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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 __________
COMMISSION FILE NUMBER 0-11204
AMERISERV FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1424278
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MAIN & FRANKLIN STREETS,
P.O. BOX 430, JOHNSTOWN, PENNSYLVANIA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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] No
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] 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.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer,
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] 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.
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date 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 aggregate market value 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) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date. 22,114,435 shares were outstanding as of January 31,
2006.
DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents
if incorporated by reference and the Part of the Form 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' report for the year ended December 31,
2005, are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders' meeting are
incorporated by reference in Part III.
Exhibit Index is located on page 79.
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2
FORM 10-K INDEX
PAGE NO.
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PART I
Item 1. Business 4
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 18
Item 6. Selected Consolidated Financial Data 19
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 38
Item 8. Consolidated Financial Statements and Supplementary Data 39
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 78
Item 9A. Controls and Procedures 78
Item 9B. Other Information 78
PART III
Item 10. Directors and Executive Officers of the Registrant 78
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 78
Item 13. Certain Relationships and Related Transactions 78
Item 14. Principal Accounting Fees and Services 78
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K 78
Signatures 81
3
PART I
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's other wholly owned
subsidiaries include AmeriServ Trust and Financial Services Company (the Trust
Company) formed in October 1992, AmeriServ Life Insurance Company (AmeriServ
Life) formed in October 1987, and AmeriServ Associates, Inc. (AmeriServ
Associates), formed in January 1997.
The Company's principal activities consist of owning and operating its four
wholly owned subsidiary entities. At December 31, 2005, the Company had, on a
consolidated basis, total assets, deposits, and shareholders' equity of $880
million, $713 million and $84 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," 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 22 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'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 24 automated bank
teller machines (ATMs) through its 24-Hour Banking Network that is linked with
STAR, a regional ATM network and CIRRUS, a national ATM network.
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 engaged in the sale of annuities, mutual funds, and insurance. On
December 31, 2004, the Company merged Ameriserv Financial Services Corporation
into the Bank.
The Bank'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
group of related industries does not comprise a material portion of the loan
portfolio. The Bank'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 and the Pennsylvania Department of Banking. See Notes 23 and 27,
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:
4
HEADQUARTERS JOHNSTOWN, PA
- ------------ -------------
Chartered 1933
Total Assets $871,299
Total Investment Securities $225,392
Total Loans (net of unearned income) $550,602
Total Deposits $712,885
Total Net Loss $ (8,623)
Asset Leverage Ratio 9.48%
2005 Return on Average Assets (0.90)%
2005 Return on Average Equity (9.08)%
Total Full-time Equivalent Employees 308
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'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'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'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, inventory
and/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 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'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.
5
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 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.
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 Isaac 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.
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.
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 two years the Company has significantly delevered its balance
sheet and reduced its level of borrowings through investment portfolio cash flow
and security sales.
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 Marketing Activities
The Residential Lending department of the Bank continues to originate
one-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" basis: Mortgages are priced and delivered on a
"best efforts" pricing, with servicing released to the investor. Freddie Mac
guidelines are used in underwriting all mortgages. The mortgages with longer
terms such as 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, and bi-weekly mortgages. These loans are usually kept in the
AmeriServ portfolio.
6
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 forty professionals administer assets valued at approximately $1.6
billion. 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,
AmeriServ Trust and Financial Services had total assets of $2.9 million and
total shareholder's equity of $2.5 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, assets in these
union funds totaled approximately $370 million.
The Trust Investment Division focuses on producing better-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'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, the trust company continued to be a major contributor of earnings
to the corporation. Gross revenue in 2005 amounted to $6.4 million which
represents an increase of $991,000 or 18.2% over 2004. The Trust Company's net
income contribution was $1.4 million an increase of $535,000 or 62% over 2004.
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's market area.
Operations of AmeriServ Life are conducted in each office of the Company's
banking subsidiary. AmeriServ Life is subject to supervision and regulation by
the Arizona Department of Insurance, the Insurance Department of the
Commonwealth of Pennsylvania, and the Federal Reserve. At December 31, 2005,
AmeriServ Life had total assets of $1.5 million and total shareholder'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.
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.
7
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 continues to be positive measuring in excess of
3.0% per annum. The economy in Cambria and Somerset Counties, while growing
slowly, produces an unemployment rate of 5.7% as compared to a national rate of
4.9%. Local markets have shown improvement as jobs in the area have improved
causing the unemployment rate to decline from last year's number of 7.4%.
Near-term expectations for future employment point to better days ahead as a
result of several recent announcements which include expansion of alternative
fuel facilities, greater work on defense projects, and more work for the local
mining industry. Local loan demand remains good particularly in the commercial
sector. Overall, economic conditions in 2006 are expected to remain positive.
Economic conditions are much better 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 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 428 people as of December 31, 2005, in full- and
part-time positions. Approximately 261 non-supervisory employees of the Bank are
represented by the United Steelworkers of America, AFL-CIO-CLC, Local Union
2635-06. The Bank's current labor contract with the Steelworkers Local will
expire on October 15, 2007. 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"), 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 corrective action" for insured depository institutions that
do not meet mimimum 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 therafter be undercapitalized. An undercapitalized bank must develop
a capital restoration plan, and its parent holding company must guarantee the
bank's compliance with the plan up to the lesser of 5% of the bank's assets at
the time it became undercapitalized and the amount needed to comply with the
plan.
As of December 31, 2005, the Company believes that its bank subsidiary was
well capitalized, based on the prompt corrective action ratios and guidelines
described above. A bank'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's overall financial
condition or prospects for other purposes.
8
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's Chief Executive Officer and Chief Financial
Officer are required. These certifications attest that the Company'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'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 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 affect 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.
CHECK CLEARING FOR THE 21ST 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 be processed electronically.
Under Check 21, as a bank processes a check, funds from the check writer's
account are transferred to the check depositor'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
printed on-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 this Form 10-K as listed
below:
I. Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential Information. Information
required by this section is presented on pages 25-26, and 31-34.
II. Investment Portfolio Information required by this section is presented
on pages 9-10 and 51-54.
III. Loan Portfolio Information required by this section appears on pages
10-11 and 26-27.
IV. Summary of Loan Loss Experience Information required by this section
is presented on pages 27-29.
V. Deposits Information required by this section follows on page 11-12.
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.
INVESTMENT PORTFOLIO
Investment securities 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
9
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's investment portfolio as of the periods indicated:
Investment securities available for sale at:
AT DECEMBER 31,
------------------------------
COST BASIS: 2005 2004 2003
- ---------- -------- -------- --------
(IN THOUSANDS)
U.S. Treasury $ 5,021 $ 10,071 $ 9,498
U.S. Agency 59,335 33,219 13,508
Mortgage-backed securities 131,981 305,986 469,086
Equity investment in Federal Home Loan Bank and Federal Reserve
Bank Stocks 6,988 17,059 22,942
Other securities 4,499 12,381 10,974
-------- -------- --------
Total cost basis of investment securities available for sale $207,824 $378,716 $526,008
======== ======== ========
Total market value of investment securities available for sale $201,569 $373,584 $524,573
======== ======== ========
Investment securities held to maturity at:
AT DECEMBER 31,
---------------------------
COST BASIS: 2005 2004 2003
- ----------- ------- ------- -------
(IN THOUSANDS)
U.S. Treasury $ 3,285 $ 3,348 $ 1,155
U.S. Agency 11,484 11,522 8,096
Mortgage-backed securities 8,836 12,565 18,838
Other securities 6,750 -- --
------- ------- -------
Total cost basis of investment securities held to maturity $30,355 $27,435 $28,089
======= ======= =======
Total market value of investment securities held to maturity $30,206 $27,550 $28,095
======= ======= =======
LOAN PORTFOLIO
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS)
Commercial $ 80,629 $ 72,011 $ 75,738 $ 89,127 $123,523
Commercial loans secured by real estate 249,204 225,661 206,204 222,854 209,483
Real estate-mortgage(1) 201,111 201,406 194,605 229,154 231,728
Consumer 20,391 23,285 28,343 32,506 36,186
-------- -------- -------- -------- --------
Loans 551,335 522,363 504,890 573,641 600,920
Less: Unearned income 831 1,634 2,926 4,881 7,619
-------- -------- -------- -------- --------
Loans, net of unearned income $550,504 $520,729 $501,964 $568,760 $593,301
======== ======== ======== ======== ========
(1) For each of the periods presented beginning with December 31, 2005, real
estate-construction loans constituted 5.5%, 6.3%, 3.2%, 7.2% and 5.6% of
the Company's total loans, net of unearned income, respectively.
NON-PERFORMING ASSETS
The following table presents information concerning non-performing assets:
AT DECEMBER 31,
------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------- ------ ------
(IN THOUSANDS)
NON-ACCRUAL LOANS
Commercial $2,315 $ 802 $ 3,282 $1,783 $4,201
Commercial loans secured by real estate 318 606 5,262 1,864 1,887
Real estate-mortgage 1,070 2,049 1,495 2,784 2,964
Consumer 446 412 742 360 251
------ ------ ------- ------ ------
Total $4,149 $3,869 $10,781 $6,791 $9,303
====== ====== ======= ====== ======
10
AT DECEMBER 31,
--------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(IN THOUSANDS)
PAST DUE 90 DAYS OR MORE AND STILL ACCRUING
Commercial $-- $-- $58 $-- $188
Commercial loans secured by real estate -- -- 10 48 --
Real estate-mortgage -- -- -- -- --
Consumer 31 -- 30 2 20
--- --- --- --- ----
Total $31 $-- $98 $50 $208
=== === === === ====
AT DECEMBER 31,
--------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(IN THOUSANDS)
OTHER REAL ESTATE OWNED
Commercial $ -- $-- $ -- $ -- $ --
Commercial loans secured by real estate -- -- 255 -- --
Real estate-mortgage 130 15 248 89 512
Consumer 5 10 29 34 21
---- --- ---- ---- ----
Total $135 $25 $532 $123 $533
==== === ==== ==== ====
AT DECEMBER 31,
--------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
TOTAL NON-PERFORMING ASSETS $4,315 $3,894 $11,411 $6,964 $10,044
====== ====== ======= ====== =======
Total non-performing assets as a percent of loans and
loans held for sale, net of unearned income, and
other real estate owned 0.78% 0.75% 2.26% 1.22% 1.67%
Total restructured loans $ 258 $5,685 $ 698 $ -- $ 269
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,
-------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(IN THOUSANDS)
Interest income due in accordance with original terms $213 $469 $ 670 $470 $340
Interest income recorded (12) (19) (119) (14) (19)
---- ---- ----- ---- ----
Net reduction in interest income $201 $450 $ 551 $456 $321
==== ==== ===== ==== ====
DEPOSITS
The following table sets forth the average balance of the Company's
deposits and average rates paid thereon for the past three calendar years:
AT DECEMBER 31,
---------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
Non-interest bearing $107,018 --% $106,249 --% $104,330 --%
Interest bearing 54,695 0.41 53,502 0.29 51,872 0.39
Savings 96,819 0.86 104,187 0.89 103,450 0.92
Money market 156,932 2.07 120,280 1.11 123,845 1.06
Other time 284,951 3.04 279,458 2.83 282,838 3.20
-------- -------- --------
Total deposits $700,415 2.18 $663,676 1.85 $666,335 2.05
======== ======== ========
11
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Interest bearing demand $ 227 $ 154 $ 201
Savings 829 928 948
Money market 3,256 1,340 1,309
Certificates of deposit in denominations of $100,000 or more 1,378 1,167 998
Other time 7,295 6,747 8,047
------- ------- -------
Total interest expense $12,985 $10,336 $11,503
======= ======= =======
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:
(IN THOUSANDS)
--------------
Three months or less $10,899
Over three through six months 10,656
Over six through twelve months 5,786
Over twelve months 6,495
-------
Total $33,836
=======
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:
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
AT DECEMBER 31, 2004
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $151,935
Maximum indebtedness at any month end -- 170,989
Average balance during year 7 128,010
Average rate paid for the year 2.32% 1.61%
Interest rate on year end balance -- 2.25
AT DECEMBER 31, 2003
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $144,643
Maximum indebtedness at any month end 12,500 159,260
Average balance during year 1,732 104,048
Average rate paid for the year 1.41% 1.38%
Interest rate on year end balance -- 1.06
12
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 three days at the end of both 2005 and 2004,
and two days at the end of 2003.
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 this Form 10-K, including
our consolidated financial statements and related notes.
FAILURE TO SUCCESSFULLY EXECUTE OUR TURNAROUND STRATEGY (THE TURNAROUND) WOULD
ADVERSELY AFFECT FUTURE EARNINGS.
At the end of 2003, we adopted a Turnaround 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.
We believe we accomplished the first two elements of the Turnaround. The
final element of the Turnaround requires sustained execution of our business
plan. If we are unable to achieve the last element of the Turnaround, 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, our Board of Directors articulated a strategy predicated upon a
return to traditional community banking. In order to improve our 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 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.
The Bank is party to a collective bargaining agreement with the United
Steelworkers of America, which represents approximately 61% of our employees. A
new three year agreement was executed in October 2004. 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. 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.
In an effort to capitalize on the Bank'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 loans on construction projects that use union labor. At December 31, 2005,
approximately $370 million was invested by unions in the ERECT and BUILD Funds.
This represents approximately 25.8% 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 significant 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.
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 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. 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.
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.
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.
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% 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.
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, we had nonperforming assets equal to 0.78% 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.
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.
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.
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 are subject to extensive federal and state banking regulation and
supervision. Banking regulations are intended primarily to protect our
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'S COMMON STOCK
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'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.
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'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.
Although the Company'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'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's common
stock, significant sales of the Company's common stock, or the expectation of
these sales, could cause the Company's stock price to fall.
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" 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
The Company has no unresolved staff comments from the SEC for the reporting
period presented.
ITEM 2. PROPERTIES
The principal offices of the Company and The Bank occupy the five-story
AmeriServ Financial building at the corner of Main and Franklin Streets in
Johnstown plus ten floors of the building adjacent thereto. The Company occupies
the main office and its subsidiary entities have 16 other locations which are
owned in fee. Ten additional locations are leased with terms expiring from
January 1, 2006 to March 31, 2018.
16
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 conclude that
the resolution of these claims will have a material adverse effect on the
Company's consolidated financial position or results of operations.
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 COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of January 31, 2006, the Company had 4,534 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 STOCK
AmeriServ Financial, Inc.'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:
PRICES CASH
------------- DIVIDENDS
HIGH LOW DECLARED
----- ----- ---------
Year ended December 31, 2005:
First Quarter $5.84 $4.95 $0.00
Second Quarter 5.67 5.04 0.00
Third Quarter 5.43 4.30 0.00
Fourth Quarter 4.99 4.08 0.00
Year ended December 31, 2004
First Quarter $6.48 $4.94 $0.00
Second Quarter 6.15 5.45 0.00
Third Quarter 5.56 4.77 0.00
Fourth Quarter 5.30 4.68 0.00
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2005 2004 2003 2002 2001
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income $ 45,865 $ 50,104 $ 55,005 $ 65,915 $ 81,198
Total interest expense 21,753 26,638 30,360 38,584 53,211
Net interest income 24,112 23,466 24,645 27,331 27,987
Provision for loan losses (175) 1,758 2,961 9,265 1,350
Net interest income after provision for loan losses 24,287 21,708 21,684 18,066 26,637
Total non-interest income 10,209 14,012 16,995 18,653 16,864
Total non-interest expense 49,420 50,091 35,902 40,406 37,460
-------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes (14,924) (14,371) 2,777 (3,687) 6,041
Provision (benefit) for income taxes (5,902) (5,845) 587 (1,692) 1,600
-------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (9,022) (8,526) 2,190 (1,995) 4,441
Loss from discontinued operations, net of income taxes * (119) (1,193) (1,641) (3,157) (2,466)
-------- ---------- ---------- ---------- ----------
Net income (loss) $ (9,141) $ (9,719) $ 549 $ (5,152) $ 1,975
======== ========== ========== ========== ==========
PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic earnings (loss) per share $ (0.44) $ (0.58) $ 0.16 $ (0.15) $ 0.33
Diluted earnings (loss) per share (0.44) (0.58) 0.16 (0.15) 0.33
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS*:
Basic loss per share $ (0.01) $ (0.08) $ (0.12) $ (0.23) $ (0.18)
Diluted loss per share (0.01) (0.08) (0.12) (0.23) (0.18)
PER COMMON SHARE DATA:
Basic earnings (loss) per share $ (0.45) $ (0.66) $ 0.04 $ (0.37) $ 0.33
Diluted earnings (loss) per share (0.45) (0.66) 0.04 (0.37) 0.33
Cash dividends declared 0.00 0.00 0.00 0.30 0.36
Book value at period end 3.82 4.32 5.32 5.77 6.01
BALANCE SHEET AND OTHER DATA:
Total assets $880,176 $1,009,232 $1,148,782 $1,175,825 $1,192,590
Loans and loans held for sale, net of unearned income 550,602 521,416 503,387 572,977 599,481
Allowance for loan losses 9,143 9,893 11,682 10,035 5,830
Investment securities available for sale 201,569 373,584 524,573 490,701 498,626
Investment securities held to maturity 30,355 27,435 28,089 15,077 --
Deposits 712,665 644,391 654,597 669,929 676,346
Total borrowings 77,256 269,169 409,064 410,135 418,478
Stockholders' equity 84,474 85,219 74,270 77,756 79,490
Full-time equivalent employees 378 406 413 422 475
* The Company sold its remaining mortgage servicing rights of Standard
Mortgage Corporation, its former mortgage servicing subsidiary, in December
2004 and incurred discontinued operations activity of this non-core
business in 2005 (see Note 24).
19
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003 2002 2001
------ ------ ----- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL RATIOS:
Return on average total equity (10.77)% (11.44)% 2.85% (2.39)% 5.33%
Return on average assets (0.95) (0.76) 0.19 (0.17) 0.35
Loans and loans held for sale, net of unearned income, as a
percent of deposits, at period end 77.26 80.92 76.90 85.53 88.64
Ratio of average total equity to average assets 8.80 6.67 6.67 7.02 6.58
Common stock cash dividends as a percent of net income (loss)
applicable to common stock -- -- -- (204.35) 109.98
Interest rate spread 2.39 2.01 2.02 2.17 2.08
Net interest margin 2.76 2.28 2.31 2.51 2.45
Allowance for loan losses as a percentage of loans and loans
held for sale, net of unearned income, at period end 1.66 1.90 2.32 1.75 0.97
Non-performing assets as a percentage of loans, loans held
for sale and other real estate owned, at period end 0.78 0.75 2.26 1.22 1.67
Net charge-offs as a percentage of average loans and loans
held for sale 0.11 0.68 0.22 0.85 0.26
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits (1.35)X 0.12X 1.15x 0.84x 1.19x
Including interest on deposits 0.05 0.46 1.09 0.90 1.11
Cumulative one year GAP ratio, at period end 0.89 0.78 0.96 1.44 1.30
(1) The ratio of earnings to fixed charges and preferred dividends is computed
by dividing the sum of income before taxes, fixed charges, and preferred
dividends by the sum of fixed charges and preferred dividends. Fixed
charges represent interest expense and are shown as both excluding and
including interest on deposits.
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
2005 QUARTER ENDED
---------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $10,989 $ 11,473 $11,712 $11,691
Interest expense 4,621 6,015 5,721 5,396
------- -------- ------- -------
Net interest income 6,368 5,458 5,991 6,295
Provision for loan losses -- 100 (275) --
------- -------- ------- -------
Net interest income after provision for loan losses 6,368 5,358 6,266 6,295
Non-interest income 3,223 658 3,180 3,148
Non-interest expense 9,293 22,278 8,906 8,943
------- -------- ------- -------
Income (loss) before income taxes 298 (16,262) 540 500
Provision (benefit) for income taxes 89 (5,689) 96 (398)
------- -------- ------- -------
Income (loss) from continuing operations 209 (10,573) 444 898
Income (loss) from discontinued operations, net of income taxes* 11 9 (74) (65)
------- -------- ------- -------
Net income (loss) $ 220 $(10,564) $ 370 $ 833
======= ======== ======= =======
Basic earnings (loss) per common share from continuing operations $ 0.01 $ (0.53) $ 0.02 $ 0.05
Diluted earnings (loss) per common share from continuing operations 0.01 (0.53) 0.02 0.05
Basic earnings (loss) per common share 0.01 (0.53) 0.02 0.04
Diluted earnings (loss) per common share 0.01 (0.53) 0.02 0.04
Cash dividends declared per common share 0.00 0.00 0.00 0.00
* The Company sold its remaining mortgage servicing rights of Standard
Mortgage Corporation, its former mortgage servicing subsidiary, in December
2004 and incurred discontinued operations activity of this non-core
business in 2005 (see Note 24).
20
2004 QUARTER ENDED
----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 11,865 $12,698 $12,622 $12,919
Interest expense 6,176 7,046 6,709 6,707
-------- ------- ------- -------
Net interest income 5,689 5,652 5,913 6,212
Provision for loan losses 1,115 -- 259 384
-------- ------- ------- -------
Net interest income after provision for loan losses 4,574 5,652 5,654 5,828
Non-interest income 2,643 4,069 3,361 3,939
Non-interest expense 23,026 9,044 8,837 9,184
-------- ------- ------- -------
Income (loss) before income taxes (15,809) 677 178 583
Provision (benefit) for income taxes (5,592) (324) (55) 126
-------- ------- ------- -------
Income (loss) from continuing operations (10,217) 1,001 233 457
Income (loss) from discontinued operations, net of income taxes * (724) (259) 21 (231)
-------- ------- ------- -------
Net income (loss) $(10,941) $ 742 $ 254 $ 226
======== ======= ======= =======
Basic earnings (loss) per common share from continuing operations $ (0.59) $ 0.07 $ 0.02 $ 0.03
Diluted earnings (loss) per common share from continuing operations (0.59) 0.07 0.02 0.03
Basic earnings (loss) per common share (0.64) 0.05 0.02 0.02
Diluted earnings (loss) per common share (0.64) 0.05 0.02 0.02
Cash dividends declared per common share 0.00 0.00 0.00 0.00
* The Company sold its remaining mortgage servicing rights of Standard
Mortgage Corporation, its former mortgage servicing subsidiary, in December
2004 and incurred discontinued operations activity of this non-core
business in 2005 (see Note 24).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (MD&A)
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, AND 2003
SUMMARY OVERVIEW:
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'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. With 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'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. . .The following table summarizes some of the
Company's key profitability performance indicators for each of the past three
years.
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
Income (loss) from continuing operations $(9,022) $(8,526) $2,190
Diluted earnings (loss) per share) from continuing operations (0.44) (0.58) 0.16
Return on average equity) from continuing operations (10.63) (11.44) 2.85
NET INCOME (LOSS):
Net income (loss) $(9,141) $(9,719) $ 549
Diluted earnings (loss) per share (0.45) (0.66) 0.04
Return on average equity (10.77)% (13.04)% 0.71%
The Company reported a net loss of $9.1 million or ($0.45) per 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 performance was also negatively impacted 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 loss 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.
NET INTEREST INCOME AND MARGIN. . . .The Company'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'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's net interest income
performance for each of the past three years:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS,
EXCEPT RATIOS)
Interest income $45,865 $50,104 $55,005
Interest expense 21,753 26,638 30,360
------- ------- -------
Net interest income 24,112 23,466 24,645
Tax-equivalent adjustment 108 117 39
------- ------- -------
Net tax-equivalent interest income $24,220 $23,583 $24,684
======= ======= =======
Net interest margin 2.76% 2.28% 2.31%
2005 NET INTEREST PERFORMANCE OVERVIEW... The Company's 2005 net interest
income on a tax equivalent basis increased by $637,000 or 2.7% from 2004. This
increase reflects the benefit of an improved net interest margin that has more
than offset a sizable decline in the level of average earning assets.
Specifically, the net interest margin increased by 48 basis points to 2.76%
while the level of average earning assets declined by $153 million. Both of
these items reflect the benefits of the previously mentioned balance sheet
restructuring where the removal of high cost debt from the Company's balance
sheet has resulted in lower levels of both borrowed funds and investment
securities. The Company's net interest margin and net interest income also
benefited from increased loans in the earning asset mix as total loans
outstanding averaged $525 million in 2005, a $28 million or 5.7% increase from
2004. This loan growth was most evident in the 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. Total
deposits averaged $700 million in 2005, a $37 million or 5.5% increase from 2004
due to increased deposits from the trust company's operations. This deposit
growth also allowed the Company 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.
COMPONENT CHANGES IN NET INTEREST INCOME: 2005 VERSUS 2004...Regarding the
separate components of net interest income, the Company's total interest income
for 2005 decreased by $4.2 million or 8.5% when compared to 2004. This decrease
was due to a $153 million decline in average earning assets but was partially
offset by a 39 basis point increase in the earning asset yield to 5.24%. Within
the earning asset base, the yield on the total loan portfolio increased by 26
basis points to 6.25%. This increase reflects the impact of the higher interest
rate environment in 2005 as the Federal Reserve has increased short-term
interest rates by 225 basis points over 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. The yield on the total investment securities
portfolio decreased by 4 basis points to 3.70% due to the sale of longer
duration higher yielding securities as part of the balance sheet restructuring.
The $153 million decline in average earning assets was due to a $176
million or 33.3% reduction in average investment securities partially mitigated
by a $28 million increase in average loans. The average investment securities
decline in 2005 reflects the impact of the Company's deleveraging and balance
sheet repositioning strategy which began in the second half of 2004 and
continued throughout 2005. The increase in average loans reflects successful
commercial loan growth as the Company was able to generate new business. This
commercial loan growth led to a greater composition of loans in the earning
asset mix that favorably impacted the Company's net interest margin.
The Company's total interest expense for 2005 decreased by $4.9 million or
18.3% when compared to 2004. This reduction in interest expense was due to a
lower volume of interest bearing liabilities. Total average interest bearing
liabilities were $164 million lower in 2005 as we have deleveraged our balance
sheet by reducing high cost FHLB debt over the past 15 months. Specifically, in
the fourth quarter 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 2005 increased modestly by one basis point to
2.85% and was driven up by higher short-term interest rates when compared to
2004. These higher short-term rates caused a 33 basis point increase in the cost
of interest bearing deposits to 2.18%. Note that some of the net-interest margin
improvement was masked 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 25 basis
points to 3.74% while the yield on the total loan portfolio decreased by 31
basis points to 5.99%. Both of these declines reflect the impact of asset
prepayments as borrowers elected to refinance their higher fixed rate loans 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.
The table that follows provides an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities, and
stockholders' equity, (ii) interest income earned on interest earning assets and
interest expense paid on interest bearing liabilities, (iii) average yields
earned on interest earning assets and average rates paid on interest bearing
liabilities, (iv) 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. Additionally, a tax rate of approximately 34% is used to compute
tax-equivalent yields.
24
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2005 2004 2003
-------------------------- ---------------------------- ----------------------------
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 $525,401 $33,055 6.25% $ 496,912 $30,414 5.99% $ 516,250 $33,346 6.30%
Deposits with banks 770 6 0.78 6,276 59 0.94 5,294 54 1.01
Federal funds sold -- -- -- 68 1 0.91 29 -- 0.96
Investment securities:
Available for sale 326,533 11,926 3.65 493,478 18,333 3.72 517,030 20,548 3.97
Held to maturity 25,422 986 3.88 34,480 1,414 4.10 25,159 1,096 4.40
-------- ------- ---------- ------- ---------- -------
Total investment securities 351,955 12,912 3.70 527,958 19,747 3.74 542,189 21,644 3.99
-------- ------- ---------- ------- ---------- -------
TOTAL INTEREST
EARNING ASSETS/ INTEREST INCOME 878,126 45,973 5.24 1,031,214 50,221 4.85 1,063,762 55,044 5.15
-------- ------- ---------- ------- ---------- -------
Non-interest earning assets:
Cash and due from banks 21,449 21,793 22,371
Premises and equipment 9,365 10,493 11,950
Other assets 63,401 61,952 59,426
Assets of discontinued operations 1,135 2,891 6,579
Allowance for loan losses (9,613) (10,674) (11,431)
-------- ---------- ----------
TOTAL ASSETS $963,863 $1,117,669 $1,152,657
======== ========== ==========
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 54,695 $ 227 0.41% $ 53,502 $ 154 0.29% $ 51,872 $ 201 0.39%
Savings 96,819 829 0.86 104,187 928 0.89 103,450 948 0.92
Money market 156,932 3,256 2.07 120,280 1,340 1.11 123,845 1,309 1.06
Other time 284,951 8,673 3.04 279,458 7,914 2.83 282,838 9,045 3.20
-------- ------- ---------- ------- ---------- -------
Total interest bearing
deposits 593,397 12,985 2.18 557,427 10,336 1.85 562,005 11,503 2.05
-------- ------- ---------- ------- ---------- -------
Federal funds purchased and other
short-term borrowings 78,152 2,599 3.32 128,017 2,098 1.64 105,780 1,464 1.37
Advances from Federal Home Loan Bank 73,924 4,510 6.10 208,444 11,218 5.38 265,184 14,433 5.44
Guaranteed junior subordinated
deferrable interest debentures 19,345 1,659 8.58 34,842 2,986 8.57 34,500 2,960 8.58
-------- ------- ---------- ------- ---------- -------
TOTAL INTEREST BEARING
LIABILITIES/INTEREST EXPENSE 764,818 21,753 2.85 928,730 26,638 2.84 967,469 30,360 3.13
-------- ------- ---------- ------- ---------- -------
Non-interest bearing liabilities:
Demand deposits 107,018 106,249 104,330
Liabilities of discontinued
operations 379 498 538
Other liabilities 6,780 7,635 3,423
Stockholders' equity 84,868 74,557 76,897
-------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $963,863 $1,117,669 $1,152,657
======== ========== ==========
Interest rate spread 2.39 2.01 2.02
Net interest income/net interest
margin 24,220 2.76% 23,583 2.28% 24,684 2.31%
Tax-equivalent adjustment (108) (117) (39)
------- ------- -------
Net interest income $24,112 $23,466 $24,645
======= ======= =======
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.
2005 VS. 2004 2004 VS. 2003
--------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
--------------------------- ---------------------------
AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned income $ 1,503 $ 1,138 $ 2,641 $(1,267) $(1,665) $(2,932)
Deposits with banks (44) (9) (53) 8 (3) 5
Federal funds sold (1) -- (1) 1 -- 1
Investment securities:
Available for sale (6,115) (292) (6,407) (930) (1,285) (2,215)
Held to maturity (355) (73) (428) 390 (72) 318
------- ------- ------- ------- ------- -------
Total investment securities (6,470) (365) (6,835) (540) (1,357) (1,897)
------- ------- ------- ------- ------- -------
Total interest income (5,012) 764 (4,248) (1,798) (3,025) (4,823)
------- ------- ------- ------- ------- -------
INTEREST PAID ON:
Interest bearing demand deposits 4 69 73 7 (54) (47)
Savings deposits (67) (32) (99) 6 (26) (20)
Money market 499 1,417 1,916 (49) 80 31
Other time deposits 153 606 759 (106) (1,025) (1,131)
Federal funds purchased and other
short-term borrowings (307) 808 501 327 307 634
Advances from Federal Home Loan Bank (8,463) 1,755 (6,708) (3,057) (158) (3,215)
Guaranteed junior subordinated deferrable
interest debentures (1,330) 3 (1,327) 26 -- 26
------- ------- ------- ------- ------- -------
Total interest expense (9,511) 4,626 (4,885) (2,846) (876) (3,722)
------- ------- ------- ------- ------- -------
Change in net interest income $ 4,499 $(3,862) $ 637 $ 1,048 $(2,149) $(1,101)
======= ======= ======= ======= ======= =======
LOAN QUALITY. . .AmeriServ Financial'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. Credit reviews are mandatory for all
commercial loans and for all commercial mortgages in excess of $250,000 within a
12-month period. In addition, due to the secured nature 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. The
following table sets forth information concerning AmeriServ Financial's loan
delinquency and other non-performing assets.
AT DECEMBER 31,
-------------------------
2005 2004 2003
------ ------ -------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Total loan delinquency (past due 30 to 89 days) $4,361 $3,311 $14,636
Total non-accrual loans 4,149 3,869 10,781
Total non-performing assets(1) 4,315 3,894 11,411
Loan delinquency as a percentage of total loans and
loans held for sale, net of unearned income 0.79% 0.64% 2.91%
Non-accrual loans as a percentage of total loans and
loans held for sale, net of unearned income 0.75 0.74 2.14
Non-performing assets as a percentage of total loans
and loans held for sale, net of unearned income,
and other real estate owned 0.78 0.75 2.26
- ----------
(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 to
interest and principal payments of which some are insured for credit loss,
and (iii) other real estate owned.
Each of the Company's loan quality metrics displayed in the above table
demonstrated significant improvement between 2003 and 2004 and remained stable
at the lower levels in 2005. This improvement resulted from the Company'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% for the
past two years and reflect the improved loan portfolio quality. Non-performing
asset levels also declined by $7.5 million between 2003 and 2004 due to the
successful work-out 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 to the transfer of a $1.6 million commercial loan into non-accrual
26
status during the fourth quarter. This secured commercial loan is to a borrower
in the retail sector who filed for reorganization under Chapter 13 bankruptcy
protection.
Overall, the Company had one loan totaling $258,000 at December 31, 2005,
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 noted 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, the 25 largest credits represented 33.5% 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. . . 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 unallocated 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'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 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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year $ 9,893 $ 11,682 $ 10,035 $ 5,830 $ 5,936
Transfer 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
27
The Company recorded a negative loan loss provision of $175,000 in 2005
compared to a provision of $1.8 million for 2004 or a 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 $575,000 or 0.11%
of total loans compared to net charge-offs of $3.4 million or 0.68% of total
loans in 2004. Non-performing assets have declined from the 2003 levels and have
stabilized at approximately $4 million over the past two year-ends. Overall, the
balance in 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% compared to 1.90% at December 31, 2004 and
2.32% at December 31, 2003. The drop in this ratio since December 31, 2003 is
due to a decrease in the size of the loan loss reserve combined with an increase
in total loans. The Company's loan loss reserve coverage of non-performing
assets amounted to 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.
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,
----------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------ ------------------- ------------------- ------------------
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
TO TO TO TO TO
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ ---------- ------- ---------- ------- ---------- ------ ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial $3,312 14.6% $2,173 13.8% $ 2,623 15.0% $ 1,932 15.6% $1,706 20.6%
Commercial loans secured
by real estate 3,644 45.3 5,519 43.2 7,120 41.0 5,968 38.9 2,874 34.9
Real estate-mortgage 381 36.5 346 38.9 376 38.9 469 40.7 403 39.7
Consumer 1,022 3.6 1,074 4.1 853 5.1 826 4.8 596 4.8
Allocation to general risk 784 781 710 840 251
------ ------ ------- ------- ------
Total $9,143 $9,893 $11,682 $10,035 $5,830
====== ====== ======= ======= ======
Even though residential real estate-mortgage loans comprise 37% of the
Company's total loan portfolio, only $381,000 or 4.2% 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'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's historical loss
experience in these categories, and other qualitative factors.
In addition to 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 total 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's loan
portfolio, we believe that the allowance for loan losses was adequate to cover
losses within the Company's loan portfolio.
NON-INTEREST INCOME. . Non-interest income for 2005 totaled $10.2 million;
a $3.8 million or 27.1% decrease from the 2004 performance. Factors contributing
to the net decrease in non-interest income in 2005 included:
- the Company realized $2.5 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 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%
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 2004 included:
- 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 recognized an income tax benefit, as
part of continuing operations, of approximately $5.9 million for both 2005 and
2004 due 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 of that benefit in 2005 and 2004, the
Company lowered its 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% in 2003. 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. . . Retail banking's net income contribution was $499,000
in 2005 compared to $1.3 million for 2004. The retail banking net income
contribution was down from the prior year due to lower net interest income and
reduced non-interest income. This more than offset the benefit of a reduced loan
loss provision, lower non-interest expense and a greater income tax benefit. The
reduced net interest income contribution reflected increased deposit costs and
the negative impact that the flatter yield curve had on limiting growth in loan
revenue. The reduced non-interest income was caused by lower service charges,
reduced mortgage loan sale gains, and fewer gains on other real estate owned
properties. When 2004 is compared to 2003, the retail banking net income
contribution was down $2.2 million due to reduced net interest income and lower
non-interest revenue.
The trust segment's net income contribution in 2005 amounted to $1.4
million which was up $535,000 from the prior year due to increased revenue.
Successful new business development efforts and the full year benefit of new
customer fee schedules that were implemented in 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'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 also due to an increase in fee revenue. The diversification of
the revenue-generating divisions within the trust segment is 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 the growth
leaders in both assets under administration and revenue production. 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 value of assets in
these union funds totaled $369 million at December 31, 2005.
The commercial lending segment significantly increased its profitability in
2005 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 million or 16.0% during 2005. The improved asset quality allowed the
Company 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.
The investment/parent segment reported a net loss of $12.2 million in 2005
that was due primarily to the previously discussed balance sheet restructuring
actions. 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.
For greater discussion on the future strategic direction of the Company's
key business segments, see Forward Looking Statement which begins on page 37.
BALANCE SHEET. . . The Company's total consolidated assets were $880
million at December 31, 2005, compared with $1.010 billion at December 31, 2004,
which represents a decrease of $130 million or 12.9%. This lower level of assets
resulted primarily from a reduced level of investment securities due to the
previously discussed balance sheet restructuring executed in the third quarter
of 2005. The Company's loans totaled $551 million at December 31, 2005 an
increase of $29 million or 5.5% from year-end 2004 due to commercial loan
growth. The Company's deferred tax asset totaled $14.9 million at December 31,
2005 and grew by $5.9 million from December 31, 2004 as a result of the income
tax benefit recorded on the 2005 loss.
The Company's deposits totaled $713 million at December 31, 2005, which was
$68 million or 10.6% higher than December 31, 2004. $63 million of this increase
was due to the transfer of certain Trust Company controlled money market
deposits into the Bank. The remainder of the deposit increase was due largely to
increased customer balances in non-interest bearing demand deposits. Total
borrowed funds decreased by $192 million or 71.3% due to the previously
discussed strategy to reduce the Company's borrowed funds and interest rate risk
on our balance sheet. The Company retired all remaining $100 million of FHLB
convertible advances in the third quarter of 2005. The Company also utilized the
increased deposits 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, as the capital provided from the 2005 private
placement basically offset the $9.1 million net loss experienced during 2005 and
a $730,000 drop in accumulated other comprehensive income due to a lower value
of the AFS investment securities portfolio. The Company continues to be
considered well capitalized for regulatory purposes with an asset leverage ratio
at December 31, 2005 of 10.24%. The Company's book value per share at December
31, 2005 was $3.82.
LIQUIDITY. . The Bank's liquidity position has been sufficient during the
last several years when the Bank has experienced poor financial results. Our
core deposit base has remained stable throughout this period and has been
adequate to fund the Bank's operations. Neither the sales of investment
securities nor the use of the proceeds from such sales and cash 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
securities was used to reduce FHLB advances and therefore these sales did not
require that replacement securities 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 decreased by $90,000 from December 31,
2004, to December 31, 2005, due primarily to $126 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 purchase new investment securities by $164
million. Cash advanced for new loan fundings and purchases totaled $141 million
and were $30 million more than the cash received from loan principal payments
and sales. Within financing activities, the Company experienced a net $68
million growth in deposits with these funds used to paydown short-term
borrowings. The Company also used net cash provided from investment securities
activities 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
The Company used $1.5 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 $15 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. There was no cash used for common stock cash dividends payments to
shareholders in any of the past three years.
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 payment of the trust preferred dividend and any reinstatement
of a common dividend is dependent upon the subsidiary bank returning to
profitability so that it can resume upstreaming dividends to the parent company
under applicable law. The subsidiary bank must first recoup the $16.6 million
net loss that it incurred over the past two years before it can consider
resuming dividend upstreams under applicable provisions of the Federal Reserve
Act which place limits on the ability of banks that have lost money to pay
dividends.
Financial institutions must maintain liquidity to meet day-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 investment securities, time deposits with
banks, federal funds sold, banker's acceptances, and commercial paper. These
assets totaled $26 million at December 31, 2005 which was comparable with the
$27 million at December 31, 2004. Maturing and repaying loans, as well as the
monthly cash flow associated with mortgage-backed securities 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'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'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. The Company
believes it has ample liquidity available to fund outstanding loan commitments
if they were fully drawn upon.
CAPITAL 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% at December 31, 2005 compared
to 9.20% 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. Note that the
impact of other comprehensive income (loss) is excluded from the regulatory
capital ratios. At December 31, 2005, accumulated other comprehensive loss
amounted to $4.1 million. Additionally, the amortization of $865,000 of core
deposit intangible assets has favorably increased tangible capital in 2005. The
tangible equity to asset ratio has increased from 7.23% at December 31, 2004 to
8.32% at December 31, 2005. We anticipate that we will continue to build our
capital ratios during 2006 due to the retention of earnings and limited change
in the overall size 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.
INTEREST RATE SENSITIVITY. . . Asset/liability management involves managing
the risks associated with changing interest rates and the resulting impact on
the Company'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's Board of Directors on an
ongoing basis.
32
The following table presents a summary of the Company's static GAP
positions at December 31, 2005:
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 ........................................... $175,772 $ 24,338 $ 57,200 $284,149 $541,459
Investment securities ........................... 39,941 14,067 13,740 164,176 231,924
Short-term assets ............................... 199 -- -- -- 199
Bank owned life insurance ....................... -- -- 31,640 -- 31,640
-------- -------- -------- -------- --------
Total rate sensitive assets .................. $215,912 $ 38,405 $102,580 $448,325 $805,222
-------- -------- -------- -------- --------
RATE SENSITIVE LIABILITIES:
Deposits:
Non-interest bearing deposits ................ $ -- $ -- $ -- $109,274 $109,274
NOW and Super NOW ............................ 9,135 -- -- 55,679 64,814
Money market ................................. 147,000 -- -- 14,822 161,822
Other savings ................................ 21,925 -- -- 65,777 87,702
Certificates of deposit of $100,000 or more .. 10,899 10,656 5,786 6,495 33,836
Other time deposits .......................... 41,933 26,098 65,583 121,593 255,207
-------- -------- -------- -------- --------
Total deposits ............................ 230,892 36,754 71,369 373,640 712,655
Borrowings ...................................... 63,194 9 20 14,033 77,256
-------- -------- -------- -------- --------
Total rate sensitive liabilities .......... $294,086 $ 36,763 $ 71,389 $387,673 $789,911
-------- -------- -------- -------- --------
INTEREST SENSITIVITY GAP:
Interval ..................................... (78,174) 1,642 31,191 60,652 --
Cumulative ................................... $(78,174) $(76,532) $(45,341) $ 15,311 $ 15,311
======== ======== ======== ======== ========
Period GAP ratio ................................ 0.73X 1.04X 1.44X 1.16X
Cumulative GAP ratio ............................ 0.73 0.77 0.89 1.02
Ratio of cumulative GAP to total assets ......... (8.88)% (8.70)% (5.15)% 1.74%
When December 31, 2005, is compared to December 31, 2004, the ratio of the
cumulative GAP to total assets for each time period became less negative due to
the balance sheet repositioning executed in the third quarter. This
restructuring improved the Company's 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.
Management places primary emphasis on simulation modeling to manage and
measure interest rate risk. The Company's asset/liability management policy
seeks to limit net interest income variability over the first twelve months of
the forecast period to +/--5.0% which include interest rate movements of 100
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's net interest income and market value of portfolio equity. The interest
rate scenarios in the table compare the Company's base forecast, which was
prepared using a flat interest rate scenario, to scenarios that reflect
immediate interest rate changes of 100 basis points. Each rate scenario contains
unique prepayment and repricing assumptions that are applied to the Company's
existing balance sheet that was developed under the flat interest rate scenario.
VARIABILITY OF CHANGE IN
NET INTEREST MARKET VALUE OF
INTEREST RATE SCENARIO INCOME PORTFOLIO EQUITY
- ---------------------- -------------- ----------------
100 bp increase 2.2% 6.0%
100 bp decrease (1.7)% (10.6)%
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. The market value of
portfolio equity increased by 6.0% in a 100 basis point upward rate shock due to
increased value of the Company'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 point downward rate
shock due to a reduced value for core deposits.
33
Within the investment portfolio at December 31, 2005, 87% of the portfolio
is classified as available for sale and 13% 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's intent to continue to manage its long-term interest rate
risk by continuing to sell newly originated fixed-rate 30-year mortgage loans
into the secondary market. The Company also periodically sells 15-year fixed
rate mortgage loans into the secondary market as well.
The amount of loans outstanding by category as of December 31, 2005, 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 $18,780 $ 50,838 $ 11,011 $ 80,629
Commercial loans secured by real estate 30,888 112,846 105,470 249,204
Real estate-mortgage 32,625 74,852 93,634 201,111
Consumer 2,500 10,780 7,111 20,391
------- -------- -------- --------
Total $84,793 $249,316 $217,226 $551,335
======= ======== ======== ========
Loans with fixed-rate $41,111 $173,735 $126,017 $340,863
Loans with floating-rate 43,682 75,581 91,209 210,472
------- -------- -------- --------
Total $84,793 $249,316 $217,226 $551,335
======= ======== ======== ========
Percent composition of maturity 15.4% 45.2% 39.4% 100.0%
Fixed-rate loans as a percentage of
total loans 61.8%
Floating-rate loans as a percentage of
total loans 38.2%
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.
CONTRACTUAL OBLIGATIONS. . .The following table presents, as of December
31, 2005, 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 10 $423,612 $ -- $ -- $ -- $423,612
Certificates of deposit* 10 166,234 88,821 24,188 33,331 312,574
Borrowed funds* 11 65,929 106 135 1,343 67,513
Guaranteed junior subordinated
deferrable interest debentures* 11 -- -- -- 35,751 35,751
Lease commitments 15 923 1,151 634 549 3,257
* Includes interest based upon interest rates in effect at December 31, 2005.
Future changes in market interest rates could materially affect contractual
amounts to be paid.
OFF BALANCE SHEET 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'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
and standby letters of credit of $10,230,000 as of December 31, 2005. 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, there were no interest rate contracts
outstanding.
34
CRITICAL ACCOUNTING POLICIES AND 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'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'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 significant change. Also,
the allocation of the allowance for credit losses to specific loan pools is
based on historical loss trends and management'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 million, or
76%, of the total allowance for credit losses at December 31, 2005 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 portfolio concentrations, recent
regulatory examination results, trends in loan volume, terms of loans and risk
of potential estimation or judgmental errors. 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 for Income 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, 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 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 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, 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 03-3 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 that the fair value of the
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 Bulletin in the second quarter 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. At December 31, 2005, gross unrealized
losses on available for sale securities was $6.5 million.
36
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 phase of the Turnaround and we believe that the
Company 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 type of banking in the
region has been in a state 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 bank 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 -- This business unit was completely restructured
in 2003, after experiencing serious difficulties in 2001 and 2002. It
hired a new chief lending officer and almost an entirely new staff of
experienced professional lenders. This business unit has been critical
in helping the Company 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. It has
also reengineered its lending procedures. The Company can provide the
unit with the capacity to grow substantially and its new procedures
permit 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 again 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, it has a unique capability that sets it apart from almost
all other trust operations. As a part of one of only 13 unionized
banks in the nation, this unit has developed a strategy and a set 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 professionals 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 it can continue to grow its assets under
management in both this discrete union market niche and within the
more traditional trust businesses.
This Form 10-K contains various forward-looking statements and includes
assumptions concerning the Company'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" 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" 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'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'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' 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'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
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'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'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'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's financial
instruments, see Interest Rate Sensitivity in the MD&A presented on pages 32-34.
The Company's principal market risk exposure is to interest rates.
38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
---------------------
2005 2004
-------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 20,762 $ 20,374
Interest bearing deposits 199 199
Investment securities:
Available for sale 201,569 373,584
Held to maturity (market value $30,206 at December 31, 2005 and $27,550 at
December 31, 2004) 30,355 27,435
Loans held for sale 98 687
Loans 551,335 522,363
Less: Unearned income 831 1,634
Allowance for loan losses 9,143 9,893
-------- ----------
Net loans 541,361 510,836
-------- ----------
Premises and equipment, net 8,689 9,688
Accrued income receivable 4,125 4,288
Goodwill 9,544 9,544
Core deposit intangibles 2,703 3,568
Bank owned life insurance 31,640 30,623
Deferred tax asset 14,976 9,102
Assets related to discontinued operations 329 1,941
Other assets 13,826 8,107
-------- ----------
TOTAL ASSETS $880,176 $1,009,976
======== ==========
LIABILITIES
Non-interest bearing deposits $109,274 $ 100,702
Interest bearing deposits 603,381 543,689
-------- ----------
Total deposits 712,655 644,391
Other short-term borrowings 63,184 151,935
Advances from Federal Home Loan Bank 987 96,949
Guaranteed junior subordinated deferrable interest debentures 13,085 20,285
-------- ----------
Total borrowed funds 77,256 269,169
-------- ----------
Liabilities related to discontinued operations 14 744
Other liabilities 5,777 10,453
-------- ----------
TOTAL LIABILITIES 795,702 924,757
-------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized; there were no shares
issued and outstanding on December 31, 2005, and 2004 -- --
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
26,203,192 shares issued and 22,112,273 shares outstanding on December 31,
2005; 23,808,760 shares issued and 19,717,841 shares outstanding on
December 31, 2004 65,508 59,522
Treasury stock at cost, 4,090,919 shares on December 31, 2005 and 2004 (65,824) (65,824)
Capital surplus 78,620 75,480
Retained earnings 10,236 19,377
Accumulated other comprehensive loss, net (4,066) (3,336)
-------- ----------
TOTAL STOCKHOLDERS' EQUITY 84,474 85,219
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $880,176 $1,009,976
======== ==========
See accompanying notes to consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004 2003
-------- -------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans:
Taxable $ 32,685 $ 30,012 $33,209
Tax exempt 262 285 98
Deposits with banks 6 59 54
Federal funds sold -- 1 --
Investment securities:
Available for sale 11,926 18,333 20,548
Held to maturity 986 1,414 1,096
-------- -------- -------
Total Interest Income 45,865 50,104 55,005
-------- -------- -------
INTEREST EXPENSE
Deposits 12,985 10,336 11,503
Federal funds purchased -- -- 25
Other short-term borrowings 2,599 2,098 1,439
Advances from Federal Home Loan Bank 4,510 11,218 14,433
Guaranteed junior subordinated deferrable interest debentures 1,659 2,986 2,960
-------- -------- -------
Total Interest Expense 21,753 26,638 30,360
-------- -------- -------
Net Interest Income 24,112 23,466 24,645
Provision for loan losses (175) 1,758 2,961
-------- -------- -------
Net Interest Income after Provision for Loan Losses 24,287 21,708 21,684
-------- -------- -------
NON-INTEREST INCOME
Trust fees 6,129 5,363 4,993
Net gains on loans held for sale 209 351 632
Net realized gains (losses) on investment securities (2,499) 816 3,787
Service charges on deposit accounts 2,700 2,806 3,180
Bank owned life insurance 1,017 1,108 1,214
Other income 2,653 3,568 3,189
-------- -------- -------
Total Non-Interest Income 10,209 14,012 16,995
-------- -------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 19,062 19,013 17,997
Net occupancy expense 2,552 2,636 2,635
Equipment expense 2,509 2,578 2,694
Professional fees 4,242 3,697 3,780
Supplies, postage, and freight 1,154 1,192 1,370
Miscellaneous taxes and insurance 1,762 1,747 1,631
FDIC deposit insurance expense 289 287 201
Amortization of core deposit intangibles 865 1,150 1,432
Federal Home Loan Bank and hedge prepayment penalties 12,287 12,637 --
Other expense 4,698 5,154 4,162
-------- -------- -------
Total Non-Interest Expense 49,420 50,091 35,902
-------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (14,924) (14,371) 2,777
Provision (benefit) for income taxes (5,902) (5,845) 587
-------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (9,022) (8,526) 2,190
LOSS FROM DISCONTINUED OPERATIONS NET OF TAX BENEFIT $(61), $(648), AND $(800),
RESPECTIVELY (119) (1,193) (1,641)
-------- -------- -------
NET INCOME (LOSS) $ (9,141) $ (9,719) $ 549
======== ======== =======
PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic:
Income (loss) $ (0.44) $ (0.58) $ 0.16
Average number of shares outstanding 20,340 14,783 13,940
Diluted:
Income (loss) $ (0.44) $ (0.58) $ 0.16
Average number of shares outstanding 20,340 14,783 13,948
PER COMMON SHARE DATA:
Basic:
Net income (loss) $ (0.45) $ (0.66) $ 0.04
Average number of shares outstanding 20,340 14,783 13,940
40
Diluted:
Net income (loss) $ (0.45) $ (0.66) $ 0.04
Average number of shares outstanding 20,340 14,783 13,948
Cash dividends declared $ 0.00 $ 0.00 $ 0.00
See accompanying notes to consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
------- -------- -------
(IN THOUSANDS)
COMPREHENSIVE LOSS
Net income (loss) $(9,141) $ (9,719) $ 549
Other comprehensive loss
Unrealized holding losses on available for sale
securities arising during period (3,605) (2,882) (6,578)
Income tax effect 1,226 1,008 2,303
Reclassification adjustment for losses (gains) on
available for sale securities included in net loss 2,499 (816) (3,787)
Income tax effect (850) 286 1,325
------- -------- -------
Other comprehensive loss (730) (2,404) (6,737)
------- -------- -------
Comprehensive loss $(9,871) $(12,123) $(6,188)
======= ======== =======
See accompanying notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of period $ -- $ -- $ --
Balance at end of period -- -- --
-------- -------- --------
COMMON STOCK
Balance at beginning of period 59,522 45,121 44,973
Stock options exercised/new shares issued 67 72 148
Shares issued from private offerings 5,919 14,329 --
-------- -------- --------
Balance at end of period 65,508 59,522 45,121
-------- -------- --------
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 75,480 66,809 66,755
Stock options exercised/new shares issued 66 77 54
Shares issued from private offerings, net of issuance costs 3,074 8,594 --
-------- -------- --------
Balance at end of period 78,620 75,480 66,809
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period 19,377 29,096 28,547
Net income (loss) (9,141) (9,719) 549
Cash dividends declared -- -- --
-------- -------- --------
Balance at end of period 10,236 19,377 29,096
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (3,336) (932) 5,805
Other comprehensive loss (730) (2,404) (6,737)
-------- -------- --------
Balance at end of period (4,066) (3,336) (932)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $ 84,474 $ 85,219 $ 74,270
======== ======== ========
See accompanying notes to consolidated financial statements
43
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------
2005 2004 2003
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net (loss) income .................................................... $ (9,141) $ (9,719) $ 549
Loss from discontinued operations .................................... (119) (1,193) (1,641)
--------- --------- ---------
(Loss) income from continuing operations ............................. (9,022) (8,526) 2,190
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Provision for loan losses ............................................ (175) 1,758 2,961
Depreciation and amortization expense ............................. 1,817 1,867 1,976
Amortization expense of core deposit intangibles .................. 865 1,150 1,432
Net amortization of investment securities ......................... 1,560 2,237 3,083
Net realized losses (gains) on investment securities -- available
for sale ....................................................... 2,499 (816) (3,787)
Net realized gains on loans held for sale ......................... (209) (351) (632)
Amortization of deferred loan fees ................................ (421) (281) (261)
Gain on sale of fixed assets ...................................... -- -- (34)
Loss on prepayment of interest rate swaps ......................... 5,825 -- --
Origination of mortgage loans held for sale ....................... (16,807) (28,257) (60,643)
Sales of mortgage loans held for sale ............................. 17,298 27,510 62,014
Write-off of debt issuance costs .................................. 210 476 --
Decrease in accrued income receivable ............................. 163 634 1,147
Decrease in accrued expense payable ............................... (707) (207) (1,316)
Net increase in other assets ...................................... (10,605) (846) (4,416)
Net increase (decrease) in other liabilities ...................... 889 1,901 (2,185)
--------- --------- ---------
Net cash (used in) provided by operating activities from continuing
operations ........................................................ (6,820) (1,751) 1,529
Net cash (used in) provided by operating activities from discontinued
operations ........................................................ (597) (254) 630
--------- --------- ---------
Net cash (used in) provided by operating activities .................. (7,417) (2,005) 2,159
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of investment securities and other short-term investments --
available for sale ................................................ (32,469) (311,410) (618,232)
Purchase of investment securities and other short-term investments --
held to maturity .................................................. -- (17,050) (19,377)
Proceeds from maturities of investment securities and other short-term
investments -- available for sale ................................. 60,086 76,999 145,811
Proceeds from maturities of investment securities and other short-term
investments -- held to maturity ................................... 3,701 6,497 6,621
Proceeds from sales of investment securities and other short-term
investments -- available for sale ................................. 132,595 391,488 428,633
Long-term loans originated ........................................... (119,012) (188,874) (111,249)
Principal collected on long-term loans ............................... 110,991 145,339 194,623
Loans purchased or participated ...................................... (22,104) (9,437) (15,340)
Loans sold or participated ........................................... 1,000 31,500 --
Net increase in other short-term loans ............................... (497) (83) (758)
Purchases of premises and equipment .................................. (1,028) (766) (919)
Proceeds from sale/retirement of premises and equipment .............. 210 216 325
--------- --------- ---------
Net cash provided by investing activities from continuing
operations ........................................................ 133,473 124,419 10,138
Net cash provided by investing activities from discontinued
operations ........................................................ -- 915 3,277
--------- --------- ---------
Net cash provided by investing activities ............................ 133,473 125,334 13,415
--------- --------- ---------
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
--------------------------------
2005 2004 2003
--------- --------- --------
(IN THOUSANDS)
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts ....................... $ 68,264 $ (10,206) $(15,332)
Net (decrease) increase in federal funds purchased and other
short-term borrowings .......................................... (88,751) 7,292 43,855
Net principal repayments on advances from Federal Home Loan Bank .. (100,039) (130,037) (43,784)
Cancellation payment of interest rate swaps ....................... (5,825) -- --
Guaranteed junior subordinated deferrable interest debenture
dividends paid ................................................. (1,546) (2,860) (2,916)
Redemption of guaranteed junior subordinated deferrable interest
debentures ..................................................... (7,200) (14,215) --
Proceeds from dividend reinvestment and stock purchase plan and
stock options exercised ........................................ 133 149 202
Private placement issuance of common stock ........................ 10,300 25,792 --
Costs associated with private placement ........................... (1,482) (2,687) --
--------- --------- --------
Net cash used in financing activities ............................. (126,146) (126,772) (17,975)
--------- --------- --------
NET DECREASE IN CASH AND DUE FROM BANKS ........................... (90) (3,443) (2,401)
CASH AND DUE FROM BANKS AT JANUARY 1 .............................. 21,330 24,773 27,174
--------- --------- --------
CASH AND DUE FROM BANKS AT DECEMBER 31 ............................ $ 21,240 $ 21,330 $ 24,773
========= ========= ========
See accompanying notes to consolidated financial statements.
45
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
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 22 banking locations in five 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 $1.6 billion 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 22 locations in Pennsylvania. 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).
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'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's intent and the Company has the ability to
hold the securities until maturity. These held to maturity securities are
carried on the Company'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's intent at the time of
purchase to hold the securities for an indefinite period of time and/or to use
the securities as part of the Company'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' 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.
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. 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'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.
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'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 loans with balances in excess of $250,000 within a 12-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 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 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.
BANK-OWNED LIFE INSURANCE:
The Company has purchased life insurance policies on certain employees.
These policies are recorded in other assets 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). Goodwill is reviewed for impairment 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 purchases 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. Increases 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.
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, 131,095 and 307,136 shares of
common stock were outstanding during 2005, 2004 and 2003, respectively, but were
not included in the computation of diluted earnings per common share as the
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, the Company had stock based compensation plans, which
are described more fully in Note 18 Stock Compensation Plans. The Company
accounts for these plans under Accounting Principles Board Opinion #25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation expense has been reflected in net income as
all rights and options to purchase the Company'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 if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS)
#123, "Accounting for Stock-Based Compensation," to stock compensation plans.
PRO FORMA INCOME (LOSS)
AND EARNINGS (LOSS) PER SHARE
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------- ------- ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Income (loss), as reported $(9,022) $(8,526) $2,190
Less: Total stock compensation expense determined under the fair
value method for all awards, net of related tax effects (74) (72) (35)
------- ------- ------
Pro forma income (loss) $(9,096) $(8,598) $2,155
======= ======= ======
Earnings (loss) per share:
Basic as reported $(0.44) $(0.58) $ 0.16
Basic pro forma (0.45) (0.58) 0.15
Diluted as reported (0.44) (0.58) 0.16
Diluted pro forma (0.45) (0.58) 0.15
COMPREHENSIVE LOSS:
For the Company, comprehensive income (loss) includes net income and
unrealized holding gains and losses from available for sale investment
securities. The balances of accumulated other comprehensive loss were
$(4,066,000), $(3,336,000) and $(932,000) at December 31, 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 in income tax payments in 2005; $3,837,000 in 2004; and $119,000 in
2003. The Company made total interest payments of $22,460,000 in 2005;
$26,845,000 in 2004; and $31,676,000 in 2003.
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
interest rate swaps, the interest differential to be paid or received was
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 was 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 floors in place at December 31, 2005
or interest rate caps or floors in 2004.
RECENT ACCOUNTING STANDARDS:
In December 2003, the Accounting Standards Executive Committee 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 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, 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 03-3 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 that the fair value of the
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 Bulletin in the second quarter 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
50
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. At December 31, 2005, gross unrealized
losses on available for sale securities was $6.5 million.
RECLASSIFICATIONS:
Certain items in the prior-year financial statements were reclassified to
conform to the current year presentation and had no impact on the Company's
consolidated financial statements.
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2005 and 2004, included $8,162,000
and $7,264,000, 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:
AT DECEMBER 31,
---------------
2005 2004
---- ----
(IN THOUSANDS)
---- ----
Total $199 $199
==== ====
All interest bearing deposits are with domestic banks and mature within six
months. The Company had no deposits in foreign banks nor in foreign branches of
United States banks. To be in compliance with Arizona Department of Insurance
rules minimum balances are maintained at appropriate institutions.
4. INVESTMENT SECURITIES
The cost basis and market values of investment securities are summarized as
follows:
Investment securities available for sale:
AT DECEMBER 31, 2005
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST BASIS GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury $ 5,021 $-- $ (180) $ 4,841
U.S. Agency 59,335 12 (1,078) 58,269
U.S. Agency mortgage-backed securities 131,981 2 (5,047) 126,936
Equity investment in Federal Home Loan Bank and Federal
Reserve Bank Stocks 6,988 -- -- 6,988
Other securities 4,499 36 -- 4,535
-------- --- ------- --------
Total $207,824 $50 $(6,305) $201,569
======== === ======= ========
51
Investment securities held to maturity:
AT DECEMBER 31, 2005
-------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED MARKET
BASIS GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
U.S. Treasury $ 3,285 $-- $ (49) $ 3,236
U.S. Agency 11,484 -- (110) 11,374
U.S. Agency mortgage-backed securities 8,836 20 (10) 8,846
Other securities 6,750 -- -- 6,750
------- --- ----- -------
Total $30,355 $20 $(169) $30,206
======= === ===== =======
Investment securities available for sale:
AT DECEMBER 31, 2004
---------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED MARKET
BASIS GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury $ 10,071 $ 1 $ (90) $ 9,982
U.S. Agency 33,219 20 (356) 32,883
U.S. Agency mortgage-backed securities 305,986 48 (4,794) 301,240
Equity investment in Federal Home Loan Bank
and Federal Reserve Bank Stocks 17,059 -- -- 17,059
Other securities 12,381 39 -- 12,420
-------- ---- ------- --------
Total $378,716 $108 $(5,240) $373,584
======== ==== ======= ========
Investment securities held to maturity:
AT DECEMBER 31, 2004
-------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED MARKET
BASIS GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
U.S. Treasury $ 3,348 $ 46 $ (1) $ 3,393
U.S. Agency 11,522 31 (161) 11,392
U.S. Agency mortgage-backed securities 12,565 200 -- 12,765
------- ---- ----- -------
Total $27,435 $277 $(162) $27,550
======= ==== ===== =======
All purchased and sold investment securities are recorded on the settlement
date which is not materially different from the trade date. 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's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investors Service or
Standard & Poor's rating of A. At December 31, 2005, 95.5% of the portfolio was
rated AAA as compared to 96.4% at December 31, 2004. Less than 1.0% of the
portfolio was rated below A or unrated on December 31, 2005. 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'
equity at December 31, 2005.
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 at December 31, 2005, and $365,173,000 at December
31, 2004. 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 gross
investment security losses on available for sale securities in 2005, 2004, and
2003, respectively. On a net basis, the realized (losses) gains amounted to
($1,649,000), $539,000 and $2.5 million in 2005, 2004, and 2003, respectively,
after factoring in tax (benefit) expense of ($850,000), $277,000 and $1.3
million for each of those same years. The Company realized no gross investment
security gains and losses on held to maturity securities in 2005, 2004 or 2003.
The following table sets forth the contractual maturity distribution of the
investment securities, cost basis and market values, and the weighted average
yield for each type and range of maturity as of December 31, 2005. 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, the Company's consolidated investment securities portfolio had a modified
duration of approximately 2.61 years. The weighted average expected maturity for
available for sale securities at December 31, 2005 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, 1.0, and 0.2 years,
respectively. The weighted average expected maturity for held to maturity
securities at December 31, 2005 for U.S. Treasury, U.S. Agency, U.S. Agency
Mortgage-Backed and other securities was 3.6, 2.2, 2.9 and 2.7 years.
Investment securities available for sale:
AT DECEMBER 31, 2005
-----------------------------------------------------------------------------------------
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 $ -- --% $ 5,021 3.11% $ -- --% $ -- --% $ 5,021 3.11%
U.S. Agency 4,096 4.05 45,239 4.01 10,000 4.01 -- -- 59,335 4.01
U.S. Agency mortgage-
backed securities -- -- 95,240 3.85 21,477 3.98 15,264 4.11 131,981 3.90
Equity investment in Federal Home
Loan Bank and Federal Reserve Bank
Stocks 6,988 3.74 -- -- -- -- -- -- 6,988 3.74
Other securities 4,499 3.00 -- -- -- -- -- -- 4,499 3.00
------- -------- ------- ------- --------
Total investment securities
available for sale $15,583 3.61% $145,500 3.87% $31,477 3.99% $15,264 4.11% $207,824 3.89%
======= ======== ======= ======= ========
MARKET VALUE
U.S. Treasury $ -- $ 4,841 $ -- $ -- $ 4,841
U.S. Agency 4,084 44,493 9,692 -- 58,269
U.S. Agency mortgage-backed
securities -- 91,752 20,584 14,600 126,936
Equity investment in Federal Home
Loan Bank and Federal Reserve Bank
Stocks 6,988 -- -- -- 6,988
Other securities 4,535 -- -- -- 4,535
------- -------- ------- ------- --------
Total investment securities
available for sale $15,607 $141,086 $30,276 $14,600 $201,569
======= ======== ======= ======= ========
53
Investment securities held to maturity:
AT DECEMBER 31, 2005
------------------------------------------------------------------------------------
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 $ -- --% $ 3,285 3.99% $ -- --% $-- --% $ 3,285 3.99%
U.S. Agency 8,015 1.61 -- -- 3,469 5.22 -- -- 11,484 2.72
U.S. Agency mortgage-backed securities -- -- 8,836 5.37 -- -- -- -- 8,836 5.37
Other securities 1,500 4.46 4,250 4.70 1,000 3.95 -- 6,750 4.54
------ ------- ------ --- -------
Total investment securities held to
maturity $9,515 2.06% $16,371 4.92% $4,469 4.94% $-- --% $30,355 4.02%
====== ======= ====== === =======
MARKET VALUE
U.S. Treasury $ -- $ 3,236 $ -- $-- $ 3,236
U.S. Agency 7,924 -- 3,450 -- 11,374
U.S. Agency mortgage-backed securities -- 8,846 -- -- 8,846
Other securities 1,500 4,250 1,000 -- 6,750
------ ------- ----- --- -------
Total investment securities held to
maturity $9,424 $16,332 $4,450 $-- $30,206
====== ======= ====== === =======
The following tables present information concerning investments with
unrealized losses as of December 31, 2005 (in thousands):
Investment securities available for sale:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------- --------------------- ---------------------
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
------- ---------- -------- ---------- -------- ----------
U.S. Treasury $ -- $ -- $ 4,841 $ (180) $ 4,841 $ (180)
U.S. Agency 20,267 (59) 30,554 (1,019) 50,821 (1,078)
U.S. Agency mortgage-backed securities 4,449 (113) 122,330 (4,934) 126,779 (5,047)
------- ----- -------- ------- -------- -------
Total investment securities available for sale $24,716 $(172) $157,725 $(6,133) $182,441 $(6,305)
======= ===== ======== ======= ======== =======
Investment securities held to maturity:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------- ------------------- --------------------
COST UNREALIZED COST UNREALIZED COST UNREALIZED
BASIS LOSSES BASIS LOSSES BASIS LOSSES
------ ---------- ------ ---------- ------- ----------
U.S. Treasury $2,157 $(20) $1,079 $ (29) $ 3,236 $ (49)
U.S. Agency 3,450 (19) 7,924 (91) 11,374 (110)
U.S. Agency mortgage-backed securities 1,274 (10) -- -- 1,274 (10)
------ ---- ------ ----- ------- -----
Total investment securities held to maturity $6,881 $(49) $9,003 $(120) $15,884 $(169)
====== ==== ====== ===== ======= =====
The following tables present information concerning investments with
unrealized losses as of December 31, 2004 (in thousands):
Investment securities available for sale:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------- --------------------- ---------------------
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- ------- ----------- -------- ----------
U.S. Treasury $ 9,783 $ (90) $ -- $ -- $ 9,783 $ (90)
U.S. Agency 31,778 (356) -- -- 31,778 (356)
U.S. Agency mortgage-backed securities 234,460 (3,260) 61,261 (1,534) 295,721 (4,794)
-------- ------- ------- ------- -------- -------
Total investment securities available for sale $276,021 $(3,706) $61,261 $(1,534) $337,282 $(5,240)
======== ======= ======= ======= ======== =======
54
Investment securities held to maturity:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------- ------------------- -------------------
COST UNREALIZED COST UNREALIZED COST UNREALIZED
BASIS LOSSES BASIS LOSSES BASIS LOSSES
------ ---------- ------ ---------- ------ ----------
U.S. Treasury $1,132 $(1) $ -- $ -- $1,132 $ (1)
U.S. Agency -- -- 8,056 (161) 8,056 (161)
------ --- ------ ----- ------ -----
Total investment securities held to maturity $1,132 $(1) $8,056 $(161) $9,188 $(162)
====== === ====== ===== ====== =====
Given the quality of the investment portfolio (greater than 95% rated AAA),
the Company believes the unrealized losses that have existed for greater than 12
months are temporary in nature and resulted from interest rate movements.
Furthermore, the Company has the ability to hold these securities until maturity
or until they recover in value.
5. LOANS
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Commercial $ 80,629 $ 72,011
Commercial loans secured by real estate 249,204 225,661
Real estate-mortgage 201,111 201,406
Consumer 20,391 23,285
-------- --------
Loans 551,335 522,363
Less: Unearned income 831 1,634
-------- --------
Loans, net of unearned income $550,504 $520,729
======== ========
Real estate construction loans comprised 5.5% and 6.3% of total loans net
of unearned income at December 31, 2005 and 2004, respectively. The Company has
no direct credit exposure to foreign countries. Additionally, the Company has no
significant industry lending concentrations. As of December 31, 2005, 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 and $4,147,000 at December 31, 2005 and 2004, respectively. An
analysis of these related party loans follows:
YEAR ENDED
DECEMBER 31,
---------------
2005 2004
------ ------
(IN THOUSANDS)
Balance January 1 $4,147 $1,819
New loans 555 3,242
Payments (452) (914)
------ ------
Balance December 31 $4,250 $4,147
====== ======
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------ ------- -------
(IN THOUSANDS)
Balance January 1 $9,893 $11,682 $10,035
Provision for loan losses (175) 1,758 2,961
Recoveries on loans previously charged-off 300 616 398
Loans charged-off (875) (4,041) (1,573)
Transfer to reserve for unfunded loan commitments -- (122) (139)
------ ------- -------
Balance December 31 $9,143 $ 9,893 $11,682
====== ======= =======
55
7. 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).
The following tables present information concerning non-performing assets:
AT DECEMBER 31,
-------------------------
2005 2004 2003
------ ------ -------
(IN THOUSANDS)
NON-ACCRUAL LOANS
Commercial $2,315 $ 802 $ 3,282
Commercial loans secured by real estate 318 606 5,262
Real estate-mortgage 1,070 2,049 1,495
Consumer 446 412 742
------ ------ -------
Total $4,149 $3,869 $10,781
====== ====== =======
AT DECEMBER 31,
-----------------
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
PAST DUE 90 DAYS OR MORE AND STILL ACCRUING
Commercial $-- $-- $58
Commercial loans secured by real estate -- -- 10
Real estate-mortgage -- -- --
Consumer 31 -- 30
--- --- ---
Total $31 $-- $98
=== === ===
AT DECEMBER 31,
------------------
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
OTHER REAL ESTATE OWNED
Commercial $ -- $-- $ --
Commercial loans secured by real estate -- -- 255
Real estate-mortgage 130 15 248
Consumer 5 10 29
---- --- ----
Total $135 $25 $532
==== === ====
AT DECEMBER 31,
-------------------------
2005 2004 2003
------ ------ -------
(IN THOUSANDS)
TOTAL NON-PERFORMING ASSETS $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 0.78% 0.75% 2.26%
Total restructured loans $ 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 Company had loans totaling $14,825,000 and $11,974,000 being
specifically identified as impaired and a corresponding allocation reserve of
$2,560,000 and $2,713,000 at December 31, 2005 and 2004, respectively. The
average outstanding balance for loans being specifically identified as impaired
was $12,388,000 for 2005 and $11,257,000 for 2004. All 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 2005, 2004 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,
-----------------------
2005 2004 2003
---- ---- -----
(IN THOUSANDS)
Interest income due in accordance with
original terms $213 $469 $ 670
Interest income recorded (12) (19) (119)
---- ---- -----
Net reduction in interest income $201 $450 $ 551
==== ==== =====
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
AT DECEMBER 31,
-----------------
2005 2004
------- -------
(IN THOUSANDS)
Land $ 1,714 $ 1,714
Premises 18,547 18,609
Furniture and equipment 16,608 15,739
Leasehold improvements 1,072 1,061
------- -------
Total at cost 37,941 37,123
Less: Accumulated depreciation and amortization 29,252 27,435
------- -------
Net book value $ 8,689 $ 9,688
======= =======
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, 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
AT DECEMBER 31, 2004
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $151,935
Maximum indebtedness at any month end -- 170,989
Average balance during year 7 128,010
Average rate paid for the year 2.32% 1.61%
Interest rate on year end balance -- 2.25
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 three days at the end of 2005 and 2004.
The Company'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's investment in assets secured by one- to four-family residential
real estate.
57
10. DEPOSITS
The following table sets forth the balance of the Company's deposits:
AT DECEMBER 31,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Demand:
Non-interest bearing $109,274 $100,702
Interest bearing 54,067 53,909
Savings 87,702 98,998
Money market 172,569 121,179
Certificates of deposit in denominations
of $100,000 or more 33,836 35,094
Other time 255,207 234,509
-------- --------
Total deposits $712,655 $644,391
======== ========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Interest bearing demand $ 227 $ 154 $ 201
Savings 829 928 948
Money market 3,256 1,340 1,309
Certificates of deposit in denominations
of $100,000 or more 1,378 1,167 998
Other time 7,295 6,747 8,047
------- ------- -------
Total interest expense $12,985 $10,336 $11,503
======= ======= =======
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:
CERTIFICATES OF
DEPOSIT
YEAR OTHER TIME DEPOSITS OF $100,000 OR MORE
- ---- ------------------- -------------------
(IN THOUSANDS)
2006 $133,614 $27,341
2007 59,801 2,546
2008 15,832 2,685
2009 7,069 204
2010 13,094 413
2011 and after 25,797 647
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:
(IN THOUSANDS)
--------------
Three months or less $10,899
Over three through six months 10,656
Over six through twelve months 5,786
Over twelve months 6,495
-------
Total $33,836
=======
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:
AT DECEMBER 31, 2005
------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- --------
(IN THOUSANDS)
Overnight 4.25% $63,184
2011 and after 6.45 987
-------
Total advances 6.45 987
-------
Total FHLB borrowings 4.28% $64,171
=======
AT DECEMBER 31, 2004
------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- --------
(IN THOUSANDS)
Overnight 2.25% $151,935
2010 6.00 100,000
2011 and after 6.45 1,026
--------
Total advances 6.00 101,026
--------
Total FHLB borrowings 3.75% $252,961
========
The rate on open repo plus advances 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
delivered 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:
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 as of December 31, 2005 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)
Consolidation of Variable Interest Entities (FIN 46(R)). The Company used $7.2
million of proceeds from a private placement of common stock to redeem Trust
Preferred Securities in the fourth quarter 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.
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
For the Company, as for most financial institutions, approximately 95% of
its assets and liabilities are considered financial instruments. Many of the
Company'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, 2005 and 2004, were as follows:
2005 2004
------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities $231,775 $231,924 $401,134 $401,019
Net loans (including loans held for sale) 545,448 550,602 520,724 521,416
FINANCIAL LIABILITIES:
Deposits with no stated maturities $423,612 $423,612 $374,787 $374,787
Deposits with stated maturities 286,987 289,043 268,543 269,604
Short-term borrowings 63,184 63,184 151,935 151,935
All other borrowings 16,554 14,072 132,426 117,234
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest rate swaps $ -- $ -- $ (4,077) $ (4,077)
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'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 million at
December 31, 2005, 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
The benefit for income taxes is summarized below:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Current $ (471) $ (87) $ 5,504
Deferred (5,431) (5,758) (4,917)
------- ------- -------
Income tax expense (benefit) from continuing operations (5,902) (5,845) 587
Deferred income tax benefit from discontinued operations (61) (648) (800)
------- ------- -------
Income tax benefit $(5,963) $(6,493) $ (213)
======= ======= =======
The reconciliation between the federal statutory tax rate and the Company's
effective consolidated income tax rate is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2005 2004 2003
--------------- --------------- --------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ----- ------- ----- ------ -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Income tax expense (benefit) based on federal statutory rate $(5,074) (34.0)% $(4,864) (34.0)% $ 918 35.0%
Tax exempt income (424) (2.8) (461) (3.2) (449) (16.2)
Goodwill and acquisition related costs -- -- -- -- 70 2.5
Reversal of contingency reserves (475) (3.2) (680) (4.7) -- --
Other 71 0.5 160 1.1 48 1.7
------- ------- -----
Income tax expense (benefit) from continuing operations (5,902) (39.6) (5,845) (40.8) 587 21.1
Income tax benefit from discontinued operations (61) (33.9) (648) (35.2) (800) (32.8)
------- ------- -----
Total benefit for income taxes $(5,963) (39.5)% $(6,493) (40.1)% $(213) (63.4)%
======= ======= =====
At December 31, 2005 and 2004, 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,
-----------------
2005 2004
------- -------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Provision for loan losses $ 3,193 $ 3,452
Mortgage servicing rights -- 1,129
Unrealized investment security losses 2,127 1,745
Net operating loss carryforwards 12,232 6,720
Alternative minimum tax credits 872 872
Other 355 254
------- -------
Total tax assets 18,779 14,172
------- -------
DEFERRED TAX LIABILITIES:
Accumulated depreciation -- (646)
Accretion of discount (8) (8)
Lease accounting (2,239) (3,064)
Pension (1,405) (1,122)
Other (51) (150)
------- -------
Total tax liabilities (3,703) (4,990)
Valuation allowance (100) (80)
------- -------
Net deferred tax asset $14,976 $ 9,102
======= =======
The change in net deferred tax assets and liabilities consist of the
following:
YEAR ENDED
DECEMBER 31,
---------------
2005 2004
------ ------
(IN THOUSANDS)
Investment write-downs due to FAS #115, charged to equity $ 382 $1,257
Deferred benefit for income taxes 5,492 5,758
------ ------
Net increase $5,874 $7,015
====== ======
The Company has alternative minimum tax credit carryforwards of
approximately $872,000 at December 31, 2005. These credits have an indefinite
carryforward period. The Company also has a $36.0 million net operating loss
carryforward that will begin to expire in the year 2023.
61
14. PENSION PLAN
The Company has a trusteed, noncontributory defined benefit pension plan
covering all employees who work at least 1,000 hours per year and who have not
yet reached age 60 at their employment date. The benefits of the plan are based
upon the employee'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'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 which is limited to
10% of the plans assets), mutual funds, and short-term cash equivalent
instruments.
PENSION BENEFITS:
YEAR ENDED
DECEMBER 31,
-------------------
2005 2004
-------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $13,256 $13,119
Service cost 855 840
Interest cost 806 734
Deferred asset gain (loss) 688 (595)
Benefits paid (1,447) (842)
------- -------
Benefit obligation at end of year $14,158 $13,256
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $11,984 $10,949
Actual return on plan assets 455 938
Employer contributions 2,000 1,000
Benefits paid (1,447) (842)
Expenses paid (36) (61)
------- -------
Fair value of plan assets at end of year $12,956 $11,984
======= =======
Funded status of the plan--under funded $(1,202) $(1,272)
Unrecognized transition asset (126) (143)
Unrecognized prior service cost (12) (8)
Unrecognized actuarial loss 5,469 4,658
------- -------
Net prepaid benefit cost as recognized in other
assets on the consolidated balance sheet $ 4,129 $ 3,235
======= =======
YEAR ENDED
DECEMBER 31,
-----------------
2005 2004
------- -------
(IN THOUSANDS)
ACCUMULATED BENEFIT OBLIGATION:
Accumulated benefit obligation $12,300 $11,569
======= =======
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
------ ------ -----
(IN THOUSANDS, EXCEPT
PERCENTAGES)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 855 $ 840 $ 730
Interest cost 806 734 738
Expected return on plan assets (924) (875) (827)
Amortization of prior year service cost 4 4 4
Amortization of transition asset (17) (17) (17)
Recognized net actuarial loss 383 339 203
------ ------ -----
Net periodic pension cost $1,107 $1,025 $ 831
====== ====== =====
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 6.00% 6.00% 6.75%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 2.50 3.00 3.00
To determine the benefit obligation as of 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. The Company has assumed an 8% long-term expected return on plan assets.
This assumption was based upon the plan's historical investment performance over
a longer-term period of 15 years combined with the plan'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's measurement date is December 31, 2005. This plan's asset
allocations at December 31, 2005 and 2004, by asset category are as follows:
ASSET CATEGORY: 2005 2004
- --------------- ---- ----
Equity securities 59% 63%
Debt securities 41 37
--- ---
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 December 31, 2005, 4.5% 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
2006 will be comparable with recent years and range between $1 and $2 million.
ESTIMATED FUTURE BENEFIT PAYMENTS:
The following benefit payments, which reflect future service, as
appropriate, are expected to be paid (in thousands).
2006 $1,158
2007 1,209
2008 1,288
2009 1,374
2010 1,635
Years 2011--2015 9,900
Except for the above pension benefits, the Company has no significant
additional exposure for any other post-retirement or post-employment benefits.
15. LEASE COMMITMENTS
The Company's obligation for future minimum lease payments on operating
leases at December 31, 2005, is as follows:
FUTURE MINIMUM
YEAR LEASE PAYMENTS
- ---- --------------
(IN THOUSANDS)
2006 $923
2007 793
2008 358
2009 342
2010 291
2011 and thereafter 549
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 $388,000,
$366,000 and $368,000, in 2005, 2004, and 2003, respectively.
16. 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's creditworthiness on a case-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's commercial loans.
The Company'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 and standby letters of credit of $10,230,000 as of
December 31, 2005. Standby letters of credit had terms ranging from 1 to 4
years. Standby letters of credit of approximately $7.9 million were secured as
of December 31, 2005. The carrying amount of the liability for AmeriServ
obligations related to standby letters of credit was $248,000 at December 31,
2005.
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's
consolidated financial position or results of operation.
17. 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'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 result 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's
interest rate risk position and position the Company for future increased
earnings performance. These 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
In 2001, the Company'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.
A summary of the status of the Company's Stock Incentive Plan at December
31, 2005, 2004, and 2003, and changes during the years then ended is presented
in the table and narrative following:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2005 2004 2003
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
Outstanding at beginning of year 393,848 $5.31 337,136 $5.13 499,534 $5.43
Granted 11,492 5.34 75,000 6.00 32,557 4.07
Exercised (3,352) 4.27 (2,386) 3.07 -- --
Forfeited (29,343) 5.23 (15,902) 4.97 (194,955) 5.71
------- ------- -------
Outstanding at end of year 372,645 5.33 393,848 5.31 337,136 5.13
======= ======= =======
Exercisable at end of year 303,653 5.25 285,195 5.30 279,454 5.40
Weighted average fair value of options granted in current year $2.99 $3.38 $2.15
A total of 303,653 of the 372,645 options outstanding at December 31, 2005,
have exercise prices between $2.31 and $15.69, with a weighted average exercise
price of $5.25 and a weighted average remaining contractual life of 4.72 years.
Options outstanding at December 31, 2005 reflect option ranges of: $2.31 to
$3.90 totaling 33,335 options which have a weighted average exercise price of
$3.00 and a weighted average remaining contractual life of 6.9 years; $4.02 to
$6.39 totaling 257,118 options which have a weighted average exercise price of
$5.14 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 2.8 years. All of
these options are exercisable. The remaining 68,992 options have exercise prices
between $3.20 and $5.75, with a weighted average exercise price of $5.67 and a
weighted average remaining contractual life of 8.5 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, 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
The Company'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, the Company had
135,223 unissued reserved shares available under the Purchase Plan. In the
65
case of purchases of shares of 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
The Company'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. Any resulting
impairment would be reflected as a non-interest expense. The Company's goodwill
of $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's goodwill had no impairment. 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 3 years.
As of December 31, 2005, the Company's core deposit intangibles had an
original cost of $17.6 million with accumulated amortization of $14.9 million.
The weighted average amortization period of the Company's core deposit
intangibles at December 31, 2005, is 3.12 years. Estimated amortization expense
for the next five years is summarized as follows (in thousands):
YEAR EXPENSE
- ---- -------
(IN THOUSANDS)
2006 $865
2007 865
2008 865
2009 108
2010 --
A reconciliation of the Company's intangible asset balances for 2005 and
2004 is as follows (in thousands):
AT DECEMBER 31,
----------------------------------
2005 2004 2005 2004
------ ------- ------ ------
CORE DEPOSIT
INTANGIBLES GOODWILL
---------------- ---------------
Balance January 1 $3,568 $ 4,719 $9,544 $9,544
Amortization expense (865) (1,151) -- --
------ ------- ------- ------
Balance December 31 $2,703 $ 3,568 $9,544 $9,544
====== ======= ======= ======
21. 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 these hedging transactions with the counter parties and incur a
pretax prepayment penalty of $5.8 million.
66
The following table summarizes the interest rate swap transactions that
impacted the Company'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
=========
FIXED FLOATING DECREASE
NOTIONAL RATE RATE REPRICING IN INTEREST
2004 HEDGE TYPE AMOUNT RECEIVED PAID FREQUENCY EXPENSE
- ---- ---------- ----------- -------- -------- --------- -----------
FAIR VALUE $50,000,000 2.58% 1.47% QUARTERLY $ (564,000)
FAIR VALUE 50,000,000 5.89 3.91 QUARTERLY (1,001,000)
-----------
$(1,565,000)
===========
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, and no interest rate caps or floors
outstanding at December 31, 2004.
22. 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'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 in 2005(see Note 24). 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, commercial real-estate loans, and commercial leasing
(excluding certain small business lending through the branch network). 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 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
The contribution of the major business segments to the consolidated results of
operations were as follows:
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
======== ======== ===== ====== ======== ====== ========
YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
RETAIL COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS)
Net interest income $ 20,065 $ 4,548 $ -- $ 93 $ (1,272) $ 32 $ 23,466
Provision for loan loss 473 1,285 -- -- -- -- 1,758
Non-interest income 6,586 640 -- 5,364 561 861 14,012
Non-interest expense 25,008 4,155 -- 4,151 16,065 712 50,091
-------- -------- ------- ------ -------- ------ ----------
Income (loss) before income taxes 1,170 (252) -- 1,306 (16,776) 181 (14,371)
Income taxes (benefit) (160) (159) -- 446 (6,033) 61 (5,845)
-------- -------- ------- ------ -------- ------ ----------
Income (loss) from continuing operations 1,330 (93) -- 860 (10,743) 120 (8,526)
Loss from discontinued operations -- -- (1,193) -- -- -- (1,193)
-------- -------- ------- ------ -------- ------ ----------
Net income (loss) $ 1,330 $ (93) $(1,193) $ 860 $(10,743) $ 120 $ (9,719)
======== ======== ======= ====== ======== ====== ==========
Total assets $349,999 $253,406 $ 1,941 $1,691 $401,019 $1,920 $1,009,976
======== ======== ======= ====== ======== ====== ==========
YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
RETAIL COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS)
Net interest income $ 23,756 $ 3,925 $ -- $ 83 $ (3,167) $ 48 $ 24,645
Provision for loan loss 965 1,996 -- -- -- -- 2,961
Non-interest income 7,399 292 -- 4,993 3,456 855 16,995
Non-interest expense 25,333 3,037 -- 3,899 2,943 690 35,902
-------- -------- ------- ------ -------- ------ ----------
Income (loss) before income taxes 4,857 (816) -- 1,177 (2,654) 213 2,777
Income taxes (benefit) 1,353 (222) -- 388 (1,004) 72 587
-------- -------- ------- ------ -------- ------ ----------
Income (loss) from continuing operations 3,504 (594) -- 789 (1,650) 141 2,190
Loss from discontinued operations -- -- (1,641) -- -- -- (1,641)
-------- -------- ------- ------ -------- ------ ----------
Net income (loss) $ 3,504 $ (594) $(1,641) $ 789 $ (1,650) $ 141 $ 549
======== ======== ======= ====== ======== ====== ==========
Total assets $363,992 $224,714 $ 3,588 $1,605 $552,662 $2,221 $1,148,782
======== ======== ======= ====== ======== ====== ==========
68
23. REGULATORY MATTERS
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.
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, chief 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. The MOU was terminated by the Federal Reserve and the Department on
February 16, 2006.
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's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company'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's financial statements.
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, 2005 and 2004, the Federal Reserve
categorized the Company as Well Capitalized under the regulatory framework for
prompt corrective action. As of February 23, 2006, the Company believes that no
conditions or events have occurred that would change this conclusion. To be
categorized as well capitalized, the Company must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table.
69
AS OF DECEMBER 31, 2005
-----------------------------------------------------
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 $96,001 15.61% $49,215 8.00% $61,518 10.00%
AmeriServ Financial Bank 88,195 14.48 48,730 8.00 60,913 10.00
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 88,311 14.36 24,607 4.00 36,911 6.00
AmeriServ Financial Bank 80,581 13.23 24,365 4.00 36,548 6.00
Tier 1 Capital (To Average Assets)
Consolidated 88,311 10.24 34,509 4.00 43,136 5.00
AmeriServ Financial Bank 80,581 9.48 34,011 4.00 42,513 5.00
AS OF DECEMBER 31, 2004
------------------------------------------------------
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 $103,286 17.08% $48,369 8.00% $60,461 10.00%
AmeriServ Financial Bank 94,804 15.88 47,774 8.00 59,718 10.00
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 95,728 15.83 24,185 4.00 36,277 6.00
AmeriServ Financial Bank 87,339 14.63 23,887 4.00 35,831 6.00
Tier 1 Capital (To Average Assets)
Consolidated 95,728 9.20 41,637 4.00 52,047 5.00
AmeriServ Financial Bank 87,339 8.51 41,069 4.00 51,336 5.00
24. 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:
AT DECEMBER 31, 2005 AT DECEMBER 31, 2004
-------------------- --------------------
(IN THOUSANDS)
Cash and due from banks $279 $ 757
Other assets 50 1,184
Other liabilities (14) (744)
---- ------
Net assets of discontinued operations $315 $1,197
==== ======
SMC's operations had previously been reported as the Company's mortgage
banking segment. All results have been removed from the Company'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 2004 2003
------- ------- -------
(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 50 179 250
Loss on sale of mortgage servicing rights -- (376) (758)
Other income 311 300 442
------- ------- -------
Total Non-Interest Income 361 103 (66)
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 240 786 926
Net occupancy expense 208 179 181
Equipment expense 49 237 257
Professional fees 22 30 38
Supplies, postage, and freight 23 109 128
Miscellaneous taxes and insurance (1) 4 28
Impairment charge (credit) for mortgage servicing rights -- (26) 390
Other expense -- 625 427
------- ------- -------
Total Non-Interest Expense 541 1,944 2,375
------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (180) (1,841) (2,441)
Benefit for income taxes (61) (648) (800)
------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS $ (119) $(1,193) $(1,641)
======= ======= =======
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS:
Basic:
Net loss $ (0.01) $ (0.08) $ (0.12)
Average number of shares outstanding 20,340 14,783 13,940
Diluted:
Net loss $ (0.01) $ (0.08) $ (0.12)
Average number of shares outstanding 20,340 14,783 13,948
25. MORTGAGE SERVICING RIGHTS PORTFOLIO
On December 28, 2004, SMC entered into an agreement to sell its remaining
mortgage servicing rights. As such, there was no activity in 2005. A rollforward
of the mortgage servicing rights through December 31, 2004 is as follows:
2004
--------------
(IN THOUSANDS)
January 1 balance ................. $ 1,718
Impairment charge ................. (26)
Net sale of servicing rights ...... (1,239)
Amortization of servicing rights .. (453)
-------
December 31 balance ............... $ --
-------
71
26. 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,
------------------
2005 2004
------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 2,492 $ 3,362
Equity investment in banking subsidiaries 88,746 97,091
Equity investment in non-banking subsidiaries 4,906 3,936
Guaranteed junior subordinated deferrable interest
debenture issuance costs 349 582
Other assets 1,594 1,255
------- --------
TOTAL ASSETS $98,087 $106,226
======= ========
LIABILITIES
Guaranteed junior subordinated deferrable interest
debentures $13,085 $ 20,285
Other liabilities 528 722
------- --------
TOTAL LIABILITIES 13,613 21,007
------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity 84,474 85,219
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,087 $106,226
======= ========
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
INCOME
Inter-entity management and other fees $ 2,411 $ 2,351 $ 2,277
Dividends from non-banking subsidiaries 1,186 1,017 1,589
Interest and dividend income 94 29 6
------- ------- -------
TOTAL INCOME 3,691 3,397 3,872
------- ------- -------
EXPENSE
Interest expense 1,659 2,985 2,960
Salaries and employee benefits 1,834 1,899 1,739
Dividends downstreamed to banking subsidiary 1,000 4,000 --
Dividends downstreamed to non-banking subsidiaries 1,000 250 --
Other expense 1,532 1,815 1,412
------- ------- -------
TOTAL EXPENSE 7,025 10,949 6,111
------- ------- -------
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
LOSS OF SUBSIDIARIES (3,334) (7,552) (2,239)
Benefit for income taxes 837 1,693 1,301
Equity in undistributed gains (losses) of subsidiaries (6,644) (3,860) 1,487
------- ------- -------
NET INCOME (LOSS) $(9,141) $(9,719) $ 549
======= ======= =======
72
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
------- -------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $(9,141) $ (9,719) $ 549
Adjustment to reconcile net income (loss) to net cash
(used) provided by operating activities:
Equity in undistributed losses (gains) of subsidiaries 6,644 3,860 (1,487)
Other -- net 1,422 2,916 3,084
------- -------- -------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (1,075) (2,943) 2,146
------- -------- -------
INVESTING ACTIVITIES
NET CASH PROVIDED BY INVESTING ACTIVITIES -- -- --
FINANCING ACTIVITIES
Proceeds from issuance of common stock 133 149 202
Proceeds from private offering, net of issuance costs 8,818 23,105 --
Guaranteed junior subordinated deferrable interest
debentures dividends paid (1,546) (2,860) (2,916)
Retirement of Trust Preferred Securities (7,200) (14,215) --
------- -------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 205 6,179 (2,714)
------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (870) 3,236 (568)
CASH AND CASH EQUIVALENTS AT JANUARY 1 3,362 126 694
------- -------- -------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 2,492 $ 3,362 $ 126
======= ======== =======
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'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'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, the subsidiary bank was not permitted to
upstream any cash dividends to the parent company. The subsidiary bank had a
combined $75,743,000 of restricted surplus and retained earnings at December 31,
2005.
27. SUBSEQUENT EVENT
The Company announced on February 21, 2006, that the Federal Reserve Bank
of Philadelphia and Pennsylvania Department of Banking have terminated the
Memorandum of Understanding that the Company had been operating under since Feb.
28, 2003.
The MOU was enacted 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 key factors that led to the termination of
this regulatory enforcement action.
The Company expects that the termination 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
REPORT ON MANAGEMENT'S ASSESSMENT OF
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'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's system of internal control over financial
reporting as of December 31, 2005, in relation to criteria for effective
internal control over financial reporting as described in "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, its system of internal control over financial reporting is
effective and meets the criteria of the "Internal Control - Integrated
Framework". Deloitte & Touche LLP, independent registered public accounting
firm, has issued an attestation report on management's assessment of the
Company'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
Johnstown, PA
March 6, 2006
74
STATEMENT OF MANAGEMENT RESPONSIBILITY
March 6, 2006
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
and Form 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'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'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 LLP and the Company'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
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 sheets of AmeriServ
Financial, Inc. and subsidiaries (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. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2005
and 2004, and the results of its operations and its cash flows for each of the
three years in the period 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 of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
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 and our report
dated March 6, 2006 expressed 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, under the supervision
and with the participation of the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and the operation of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2005,
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation the Chief
Executive Officer along with the Chief Financial Officer concluded that the
Company's disclosure controls and procedures as of December 31, 2005, are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act. In the fourth quarter no
changes in the Company's internal control over financial reporting have come to
management's attention that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
For more information see Report On Management's Assessment Of Internal Control
Over Financial Reporting on page 74.
ITEM 9B. OTHER INFORMATION
None.
PART III
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 of ASRV Directors" section of the Proxy
Statement for the Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented in the "Compensation Paid
to Executive 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
Information required by this section is presented in the "Security
Ownership of Management" section of the Proxy Statement for the Annual Meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this section is presented in the "Transactions with
Management" section of the Proxy Statement for the Annual Meeting of
Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this section is presented in the "Audit Committee
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
CONSOLIDATED FINANCIAL STATEMENTS FILED:
The consolidated financial statements listed below are from the 2005 Form
10-K and Part II -- Item 8. Page references are to said Form 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
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.
EXHIBITS:
The exhibits listed below are filed herewith or to other filings.
EXHIBIT PRIOR FILING OR EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER HEREIN
- ------- ------------------------------------------- ----------------------------------
3.1 Amended and Restated Articles of Exhibit 3.1 to 2004 Form 10-K
Incorporation as amended through January 5, Filed on March 10, 2005
2005.
3.2 Bylaws, as amended and restated on January Exhibit 3.2 to January 26, 2005
26, 2005. Form 8-K Filed on January 26, 2005
10.3 Agreement, dated May 24, 2002, between Exhibit 10.1 to Form 10-Q Filed
AmeriServ Financial, Inc. and Jeffrey A. August 14, 2002
Stopko.
10.5 2001 Stock Incentive Plan dated February 2000 Proxy Statement Filed March
23, 2001. 16, 2001
10.6 Agreement, dated December 1, 1994, between Exhibit 10.6 to 2000 Form 10-K
AmeriServ Financial, Inc. and Ronald W. Filed March 21, 2001
Virag.
10.7 Agreement, dated February 1, 2004, between Exhibit 10.7 to 2003 Form 10-K
AmeriServ Financial, Inc. and Allan R. Filed March 23, 2004
Dennison
10.8 Agreement, dated May 24, 2002, between Exhibit 10.8 to 2004 Form 10-K
AmeriServ Financial, Inc. and Dan L. Hummel Filed March 10, 2005
21 Subsidiaries of the Registrant. Below
23 Consent of Independent Registered Public Below
Accounting Firm
31.1 Certification pursuant to Rule Below
13a-14(a)/15d-14(a), as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Rule Below
13a-14(a)/15d-14(a), as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to 18 U.S.C. section Below
1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. section Below
1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
79
EXHIBIT A
(21) SUBSIDIARIES OF THE REGISTRANT
PERCENT OF JURISDICTION
NAME OWNERSHIP OF ORGANIZATION
- ---- ---------- ----------------------------
AmeriServ Financial Bank 100% Commonwealth of Pennsylvania
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907
AmeriServ Life Insurance Company 100% State of Arizona
101 N. First Avenue #2460
Phoenix, AZ 85003
AmeriServ Trust and Financial Services Company 100% Commonwealth of Pennsylvania
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907
AmeriServ Associates, Inc 100% Commonwealth of Pennsylvania
734 South Atherton Street
State College, PA 16801
80
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/ Allan R. Dennison
------------------------------------
Allan R. Dennison
President & CEO
Date: February 23, 2006
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:
/s/ Craig G. Ford Chairman
- ---------------------------- Director
Craig G. Ford
/s/ Allan R. Dennison President, CEO & Director /s/ Jeffrey A. Stopko SVP & CFO
- ---------------------------- -------------------------------
Allan R. Dennison Jeffrey A. Stopko
/s/ J. Michael Adams, Jr. Director /s/ Margaret A. O'Malley Director
- ---------------------------- -------------------------------
J. Michael Adams, Jr. Margaret A. O'Malley
Edward J. Cernic, Sr. Director Very Rev. Christian R. Oravec Director
- ---------------------------- -------------------------------
Edward J. Cernic, Sr. Very Rev. Christian R. Oravec
/s/ Daniel R. DeVos Director /s/ Mark E. Pasquerilla Director
- ---------------------------- -------------------------------
Daniel R. DeVos Mark E. Pasquerilla
/s/ James C. Dewar Director /s/ Howard M. Picking, III Director
- ---------------------------- -------------------------------
James C. Dewar Howard M. Picking, III
/s/ Bruce E. Duke, III Director /s/ Sara A. Sargent Director
- ---------------------------- -------------------------------
Bruce E. Duke, III, M.D. Sara A. Sargent
/s/ James M. Edwards, Sr. Director /s/ Thomas C. Slater Director
- ---------------------------- -------------------------------
James M. Edwards, Sr. Thomas C. Slater
/s/ Kim W. Kunkle Director /s/ Robert L. Wise Director
- ---------------------------- -------------------------------
Kim W. Kunkle Robert L. Wise
81
AMERISERV FINANCIAL
BANK
OFFICE LOCATIONS
* Main Office Downtown
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907-0520
1-800-837-BANK(2265)
+* Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1211
+* University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3218
* East Hills Teller Express Office
1213 Scalp Avenue
Johnstown, PA 15904-3150
* Eighth Ward Office
1059 Franklin Street
Johnstown, PA 15905-4303
* West End Office
163 Fairfield Avenue
Johnstown, PA 15906-2347
* Carrolltown Office
101 South Main Street
Carrolltown, PA 15722-0507
* Northern Cambria Office
4206 Crawford Avenue Suite 1
Northern Cambria, PA
15714-1342
* Ebensburg Office
104 South Center Street
Ebensburg, PA 15931-0209
+* Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-0418
Nanty Glo Office
928 Roberts Street
Nanty Glo, PA 15943-1303
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1254
+* Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-0393
82
* Seward Office
6858 Route 711, Suite 1
Seward, PA 15954-9501
* Windber Office
1501 Somerset Avenue
Windber, PA 15963-1745
Central City Office
104 Sunshine Avenue
Central City, PA 15926-1129
* Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
* Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
* South Atherton Office
734 South Atherton Street
State College, PA 16801-4628
* Pittsburgh Office
60 Boulevard of the Allies
Suite 100
Pittsburgh, PA 15222-1232
* Benner Pike Office
763 Benner Pike
State College, PA 16801-7313
* = 24-Hour ATM Banking
Available
+ = Seven Day a Week Banking
Available
REMOTE ATM
BANKING LOCATIONS
Main Office, 216 Franklin Street, Johnstown
The Galleria, Johnstown
6-2-Go Shop, Nanty Glo
Gogas Service Station, Cairnbrook
AMERISERV RESIDENTIAL
LENDING LOCATIONS
Greensburg Office
Oakley Park II, 4963 Route 30
Greensburg, PA 15601-9560
Altoona Office
87 Logan Boulevard
Altoona, PA 16602-3123
Mt. Nittany Mortgage Company
2300 South Atherton Street
State College, PA 16801-7613
83
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." 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
Telephone: (412) 456-0200
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 Trading Group, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (800) 544-7508
Parker/Hunter, Inc.
416 Main Street
Johnstown, PA 15901
Telephone: (814) 535-8403
Sandler O'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, PA 15907-0430
(814) 533-5300
AGENTS
The transfer agent and registrar for AmeriServ Financial, Inc.'s common
stock is:
Computershare Investor Services
P O Box 43010
Providence, RI 02940-3023
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' annual and quarterly
reports, proxy statements, 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 by e-mail at JStopko@AMERISERVFINANCIAL.com. The Company also
maintains a website (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's
website.
84