating its fourthree wholly owned subsidiary entities. At December 31, 2005,2007, the Company had, on a consolidated basis, total assets, deposits, and shareholders'shareholders’ equity of $880$905 million, $713$710 million and $84$90 million, respectively. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, accounting and taxes, loan review, auditing, investment accounting, marketing and insurance risk management.
As previously stated, the Company is a bank holding company and is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and Pennsylvania Department of Banking. The Company is also under the jurisdiction of the Securities and Exchange Commission (SEC) for matters relating to offering and sale of its securities. The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. The Company is listed on the NASDAQ Stock Market under the trading symbol "ASRV,"“ASRV,” and is subject to the rules of NASDAQ for listed companies.
AMERISERV FINANCIAL BANKING SUBSIDIARY
AmeriServ Financial Bank
The Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended. Through 2219 locations in Allegheny, Cambria, Centre, Somerset, and Westmoreland Counties, Pennsylvania, AmeriServ Financial Bank conducts a general banking business. It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, money market accounts, secured and unsecured loans, mortgage loans, safe deposit boxes, holiday club accounts, collection services, money orders, and traveler'straveler’s checks; (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as real estate-mortgage loans, short- and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services. The Bank also operates 2422 automated bank teller machines (ATMs) through its24-Hour Banking Network that is linked with STAR,NYCE, a regional ATM network and CIRRUS, a national ATM network.
On March 7, 2007, the Bank completed the acquisition of West Chester Capital Advisors (WCCA). WCCA is a registered investment advisor with expertise in large cap stocks and as of December 31, 2007 had $137 million in assets under management. The Bank had a wholly owned mortgage banking subsidiary --— Standard Mortgage Corporation of Georgia (SMC). SMC was a residential mortgage loan servicer based in Atlanta, GA. The Company concluded that mortgage servicing was not a core community banking business and it did not have the scale nor the earnings power to absorb the volatility and risk associated with this business line. On December 28, 2004, the Company sold all of its remaining mortgage servicing rights and discontinued operations of this non-core business in 2005. Additionally, AmeriServ Financial Services Corporation was formed on May 23, 1997 and engagedengages in the sale of annuities, mutual funds, and insurance. On December 31, 2004, the Company merged AmeriservAmeriServ Financial Services Corporation into the Bank.
The Bank'sBank’s deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or
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group of related industries does not comprise a material portion of the loan portfolio. The Bank'sBank’s business is not seasonal nor does it have any risks attendant to foreign sources.
The Bank is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking. See Notes 23 and 27,Note 22, Regulatory Matters, and Subsequent Event, for a discussion of the Memorandum Of Understanding (MOU) which the Company and its Board of Directors entered into with its primary regulators in February 2003 and which was terminated in February 2006. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios at December 31, 2005:
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2007:
Headquarters | Johnstown, PA | |||
| Chartered | 1933 | |||
| Total Assets | $ | 894,193 | ||
| Total Investment Securities | 156,248 | |||
| Total Loans (net of unearned income) | 636,155 | |||
| Total Deposits | 710,639 | |||
| Total Net Income | 2,503 | |||
| Asset Leverage Ratio | 8.84 | % | ||
| Return on Average Assets | 0.29 | |||
| Return on Average Equity | 2.78 | |||
| Total Full-time Equivalent Employees | 287 | |||
RISK MANAGEMENT OVERVIEW:
Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, which includes interest rate, credit, and liquidity risk. The Company controls and monitors these risks with policies, procedures, and various levels of managerial and Board oversight.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk.
Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors and debtholders. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. The Company'sCompany’s primary credit risk occurs in the loan portfolio. The Company uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. The Company'sCompany’s investment policy and hedging policy strictly limit the amount of credit risk that may be assumed in the investment portfolio and through hedging activities. The following summarizes and describes the Company'sCompany’s various loan categories and the underwriting standards applied to each:
Commercial
This category includes credit extensions and leases to commercial and industrial borrowers. Business assets, including accounts receivable, inventoryand/or equipment, typically secure these credits. In appropriate instances, extensions of credit in this category are subject to collateral advance formulas. Balance sheet strength and profitability are considered when analyzing these credits, with special attention given to historical, current and prospective sources of cash flow, and the ability of the customer to sustain cash flow at acceptable levels. Our policy permits flexibility in determining acceptable debt service coverage ratios, with a minimum level of 1.1 to 1 desired. Personal guarantees are frequently required; however, as the financial strength of the borrower increases, the Company's Company’s
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ability to obtain personal guarantees decreases. In addition to economic risk, this category is impacted by the management ability of the borrower and industry risk, which are also considered during the underwriting process.
Commercial Loans Secured by Real Estate
This category includes various types of loans, including acquisition and construction of investment property, owner-occupied property and operating property. Maximum term, minimum cash flow coverage, leasing requirements, maximum amortization and maximum loan to value ratios are controlled by the Company'sCompany’s credit policy and follow industry guidelines and norms, and regulatory limitations. Personal guarantees are normally required during the construction phase on construction credits, and are frequently obtained on mid to smaller commercial real estate loans. In addition to economic risk, this category is subject to geographic and portfolio concentration risk, which are monitored and considered in underwriting.
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Real Estate --— Mortgage
This category includes mortgages that are secured by residential property. Underwriting of loans within this category is pursuant to Freddie Mac/Fannie Mae underwriting guidelines, with the exception of Community Reinvestment Act (CRA) loans, which exhibit more liberal standards. The major risk in this category is that a significant downward economic trend would increase unemployment and cause payment default. The Company does not and has never engaged insub-prime residential mortgage lending.
Consumer
This category includes consumer installment loans and revolving credit plans. Underwriting is pursuant to industry norms and guidelines and is achieved through a process, which is inclusive of the Fair IsaacAppro Credit Scoring program. The major risk in this category is a significant economic downturn.
MAJOR TYPES OF INVESTMENTS AND THE ASSOCIATED INVESTMENT POLICIES
The investment securities portfolio of the Company and its subsidiaries is managed to provide ample liquidity in a manner that is consistent with proper bank asset/liability management and current banking practices. The objectives of portfolio management include consideration of proper liquidity levels, interest rate and market valuation sensitivity, and profitability. The investment portfolios of the Company and subsidiaries are proactively managed in accordance with federal and state laws and regulations in accordance with generally accepted accounting practices.
principles.
The investment portfolio is primarily made up of AAA Agency Mortgage-backed securities and short maturity agency securities. The purpose of this type of portfolio is to generate adequate cash flow to fund potential loan growth, as the market allows. Management strives to maintain a relatively short duration in the portfolio. All holdings must meet standards documented in the AmeriServ Financial Investment Policy.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS, INCLUDING REPAYMENTS AND MATURITIES OF LOANS, SALES AND MATURITIES OF INVESTMENTS AND FHLB ADVANCES
Deposits
The Bank has a loyal core deposit base made up of traditional commercial bank products that exhibits little fluctuation, other than Jumbo CDs, which demonstrate some seasonality. The bank also utilizes certain Trust Company specialty deposits related to the Build and Erect Funds as a funding source which serve as an alternative to wholesale borrowings and could exhibit some degree of volatility.
Borrowings
The Bank, when needed, uses both overnight borrowings and term advances from the Federal Home Loan Bank of Pittsburgh for liquidity management purposes. During the past twoseveral years the Company has significantly delevereddeleveraged its balance sheet and reduced its level of borrowings through investment portfolio cash flow and security sales.
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Loans
During the periods presented herein, the Company has moderately grown its loan portfolio with no adverse effect on liquidity. The Company believes it will be able to fund anticipated loan growth generally from investment securities portfolio cash flow and deposit growth.
Secondary MarketingMarket Activities
The Residential Lending department of the Bank continues to originateone-to-four family mortgage loans for both outside investors in the secondary market and for the AmeriServ portfolio. Mortgages sold on the secondary market are sold to investors on a "flow"“flow” basis: Mortgages are priced and delivered on a "best efforts"“best efforts” pricing, with servicing released to the investor. Freddie Mac guidelines are used in underwriting all mortgages.mortgages with the exception of CRA loans. The mortgages with longer terms such as 20-year, 30-year,20-year,30-year, FHA, and VA loans are usually sold. The remaining production of the department includes Adjustable Rate Mortgages,
10-year, 15-year,10-year,15-year, and bi-weekly mortgages. These loans are usually kept in the AmeriServ portfolio.
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AMERISERV FINANCIAL NON-BANKING SUBSIDIARIES
AmeriServ Trust and Financial Services Company
AmeriServ Trust and Financial Services Company is a trust company organized under Pennsylvania law in October 1992. As one of the larger providers of trust and investment management products and services between Pittsburgh and Harrisburg, AmeriServ Trust and Financial Services Company is committed to delivering personalized, professional service to its clients. Its staff of approximately forty39 professionals administer assets valued at approximately $1.6
billion.$1.9 billion at December 31, 2007. The Trust Company has two primary business divisions, traditional trust and union collective investment funds. Traditional trust 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 division. The union collective investment funds, namely the ERECT and BUILD Funds, are designed to invest union pension dollars in construction projects that utilize union labor. At December 31, 2005,2007, AmeriServ Trust and Financial Services had total assets of $2.9$2.9 million and total shareholder'sshareholder’s equity of $2.5$2.7 million. The Trust Company is subject to regulation and supervision by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking.
The diversification of the revenue-generating divisions within the trust company is one of the primary reasons for its successful profitable growth. The specialized union collective funds are expected to continue to be the growth
leaders in both assets under administration and revenue production. The union
funds have attracted several international labor unions as investors as well as many local unions from a number of states. At the end of 2005,2007, assets in these union funds totaled approximately $370$415 million.
The Trust Investment Division focuses on producingbetter-than-average investment returns by offering an array of individually managed accounts and several asset allocation disciplines utilizing non-proprietary mutual funds. In addition, the Tactical High Yield Bond Fund, the Pathroad Funds and the Premier Equity Discipline are examples of the Investment Division'sDivision’s ability to respond to the needs and expectations of our clients. The diversified array of investment options, experienced staff and good investment returns facilitate client retention and the development of new clients.
In 2005,2007, the trust companyTrust Company continued to be a major contributor of earnings to the corporation. Gross revenue in 20052007 amounted to $6.4$6.9 million which represents an increase of $991,000$248,000 or 18.2%3.7% over 2004.2006. The Trust Company'sCompany’s net income contribution was $1.4$1.7 million, an increase of $535,000$135,000 or 62%8.7% over 2004.
2006.
AmeriServ Life
AmeriServ Life is a captive insurance company organized under the laws of the State of Arizona. AmeriServ Life engages in underwriting as reinsurer of credit life and disability insurance within the Company'sCompany’s market area. Operations of AmeriServ Life are conducted in each office of the Company'sCompany’s banking subsidiary. AmeriServ Life is subject to supervision and regulation by the Arizona Department of Insurance, the Insurance Department of the
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Commonwealth of Pennsylvania, and the Federal Reserve. At December 31, 2005,2007, AmeriServ Life had total assets of $1.5$1.1 million and total shareholder'sshareholder’s equity of $1.1 million.
AmeriServ Associates
AmeriServ Associates is a registered investment advisory firm that
administers investment portfolios, offers operational support systems and
provides asset and liability management services to small and mid-sized
financial institutions. At December 31, 2005, AmeriServ Associates had total
assets of $303,000 and total shareholder's equity of $239,000.
$939,000.
MONETARY POLICIES
Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Board of Governors are: open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Board of Governors have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
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COMPETITION
The subsidiaries face strong competition from other commercial banks, savings banks, savings and loan associations, and several other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions which are substantially larger and have greater financial resources than the subsidiary entities. As the financial services industry continues to consolidate, the scope of potential competition affecting the subsidiary entities will also increase. For most of the services that the subsidiary entities perform, there is also competition from credit unions and issuers of commercial paper and money market funds. Such institutions, as well as brokerage houses, consumer finance companies, insurance companies, and pension trusts, are important competitors for various types of financial services. In addition, personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals.
MARKET AREA
Nationally, economic growth continuesslowed during 2007 but remained positive at 2.2%, the least growth in five years. Consumer spending, which accounts for more than two thirds of the economy, increased 2.9% in 2007, which was the least growth in four years. By the fourth quarter of 2007, the Federal Reserve’s monetary policy had shifted from a neutral stance to an accommodative position in light of a weakening economic outlook and increasing downside risks to growth. Thesub-prime mortgage crisis caused housing activity and home values to decline. The troubled housing market along with rising energy and food prices began to negatively impact other sectors of the economy and increase the possibility of the economy slipping into a recession. Credit markets have tightened making it more difficult for households and businesses to borrow money. As a result, the labor markets began to soften. National economic growth is expected to be positive measuringflat in excessthe first quarter of 3.0% per annum. 2008 and rebound slightly averaging 2% for the remainder of the year.
The economy in Cambria and Somerset Counties, while growing slowly, produces anhad unemployment raterates of 5.7%5.3% and 5.5%, respectively at December 31, 2007, as compared to a national rateand state rates of 4.9% and 4.3%. Local markets have shown improvement as jobs in the area have improvedincreased causing the unemployment rate to decline from last year'syear’s number of 7.4%5.7%. Near-term expectationsJohnstown, PA, where AmeriServ Financial, Inc is headquartered, is a national leader in technology, ranked 45th in the nation for future employment point to better days ahead astechnology growth by the Milken Institute, the 4th best city in the eastern US byMoney Magazine and the most affordable city in the nation byForbes Magazine.The local economy did suffer a resultset back during the summer of several recent announcements which include expansion2007 with the announced layoff of alternative
fuel facilities,200 workers at a local freight car manufacturer. However, the beginning of construction on a planned technology park, greater work on defense projects and more work for the recent announcement of several retail and restaurant openings are expected to contribute to economic expansion. Overall, local
mining industry. Local loan demand remains good particularly in the commercial
sector. Overall, economic conditions in 20062008 are expected to remain positive.
Economic conditions are much betterstronger in the State College market. The unemployment rate is 3.4% and one of the lowest of all regions in the Commonwealth. The State College market presents the Company with a more vibrant economic market and a much different demographic. A large percentage of the population in State College falls into the 18 to 34 year old age group, while potential customers in the Cambria/Somerset markets tend to be over 50 years
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of age. Overall, opportunities in the State College market are quite different and challenging, providing a promising source of business to profitably grow the Company.
Nationally, the economic environment appears quite strong. Most economists
remain hopeful that the economy in 2006 will continue to grow while inflation
remains in check.
EMPLOYEES
The Company employed 428385 people as of December 31, 2005,2007, in full- and part-time positions. Approximately 261221 non-supervisory employees of the Bank are represented by the United Steelworkers of America, AFL-CIO-CLC, Local Union2635-06. The Bank'sBank’s current labor contract with the Steelworkers Local will expire on October 15, 2007.2009. The Bank has not experienced a work stoppage since 1979. The Bank is one of 13 union-represented banks nationwide.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"“FDICIA”), among other things, identifies five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. It requires U.S. federal bank regulatory agencies to implement systems for "prompt“prompt corrective action"action” for insured depository institutions that do not meet mimimumminimum capital requirements based on these categories. The FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on other aspects of its operations. The FDICIA generally prohibits a bank from paying any dividend or making any capital distribution or paying any management fee to its holding company if the bank would therafterthereafter be undercapitalized. An undercapitalized bank must develop a capital restoration plan, and its parent holding company must guarantee the bank'sbank’s compliance with the plan up to the lesser of 5% of the bank'sbank’s assets at the time it became undercapitalized and the amount needed to comply with the plan.
As of December 31, 2005,2007, the Company believes that its bank subsidiary was well capitalized, based on the prompt corrective action ratios and guidelines described above. A bank'sbank’s capital category is determined solely for the purpose of applying the prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank'sbank’s overall financial condition or prospects for other purposes.
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SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 contains important new requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley act, written certifications by the Company'sCompany’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that the Company'sCompany’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. In response to the Sarbanes-Oxley Act of 2002, the Company adopted a series of procedures to further strengthen its corporate governance practices. The Company also requires signed certifications from managers who are responsible for internal controls throughout the Company as to the integrity of the information they prepare. These procedures supplement the Company'sCompany’s Code of Conduct Policy and other procedures that were previously in place. In 2005, the Company implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act. This program included the identification of key processes and accounts, documentation of the design of control effectiveness over process and entity level controls, and testing of the effectiveness of key controls.
PRIVACY PROVISIONS OF GRAMM-LEACH-BLILEY ACT
Under the Gramm-Leach-Bliley Act (GLB Act), federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about customers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The privacy provision of the GLB Act affectaffects how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Company believes it is in compliance with the various provisions of the GLB Act.
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CHECK CLEARING FOR THE 21ST21ST CENTURY ACT
The Check Clearing for the 21st Century Act, also known as Check 21, which became effective on October 28, 2004, altered the way banks process checks. Check 21 facilitates check truncation, eliminating the original paper check from the clearing process. Instead, many checks will beare processed electronically. Under Check 21, as a bank processes a check, funds from the check writer'swriter’s account are transferred to the check depositor'sdepositor’s account, and an electronic image of the check, a processable printout known as a substitute check or Image Replacement Document (IRD), is considered the legal equivalent of the original check. Banks can choose to send substitute checks as electronic files to be printedon-site or in close proximity to the paying bank. For financial institutions and their clients, these changes have the potential to reduce costs, improve efficiency in check collections and accelerate funds availability, while alleviating dependence on the national transportation system.
STATISTICAL DISCLOSURES FOR BANK HOLDING COMPANIES
The following Guide 3 information is included in thisForm 10-K as listed below:
I. Distribution of Assets, Liabilities, and Stockholders'Stockholders’ Equity; Interest Rates and Interest Differential Information. Information required by this section is presented on pages 25-26,22-24, and 31-34.
33-35.
II. Investment Portfolio Information required by this section is presented on pages 9-108-9 and 51-54.
52-56.
III. Loan Portfolio Information required by this section appears on pages
10-119-10 and26-27.
IV. Summary of Loan Loss Experience Information required by this section is presented on pages27-29.
V. Deposits Information required by this section follows on page 11-12.
11.
VI. Return on Equity and Assets Information required by this section is presented on page 20.
VII. Short-Term Borrowings Information required by this section is presented on page 12-13.
12.
INVESTMENT PORTFOLIO
Investment securities classified as held to maturity are carried at amortized cost while investment securities classified as available for sale are reported at fair market value. At December 31, 2005, the Company transferred $6.8 million of
other securities from available for sale
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to held to maturity because it is the intent of the Company to hold these
securities to maturity. The following table sets forth the cost basis and fair market value of the Company'sCompany’s investment portfolio as of the periods indicated:
Investment securities available for sale at:
| At December 31, | ||||||||||||
Cost Basis: | 2007 | 2006 | 2005 | |||||||||
| (In thousands) | ||||||||||||
| U.S. Treasury | $ | 6,006 | $ | 6,011 | $ | 5,021 | ||||||
| U.S. Agency | 38,041 | 57,636 | 59,335 | |||||||||
| Mortgage-backed securities | 98,484 | 113,460 | 131,981 | |||||||||
| Equity investment in Federal Home Loan Bank and Federal Reserve Stock* | — | — | 6,988 | |||||||||
| Other securities | 3,598 | 3,362 | 4,499 | |||||||||
| Total cost basis of investment securities available for sale | $ | 146,129 | $ | 180,469 | $ | 207,824 | ||||||
| Total fair value of investment securities available for sale | $ | 144,941 | $ | 175,543 | $ | 201,569 | ||||||
| * | On January 1, 2006, the equity investments in Federal Home Loan Bank and Federal Reserve |
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Investment securities held to maturity at:
| At December 31, | ||||||||||||
Cost Basis: | 2007 | 2006 | 2005 | |||||||||
| (In thousands) | ||||||||||||
| U.S. Treasury | $ | 3,153 | $ | 3,220 | $ | 3,285 | ||||||
| U.S. Agency | 3,473 | 3,471 | 11,484 | |||||||||
| Mortgage-backed securities | 6,157 | 7,216 | 8,836 | |||||||||
| Other securities | 5,750 | 6,750 | 6,750 | |||||||||
| Total cost basis of investment securities held to maturity | $ | 18,533 | $ | 20,657 | $ | 30,355 | ||||||
| Total fair value of investment securities held to maturity | $ | 18,378 | $ | 20,460 | $ | 30,206 | ||||||
LOAN PORTFOLIO
The loan portfolio of the Company consisted of the following:
| At December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Commercial | $ | 118,936 | $ | 91,746 | $ | 80,629 | $ | 72,011 | $ | 75,738 | ||||||||||
| Commercial loans secured by real estate | 285,115 | 269,781 | 249,204 | 225,661 | 206,204 | |||||||||||||||
| Real estate-mortgage(1) | 214,839 | 209,728 | 201,111 | 201,406 | 194,605 | |||||||||||||||
| Consumer | 16,676 | 18,336 | 20,391 | 23,285 | 28,343 | |||||||||||||||
| Loans | 635,566 | 589,591 | 551,335 | 522,363 | 504,890 | |||||||||||||||
| Less: Unearned income | 471 | 514 | 831 | 1,634 | 2,926 | |||||||||||||||
| Loans, net of unearned income | $ | 635,095 | $ | 589,077 | $ | 550,504 | $ | 520,729 | $ | 501,964 | ||||||||||
| (1) | For each of the periods presented beginning with December 31, |
9
NON-PERFORMING ASSETS
The following table presents information concerning non-performing assets:
10
| At December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||
Non-accrual loans | ||||||||||||||||||||
| Commercial | $ | 3,553 | $ | 494 | $ | 2,315 | $ | 802 | $ | 3,282 | ||||||||||
| Commercial loans secured by real estate | 225 | 195 | 318 | 606 | 5,262 | |||||||||||||||
| Real estate-mortgage | 875 | 1,050 | 1,070 | 2,049 | 1,495 | |||||||||||||||
| Consumer | 585 | 547 | 446 | 412 | 742 | |||||||||||||||
| Total | 5,238 | 2,286 | 4,149 | 3,869 | 10,781 | |||||||||||||||
Past due 90 days or more and still accruing | ||||||||||||||||||||
| Commercial | — | — | — | — | 58 | |||||||||||||||
| Commercial loans secured by real estate | — | — | — | — | 10 | |||||||||||||||
| Consumer | — | 3 | 31 | — | 30 | |||||||||||||||
| Total | — | 3 | 31 | — | 98 | |||||||||||||||
Other real estate owned | ||||||||||||||||||||
| Commercial loans secured by real estate | — | — | — | — | 255 | |||||||||||||||
| Real estate-mortgage | 42 | 3 | 130 | 15 | 248 | |||||||||||||||
| Consumer | — | — | 5 | 10 | 29 | |||||||||||||||
| Total | 42 | 3 | 135 | 25 | 532 | |||||||||||||||
Total non-performing assets | $ | 5,280 | $ | 2,292 | $ | 4,315 | $ | 3,894 | $ | 11,411 | ||||||||||
| Total non-performing assets as a percent of loans and loans held for sale, net of unearned income, and other real estate owned | 0.83 | % | 0.39 | % | 0.78 | % | 0.75 | % | 2.26 | % | ||||||||||
| Total restructured loans (included in non-accrual loans above) | $ | 1,217 | $ | 1,302 | $ | 258 | $ | 5,685 | $ | 698 |
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 the lower of 1) fair value minus estimated costs to sell, or 2) carrying cost.
The following table sets forth, for the periods indicated, (i) 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, (ii) the amount of interest income actually recorded on such loans, and (iii) the net reduction in interest income attributable to such loans.
| Year Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Interest income due in accordance with original terms | $ | 215 | $ | 214 | $ | 213 | $ | 469 | $ | 670 | ||||||||||
| Interest income recorded | (24 | ) | (55 | ) | (12 | ) | (19 | ) | (119 | ) | ||||||||||
| Net reduction in interest income | $ | 191 | $ | 159 | $ | 201 | $ | 450 | $ | 551 | ||||||||||
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DEPOSITS
The following table sets forth the average balance of the Company'sCompany’s deposits and average rates paid thereon for the past three calendar years:
11
| At December 31, | ||||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Demand: | ||||||||||||||||||||||||
| Non-interest bearing | $ | 105,306 | — | % | $ | 104,266 | — | % | $ | 107,018 | — | % | ||||||||||||
| Interest bearing | 67,132 | 1.76 | 57,817 | 1.05 | 54,695 | 0.41 | ||||||||||||||||||
| Savings | 71,922 | 0.76 | 81,964 | 0.78 | 96,819 | 0.86 | ||||||||||||||||||
| Money market | 158,947 | 3.80 | 172,029 | 3.34 | 156,932 | 2.07 | ||||||||||||||||||
| Other time | 346,134 | 4.34 | 319,220 | 3.83 | 284,951 | 3.04 | ||||||||||||||||||
| Total deposits | $ | 749,441 | 3.54 | $ | 735,296 | 3.05 | $ | 700,415 | 2.18 | |||||||||||||||
Interest expense on deposits consisted of the following:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| Interest bearing demand | $ | 1,184 | $ | 606 | $ | 227 | ||||||
| Savings | 549 | 644 | 829 | |||||||||
| Money market | 6,040 | 5,743 | 3,256 | |||||||||
| Certificates of deposit in denominations of $100,000 or more | 1,774 | 1,894 | 1,378 | |||||||||
| Other time | 13,264 | 10,345 | 7,295 | |||||||||
| Total interest expense | $ | 22,811 | $ | 19,232 | $ | 12,985 | ||||||
Additionally, the following table provides more detailed maturity information regarding certificates of deposit issued in denominations of $100,000 or more as of December 31, 2005:
2007:
MATURING IN:
| (In thousands) | ||||
| Three months or less | $ | 14,354 | ||
| Over three through six months | 15,270 | |||
| Over six through twelve months | 7,895 | |||
| Over twelve months | 3,871 | |||
| Total | $ | 41,390 | ||
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FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS
The outstanding balances and related information for federal funds purchased and other short-term borrowings from continuing operations are summarized as follows:
12
| At December 31, 2007 | ||||||||
| Federal | Other | |||||||
| Funds | Short-Term | |||||||
| Purchased | Borrowings | |||||||
| (In thousands, | ||||||||
| except rates) | ||||||||
| Balance | $ | — | $ | 72,210 | ||||
| Maximum indebtedness at any month end | 3,430 | 74,095 | ||||||
| Average balance during year | 99 | 19,745 | ||||||
| Average rate paid for the year | 5.18 | % | 4.89 | % | ||||
| Interest rate on year end balance | — | 3.88 | ||||||
| At December 31, 2006 | ||||||||
| Federal | Other | |||||||
| Funds | Short-Term | |||||||
| Purchased | Borrowings | |||||||
| (In thousands, | ||||||||
| except rates) | ||||||||
| Balance | $ | — | $ | 49,091 | ||||
| Maximum indebtedness at any month end | — | 61,728 | ||||||
| Average balance during year | 43 | 32,778 | ||||||
| Average rate paid for the year | 5.69 | % | 5.10 | % | ||||
| Interest rate on year end balance | — | 5.48 | ||||||
| At December 31, 2005 | ||||||||
| Federal | Other | |||||||
| Funds | Short-Term | |||||||
| Purchased | Borrowings | |||||||
| (In thousands, | ||||||||
| except rates) | ||||||||
| Balance | $ | — | $ | 63,184 | ||||
| Maximum indebtedness at any month end | — | 150,552 | ||||||
| Average balance during year | 1 | 78,151 | ||||||
| Average rate paid for the year | 4.94 | % | 3.32 | % | ||||
| Interest rate on year end balance | — | 4.25 | ||||||
Average amounts outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances.
These borrowing transactions can range from overnight to one year in maturity. The average maturity was two days at the end of 2007 and three days at the end of both 20052006 and 2004,
and two days at the end of 2003.
ITEM 1A. RISK FACTORS
2005.
| ITEM 1A. | RISK FACTORS |
Investors should carefully consider the risks described below before investing in our common stock. The risks described below are not the only ones facing the Company. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained or incorporated by reference in thisForm 10-K, including our consolidated financial statements and related notes. FAILURE TO SUCCESSFULLY EXECUTE OUR TURNAROUND STRATEGY (THE TURNAROUND) WOULD
ADVERSELY AFFECT FUTURE EARNINGS.
Other corporate information is available at www.AmeriServFinancial.com
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Failure to successfully execute our turnaround strategy would adversely affect future earnings.
At the end of 2003, we adopted a Turnaroundturnaround strategy that consisted of three distinct elements. These were:
- In 2003, stabilizing AmeriServ and taking immediate steps to eliminate
or minimize those risk elements that posed a threat to our survival;
- In 2004 and 2005, initiating steps to eliminate the key structural
impediments to sustainable, improved earnings; and
- Articulating and executing, over the long-term, a strategy centered on
community banking and continued expansion of our successful trust
business that is intended to produce consistent future earnings.
| • | In 2003, stabilizing AmeriServ and taking immediate steps to eliminate or minimize those risk elements that posed a threat to our survival; | |
| • | In 2004 and 2005, initiating steps to eliminate the key structural impediments to sustainable, improved earnings; and | |
| • | Articulating and executing, over the long-term, a strategy centered on community banking and continued expansion of our successful trust business that is intended to produce consistent future earnings. |
We believe we accomplished the first two elements of the Turnaround. Theturnaround strategy. With our earnings growth in 2007, we achieved some success towards the third element of the turnaround. However, this final element of the Turnaroundturnaround requires sustained execution of our business plan.plan to drive our financial performance closer to peer bank levels. If we are unable to achieve the last element of the Turnaround,turnaround strategy, our financial condition and results of operations will not dramatically improve and may deteriorate.
WEAK LOAN GROWTH MAY HINDER OUR ABILITY TO IMPROVE EARNINGS PERFORMANCE.
In 2003,
Weak loan growth may hinder our Board of Directors articulated a strategy predicated upon a
returnability to traditional community banking. improve earnings performance.
In order to improve our financial performance, in
accordance with this strategy, we must increase our average balance of quality loans. However, our market area is characterized by an aging and declining population base and comparatively slow economic growth. Despite these unattractive fundamentals, our market also is highly competitive. Unless loan originations increase, our earnings performance may not improve to the degree we have planned.
AMERISERV OPERATES UNDER LIQUIDITY CONSTRAINTS AND MAY DO SO IN THE FUTURE
BECAUSE OF LOSSES AT THE BANK.
The payment of dividends by the Bank to us is a primary source of funding
for us
We have unionized employees, which increases our costs and is also the principal source of funds for us to pay dividends to our
shareholders. Under federal banking law, the Bank may only pay dividends out of
accumulated earnings for the current year and the prior two calendar years.
Because of the restructuring undertaken in 2005 and 2004, the Bank incurred
aggregate losses of $16.6 million, which extended the date on which the Bank's
dividend authority could be restored. As a consequence, we have relied on
dividends from non-bank subsidiaries, a tax refund, inter-company tax payments,
$3.2 million of retained proceeds from the 2004 Offering, and other short-term
solutions to provide the cash needed to make interest payments on the
debentures. We believe we have sufficient cash on hand at the holding company
and from these alternative sources to make dividend payments on the debentures
until the Bank's dividend authority is restored, which we believe will occur no
later than the first quarter of 2008 if the Bank does not suffer future losses.
However, we cannot assure you that the Bank's dividend authority will be
restored. Moreover, we have no significant secondary sources of liquidity such
as lines of credit. If the Bank's dividend authority is not restored or we are
unable to develop meaningful secondary sources of liquidity, we may not be able
to improve our liquidity.
WE HAVE UNIONIZED EMPLOYEES, WHICH INCREASES OUR COSTS AND MAY DETER ANY
ACQUISITION PROPOSAL.
deter any acquisition proposal.
The Bank is party to a collective bargaining agreement with the United Steelworkers of America, which represents approximately 61% of our employees. A
new threeIn 2007, our current contract was extended until October 15, 2009. Terms of the contract extension remain the same as the prior contract with the exception of a 2.0% wage increase in the first year, agreement was executedand a 2.5% increase in October 2004.the second year. As a result of provisions in the contract, generally known as work rules, we sometimes cannot take steps that would reduce our operating costs. Furthermore, to our knowledge, we are one of only 13 unionized banking institutions in the United States. The banking industry is a consolidating industry in which acquisitions are frequent. However, some banking institutions may be reluctant to buy a unionized bank because of a perception that operating costs may be higher or that it could result in unionization of its work force. Additionally, there is the risk of a work stoppage if a new collective bargaining agreement cannot be negotiated before the end of the current agreement. Therefore, our stock price may
13
be adversely affected because investors may conclude that there is a reduced likelihood that we will be acquired or could be an acquiror.
A SIGNIFICANT PORTION OF OUR TRUST BUSINESS IS DEPENDENT ON A UNION CLIENT BASE.
meaningful portion of our trust business is dependent on a union client base.
In an effort to capitalize on the Bank'sBank’s union affiliation, our Trust Company operates the ERECT Funds and the BUILD Funds that seek to attract investment from union pension funds. These funds then use the investments to make loansand/or equity investments on construction projects that use union labor. At December 31, 2005,2007, approximately $370$415 million was invested by unions in the ERECT and BUILD Funds. This represents approximately 25.8%22.0% of the total assets under management held by the Trust Company. Therefore, the Trust Company is dependent on a discrete union client base for a significantmeaningful portion of its assets under management and its resulting revenue and net income.
CHANGES IN INTEREST RATES COULD REDUCE OUR INCOME, CASH FLOWS AND ASSET VALUES.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income, cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, as well as the interest rates we pay on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in
13
monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings, but it also will affect our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could be adversely affected. This challenge was particularly evident during periods such as 2006 and the first half of 2007 when the yield curve was flat to inverted. Our earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.
BECAUSE OUR OPERATIONS ARE CONCENTRATED IN CAMBRIA AND SOMERSET COUNTIES,
PENNSYLVANIA, WE ARE SUBJECT TO ECONOMIC CONDITIONS IN THIS AREA, WHICH
TYPICALLY LAG BEHIND ECONOMIC ACTIVITY IN OTHER AREAS.
Because our operations are concentrated in Cambria and Somerset Counties, Pennsylvania, we are subject to economic conditions in this area, which typically lag behind economic activity in other areas.
Our loan and deposit activities are largely based in Cambria and Somerset Counties, located in southwestern Pennsylvania. As a result, our financial performance will depend largely upon economic conditions in this area. Economic activity in this geographic market generally lags behind the economic activity in Pennsylvania and the nation. Similarly, unemployment in this market area is typically higher than the unemployment rate in Pennsylvania and the nation.nation, although this difference has declined in recent years as our local economy has become more diversified. Adverse local economic conditions could cause us to experience an increase in
loan delinquencies, a reduction in deposits, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, all of which could adversely affect our profitability.
WE ARE SUBJECT TO LENDING RISKS.
We are subject to lending risks.
There are risks inherent in making all loans. These risks include interest rate changes over the time period in which loans may be repaid and changes in the national economy or the economy of our regional market that affect the ability of our borrowers to repay their loans or the value of the collateral securing these loans.
At December 31, 2005, 59.9%2007, 63.5% of our net loan portfolio consisted of commercial and commercial mortgage loans, including construction loans. Commercial loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans also are typically larger than residential real estate loans and consumer loans. Because our loan portfolio contains a significant number of commercial construction and commercial mortgage loans with relatively large balances, the deterioration of one or a few of these loans would cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in our provision for loan losses and an increase in loan charge-offs.
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE ADVERSELY AFFECTED IF
OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO ABSORB ACTUAL LOSSES OR IF WE
ARE REQUIRED TO INCREASE OUR ALLOWANCE.
Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance.
Despite our underwriting criteria, we may experience loan delinquencies and losses for reasons beyond our control, such as general economic conditions. At December 31, 2005,2007, we had nonperforming assets equal to 0.78%0.83% of total loans, and loans held for sale, net of unearned income and other real estate owned. In order to absorb losses associated with nonperforming assets, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. We
14
may be required to increase our allowance for loan losses for any of several reasons. State and federal regulators, in reviewing our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in our allowance. In addition, if charge-offs in future periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our results of operations in the period in which the allowance is increased.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO COMPETE EFFECTIVELY IN A HIGHLY
COMPETITIVE MARKET AND GEOGRAPHIC AREA.
14
Our future success will depend on our ability to compete effectively in a highly competitive market and geographic area.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, insurance companies and money market mutual funds. There is very strong competition among financial services providers in our principal service area. Due to their size, many competitors can achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
We believe that our ability to compete successfully depends on a number of factors, including:
- Our ability to build upon existing customer relationships and market
position;
- Competitors' interest rates and service fees;
- The scope of our products and services;
- The relevance of our products and services to customer needs and
demands and the rate at which we and our competitors introduce them;
- Satisfaction of our customers with our customer service; and
- Industry and general economic trends.
| • | Our ability to build upon existing customer relationships and market position; | |
| • | Competitors’ interest rates and service fees; | |
| • | Our ability to attract and retain a qualified workforce; | |
| • | The scope of our products and services; | |
| • | The relevance of our products and services to customer needs and demands and the rate at which we and our competitors introduce them; | |
| • | Satisfaction of our customers with our customer service; and | |
| • | Industry and general economic trends. |
If we experience difficulty in any of these areas, our competitive position could be materially adversely affected, which will affect our growth and profitability.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on federally insured financial institutions. As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.
ENVIRONMENTAL LIABILITY ASSOCIATED WITH LENDING ACTIVITIES COULD RESULT IN
LOSSES.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
WE MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION.
We may be adversely affected by government regulation.
We are subject to extensive federal and state banking regulation and supervision. Banking regulations are intended primarily to protect our depositors'depositors’ funds and the federal deposit insurance funds, not shareholders. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. Failure to meet minimum capital requirements could result in the imposition of limitations on our operations that would adversely impact our operations and could, if capital levels drop significantly, result in our being required to cease operations. Changes in governing law, regulations or regulatory practices could impose additional costs on us or adversely affect our ability to obtain deposits or make loans and, as a consequence, our revenues and profitability.
15
FEDERAL AND STATE BANKING LAWS, OUR ARTICLES OF INCORPORATION AND OUR BY-LAWS
MAY HAVE AN ANTI-TAKEOVER EFFECT.
Federal law imposes restrictions, including regulatory approval
requirements, on persons seeking to acquire control over us. Pennsylvania law
also has provisions that may have an anti-takeover effect. In addition, our
articles of incorporation and bylaws permit our board of directors to issue,
without shareholder approval, preferred stock and additional shares of common
stock that could adversely affect the voting power and other rights of existing
common shareholders.
RISKS ASSOCIATED WITH THE COMPANY'SCOMPANY’S COMMON STOCK
THE COMPANY'S STOCK PRICE CAN BE VOLATILE.
The Company’s stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company'sCompany’s stock price can fluctuate significantly in response to a variety of factors including, among other things:
- Actual or anticipated variations in quarterly results of operations;
- Operating and stock price performance of other companies that
investors deem comparable to the Company;
- News reports relating to trends, concerns and other issues in the
financial services industry;
- Perceptions in the marketplace regarding the Company and/or its
competitors;
- New technology used, or services offered, by competitors;
- Changes in government regulations; and
- Geopolitical conditions such as acts or threats of terrorism or
military conflicts.
| • | Actual or anticipated variations in quarterly results of operations; | |
| • | Operating and stock price performance of other companies that investors deem comparable to the Company; | |
| • | News reports relating to trends, concerns and other issues in the financial services industry; | |
| • | Perceptions in the marketplace regarding the Companyand/or its competitors; | |
| • | New technology used, or services offered, by competitors; | |
| • | Changes in government regulations; and | |
| • | Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company'sCompany’s stock price to decrease regardless of operating results.
THE TRADING VOLUME IN THE COMPANY'S COMMON STOCK IS LESS THAN THAT OF OTHER
LARGER FINANCIAL SERVICES COMPANIES.
The trading volume in the Company’s common stock is less than that of other larger financial services companies.
Although the Company'sCompany’s common stock is listed for trading on the National Market System (NASDAQ), the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company'sCompany’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company'sCompany’s common stock, significant sales of the Company'sCompany’s common stock, or the expectation of these sales, could cause the Company'sCompany’s stock price to fall.
AN INVESTMENT IN OUR COMMON STOCK IS NOT AN INSURED DEPOSIT.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this "Risk Factors"“Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
The Company has no unresolved staff comments from the SEC for the reporting period presented.
ITEM 2. PROPERTIES
| ITEM 2. | PROPERTIES |
The principal offices of the Company and Thethe Bank occupy the five-story AmeriServ Financial building at the corner of Main and Franklin Streets in Johnstown plus tentwelve floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 1613 other locations which are owned in fee.owned. Ten additional locations are leased with terms expiring from January 1, 20062008 to March 31, 2018.
16
ITEM 3. LEGAL PROCEEDINGS
| ITEM 3. | LEGAL PROCEEDINGS |
The Company is subject to a number of asserted and unasserted potential legal claims encountered in the normal course of business. In the opinion of both management and legal counsel, there is no present basis to
16
conclude that the resolution of these claims will have a material adverse effect on the Company'sCompany’s consolidated financial position, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
operations or cash flows.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matter was submitted by the Company to its shareholders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
COMMON STOCK
As of January 31, 2006,2008, the Company had 4,5345,795 shareholders of its Common
Stock. On February 28, 2003, the Company and the Bank entered into a Memorandum
of Understanding (MOU) with the Federal Reserve Bank of Philadelphia (Federal
Reserve) and the Pennsylvania Department of Banking (Department). Under the
terms of the MOU, the Company and the Bank could not declare dividends, the
Company could not redeem any of its own stock, and the Company could not incur
any additional debt other than in the ordinary course of business, in each case,
without the prior written approval of the Federal Reserve and the Department.
The MOU was terminated on February 16, 2006.
COMMON STOCKcommon stock. AmeriServ Financial, Inc.'s Common Stock’s common stock is traded on the NASDAQ National Market System under the symbol ASRV. The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:
| Cash | ||||||||||||
| Prices | Dividends | |||||||||||
| High | Low | Declared | ||||||||||
Year ended December 31, 2007: | ||||||||||||
First Quarter | $ | 4.85 | $ | 4.52 | $ | 0.00 | ||||||
Second Quarter | 4.77 | 4.25 | 0.00 | |||||||||
Third Quarter | 4.26 | 3.33 | 0.00 | |||||||||
Fourth Quarter | 3.36 | 2.77 | 0.00 | |||||||||
| Year ended December 31, 2006 | ||||||||||||
| First Quarter | $ | 5.00 | $ | 4.31 | $ | 0.00 | ||||||
| Second Quarter | 5.24 | 4.50 | 0.00 | |||||||||
| Third Quarter | 4.96 | 4.43 | 0.00 | |||||||||
| Fourth Quarter | 5.00 | 4.25 | 0.00 | |||||||||
17
PERFORMANCE GRAPH
The following Performance Graph and related information shall not be deemed “Soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
Comparison of Five Year Cumulative Total Returns
Among AmeriServ Financial, Inc., NASDAQ Stock Market,
and NASDAQ Bank Stocks
Among AmeriServ Financial, Inc., NASDAQ Stock Market,
and NASDAQ Bank Stocks
The following table compares total shareholder returns for the Company over the past five years to the NASDAQ Stock Market and the NASDAQ Bank Stocks assuming a $100 investment made on December 31, 2002. Each of the three measures of cumulative return assumes reinvestment of dividends. The stock performance shown on the graph above is not necessarily indicative of future price performance.
| 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | |||||||||||||||||||||||||
| AmeriServ Financial, Inc. | $ | 100.00 | $ | 175.40 | $ | 181.40 | $ | 153.70 | $ | 173.00 | $ | 97.20 | ||||||||||||||||||
| NASDAQ Stock Market (US Companies) | 100.00 | 150.80 | 164.60 | 168.10 | 185.50 | 205.30 | ||||||||||||||||||||||||
| NASDAQ Bank Stocks | 100.00 | 133.00 | 151.20 | 148.30 | 168.70 | 135.20 | ||||||||||||||||||||||||
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SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
| At or for the Year Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| SUMMARY OF INCOME STATEMENT DATA: | ||||||||||||||||||||
| Total interest income | $ | 49,379 | $ | 46,565 | $ | 45,865 | $ | 50,104 | $ | 55,005 | ||||||||||
| Total interest expense | 25,156 | 22,087 | 21,753 | 26,638 | 30,360 | |||||||||||||||
| Net interest income | 24,223 | 24,478 | 24,112 | 23,466 | 24,645 | |||||||||||||||
| Provision for loan losses | 300 | (125 | ) | (175 | ) | 1,758 | 2,961 | |||||||||||||
| Net interest income after provision for loan losses | 23,923 | 24,603 | 24,287 | 21,708 | 21,684 | |||||||||||||||
| Total non-interest income | 14,707 | 12,841 | 10,209 | 14,012 | 16,995 | |||||||||||||||
| Total non-interest expense | 34,672 | 34,692 | 49,420 | 50,091 | 35,902 | |||||||||||||||
| Income (loss) from continuing operations before income taxes | 3,958 | 2,752 | (14,924 | ) | (14,371 | ) | 2,777 | |||||||||||||
| Provision (benefit) for income taxes | 924 | 420 | (5,902 | ) | (5,845 | ) | 587 | |||||||||||||
| Income (loss) from continuing operations | 3,034 | 2,332 | (9,022 | ) | (8,526 | ) | 2,190 | |||||||||||||
| Loss from discontinued operations, net of income taxes* | — | — | (119 | ) | (1,193 | ) | (1,641 | ) | ||||||||||||
| Net income (loss) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | $ | (9,719 | ) | $ | 549 | ||||||||
| PER COMMON SHARE DATA FROM CONTINUING OPERATIONS: | ||||||||||||||||||||
| Basic earnings (loss) per share | $ | 0.14 | $ | 0.11 | $ | (0.44 | ) | $ | (0.58 | ) | $ | 0.16 | ||||||||
| Diluted earnings (loss) per share | 0.14 | 0.11 | (0.44 | ) | (0.58 | ) | 0.16 | |||||||||||||
| PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS*: | ||||||||||||||||||||
| Basic loss per share | $ | — | $ | — | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.12 | ) | |||||||
| Diluted loss per share | — | — | (0.01 | ) | (0.08 | ) | (0.12 | ) | ||||||||||||
| PER COMMON SHARE DATA: | ||||||||||||||||||||
| Basic earnings (loss) per share | $ | 0.14 | $ | 0.11 | $ | (0.45 | ) | $ | (0.66 | ) | $ | 0.04 | ||||||||
| Diluted earnings (loss) per share | 0.14 | 0.11 | (0.45 | ) | (0.66 | ) | 0.04 | |||||||||||||
| Cash dividends declared | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||
| Book value at period end | 4.07 | 3.82 | 3.82 | 4.32 | 5.32 | |||||||||||||||
| BALANCE SHEET AND OTHER DATA: | ||||||||||||||||||||
| Total assets | $ | 904,878 | $ | 895,992 | $ | 880,176 | $ | 1,009,232 | $ | 1,148,782 | ||||||||||
| Loans and loans held for sale, net of unearned income | 636,155 | 589,435 | 550,602 | 521,416 | 503,387 | |||||||||||||||
| Allowance for loan losses | 7,252 | 8,092 | 9,143 | 9,893 | 11,682 | |||||||||||||||
| Investment securities available for sale | 144,941 | 175,543 | 201,569 | 373,584 | 524,573 | |||||||||||||||
| Investment securities held to maturity | 18,533 | 20,657 | 30,355 | 27,435 | 28,089 | |||||||||||||||
| Deposits | 710,439 | 741,755 | 712,665 | 644,391 | 654,597 | |||||||||||||||
| Total borrowings | 82,115 | 63,122 | 77,256 | 269,169 | 409,064 | |||||||||||||||
| Stockholders’ equity | 90,294 | 84,684 | 84,474 | 85,219 | 74,270 | |||||||||||||||
| Full-time equivalent employees | 351 | 369 | 378 | 406 | 413 | |||||||||||||||
| * | The Company sold its remaining mortgage servicing rights of Standard Mortgage Corporation, its former mortgage servicing subsidiary, in December 2004 |
19
| At or for the Year Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| SELECTED FINANCIAL RATIOS: | ||||||||||||||||||||
| Return on average total equity | 3.51 | % | 2.74 | % | (10.77 | )% | (11.44 | )% | 0.71 | % | ||||||||||
| Return on average assets | 0.34 | 0.27 | (0.95 | ) | (0.76 | ) | 0.05 | |||||||||||||
| Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end | 89.54 | 79.46 | 77.26 | 80.92 | 76.90 | |||||||||||||||
| Ratio of average total equity to average assets | 9.79 | 9.73 | 8.80 | 6.67 | 6.67 | |||||||||||||||
| Interest rate spread | 2.54 | 2.67 | 2.39 | 2.01 | 2.02 | |||||||||||||||
| Net interest margin | 3.06 | 3.12 | 2.76 | 2.28 | 2.31 | |||||||||||||||
| Allowance for loan losses as a percentage of loans and loans held for sale, net of unearned income, at period end | 1.14 | 1.37 | 1.66 | 1.90 | 2.32 | |||||||||||||||
| Non-performing assets as a percentage of loans, loans held for sale and other real estate owned, at period end | 0.83 | 0.39 | 0.78 | 0.75 | 2.26 | |||||||||||||||
| Net charge-offs as a percentage of average loans and loans held for sale | 0.19 | 0.16 | 0.11 | 0.68 | 0.22 | |||||||||||||||
| Ratio of earnings to fixed charges and preferred dividends:(1) | ||||||||||||||||||||
| Excluding interest on deposits | 2.60 | X | 1.93 | X | (1.35 | )X | 0.12 | X | 1.15 | x | ||||||||||
| Including interest on deposits | 1.16 | 1.12 | 0.05 | 0.46 | 1.09 | |||||||||||||||
| Cumulative one year interest rate sensitivity gap ratio, at period end | 0.90 | 0.85 | 0.89 | 0.78 | 0.96 | |||||||||||||||
| (1) | The ratio of earnings to fixed charges and preferred |
The following discussion and analysis of financial condition and results of operations of AmeriServ Financial, Inc. should be read in conjunction with the consolidated financial statements of AmeriServ Financial, Inc. including the related notes thereto, included elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004,2007, 2006, AND 2003
2005
SUMMARY OVERVIEW:
There was significant financial turmoil in the national and global market place during the fourth quarter of 2007. Concerns that a credit and liquidity crunch within the banking sector and a weak housing market impacted by risky sub prime lending practices could combine to cause the United States economy to enter a recession in 2008. Because of the actions taken early in the Turnaround effort in 2003, 2004 and 2005, AmeriServ enters this period of uncertainty with strong capital, good asset quality, reduced operating expenses and continued improvement in net income. Additionally, AmeriServ has never made a sub prime mortgage, therefore, it has never sold a sub prime mortgage and it owns no investment securities for which the collateral is sub prime mortgages. A few of the highlights of the fourth quarter of 2007 and some comments about the year as a whole follow.
| • | On January 22, 2008, AmeriServ announced fourth quarter net income of $924,000 or $0.04 per share. This was a 59% increase over the $581,000 reported for the fourth quarter of 2006. | |
| • | This level of net income meant that AmeriServ — in the fourth quarter of 2007 — reported a Return on Assets of 0.41%, the highest level reported since the balance sheet restructuring in 2005. |
20
| • | Loans Outstanding continued to grow, ending the 2007 year at $636 million. This represented solid growth of $47 million or 7.9% from the December 31, 2006 total. | |
| • | Operating Expenses declined by $69,000 from the third quarter and $20,000 for the full year creating the third consecutive year of declining expenses. | |
| • | Non-Performing Assets increased by $2.8 million over September 30, 2007. However, in early January 2008 the largest non- performing loan in the portfolio was paid off with no loss to the company, returning the coverage of the remaining non- performing assets by the Loan Loss Reserve to approximately 250%. | |
| • | The Net Interest Margin in the fourth quarter was 3.08% or 15 basis points above the fourth quarter of 2006 and demonstrated an improving trend in the second half of 2007. |
These fourth quarter highlights, combined with the improvements reported in the preceding quarters of 2007, enabled AmeriServ to report net income for the full year of $3.0 million or $0.14 per share, an increase of $702,000 or 30.1% better than the $2.3 million or $0.11 per share reported for 2006. We believe that this is tangible evidence that the AmeriServ Turnaround continued in 2007 even as conditions in our industry deteriorated. However, it is important to say that while we are pleased to report the continuing recovery of the franchise, we recognize that this level of earnings is still well below the level AmeriServ should be reporting. We remain committed to continue the unrelenting focus on building upon our growing strength in the community banking and trust activities which have been the focus of the Turnaround.
On January 22, 2008, AmeriServ also announced a stock repurchase program with a goal to buy back up to 5% — or approximately 1.1 million — of the outstanding common shares. The Board and management believe this is a positive strategy that will benefit shareholders. During 2007 the common stock prices of most banks were severely punished by investors who were concerned about the spreading turmoil in financial markets. By the end of 2007 many bank stocks, including that of AmeriServ, were selling below their stated book value. With the balance sheet restructuring activities of 2004 and 2005, AmeriServ not only reduced the size of the Company but also reduced the level of risk present on the restructured balance sheet. Concurrently, a maximum effort was effective in reducing the level of non-performing assets below that of AmeriServ’s peer banks. We believe this stock repurchase program will result in positive changes. The number of shares outstanding will be reduced with the goal of improving future earnings per share. This will also allow us to return a portion of Company capital to shareholders while maintaining conservative capital ratios.
For the year ended December 31, 2006, the Company returned to profitability by reporting net income of $2.3 million or $0.11 per share. This compared favorably to the net loss of $9.1 million or ($0.45) per share reported for 2005. These positive 2006 earnings were generated from traditional community banking and trust activities with no complex financial transactions or unusual strategies. These earnings are an indication that the operating losses of 2002 and 2003 have ended and that the balance sheet restructuring losses of 2004 and 2005 have accomplished their stated goal — to reconstitute AmeriServ as a safe and sound community bank with a growing trust and asset management subsidiary.
Specifically when analyzing 2005, the successful completion of a $10.3 million private placement common stock offering on September 29, 2005 provided the Company with the capital to facilitate a series of transactions in the third and fourth quarters of 2005
which were designed to significantly improve the Company'sCompany’s interest rate risk position and position the Company for future increased earnings performance. These transactions and their related impact on 2005 earnings were as follows: 1) We retired all remaining $100 million of Federal Home Loan Bank (FHLB) convertible advances that had a cost of approximately 6.0% and a 2010 maturity. The Company incurred a $6.5 million pre-tax prepayment penalty to accomplish this transaction. 2) We terminated all interest rate hedges associated with the FHLB debt. The Company incurred a pre-tax termination fee of $5.8 million to eliminate these hedges on which the Company was a net payer. 3) We sold $112 million of investment securities to provide the additional cash needed by the Bank for these FHLB debt and interest rate swap prepayments. The Company incurred a $2.5 million pre-tax loss on these investment security sales. 4) We redeemed at par $7.2 million of our high coupon trust preferred securities for which the Company incurred a $210,000 charge to write-off related unamortized issuance costs which is included within other expense. Similar balance sheet repositioning actions were also executed in the
fourth quarter of 2004 as a result of $25.8 million of funds provided from a
shareholder approved two tranche private placement common stock offering. These
transactions and their related impact on 2004 earnings were as follows: 1) We
retired $125 million in FHLB term borrowings that had a cost of approximately
6.0% and a 2010 maturity. The Company incurred a $12.6 million pre-tax
prepayment penalty to accomplish this transaction. 2) We redeemed at par $15.3
million of outstanding trust preferred securities for which the Company incurred
a $476,000 charge to write-off unamortized issuance costs. 3) We sold all
remaining mortgage servicing rights and took the necessary steps to terminate
operations at Standard Mortgage Corporation in Atlanta, Georgia. The cost of
this closing was approximately $800,000 in 2004, but the closing eliminates an
activity that lost $1.2 million in 2004 and $1.6 million in 2003. 4) We restored
cash reserves at the parent company and closed an outpost branch office in
Harrisburg, Pennsylvania for which the Company incurred $170,000 of costs.
These transactions were significant factors that caused the Company to report a net loss of $9.1 million or ($0.45) per share for 2005 and a net loss
of $9.7 million or ($0.66) per share for 2004. Withlosses in 2005.
21
However, the majority of these
balance sheet repositioning actions
21
completed by the end of the third quarter of 2005, the Company did return to
profitability in the fourth quarter by reporting net income of $220,000 or $0.01
per diluted share. The execution of these transactions combined with the capital provided from the successful private placement common stock offerings strengthened the Company'sCompany’s balance sheet and reduced its risk profile. At
December 31, 2005, the Company's asset leverage ratio improved to 10.24%
compared to 7.71% at June 30, 2004 which was the last quarter-end prior to
commencing the balance sheet repositioning actions.
Overall, the years 2004 and 2005 have been critical years in designing and
executing the Turnaround of the Company. As 2005 ended, AmeriServ Financial,
Inc. bore little resemblance to the Company that began 2004. Some of the more
substantive changes are as follows:
- Ten institutional investors have provided ASRV with $36.1 million of
new capital over the past 15 months.
- The Company has repaid all of its costly long-term convertible
borrowings from the FHLB of Pittsburgh such that the FHLB borrowings
to total assets has been reduced from over 30% to just 7.3% at
December 31, 2005.
- The original $35 million of Trust Preferred Securities, which accrue
interest at an annual rate of 8.45%, have been reduced to an
outstanding balance of $13 million thus decreasing our annual debt
service by nearly $2 million.
- The losses of Standard Mortgage Corporation have been ended by closing
the company completely.
- A troublesome level of non-performing assets has been reduced to 0.78%
of total loans, a level comparable with that of competing peer banks.
- The newly reconstituted lending area has grown loans outstanding since
December 2003 by 9.2%.
- The Retail Bank has reasserted itself and deposit growth in the period
since December 2003 was 8.9%.
- Through all of the difficulties the Trust Company continued its
double-digit growth in assets under management and increased its net
income contribution by approximately 50% in 2005.
- The Company complied with all aspects of the regulatory Memorandum of
Understanding that had been in effect since February 2003 and was
subsequently terminated in February 2006.
We have completed the first significant Turnaround goal of restructuring
the balance sheet into that of a traditional community bank operating within the
normal policies and procedures expected by the regulatory authorities. The next
step in the Turnaround is to attack financial performance with the same level of
intensity that has been directed at balance sheet restructuring and regulatory
compliance. The challenge for the future is to improve earnings performance to
peer levels through a disciplined focus on community banking and our growing
trust company.
PERFORMANCE OVERVIEW.OVERVIEW. . .The following table summarizes some of the Company'sCompany’s key profitability performance indicators for each of the past three years.
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands, except per share data and ratios) | ||||||||||||
| Net income (loss) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | |||||
| Diluted earnings (loss) per share | 0.14 | 0.11 | (0.45 | ) | ||||||||
| Return on average equity | 3.51 | % | 2.74 | % | (10.77 | )% | ||||||
The Company reported net income of $3.0 million or $0.14 per diluted share for 2007. This represents an increase of $702,000 or 30.1% when compared to net income of $2.3 million or $0.11 per diluted share for the full year 2006. The increase in net income in 2007 was due to increased non-interest revenue and lower non-interest expense which more than offset the negative impact of reduced net interest income, a higher provision for loan losses and increased income tax expense. The increase in non-interest revenue was driven by the benefit of the West Chester Capital Advisors acquisition which was completed in March of 2007. Also, the Company benefited from higher trust revenue and increased gains on asset sales in 2007.
The Company reported net income of $2.3 million or $0.11 per diluted share for 2006 compared to a net loss of $9.1 million or ($0.45) per diluted share for
2005 compared to a net loss of $9.7 million or ($0.66) per share for 2004. The
loss in both years was due largely to the balance sheet repositioning actions
discussed above. However, the 2005 performance was positively impacted by
increased net interest income and a lower provision for loan losses due to
continuing asset quality improvements. Also, the net loss from discontinued
operations declined by $1.1 million between years as a result of the closure of
the SMC in 2005. The Company's 2004 performanceCompany increased earnings in 2006 by generating more revenue from traditional community banking and its trust company while reducing its non-interest expense base. This revenue improvement was also negatively impactedevidenced by reduced net
interest income and lower non-interest revenue when compared to 2003. These
negative items were partially offset by a reduced loan loss provision and an
increased income tax benefit. A net losslevels of $1.2 million from discontinued
operations is also reflected in the Company's 2004 performance.
22
The Company reported net income of $549,000 or $0.04 per share in 2003.
This represented a turnaround from the net loss of $5.2 million or $0.37 per
share in 2002. The improved net income in 2003 when compared to 2002 resulted
from reduced non-interest expenses and a lower provision for loan losses. These
positive items more than offset reduced revenue from both net interest income and non-interest income. The Company also benefited from a negative loan loss provision for the second consecutive year in 2006 due to the demonstrated sustained improvement in its asset quality. The Company’s financial performance was negatively impacted by increased income tax expense in 2006 after recording an income tax benefit in 2005 due to the large pre-tax loss realized that year from the balance sheet restructuring actions discussed earlier.
NET INTEREST INCOME AND MARGIN.MARGIN. . . .The Company'sCompany’s net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company'sCompany’s earnings; it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. The following table summarizes the Company'sCompany’s net interest income performance for each of the past three years:
2005
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands, except ratios) | ||||||||||||
| Interest income | $ | 49,379 | $ | 46,565 | $ | 45,865 | ||||||
| Interest expense | 25,156 | 22,087 | 21,753 | |||||||||
| Net interest income | 24,223 | 24,478 | 24,112 | |||||||||
| Tax-equivalent adjustment | 91 | 96 | 108 | |||||||||
| Net tax-equivalent interest income | $ | 24,314 | $ | 24,574 | $ | 24,220 | ||||||
| Net interest margin | 3.06 | % | 3.12 | % | 2.76 | % | ||||||
2007 NET INTEREST PERFORMANCE OVERVIEW...OVERVIEW. . . The Company's 2005Company’s 2007 net interest income on a tax equivalenttax-equivalent basis decreased by $260,000 or 1.1% from 2006 due to a six basis point drop in the net interest margin to 3.06%. The decline in both net interest income and net interest margin resulted from the Company’s cost of funds increasing at a faster pace than the earning asset yield particularly during the first six months of 2007. This resulted from deposit customer preference for higher yielding certificates of deposit and money market accounts due to the inverted/flat yield curve with short-term interest rates exceeding intermediate to longer term rates during that period. This net interest margin pressure overshadowed solid loan and deposit growth within our community bank. Average loans in 2007 grew by $43 million or 7.7% while average deposits increased by $14 million or 1.9% when
22
compared to 2006. However, it is important to note that the Federal Reserve reductions in short-term interest rates that began late in the third quarter of 2007 favorably impacted the Company. On a quarterly basis, the Company’s net interest margin has shown improvement throughout 2007 increasing from 2.97% in the first quarter to 3.08% in the fourth quarter. This helped to reverse a trend of four consecutive quarters of net interest income and margin contraction experienced in 2006 where the margin declined from 3.20% to a low of 2.93% in the fourth quarter. The Company believes it is well positioned for net interest income and margin expansion in 2008.
COMPONENT CHANGES IN NET INTEREST INCOME: 2007 VERSUS 2006...Regarding the separate components of net interest income, the Company’s total interest income for 2007 increased by $2.8 million or 6.0% when compared to 2006. This increase was due to a 30 basis point increase in the earning asset yield to 6.23%, and was aided by an $8 million increase in average earning assets. Within the earning asset base, the yield on the total loan portfolio increased by 18 basis points to 6.82% and reflects the higher interest rate environment in place during most of 2007 which has allowed the Company to book new loans at rates moderately higher than those currently in the portfolio. The yield on the total investment securities portfolio increased by 12 basis points to 4.08% as the Company has generally elected to not replace maturing lower yielding securities. Also reduced amortization expense on the Company’s lower balance of mortgage-backed securities has favorably impacted the portfolio yield.
The $8 million increase in average earning assets was due to a $43 million or 7.7% increase in average loans partially mitigated by a $38 million or 17.0% reduction in average investment securities. This loan growth was driven by increased commercial and commercial real estate loans as a result of successful new business development efforts. Note that the Company has focused on growing the higher yielding and more rate sensitive commercial loans at a faster rate than the commercial real-estate loans. The decline in investment securities was caused by regularly scheduled maturities and ongoing cash flow from mortgage-backed securities. The Company has elected to utilize this cash from lower yielding investment securities to fund higher yielding loans in an effort to increase the Company’s earning asset yield.
The Company’s total interest expense for 2007 increased by $3.1 million or 13.9% when compared to 2006. This increase in interest expense was due to a higher cost of funds and an increase in total average interest bearing liabilities which were $4.0 million higher in 2007. The total cost of funds for 2007 increased by 43 basis points to 3.69% and was driven up by higher short-term interest rates and increased deposits when compared to 2006. Specifically, total average deposits increased by $14 million or 1.9% compared to 2006, while the cost of interest bearing deposits increased by 49 basis points to 3.54%. The increased cost of deposits reflects the higher short-term interest rate environment for the majority of 2007 as well as a customer movement of funds from lower cost savings accounts into higher yielding certificates of deposit. Average wholesale borrowings declined by $9 million in 2007 and averaged only 2.8% of total assets in 2007.
2006 NET INTEREST PERFORMANCE OVERVIEW. . . The Company’s 2006 net interest income on atax-equivalent basis increased by $637,000$354,000 or 2.7%1.5% from 2004.2005. This increase reflectsimprovement reflected the benefit of an improvedincreased net interest margin that haswhich more than offset a sizable decline in thereduced level of average earning assets. Specifically, the net interest margin increased by 4836 basis points to 2.76%3.12% while the level of average earning assets declined by $153 million.$91 million or 10.4%. Both of these items reflectreflected the benefits of the previously mentioned balance sheet restructuring where the removal of high cost debt from the Company'sCompany’s balance sheet hashad resulted in lower levels of both borrowed funds and investment securities. Wholesale borrowings averaged only 3.9% of total assets in 2006 compared to 15.8% of total assets in 2005 while investment securities as a percentage of total assets had declined from 36.5% to 25.4% during this same period. The Company'sCompany’s net interest margin and net interest income also benefited from increased loans in the earning asset mix as total loans outstanding averaged $525$564 million in 2005,2006, a $28$39 million or 5.7%7.4% increase from 2004.2005. This loan growth was most evident in thedriven by increased commercial loan portfolio as a
result of successful new business development efforts. Deposits continued their
recovery from the low point reached in the fourth quarter of 2004.and commercial real estate loans. Total deposits averaged $700$735 million in 2005,2006, a $37$35 million or 5.5%5.0% increase from 20042005 due primarily to increased deposits from the trust company's operations. Thiscompany’s operations and increased certificates of deposit growth also allowedas customers demonstrated a preference for this product due to higher short-term interest rates. Overall, the Company generated increased net interest income from a smaller but stronger balance sheet despite the negative impact resulting from a flat to further reduce FHLB borrowings as these
borrowings amounted to only 7.3% of total assets at December 31, 2005 compared
to 25% of total assets at December 31, 2004.
inverted yield curve which pressured the Company’s net interest margin on a quarterly basis throughout 2006.
COMPONENT CHANGES IN NET INTEREST INCOME: 2005 2006 VERSUS 2004...Regarding2005... Regarding the separate components of net interest income, the Company'sCompany’s total interest income for 2005 decreased2006 increased by $4.2 million$688,000 or 8.5% 1.5%
23
when compared to 2004.2005. This decreaseincrease was due to a $153 million decline in average earning assets but was partially
offset by a 3969 basis point increase in the earning asset yield to 5.24%.5.93%, but was partially offset by a $91 million decrease in average earning assets. Within the earning asset base, the yield on the total loan portfolio increased by 2639 basis points to 6.25%. This increase reflects the impact of6.64% and reflected the higher interest rate environment in 2005 as2006 which allowed the Federal Reserve has increased short-term
interestCompany to book new loans at rates by 225 basis points overhigher than those in the past year. Note that the higher
yields reflect the upward repricing of floating rate loans as the yields on
fixed rate loans are relatively consistent with the prior year due to the
flattening of the yield curve.portfolio. The yield on the total investment securities portfolio decreasedincreased by 426 basis points to 3.70%3.96% due to the salerepricing of longer
durationvariable rate securities in the higher yielding securities as partrate environment and reduced amortization expense on the Company’s lower balance of the balance sheet restructuring.
mortgage-backed securities.
The $153$91 million decline in average earning assets was due to a $176$130 million or 33.3%37% reduction in average investment securities partially mitigated by a $28$39 million increase in average loans. The average investment securities decline in 20052006 reflects the impact of the Company'sCompany’s deleveraging and balance sheet repositioning strategystrategies which began in the second half of 2004 and continued throughout 2005. This repositioning involved selling investment securities and using the proceeds to retire borrowings. The increase in average loans reflects successful commercial loan growth as the Company was able to generate new business.business particularly in commercial real estate loans. This commercial loan growth led to a greater composition of loans in the earning asset mix that favorably impacted the Company'sCompany’s net interest margin.
The Company'sCompany’s total interest expense for 2005 decreased2006 increased by $4.9 million$334,000 or 18.3%1.5% when compared to 2004.2005. This reductionincrease in interest expense was due to a lower volumehigher cost of interest bearing liabilities. Totalfunds which more than offset the decline in total average interest bearing liabilities which were $164$87 million lower in 2005 as we have2006. We deleveraged our balance sheet by reducing high cost FHLB debt over the past 15 months. Specifically,and trust preferred securities in the fourth quartersecond half of 2004 we retired $125 million of high cost FHLB advances
and late in the third quarter of 2005 we retired the remaining $100 million of
high cost FHLB convertible advances. We also benefited from the retirement of
$22.5 million of guaranteed junior subordinated deferrable interest debentures
as part of our balance sheet restructuring which favorably reduced interest
expense by $1.3 million in 2005.
23
The total cost of funds for 20052006 increased modestly by one41 basis pointpoints to 2.85%3.26% and was driven up by higher short-term interest rates and increased deposits when compared to 2004. These higher short-term rates caused a 33 basis point increase in2005. Specifically, total average deposits increased by $35 million or 5.0% compared to 2005, while the cost of interest bearing deposits to 2.18%. Note that some of the net-interest margin
improvement was maskedincreased by the upward repricing of $100 million of interest rate
swaps and the remaining short-term borrowings. Specifically, in 2004 the Company
was a net receiver of $1.6 million from the interest rate hedges compared to a
net payer of $27,000 in 2005 or a net unfavorable change of $1.6 million. We
terminated these interest rate hedges as part of the third quarter 2005 balance
sheet repositioning.
2004 NET INTEREST PERFORMANCE OVERVIEW. . .The Company's 2004 net interest
income on a tax-equivalent basis decreased by $1.1 million or 4.5% from 2003 due
to a lower level of earning assets and a three basis point decline in the net
interest margin to 2.28%. Loan portfolio shrinkage combined with a reduced level
of investment securities resulting from the Company's decision to delever its
balance sheet in the fourth quarter of 2004 caused the reduction in earning
assets. The modest decline in the net interest margin was due to the earning
asset yield declining to a greater extent than the cost of funds in 2004, due to
the flattening of the yield curve.
COMPONENT CHANGES IN NET INTEREST INCOME: 2004 VERSUS 2003. . .Regarding
the separate components of net interest income, the Company's total interest
income for 2004 decreased by $4.9 million or 8.9% when compared to 2003. This
decrease was due to a $32.5 million decline in average earning assets and a 30
basis point drop in the earning asset yield to 4.85%. Within the earning asset
base, the yield on the total investment securities portfolio dropped by 2587 basis points to 3.74% while3.05%. The increased cost of deposits reflects the yield on the total loan portfolio decreased by 31
basis points to 5.99%. Bothhigher short-term interest rate environment as well as a customer movement of these declines reflect the impact of asset
prepayments as borrowers elected to refinance their higher fixed rate loansfunds from lower cost savings and demand deposit accounts into
lower rate loans available over the past several years. Additionally, a lower
level of higher yielding commercial loans had a negative impact on the total
loan portfolio yield.
The $32.5 million decline in the volume of earning assets was due to a
$19.3 million or 3.7% decrease in average loans and a $14.2 million or 2.6%
decrease in average investment securities. The decline in average loans reflects
the results of heightened prepayment pressures experienced throughout 2003.
While the Company experienced new commercial loan growth in the fourth quarter
of 2004, its full impact was not felt until 2005. The decline in average
investment securities represents the results of the deleveraging strategy in the
fourth quarter of 2004 in which the Company reduced the size of its securities
portfolio by approximately $125 million in order to prepay certain high cost
FHLB advances. However, because this deleveraging occurred late in the year its
effect on average investment securities was diminished. The deleveraging had a
favorable impact on the Company's net interest margin in 2005.
The Company's total interest expense for 2004 decreased by $3.7 million or
12.3% when compared to 2003. This reduction in interest expense was due to a
lower volume of interest bearing liabilities and a reduced cost of funds. Total
average interest bearing liabilities were $38.7 million or 4.0% lower in 2004 as
fewer deposits and borrowings were needed to fund the smaller earning asset
base. The total cost of funds declined by 29 basis points to 2.84% and was
driven down by a reduced cost of both deposits and borrowings. Specifically, the
cost of interest bearing deposits decreased by 20 basis points to 1.85% and the
cost of short-term borrowings and FHLB advances declined by 31 basis points to
3.96%. The reduced deposit cost was caused by lower rates paid particularly for
certificates of deposits. The lower cost of borrowings reflected the downward
repricing of maturing FHLB advances to lower current market rates and the full
year favorable impact that the fair value hedges had on reducing interest
expense by $1.6 million in 2004 compared to $451,000 in 2003. As a result of the
deleveraging strategy, the Company reduced its ratio of FHLB advances and
short-term borrowings to total assets to 25.1% at December 31, 2004 compared to
32.7% at December 31, 2003.
deposit.
24
The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders'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) 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) net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables loan balances exclude non-accrual loans, but interest income recorded on non-accrual loans on a cash basis, which is deemed to be immaterial, is included in interest income. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of approximately 34% is used to compute tax-equivalent yields.
24
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||||||||||
| Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||
| Interest earning assets: | ||||||||||||||||||||||||||||||||||||
| Loans, net of unearned income | $ | 607,507 | $ | 41,654 | 6.82 | % | $ | 564,173 | $ | 37,693 | 6.64 | % | $ | 525,401 | $ | 33,055 | 6.25 | % | ||||||||||||||||||
| Deposits with banks | 500 | 20 | 4.00 | 706 | 23 | 3.26 | 770 | 6 | 0.78 | |||||||||||||||||||||||||||
| Federal funds sold | 2,278 | 121 | 5.26 | 62 | 3 | 5.21 | — | — | — | |||||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||||||
| Available for sale | 163,860 | 6,636 | 3.96 | 197,256 | 7,868 | 3.92 | 326,533 | 11,926 | 3.65 | |||||||||||||||||||||||||||
| Held to maturity | 20,257 | 1,039 | 5.04 | 24,448 | 1,074 | 4.39 | 25,422 | 986 | 3.88 | |||||||||||||||||||||||||||
| Total investment securities | 184,117 | 7,675 | 4.08 | 221,704 | 8,942 | 3.96 | 351,955 | 12,912 | 3.70 | |||||||||||||||||||||||||||
| TOTAL INTEREST EARNING ASSETS/ INTEREST INCOME | 794,402 | 49,470 | 6.23 | 786,645 | 46,661 | 5.93 | 878,126 | 45,973 | 5.24 | |||||||||||||||||||||||||||
| Non-interest earning assets: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 17,750 | 18,841 | 21,449 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 8,623 | 8,324 | 9,365 | |||||||||||||||||||||||||||||||||
| Other assets | 70,369 | 68,920 | 63,401 | |||||||||||||||||||||||||||||||||
| Assets of discontinued operations | — | — | 1,135 | |||||||||||||||||||||||||||||||||
| Allowance for loan losses | (7,755 | ) | (8,750 | ) | (9,613 | ) | ||||||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 883,389 | $ | 873,980 | $ | 963,863 | ||||||||||||||||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Interest bearing deposits: | ||||||||||||||||||||||||||||||||||||
| Interest bearing demand | $ | 67,132 | $ | 1,184 | 1.76 | % | $ | 57,817 | $ | 606 | 1.05 | % | $ | 54,695 | $ | 227 | 0.41 | % | ||||||||||||||||||
| Savings | 71,922 | 549 | 0.76 | 81,964 | 643 | 0.78 | 96,819 | 829 | 0.86 | |||||||||||||||||||||||||||
| Money market | 158,947 | 6,040 | 3.80 | 172,029 | 5,741 | 3.34 | 156,932 | 3,256 | 2.07 | |||||||||||||||||||||||||||
| Other time | 346,134 | 15,038 | 4.34 | 319,220 | 12,242 | 3.83 | 284,951 | 8,673 | 3.04 | |||||||||||||||||||||||||||
| Total interest bearing deposits | 644,135 | 22,811 | 3.54 | 631,030 | 19,232 | 3.05 | 593,397 | 12,985 | 2.18 | |||||||||||||||||||||||||||
| Federal funds purchased and other short-term borrowings | 19,844 | 972 | 4.89 | 32,821 | 1,672 | 5.09 | 78,152 | 2,599 | 3.32 | |||||||||||||||||||||||||||
| Advances from Federal Home Loan Bank | 4,852 | 253 | 5.22 | �� | 967 | 63 | 6.45 | 73,924 | 4,510 | 6.10 | ||||||||||||||||||||||||||
| Guaranteed junior subordinated deferrable interest debentures | 13,085 | 1,120 | 8.57 | 13,085 | 1,120 | 8.57 | 19,345 | 1,659 | 8.58 | |||||||||||||||||||||||||||
| TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE | 681,916 | 25,156 | 3.69 | 677,903 | 22,087 | 3.26 | 764,818 | 21,753 | 2.85 | |||||||||||||||||||||||||||
| Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 105,306 | 104,266 | 107,018 | |||||||||||||||||||||||||||||||||
| Liabilities of discontinued operations | — | — | 379 | |||||||||||||||||||||||||||||||||
| Other liabilities | 9,703 | 6,765 | 6,780 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 86,464 | 85,046 | 84,868 | |||||||||||||||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 883,389 | $ | 873,980 | $ | 963,863 | ||||||||||||||||||||||||||||||
| Interest rate spread | 2.54 | 2.67 | 2.39 | |||||||||||||||||||||||||||||||||
| Net interest income/net interest margin | 24,314 | 3.06 | % | 24,574 | 3.12 | % | 24,220 | 2.76 | % | |||||||||||||||||||||||||||
| Tax-equivalent adjustment | (91 | ) | (96 | ) | (108 | ) | ||||||||||||||||||||||||||||||
| Net interest income | $ | 24,223 | $ | 24,478 | $ | 24,112 | ||||||||||||||||||||||||||||||
25
The average balance and yield on taxable securities was $352 million and
3.70%, $528 million and 3.74% and $542 million and 3.99% for 2005, 2004, and
2003, respectively. The Company had no tax-exempt securities in any of the
periods presented.
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
| 2007 vs. 2006 | 2006 vs. 2005 | |||||||||||||||||||||||
| Increase (Decrease) due to Change in: | Increase (Decrease) due to Change in: | |||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| INTEREST EARNED ON: | ||||||||||||||||||||||||
| Loans, net of unearned income | $ | 2,928 | $ | 1,033 | $ | 3,961 | $ | 2,513 | $ | 2,125 | $ | 4,638 | ||||||||||||
| Deposits with banks | (14 | ) | 11 | (3 | ) | — | 17 | 17 | ||||||||||||||||
| Federal funds sold | 118 | — | 118 | 3 | — | 3 | ||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||
| Available for sale | (1,286 | ) | 79 | (1,207 | ) | (4,990 | ) | 932 | (4,058 | ) | ||||||||||||||
| Held to maturity | (257 | ) | 197 | (60 | ) | (36 | ) | 124 | 88 | |||||||||||||||
| Total investment securities | (1,543 | ) | 276 | (1,267 | ) | (5,026 | ) | 1,056 | (3,970 | ) | ||||||||||||||
| Total interest income | 1,489 | 1,320 | 2,809 | (2,510 | ) | 3,198 | 688 | |||||||||||||||||
| INTEREST PAID ON: | ||||||||||||||||||||||||
| Interest bearing demand deposits | 111 | 467 | 578 | 13 | 366 | 379 | ||||||||||||||||||
| Savings deposits | (78 | ) | (16 | ) | (94 | ) | (116 | ) | (70 | ) | (186 | ) | ||||||||||||
| Money market | (369 | ) | 668 | 299 | 337 | 2,148 | 2,485 | |||||||||||||||||
| Other time deposits | 1,084 | 1,712 | 2,796 | 1,139 | 2,430 | 3,569 | ||||||||||||||||||
| Federal funds purchased and other short-term borrowings | (637 | ) | (63 | ) | (700 | ) | (1,964 | ) | 1,037 | (927 | ) | |||||||||||||
| Advances from Federal Home Loan Bank | 199 | (9 | ) | 190 | (4,721 | ) | 274 | (4,447 | ) | |||||||||||||||
| Guaranteed junior subordinated deferrable interest debentures | — | — | — | (537 | ) | (2 | ) | (539 | ) | |||||||||||||||
| Total interest expense | 310 | 2,759 | 3,069 | (5,849 | ) | 6,183 | 334 | |||||||||||||||||
| Change in net interest income | $ | 1,179 | $ | (1,439 | ) | $ | (260 | ) | $ | 3,339 | $ | (2,985 | ) | $ | 354 | |||||||||
LOAN QUALITY.QUALITY. . .AmeriServ Financial'sFinancial’s written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. CreditThe Company’s policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial loans and for all commercial mortgagesmortgage loan relationships with aggregate balances in excess of $250,000 within a12-month period. In addition, due toThe Company defines classified loans as those loans rated substandard or doubtful. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business loans $250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the secured naturepool if factors such as significant delinquency in payments of residential mortgages
and the smaller balances of individual installment loans, sampling techniques
are used on a continuing basis for credit reviews in these loan areas.90 days or more, bankruptcy, or other negative
26
economic concerns indicate impairment. The following table sets forth information concerning AmeriServ Financial'sFinancial’s loan delinquency and other non-performing assets.
| At December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands, except percentages) | ||||||||||||
| Total loan past due 30 to 89 days | $ | 3,559 | $ | 2,991 | $ | 4,361 | ||||||
| Total non-accrual loans | 5,238 | 2,286 | 4,149 | |||||||||
| Total non-performing assets(1) | 5,280 | 2,292 | 4,315 | |||||||||
| Loan delinquency as a percentage of total loans and loans held for sale, net of unearned income | 0.56 | % | 0.51 | % | 0.79 | % | ||||||
| Non-accrual loans as a percentage of total loans and loans held for sale, net of unearned income | 0.82 | 0.39 | 0.75 | |||||||||
| Non-performing assets as a percentage of total loans and loans held for sale, net of unearned income, and other real estate owned | 0.83 | 0.39 | 0.78 | |||||||||
| (1) | Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as |
Loan delinquency levels have now remained below 1% for the past due 90 days or more as to
interestthree years and principal payments of which some are insured for credit loss,
and (iii) other real estate owned.
Each ofreflect the Company'simproved loan quality metrics displayed in the above table
demonstrated significant improvement between 2003 and 2004 and remained stable
at the lower levels in 2005.portfolio quality. This improvementstability resulted from the Company'sCompany’s diligent focus on improving asset quality as one of the core strategies of the Company's Turnaround. Loan delinquency levels have now remained below 1% forCompany’s turnaround. Non-performing assets totaled $5.3 million or 0.83% of total loans at December 31, 2007 which represented an increase from the past two years and reflectapproximate $2.4 million non-performing asset total at December 31, 2006. The increase during the improved loan portfolio quality. Non-performing
asset levels also declined by $7.5 million between 2003 and 2004 due to the
successful work-outfourth quarter of the Company's two largest problem credits during 2004.
The $421,000 increase in non-performing assets between 2004 and 2005 was due
largely to2007 resulted primarily from the transfer of a $1.6$2.4 million commercial real-estate loan into non-accrual 26
status duringstatus. The Company is pleased to report that this non-performing loan was subsequently paid-off in January 2008 with no loss to the fourth quarter. This secured commercial loan is to a borrower
in the retail sector who filed for reorganization under Chapter 13 bankruptcy
protection.
bank.
Overall, the Company had one loan totaling $258,000$1.2 million at December 31, 2005,2007, that had been restructured which involved forgiving a portion of interest or
principal on this loan or granting loan rates less than that of the market rate.
While we are pleased with the notedsustained improvement in asset quality, we continue to closely monitor the portfolio given the number of relatively large sized commercial and commercial real estate loans within the portfolio. As of December 31, 2005,2007, the 25 largest credits represented 33.5%31.4% of total loans outstanding. This portfolio characteristic combined with the limited seasoning
of recent new loan production are some of the factors that the Company
considered in maintaining a $784,000 general unallocated reserve within the
allowance for loan losses at December 31, 2005.
ALLOWANCE AND PROVISION FOR LOAN LOSSES.LOSSES. . . As described in more detail in the Critical Accounting Policies and Estimates section of this MD&A, the Company uses a comprehensive methodology and procedural discipline to maintain an allowance for loan losses 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) reserves 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 and non-performing 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 unallocatedrisk reserve which provides adequate positioning in the event of variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the bank'sbank’s loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. Note that the qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company's
27
Company’s management to establish allocations which accommodate each of the listed risk factors. The following table sets forth changes in the allowance for loan losses and certain ratios for the periods ended.
27
The Company recorded a negative loan loss provision of $125,000 for 2006 and $175,000 in 2005
compared to a provision of $1.8 million for 2004 or a2005. The Company did experience higher net favorable change of
$1.9 million. The overall reduced provision in 2005 resulted from a sustained
improvement in asset quality. Net charge-offs in 2005 totaled $575,0002007, as net charge-offs amounted to $1.1 million or 0.11%0.19% of total loans compared to net charge-offs of $3.4 million$926,000 or 0.68%0.16% of total loans for 2006 and net charge-offs of $575,000 or 0.11% of total loans in 2004. Non-performing assets2005. Note that the Company’s
| Year Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (In thousands, except ratios and percentages) | ||||||||||||||||||||
| Balance at beginning of year | $ | 8,092 | $ | 9,143 | $ | 9,893 | $ | 11,682 | $ | 10,035 | ||||||||||
| Transfer to reserve for unfunded loan commitments | — | — | — | (122 | ) | (139 | ) | |||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Commercial | (934 | ) | (769 | ) | (214 | ) | (1,107 | ) | (425 | ) | ||||||||||
| Commercial loans secured by real estate | (12 | ) | (2 | ) | (113 | ) | (1,928 | ) | (172 | ) | ||||||||||
| Real estate-mortgage | (79 | ) | (76 | ) | (145 | ) | (139 | ) | (331 | ) | ||||||||||
| Consumer | (307 | ) | (397 | ) | (403 | ) | (867 | ) | (645 | ) | ||||||||||
| Total charge-offs | (1,332 | ) | (1,244 | ) | (875 | ) | (4,041 | ) | (1,573 | ) | ||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial | 40 | 115 | 77 | 410 | 170 | |||||||||||||||
| Commercial loans secured by real estate | 38 | 41 | 15 | 7 | 2 | |||||||||||||||
| Real estate-mortgage | 12 | 19 | 52 | 65 | 63 | |||||||||||||||
| Consumer | 102 | 143 | 156 | 134 | 163 | |||||||||||||||
| Total recoveries | 192 | 318 | 300 | 616 | 398 | |||||||||||||||
| Net charge-offs | (1,140 | ) | (926 | ) | (575 | ) | (3,425 | ) | (1,175 | ) | ||||||||||
| Provision for loan losses | 300 | (125 | ) | (175 | ) | 1,758 | 2,961 | |||||||||||||
| Balance at end of year | $ | 7,252 | $ | 8,092 | $ | 9,143 | $ | 9,893 | $ | 11,682 | ||||||||||
| Loans and loans held for sale, net of unearned income: | ||||||||||||||||||||
| Average for the year | $ | 610,685 | $ | 567,435 | $ | 528,545 | $ | 503,742 | $ | 525,604 | ||||||||||
| At December 31 | 636,155 | 589,435 | 550,602 | 521,416 | 503,387 | |||||||||||||||
| As a percent of average loans and loans held for sale: | ||||||||||||||||||||
| Net charge-offs | 0.19 | % | 0.16 | % | 0.11 | % | 0.68 | % | 0.22 | % | ||||||||||
| Provision for loan losses | 0.05 | (0.02 | ) | (0.03 | ) | 0.35 | 0.56 | |||||||||||||
| Allowance for loan losses | 1.19 | 1.43 | 1.73 | 1.96 | 2.22 | |||||||||||||||
| Allowance as a percent of each of the following: | ||||||||||||||||||||
| Total loans and loans held for sale, net of unearned income | 1.14 | 1.37 | 1.66 | 1.90 | 2.32 | |||||||||||||||
| Total delinquent loans (past due 30 to 89 days) | 203.77 | 270.54 | 209.65 | 298.79 | 79.82 | |||||||||||||||
| Total non-accrual loans | 138.45 | 353.98 | 220.37 | 255.70 | 108.36 | |||||||||||||||
| Total non-performing assets | 137.35 | 353.05 | 211.89 | 254.06 | 102.37 | |||||||||||||||
| Allowance as a multiple of net charge-offs | 6.36 | x | 8.74 | x | 15.90 | x | 2.89 | x | 9.94 | x | ||||||||||
| Total classified loans | $ | 10,839 | $ | 15,163 | $ | 20,208 | $ | 22,921 | $ | 35,135 | ||||||||||
For 2007, the provision for loan losses amounted to $300,000 compared to reserve for unfunded loan commitments -- (122) (139) -- --
-------- -------- -------- -------- --------
Charge-offs:
Commercial (214) (1,107) (425) (5,119) (1,147)
Commercial loans secured by real estate (113) (1,928) (172) -- --
Real estate-mortgage (145) (139) (331) (516) (220)
Consumer (403) (867) (645) (348) (453)
-------- -------- -------- -------- --------
Total charge-offs (875) (4,041) (1,573) (5,983) (1,820)
-------- -------- -------- -------- --------
Recoveries:
Commercial 77 410 170 584 133
Commercial loans secured by real estate 15 7 2 -- --
Real estate-mortgage 52 65 63 160 65
Consumer 156 134 163 179 166
-------- -------- -------- -------- --------
Total recoveries 300 616 398 923 364
-------- -------- -------- -------- --------
Net charge-offs (575) (3,425) (1,175) (5,060) (1,456)
Provision for loan losses (175) 1,758 2,961 9,265 1,350
-------- -------- -------- -------- --------
Balance at end of year $ 9,143 $ 9,893 $ 11,682 $ 10,035 $ 5,830
======== ======== ======== ======== ========
Loans and loans held for sale, net of unearned income:
Average for the year $528,545 $503,742 $525,604 $592,686 $566,884
At December 31 550,602 521,416 503,387 572,977 599,481
As a percent of average loans and loans held for sale:
Net charge-offs 0.11% 0.68% 0.22% 0.85% 0.26%
Provision for loan losses (0.03) 0.35 0.56 1.56 0.24
Allowance for loan losses 1.73 1.96 2.22 1.69 1.03
Allowance as a percent of each of the following:
Total loans and loans held for sale, net of unearned income 1.66 1.90 2.32 1.75 0.97
Total delinquent loans (past due 30 to 89 days) 209.65 298.79 79.82 56.13 48.97
Total non-accrual loans 220.37 255.70 108.36 147.77 62.67
Total non-performing assets 211.89 254.06 102.37 144.10 58.04
Allowance as a multiple of net charge-offs 15.90x 2.89x 9.94x 1.98x 4.01x
Total classified loans $ 20,208 $ 22,921 $ 35,135 $ 20,666 $ 13,758
28
2007 net charge-offs were materially impacted by a third quarter $875,000 complete charge-off of a commercial loan that resulted from fraud committed by the borrower. Classified loans have now declined for four consecutive years from a high point of $35.1 million at December 31, 2003 to $10.8 million at December 31, 2007. This is another metric that demonstrates the 2003 levels and have
stabilizedsustained improvement in asset quality that the Company has experienced.
Additionally, at approximately $4 million over the past two year-ends. Overall, the
balance inDecember 31, 2007, the allowance for loan losses declined by $750,000 during 2005 to
$9.1 million at December 31, 2005.
Additionally, at December 31, 2005, the loan loss reserve as a percentage of total loans amounted to 1.66%1.14% compared to 1.90%1.37% at December 31, 20042006 and 2.32%1.66% at December 31, 2003.2005. The drop in this ratio since December 31, 20032005 is due to a decrease in the size of the allowance for loan loss reserve combined with an increase in total loans. The Company'sCompany’s allowance for loan loss reserve coverage of non-performing assets amounted to 137% at December 31, 2007 compared to 353% at December 31, 2006 and 212% at December 31, 2005 compared to 254% at December 31,
2004 and 102% at December 31, 2003. The drop in non-performing assets was a key
factor contributing to the improvement in this ratio over the past two years.
The Company's provision for loan losses totaled $1.8 million or 0.35% of
total loans for 2004. This represented a decrease of $1.2 million from the 2003
provision of $3.0 million or 0.56% of total loans. Net charge-offs for 2004
totaled $3.4 million or 0.68% of total average loans compared to net charge-offs
of $1.2 million or 0.22% of total average loans in 2003. The higher net
charge-offs in 2004 reflect a $914,000 charge-off as a result of the successful
sale of a $4.3 million non-performing asset, a $625,000 write-down of a $4.8
million loan on a personal care facility that was moved into other real estate
owned in the first quarter of 2004 and subsequently sold in the third quarter,
and $251,000 increase in net charge-offs on consumer loans. The consumer loan
charge-offs were higher than typical due to the charge-off of a few larger
consumer loans.
Overall, as a result of the net charge-offs exceeding the provision, the
balance in the allowance for loan losses decreased by $1.8 million during 2004
to total $9.9 million at December 31, 2004. This decline in the balance of the
allowance for loan losses and lower provision largely reflects the improvement
in the Company's asset quality in 2004 as the charge-offs incurred largely
relate to loans that were previously reserved for and worked-out.
2005.
The following schedule sets forth the allocation of the allowance for loan losses among various loan categories. This allocation is determined by using the consistent quarterly procedural discipline that was previously discussed. The entire allowance for loan losses is available to absorb future loan losses in any loan category.
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||||
| Percent of | Percent of | Percent of | Percent of | Percent of | ||||||||||||||||||||||||||||||||||||
| Loans in | Loans in | Loans in | Loans in | Loans in | ||||||||||||||||||||||||||||||||||||
| Each | Each | Each | Each | Each | ||||||||||||||||||||||||||||||||||||
| Category | Category | Category | Category | Category | ||||||||||||||||||||||||||||||||||||
| Amount | to Loans | Amount | to Loans | Amount | to Loans | Amount | to Loans | Amount | to Loans | |||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 2,074 | 18.7 | % | $ | 2,361 | 15.6 | % | $ | 3,312 | 14.6 | % | $ | 2,173 | 13.8 | % | $ | 2,623 | 15.0 | % | ||||||||||||||||||||
| Commercial loans secured by real estate | 3,632 | 44.8 | 3,546 | 45.8 | 3,644 | 45.3 | 5,519 | 43.2 | 7,120 | 41.0 | ||||||||||||||||||||||||||||||
| Real estate-mortgage | 316 | 33.9 | 424 | 35.6 | 381 | 36.5 | 346 | 38.9 | 376 | 38.9 | ||||||||||||||||||||||||||||||
| Consumer | 835 | 2.6 | 1,000 | 3.0 | 1,022 | 3.6 | 1,074 | 4.1 | 853 | 5.1 | ||||||||||||||||||||||||||||||
| Allocation to general risk | 395 | — | 761 | — | 784 | — | 781 | — | 710 | — | ||||||||||||||||||||||||||||||
| Total | $ | 7,252 | 100.0 | % | $ | 8,092 | 100.0 | % | $ | 9,143 | 100.0 | % | $ | 9,893 | 100.0 | % | $ | 11,682 | 100.0 | % | ||||||||||||||||||||
Even though residential real estate-mortgage loans comprise 37%33.9% of the Company'sCompany’s total loan portfolio, only $381,000$316,000 or 4.2%4.4% of the total allowance for loan losses is allocated against this loan category. The residential real estate-mortgage loan allocation is based upon the Company'sCompany’s five-year historical average of actual loan charge-offs experienced in that category and other qualitative factors. The disproportionately higher allocations for commercial loans and commercial loans secured by real estate reflect the increased credit risk associated with this type of lending, the Company'sCompany’s historical loss experience in these categories, and other qualitative factors.
In addition to
Based on the specific and formula-driven reserve calculations, the
Company has consistently established a general unallocated reserve to provide
for risk inherent in the loan portfolio as a whole. Management believes that its
judgment with respect to the establishment of the reserve allocated to general
risk has been validated by experience and prudently reflects the model and
estimation risk associated with the specific and formula driven allowances. The
Company determines the unallocated reserve based on a variety of factors, some
of which also are components of the formula-driven methodology. These include,
without limitation, the previously
28
mentioned qualitative factors along with general economic data, management's
assessment of the direction of interest rates, and credit concentrations. In
conjunction with the establishment of the general unallocated reserve, the
Company also looks at the totalCompany’s allowance for loan losses in relation to the
size of the total loan portfolio and the level of non-performing assets.
Based on the Company's loan loss reserve methodology and the related assessment of the inherent risk factors contained within the Company'sCompany’s loan portfolio, we believe that the allowance for loan losses was adequate at December 31, 2007 to cover losses within the Company'sCompany’s loan portfolio.
NON-INTEREST INCOME.INCOME. . Non-interest income for 20052007 totaled $10.2$14.7 million; a $3.8$1.9 million or 27.1%14.5% increase from the 2006 performance. Factors contributing to the net increase in non-interest income in 2007 included:
| • | a $974,000 increase in investment advisory fees resulting from the acquisition of West Chester Capital Advisors in March of 2007. | |
| • | a $234,000 or 3.6% increase in trust fees due to continued successful new business development efforts. Over the past year, the fair market value of trust customer assets has grown by 5.9% to $1.9 billion at December 31, 2007. | |
| • | a $202,000 increase in gains realized on residential mortgage loan sales into the secondary market in 2007. There were $26.3 million of residential mortgage loans sold into the secondary market in 2007 compared to $11.5 million in 2006. |
29
| • | other income increased by $377,000 in 2007 or 15.4% due in part to a $200,000 gain realized on the sale of a bank owned operations facility that was no longer being fully utilized. The Company also benefited from a $69,000 gain realized on the sale of a closed branch facility in the third quarter of 2007. |
Non-interest income for 2006 totaled $12.8 million; a $2.6 million or 25.8% increase from the 2005 performance. Factors contributing to the net increase in non-interest income in 2006 included:
| • | the Company realized $2.5 million of investment security losses in 2005 in conjunction with its balance sheet restructuring. There were no investment security losses realized in 2006. | |
| • | a $390,000 or 6.4% increase in trust fees due to continued successful business development efforts in both the union and traditional trust product lines. | |
| • | a $190,000 increase in bank owned life insurance proceeds due largely to the payment of a death claim in 2006. | |
| • | a $104,000 decrease in gains realized on loan sales into the secondary market due to weaker residential mortgage loan production in 2006. Overall, there were $5.8 million fewer loans sold into the secondary market in 2006 when compared to 2005. | |
| • | other income declined by $204,000 in 2006 or 7.7% due to reduced revenues from AmeriServ Associates, a subsidiary that previously provided asset liability management and investment consulting services to smaller community banks, that was closed in the second quarter of 2006 because it no longer fit the Company’s strategic direction. |
NON-INTEREST EXPENSE. . . Non-interest expense for 2007 totaled $34.7 million, a $20,000 decrease from the 20042006 performance. Note that this overall decline in total non-interest expense occurred even after the inclusion of $820,000 of non-interest expenses from the newly acquired West Chester Capital Advisors. Factors contributing to the net decrease in non-interest incomeexpense in 20052007 included:
- the Company realized $2.5
| • | salaries and employee benefits increased by $670,000 or 3.6% due primarily to $588,000 of personnel costs related to the West Chester Capital Advisors acquisition and an $85,000 curtailment charge for an early retirement program. | |
| • | equipment expense decreased by $304,000 or 12.9% due to lower depreciation expense and maintenance costs. | |
| • | FDIC deposit insurance expense declined by $104,000 or 54.2% due to the termination of the Memorandum of Understanding that the Company had been operating under in the first quarter of 2006. | |
| • | other expenses declined by $268,000 due to a recovery on a previous mortgage loan securitization and our continuing focus on cost reduction and rationalization that has resulted in numerous expense reductions in categories such as software amortization, collection costs, telephone costs, and other taxes and insurance. |
Non-interest expense for 2006 totaled $34.7 million, of investment security losses in
2005 compared to investment security gains of $816,000 in 2004, or a net unfavorable change of $3.3 million. The 2005 net loss resulted
from the previously discussed third quarter balance sheet
restructuring that included the sale of $112 million of securities.
- other income declined by $915,000 in 2005 or 25.6% as the Company
benefited from $578,000 of additional gains on the sale of other real
estate owned properties in 2004. Lower mortgage production related
revenues also contributed to the decrease in other income in 2005 and
a $142,000 decline in gains on loan sales into the secondary market.
- a $766,000 or 14.3% increase in trust fees due to continued successful
union and non-union new business development efforts and the full year
benefit of new customer fee schedules that were implemented in the
fourth quarter of 2004. Trust assets under management since December
31, 2004 increased by $298$14.7 million or 22.7% to $1.6 billion at
December 31, 2005.
Non-interest income for 2004 totaled $14.0 million; a $3.0 million or 17.6%29.8% decrease from the 2003 performance. Factors contributing to the net decrease in
non-interest income in 2004 included:
- a $3.0 million or 78.5% decrease in gains realized on investment
security sales as the higher interest rate environment in 2004 limited
the Company's ability to capture profits on prepaying securities.
Also, the Company incurred $460,000 in losses on security sales in the
fourth quarter of 2004 by selling $47 million of the longest duration
securities in its investment portfolio as part of its balance sheet
repositioning actions.
- a $281,000 or 44.5% decrease in gains realized on the sale of mortgage
loans into the secondary market as a result of reduced mortgage
refinancing activity in 2004.
- a $374,000 or 11.8% reduction in service charges on deposit accounts
due to fewer overdraft penalty fees as it appears certain customers
adjusted their banking behavior to minimize overdraft charges.
- a $370,000 or 7.4% increase in trust fees due to continued successful
union related new business development efforts particularly with the
BUILD and ERECT Funds.
- $379,000 or 11.9% increase in other income due largely to a gain
realized on the sale of the Company's largest other real-estate owned
property in the third quarter of 2004.
NON-INTEREST EXPENSE. . . Non-interest expense for 2005 totaled $49.4 million, a
$671,000 or 1.3% decrease from the 2004 performance. Factors contributing to the net decrease in non-interest expense in 20042006 included:
-
| • | the Company incurred $12.3 million in charges related to FHLB prepayment penalties and interest rate hedge termination costs in conjunction with its balance sheet restructuring in 2005. There were no such charges in 2006. | |
| • | professional fees decreased by $1.0 million or 24.4% due to lower legal costs and external audit fees. The Company also experienced a reduction in costs related to Sarbanes Oxley Section 404 compliance in 2006 as the professional costs associated with the first year implementation were higher in 2005. | |
| • | salaries and employee benefits decreased by $393,000 or 2.1% due primarily to 17 fewer full time equivalent employees (FTE) in 2006. The closure of AmeriServ Associates was responsible for a reduction of 8 of these FTE. | |
| • | miscellaneous taxes and insurance declined by $195,000 or 11.1% due largely to reduced premium costs for professional insurance coverage. |
30
| • | other expenses declined by $433,000 as our continuing focus on cost reduction and rationalization has resulted in numerous expense reductions in categories such as collection costs, business development expenses, telephone costs, and other real estate owned expense. Also, the Company incurred a $210,000 charge to write-off unamortized issuance costs related to the redemption of trust preferred securities in 2005. There was no such charge in 2006. |
INCOME TAX EXPENSE. . . For the full year 2007, the Company incurred as part of the balance sheet restructuring
measures FHLB and interest rate hedge prepayment penalties of $12.3
million in 2005 compared to similar penalties of $12.6 million in 2004
or a decline between years of $350,000.
- other expense declined by $456,000 or 8.8% in 2005 as the Company
wrote off $210,000 of unamortized trust preferred issuance costs in
2005 compared to $476,000 of unamortized issuance costs written off in
2004. The Company also incurred $170,000 in costs associated with the
Harrisburg branch office closing in 2004 and there were no such costs
incurred in 2005.
- a $285,000 decrease in amortization of core deposit intangibles as the
premium associated with the 1994 acquisition of Johnstown Savings Bank
has been fully recognized.
- professional fees increased by $545,000 or 14.7% in 2005 due to the
costs associated with implementing Sarbanes-Oxley Section 404.
29
Non-interest expense for 2004 totaled $50.1 million, a $14.2 million or 39.5%
increase from the 2003 performance. Factors contributing to the net increase in
non-interest expense in 2004 included:
- a $12.6 million penalty realized on the prepayment of $125 million of
FHLB convertible advances as part of the Company's balance sheet
deleveraging strategy.
- salaries and employee benefits increased by $1.0 million or 5.6% due
to higher medical insurance costs resulting from premium increases,
higher pension expense, and the payment of a lump sum bonus to union
employees in the fourth quarter of 2004 as a result of the new
collective bargaining agreement. These higher costs offset the benefit
of reduced salary expense due to 11 fewer average full-time equivalent
employees when compared to 2003 and lower incentive compensation
expense.
- a $282,000 decrease in amortization of core deposit intangibles as the
premium associated with the 1994 acquisition of Johnstown Savings Bank
has been fully recognized as of July 1, 2004.
- a $992,000 or 19.2% increase in other expense due largely to the
write-off of $476,000 of unamortized issuance costs related to the
redemption of $15.3 million of trust preferred securities and the
accrual of $170,000 in costs associated with the Harrisburg branch
office closing.
INCOME TAX EXPENSE. . . The Company recognizedrecorded an income tax benefit, as
partexpense of continuing operations,$924,000, which reflects an effective tax rate of approximately $5.9 million for both 2005 and
2004 due23.3%. This compares to the pre-tax losses incurred in both years and our belief that the
Company will generate sufficient earnings in future periods to utilize these net
operating loss carryforwards. As part$420,000 of that benefit in 2005 and 2004, the
Company lowered itsincome tax expense by $475,000 and $680,000, respectively, due to a
reduction in reserves for prior year tax contingencies as a result of the
successful conclusion of an IRS examination on several open tax years. The
Company recognized a provision for income taxes of $587,000 or an effective tax rate of 21.1%approximately 15.3% in 2003.2006 compared to an income tax benefit of approximately $5.9 million for 2005. The Company'shigher effective tax rate in 2007 resulted from the Company’s improved profitability. As part of the 2006 tax expense, the Company did benefit from the elimination of a $100,000 income tax valuation allowance related to the deductibility of charitable contributions that management determined was no longer needed given the level of taxable income generated by the Company in 2006. The Company’s largest source of tax-free income is from bank owned life insurance which is the primary reason why the effective tax rate is lower than the statutory rate in all years.
SEGMENT RESULTS.RESULTS. . . Retail banking'sbanking’s net income contribution was $499,000$2.0 million in 20052007 compared to $1.3$1.2 million for 2004.2006. The retail banking net income contribution was downup from the prior year due to higher non-interest income and lower non-interest expense. This more than offset reduced net interest income and reduced non-interest income. This more than offsethigher provision for loan losses. These same factors were also responsible for the benefit of a reduced loan
loss provision, lower non-interest expense$704,000 improvement in net income between 2006 and a greater income tax benefit.2005. The reduced net interest income contributionin both 2006 and 2007 reflected increased deposit costs anddue to the negative impact that the flatterflat to inverted yield curve had on limiting growthshifting customers into higher cost certificates of deposit.
The commercial lending segment increased its profitability by generating net income of $3.2 million in loan
revenue.2007 compared to $2.6 million of net income earned in 2006. The reduced non-interest incomeimproved performance in 2007 was caused by lower service charges,
reduced mortgageincreased net interest income resulting from the greater level of commercial loans outstanding. This more than offset higher non-interest expense and an increased provision for loan sale gains, and fewer gains on other real estate owned
properties.losses. Assets within the commercial lending segment increased by $70 million or 21.2% during 2007. When 20042006 is compared to 2003,2005, the retail banking net income contribution was down $2.2increased by $1.2 million for this segment again due largely to reducedhigher net interest income resulting from commercial loan growth. Improved asset quality also allowed the Company to release a portion of our allowance for loan losses into earnings in both 2006 and lower
non-interest revenue.
2005.
The trust segment'ssegment’s net income contribution in 20052007 amounted to $1.4$1.8 million which was up $535,000$99,000 from the prior year due to increased revenue.year. Successful new business development efforts and the full year benefitacquisition of new
customer fee schedules that were implementedWest Chester Capital Advisors caused revenues to increase at a faster pace than expenses in 2007. Between 2006 and 2005, the fourth quarter of 2004 were
the drivers of the improved revenue. Assets under management since December 31,
2004 increased by $298 million or 22.7% to $1.6 billion at December 31, 2005.
The trust segment'ssegment’s net income contribution in 2004 amounted to $860,000. This
represented an increase of $71,000 from the $789,000 net income contribution
earned in 2003 alsoincreased by $303,000 due to an increase in fee revenue.increased revenue and controlled expenses. The diversification of the revenue-generating divisions within the trust segment is also one of the primary reasons for its successful profitable growth over the past several years. The specialized union collective funds are expected to continue to be a unique growth niche for the growth
leaders in both assets under administration and revenue production.trust company. The union collective investment funds, namely the ERECT and BUILD Funds are designed to invest union pension dollars in construction projects that utilize union labor. The union funds have attracted several international labor unions as investors as well as many local unions from a number of states. The market value of assets in these union funds totaled $369$415 million at December 31, 2005.
The commercial lending segment significantly increased its profitability in
20052007. Overall, since December 31, 2006, the fair market value of all trust assets combined with the West Chester Capital acquisition caused customer assets to increase by generating net income of $1.4 million compared to a net loss of $93,000
in 2004. The improved performance in 2005 was caused by increased net interest
income resulting from the greater level of commercial loans outstanding and
improved asset quality. Assets within the commercial lending segment increased
by $41$242 million or 16.0% during 2005. The improved asset quality allowed the
Company13.6% to release a portion of our allowance for loan losses into earnings in
2005. When 2004 is compared to 2003, the commercial lending segment lost $93,000
which represented an improvement from the $594,000 net loss experienced in 2003.
The loss in both periods resulted primarily from provision for loan losses;
although the size of the provision expense did decline by $711,000 between
years.
$1.9 billion at December 31, 2007.
The investment/parent segment reported a net loss of $3.9 million in 2007 which was greater than the net loss of $3.2 million realized in 2006, but significantly less than the net loss of $12.2 million realized in 2005. The lower level of net interest income in this segment in 2007 reflects the negative impact of the inverted/flat yield curve with short-term rates exceeding intermediate to longer term rates during the first eight months of 2007. This more than offset the benefit of lower non-interest expenses. Note that the loss in 2005
that was due primarily to the previously discussed balance sheet restructuring actions. Theseactions which were executed to reduce the Company’s risk profile and improve our earnings power. Specifically in 2005, these restructuring actions included $12.3 million of FHLB debt and interest rate hedge prepayment penalties and $2.6 million of losses realized on investment security sales. In 2004, the net loss in the investment/parent
30
segment amounted to $10.7 million and was due primarily to the $12.6 million
FHLB prepayment penalty that was previously discussed. When compared to 2004,
the 2005 net loss is greater due a $3.3 million unfavorable swing in investment
security sales from a realized gain to a realized loss. This unfavorable item
more than offset a $1.3 million reduction in interest expense on the guaranteed
junior subordinated debentures.
On December 28, 2004, the Company sold all of its remaining mortgage
servicing rights and discontinued operations of this non-core business. The
Company concluded that mortgage servicing was not a core community banking
business and we did not have the scale nor the earnings power to absorb the
volatility and risk associated with this business line. The Company reduced its
loss from discontinued operations from $1.2 million in 2004 to $119,000 in 2005.
The 2004 performance included a $376,000 loss on the sale of mortgage servicing
rights, $380,000 of costs related to employee severance and $65,000 of costs
incurred for the write-off of its remaining fixed assets.
31
For greater discussion on the future strategic direction of the Company'sCompany’s key business segments, see Forward Looking Statement which begins on page 37.
38.
BALANCE SHEET.SHEET. . . The Company'sCompany’s total consolidated assets were $880$905 million at December 31, 2005,2007, compared with $1.010 billion$896 million at December 31, 2004,2006, which represents a decreasean increase of $130$8.9 million or 12.9%1.0%. This lowerhigher level of assets resulted primarily from a reducedan increased level of investment securities due to the
previously discussed balance sheet restructuring executed in the third quarter
of 2005.loans. The Company'sCompany’s loans totaled $551$636 million at December 31, 20052007, an increase of $29$47 million or 5.5%7.9% from year-end 20042006 due to commercial loan growth. The Company's deferred tax asset totaled $14.9Investment securities declined by $33 million at December 31,
2005 and grewin 2007 as investment portfolio cash flow has been used to either fund loan growth or pay-down borrowings. Goodwill increased by $5.9$4.0 million from December 31, 2004to $13.5 million as a result of the income
tax benefit recorded on the 2005 loss.
West Chester Capital Advisors acquisition.
The Company'sCompany’s deposits totaled $713$710 million at December 31, 2005,2007, which was $68$31 million or 10.6% higher4.2% lower than December 31, 2004. $63 million of this increase2006. This decrease was due entirely to a $39 million decline in Trust Company specialty deposits related to the transferBuild and Erect Funds as wholesale borrowings provided the Company with a lower cost funding source than these deposits in the fourth quarter of certain Trust Company controlled money market
deposits into the Bank.2007. The remainder of the deposit increase was due largely to increased customer balancescertificates of deposit and growth in non-interest bearing demand deposits. Total borrowed funds decreasedincreased by $192$32 million or 71.3% due to the previously
discussed strategy to reducereplacement of the Company'sTrust specialty deposits with lower rate short-term borrowed funds and interest rate risk
on our balance sheet. The Company retired all remaining $100FHLB advances. Total stockholders’ equity increased to approximately $90 million of FHLB
convertible advances in the third quarter of 2005. The Company also utilized the
increased depositsat December 31, 2007 from the Trust Company to reduce short-term borrowings. Total
stockholders' equity remained constant at approximately $85 million at December 31, 2005 and December 31, 2004, as2006 due to the capital provided from the 2005 private
placement basically offset the $9.1 million net loss experienced during 2005retention of all earnings and a $730,000 drop inreduced accumulated other comprehensive incomeloss due to a lowerthe improved value of the AFSCompany’s available for sale investment securities portfolio.in 2007. The Company continues to be considered well capitalized for regulatory purposes with an asset leverage ratio at December 31, 20052007 of 10.24%9.74%. The Company'sCompany’s book value per share at December 31, 20052007 was $3.82.
LIQUIDITY.$4.07.
LIQUIDITY. . The Bank'sBank’s liquidity position has been sufficient during the last several years when the Bank has experienced poor financial results.was undergoing a turnaround and return to traditional community banking. Our core deposit base has first remained stable and then grown throughout this period and has been adequate to fund the Bank'sBank’s operations. Neither the sales of investment
securities nor the use of the proceeds from such sales and cashCash flow from prepayments and amortization of securities to redeem Federal Home Loan Bank
advances has materially affected the Bank's liquidity. The securities sold were
pledged as collateral for FHLB borrowings, but the proceeds from the sale of
securitiesthat was used to reduce FHLB advances and therefore these sales didborrowings has not requireadversely affected the Bank’s liquidity. We expect that replacement securitiesliquidity will continue to be pledged and did not otherwise adversely
affect Bank liquidity. In addition, although the Bank incurred losses in both
2005 and 2004 in an amount greater than the total $5.0 million of capital
injected into the Bank, the reduction in the size of the Bank from the
deleveraging steps taken has resulted in improvement in the Bank's capital
ratios and the Bank remains well-capitalized under all applicable regulatory
guidelines. The Bank's Tier 1 leverage ratio increased from 8.51% at December
31, 2004 to 9.48% at December 31, 2005. We believe the Bank will have adequate
liquidity as we continue to transform the balance sheet to one that is more loan dependent.
Liquidity can also be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents decreasedincreased by $90,000$1.0 million from December 31, 2004,2006, to December 31, 2005,2007, due primarily to $126$10.3 million of cash provided by operating activities. This was partially offset by $9.2 million of cash used by
financing activities and $8 million of cash used in operating activities. This
was almost entirely offset by $133 million of cash provided by investing activities. Within investing activities, proceeds from investment security sales
and maturities exceeded cash used to purchasefor limited purchases of new investment securities by $164$32.1 million. This reflected the Company’s ongoing strategy of using cash from the investment portfolio to fund loans. Cash advanced for new loan fundings and purchases totaled $141$214 million and were $30was $46 million more than the cash received from loan principal payments and sales. Note that both the level of new loan fundings and existing loan payoffs were sharply higher in 2007 when compared to the prior two years. Within financing activities, the Company experienced a net $68$31.3 million growthdecline in deposits with these funds useddue to paydown short-term
borrowings.less utilization of specialty deposits from the Trust Company. The Company also used net cash provided from investment securities
activitieslargely replaced these deposits with increased short-term FHLB borrowings and advances due to retire $100 million of FHLB advances and used net cash from the
private placement to retire $7.2 million of guaranteed junior subordinated
debentures in 2005.
31
more attractive funding costs.
The Company used $1.5$1.0 million of cash to service the dividend on the guaranteed junior subordinated deferrable interest debentures (trust preferred securities) in 2005. This was $1.3 million less than the cash used for this
purpose in 2004 due to the retirement of $152007 and $2.2 million of these securities as part
of the fourth quarter 2004 balance sheet restructuring and $7 million of these
securities as part of the 2005 balance sheet restructuring. The liquidity
position of the parent company has improved significantly as a result of the
successful private placement common stock offerings over the past 15 months
which provided $32 million of net cash after paying offering expenses. The
parent company retained $3.4 million of the offering proceeds to provide ongoing
liquidity and support the reduced debt service on the remaining trust preferred
securities.acquire West Chester Capital Advisors. There was no cash used for common stock cash dividends payments to shareholders in any of the past three years. The parent company had $4.1 million of cash and short-term investments at December 31, 2007.
Dividend payments from non-bank subsidiaries and the settlement of the inter-company tax position also provide ongoing cash to the parent. Longer
term, however, the paymentAs of the trust preferred dividend and any reinstatement
of a common dividend is dependent uponJanuary 1, 2008, the subsidiary bank returning to
profitability so that it can resume upstreaming dividendshad $4.6 million of cash available for dividend upstream to the parent company
under applicable law. The subsidiary bank must first recoupas the $16.6 million
netbank’s 2004 and 2005 loss that it incurred over the past two years before it can consider
resuming dividend upstreams under applicable provisionsare no longer part of the Federal Reserve
Act which place limits ondividend upstream calculation. On January 22, 2008, the abilityCompany announced a stock repurchase program with a goal to buy back up to 5% — or approximately 1.1 million — of banks that have lost money to pay
dividends.
the outstanding common shares.
Financial institutions must maintain liquidity to meetday-to-day requirements of depositor and borrower customers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term
32
investment securities, time deposits with banks, federal funds sold, banker'sbanker’s acceptances, and commercial paper. These assets totaled $26$8 million at both December 31, 2005 which was comparable with the
$27 million at2007 and December 31, 2004.2006. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.
Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the Federal Home Loan Bank systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company'sCompany’s subsidiary bank is a member of the Federal Home Loan Bank which provides the opportunity to obtain short- to longer-term advances based upon the Bank'sBank’s investment in assets secured by one- to four-family residential real estate. At December 31, 2005,2007, the bank had immediately available $31$218 million of overnight borrowing capability at the FHLB.FHLB and $18 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.
CAPITAL RESOURCES.RESOURCES. . . The Company exceeds all regulatory capital ratios for each of the periods presented. The Company continues to be considered well capitalized as the asset leverage ratio was 10.24%9.74% at December 31, 20052007 compared to 9.20%10.54% at December 31, 2004. This improvement between years was due to the
successful private placement of $10.3 million of common stock in the third
quarter of 2005. The capital ratios also benefited from the $130 million
shrinkage in the size of the balance sheet over the past year.2006. Note that the impact of other comprehensive income (loss)loss is excluded from the regulatory capital ratios. At December 31, 2005,2007, accumulated other comprehensive loss amounted to $4.1$4.0 million. Additionally, the amortization of $865,000 of core deposit intangible assets has favorably increasedimpacted tangible capital in 2005.capital. The tangible equity to asset ratio has increased from 7.23%was 8.52% at December 31, 2004 to
8.32% at December 31, 2005.2007. We anticipate that we will continue to build our capital ratios may decline modestly during 2006 due2008 as we expect to return capital to our shareholders through the retention of earnings and limited change
in the overall sizeexecution of the balance sheet.
The Company announced on January 24, 2003 that it suspended its common
stock cash dividend. While the Company had not repurchased any of its own shares
since the year 2000, the Company has also suspended its treasury stock repurchase program.
program that was discussed earlier.
INTEREST RATE SENSITIVITY.SENSITIVITY. . . Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company'sCompany’s net interest income, net income and capital. The management and measurement of interest rate risk at AmeriServ Financial is performed by using the following tools: 1) simulation modeling which analyzes the impact of interest rate changes on net interest income, net income and capital levels over specific future time periods. The simulation modeling forecasts earnings under a variety of scenarios that incorporate changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling also
incorporates any hedging activity as well as assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities; 2) market value of portfolio equity sensitivity analysis, and 3) static GAP analysis which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. The overall interest rate risk position and strategies are reviewed by senior management and the Company'sCompany’s Board of Directors on an ongoing basis.
32
33
The following table presents a summary of the Company'sCompany’s static GAP positions at December 31, 2005:
2007:
| Over | Over | |||||||||||||||||||
| 3 Months | 6 Months | |||||||||||||||||||
| 3 Months | through | through | Over | |||||||||||||||||
Interest Sensitivity Period | or Less | 6 Months | 1 Year | 1 Year | Total | |||||||||||||||
| (In thousands, except ratios and percentages) | ||||||||||||||||||||
| RATE SENSITIVE ASSETS: | ||||||||||||||||||||
| Loans and loans held for sale | $ | 169,747 | $ | 41,332 | $ | 86,501 | $ | 331,323 | $ | 628,903 | ||||||||||
| Investment securities | 13,655 | 15,949 | 32,137 | 101,733 | 163,474 | |||||||||||||||
| Regulatory stock | 5,079 | — | — | 2,125 | 7,204 | |||||||||||||||
| Short-term assets | 197 | — | — | — | 197 | |||||||||||||||
| Bank owned life insurance | — | — | 32,864 | — | 32,864 | |||||||||||||||
| Total rate sensitive assets | $ | 188,678 | $ | 57,281 | $ | 151,502 | $ | 435,181 | $ | 832,642 | ||||||||||
| RATE SENSITIVE LIABILITIES: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Non-interest bearing deposits | $ | — | $ | — | $ | — | $ | 113,380 | $ | 113,380 | ||||||||||
| NOW | 9,243 | — | — | 53,956 | 63,199 | |||||||||||||||
| Money market | 106,987 | — | — | 10,986 | 117,973 | |||||||||||||||
| Other savings | 17,289 | — | — | 51,866 | 69,155 | |||||||||||||||
| Certificates of deposit of $100,000 or more | 14,354 | 15,270 | 7,895 | 3,871 | 41,390 | |||||||||||||||
| Other time deposits | 110,587 | 31,215 | 55,837 | 107,703 | 305,642 | |||||||||||||||
| Total deposits | 258,460 | 46,485 | 63,732 | 341,762 | 710,439 | |||||||||||||||
| Borrowings | 72,222 | 12 | 24 | 22,942 | 95,200 | |||||||||||||||
| Total rate sensitive liabilities | $ | 330,682 | $ | 46,497 | $ | 63,756 | $ | 364,704 | $ | 805,639 | ||||||||||
| INTEREST SENSITIVITY GAP: | ||||||||||||||||||||
| Interval | (142,004 | ) | 10,784 | 87,746 | 70,477 | — | ||||||||||||||
| Cumulative | $ | (142,004 | ) | $ | (131,220 | ) | $ | (43,474 | ) | $ | 27,003 | $ | 27,003 | |||||||
| Period GAP ratio | 0.57 | X | 1.23 | X | 2.38 | X | 1.19 | X | ||||||||||||
| Cumulative GAP ratio | 0.57 | 0.65 | 0.90 | 1.03 | ||||||||||||||||
| Ratio of cumulative GAP to total assets | (15.69 | )% | (14.50 | )% | (4.80 | )% | 2.98 | % | ||||||||||||
When December 31, 2005,2007, is compared to December 31, 2004,2006, the ratio of the cumulative GAP to total assets for eachup to the one year time periodframe became less negative increasing from -7.80% to -4.80% due to an anticipated increase in asset prepayment speeds. This negative gap positioning suggests that the balance sheet repositioning executedCompany’s net interest income should benefit from the recent reductions in the third quarter. This
restructuring improved the Company'sshort-term interest rate risk profile by reducing the
level of FHLB convertible borrowings and the related $100 million of fair value
hedges that caused the borrowings to reprice within 90 days.
rates.
Management places primary emphasis on simulation modeling to manage and measure interest rate risk. The Company'sCompany’s asset/liability management policy seeks to limit net interest income variability over the first twelve months of the forecast period to +/--5.0% − 7.5% which include interest rate movements of 100200 basis points. Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet exposure to changes in interest rates. The Company monitors the trends in market value of portfolio equity sensitivity analysis on a quarterly basis.
The following table presents an analysis of the sensitivity inherent in the Company'sCompany’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company'sCompany’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of
34
100 and 200 basis points. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company'sCompany’s existing balance sheet that was developed under the flat interest rate scenario.
As indicated in the table, the third quarter 2005 balance sheet
restructuring has better positioned the Company for rising interest rates and
reduced its exposure to falling rates. Variability of net interest income is now
positive in the 100 basis point upward rate shock due to the removal of the
interest rate hedges and lower short-term FHLB borrowings.
| Variability of | Change in | |||||||
| Net Interest | Market Value of | |||||||
Interest Rate Scenario | Income | Portfolio Equity | ||||||
| 200 bp increase | (2.7 | )% | 7.8 | % | ||||
| 100 bp increase | 0.3 | 5.7 | ||||||
| 100 bp decrease | (1.9 | ) | (12.3 | ) | ||||
| 200 bp decrease | (8.9 | ) | (32.9 | ) | ||||
The market value of portfolio equity increased by 6.0%increases in a 100 basis pointthe upward rate shockshocks due to increasedimproved value of the Company'sCompany’s core deposit base. The negative variability of
net interest income in the 100 basis point down shock results from accelerated
cash flows from mortgage backed securities and loans. Negative variability of market value of portfolio equity occurred in a 100 basis pointboth downward rate shockshocks due to a reduced value for core deposits. 33
Overall, the Company is within its policy guidelines for the interest rate simulations.
Within the investment portfolio at December 31, 2005, 87%2007, 90% of the portfolio is classified as available for sale and 13%10% as held to maturity. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity to fund loan growth if needed. The mark to market of the available for sale securities does inject more volatility in the book value of equity but has no impact on regulatory capital. Furthermore, it is the Company'sCompany’s intent to continue to manage its long-term interest rate risk by continuing to sell newly originated fixed-rate30-year mortgage loans into the secondary market. The Company also periodically sells15-year fixed rate mortgage loans into the secondary market as well.
The amount of loans outstanding by category as of December 31, 2005,2007, which are due in (i) one year or less, (ii) more than one year through five years, and (iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.
| More | ||||||||||||||||
| than One | ||||||||||||||||
| One | Year | |||||||||||||||
| Year or | through | Over Five | Total | |||||||||||||
| Less | Five Years | Years | Loans | |||||||||||||
| (In thousands, except ratios) | ||||||||||||||||
| Commercial | $ | 36,461 | $ | 66,550 | $ | 15,925 | $ | 118,936 | ||||||||
| Commercial loans secured by real estate | 29,967 | 103,524 | 151,624 | 285,115 | ||||||||||||
| Real estate-mortgage | 40,748 | 75,862 | 99,289 | 215,899 | ||||||||||||
| Consumer | 2,763 | 4,694 | 9,219 | 16,676 | ||||||||||||
| Total | $ | 109,939 | $ | 250,630 | $ | 276,057 | $ | 636,626 | ||||||||
| Loans with fixed-rate | $ | 54,294 | $ | 160,737 | $ | 155,567 | $ | 370,600 | ||||||||
| Loans with floating-rate | 55,645 | 89,893 | 120,490 | 266,026 | ||||||||||||
| Total | $ | 109,939 | $ | 250,630 | $ | 276,057 | $ | 636,626 | ||||||||
| Percent composition of maturity | 17.3 | % | 39.3 | % | 43.4 | % | 100.0 | % | ||||||||
| Fixed-rate loans as a percentage of total loans | 58.2 | % | ||||||||||||||
| Floating-rate loans as a percentage of total loans | 41.8 | % | ||||||||||||||
The loan maturity information is based upon original loan terms and is not adjusted for principal paydowns and rollovers. In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.
35
CONTRACTUAL OBLIGATIONS.OBLIGATIONS. . .The following table presents, as of December 31, 2005,2007, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
| Payments due in | ||||||||||||||||||||||||
| Note | One Year | One to Three | Three to Five | Over Five | ||||||||||||||||||||
| Reference | or Less | Years | Years | Years | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Deposits without a stated maturity | 8 | $ | 363,707 | $ | — | $ | — | $ | — | $ | 363,707 | |||||||||||||
| Certificates of deposit* | 8 | 245,387 | 78,661 | 29,039 | 24,234 | 377,321 | ||||||||||||||||||
| Borrowed funds* | 10 | 76,001 | 10,443 | 146 | 819 | 87,409 | ||||||||||||||||||
| Guaranteed junior subordinated deferrable interest debentures* | 10 | — | — | — | 33,264 | 33,264 | ||||||||||||||||||
| Pension obligation | 13 | 1,100 | — | — | — | 1,100 | ||||||||||||||||||
| Lease commitments | 14 | 582 | 970 | 524 | 502 | 2,578 | ||||||||||||||||||
| * | Includes interest |
OFF BALANCE SHEET ARRANGEMENTS.ARRANGEMENTS. . . The Bank incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company'sCompany’s 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. The Company had various outstanding commitments to extend credit approximating $98,294,000$93,583,000 and standby letters of credit of $10,230,000$7,884,000 as of December 31, 2005.2007. The Company can also use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. As of December 31, 2005,2007, there were no interest rate contracts outstanding.
34
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.ESTIMATES. . . The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses and income taxes are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company'sCompany’s financial position or results of operation.
ACCOUNT -- — Allowance for Loan Losses
BALANCE SHEET REFERENCE --— Allowance for Loan Losses
INCOME STATEMENT REFERENCE -- — Provision for Loan Losses
DESCRIPTION
The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management'sManagement’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios. All of these factors may be susceptible to
36
significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management'smanagement’s judgment concerning those trends.
Commercial and commercial mortgages are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan loss. Approximately $7.0$5.7 million, or 76%79%, of the total allowance for credit losses at December 31, 20052007 has been allotted to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, regional and national
economic conditions, business segment and portfoliotrends, delinquencies, concentrations recent
regulatory examination results,of credit, trends in loan volume, termsexperience and depth of loansmanagement, examination and riskaudit results, effects of potential estimation or judgmental errors.any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods.
ACCOUNT -- — Income Taxes
BALANCE SHEET REFERENCE -- — Deferred Tax Asset and Current Taxes Payable
INCOME STATEMENT REFERENCE -- — Provision for Income Taxes
DESCRIPTION
In accordance with the liability method of accounting for income taxes specified in Statement of Financial Accounting Standards (FAS) No. 109,
"Accounting#109, “Accounting for Income Taxes"Taxes” the provision for income taxes is the sum of income taxes both currently payable and deferred. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the basis of asset and liabilities for financial reporting purposes and the basis of assets and liabilities as measured by the enacted tax rates that management estimates will be in effect when the differences reverse.
In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of December 31, 2005,2007, we believe that all of the deferred tax assets recorded on our balance sheet except
for $100,000 will ultimately be recovered.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit 35
during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
RECENT ACCOUNTING STANDARDS... In December 2003, the Accounting Standards
Executive Committee
ACCOUNT — Investment Securities
BALANCE SHEET REFERENCE — Investment Securities
INCOME STATEMENT REFERENCE — Net realized gains (losses) on investment securities
DESCRIPTION
Available-for-sale andheld-to-maturity securities are reviewed quarterly for possibleother-than-temporary impairment. The review includes an analysis of the American Institutefacts and circumstances of Certified Public Accountants
issued AICPA Statement of Position No. 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" (SOP 03-3), to address accounting for
differences between the contractual cash flows of certain loans and debt
securities and the cash flows expected to be collected when loans or debt
securities are acquired in a transfer and those cash flow differences are
attributable, at least in part, to credit quality. As such, SOP 03-3 applies to
such loans and debt securities purchased or acquired in purchase business
combinations and does not apply to originated loans. The application of SOP 03-3
limits the interest income, including accretion of purchase price discounts that
may be recognized for certain loans and debt securities. Additionally, SOP 03-3
requires that the excess of contractual cash flows over cash flows expected to
be collected (nonaccretable difference) not be recognized as an adjustment of
yield or valuation allowance,each individual investment such as the allowance for loan losses. Subsequent
toseverity of loss, the initial investment, increases in expected cash flows generally should be
recognized prospectively through adjustmentlength of the yield on the loan or debt
security over its remaining life. Decreases in expected cash flows should be
recognized as impairment. SOP 03-3 is effective for loans and debt securities
acquired in fiscal years beginning after December 15, 2004, with early
application encouraged. The impact of this new pronouncement was not material to
the Company's financial condition, results of operations or cash flows.
In March 2004, the SEC issued Staff Accounting Bulletin #105, "Application
of Accounting Principles to Loan Commitments" (SAB 105). This bulletin was
issued to inform registrants of the SEC's view thattime the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to beother-than-temporary is recorded loan commitments, which are required to follow derivative accounting
under FAS #133, "Accounting for Derivative Instruments and Hedging Activities,"
should not consider the expected future cash flows related to the associated
servicing of the future loan. The provisions of SAB 105 must be applied to loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The adoption of this Staff Accounting Bulletina loss within non-interest income in the second quarterConsolidated Statements of 2004 did not have a material impact on the Company.
In December 2004, the FASB issued FAS #123 (revised 2004), "Share-Based
Payment," which revises FAS #123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion #25, "Accounting for Stock issued to Employees." This
Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. This Statement
does not address the accounting for employee share ownership plans, which are
subject to AICPA Statement of Position 93-6, "Employers' Accounting for Stock
Ownership Plans." This Statement requires an entity to recognize the cost of
employee services received in share-based payment transactions and measure the
cost based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award. The Company will be required to adopt these
statements on January 1, 2006. The Company adopted this standard in the first
quarter of 2006 and it did not have a material impact on the Company's financial
condition, results of operations, or cash flows.
In June, 2005, the FASB issued FAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20, Accounting Changes, and FAS
No. 3, Reporting Accounting Changes in Interim Financial Statements." Under the
provisions of FAS No. 154, voluntary changes in accounting principles are
applied retrospectively to prior periods' financial statements unless it would
be impractical. FAS No. 154 supersedes APB opinion No. 20, which required that
most voluntary changes in accounting principles be recognized by including in
the current period's net income the cumulative effect of the change. FAS No. 154
also makes a distinction between "retrospective application" of a change in
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. The provisions of FAS No. 154 are effective for
accounting changes made in fiscal years beginning after December 15, 2005. The
Company does not expect adoption to have a material impact on the consolidated
financial statements, results of operations or liquidity of the Company.
In November 2005, the FASB issued FASB Staff Position No. (FSP) FAS 115-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." This FSP clarified and reaffirmed existing guidance as to when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. Certain disclosures about
unrealized losses on available for sale debt and equity securities that have not
been recognized as other-than -temporary impairments are required under FSP
115-1. The FSP is effective for fiscal years beginning after December 15, 2005.
As the FSP reaffirms existing guidance, the Company does not expect this FSP to
have a significant impact on our consolidated financial statements, results of
operations or liquidity of the Company.Operations. At December 31, 2005, gross2007, 100% of the unrealized losses on available for salein theavailable-for-sale security portfolio were comprised of securities was $6.5 million.
36
issued by Government agencies, U.S. Treasury or
37
Government sponsored agencies. The Company believes the price movements in these securities are dependent upon the movement in market interest rates. The Company’s management also maintains the intent and ability to hold securities in an unrealized loss position to the earlier of the recovery of losses or maturity.
FORWARD LOOKING STATEMENT. . .
THE STRATEGIC FOCUS:
The stabilizing of the Company in 2003 and the infusion of new capital in
2004 and 2005 has enabled the Board and management to complete the first
significant Turnaround goal of restructuring the balance sheet into that of a
traditional community bank. The next step in the Turnaround is to attack
financial performance with the same level of intensity that has been directed at
balance sheet restructuring and regulatory compliance.
The challenge for the future is to improve earnings performance to peer levels through a disciplined focus on community banking and our growing trust company. The Company is
coalescing around this next phaseTrust Company. In accordance with our strategic plan, our focus encompasses the following:
| • | Customer Service — it is the existing and prospective customer that AmeriServ must satisfy. This means good products and fair prices. But it also means quick response time and professional competence. It means speedy problem resolution and a minimizing of bureaucratic frustrations. AmeriServ is training and motivating its staff to meet these standards. | |
| • | Revenue Growth — It is necessary for AmeriServ to focus on growing revenues. This means loan growth, deposit growth and fee growth. It also means close coordination between all customer service areas so as many revenue producing products as possible can be presented to existing and prospective customers. The Company’s Strategic Plan contains action plans in each of these areas. This challenge will be met by seeking to exceed customer expectations in every area. An examination of the peer bank database provides ample proof that a well executed community banking business model can generate a reliable and rewarding revenue stream. | |
| • | Expense Rationalization — a quick review of recent AmeriServ financial statements tells the story of a continuing process of expense rationalization. This has not been a program of broad based cuts but has been targeted so AmeriServ stays strong but spends less. However, this initiative takes on new importance because it is critical to be certain that future expenditures are directed to areas that are playing a positive role in the drive to improve revenues. |
Each of the Turnaroundpreceding charges has become the focus at AmeriServ, particularly in the three major customer service, revenue generating areas.
1. THE RETAIL BANK — this business unit has emerged from the past difficulties strong and we believeeager to grow. It has new powers in that the
Companyit now includes Consumer Lending and Residential Mortgages. But more importantly, it has a solid franchise and can create greater institutional value. The
Company has three key business units that management and the Board believe can
perform at a higher level of profitability.
1. THE RETAIL BANK -- The Retail Bank now has a traditional community
bank balance sheet with $871 million in assets and approximately $712
million in core deposits. This retail bank operates 22 branches and
has been profitable. It is a fact that this typearray of banking in the
region has been inservices, and a statebroad distribution of change in recent years. There have been
mergers, divestitures, branch closings, name changes, etc.
Unfortunately for the Company, during this period, its focus has been
diluted by a spin-off, a name change, operating losses and regulatory
criticisms. However, as the Company emerges from the first phase of
the Turnaround it now finds itself to be the largest independent,
locally managed bankcommunity offices in its primary retail market area. It also has
discovered that, in spite of its recent difficulties, its core
customers have remained loyal and supportive. The Company believes
that its Retail Bank has a powerful future ahead. We believe that as
it sharpens its community banking skills, good products and exemplary
personal service will enable the Retail Bank to establish a strong
base for the Company as a whole.
2. COMMERCIAL LENDING --market. This business unit was completely restructuredwill provide a solid foundation for the company as it presents its new, positive face to the community.
2. COMMERCIAL LENDING — this business unit is already in 2003, after experiencing serious difficulties in 2001a growth mode. It has totally revised procedures and 2002. It
hired a new chief lending officer and almosthas recruited an entirely new staff of experienced professional lenders.staff. But it also has the skills and energy to provide financial advice and counsel. The challenge is to shorten response time, to eliminate bureaucracy and to always understand the needs of the customer. This business unit has been criticalalready proven its value, while now only in helping the early stages of working to maximize its potential.
3. TRUST COMPANY — the Trust Company has already proven its ability to grow loans outstanding since December 2003 by
9.2%. The unit is focused on the stated primary lending market of an
approximate 100-mile radius from Johnstown. It is mounting an
energetic customer calling effort to build its loan balances.assets under management along with its fees. It has also reengineeredrestructured itself into a true 21st Century business model which has improved its lending procedures. The Company can provide the
unit with the capacity to grow substantially and its new procedures
permitmarketplace focus. It has a positive investment performance record which enables it to increase its margins and build permanent relationships.
This unit bears little resemblance to its former self and is poised to
generate increased loan outstandings againexcel in 2006 and be a strong
future contributor to the Company's revenue stream.
3. TRUST COMPANY -- This business unit has a unique business opportunity.
It has all of the activities expected of a traditional bank trust department and we believe it is proficient in each of them. In
addition,functions such as wealth management. But also, it has shown creativity in building a unique capability that sets it apart from almost
all other trust operations. As a partposition of one of only 13 unionized
bankssubstance in the nation, this unit has developed a strategy and a setvast world of
products (BUILD and ERECT Funds) that leverage that unusual situation.
It has been quite successful in building products that serve the union managed pension funds that are a significant facet of certain segments
of the American labor scene. These products have no geographic
restrictions, nor do they require major commitments of the Company's
capital. They do, however, require skilled professionalsfunds. Resources will continue to market and
manage the trust company's capabilities. As demonstrated with the most
recent capital offering, resources will be channeled to the Trust Company as needed so that itthis kind of creativity can continue to grow its assets under
management in both this discrete union market nichelead to new opportunities. Also, synergies need to be developed between the Trust Company and within the
more traditional trust businesses.
West Chester Capital Advisors so that revenue growth can be further enhanced.
ThisForm 10-K contains various forward-looking statements and includes assumptions concerning the Company'sCompany’s beliefs, plans, objectives, goals, expectations, anticipations estimates, intentions, operations, future results, and prospects, including statements that include the words "may," "could,"
"should," "would," "believe," "expect," "anticipate," "estimate," "intend,"
"plan"“may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions. These forward-looking statements are based upon current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" “safe harbor”
38
provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company'sCompany’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.
Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (iii) significant changes in interest rates and prepayment speeds; (iv) inflation, stock and bond market, and monetary fluctuations; (v) credit risks of commercial, real estate, consumer, and other lending activities; (vi) changes in federal and state banking and financial services laws and regulations; (vii) the presence in the Company'sCompany’s market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors'competitors’ products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) 37
unanticipated regulatory or judicial proceedings; and (xii) other external developments which could materially impact the Company'sCompany’s operational and financial performance.
The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
39
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, and liquidity risk. The Company controls and monitors these risks with policies, procedures, and various levels of managerial and Board oversight. The Company'sCompany’s objective is to optimize profitability while managing and controlling risk within Board approved policy limits.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and hedges. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk.
Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors and debtholders. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. The Company'sCompany’s primary credit risk occurs in the loan portfolio. The Company uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. The Company'sCompany’s investment policy and hedging policy strictly limit the amount of credit risk that may be assumed in the investment portfolio and through hedging activities.
For information regarding the market risk of the Company'sCompany’s financial instruments, see Interest Rate Sensitivity in the MD&A presented on pages 32-34.33-35. The Company'sCompany’s principal market risk exposure is to interest rates.
38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
40
| ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
CONSOLIDATED BALANCE SHEETS
| At December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
ASSETS | ||||||||
| Cash and due from depository institutions | $ | 24,715 | $ | 23,491 | ||||
| Interest bearing deposits | 197 | 413 | ||||||
| Cash and cash equivalents | 24,912 | 23,904 | ||||||
| Investment securities: | ||||||||
| Available for sale | 144,941 | 175,543 | ||||||
| Held to maturity (market value $18,378 at December 31, 2007 and $20,460 at December 31, 2006) | 18,533 | 20,657 | ||||||
| Loans held for sale | 1,060 | 358 | ||||||
| Loans | 635,566 | 589,591 | ||||||
| Less: Unearned income | 471 | 514 | ||||||
| Allowance for loan losses | 7,252 | 8,092 | ||||||
| Net loans | 627,843 | 580,985 | ||||||
| Premises and equipment, net | 8,450 | 8,562 | ||||||
| Accrued income receivable | 4,032 | 4,165 | ||||||
| Goodwill | 13,497 | 9,544 | ||||||
| Core deposit intangibles | 973 | 1,838 | ||||||
| Bank owned life insurance | 32,864 | 32,256 | ||||||
| Net deferred tax asset | 13,750 | 15,837 | ||||||
| Regulatory stock | 7,204 | 5,355 | ||||||
| Other assets | 6,819 | 16,988 | ||||||
| TOTAL ASSETS | $ | 904,878 | $ | 895,992 | ||||
LIABILITIES | ||||||||
| Non-interest bearing deposits | $ | 113,380 | $ | 107,559 | ||||
| Interest bearing deposits | 597,059 | 634,196 | ||||||
| Total deposits | 710,439 | 741,755 | ||||||
| Short-term borrowings | 72,210 | 49,091 | ||||||
| Advances from Federal Home Loan Bank | 9,905 | 946 | ||||||
| Guaranteed junior subordinated deferrable interest debentures | 13,085 | 13,085 | ||||||
| Total borrowed funds | 95,200 | 63,122 | ||||||
| Other liabilities | 8,945 | 6,431 | ||||||
| TOTAL LIABILITIES | 814,584 | 811,308 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, no par value; 2,000,000 shares authorized; there were no shares issued and outstanding on December 31, 2007, and 2006 | — | — | ||||||
| Common stock, par value $2.50 per share; 30,000,000 shares authorized; 26,279,916 shares issued and 22,188,997 shares outstanding on December 31, 2007; 26,247,013 shares issued and 22,156,094 shares outstanding on December 31, 2006 | 65,700 | 65,618 | ||||||
| Treasury stock at cost, 4,090,919 shares on December 31, 2007 and 2006 | (65,824 | ) | (65,824 | ) | ||||
| Capital surplus | 78,788 | 78,739 | ||||||
| Retained earnings | 15,602 | 12,568 | ||||||
| Accumulated other comprehensive loss, net | (3,972 | ) | (6,417 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 90,294 | 84,684 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 904,878 | $ | 895,992 | ||||
See accompanying notes to consolidated financial statements.
39
41
CONSOLIDATED STATEMENTS OF OPERATIONS
40
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands, except | ||||||||||||
| per share data) | ||||||||||||
| INTEREST INCOME | ||||||||||||
| Interest and fees on loans: | ||||||||||||
| Taxable | $ | 41,345 | $ | 37,366 | $ | 32,685 | ||||||
| Tax exempt | 218 | 231 | 262 | |||||||||
| Deposits with banks | 20 | 23 | 6 | |||||||||
| Federal funds sold | 121 | 3 | — | |||||||||
| Investment securities: | ||||||||||||
| Available for sale | 6,636 | 7,868 | 11,926 | |||||||||
| Held to maturity | 1,039 | 1,074 | 986 | |||||||||
| Total Interest Income | 49,379 | 46,565 | 45,865 | |||||||||
| INTEREST EXPENSE | ||||||||||||
| Deposits | 22,811 | 19,232 | 12,985 | |||||||||
| Short-term borrowings | 972 | 1,672 | 2,599 | |||||||||
| Advances from Federal Home Loan Bank | 253 | 63 | 4,510 | |||||||||
| Guaranteed junior subordinated deferrable interest debentures | 1,120 | 1,120 | 1,659 | |||||||||
| Total Interest Expense | 25,156 | 22,087 | 21,753 | |||||||||
| Net Interest Income | 24,223 | 24,478 | 24,112 | |||||||||
| Provision for loan losses | 300 | (125 | ) | (175 | ) | |||||||
| Net Interest Income after Provision for Loan Losses | 23,923 | 24,603 | 24,287 | |||||||||
| NON-INTEREST INCOME | ||||||||||||
| Trust fees | 6,753 | 6,519 | 6,129 | |||||||||
| Net gains on loans held for sale | 307 | 105 | 209 | |||||||||
| Net realized losses on investment securities | — | — | (2,499 | ) | ||||||||
| Service charges on deposit accounts | 2,579 | 2,561 | 2,700 | |||||||||
| Investment advisory fees | 974 | — | — | |||||||||
| Bank owned life insurance | 1,268 | 1,207 | 1,017 | |||||||||
| Other income | 2,826 | 2,449 | 2,653 | |||||||||
| Total Non-Interest Income | 14,707 | 12,841 | 10,209 | |||||||||
| NON-INTEREST EXPENSE | ||||||||||||
| Salaries and employee benefits | 19,339 | 18,669 | 19,062 | |||||||||
| Net occupancy expense | 2,494 | 2,410 | 2,552 | |||||||||
| Equipment expense | 2,045 | 2,349 | 2,509 | |||||||||
| Professional fees | 3,197 | 3,208 | 4,242 | |||||||||
| Supplies, postage, and freight | 1,211 | 1,167 | 1,154 | |||||||||
| Miscellaneous taxes and insurance | 1,436 | 1,567 | 1,762 | |||||||||
| FDIC deposit insurance expense | 88 | 192 | 289 | |||||||||
| Amortization of core deposit intangibles | 865 | 865 | 865 | |||||||||
| Federal Home Loan Bank and hedge prepayment penalties | — | — | 12,287 | |||||||||
| Other expense | 3,997 | 4,265 | 4,698 | |||||||||
| Total Non-Interest Expense | 34,672 | 34,692 | 49,420 | |||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 3,958 | 2,752 | (14,924 | ) | ||||||||
| Provision (benefit) for income taxes | 924 | 420 | (5,902 | ) | ||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS | 3,034 | 2,332 | (9,022 | ) | ||||||||
| LOSS FROM DISCONTINUED OPERATIONS NET OF TAX BENEFIT $(61) | — | — | (119 | ) | ||||||||
| NET INCOME (LOSS) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | |||||
| PER COMMON SHARE DATA FROM CONTINUING OPERATIONS: | ||||||||||||
| Basic: | ||||||||||||
| Income (loss) | $ | 0.14 | $ | 0.11 | $ | (0.44 | ) | |||||
| Average number of shares outstanding | 22,171 | 22,141 | 20,340 | |||||||||
| Diluted: | ||||||||||||
| Income (loss) | $ | 0.14 | $ | 0.11 | $ | (0.44 | ) | |||||
| Average number of shares outstanding | 22,173 | 22,149 | 20,340 | |||||||||
| PER COMMON SHARE DATA: | ||||||||||||
| Basic: | ||||||||||||
| Net income (loss) | $ | 0.14 | $ | 0.11 | $ | (0.45 | ) | |||||
| Average number of shares outstanding | 22,171 | 22,141 | 20,340 | |||||||||
| Diluted: | ||||||||||||
| Net income (loss) | $ | 0.14 | $ | 0.11 | $ | (0.45 | ) | |||||
| Average number of shares outstanding | 22,173 | 22,149 | 20,340 | |||||||||
| Cash dividends declared | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||
See accompanying notes to consolidated financial statements.
41
42
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
INCOME (LOSS)
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| COMPREHENSIVE INCOME (LOSS) | ||||||||||||
| Net income (loss) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | |||||
| Other comprehensive income (loss), before tax: | ||||||||||||
| Pension obligation change for defined benefit plan | 21 | — | — | |||||||||
| Income tax effect | (7 | ) | — | — | ||||||||
| Unrealized holding gains (losses) on available for sale securities arising during period | 3,683 | 1,309 | (3,605 | ) | ||||||||
| Income tax effect | (1,252 | ) | (444 | ) | 1,226 | |||||||
| Reclassification adjustment for losses on available for sale securities included in net loss | — | — | 2,499 | |||||||||
| Income tax effect | — | — | (850 | ) | ||||||||
| Other comprehensive income (loss) | 2,445 | 865 | (730 | ) | ||||||||
| Comprehensive income (loss) | $ | 5,479 | $ | 3,197 | $ | (9,871 | ) | |||||
See accompanying notes to consolidated financial statements.
42
43
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements
43
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| COMMON STOCK | ||||||||||||
| Balance at beginning of period | $ | 65,618 | $ | 65,508 | $ | 59,522 | ||||||
| Stock options exercised/new shares issued | 82 | 110 | 67 | |||||||||
| Shares issued from private offering | — | — | 5,919 | |||||||||
| Balance at end of period | 65,700 | 65,618 | 65,508 | |||||||||
| TREASURY STOCK | ||||||||||||
| Balance at beginning of period | (65,824 | ) | (65,824 | ) | (65,824 | ) | ||||||
| Balance at end of period | (65,824 | ) | (65,824 | ) | (65,824 | ) | ||||||
| CAPITAL SURPLUS | ||||||||||||
| Balance at beginning of period | 78,739 | 78,620 | 75,480 | |||||||||
| Stock options exercised/new shares issued | 37 | 64 | 66 | |||||||||
| Stock option expense | 12 | 55 | — | |||||||||
| Shares issued from private offering, net of issuance costs | — | — | 3,074 | |||||||||
| Balance at end of period | 78,788 | 78,739 | 78,620 | |||||||||
| RETAINED EARNINGS | ||||||||||||
| Balance at beginning of period | 12,568 | 10,236 | 19,377 | |||||||||
| Net income (loss) | 3,034 | 2,332 | (9,141 | ) | ||||||||
| Balance at end of period | 15,602 | 12,568 | 10,236 | |||||||||
| ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||
| Balance at beginning of period | (6,417 | ) | (4,066 | ) | (3,336 | ) | ||||||
| Cumulative effect of adoption of change in accounting for pension obligation, net of tax effect | — | (3,216 | ) | — | ||||||||
| Other comprehensive income (loss) | 2,445 | 865 | (730 | ) | ||||||||
| Balance at end of period | (3,972 | ) | (6,417 | ) | (4,066 | ) | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | $ | 90,294 | $ | 84,684 | $ | 84,474 | ||||||
See accompanying notes to consolidated financial statements.
(continued on next page)
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued from previous page)
| Year Ended December 31 | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
OPERATING ACTIVITIES | ||||||||||||
| Net income (loss) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | |||||
| Loss from discontinued operations | — | — | (119 | ) | ||||||||
| Income (loss) from continuing operations | 3,034 | 2,332 | (9,022 | ) | ||||||||
| Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: | ||||||||||||
| Provision for loan losses | 300 | (125 | ) | (175 | ) | |||||||
| Depreciation and amortization expense | 1,505 | 1,700 | 1,817 | |||||||||
| Amortization expense of core deposit intangibles | 865 | 865 | 865 | |||||||||
| Net amortization of investment securities | 387 | 597 | 1,560 | |||||||||
| Net realized losses on investment securities — available for sale | — | — | 2,499 | |||||||||
| Net gain on sale of fixed assets | (248 | ) | — | — | ||||||||
| Net realized gains on loans held for sale | (307 | ) | (105 | ) | (209 | ) | ||||||
| Amortization of deferred loan fees | (518 | ) | (393 | ) | (421 | ) | ||||||
| Loss on prepayment of interest rate swaps | — | — | 5,825 | |||||||||
| Origination of mortgage loans held for sale | (26,720 | ) | (11,714 | ) | (16,807 | ) | ||||||
| Sales of mortgage loans held for sale | 26,325 | 11,454 | 17,298 | |||||||||
| Write-off of debt issuance costs | — | — | 210 | |||||||||
| Decrease (increase) in accrued interest receivable | 133 | (40 | ) | 163 | ||||||||
| Increase (decrease) in accrued interest payable | 530 | 1,029 | (707 | ) | ||||||||
| Net decrease (increase) in other assets | 2,047 | (1,148 | ) | (10,605 | ) | |||||||
| Net increase in other liabilities | 3,000 | 627 | 889 | |||||||||
| Net cash provided by (used in) operating activities from continuing operations | 10,333 | 5,079 | (6,820 | ) | ||||||||
| Net cash used in operating activities from discontinued operations | — | — | (597 | ) | ||||||||
| Net cash provided by (used in) operating activities | 10,333 | 5,079 | (7,417 | ) | ||||||||
INVESTING ACTIVITIES | ||||||||||||
| Purchase of investment securities — available for sale | (6,768 | ) | (8,823 | ) | (32,469 | ) | ||||||
| Purchase of investment securities — held to maturity | — | (1,500 | ) | — | ||||||||
| Purchase of regulatory stock | (5,824 | ) | (3,363 | ) | — | |||||||
| Proceeds from maturities of investment securities — available for sale | 42,639 | 28,088 | 60,086 | |||||||||
| Proceeds from maturities of investment securities — held to maturity | 2,054 | 11,104 | 3,701 | |||||||||
| Proceeds from sales of investment securities — available for sale | — | — | 132,595 | |||||||||
| Proceeds from redemption of regulatory stock | 3,975 | 4,996 | — | |||||||||
| Long-term loans originated | (180,558 | ) | (142,247 | ) | (119,012 | ) | ||||||
| Principal collected on long-term loans | 163,819 | 112,027 | 110,991 | |||||||||
| Loans purchased or participated | (33,762 | ) | (10,004 | ) | (22,104 | ) | ||||||
| Loans sold or participated | 4,500 | 1,600 | 1,000 | |||||||||
| Net increase in other short-term loans | (332 | ) | (377 | ) | (497 | ) | ||||||
| Purchases of premises and equipment | (1,667 | ) | (1,597 | ) | (1,028 | ) | ||||||
| Proceeds from sale/retirement of premises and equipment | 522 | 50 | 210 | |||||||||
| Acquisition of West Chester Capital Advisors | 2,200 | — | — | |||||||||
| Net cash (used in) provided by investing activities | (9,202 | ) | (10,046 | ) | 133,473 | |||||||
FINANCING ACTIVITIES | ||||||||||||
| Net (decrease) increase in deposit accounts | (31,316 | ) | 22,608 | 68,264 | ||||||||
| Net increase (decrease) in other short-term borrowings | 23,119 | (14,093 | ) | (88,751 | ) | |||||||
| Principal advances on advances from Federal Home Loan Bank | 9,004 | — | — | |||||||||
| Principal repayments on advances from Federal Home Loan Bank | (45 | ) | (41 | ) | (100,039 | ) | ||||||
| Cancellation payment of interest rate swaps | — | — | (5,825 | ) | ||||||||
| Guaranteed junior subordinated deferrable interest debenture dividends paid | (1,016 | ) | (1,016 | ) | (1,546 | ) | ||||||
| Redemption of guaranteed junior subordinated deferrable interest debentures | — | — | (7,200 | ) | ||||||||
| Proceeds from dividend reinvestment and stock purchase plan and stock options exercised | 131 | 173 | 133 | |||||||||
| Private placement issuance of common stock | — | — | 10,300 | |||||||||
| Costs associated with private placement | — | — | (1,482 | ) | ||||||||
| Net cash (used in) provided by financing activities | (123 | ) | 7,631 | (126,146 | ) | |||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,008 | 2,664 | (90 | ) | ||||||||
| CASH AND CASH EQUIVALENTS AT JANUARY 1 | 23,904 | 21,240 | 21,330 | |||||||||
| CASH AND CASH EQUIVALENTS AT DECEMBER 31 | $ | 24,912 | $ | 23,904 | $ | 21,240 | ||||||
See accompanying notes to consolidated financial statements.
45
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER
At and for the Years Ended
December 31, 2007, 2006 and 2005 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
At and for the Years Ended
December 31, 2007, 2006 and 2005
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
BUSINESS AND NATURE OF OPERATIONS:
AmeriServ Financial, Inc. (the Company) is a bank holding company, headquartered in Johnstown, Pennsylvania. Through its banking subsidiary the Company operates 2219 banking locations in five southwestern Pennsylvania counties. These branches provide a full range of consumer, mortgage, and commercial financial products. The AmeriServ Trust and Financial Services Company (Trust Company) offers a complete range of trust and financial services and has $1.6administers assets valued at approximately $1.9 billion at December 31, 2007. On March 7, 2007, the Bank completed the acquisition of West Chester Capital Advisors (WCCA). WCCA is a registered investment advisor with expertise in large cap stocks and at December 31, 2007 had $137 million in assets under management. The Trust Company administers the ERECT and BUILD Funds
which are collective investment funds for trade union controlled pension fund
assets.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of AmeriServ Financial, Inc. and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), Trust Company, AmeriServ Associates, Inc. (AmeriServ Associates), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a state-chartered full service bank with 2219 locations in Pennsylvania. On March 7, 2007, the Bank completed the acquisition of West Chester Capital Advisors (WCCA). WCCA is a registered investment advisor with expertise in large cap stocks and at December 31, 2007 had $137 million in assets under management. Standard Mortgage Corporation of Georgia (SMC), a former wholly-owned subsidiary of the Bank, was a mortgage banking company whose business included the servicing of mortgage loans. The Company sold its remaining mortgage servicing rights in December 2004 and discontinued the operations of this non-core business in 2005 (see Note 24)23).
AmeriServ Associates, based in State College, is a registered investment
advisory firm that provides investment portfolio and asset/liability management
services to small and mid-sized financial institutions. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.
Intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles, or GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates and the differences may be material to the consolidated financial statements. The Company'sCompany’s most significant estimate is the allowance for loan losses.
INVESTMENT SECURITIES:
Securities are classified at the time of purchase as investment securities held to maturity if it is management'smanagement’s intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company'sCompany’s books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management'smanagement’s intent at the time of purchase to hold the securities for an indefinite period of timeand/or to use the securities as part of the Company'sCompany’s asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate appreciation/depreciation excluded from income and credited/charged to accumulated other comprehensive income/loss within stockholders'stockholders’ equity on a net of tax basis. Any securities classified as trading assets are reported at fair value with unrealized aggregate appreciation/depreciation included in income on a net of tax basis. The Company presently does not engage in trading activity. Realized gains or losses on securities sold are computed upon the adjusted cost of the specific securities sold. Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time
46
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery.
LOANS:
Interest income is recognized using methods which approximate a level yield related to principal amounts outstanding. The Bank discontinues the accrual of interest income when loans except for loans that are insured for credit loss, become 90 days past due in either principal or interest. In addition, if circumstances warrant, the accrual of interest may be discontinued prior to 90 days. Payments received on non-accrual loans are credited to principal until full recovery of principal has been recognized; it is only after full recovery
of principal that any additional payments received are recognized as interest
income.or the loan has been returned to accrual status. The only exception to this policy is for residential mortgage loans wherein interest income is recognized on a cash basis as payments are received. A non-accrual commercial loan is placed on accrual status after becoming current and remaining current for twelve consecutive payments. Residential mortgage loans are placed on accrual status upon becoming current.
46
LOAN FEES:
Loan origination and commitment fees, net of associated direct costs, are deferred and amortized into interest and fees on loans over the loan or commitment period. Fee amortization is determined by the effective interest method.
LOANS HELD FOR SALE:
Certain newly originated fixed-rate residential mortgage loans are classified as held for sale, because it is management'smanagement’s intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or market value.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the premises and equipment using the straight-line method with a half-year convention. Useful lives of up to 45 years for buildings and up to 12 years for equipment are utilized. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives of the improvements, whichever is shorter. Maintenance, repairs, and minor alterations are charged to current operations as expenditures are incurred.
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFF PROCEDURES:
As a financial institution, which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline to perform an analysis which is updated on a quarterly basis at the Bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes:
- review of all criticized and impaired loans with balances over
$250,000 ($100,000 for loans classified as doubtful or worse) to
determine if any specific reserve allocations are required on an
individual loan basis. The specific reserve established for these
criticized and impaired loans is based on careful analysis of the
loan's performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor. For
impaired loans the measurement of impairment may be based upon: 1) the
present value of expected future cash flows discounted at the loan's
effective interest rate; 2) the observable market price of the
impaired loan; or 3) the fair value of the collateral of a collateral
dependent loan.
- The application of formula driven reserve allocations for all
commercial and commercial real-estate loans by using a three-year
migration analysis of net losses incurred within each risk grade for
the entire commercial loan portfolio. The difference between estimated
and actual losses is reconciled through the nature of the migration
analysis.
- The application of formula driven reserve allocations to consumer and
mortgage loans which are based upon historical net charge-off
experience for those loan types. The residential mortgage loan
allocation is based upon the Company's five-year historical average of
actual loan net charge-offs experienced in that category. The same
methodology is used to determine the allocation for consumer loans
except the allocation is based upon an average of the most recent
actual three-year historical net charge-off experience for consumer
loans.
- The application of formula driven reserve allocations to all
outstanding loans is based upon review of historical losses and
qualitative factors, which include but are not limited to, economic
trends, delinquencies, 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.
- The maintenance of a general unallocated reserve to accommodate
inherent risk in the Company's portfolio that is not identified
through the Company's specific loan and portfolio segment reviews
discussed above. Management recognizes that there may be events or
economic factors that have occurred affecting specific borrowers or
segments of borrowers that may not yet be fully reflected in the
information that the Company uses for arriving at reserves for a
specific loan or portfolio segment. Therefore, the Company and its
Board of Directors believe a general unallocated reserve is needed to
recognize the estimation risk associated with the specific and formula
driven allowances. In conjunction with the establishment of the
general unallocated reserve, the Company also looks at the total
allowance for loan losses in relation to the size of the total loan
portfolio and the level of non-performing assets.
| • | review of all criticized and impaired loans with balances over $250,000 ($100,000 for loans classified as doubtful or worse) to determine if any specific reserve allocations are required on an individual loan basis. The specific reserve established for these criticized and impaired loans is based on careful analysis of the loan’s performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. For impaired loans the measurement of impairment may be based upon: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate; 2) the observable market price of the impaired loan; or 3) the fair value of the collateral of a collateral dependent loan. | |
| • | The application of formula driven reserve allocations for all commercial and commercial real-estate loans by using a three-year migration analysis of net losses incurred within each risk grade for the entire commercial |
47
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| loan portfolio. The difference between estimated and actual losses is reconciled through the nature of the migration analysis. |
| • | The application of formula driven reserve allocations to consumer and mortgage loans which are based upon historical net charge-off experience for those loan types. The residential mortgage loan allocation is based upon the Company’s five-year historical average of actual loan net charge-offs experienced in that category. The same methodology is used to determine the allocation for consumer loans except the allocation is based upon an average of the most recent actual three-year historical net charge-off experience for consumer loans. | |
| • | The application of formula driven reserve allocations to all outstanding loans is based upon review of historical losses and qualitative factors, which include but are not limited to, economic trends, delinquencies, 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. | |
| • | Management recognizes that there may be events or economic factors that have occurred affecting specific borrowers or segments of borrowers that may not yet be fully reflected in the information that the Company uses for arriving at reserves for a specific loan or portfolio segment. Therefore, the Company believes that there is estimation risk associated with the use of specific and formula driven allowances. |
After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve.
47
When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are
90 days past due, except loans that are insured for credit loss or loans secured
by residential real estate.
The Company'sCompany’s policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loansloan relationships with aggregate balances in excess of $250,000 within a12-month period. The Company defines classified loans as those loans rated substandard or doubtful. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business loans $100,000$250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment.
RESERVE
ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT:
The allowance for unfunded loan commitments and letters of credit is maintained at a level believed by management to be sufficient to absorb estimated losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers and the terms and expiration dates of the unfunded credit facilities. Net adjustments to the allowance for unfunded loan commitments and letters of credit are provided for in the unfunded commitment reserve expense line item within other expense in the consolidated statement of income and a separate reserve is recorded within the liabilities section of the consolidated balance sheet in other liabilities.
TRUST FEES:
Trust fees are recorded on the cash basis which approximates the accrual basis for such income.
48
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
BANK-OWNED LIFE INSURANCE:
The Company has purchased life insurance policies on certain employees. These policies are recorded in other assetson the Consolidated Balance Sheet at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in bank owned life insurance within non-interest income.
INTANGIBLE ASSETS:
Core deposit intangible assets are amortized over their useful lives, which do not exceed 10 years. Prior to January 1, 2002, goodwill was amortized using the straight-line method over a period of 15 years. Beginning in 2002, the Company ceased amortizing goodwill in accordance with Financial Accounting Statement #142 (FAS 142)#142). Goodwill isand core deposit intangibles are reviewed for impairment at least on an annual basis.
PURCHASED AND ORIGINATED MORTGAGE SERVICING RIGHTS:
The Company recognized as assets the rights to service mortgage loans for
others whether the servicing rights were acquired through purchasesbasis or originations. Purchased mortgage servicing rights were capitalized at cost. For
loans originated and sold where servicing rights had been retained, the Company
allocated the cost of originating the loan to the loan (without the servicing
rights) and the servicing rights retained based on their relative fair market
values if it was practicable to estimate those fair values. Where it was not
practicable to estimate the fair values, the entire cost of originating the loan
was allocated to the loan without the servicing rights.
The fair value of originated Mortgage Servicing Rights (MSRs) was estimated
by calculating the present value of estimated future net servicing cash flows,
taking into consideration actual and expected mortgage loan prepayment rates,
discount rates, servicing costs, and other economic factors, which were
determined based on current market conditions. The expected and actual rates of
mortgage loan prepayments were the most significant factors driving the value of
MSRs. Increaseswhen events occur that could result in mortgage loan prepayments reduced estimated future net
servicing cash flows because the life of the underlying loan was reduced. In
determining the fair value of the MSRs, mortgage interest rates, which were used
to determine prepayment rates, and discount rates were held constant over the
estimated life of the portfolio. Expected mortgage loan prepayment rates were
derived from a third-party model and adjusted to reflect AmeriServ's actual
prepayment experience.
For purposes of evaluating and measuring impairment, the Company stratified
the rights based on risk characteristics. If the discounted projected net cash
flows of a stratum were less than the carrying amount of the stratum, the
stratum was written down to the amount of the discounted projected net cash
flows through a valuation account. The Company had determined that the
48
predominant risk characteristics of its portfolio were loan type and interest
rate. For the purposes of evaluating impairment, the Company had stratified its
portfolio in 200 basis point tranches by loan type. Mortgage servicing rights
were amortized in proportion to, and over the period of, estimated net servicing
income. Servicing fees, net of amortization, impairment, and related gains and
losses on sales were recorded in individual lines on the Consolidated Statement
of Operations within the Discontinued Operations (See Note 24). The value of
mortgage servicing rights was subject to interest rate and prepayment risk.
impairment.
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 to purchase 134,349, 131,095220,892, 213,974, and 307,136134,349 shares of common stock were outstanding during 2005, 20042007, 2006 and 2003,2005, respectively, but were not included in the computation of diluted earnings per common share as the options'options’ exercise prices were greater than the average market price of the common stock for the respective periods.
STOCK-BASED COMPENSATION:
At December 31, 2005,
On January 1, 2006, the Company hadadopted Statement of Financial Accounting Standards (FAS) #123(R) “Share-Based Payment” using the “modified prospective” method. Under this method, awards that are granted, modified, or vested after December 15, 2005, are measured and accounted for in accordance with FAS #123(R). The Company recognized $12,000 and $55,000 of pretax compensation expense for the year 2007 and 2006. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions used for the grants: risk-free interest rates ranging from 3.41% to 4.70%; expected lives of 10 years; expected volatility ranging from 33.39% to 39.65% and expected dividend yields of 0%.
The Company has stock based compensation plans, which are described more fully in Note 1817 Stock Compensation Plans. ThePrior to FAS #123(R), the Company accountsaccounted for these plans under Accounting Principles Board Opinion #25, "Accounting“Accounting for Stock Issued to Employees,"” and related interpretations. No stock-based employee compensation expense hashad been reflected in net income as all rights and options to purchase the Company'sCompany’s stock granted under these plans had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the income from continuing operations and earnings per share as
49
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS)(FAS) #123, "Accounting“Accounting for Stock-Based Compensation,"” to stock compensation plans.
PRO FORMA INCOME (LOSS)
NET LOSS
ANDEARNINGS (LOSS)LOSS PER SHARE
AND
| Year Ended December 31, | ||||
| 2005 | ||||
| (In thousands, except per | ||||
| share data) | ||||
| Net loss, as reported | $ | (9,022 | ) | |
| Less: Total stock compensation expense determined under the fair value method for all awards, net of related tax effects | (74 | ) | ||
| Pro forma net loss | $ | (9,096 | ) | |
| Loss per share: | ||||
| Basic as reported | $ | (0.44 | ) | |
| Basic pro forma | (0.45 | ) | ||
| Diluted as reported | (0.44 | ) | ||
| Diluted pro forma | (0.45 | ) | ||
COMPREHENSIVE LOSS:
For the Company, comprehensive income (loss)loss includes net income, unfunded pension obligation and unrealized holding gains and losses from available for sale investment securities. The balances of accumulated other comprehensive loss were $(4,066,000)$(3,972,000), $(3,336,000)$(6,417,000) and $(932,000)$(4,066,000) at December 31, 2007, 2006 and 2005, 2004 and 2003,
respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS:
On a consolidated basis, cash and cash equivalents include cash and due from banks, interest bearing deposits with banks, and federal funds sold and securities purchased under agreements to resell. For the parent company, cash
and cash equivalents also include short-term investments. The Company made $54,000$138,000 in income tax payments in 2005; $3,837,0002007; $169,000 in 2004;2006; and $119,000$54,000 in 2003.2005. The Company made total interest payments of $24,626,000 in 2007; $21,058,000 in 2006; and $22,460,000 in 2005;
$26,845,000 in 2004; and $31,676,000 in 2003.
2005.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the 49
corresponding asset or liability from period to period. Deferred tax assets are reduced, if necessary, by the amounts of such benefits that are not expected to be realized based upon available evidence.
INTEREST RATE CONTRACTS:
The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. These interest rate contracts function as hedges against specific assets or liabilities on the Consolidated Balance Sheets. The Company does not use interest rate contracts for trading purposes.
The interest rate contracts involve no exchange of principal either at inception or upon maturity; rather, they involve the periodic exchange of interest payments arising from an underlying notional principal amount. For
50
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
interest rate swaps, the interest differential to be paid or received wasis accrued by the Company and recognized as an adjustment to interest income or interest expense of the underlying assets or liabilities being hedged. Because only interest payments are exchanged, the cash requirement and exposure to credit risk are significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest rate caps or floors wasis deferred and amortized to interest income or interest expense over the term of the contract. Unamortized premiums related to the purchase of caps and floors are included in other assets on the consolidated balance sheets. There were no interest rate swaps, caps or floorscontracts in place at December 31, 20052007 or interest rate caps or floors in 2004.
December 31, 2006.
RECENT ACCOUNTING STANDARDS:
In December 2003,2007, the Accounting Standards Executive CommitteeFASB issued FAS No. 141 (revised 2007),Business Combinations(“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of the
American Institute of Certified Public Accountants issued AICPA Statement of
Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in
a Transfer" (SOP 03-3), to address accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows
expected to be collected when loans or debt securities aregoodwill acquired in a transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to such loans and debt securities
purchased or acquired in purchase business combinations and does not apply to
originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts that may be recognized for
certain loans and debt securities. Additionally, SOP 03-3 requires that the
excess of contractual cash flows over cash flows expected to be collected
(nonaccretable difference) not be recognized as an adjustment of yield or
valuation allowance, such as the allowance for loan losses. Subsequent to the
initial investment, increases in expected cash flows generally should be
recognized prospectively through adjustment of the yield on the loan or debt
security over its remaining life. Decreases in expected cash flows should be
recognized as impairment. SOP 03-3combination. FAS No. 141(R) is effective for loansfiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In September 2006, the FASB issued FAS No. 157,Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and debt securities
acquiredliabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after DecemberNovember 15, 2004, with early
application encouraged. The impact of this new pronouncement was not material to
the Company's financial condition, results of operations or cash flows.
In March 2004, the SEC issued Staff Accounting Bulletin #105, "Application
of Accounting Principles to Loan Commitments" (SAB 105). This bulletin was
issued to inform registrants of the SEC's view that the fair value of the
recorded loan commitments, which are required to follow derivative accounting
under FAS #133, "Accounting for Derivative Instruments2007 and Hedging Activities,"
should not consider the expected future cash flows related to the associated
servicing of the future loan. The provisions of SAB 105 must be applied to loan
commitments accounted for as derivatives that are entered into after March 31,
2004.interim periods within those fiscal years. Early adoption is permitted. The adoption of this Staff Accounting Bulletin in the second quarter of
2004standard did not have a material impacteffect on the Company.
In December 2004, the FASB issued FAS #123 (revised 2004), "Share-Based
Payment," which revises FAS #123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion #25, "Accounting for Stock issued to Employees." This
Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. This Statement
does not address the accounting for employee share ownership plans, which are
subject to AICPA Statement of Position 93-6, "Employers' Accounting for Stock
Ownership Plans." This Statement requires an entity to recognize the cost of
employee services received in share-based payment transactions and measure the
cost based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award. The Company will be required to adopt these
statements on January 1, 2006. The Company adopted this standard in the first
quarter of 2006 and it did not have a material impact on the Company's financial
condition,Company’s results of operations or cash flows.
financial position.
In June, 2005,February 2007, the FASB issued FAS No. 154, "Accounting Changes159,The Fair Value Option for Financial Assets and Error
Corrections - a replacementFinancial Liabilities — Including an amendment of APB OpinionFASB Statement No. 20, Accounting Changes,115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 3, Reporting Accounting Changes159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in Interim financial statements." Underearnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 154, voluntary changes in accounting principles are
applied retrospectively157,Fair Value Measurements. The Company presently does not expect to prior periods' financial statements unless it would
be impractical.elect to adopt this standard.
In December 2007, the FASB issued FAS No. 154 supersedes APB opinion160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 20,51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which required that
most voluntary changes in accounting
50
principles be recognized by includingis sometimes referred to as minority interest, is an ownership interest in the current period'sconsolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the cumulative effectamounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the change.consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS No. 154 also makes a distinction between
"retrospective application" of a change in accounting principle and the
"restatement" of financial statements to reflect the correction of an error. The
provisions of FAS No. 154 are160 is effective for accounting changes made in fiscal years beginning on or after December 15, 2005.2008. Earlier adoption is prohibited. The Company doesadoption of this standard is not expect adoptionexpected to have a material impacteffect on the consolidated financial statements,Company’s results of operations or liquidityfinancial position.
In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue06-4(“EITF 06-4”),Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with
51
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
a postretirement benefit.EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Company.
In November 2005,Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the FASB issued FASB Staff Position No. (FSP) FAS 115-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." This FSP clarified and reaffirmed existing guidance as to whenarrangement is, in substance, an investment is considered impaired, whether that impairment is other than
temporary, andindividual deferred compensation contract) based on the measurement of an impairment loss. Certain disclosures about
unrealized losses on available for sale debt and equity securities that have not
been recognized as other-than -temporary impairments are required under FSP
115-1. The FSPsubstantive agreement with the employee.EITF 06-4 is effective for fiscal years beginning after December 15, 2005.
As the FSP reaffirms existing guidance, the Company does2007. The adoption of this EITF did not expect this FSP to have a significant impactmaterial effect on our consolidated financial statements,the Company’s results of operations or liquidityfinancial position.
In March 2007, the FASB ratified Emerging Issues Task Force IssueNo. 06-10(“EITF 06-10”),Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements.EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the Company. Atassociated asset on the basis of the terms of the collateral assignment agreement.EITF 06-10 is effective for fiscal years beginning after December 31, 2005, gross unrealized
losses15, 2007. The adoption of this EITF did not have a material effect on availablethe Company’s results of operations or financial position.
In June 2007, the FASB ratified Emerging Issues Task Force IssueNo. 06-11(“EITF 06-11”),Accounting for sale securities was $6.5 million.
RECLASSIFICATIONS:
Certain items in the prior-year financial statements were reclassifiedIncome Tax Benefits of Dividends on Share-Based Payment Awards.EITF 06-11 applies to conformshare-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the current year presentation and had no impactdividends paid on the Company's
consolidatedunderlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R,Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital.EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of this EITF did not have a material effect on the Company’s results of operations or financial statements.
2. CASH AND DUE FROM BANKS
position.
| 2. | CASH AND DUE FROM BANKS |
Cash and due from banks at December 31, 20052007 and 2004,2006, included $8,162,000$9,107,000 and $7,264,000,$8,481,000, respectively, of reserves required to be maintained under Federal Reserve Bank regulations.
3. INTEREST BEARING DEPOSITS WITH BANKS
The book value of interest bearing deposits with domestic banks is as
follows:
| 3. | INVESTMENT SECURITIES |
The cost basis and marketfair values of investment securities are summarized as follows:
Investment securities available for sale:
51
| At December 31, 2007 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Cost Basis | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| U.S. Treasury | $ | 6,006 | $ | 5 | $ | — | $ | 6,011 | ||||||||
| U.S. Agency | 38,041 | 44 | (12 | ) | 38,073 | |||||||||||
| U.S. Agency mortgage-backed securities | 98,484 | 105 | (1,328 | ) | 97,261 | |||||||||||
| Other securities | 3,598 | — | (2 | ) | 3,596 | |||||||||||
| Total | $ | 146,129 | $ | 154 | $ | (1,342 | ) | $ | 144,941 | |||||||
52
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investment securities held to maturity:
| At December 31, 2007 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Cost Basis | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| U.S. Treasury | $ | 3,153 | $ | 55 | $ | — | $ | 3,208 | ||||||||
| U.S. Agency | 3,473 | 23 | — | 3,496 | ||||||||||||
| U.S. Agency mortgage-backed securities | 6,157 | 13 | — | 6,170 | ||||||||||||
| Other securities | 5,750 | — | (246 | ) | 5,504 | |||||||||||
| Total | $ | 18,533 | $ | 91 | $ | (246 | ) | $ | 18,378 | |||||||
Investment securities available for sale:
Investment securities held to maturity:
All purchased and sold investment securities are recorded on the settlement
date which is not materially different from the trade date.
| At December 31, 2006 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Cost Basis | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| U.S. Treasury | $ | 6,011 | $ | — | $ | (164 | ) | $ | 5,847 | |||||||
| U.S. Agency | 57,636 | 7 | (1,021 | ) | 56,622 | |||||||||||
| U.S. Agency mortgage-backed securities | 113,460 | 22 | (3,800 | ) | 109,682 | |||||||||||
| Other securities | 3,362 | 30 | — | 3,392 | ||||||||||||
| Total | $ | 180,469 | $ | 59 | $ | (4,985 | ) | $ | 175,543 | |||||||
| Investment securities held to maturity: | ||||||||||||||||
| At December 31, 2006 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Cost Basis | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| U.S. Treasury | $ | 3,220 | $ | — | $ | (69 | ) | $ | 3,151 | |||||||
| U.S. Agency | 3,471 | — | (75 | ) | 3,396 | |||||||||||
| U.S. Agency mortgage-backed securities | 7,216 | — | (53 | ) | 7,163 | |||||||||||
| Other securities | 6,750 | — | — | 6,750 | ||||||||||||
| Total | $ | 20,657 | $ | — | $ | (197 | ) | $ | 20,460 | |||||||
Realized gains and losses are calculated by the specific identification method. At December 31,
2005, the Company transferred $6.8 million of other securities from available
for sale to held to maturity because it is the intent of the Company to hold
these securities to maturity.
Maintaining investment quality is a primary objective of the Company'sCompany’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody'sMoody’s Investors Service or Standard & Poor'sPoor’s rating of A. At December 31, 2005, 95.5%2007, 94.3% of the portfolio was rated AAA as compared to 96.4%94.8% at December 31, 2004.2006. Less than 1.0% of the portfolio was rated below A or unrated on December 31, 2005.2007. The Company and its subsidiaries, collectively, did not hold securities of any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10% of shareholders'shareholders’ equity at December 31, 2005.
2007.
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 $210,085,000$146,365,000 at December 31, 2005,2007 and $365,173,000$182,552,000 at December 31, 2004.2006. The Company had realized no security gains or losses on available for sale securities in 2007 or 2006. The Company realized $78,000 $1,768,000 and $4,409,000 of gross investment security gains and $2,577,000 $952,000 and $622,000 of
53
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
gross investment security losses on available for sale securities in 2005, 2004, and
2003, respectively.2005. On a net basis, the realized (losses) gainslosses amounted to ($1,649,000), $539,000 and $2.5 million in 2005 2004, and 2003, respectively, after factoring in the tax (benefit) expensebenefit of ($850,000), $277,000 and $1.3
million for each of those same years.2005. The Company realized no gross investment security gains and losses on held to maturity securities in 2005, 20042007, 2006 or 2003.
2005. Proceeds from sales of investment securities were zero during 2007 and 2006 and $133 million during 2005.
The following table sets forth the contractual maturity distribution of the investment securities, cost basis and fair market values, and the weighted average yield for each type and range of maturity as of December 31, 2005.2007. Yields are not presented on a tax-equivalent basis, but are based upon the cost basis and are weighted for the scheduled maturity. Average maturities are based upon the original contractual maturity dates with the exception of mortgage-backed securities for which the average lives were used. At December 31, 52
2005,2007, the Company'sCompany’s consolidated investment securities portfolio had a modified duration of approximately 2.611.98 years. The weighted average expected maturity for available for sale securities at December 31, 20052007 for U.S. Treasury, U.S. Agency, U.S. Agency Mortgage-Backed, Federal Home Loan Bank (FHLB) and Federal
Reserve Bank Stocks, and other securities was 2.8, 2.9, 4.4,0.87, 1.73, 4.73, and 1.0 and 0.2 years, respectively. The weighted average expected maturity for held to maturity securities at December 31, 20052007 for U.S. Treasury, U.S. Agency, U.S. Agency Mortgage-Backed and other securities was 3.6, 2.2, 2.91.94, 5.16, 5.01 and 2.71.42 years.
Investment securities available for sale:
53
| At December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||
| After 1 Year | After 5 Years | |||||||||||||||||||||||||||||||||||||||
| But Within | But Within | |||||||||||||||||||||||||||||||||||||||
| Within 1 Year | 5 Years | 10 Years | After 10 Years | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||
| (In thousands, except yields) | ||||||||||||||||||||||||||||||||||||||||
| COST BASIS U.S. Treasury | $ | 6,006 | 3.39 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 6,006 | 3.39 | % | ||||||||||||||||||||
| U.S. Agency | 1,983 | 4.61 | 36,058 | 4.38 | — | — | — | — | 38,041 | 4.39 | ||||||||||||||||||||||||||||||
| U.S. Agency mortgage-backed securities | — | — | 61,097 | 4.19 | 28,580 | 4.15 | 8,807 | 3.98 | 98,484 | 4.16 | ||||||||||||||||||||||||||||||
| Other securities | 3,598 | 4.92 | — | — | — | — | — | — | 3,598 | 4.92 | ||||||||||||||||||||||||||||||
| Total investment securities available for sale | $ | 11,587 | 4.07 | % | $ | 97,155 | 4.26 | % | $ | 28,580 | 4.15 | % | $ | 8,807 | 3.98 | % | $ | 146,129 | 4.21 | % | ||||||||||||||||||||
| FAIR VALUE U.S. Treasury | $ | 6,011 | $ | — | $ | — | $ | — | $ | 6,011 | ||||||||||||||||||||||||||||||
| U.S. Agency | 1,984 | 36,089 | — | — | 38,073 | |||||||||||||||||||||||||||||||||||
| U.S. Agency mortgage-backed securities | — | 60,258 | 28,328 | 8,675 | 97,261 | |||||||||||||||||||||||||||||||||||
| Other securities | 3,596 | — | — | — | 3,596 | |||||||||||||||||||||||||||||||||||
| Total investment securities available for sale | $ | 11,591 | $ | 96,347 | $ | 28,328 | $ | 8,675 | $ | 144,941 | ||||||||||||||||||||||||||||||
54
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investment securities held to maturity:
| At December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||
| After 5 Years | ||||||||||||||||||||||||||||||||||||||||
| After 1 Year But | But Within | |||||||||||||||||||||||||||||||||||||||
| Within 1 Year | Within 5 Years | 10 Years | After 10 Years | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||
| (In thousands, except yields) | ||||||||||||||||||||||||||||||||||||||||
| COST BASIS | ||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury | $ | — | — | % | $ | 3,153 | 3.98 | % | $ | — | — | % | $ | — | — | % | $ | 3,153 | 3.98 | % | ||||||||||||||||||||
| U.S. Agency | — | — | — | — | 3,473 | 5.22 | — | — | 3,473 | 5.22 | ||||||||||||||||||||||||||||||
| U.S. Agency mortgage-backed securities | — | — | 5,110 | 5.49 | 1,047 | 5.50 | — | — | 6,157 | 5.50 | ||||||||||||||||||||||||||||||
| Other securities | 2,500 | 5.62 | 3,250 | 5.78 | — | — | — | 5,750 | 5.71 | |||||||||||||||||||||||||||||||
| Total investment securities held to maturity | $ | 2,500 | 5.62 | % | $ | 11,513 | 5.16 | % | $ | 4,520 | 5.28 | % | $ | — | — | % | $ | 18,533 | 5.25 | % | ||||||||||||||||||||
| FAIR VALUE | ||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury | $ | — | $ | 3,208 | $ | — | $ | — | $ | 3,208 | ||||||||||||||||||||||||||||||
| U.S. Agency | — | — | 3,496 | — | 3,496 | |||||||||||||||||||||||||||||||||||
| U.S. Agency mortgage-backed securities | — | 5,122 | 1,048 | — | 6,170 | |||||||||||||||||||||||||||||||||||
| Other securities | 2,452 | 3,052 | — | — | 5,504 | |||||||||||||||||||||||||||||||||||
| Total investment securities held to maturity | $ | 2.452 | $ | 11,382 | $ | 4,544 | $ | — | $ | 18,378 | ||||||||||||||||||||||||||||||
The following tables present information concerning investments with unrealized losses as of December 31, 20052007 (in thousands):
Investment securities available for sale:
| Less Than 12 Months | 12 Months Or Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| U.S. Agency | $ | — | $ | — | $ | 25,963 | $ | (12 | ) | $ | 25,963 | $ | (12 | ) | ||||||||||
| U.S. Agency mortgage-backed securities | 4,388 | (31 | ) | 81,085 | (1,297 | ) | 85,473 | (1,328 | ) | |||||||||||||||
| Other | 22 | (2 | ) | — | — | 22 | (2 | ) | ||||||||||||||||
| Total investment securities available for sale | $ | 4,410 | $ | (33 | ) | $ | 107,048 | $ | (1,309 | ) | $ | 111,458 | $ | (1,342 | ) | |||||||||
Investment securities held to maturity:
| Less Than 12 Months | 12 Months Or Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Other | $ | — | $ | — | $ | 5,504 | $ | (246 | ) | $ | 5,504 | $ | (246 | ) | ||||||||||
| Total investment securities held to maturity | $ | — | $ | — | $ | 5,504 | $ | (246 | ) | $ | 5,504 | $ | (246 | ) | ||||||||||
55
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present information concerning investments with unrealized losses as of December 31, 20042006 (in thousands):
Investment securities available for sale:
54
| Less Than 12 Months | 12 Months Or Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| U.S. Treasury | $ | 996 | $ | (2 | ) | $ | 4,851 | $ | (162 | ) | $ | 5,847 | $ | (164 | ) | |||||||||
| U.S. Agency | — | — | 49,554 | (1,021 | ) | 49,554 | (1,021 | ) | ||||||||||||||||
| U.S. Agency mortgage-backed securities | 1,948 | (5 | ) | 105,151 | (3,795 | ) | 107,099 | (3,800 | ) | |||||||||||||||
| Total investment securities available for sale | $ | 2,944 | $ | (7 | ) | $ | 159,556 | $ | (4,978 | ) | $ | 162,500 | $ | (4,985 | ) | |||||||||
Investment securities held to maturity:
Given the quality of the investment portfolio (greater than 95% rated AAA),
the Company believes the
| Less Than 12 Months | 12 Months Or Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| U.S. Treasury | $ | — | $ | — | $ | 3,151 | $ | (69 | ) | $ | 3,151 | $ | (69 | ) | ||||||||||
| U.S. Agency | — | — | 3,396 | (75 | ) | 3,396 | (75 | ) | ||||||||||||||||
| U.S. Agency mortgage-backed securities | 3,005 | (17 | ) | 4,158 | (36 | ) | 7,163 | (53 | ) | |||||||||||||||
| Total investment securities held to maturity | $ | 3,005 | $ | (17 | ) | $ | 10,705 | $ | (180 | ) | $ | 13,710 | $ | (197 | ) | |||||||||
For fixed maturity investments with unrealized losses that have existed for greater than 12
months are temporary in nature and resulted fromdue to interest rate movements.
Furthermore,rates where the Company has the positive intent and ability to hold thesethe investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. There are 37 positions that are temporarily impaired at December 31, 2007. The Company reviews its position quarterly and has asserted that at December 31, 2007, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability to hold those securities untilto maturity or until they recover in value.
5. LOANS
to allow a market recovery.
| 4. | LOANS |
The loan portfolio of the Company consisted of the following:
| At December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| Commercial | $ | 118,936 | $ | 91,746 | ||||
| Commercial loans secured by real estate | 285,115 | 269,781 | ||||||
| Real estate-mortgage | 214,839 | 209,728 | ||||||
| Consumer | 16,676 | 18,336 | ||||||
| Loans | 635,566 | 589,591 | ||||||
| Less: Unearned income | 471 | 514 | ||||||
| Loans, net of unearned income | $ | 635,095 | $ | 589,077 | ||||
56
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Real estate construction loans comprised 5.5% and 6.3%4.4% of total loans net of unearned income at December 31, 20052007 and 2004,2006, respectively. The Company has no exposure to sub prime mortgage loans in either the loan or investment portfolios. The Company has no direct credit exposure to foreign countries. Additionally, the Company has no significant industry lending concentrations. As of December 31, 2005,2007 and 2006, loans to customers engaged in similar activities and having similar economic characteristics, as defined by standard industrial classifications, did not exceed 10% of total loans.
In the ordinary course of business, the subsidiaries have transactions, including loans, with their officers, directors, and their affiliated companies. These transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than the normal credit risk. These loans totaled $4,250,000$4,729,000 and $4,147,000$3,977,000 at December 31, 20052007 and 2004,2006, respectively. An analysis of these related party loans follows:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| Balance January 1 | $ | 3,977 | $ | 4,250 | ||||
| New loans | 1,457 | 350 | ||||||
| Payments | (705 | ) | (623 | ) | ||||
| Balance December 31 | $ | 4,729 | $ | 3,977 | ||||
| 5. | ALLOWANCE FOR LOAN LOSSES |
An analysis of the changes in the allowance for loan losses follows:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| Balance January 1 | $ | 8,092 | $ | 9,143 | $ | 9,893 | ||||||
| Provision for loan losses | 300 | (125 | ) | (175 | ) | |||||||
| Recoveries on loans previously charged-off | 192 | 318 | 300 | |||||||||
| Loans charged-off | (1,332 | ) | (1,244 | ) | (875 | ) | ||||||
| Balance December 31 | $ | 7,252 | $ | 8,092 | $ | 9,143 | ||||||
| 6. | NON-PERFORMING ASSETS |
Non-performing assets are comprised of (i) loans which are on a non-accrual basis, (ii) loans which are contractually past due 90 days or more as to interest or principal payments, some of which are insured for credit loss, and (iii) other real estate owned (real estate acquired through foreclosure, in-substance foreclosures and repossessed assets).
57
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present information concerning non-performing assets:
| At December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands, except percentages) | ||||||||||||
Non-accrual loans | ||||||||||||
| Commercial | $ | 3,553 | $ | 494 | $ | 2,315 | ||||||
| Commercial loans secured by real estate | 225 | 195 | 318 | |||||||||
| Real estate-mortgage | 875 | 1,050 | 1,070 | |||||||||
| Consumer | 585 | 547 | 446 | |||||||||
| Total | 5,238 | 2,286 | 4,149 | |||||||||
Past due 90 days or more and still accruing | ||||||||||||
| Consumer | — | 3 | 31 | |||||||||
| Total | — | 3 | 31 | |||||||||
Other real estate owned | ||||||||||||
| Real estate-mortgage | 42 | 3 | 130 | |||||||||
| Consumer | — | — | 5 | |||||||||
| Total | 42 | 3 | 135 | |||||||||
Total non-performing assets | $ | 5,280 | $ | 2,292 | $ | 4,315 | ||||||
| Total non-performing assets as a percent of loans and loans held for sale, net of unearned income, and other real estate owned | 0.83 | % | 0.39 | % | 0.78 | % | ||||||
| Total restructured loans (included in non-accrual loans above) | $ | 1,217 | $ | 1,302 | $ | 258 | ||||||
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 the lower of 1) fair value minus estimated costs to sell, or 2) carrying cost.
The Company had loans totaling $14,825,000$3,778,000 and $11,974,000$9,582,000 being specifically identified as impaired and a corresponding allocation reserve of $2,560,000$694,000 and $2,713,000$1,835,000 at December 31, 20052007 and 2004,2006, respectively. The average outstanding balance for loans being specifically identified as impaired was $12,388,000$3,907,000 for 20052007 and $11,257,000$10,872,000 for 2004. All2006. A majority of the impaired loans are collateral dependent, therefore the fair value of the collateral of the impaired loans is evaluated in measuring the impairment. The interest income recognized on impaired loans during 2007, 2006 and 2005 2004was $262,000, $725,000 and 2003 was $833,000, $635,000 and
$408,000, respectively.
The following table sets forth, for the periods indicated, (i) 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, (ii) the amount of interest income actually recorded on such loans, and (iii) the net reduction in interest income attributable to such loans.
56
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| Interest income due in accordance with original terms | $ | 215 | $ | 214 | $ | 213 | ||||||
| Interest income recorded | (24 | ) | (55 | ) | (12 | ) | ||||||
| Net reduction in interest income | $ | 191 | $ | 159 | $ | 201 | ||||||
58
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 7. | PREMISES AND EQUIPMENT |
An analysis of premises and equipment follows:
| At December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| Land | $ | 1,208 | $ | 1,714 | ||||
| Premises | 20,041 | 19,198 | ||||||
| Furniture and equipment | 15,681 | 15,087 | ||||||
| Leasehold improvements | 612 | 618 | ||||||
| Total at cost | 37,542 | 36,617 | ||||||
| Less: Accumulated depreciation and amortization | 29,092 | 28,055 | ||||||
| Net book value | $ | 8,450 | $ | 8,562 | ||||
The Company recorded depreciation expense of $1.5 million, $1.7 million and $1.8 million for 2007, 2006 and 2005, respectively.
| 8. | DEPOSITS |
The following table sets forth the balance of the Company’s deposits:
| At December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| Demand: | ||||||||
| Non-interest bearing | $ | 113,380 | $ | 107,559 | ||||
| Interest bearing | 63,199 | 58,047 | ||||||
| Savings | 69,155 | 74,452 | ||||||
| Money market | 117,973 | 174,118 | ||||||
| Certificates of deposit in denominations of $100,000 or more | 41,390 | 30,580 | ||||||
| Other time | 305,342 | 296,999 | ||||||
| Total deposits | $ | 710,439 | $ | 741,755 | ||||
Interest expense on deposits consisted of the following:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| Interest bearing demand | $ | 1,184 | $ | 606 | $ | 227 | ||||||
| Savings | 549 | 644 | 829 | |||||||||
| Money market | 6,040 | 5,743 | 3,256 | |||||||||
| Certificates of deposit in denominations of $100,000 or more | 1,774 | 1,894 | 1,378 | |||||||||
| Other time | 13,264 | 10,345 | 7,295 | |||||||||
| Total interest expense | $ | 22,811 | $ | 19,232 | $ | 12,985 | ||||||
59
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the balance of other time deposits and certificates of deposit of $100,000 or more as of December 31, 2007 maturing in the periods presented:
| Certificates of | ||||||||
| Deposit | ||||||||
Year | Other Time Deposits | of $100,000 or More | ||||||
| (In thousands) | ||||||||
| 2008 | $ | 197,638 | $ | 37,519 | ||||
| 2009 | 48,094 | 2,310 | ||||||
| 2010 | 18,776 | 400 | ||||||
| 2011 | 8,640 | 561 | ||||||
| 2012 | 14,411 | 238 | ||||||
| 2013 and after | 17,783 | 362 | ||||||
| Total | $ | 305,342 | $ | 41,390 | ||||
The aggregate amount of time certificates of deposit with a minimum denomination of $100,000 and individual retirement accounts with a minimum denomination of $250,000 was $85 million and $968,000, respectively, at December 31, 2007. Time certificates of deposit in excess of $100,000 and individual retirement accounts in excess of $250,000 are not federally insured.
The maturities on certificates of deposit greater than $100,000 or more as of December 31, 2007, are as follows:
MATURING IN:
| (In thousands) | ||||
| Three months or less | $ | 32,692 | ||
| Over three through six months | 18,847 | |||
| Over six through twelve months | 13,821 | |||
| Over twelve months | 19,282 | |||
| Total | $ | 84,642 | ||
| 9. | FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS |
The outstanding balances and related information for federal funds purchased and other short-term borrowings are summarized as follows:
| At December 31, 2007 | ||||||||
| Federal | Other | |||||||
| Funds | Short-Term | |||||||
| Purchased | Borrowings | |||||||
| (In thousands, except rates) | ||||||||
| Balance | $ | — | $ | 72,210 | ||||
| Maximum indebtedness at any month end | 3,430 | 74,095 | ||||||
| Average balance during year | 99 | 19,745 | ||||||
| Average rate paid for the year | 5.18 | % | 4.89 | % | ||||
| Interest rate on year end balance | — | 3.88 | ||||||
60
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| At December 31, 2006 | ||||||||
| Federal | Other | |||||||
| Funds | Short-Term | |||||||
| Purchased | Borrowings | |||||||
| (In thousands, except rates) | ||||||||
| Balance | $ | — | $ | 49,091 | ||||
| Maximum indebtedness at any month end | — | 61,728 | ||||||
| Average balance during year | 43 | 32,778 | ||||||
| Average rate paid for the year | 5.69 | % | 5.10 | % | ||||
| Interest rate on year end balance | — | 5.48 | ||||||
Average amounts outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances.
These borrowing transactions can range from overnight to one year in maturity. The average maturity was two days at the end of 2007 and three days at the end of 20052006.
| 10. | ADVANCES FROM FEDERAL HOME LOAN BANK AND GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES |
Borrowings and 2004.
advances from the FHLB consist of the following:
| At December 31, 2007 | ||||||||
| Weighted | ||||||||
Maturing | Average Yield | Balance | ||||||
| (In thousands) | ||||||||
| Overnight | 3.88 | % | $ | 72,210 | ||||
| 2009 | 4.62 | 9,004 | ||||||
| 2010 and after | 6.45 | 901 | ||||||
| Total advances | 4.79 | 9,905 | ||||||
| Total FHLB borrowings | 3.99 | % | $ | 82,115 | ||||
| At December 31, 2006 | ||||||||
| Weighted | ||||||||
| Maturing | ||||||||
Maturing | Average Yield | Balance | ||||||
| (In thousands) | ||||||||
| Overnight | 5.48 | % | $ | 49,091 | ||||
| 2011 and after | 6.45 | 946 | ||||||
| Total FHLB borrowings | 5.50 | % | $ | 50,037 | ||||
The Company'sCompany’s subsidiary bank is a member of the FHLB which provides this subsidiary with the opportunity to obtain short to longer-term advances based upon the bank'sbank’s investment in assets secured by one- toone-to four-family residential real estate.
57
10. DEPOSITS
The following table sets forth the balance of the Company's deposits:
Interest expense on deposits consisted of the following:
The following table sets forth the balance of other time deposits and
certificates of deposit of $100,000 or more as of December 31, 2005 maturing in
the periods presented:
Additionally, the following table provides more detailed maturity
information regarding certificates of deposit issued in denominations of
$100,000 or more as of December 31, 2005.
MATURING IN:
58
11. ADVANCES FROM FEDERAL HOME LOAN BANK AND GUARANTEED JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
Borrowings and advances from the FHLB consist of the following:
The rate on open repo plus advances, which are typically overnight borrowings, can change daily, while the rate on the advances is fixed until the maturity of the advance. All FHLB stock, along with an interest in certain mortgage loans and mortgage-backed securities, with an aggregate statutory value equal to the amount of the advances, have been
deliveredare pledged as collateral to the FHLB of Pittsburgh to support these borrowings.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the FHLB systems. The Company utilizes a
variety of these methods of liability liquidity. These lines of credit enable
the Company's banking subsidiary to purchase funds for short-term needs at
current market rates. Additionally, the Company's subsidiary bank is a member of
the FHLB which provides the opportunity to obtain short- to longer-term advances
based upon the Bank's investment in assets secured by one- to four-family
residential real estate. At December 31, 2005, the bank had immediately
available $31 million of overnight borrowing capability at the FHLB.
GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
61
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Guaranteed Junior Subordinated Deferrable Interest Debentures:
On April 28, 1998, the Company completed a $34.5 million public offering of 8.45% Trust Preferred Securities, which represent undivided beneficial interests in the assets of a Delaware business trust, AmeriServ Financial Capital Trust I. The Trust Preferred Securities will mature on June 30, 2028, and are callable at par at the option of the Company after June 30, 2003. Proceeds of the issue were invested by AmeriServ Financial Capital Trust I in Junior Subordinated Debentures issued by AmeriServ Financial, Inc. Net proceeds from the $34.5
million offering were used for general corporate purposes, including the
repayment of debt, the repurchase of AmeriServ Financial common stock, and
investments in and advances to the Company's subsidiaries. Unamortized deferred issuance costs associated with the Trust Preferred Securities amounted to $349,000$318,000 as of December 31, 20052007 and are included in other assets on the consolidated balance sheet, and are being amortized on a straight-line basis over the term of the issue. The Trust Preferred securities are listed on NASDAQ under the symbol ASRVP. AmeriServ Financial Capital Trust I was deconsolidated in the first quarter of 2004 in accordance with FASB Interpretation No. 46(R)#46(R) Consolidation of Variable Interest Entities (FIN 46(R)). The Company used $7.2$22.5 million of proceeds from a private placement of common stock to redeem Trust Preferred Securities in the fourth quarter2005 and 2004. The balance as of 2005. The Company used $15.3
million of proceeds from a private placement of common stock to redeem Trust
Preferred Securities in the fourth quarter of 2004.
December 31, 2007 and 2006 was $13.1 million.
Upon the occurrence of certain events, specifically a tax event or a capital treatment event, the Company may redeem in whole, or in part, the Guaranteed Junior Subordinated Deferrable Interest Debentures prior to June 30, 2028. A tax event means that the interest paid by the Company on the subordinated debentures will no longer be deductible for federal income tax purposes. A capital treatment event means that the Trust Preferred Securities no longer qualify as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve. Proceeds from any redemption of the subordinated debentures would cause mandatory redemption of the Trust Preferred Securities.
As a result of dividend payments from non-bank subsidiaries, the settlement
of the inter-company tax position and the retention of some proceeds from the
private placement sale of the Company's common stock management believes that
the parent company has
59
adequate cash to continue to make the reduced dividend payments on the trust
preferred securities. Longer term, however, the payment of the trust preferred
dividend is dependent upon the subsidiary bank maintaining profitability so that
it can resume upstreaming dividends to the parent company. The subsidiary bank
must first recoup the $16.6 million of net losses that it incurred for the years
ended December 31, 2005 and 2004 before it can consider resuming dividend
upstreams. The Company views the deferral of interest payments on the trust
preferred securities, which is permitted under the indenture, as the least
favorable alternative to maintaining parent company liquidity because the
payments are cumulative and interest immediately begins to accrue on the unpaid
amount at a rate of 8.45% along with the reputational risk associated with the
deferral.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
| 11. | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS |
For the Company, as for most financial institutions, approximately 95%90% of its assets and liabilities are considered financial instruments. Many of the Company'sCompany’s 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.
Estimated fair values have been determined by the Company using the best available data and an estimation methodology 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, and recorded book balances at December 31, 20052007 and 2004,2006, were as follows:
| 2007 | 2006 | |||||||||||||||
| Estimated | Recorded | Estimated | Recorded | |||||||||||||
| Fair Value | Book Balance | Fair Value | Book Balance | |||||||||||||
| (In thousands) | ||||||||||||||||
| FINANCIAL ASSETS: | ||||||||||||||||
| Investment securities | $ | 163,319 | $ | 163,474 | $ | 196,603 | $ | 196,200 | ||||||||
| Regulatory stock | 7,204 | 7,204 | 5,355 | 5,355 | ||||||||||||
| Net loans (including loans held for sale), net of allowance for loan loss | 632,609 | 628,903 | 579,691 | 581,343 | ||||||||||||
| Bank owned life insurance | 32,864 | 32,864 | 32,256 | 32,256 | ||||||||||||
| FINANCIAL LIABILITIES: | ||||||||||||||||
| Deposits with no stated maturities | $ | 363,707 | $ | 363,707 | $ | 414,176 | $ | 414,176 | ||||||||
| Deposits with stated maturities | 347,361 | 346,732 | 326,752 | 327,579 | ||||||||||||
| Short-term borrowings | 72,210 | 72,210 | 49,091 | 49,091 | ||||||||||||
| All other borrowings | 25,811 | 22,990 | 16,181 | 14,031 | ||||||||||||
62
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial instruments actively traded in a secondary market have been valued using quoted available market prices. 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, and assumed prepayment risk.
Financial instruments 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. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company'sCompany’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting. The
estimated fair value of instruments used for hedging purposes is estimated by
financial modeling performed by an independent third party. These values
represent the estimated amount the Company would receive or pay, to terminate
the agreements, considering current interest rates, as well as the
creditworthiness of the counterparties.
There is not a material difference between the notional amount and the estimated fair value of the off-balance sheet items which total $98.3$93.6 million at December 31, 2005,2007, and are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding.
Management believes that reported fair values by different financial
institutions may not be comparable due to the wide range of assumptions,
methodologies and other uncertainties used in estimating fair values, and the
absence of active secondary markets for many of the financial instruments. This
lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
60
13. INCOME TAXES
| 12. | INCOME TAXES |
The benefitexpense (benefit) for income taxes is summarized below:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| Current | $ | 116 | $ | 76 | $ | (471 | ) | |||||
| Deferred | 808 | 344 | (5,431 | ) | ||||||||
| Income tax expense (benefit) from continuing operations | 924 | 420 | (5,902 | ) | ||||||||
| Deferred income tax benefit from discontinued operations | — | — | (61 | ) | ||||||||
| Income tax expense (benefit) | $ | 924 | $ | 420 | $ | (5,963 | ) | |||||
The reconciliation between the federal statutory tax rate and the Company'sCompany’s effective consolidated income tax rate is as follows:
At
| Year Ended December 31, | ||||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||
| Income tax expense (benefit) based on federal statutory rate | $ | 1,346 | 34.0 | % | $ | 936 | 34.0 | % | $ | (5,074 | ) | (34.0 | )% | |||||||||||
| Tax exempt income | (506 | ) | (12.8 | ) | (478 | ) | (17.4 | ) | (424 | ) | (2.8 | ) | ||||||||||||
| Reversal of valuation allowance | — | — | (100 | ) | (3.6 | ) | — | — | ||||||||||||||||
| Reversal of contingency reserves | — | — | — | — | (475 | ) | (3.2 | ) | ||||||||||||||||
| Other | 84 | 2.1 | 62 | 2.3 | 71 | 0.5 | ||||||||||||||||||
| Income tax expense (benefit) from continuing operations | 924 | 23.3 | 420 | 15.3 | (5,902 | ) | (39.6 | ) | ||||||||||||||||
| Income tax benefit from discontinued operations | — | — | — | — | (61 | ) | (33.9 | ) | ||||||||||||||||
| Total expense (benefit) for income taxes | $ | 924 | 23.3 | % | $ | 420 | 15.3 | % | $ | (5,963 | ) | (39.5 | )% | |||||||||||
63
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 20052007 and 2004,2006, deferred taxes are included in the accompanying Consolidated Balance Sheets. The following table highlights the major components comprising the deferred tax assets and liabilities for each of the periods presented:
| At December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| DEFERRED TAX ASSETS: | ||||||||
| Allowance for loan losses | $ | 2,465 | $ | 2,751 | ||||
| Unfunded commitment reserve | 135 | 112 | ||||||
| Premises and equipment | 876 | 431 | ||||||
| Accrued pension obligation | 100 | 108 | ||||||
| Unrealized investment security losses | 403 | 1,675 | ||||||
| Net operating loss carryforwards | 8,539 | 10,318 | ||||||
| Alternative minimum tax credits | 1,132 | 994 | ||||||
| Other | 332 | 274 | ||||||
| Total tax assets | 13,982 | 16,663 | ||||||
| DEFERRED TAX LIABILITIES: | ||||||||
| Investment accretion | (26 | ) | (26 | ) | ||||
| Lease accounting | — | (702 | ) | |||||
| Other | (206 | ) | (98 | ) | ||||
| Total tax liabilities | (232 | ) | (826 | ) | ||||
| Net deferred tax asset | $ | 13,750 | $ | 15,837 | ||||
As part of the 2006 tax expense, the Company did benefit from the elimination of a $100,000 income tax valuation allowance related to the deductibility of charitable contributions that management determined was no longer needed given the level of taxable income generated by the Company in 2006. At December 31, 2007, the Company had no valuation allowance established against its deferred tax assets as we believe the Company will generate sufficient future taxable income to fully utilize all net operating loss carryforwards and AMT tax credits.
The change in net deferred tax assets and liabilities consist of the following:
| Year Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
Investmentwrite-ups due to FAS #115, charged to equity | $ | (1,272 | ) | $ | (452 | ) | ||
| Cumulative effect of adoption of change in accounting for pension obligation | (7 | ) | 1,657 | |||||
| Reversal of valuation allowance | — | 100 | ||||||
| Deferred provision for income taxes | (808 | ) | (444 | ) | ||||
| Net (decrease) increase | $ | (2,087 | ) | $ | 861 | |||
The Company has alternative minimum tax credit carryforwards of approximately $872,000$1.1 million at December 31, 2005.2007. These credits have an indefinite carryforward period. The Company also has a $36.0$25.1 million net operating loss carryforward that will begin to expire in the year 2023.
61
14. 2024.
The Company adopted the provisions of FIN No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109, effective January 1, 2007. FIN No. 48 prescribes a recognition threshold and
64
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN No. 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The adoption of FIN No. 48 did not have a significant impact on the Company’s financial statements.
| 13. | EMPLOYEE BENEFIT PLANS |
PENSION PLAN
PLANS:
The Company has a trusteed, noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year and whoyear. The participants shall have not
yet reached age 60 ata vested interest in their employment date.accrued benefit after five full years of service. The benefits of the plan are based upon the employee'semployee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. The Company'sCompany’s funding policy has been to contribute annually an amount that will ensure that the total value of the plans assets will exceed the accumulated benefit obligation. Plan assets are primarily debt securities (including U.S. Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock whichvalued at $576,000 and is limited to 10% of the plans assets), mutual funds, and short-term cash equivalent instruments.
65
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PENSION BENEFITS:
To determine
| Year Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands, except percentages) | ||||||||
| CHANGE IN BENEFIT OBLIGATION: | ||||||||
| Benefit obligation at beginning of year | $ | 15,410 | $ | 14,158 | ||||
| Service cost | 927 | 882 | ||||||
| Interest cost | 880 | 816 | ||||||
| Actuarial loss | 109 | 85 | ||||||
| Special termination benefits | 85 | — | ||||||
| Benefits paid | (1,180 | ) | (531 | ) | ||||
| Benefit obligation at end of year | 16,231 | 15,410 | ||||||
| CHANGE IN PLAN ASSETS: | ||||||||
| Fair value of plan assets at beginning of year | 15,091 | 12,956 | ||||||
| Actual return on plan assets | 918 | 1,166 | ||||||
| Employer contributions | 1,100 | 1,500 | ||||||
| Benefits paid | (1,180 | ) | (531 | ) | ||||
| Fair value of plan assets at end of year | 15,929 | 15,091 | ||||||
| Funded status of the plan — under funded | $ | (302 | ) | $ | (319 | ) | ||
| AMOUNTS NOT YET RECOGNIZED AS A COMPONENT OF NET PERIODIC PENSION COST: | ||||||||
| Amounts recognized in accumulated other comprehensive income (loss) consists of: | ||||||||
| Transition asset | $ | 17 | $ | (109 | ) | |||
| Prior service cost | (4 | ) | (17 | ) | ||||
| Net actuarial (loss) gain | (34 | ) | 4,998 | |||||
| Total | $ | (21 | ) | $ | 4,872 | |||
| Year Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| ACCUMULATED BENEFIT OBLIGATION: | ||||||||
| Accumulated benefit obligation | $ | 14,254 | $ | 13,486 | ||||
| Year Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| (Percentages) | ||||||||
| WEIGHTED AVERAGE ASSUMPTIONS: | ||||||||
| Discount rate | 6.00 | % | 6.00 | % | ||||
| Salary scale | 2.50 | 2.50 | ||||||
66
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| COMPONENTS OF NET PERIODIC BENEFIT COST: | ||||||||||||
| Service cost | $ | 927 | $ | 882 | $ | 855 | ||||||
| Interest cost | 880 | 816 | 806 | |||||||||
| Expected return on plan assets | (1,146 | ) | (1,007 | ) | (924 | ) | ||||||
| Amortization of prior year service cost | 4 | 4 | 4 | |||||||||
| Amortization of transition asset | (17 | ) | (17 | ) | (17 | ) | ||||||
| Recognized net actuarial loss due to special termination benefit | 85 | — | — | |||||||||
| Recognized net actuarial loss | 370 | 398 | 383 | |||||||||
| Net periodic pension cost | $ | 1,103 | $ | 1,076 | $ | 1,107 | ||||||
The estimated net loss, prior service cost and transition asset for the defined benefit obligation as ofpension plan that be will amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the date of each balance sheet,
the Company used the same rates disclosed in the above table with the following
exception: a 2.50% rate of compensation increase was used as of December 31,
2004. next year are $341,000, $(17,000), and $4,000, respectively.
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (Percenttages) | ||||||||||||
| WEIGHTED AVERAGE ASSUMPTIONS: | ||||||||||||
| Discount rate | 6.00 | % | 6.00 | % | 6.00 | % | ||||||
| Expected return on plan assets | 8.00 | 8.00 | 8.00 | |||||||||
| Rate of compensation increase | 2.50 | 2.50 | 2.50 | |||||||||
The Company has assumed an 8% long-term expected return on plan assets. This assumption was based upon the plan'splan’s historical investment performance over a longer-term period of 15 years combined with the plan'splan’s investment objective of balanced growth and income. Additionally, this assumption also incorporates a targeted range for equity securities of 50% to 60% of plan assets.
62
PLAN ASSETS:
The plan'splan’s measurement date is December 31, 2005.2007. This plan'splan’s asset allocations at December 31, 20052007 and 2004,2006, by asset category are as follows:
| 2007 | 2006 | |||||||
| ASSET CATEGORY: | ||||||||
| Equity securities | 59 | % | 64 | % | ||||
| Debt securities and short-term investments | 41 | 36 | ||||||
| Total | 100 | % | 100 | % | ||||
The investment strategy objective for the pension plan is a balance of growth and income. This objective seeks to develop a portfolio for acceptable levels of current income together with the opportunity for capital appreciation. The balanced growth and income objective reflects a relatively equal balance between equity and fixed income investments such as debt securities. The allocation between equity and fixed income assets may vary by a moderate degree but the plan typically targets a range of equity investments between 50% and 60% of the plan assets. This means that fixed income and cash investments typically approximate 40% to 50% of the plan assets. The plan is also able to invest in ASRV common stock up to a maximum level of 10% of the market value of the plan assets (at
67
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005, 4.5%2007, 3.6% of the plan assets were invested in ASRV common stock). This asset mix is intended to ensure that there is a steady stream of cash from maturing investments to fund benefit payments.
CASH FLOWS:
The Bank presently expects that the contribution to be made to the Plan in 20062008 will be comparable with recent years and range between $1 and $2of approximately $1.1 million.
ESTIMATED FUTURE BENEFIT PAYMENTS:
The following benefit payments, which reflect future service, as appropriate, are expected to be paid (in thousands).
| 2008 | $ | 1,493 | ||
| 2009 | 1,467 | |||
| 2010 | 1,847 | |||
| 2011 | 1,965 | |||
| 2012 | 1,972 | |||
| Years 2013 — 2017 | 11,175 |
401(k) PLAN:
The Bank maintains a qualified 401(k) plan that allows for participation by Bank employees. Under the plan, employees may elect to make voluntary, pretax contributions to their accounts, and the Bank contributes 4% of salaries for union members who are in the plan. Contributions by the Bank charged to operations were $218,000 and $195,000 for the years ended December 31, 2007 and 2006, respectively. The fair value of plan assets includes $293,000 pertaining to the value of the Company’s common stock that is held by the plan at December 31, 2007.
Except for the above pension benefits,benefit plans, the Company has no significant additional exposure for any other post-retirement or post-employment benefits.
15. LEASE COMMITMENTS
| 14. | LEASE COMMITMENTS |
The Company'sCompany’s obligation for future minimum lease payments on operating leases at December 31, 2005,2007, is as follows:
| Future Minimum | ||||
Year | Lease Payments | |||
| (In thousands) | ||||
| 2008 | $ | 582 | ||
| 2009 | 520 | |||
| 2010 | 449 | |||
| 2011 | 352 | |||
| 2012 | 171 | |||
| 2013 and thereafter | 502 | |||
In addition to the amounts set forth above, certain of the leases require payments by the Company for taxes, insurance, and maintenance. Rent expense included in total non-interest expense amounted to $492,000, $423,000 and $388,000, $366,000in 2007, 2006, and $368,000, in 2005, 2004, and 2003, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
68
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 15. | COMMITMENTS AND CONTINGENT LIABILITIES |
The Bank incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements.
63
Commitments to extend credit are obligations to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer'scustomer’s creditworthiness on acase-by-case basis. Collateral which secures these types of commitments is the same as for other types of secured lending such as accounts receivable, inventory, and fixed assets.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financings, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Letters of credit are issued both on an unsecured and secured basis. Collateral securing these types of transactions is similar to collateral securing the Bank'sBank’s commercial loans.
The Company'sCompany’s 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. TheAt December 31, 2007 the Company had various outstanding commitments to extend credit approximating $98,294,000$93,583,000 and standby letters of credit of $10,230,000 as$7,884,000, compared to commitments to extend credit of $125,863,000 and standby letters of credit of $8,472,000 at December 31, 2005.2006. Standby letters of credit had terms ranging from 1 to 4 years. Standby letters of credit of approximately $7.9$5.1 million were secured as of December 31, 2005.2007 and approximately $5.6 million at December 31, 2006. The carrying amount of the liability for AmeriServ obligations related to standby letters of credit was $248,000$398,000 at December 31, 2005.
2007 and $330,000 at December 31, 2006.
Pursuant to its bylaws, the Company provides indemnification to its directors and officers against certain liabilities incurred as a result of their service on behalf of the Company. In connection with this indemnification obligation, the Company advances on behalf of covered individuals costs incurred in defending against certain claims. 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 Company'sCompany’s consolidated financial position, or results of operation.
17. PRIVATE PLACEMENT OFFERINGS
operation or cash flows.
| 16. | PRIVATE PLACEMENT OFFERINGS |
On September 27, 2005, the Company entered into agreements with institutional investors for a $10.3 million private placement of common stock. The agreements secured commitments from these investors to purchase 2.4 million of the Company'sCompany’s shares at a price of $4.35 per share.
The Company contributed $1.0 million of the net proceeds to the capital of the Bank and $1.0 million of the net proceeds to the capital of the Trust Company. The Company used the remaining $7.2 million of net proceeds to redeem outstanding 8.45% Trust Preferred Securities, which will resultresulted in annual pre-tax savings of approximately $600,000 in interest expense.
The successful completion of a $10.3 million private placement common stock offering provided the Company with the capital to facilitate a series of transactions in 2005 which were designed to significantly improve the Company'sCompany’s interest rate risk position and position the Company for future increased earnings performance. These
69
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
transactions and their related impact on earnings were as follows: 1) The Company retired all remaining $100 million of Federal Home Loan Bank (FHLB) convertible advances that had a cost of approximately 6.0% and a 2010 maturity. The Company incurred a $6.5 million pre-tax prepayment penalty to accomplish this transaction. 2) The Company terminated all interest rate hedges associated with the FHLB debt. The Company incurred a pre-tax termination fee of $5.8 million to eliminate these hedges on which the Company was a net payer. 3) The Company sold $112 million of investment securities to provide the cash needed at the bank for this FHLB debt and swap prepayment. The Company incurred a $2.6 million pre-tax loss on these investment security sales. 4) The Company redeemed at par $7.2 million of our high coupon trust preferred securities for which the Company incurred a $210,000 charge to write-off related unamortized issuance costs which is included within other expense.
On October 8, 2004, the Company announced that it entered into agreements with institutional investors on a $25.8 million private placement of common stock. The agreements secured commitments from investors to purchase 5.7 million shares at a price of $4.50 per share. The private placement was funded in two tranches. The first tranche for 2.8 million shares, or $12.6 million, closed on October 8, 2004. The second tranche of 2.9 million shares, or $13.2 million, closed on December 13, 2004. The funding of the second tranche was subject to shareholder approval, which was obtained on December 10, 2004.
The Company received net proceeds of $22.8 million after payment of offering expenses of $3.0 million and used the proceeds to strengthen its balance sheet. The specific actions included a $125 million reduction in high-cost, long-term borrowings from the
64
FHLB, the repurchase or redemption of $15.3 million of outstanding AmeriServ Trust Preferred Stock, and the closure of Standard Mortgage Corporation of Georgia. The Company incurred penalties in connection with the prepayment of the advances, and expenses associated with reducing the amount of Trust Preferred Stock, and the closure of Standard Mortgage Corporation of Georgia totaling approximately $10.0 million, after-tax.
18. STOCK COMPENSATION PLANS
| 17. | STOCK COMPENSATION PLANS |
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (FAS) #123(R) “Share-Based Payment” using the “modified perspective” method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with FAS #123(R). As a result of this adoption the Company recognized $12,000 of pretax compensation expense for the year 2007 and $56,000 in 2006.
In 2001, the Company'sCompany’s Board of Directors adopted a shareholder approved Stock Incentive Plan (the Plan) authorizing the grant of options or restricted stock covering 800,000 shares of common stock. This Plan replaced the expired 1991 Stock Option Plan. Under the Plan, options or restricted stock can be granted (the Grant Date) to directors, officers, and employees that provide services to the Company and its affiliates, as selected by the compensation committee of the Board of Directors. The Company accounts for this Plan under
Accounting Principles Board Opinion #25, "Accounting for Stock Issued to
Employees". The option price at which a stock option may be exercised shall not be less than 100% of the fair market value per share of common stock on the Grant Date. The maximum term of any option granted under the Plan cannot exceed 10 years. Generally, under the Plan on or after the first anniversary of the Grant Date, one-third of such options may be exercised. On or after the second anniversary of the Grant Date, two-thirds of such options may be exercised minus the aggregate number of such options previously exercised. On or after the third anniversary of the Grant Date, the remainder of the options may be exercised.
70
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company'sCompany’s Stock Incentive Plan at December 31, 2005, 2004,2007, 2006, and 2003,2005, and changes during the years then ended is presented in the table and narrative following:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
| Outstanding at beginning of year | 247,208 | $ | 5.03 | 372,645 | $ | 5.33 | 393,848 | $ | 5.31 | |||||||||||||||
| Granted | 900 | 4.60 | 1,233 | 4.70 | 11,492 | 5.34 | ||||||||||||||||||
| Exercised | (5,834 | ) | 2.71 | (21,667 | ) | 3.21 | (3,352 | ) | 4.27 | |||||||||||||||
| Forfeited | (13,882 | ) | 5.02 | (105,003 | ) | 6.46 | (29,343 | ) | 5.23 | |||||||||||||||
| Outstanding at end of year | 228,392 | 5.09 | 247,208 | 5.03 | 372,645 | 5.33 | ||||||||||||||||||
| Exercisable at end of year | 227,381 | 5.09 | 223,314 | 4.93 | 303,653 | 5.25 | ||||||||||||||||||
| Weighted average fair value of options granted in current year | $ | 2.59 | $ | 2.69 | $ | 2.99 | ||||||||||||||||||
A total of 303,653227,381 of the 372,645228,392 options outstanding at December 31, 2005,2007, have exercise prices between $2.31 and $15.69,$6.10, with a weighted average exercise price of $5.25$5.09 and a weighted average remaining contractual life of 4.723.97 years. Options outstanding at December 31, 20052007 reflect option ranges of: $2.31 to $3.90$3.49 totaling 33,3357,500 options which have a weighted average exercise price of $3.00$2.70 and a weighted average remaining contractual life of 6.95.0 years; and $4.02 to $6.39$6.10 totaling 257,118219,881 options which have a weighted average exercise price of $5.14$5.17 and a weighted average remaining contractual life of 4.5 years; and $10.42
to $15.69 totaling 13,200 options which have a weighted average exercise price
of $13.06 and a weighted average remaining contractual life of 2.83.94 years. All of these options are exercisable. The remaining 68,9921,011 options have exercise prices between $3.20$4.60 and $5.75,$4.70, with a weighted average exercise price of $5.67$4.64 and a weighted average remaining contractual life of 8.58.84 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2005, 2004,2007, 2006, and 2003, respectively: risk-free interest rates ranging from 3.95% to 4.19% for
2005 options, 3.50% to 4.20% for 2004 options, and 3.40% to 4.40% for 2003
options; expected lives of 10.0 years for 2005, 2004 and 2003 options; expected
volatility ranging from 37.34% to 38.63% for 2005 options, 39.24% to 39.65% for
2004 options, and 33.39% to 33.64% for 2003 options; and expected dividend
yields of 0% for 2005, 2004 and 2003 options.
19. DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN
2005.
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Black-Scholes Assumption Ranges | ||||||||||||
| Risk-free interest rate | 4.52 | % | 4.70 | % | 3.95-4.19 | % | ||||||
| Expected lives in years | 10 | 10 | 10 | |||||||||
| Expected volatility | 36.84 | % | 37.22 | % | 37.34-38.63 | % | ||||||
| Expected dividend rate | 0 | % | 0 | % | 0 | % | ||||||
| 18. | DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN |
The Company'sCompany’s Dividend Reinvestment and Common Stock Purchase Plan (the Purchase Plan) provides each record holder of Common Stock with a simple and convenient method of purchasing additional shares without payment of any brokerage commissions, service charges or other similar expense. A participant in the Purchase Plan may purchase shares of Common Stock by electing either to (1) reinvest dividends on all of his or her shares of Common Stock (if applicable) or (2) make optional cash payments of not less than $10 and up to a maximum of $2,000 per month and continue to receive regular dividend payments on his or her other shares. A participant may withdraw from the Purchase Plan at any time.
In the case of purchases from AmeriServ Financial, Inc. of treasury or newly-issued shares of Common Stock, the average market price is determined by averaging the high and low sale price of the Common Stock as reported on the NASDAQ on the relevant investment date. At December 31, 2005,2007, the Company issued 27,069 shares and had 135,22386,000 unissued reserved shares available under the Purchase Plan. In the 65
case of purchases of shares of
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AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common Stock on the open market, the average market price will be the weighted average purchase price of shares purchased for the Purchase Plan in the market for the relevant investment date.
20. INTANGIBLE ASSETS
| 19. | INTANGIBLE ASSETS |
The Company'sCompany’s consolidated balance sheet shows both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill and core deposits). Goodwill and other intangible assets with indefinite lives are not amortized. Instead such intangibles are evaluated for impairment at the reporting unit level at least annually in the third quarter.annually. Any resulting impairment would be reflected as a non-interest expense. The Company'sOf the Company’s goodwill of $13.5 million, $9.5 million is allocated to the retail banking segment and was evaluated for impairment on its annual impairment evaluation date. The result of this evaluation indicated that the Company'sCompany’s goodwill had no impairment. The Company'sremaining $4.0 million relates to the West Chester Capital Advisors (WCCA) acquisition which will be evaluated for impairment in the first quarter of 2008. The Company’s only intangible asset, other than goodwill, is its core deposit intangible, which the Company currently believes has a remaining finite life of approximately 31.1 years.
As of December 31, 2005,2007, the Company'sCompany’s core deposit intangibles had an original cost of $17.6 million with accumulated amortization of $14.9$16.6 million. The weighted average amortization period of the Company'sCompany’s core deposit intangibles at December 31, 2005,2007, is 3.121.10 years. Estimated amortization expense for the next fivetwo years is summarized as follows (in thousands):
Year | Expense | |||
| (In thousands) | ||||
| 2008 | 865 | |||
| 2009 | 108 | |||
A reconciliation of the Company'sCompany’s intangible asset balances for 20052007 and 20042006 is as follows (in thousands):
| At December 31, | ||||||||||||||||
| Core Deposit | ||||||||||||||||
| Intangibles | Goodwill | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Balance January 1 | $ | 1,838 | $ | 2,703 | $ | 9,544 | $ | 9,544 | ||||||||
| Addition due to WCCA | — | — | 3,953 | — | ||||||||||||
| Amortization expense | (865 | ) | (865 | ) | — | — | ||||||||||
| Balance December 31 | $ | 973 | $ | 1,838 | $ | 13,497 | $ | 9,544 | ||||||||
| 20. | DERIVATIVE HEDGING INSTRUMENTS |
The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company can use derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates. A summary of the
Company's derivative hedging transactions is as follows:
FAIR VALUE HEDGES:
In June 2003, the Company entered into an interest rate swap with a
notional amount of $50 million, inclusive of a swaption feature, effectively
hedging a $50 million FHLB convertible advance with a fixed cost of 6.10% that
was callable quarterly with a remaining maturity of five years. The Company
received a fixed rate of 2.58% and made variable rate payments based on 90-day
LIBOR. In December 2003, the Company entered into an interest rate swap with a
notional amount of $50 million, inclusive of a swaption feature, effectively
hedging a $50 million FHLB convertible advance with a fixed cost of 5.89% that
was callable quarterly with a remaining five-year maturity. The Company received
a fixed rate of 5.89% and made variable rate payments based on 90-day LIBOR plus
246 basis points. The swaps were carried at their fair values and the carrying
amount of FHLB advances included the change in their fair values since the
inception of the hedge. Because the hedges were considered highly effective and
qualified for the shortcut method of accounting treatment, changes in the swap's
fair value offset the corresponding changes in the fair value of the FHLB
advances and as a result, the change in fair value did not have any impact on
net income. The Company performed effectiveness testing by isolating the change
in value of the interest rate swaps and swaptions and comparing that to the
change in value of the FHLB convertible advances that were hedged. The
effectiveness test results for 2004 were 97.1% and 86.6%. During the third quarter of 2005, the increasing short-term interest rate environment caused the Company to exit theseall hedging transactions with the counter parties and incur a pretax prepayment penalty of $5.8 million.
66
72
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the interest rate swap transactions that impacted the Company'sCompany’s 2005 and 2004 performance:
| Increase | ||||||||||||||||||||||||
| Fixed | Floating | (Decrease) | ||||||||||||||||||||||
| Notional | Rate | Rate | Repricing | in Interest | ||||||||||||||||||||
2005 | Hedge Type | Amount | Received | Paid | Frequency | Expense | ||||||||||||||||||
| FAIR VALUE | $ | 50,000,000 | 2.58 | % | 2.70 | % | QUARTERLY | $ | 175,000 | |||||||||||||||
| FAIR VALUE | 50,000,000 | 5.89 | 5.27 | QUARTERLY | (148,000 | ) | ||||||||||||||||||
| $ | 27,000 | |||||||||||||||||||||||
The Company monitors and controls all derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions. All hedge transactions must be approved in advance by the Investment Asset/Liability Committee (ALCO) of the Board of Directors. The Company had no interest rate swaps, caps or floors outstanding at December 31, 2005,2007 and no interest rate caps or floors
outstanding at December 31, 2004.
22. SEGMENT RESULTS
2006.
| 21. | 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 Company'sCompany’s major business units include retail banking, commercial lending, trust, other fee based
businesses and investment/parent. The Company sold its remaining mortgage servicing rights in December 2004 and discontinued the operations of this non-core business (mortgage banking) in 2005(see Note 24)23). 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.
Retail banking includes the deposit-gathering branch franchise, lending to both individuals and small businesses, and financial services. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Financial services include the sale of mutual funds, annuities, and insurance products. Commercial lending to businesses includes commercial loans, and commercial real-estate loans, and commercial leasing
(excluding certain small business lending through the branch network).loans. The trust segment has two primary business divisions, traditional trust and union collective investment funds. Traditional trust 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. The union collective investment funds, namely the ERECT and BUILD Funds are designed to invest union pension dollars in construction projects that utilize union labor. Other fee based businesses
include AmeriServ Associates and AmeriServ Life.The financial results of the recently acquired WCCA, an investment advisory firm, have been incorporated into the trust segment beginning March 7, 2007. 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.
67
73
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The contribution of the major business segments to the consolidated results of operations were as follows:
| Year Ended December 31, 2007 | ||||||||||||||||||||
| Retail | Commercial | Investment/ | ||||||||||||||||||
| Banking | Lending | Trust | Parent | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net interest income | $ | 18,207 | $ | 9,199 | $ | 159 | $ | (3,342 | ) | $ | 24,223 | |||||||||
| Provision for loan loss | 60 | 240 | — | — | 300 | |||||||||||||||
| Non-interest income | 6,312 | 588 | 7,728 | 79 | 14,707 | |||||||||||||||
| Non-interest expense | 21,932 | 5,463 | 5,155 | 2,122 | 34,672 | |||||||||||||||
| Income (loss) before income taxes | 2,527 | 4,084 | 2,732 | (5,385 | ) | 3,958 | ||||||||||||||
| Income taxes (benefit) | 548 | 892 | 935 | (1,451 | ) | 924 | ||||||||||||||
| Net income (loss) | $ | 1,979 | $ | 3,192 | $ | 1,797 | $ | (3,934 | ) | $ | 3,034 | |||||||||
| Total assets | $ | 336,291 | $ | 402,222 | $ | 2,891 | $ | 163,474 | $ | 904,878 | ||||||||||
| Year Ended December 31, 2006 | ||||||||||||||||||||
| Retail | Commercial | Investment/ | ||||||||||||||||||
| Banking | Lending | Trust | Parent | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net interest income | $ | 18,822 | $ | 7,328 | $ | 343 | $ | (2,015 | ) | $ | 24,478 | |||||||||
| Provision for loan loss | (34 | ) | (91 | ) | — | — | (125 | ) | ||||||||||||
| Non-interest income | 5,732 | 540 | 6,521 | 48 | 12,841 | |||||||||||||||
| Non-interest expense | 23,120 | 4,735 | 4,291 | 2,546 | 34,692 | |||||||||||||||
| Income (loss) before income taxes | 1,468 | 3,224 | 2,573 | (4,513 | ) | 2,752 | ||||||||||||||
| Income taxes (benefit) | 265 | 626 | 875 | (1,346 | ) | 420 | ||||||||||||||
| Net income (loss) | $ | 1,203 | $ | 2,598 | $ | 1,698 | $ | (3,167 | ) | $ | 2,332 | |||||||||
| Total assets | $ | 357,083 | $ | 331,849 | $ | 2,716 | $ | 204,344 | $ | 895,992 | ||||||||||
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AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, 2005 | ||||||||||||||||||||||||||||
| Retail | Commercial | Mortgage | Investment/ | Other Fee | ||||||||||||||||||||||||
| Banking | Lending | Banking | Trust | Parent | Based | Total | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Net interest income | $ | 19,237 | $ | 5,538 | $ | — | $ | 319 | $ | (1,025 | ) | $ | 43 | $ | 24,112 | |||||||||||||
| Provision for loan loss | (56 | ) | (119 | ) | — | — | — | — | (175 | ) | ||||||||||||||||||
| Non-interest income | 5,607 | 442 | — | 6,129 | (2,624 | ) | 655 | 10,209 | ||||||||||||||||||||
| Non-interest expense | 24,879 | 4,418 | — | 4,334 | 15,014 | 775 | 49,420 | |||||||||||||||||||||
| Income (loss) before income taxes | 21 | 1,681 | — | 2,114 | (18,663 | ) | (77 | ) | (14,924 | ) | ||||||||||||||||||
| Income taxes (benefit) | (478 | ) | 309 | — | 719 | (6,426 | ) | (26 | ) | (5,902 | ) | |||||||||||||||||
| Income (loss) from continuing operations | 499 | 1,372 | — | 1,395 | (12,237 | ) | (51 | ) | (9,022 | ) | ||||||||||||||||||
| Loss from discontinued operations | — | — | (119 | ) | — | — | — | (119 | ) | |||||||||||||||||||
| Net income (loss) | $ | 499 | $ | 1,372 | $ | (119 | ) | $ | 1,395 | $ | (12,237 | ) | $ | (51 | ) | $ | (9,141 | ) | ||||||||||
| Total assets | $ | 349,255 | $ | 293,997 | $ | 329 | $ | 2,890 | $ | 231,924 | $ | 1,781 | $ | 880,176 | ||||||||||||||
| 22. | REGULATORY MATTERS |
The Company announced on February 28, 2003, the Company and the Bank entered into a Memorandum of
Understanding (MOU) with21, 2006, that the Federal Reserve Bank of Philadelphia (Federal
Reserve) and the Pennsylvania Department of Banking (Department). Underhad terminated the termsMemorandum of the MOU,Understanding (MOU) that the Company and the Bank could not declare dividends, the
Company could not redeem any of its own stock, and the Company could not incur
any additional debt other than in the ordinary course of business, in each case,
without the prior written approval of the Federal Reserve and the Department.
Accordingly, the Board of Directors of the Company could not reinstate the
previously suspended common stock dividend, or reinstitute its stock repurchase
program without the concurrence of the Federal Reserve and the Department. Other
provisions of the MOU required the Company and the Bank to: (i) improve credit
quality and credit administration practices, (ii) improve data security and
disaster recovery procedures, (iii) make periodic reports to the Federal Reserve
and the Department regarding compliance with the MOU, and (iv) appoint a
committee of independent directors to monitor compliance with the MOU. In
addition to those specific actions required by the MOU, changes made by the
Board of Directors included: (i) accepting the resignation of the previous
chairman, president, chief executive officer, chiefhad been operating officer, chief
lending officer and chief operating officer of the Trust company, (ii) enhanced
board oversight, including separation of the chairman's function from the duties
of the president and chief executive officer, (iii) retention of a new
management team, including a new president and chief executive officer and a new
chief lending officer, (iv) a comprehensive review of the loan portfolio, and
(v) a restructuring of the loan department, both with respect to personnel and
operations.under since February 28, 2003. The MOU was terminated byenacted to address prior deficiencies in asset quality, credit administration, and other matters. The Company’s successful actions to improve asset quality, strengthen capital, reduce interest rate risk, and enhance administrative procedures were the Federal Reserve andkey factors that led to the Department on
February 16, 2006.
termination of this regulatory enforcement action.
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 Company'sCompany’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company'sCompany’s 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 Company'sCompany’s financial statements.
75
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 20052007 and 2004,2006, the Federal Reserve categorized the Company as Well Capitalized under the regulatory framework for prompt corrective action. As of February 23, 2006, theThe 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 I risk-based, and Tier I leverage ratios as set forth in the table.
69
| As of December 31, 2007 | ||||||||||||||||||||||||
| To be Well | ||||||||||||||||||||||||
| For Capital | Capitalized Under | |||||||||||||||||||||||
| Adequacy | Prompt Corrective | |||||||||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (In thousands, Except Ratios) | ||||||||||||||||||||||||
| Total Capital (To Risk Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | $ | 92,404 | 13.94 | % | $ | 53,017 | 8.00 | % | $ | 66,271 | 10.00 | % | ||||||||||||
| AmeriServ Financial Bank | 83,612 | 12.75 | 52,458 | 8.00 | 65,573 | 10.00 | ||||||||||||||||||
| Tier 1 Capital (To Risk Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | 84,754 | 12.79 | 26,508 | 4.00 | 39,762 | 6.00 | ||||||||||||||||||
| AmeriServ Financial Bank | 75,962 | 11.58 | 26,229 | 4.00 | 39,344 | 6.00 | ||||||||||||||||||
| Tier 1 Capital (To Average Assets) | ||||||||||||||||||||||||
| Consolidated | 84,754 | 9.74 | 34,811 | 4.00 | 43,514 | 5.00 | ||||||||||||||||||
| AmeriServ Financial Bank | 75,962 | 8.84 | 34,391 | 4.00 | 42,989 | 5.00 | ||||||||||||||||||
| As of December 31, 2006 | ||||||||||||||||||||||||
| To be Well | ||||||||||||||||||||||||
| For Capital | Capitalized Under | |||||||||||||||||||||||
| Adequacy | Prompt Corrective | |||||||||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (In thousands, Except Ratios) | ||||||||||||||||||||||||
| Total Capital (To Risk Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | $ | 99,881 | 15.34 | % | $ | 52,097 | 8.00 | % | $ | 65,121 | 10.00 | % | ||||||||||||
| AmeriServ Financial Bank | 91,555 | 14.25 | 51,391 | 8.00 | 64,239 | 10.00 | ||||||||||||||||||
| Tier 1 Capital (To Risk Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | 91,737 | 14.09 | 26,048 | 4.00 | 39,073 | 6.00 | ||||||||||||||||||
| AmeriServ Financial Bank | 83,520 | 13.00 | 25,696 | 4.00 | 38,543 | 6.00 | ||||||||||||||||||
| Tier 1 Capital (To Average Assets) | ||||||||||||||||||||||||
| Consolidated | 91,737 | 10.54 | 34,800 | 4.00 | 43,500 | 5.00 | ||||||||||||||||||
| AmeriServ Financial Bank | 83,520 | 9.70 | 34,428 | 4.00 | 43,035 | 5.00 | ||||||||||||||||||
| 23. | DISCONTINUED OPERATIONS |
As of December 28, 2004, SMC entered into an agreement to sell its remaining mortgage servicing rights. This action resulted in the closing of this non-core business which exposed the Company to greater balance sheet market risk and earnings volatility. The assets and liabilities are separately identified in
the December 31, 2005 and 2004 Consolidated Balance Sheets as Assets and
Liabilities from discontinued operations. SMC completed the transfer of all files related to the servicing rights in the first half of 2005 and ceased operations as of June 30, 2005. The major asset and liability categories of net
discontinued operations as of December 31, 2005 and 2004 are as follows:
SMC's
76
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SMC’s operations had previously been reported as the Company'sCompany’s mortgage banking segment. All results have been removed from the Company'sCompany’s continuing operations for all periods presented. The results of SMC presented as discontinued operations in the Consolidated Statement of Operations are as follows:
70
| Year Ended | ||||
| December 31, | ||||
| 2005 | ||||
| (In thousands, Except | ||||
| Per Share Data) | ||||
| NET INTEREST INCOME | $ | — | ||
| Provision for loan losses | — | |||
| Net Interest Income after Provision for Loan Losses | — | |||
| NON-INTEREST INCOME | ||||
| Net mortgage servicing fees | 50 | |||
| Other income | 311 | |||
| Total Non-Interest Income | 361 | |||
| NON-INTEREST EXPENSE | ||||
| Salaries and employee benefits | 240 | |||
| Net occupancy expense | 208 | |||
| Equipment expense | 49 | |||
| Professional fees | 22 | |||
| Supplies, postage, and freight | 23 | |||
| Miscellaneous taxes and insurance | (1 | ) | ||
| Total Non-Interest Expense | 541 | |||
| LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES | (180 | ) | ||
| Benefit for income taxes | (61 | ) | ||
| LOSS FROM DISCONTINUED OPERATIONS | $ | (119 | ) | |
| PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS: | ||||
| Basic: | ||||
| Net loss | $ | (0.01 | ) | |
| Average number of shares outstanding | 20,340 | |||
| Diluted: | ||||
| Net loss | $ | (0.01 | ) | |
| Average number of shares outstanding | 20,340 | |||
| 24. | WEST CHESTER CAPITAL ADVISORS ACQUISITION |
The Company announced on January 22, 2007, that it had signed a Definitive Agreement to acquire West Chester Capital Advisors (WCCA) of West Chester, Pennsylvania. WCCA is registered investment advisor with expertise in large cap stocks, and at December 28, 2004, SMC entered into an agreement31, 2007 had $137 million in assets under management. WCCA was formed in 1994.
The acquisition was completed on March 7, 2007. WCCA is a wholly owned subsidiary of AmeriServ Financial Bank. Because the acquisition was a cash transaction, the Company did not issue any stock to sell its remaining
mortgage servicing rights. As such,execute the purchase. Therefore, there was no activityownership dilution to AmeriServ stockholders, and as expected the transaction was accretive to earnings in 2005. A rollforward2007. The purchase price paid by AmeriServ Financial Bank to the Sellers for all the
77
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
capital stock of the mortgage servicing rights through December 31, 2004 isWCCA was $4,000,000. This amount consisted of: (a) $2,200,000 paid at closing in immediately available funds, and (b) a deferred payment of up to $1,800,000 to be paid as follows: (A) up to $1,000,000 payable 30 months after closing, and (B) up to $800,000 payable 48 months after closing, in each case, subject to proportionate reduction if revenues of WCCA as of those dates is less than $1,360,000.
| 25. | PARENT COMPANY FINANCIAL INFORMATION |
The parent company functions primarily as a coordinating and servicing unit for all subsidiary entities. Provided services include general management, accounting and taxes, loan review, internal auditing, investment advisory, marketing, insurance risk management, general corporate services, and financial and strategic planning. The following financial information relates only to the parent company operations:
BALANCE SHEETS
| At December 31, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
| ASSETS | ||||||||
| Cash | $ | 100 | $ | 100 | ||||
| Investment securities available for sale | 4,060 | 3,112 | ||||||
| Equity investment in banking subsidiaries | 93,427 | 88,468 | ||||||
| Equity investment in non-banking subsidiaries | 4,720 | 4,645 | ||||||
| Guaranteed junior subordinated deferrable interest debenture issuance costs | 318 | 334 | ||||||
| Other assets | 1,508 | 1,717 | ||||||
| TOTAL ASSETS | $ | 104,133 | $ | 98,376 | ||||
| LIABILITIES | ||||||||
| Guaranteed junior subordinated deferrable interest debentures | $ | 13,085 | $ | 13,085 | ||||
| Other liabilities | 754 | 607 | ||||||
| TOTAL LIABILITIES | 13,839 | 13,692 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Total stockholders’ equity | 90,294 | 84,684 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 104,133 | $ | 98,376 | ||||
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AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
STATEMENTS OF OPERATIONS
72
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| INCOME | ||||||||||||
| Inter-entity management and other fees | $ | 2,363 | $ | 2,351 | $ | 2,411 | ||||||
| Dividends from non-banking subsidiaries | 1,580 | 1,722 | 1,186 | |||||||||
| Interest and dividend income | 167 | 120 | 94 | |||||||||
| TOTAL INCOME | 4,110 | 4,193 | 3,691 | |||||||||
| EXPENSE | ||||||||||||
| Interest expense | 1,121 | 1,121 | 1,659 | |||||||||
| Salaries and employee benefits | 1,910 | 2,008 | 1,834 | |||||||||
| Dividends downstreamed to banking subsidiary | — | — | 1,000 | |||||||||
| Dividends downstreamed to non-banking subsidiaries | — | — | 1,000 | |||||||||
| Other expense | 1,223 | 1,184 | 1,532 | |||||||||
| TOTAL EXPENSE | 4,254 | 4,313 | 7,025 | |||||||||
| LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES | (144 | ) | (120 | ) | (3,334 | ) | ||||||
| Benefit for income taxes | 583 | 640 | 837 | |||||||||
| Equity in undistributed gains (losses) of subsidiaries | 2,595 | 1,812 | (6,644 | ) | ||||||||
| NET INCOME (LOSS) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | |||||
79
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (In thousands) | ||||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income (loss) | $ | 3,034 | $ | 2,332 | $ | (9,141 | ) | |||||
| Adjustment to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||||||
| Equity in undistributed (gains) losses of subsidiaries | (2,595 | ) | (1,812 | ) | 6,644 | |||||||
| Other — net | 1,445 | 1,043 | 1,422 | |||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 1,884 | 1,563 | (1,075 | ) | ||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Purchase of short-term investments — available for sale | (999 | ) | (3,112 | ) | — | |||||||
| NET CASH USED IN INVESTING ACTIVITIES | (999 | ) | (3,112 | ) | — | |||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from issuance of common stock | 131 | 173 | 133 | |||||||||
| Proceeds from private offering, net of issuance costs | — | — | 8,818 | |||||||||
| Guaranteed junior subordinated deferrable interest debentures dividends paid | (1,016 | ) | (1,016 | ) | (1,546 | ) | ||||||
| Retirement of Trust Preferred Securities | — | — | (7,200 | ) | ||||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (885 | ) | (843 | ) | 205 | |||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | — | (2,392 | ) | (870 | ) | |||||||
| CASH AND CASH EQUIVALENTS AT JANUARY 1 | 100 | 2,492 | 3,362 | |||||||||
| CASH AND CASH EQUIVALENTS AT DECEMBER 31 | $ | 100 | $ | 100 | $ | 2,492 | ||||||
The ability of the subsidiary bank to upstream cash to the parent company is restricted by regulations. Federal law prevents the parent company from borrowing from its subsidiary bank unless the loans are secured by specified assets. Further, such secured loans are limited in amount to ten percent of the subsidiary bank'sbank’s capital and surplus. In addition, the Bank is subject to legal limitations on the amount of dividends that can be paid to its shareholder. The dividend limitation generally restricts dividend payments to a bank'sbank’s retained net income for the current and preceding two calendar years. Cash may also be upstreamed to the parent company by the subsidiaries as an inter-entity management fee. At December 31, 2005,2007, the subsidiary bank was not permitted to upstream any cash dividends to the parent company. However, as of January 1, 2008, the subsidiary bank had $4.6 million of cash available for dividend upstream to the parent. The subsidiary bank had a combined $75,743,000$90,717,000 of restricted surplus and retained earnings at December 31, 2005.
27. SUBSEQUENT EVENT
2007.
80
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 26. | SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA |
The following table sets forth certain unaudited quarterly consolidated financial data regarding the Company:
| 2007 Quarter Ended | ||||||||||||||||
| Dec. 31 | Sept. 30 | June 30 | March 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| Interest income | $ | 12,442 | $ | 12,454 | $ | 12,308 | $ | 12,175 | ||||||||
| Interest expense | 6,209 | 6,432 | 6,295 | 6,220 | ||||||||||||
| Net interest income | 6,233 | 6,022 | 6,013 | 5,955 | ||||||||||||
| Provision for loan losses | 150 | 150 | — | — | ||||||||||||
| Net interest income after provision for loan losses | 6,083 | 5,872 | 6,013 | 5,955 | ||||||||||||
| Non-interest income | 3,860 | 4,022 | 3,592 | 3,233 | ||||||||||||
| Non-interest expense | 8,704 | 8,773 | 8,522 | 8,673 | ||||||||||||
| Income before income taxes | 1,239 | 1,121 | 1,083 | 515 | ||||||||||||
| Provision for income taxes | 315 | 247 | 275 | 87 | ||||||||||||
| Net income | $ | 924 | $ | 874 | $ | 808 | $ | 428 | ||||||||
| Basic earnings per common share | 0.04 | 0.04 | 0.04 | 0.02 | ||||||||||||
| Diluted earnings per common share | 0.04 | 0.04 | 0.04 | 0.02 | ||||||||||||
| Cash dividends declared per common share | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
| 2006 Quarter Ended | ||||||||||||||||
| Dec. 31 | Sept. 30 | June 30 | March 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| Interest income | $ | 12,077 | $ | 11,895 | $ | 11,414 | $ | 11,179 | ||||||||
| Interest expense | 6,181 | 5,796 | 5,223 | 4,887 | ||||||||||||
| Net interest income | 5,896 | 6,099 | 6,191 | 6,292 | ||||||||||||
| Provision for loan losses | (75 | ) | — | (50 | ) | — | ||||||||||
| Net interest income after provision for loan losses | 5,971 | 6,099 | 6,241 | 6,292 | ||||||||||||
| Non-interest income | 3,084 | 3,247 | 3,268 | 3,242 | ||||||||||||
| Non-interest expense | 8,493 | 8,564 | 8,777 | 8,858 | ||||||||||||
| Income before income taxes | 562 | 782 | 732 | 676 | ||||||||||||
| Provision (benefit) for income taxes | (19 | ) | 139 | 164 | 136 | |||||||||||
| Net income | $ | 581 | $ | 643 | $ | 568 | $ | 540 | ||||||||
| Basic earnings per common share | 0.03 | 0.03 | 0.03 | 0.02 | ||||||||||||
| Diluted earnings per common share | 0.03 | 0.03 | 0.03 | 0.02 | ||||||||||||
| Cash dividends declared per common share | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee
AmeriServ Financial, Inc.
We have audited the consolidated balance sheet of AmeriServ Financial, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended. We also have audited AmeriServ Financial Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanyingReport on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits. The accompanying consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows of AmeriServ Financial, Inc. and subsidiaries for the year ended December 31, 2005, were audited by other auditors whose report thereon dated March 6, 2006, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company announcedAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements include examining, on February 21, 2006,a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the Federal Reserve Bankdegree of Philadelphiacompliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Financial, Inc. and Pennsylvania Departmentsubsidiaries as of Banking have terminatedDecember 31, 2007 and 2006, and the Memorandumconsolidated results of Understanding thattheir operations and their cash flows for the Company had been operating under since Feb.
28, 2003.
The MOU was enacted to address prior deficienciesyears then ended in asset quality, credit
administration, and other matters. The Company's successful actions to improve
asset quality, strengthen capital, reduce interest rate risk, and enhance
administrative procedures, wereconformity with U.S. generally accepted accounting principles. Also in our opinion, AmeriServ Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based onIntegrated Framework issued by the key factors that led to the terminationCommittee of this regulatory enforcement action.
The Company expects that the terminationSponsoring Organizations of the MOU will mean lower
insurance and regulatory costs and it will reduce the administrative burdens so
the Company can focus on the development of new business within the context of a
community bank based strategic plan.
73
Treadway Commission (COSO).
/s/ S.R. Snodgrass, A.C.
Wexford, PA
March 6, 2008
82
REPORT ON MANAGEMENT'SMANAGEMENT’S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
Ameriserv
INTERNAL CONTROL OVER FINANCIAL REPORTING
AmeriServ Financial, Inc. is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management'smanagement’s best estimates and judgments.
We, as management of AmeriServ Financial, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company'sCompany’s system of internal control over financial reporting as of December 31, 2005,2007, in relation to criteria for effective internal control over financial reporting as described in "Internal“Internal Control -— Integrated Framework,"” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2005,2007, its system of internal control over financial reporting is effective and meets the criteria of the "Internal“Internal Control -— Integrated Framework"Framework”. Deloitte & Touche LLP,S.R. Snodgrass A.C., independent registered public accounting firm, has issued an attestation report on management'smanagement’s assessment of the Company'sCompany’s internal control over financial reporting.
/s/ ALLAN R. DENNISON /s/ JEFFREY A. STOPKO
- ------------------------------------- ----------------------------------------
Allan R. Dennison Jeffrey A. Stopko
President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
/s/ ALLAN R. DENNISON Allan R. Dennison President & Chief Executive Officer | /s/ JEFFREY A. STOPKO Jeffrey A. Stopko Senior Vice President & Chief Financial Officer |
Johnstown, PA
March 6, 2006
74
February 21, 2008
83
STATEMENT OF MANAGEMENT RESPONSIBILITY
March 6, 2006
February 21, 2008
To the Stockholders and
Board of Directors of
AmeriServ Financial, Inc.
Management of AmeriServ Financial, Inc. and its subsidiaries have prepared the consolidated financial statements and other information in the Annual Report andForm 10-K in accordance with generally accepted accounting principles and are responsible for its accuracy.
In meeting its responsibility, management relies on internal accounting and related control systems, which include selection and training of qualified personnel, establishment and communication of accounting and administrative policies and procedures, appropriate segregation of responsibilities, and programs of internal audit. These systems are designed to provide reasonable assurance that financial records are reliable for preparing financial statements and maintaining accountability for assets and that assets are safeguarded against unauthorized use or disposition. Such assurance cannot be absolute because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which Company affairs are conducted with the highest ethical standards. The Company'sCompany’s Code of Conduct, furnished to each employee and director, addresses the importance of open internal communications, potential conflicts of interest, compliance with applicable laws, including those related to financial disclosure, the confidentiality of proprietary information, and other items. There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company'sCompany’s Board of Directors consists solely of outside directors. The Audit Committee meets periodically with management and the independent auditors to discuss audit, financial reporting, and related matters. Deloitte & Touche LLPS.R. Snodgrass A.C. and the Company'sCompany’s internal auditors have direct access to the Audit Committee.
/s/ ALLAN R. DENNISON /s/ JEFFREY A. STOPKO
- ------------------------------------- ----------------------------------------
Allan R. Dennison Jeffrey A. Stopko
President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
75
/s/ ALLAN R. DENNISON Allan R. Dennison President & Chief Executive Officer | /s/ JEFFREY A. STOPKO Jeffrey A. Stopko Senior Vice President & Chief Financial Officer |
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors
of AmeriServ Financial, Inc.
Johnstown, PA
We have audited management's assessment, included in the accompanying Report On
Management's Assessment of Internal Control Over Financial Reporting, that
AmeriServ Financial, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the consolidated financial
statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of the Company as
of December 31, 2005 and 2004, and the related consolidated statements of
operations, comprehensive loss, changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2005 of the
Company, and our report dated March 6, 2006 expressed an unqualified opinion on
those consolidated financial statements.
/s/ Deloitte & Touche
Pittsburgh, PA
March 6, 2006
76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors
of AmeriServ Financial, Inc.
Johnstown, Pennsylvania
We have audited the accompanying consolidated balance sheetsstatement of operations of AmeriServ Financial, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 2005, and 2004, and the related consolidated statements of operations, comprehensive loss,income, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in
the periodyear ended December 31, 2005. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
audit.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial positionresults of operations and cash flows of the Company as of December 31, 2005
and 2004, andfor the results of its operations and its cash flows for each of the
three years in the periodyear ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 6, 2008
85
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting asDisclosure Controls and Procedures. As of December 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 6, 2006 expressed2007, an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ Deloitte & Touche
Pittsburgh, PA
March 6, 2006
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management carried out an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, ofon the effectiveness of the design and the operation of the Company'sCompany’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and15d-15(e) under the Exchange Act) as of December 31, 2005,
pursuant toSecurities Exchange Act Rule 13a-15.of 1934). Based uponon that evaluation, the Company’s management, including the Chief Executive Officer along with theand Chief Financial Officer, concluded that the Company'sCompany’s disclosure controls and procedures were effective as of December 31, 2005,2007.
Disclosure controls and procedures are effective in timely alerting themthe controls and other procedures that are designed to materialensure that the information relating to the
Company (including its consolidated subsidiaries) required to be includeddisclosed by the Company in its reports filed and submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Company's periodic filingsSecurities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports filed under the Exchange Act. InAct is accumulated and communicated to the fourthCompany’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. During the third quarter, noAmeriServ Financial Inc. completed a data processing conversion. As a result there were changes into the Company'sCompany’s internal controlcontrols over financial reportingreporting. While the controls are similar in nature, modifications have comebeen made to management's attentionconfirm to the specifications of the new system. Through evaluation and comparison of these controls, we have determined that havethe change has not materially affected, or areis reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
For more information see
Management Report On Management's Assessment Ofon Internal Control Overover Financial Reporting on page 74.
ITEM 9B. OTHER INFORMATION
Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Exchange Act. Management’s assessment of internal control over financial reporting for the fiscal year ended December 31, 2007 is included in Item 8.
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Information required by this section relative to Directors of the Registrant is presented in the "Election“Election of ASRV Directors"Directors” section of the Proxy Statement for the Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
| ITEM 11. | EXECUTIVE COMPENSATION |
Information required by this section is presented in the "Compensation“Compensation Paid to Executive Officers"Officers” section of the Proxy Statement for the Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required by this section is presented in the "Security“Security Ownership of Management"Management” section of the Proxy Statement for the Annual Meeting of Shareholders.
ITEM 13.
86
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Information required by this section is presented in the "Transactions“Transactions with Management"Management” section of the Proxy Statement for the Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Information required by this section is presented in the "Audit“Audit Committee Report"Report” section of the Proxy Statement for the Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
| ITEM 15. | EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ONFORM 8-K |
CONSOLIDATED FINANCIAL STATEMENTS FILED:
The consolidated financial statements listed below are from the 2005 2007Form 10-K and Part II --— Item 8. Page references are to saidForm 10-K.
78
CONSOLIDATED FINANCIAL STATEMENTS:
AmeriServ Financial, Inc. and Subsidiaries
Consolidated Balance Sheets, 39
Consolidated Statements of Operations, 40-41
Consolidated Statements of Comprehensive Loss, 42
Consolidated Statements of Changes in Stockholders' Equity, 43
Consolidated Statements of Cash Flows, 44-45
Notes to Consolidated Financial Statements, 46
Report on Management's Assessment of Internal Control
Over Financial Reporting, 74
Statement of Management Responsibility, 75
Independent Registered Public Accounting Firm Opinion on
Internal Control Over Financial Reporting, 76
Report of Independent Registered Public Accounting Firm, 77
| AmeriServ Financial, Inc. and Subsidiaries | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 82 | ||||
| 83 | ||||
| 84 |
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
These schedules are not required or are not applicable under Securities and Exchange Commission accounting regulations and therefore have been omitted.
87
EXHIBITS:
The exhibits listed below are filed herewith or to other filings.
79
EXHIBIT A
(21) SUBSIDIARIES OF THE REGISTRANT
80
| Exhibit | Prior Filing or Exhibit | |||||
Number | Description | Page Number Herein | ||||
| 3 | .1 | Amended and Restated Articles of Incorporation as amended through January 5, 2005. | Exhibit 3.1 to 2004Form 10-K Filed on March 10, 2005 | |||
| 3 | .2 | Bylaws, as amended and restated on January 26, 2005. | Exhibit 3.2 to January 26, 2005Form 8-K Filed on January 26, 2005 | |||
| 10 | .3 | Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Jeffrey A. Stopko. | Exhibit 10.1 toForm 10-Q Filed August 14, 2002 | |||
| 10 | .5 | 2001 Stock Incentive Plan dated February 23, 2001. | 2000 Proxy Statement Filed March 16, 2001 | |||
| 10 | .6 | Agreement, dated December 1, 1994, between AmeriServ Financial, Inc. and Ronald W. Virag. | Exhibit 10.6 to 2000Form 10-K Filed March 21, 2001 | |||
| 10 | .7 | Agreement, dated February 1, 2004, between AmeriServ Financial, Inc. and Allan R. Dennison, as amended on January 24, 2008 | Exhibit 10.7 to 2007Form 10-K Filed March 6, 2008 | |||
| 10 | .8 | Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Dan L. Hummel | Exhibit 10.8 to 2004Form 10-K Filed March 10, 2005 | |||
| 21 | Subsidiaries of the Registrant. | Below | ||||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm | Below | |||
| 23 | .2 | Consent of Independent Registered Public Accounting Firm | Below | |||
| 31 | .1 | Certification pursuant to Rule 13a-14 (a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | Below | |||
| 31 | .2 | Certification pursuant to Rule 13a-14 (a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | Below | |||
| 32 | .1 | Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | Below | |||
| 32 | .2 | Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | Below | |||
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AmeriServ Financial, Inc.
(Registrant)
By: /s/
| By: | /s/ Allan R. Dennison |
Allan R. Dennison
------------------------------------
Allan R. Dennison
President & CEO
Date: February 23, 2006
21, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 2006:
21, 2008:
/s/ Craig G. Ford | ChairmanDirector | |||
/s/ Allan R. Dennison | President, CEO & Director | |||
/s/ J. Michael Adams, Jr. J. Michael Adams, Jr. | Director | |||
/s/ Edward J. Cernic, Sr. | Director | |||
/s/ Daniel R. DeVos | Director | |||
/s/ James C. Dewar | Director | |||
/s/ Bruce E. Duke, III, M.D. | Director | |||
/s/ James M. Edwards, Sr. | Director | |||
/s/ Kim W. Kunkle | Director | |||
/s/ Jeffrey A. Stopko | SVP & CFO | |||
/s/ Margaret A. O’Malley | Director | |||
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/s/ Very Rev. Christian R. Oravec | Director | |||
/s/ Mark E. Pasquerilla | Director | |||
/s/ Howard M. Picking, III | Director | |||
/s/ Sara A. Sargent | Director | |||
/s/ Thomas C. Slater | Director | |||
/s/ Robert L. Wise | Director | |||
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AMERISERV FINANCIAL
BANK
OFFICE LOCATIONS
* Main Office Downtown
BANK
OFFICE LOCATIONS
| * | Main Office Downtown |
216 Franklin Street
P.O. Box 520
Johnstown, PA15907-0520
1-800-837-BANK(2265)
+* Westmont Office
| +* | Westmont Office |
110 Plaza Drive
Johnstown, PA15905-1211
+* University Heights Office
| +* | University Heights Office |
1404 Eisenhower Boulevard
Johnstown, PA15904-3218
* East Hills Teller Express Office
1213 Scalp Avenue
Johnstown, PA 15904-3150
* Eighth Ward Office
| * | Eighth Ward Office |
1059 Franklin Street
Johnstown, PA15905-4303
* West End Office
| * | West End Office |
163 Fairfield Avenue
Johnstown, PA15906-2347
* Carrolltown Office
| * | Carrolltown Office |
101 South Main Street
Carrolltown, PA15722-0507
* Northern Cambria Office
| * | Northern Cambria Office |
4206 Crawford Avenue Suite 1
Northern Cambria, PA
15714-1342
* Ebensburg Office
| * | Ebensburg Office |
104 South Center Street
Ebensburg, PA15931-0209
+* Lovell Park Office
| +* | Lovell Park Office |
179 Lovell Avenue
Ebensburg, PA15931-0418
Nanty Glo Office
928 Roberts
| * | Nanty Glo Office |
1383 Shoemaker Street
Nanty Glo, PA 15943-1303
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1254
+* Galleria Mall Office
| +* | Galleria Mall Office |
500 Galleria Drive Suite 100
Johnstown, PA15904-8911
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-0393
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* Seward Office
| * | Seward Office |
6858 Route 711, Suite 1
Seward, PA15954-9501
* Windber Office
| * | Windber Office |
1501 Somerset Avenue
Windber, PA15963-1745
Central City Office
| Central City Office |
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104 Sunshine Avenue
Central City, PA15926-1129
* Somerset Office
| * | Somerset Office |
108 W. Main Street
Somerset, PA15501-2035
* Derry Office
| * | Derry Office |
112 South Chestnut Street
Derry, PA15627-1938
* South Atherton Office
| * | South Atherton Office |
734 South Atherton Street
State College, PA16801-4628
* Pittsburgh Office
| * | Pittsburgh Office |
60 Boulevard of the Allies
Suite 100
Pittsburgh, PA15222-1232
* Benner Pike Office
| * | Benner Pike Office |
763 Benner Pike
State College, PA16801-7313
* = 24-Hour ATM Banking
| *= | 24-Hour ATM Banking |
Available
+ = Seven Day a Week Banking
| += | Seven Day a Week Banking |
Available
REMOTE ATM
BANKING LOCATIONS
BANKING LOCATIONS
East HillsDrive-up, 1213 Scalp Avenue, Johnstown
Main Office, 216 Franklin Street, Johnstown
The Galleria, Johnstown
6-2-Go Shop, Nanty Glo
Gogas Service Station, Cairnbrook
AMERISERV RESIDENTIAL
LENDING LOCATIONS
LENDING LOCATIONS
Greensburg Office
Oakley Park II, 4963 Route 30
Greensburg, PA15601-9560
Altoona Office
87 Logan Boulevard
Altoona, PA16602-3123
Mt. Nittany Mortgage Company
2300 South Atherton Street
State College, PA16801-7613
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Pittsburgh Loan Center
300 Penn Center Boulevard
Suite 613
Pittsburgh, PA15235-5507
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SHAREHOLDER INFORMATION
SECURITIES MARKETS
AmeriServ Financial, Inc. Common Stock is publicly traded and quoted on the NASDAQ National Market System. The common stock is traded under the symbol of "ASRV."“ASRV.” The listed market makers for the stock are:
Citigroup SmithBarney
969 Eisenhower Boulevard
Oak Ridge East
Johnstown, PA 15904
Telephone:(814) 266-7900
Ryan Beck & Company
Liberty Center
1001 Liberty Avenue, Suite 900
Pittsburgh, PA 15222
Stifel Nicolaus
18 Columbia Turnpike
Florham Park, NJ07932-2290
Telephone: (412) 456-0200
(973) 549-4217
UBS Financial Services, Inc.
1407 Eisenhower Boulevard
Johnstown, PA 15904
Telephone:(814) 269-9211
Keefe Bruyette & Woods, Inc.
787 Seventh Avenue
Equitable Bldg --— 4th Floor
New York, NY 10019
Telephone:(800) 966-1559
Knight TradingCapital Group, Inc.
525
545 Washington Boulevard
Jersey City, NJ 07310
Telephone:(800) 544-7508
Parker/Hunter, Inc.
416 Main
Janney Montgomery Scott, LLC
1801 Market Street, Johnstown,8th Floor
Philadelphia, PA 15901
19103-1675
Telephone: (814) 535-8403
(215) 665-6000
Sandler O'NeillO’Neill & Partners, L.P.
919 Third Avenue
6th Floor
New York, NY 10022
Telephone:(800) 635-6860
CORPORATE OFFICES
The corporate offices of AmeriServ Financial, Inc. are located at 216 Franklin Street, Johnstown, PA 15901. Mailing address:
P.O. Box 430
Johnstown, PA15907-0430
(814) 533-5300
AGENTS
The transfer agent and registrar for AmeriServ Financial, Inc.'s’s common stock is:
Computershare Investor Services
P O Box 43010
Providence, RI02940-3023
Shareholder Inquiries:1-800-730-4001
Internet Address:http://www. Computershare.com
INFORMATION
Analysts, investors, shareholders, and others seeking financial data about AmeriServ Financial, Inc. or any of its subsidiaries'subsidiaries’ annual and quarterly reports, proxy statements, 10-K, 10-Q, 8-K,10-K,10-Q,8-K, and call reports --— are asked to contact Jeffrey A. Stopko, Senior Vice President & Chief Financial Officer at(814) 533-5310 or bye-mail at JStopko@AMERISERVFINANCIAL.com.JStopko@AMERISERVFINANCIAL.com. The Company also maintains a website (www.AmeriServFinancial.com)(www.AmeriServFinancial.com) that makes available current financial information, such as press releases and SEC documents, as well as the corporate governance documents under the Investor Relations tab on the Company'sCompany’s website.
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