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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 OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
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
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked prices of such common equity,
as of the business day of the registrant's most recently completed second fiscal
quarter. The aggregate market value was $102,232,167.48 as of June 30, 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. [X] 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. There were 22,157,715 shares 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,
2006, 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 78.
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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 12
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 17
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 37
Item 8. Consolidated Financial Statements and Supplementary Data 38
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 76
Item 9A. Controls and Procedures 76
Item 9B. Other Information 76
PART III
Item 10. Directors and Executive Officers of the Registrant 76
Item 11. Executive Compensation 76
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 76
Item 13. Certain Relationships and Related Transactions 76
Item 14. Principal Accounting Fees and Services 76
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K 77
Signatures 80
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. In the second quarter 2006, the Company
closed AmeriServ Associates since it no longer fit the Company's strategic
direction.
The Company's principal activities consist of owning and operating its
three wholly owned subsidiary entities. At December 31, 2006, the Company had,
on a consolidated basis, total assets, deposits, and shareholders' equity of
$896 million, $742 million and $85 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 21 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 23 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 Bank of Philadelphia and the Pennsylvania Department of Banking. See
Note 22, Regulatory Matters, 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, 2006:
4
HEADQUARTERS JOHNSTOWN, PA
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Chartered 1933
Total Assets $886,111
Total Investment Securities $197,425
Total Loans (net of unearned income) $589,077
Total Deposits $741,955
Total Net Income $ 2,074
Asset Leverage Ratio 9.70%
2006 Return on Average Assets 0.24%
2006 Return on Average Equity 2.33%
Total Full-time Equivalent Employees 304
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.
Real Estate -- Mortgage
This category includes mortgages that are secured by residential property.
Underwriting of loans within this category is pursuant to Freddie Mac/Fannie Mae
underwriting guidelines, with the exception of Community Reinvestment Act (CRA)
loans, which exhibit
5
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 Appro 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 principles.
The investment portfolio is primarily made up of AAA Agency Mortgage-backed
securities and short maturity agency securities. The purpose of this type of
portfolio is to generate adequate cash flow to fund potential loan growth, as
the market allows. Management strives to maintain a relatively short duration in
the portfolio. All holdings must meet standards documented in the AmeriServ
Financial Investment Policy.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS, INCLUDING REPAYMENTS AND
MATURITIES OF LOANS, SALES AND MATURITIES OF INVESTMENTS AND FHLB ADVANCES
Deposits
The Bank has a loyal core deposit base made up of traditional commercial
bank products that exhibits little fluctuation, other than Jumbo CDs, which
demonstrate some seasonality.
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 Market 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 with the exception of CRA
loans. 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.
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 $1.8
billion. The Trust Company has two primary business divisions, traditional trust
and union collective investment funds. Traditional trust includes personal trust
products and
6
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, 2006, AmeriServ
Trust and Financial Services had total assets of $2.7 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 have attracted several international labor
unions as investors as well as many local unions from a number of states. At the
end of 2006, assets in these union funds totaled approximately $400 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 2006, the Trust Company continued to be a major contributor of earnings
to the corporation. Gross revenue in 2006 amounted to $6.9 million which
represents an increase of $416,000 or 6.5% over 2005. The Trust Company's net
income contribution was $1.7 million an increase of $303,000 or 22% over 2005.
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, 2006,
AmeriServ Life had total assets of $1.3 million and total shareholder's equity
of $1.1 million.
AmeriServ Associates
AmeriServ Associates was a registered investment advisory firm that
administered investment portfolios, offered operational support systems and
provided asset and liability management services to small and mid-sized
financial institutions. As of June 30, 2006, the Company closed this subsidiary
since it no longer fit the Company's strategic direction.
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.
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.
7
MARKET AREA
Nationally, economic growth slowed during 2006 but continues to be positive
measuring in excess of 3.3% per annum. The economy in Cambria and Somerset
Counties, while growing more slowly, produced an unemployment rate of 5.1% as
compared to a national rate of 4.6%. Local markets have shown improvement as
jobs in the area have improved causing the unemployment rate to decline from
last year's number of 5.7%. Near-term expectations for future employment point
to improvements as a result of the arrival of a wind-energy corporation, and the
restructuring of the local health care system. Also, greater work on defense
projects and the opening of a mortgage servicing company are expected to
contribute to economic expansion. It is expected that an additional 2,000 local
positions will open up within the next two years. One potential negative
development for the local Johnstown economy is the possible closure of a
railroad freight car manufacturer that could result in the loss of approximately
500 manufacturing jobs. Local loan demand remains good particularly in the
commercial sector. Overall, economic conditions in 2007 are expected to remain
positive.
Economic conditions are much better in the State College market. The
unemployment rate is 3.3% 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 strong. Most economists remain
hopeful that the economy in 2007 will continue to grow while inflation remains
in check.
EMPLOYEES
The Company employed 414 people as of December 31, 2006, in full- and
part-time positions. Approximately 250 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 minimum 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 thereafter 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, 2006, the Company believes that its bank subsidiary was
well capitalized, based on the prompt corrective action 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.
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.
8
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 22-24, and 32-34.
II. Investment Portfolio Information required by this section is presented
on pages 9-10 and 50-53.
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 27-28.
V. Deposits Information required by this section follows on page 11.
VI. Return on Equity and Assets Information required by this section is
presented on page 20.
VII. Short-Term Borrowings Information required by this section is
presented on pages 11-12.
INVESTMENT PORTFOLIO
Investment securities classified as held to maturity are carried at
amortized cost while investment securities classified as available for sale are
reported at fair market value. 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: 2006 2005 2004
----------- -------- -------- --------
(IN THOUSANDS)
U.S. Treasury $ 6,011 $ 5,021 $ 10,071
U.S. Agency 57,636 59,335 33,219
Mortgage-backed securities 113,460 131,981 305,986
Equity investment in Federal Home Loan Bank and Federal Reserve Bank Stocks 5,355 6,988 17,059
Other securities 3,962 4,499 12,381
-------- -------- --------
Total cost basis of investment securities available for sale $186,424 $207,824 $378,716
======== ======== ========
Total fair value of investment securities available for sale $181,498 $201,569 $373,584
======== ======== ========
9
Investment securities held to maturity at:
AT DECEMBER 31,
---------------------------
COST BASIS: 2006 2005 2004
----------- ------- ------- -------
(IN THOUSANDS)
U.S. Treasury $ 3,220 $ 3,285 $ 3,348
U.S. Agency 3,471 11,484 11,522
Mortgage-backed securities 7,216 8,836 12,565
Other securities 6,750 6,750 --
------- ------- -------
Total cost basis of investment securities
held to maturity $20,657 $30,355 $27,435
======= ======= =======
Total fair value of investment securities
held to maturity $20,460 $30,206 $27,550
======= ======= =======
LOAN PORTFOLIO
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(IN THOUSANDS)
Commercial $ 91,746 $ 80,629 $ 72,011 $ 75,738 $ 89,127
Commercial loans secured by real estate 269,781 249,204 225,661 206,204 222,854
Real estate-mortgage(1) 209,728 201,111 201,406 194,605 229,154
Consumer 18,336 20,391 23,285 28,343 32,506
-------- -------- -------- -------- --------
Loans 589,591 551,335 522,363 504,890 573,641
Less: Unearned income 514 831 1,634 2,926 4,881
-------- -------- -------- -------- --------
Loans, net of unearned income $589,077 $550,504 $520,729 $501,964 $568,760
======== ======== ======== ======== ========
(1) For each of the periods presented beginning with December 31, 2006, real
estate-construction loans constituted 4.4%, 5.5%, 6.3%, 3.2% and 7.2% 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,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
NON-ACCRUAL LOANS
Commercial $ 494 $2,315 $ 802 $ 3,282 $1,783
Commercial loans secured by real estate 195 318 606 5,262 1,864
Real estate-mortgage 1,050 1,070 2,049 1,495 2,784
Consumer 547 446 412 742 360
------- ------ ------ ------- ------
Total $ 2,286 $4,149 $3,869 $10,781 $6,791
------- ------ ------ ------- ------
PAST DUE 90 DAYS OR MORE AND STILL
ACCRUING
Commercial $ -- $ -- $ -- $ 58 $ --
Commercial loans secured by real estate -- -- -- 10 48
Real estate-mortgage -- -- -- -- --
Consumer 3 31 -- 30 2
------- ------ ------ ------- ------
Total $ 3 $ 31 $ -- $ 98 $ 50
------- ------ ------ ------- ------
OTHER REAL ESTATE OWNED
Commercial $ -- $ -- $ -- $ -- $ --
Commercial loans secured by real estate -- -- -- 255 --
Real estate-mortgage 3 130 15 248 89
Consumer -- 5 10 29 34
------- ------ ------ ------- ------
Total $ 3 $ 135 $ 25 $ 532 $ 123
------- ------ ------ ------- ------
TOTAL NON-PERFORMING ASSETS $ 2,292 $4,315 $3,894 $11,411 $6,964
======= ====== ====== ======= ======
Total non-performing assets as a
percent of loans and loans held for
sale, net of unearned income, and
other real estate owned 0.39% 0.78% 0.75% 2.26% 1.22%
Total restructured loans $ 1,302 $ 258 $5,685 $ 698 $ --
10
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,
---------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ----- ----
(IN THOUSANDS)
Interest income due in accordance with
original terms $214 $213 $469 $ 670 $470
Interest income recorded (55) (12) (19) (119) (14)
---- ---- ---- ----- ----
Net reduction in interest income $159 $201 $450 $ 551 $456
==== ==== ==== ===== ====
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,
---------------------------------------------------
2006 2005 2004
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
Non-interest bearing $104,266 --% $107,018 --% $106,249 --%
Interest bearing 57,817 1.05 54,695 0.41 53,502 0.29
Savings 81,964 0.78 96,819 0.86 104,187 0.89
Money market 172,029 3.34 156,932 2.07 120,280 1.11
Other time 319,220 3.83 284,951 3.04 279,458 2.83
-------- -------- --------
Total deposits $735,296 3.05 $700,415 2.18 $663,676 1.85
======== ======== ========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
Interest bearing demand $ 606 $ 227 $ 154
Savings 644 829 928
Money market 5,743 3,256 1,340
Certificates of deposit
in denominations of
$100,000 or more 1,894 1,378 1,167
Other time 10,345 7,295 6,747
------- ------- -------
Total interest expense $19,232 $12,985 $10,336
======= ======= =======
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, 2006:
MATURING IN:
(IN THOUSANDS)
--------------
Three months or less $17,424
Over three through six months 3,413
Over six through twelve months 5,629
Over twelve months 4,114
-------
Total $30,580
=======
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:
11
AT DECEMBER 31, 2006
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $49,091
Maximum indebtedness at any month end -- 61,728
Average balance during year 43 32,778
Average rate paid for the year 5.69% 5.10%
Interest rate on year end balance -- 5.48
AT DECEMBER 31, 2005
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $ 63,184
Maximum indebtedness at any month end -- 150,552
Average balance during year 1 78,151
Average rate paid for the year 4.94% 3.32%
Interest rate on year end balance -- 4.25
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 2006, 2005, and
2004.
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 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
strategy. The final element requires sustained execution of our business plan.
If we are unable to achieve the last element of the turnaround strategy, our
financial condition and results of operations will not dramatically improve and
may deteriorate.
12
WEAK LOAN GROWTH MAY HINDER OUR ABILITY TO IMPROVE EARNINGS PERFORMANCE.
In order to improve our financial performance, 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. As a consequence, we have relied on dividends
from non-bank subsidiaries, a tax refund, inter-company tax payments, and $3.4
million of retained proceeds from the 2004 and 2005 common stock offerings 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 meet our obligations, including our debt service
obligations on outstanding 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. Moreover, we have no significant
secondary sources of liquidity such as lines of credit.
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 that expires in October
2007. As a result of provisions in the contract, generally known as work rules,
we sometimes cannot take steps that would reduce our operating costs.
Furthermore, to our knowledge, we are one of only 13 unionized banking
institutions in the United States. The banking industry is a consolidating
industry in which acquisitions are frequent. However, some banking institutions
may be reluctant to buy a unionized bank because of a perception that operating
costs may be higher or that it could result in unionization of its work force.
Additionally, there is the risk of a work stoppage if a new collective
bargaining agreement cannot be negotiated before the end of the current
agreement. Therefore, our stock price may 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, 2006,
approximately $400 million was invested by unions in the ERECT and BUILD Funds.
This represents approximately 22.5% 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 sizable 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. This challenge is particularly evident during periods such
as 2006 when the yield curve is flat to inverted. Our earnings also could be
adversely affected if the rates on our loans and other investments fall more
quickly than those on our deposits and other borrowings.
13
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, 2006, 61.3% 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 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, 2006, we had nonperforming assets equal to 0.39% 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 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;
- Our ability to attract and retain a qualified workforce;
- The scope of our products and services;
- The relevance of our products and services to customer needs and
demands and the rate at which we and our competitors introduce them;
- Satisfaction of our customers with our customer service; and
- Industry and general economic trends.
14
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.
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.
15
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 eleven floors of the building adjacent thereto. The Company
occupies the main office and its subsidiary entities have 15 other locations
which are owned Ten additional locations are leased with terms expiring from
January 1, 2007 to March 31, 2018.
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, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of January 31, 2007, the Company had 3,589 shareholders of its 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, 2006: $5.00 $4.31 $0.00
First Quarter 5.24 4.50 0.00
Second Quarter 4.96 4.43 0.00
Third Quarter 5.00 4.25 0.00
Fourth Quarter
Year ended December 31, 2005 $5.84 $4.95 $0.00
First Quarter 5.67 5.04 0.00
Second Quarter 5.43 4.30 0.00
Third Quarter 4.99 4.08 0.00
Fourth Quarter
17
PERFORMANCE GRAPH
The following Performance Graph and related information shall not be deemed
"Soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that the Company specifically
incorporates it by reference into such filing.
(PERFORMANCE GRAPH)
The following table compares total shareholder returns for the Company over
the past five years to the NASDAQ Stock Market and the NASDAQ Bank Stocks
assuming a $100 investment made on December 31, 2001. Each of the three measures
of cumulative return assumes reinvestment of dividends. The stock performance
shown on the graph above is not necessarily indicative of future price
performance.
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
-------- -------- -------- -------- -------- --------
AmeriServ Financial, Inc. $100.00 $ 64.50 $113.10 $116.90 $ 99.10 $111.50
NASDAQ Stock Market (US Companies) $100.00 $ 68.80 $103.70 $113.20 $115.60 $127.60
NASDAQ Bank Stocks $100.00 $106.90 $142.30 $161.70 $158.50 $180.40
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income $ 46,565 $ 45,865 $ 50,104 $ 55,005 $ 65,915
Total interest expense 22,087 21,753 26,638 30,360 38,584
-------- -------- ---------- ---------- ----------
Net interest income 24,478 24,112 23,466 24,645 27,331
Provision for loan losses (125) (175) 1,758 2,961 9,265
-------- -------- ---------- ---------- ----------
Net interest income after provision for loan losses 24,603 24,287 21,708 21,684 18,066
Total non-interest income 12,841 10,209 14,012 16,995 18,653
Total non-interest expense 34,692 49,420 50,091 35,902 40,406
-------- -------- ---------- ---------- ----------
Income (loss) from continuing operations before income
taxes 2,752 (14,924) (14,371) 2,777 (3,687)
Provision (benefit) for income taxes 420 (5,902) (5,845) 587 (1,692)
-------- -------- ---------- ---------- ----------
Income (loss) from continuing operations 2,332 (9,022) (8,526) 2,190 (1,995)
Loss from discontinued operations, net of income taxes * -- (119) (1,193) (1,641) (3,157)
-------- -------- ---------- ---------- ----------
Net income (loss) $ 2,332 $ (9,141) $ (9,719) $ 549 $ (5,152)
======== ======== ========== ========== ==========
PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic earnings (loss) per share $ 0.11 $ (0.44) $ (0.58) $ 0.16 $ (0.15)
Diluted earnings (loss) per share 0.11 (0.44) (0.58) 0.16 (0.15)
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS*:
Basic loss per share $ -- $ (0.01) $ (0.08) $ (0.12) $ (0.23)
Diluted loss per share -- (0.01) (0.08) (0.12) (0.23)
PER COMMON SHARE DATA:
Basic earnings (loss) per share $ 0.11 $ (0.45) $ (0.66) $ 0.04 $ (0.37)
Diluted earnings (loss) per share 0.11 (0.45) (0.66) 0.04 (0.37)
Cash dividends declared 0.00 0.00 0.00 0.00 0.30
Book value at period end 3.82 3.82 4.32 5.32 5.77
BALANCE SHEET AND OTHER DATA:
Total assets $895,992 $880,176 $1,009,232 $1,148,782 $1,175,825
Loans and loans held for sale, net of unearned income 589,435 550,602 521,416 503,387 572,977
Allowance for loan losses 8,092 9,143 9,893 11,682 10,035
Investment securities available for sale 181,498 201,569 373,584 524,573 490,701
Investment securities held to maturity 20,657 30,355 27,435 28,089 15,077
Deposits 741,755 712,665 644,391 654,597 669,929
Total borrowings 63,122 77,256 269,169 409,064 410,135
Stockholders' equity 84,684 84,474 85,219 74,270 80,256
Full-time equivalent employees 369 378 406 413 422
* 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 23).
19
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2006 2005 2004 2003 2002
----- ------ ------ ----- ------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
SELECTED FINANCIAL RATIOS:
Return on average total equity 2.74% (10.77)% (11.44)% 0.71% (6.18)%
Return on average assets 0.27 (0.95) (0.76) 0.05 (0.43)
Loans and loans held for sale, net of unearned
income, as a percent of deposits, at period end 79.46 77.26 80.92 76.90 85.53
Ratio of average total equity to average assets 9.73 8.80 6.67 6.67 7.00
Common stock cash dividends as a percent of net
loss applicable to common stock -- -- -- -- (80.16)
Interest rate spread 2.67 2.39 2.01 2.02 2.16
Net interest margin 3.12 2.76 2.28 2.31 2.51
Allowance for loan losses as a percentage of
loans and loans held for sale, net of unearned
income, at period end 1.37 1.66 1.90 2.32 1.75
Non-performing assets as a percentage of loans,
loans held for sale and other real estate
owned, at period end 0.39 0.78 0.75 2.26 1.22
Net charge-offs as a percentage of average loans
and loans held for sale 0.16 0.11 0.68 0.22 0.85
Ratio of earnings to fixed charges and preferred
dividends:(1)
Excluding interest on deposits 1.93X (1.35)X 0.12X 1.15x 0.84x
Including interest on deposits 1.12 0.05 0.46 1.09 0.90
Cumulative one year interest rate sensitivity gap
ratio, at period end 0.85 0.89 0.78 0.96 1.44
(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.
20
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, 2006, 2005, AND 2004
SUMMARY OVERVIEW:
The year 2006 marked the opening of a new phase in the turnaround of
AmeriServ Financial. For the year ended December 31, 2006, the Company returned
to profitability by reporting net income of $2.3 million or $0.11 per share.
This compares favorably to the net loss of $9.1 million or ($0.45) per share
reported for 2005 and a net loss of $9.7 million or ($0.66) per share for 2004.
It was heartening to note that these positive 2006 earnings were generated from
traditional community banking and trust activities with no complex financial
transactions or unusual strategies. These earnings are an indication that the
operating losses of 2002 and 2003 have ended and that the balance sheet
restructuring losses of 2004 and 2005 have accomplished their stated goal - to
reconstitute AmeriServ as a safe and sound community bank with a growing trust
and asset management subsidiary. As AmeriServ pursues its continuing turnaround
it is important to note that the basic metrics of a community bank continue to
improve.
- Since December 31, 2005, loans outstanding have increased by $39
million or 7.1%.
- Since December 31, 2005, deposits have increased by $29 million or
4.1%.
- Non-interest expenses in 2006 are 6.6% or $2.4 million lower than 2005
(excluding the 2005 FHLB and hedge prepayment penalties). The
Company's continuing focus on cost rationalization and the termination
of the Memorandum of Understanding earlier in 2006 were key factors
causing the non-interest expense reduction.
- Non-Performing Assets are $2 million less than December 31, 2005, and
are now below local and national peer bank averages.
- The Trust Company in 2006 increased its net income contribution by 27%
and recorded asset growth of 10.7% when compared to 2005.
- Despite experiencing pressure throughout the year due largely to the
flat to inverted yield curve, the 2006 net interest margin has
increased by 81 basis points since December 31, 2003 as a result of
the balance sheet restructurings completed in the prior two years.
Specifically when analyzing 2005, the successful completion of a $10.3
million private placement common stock offering on September 29, 2005 provided
the Company with the capital to facilitate a series of transactions 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. 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.
21
These transactions were significant factors that caused the Company to
report losses in both 2005 and 2004. However, 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, 2006, the Company's asset leverage
ratio improved to 10.54% compared to 7.71% at June 30, 2004 which was the last
quarter-end prior to commencing the balance sheet repositioning actions.
As discussed in our strategic direction statement, AmeriServ Financial's
focus will be to drive continued meaningful earnings improvement in 2007 and
move our financial performance metrics closer to industry norms. The strategic
plan is in the early stages of execution and the key is to have every AmeriServ
banker involved so customer service excellence becomes synonymous with the name
AmeriServ. This customer service focus combined with revenue growth and expense
rationalization are the key ingredients needed to improve our earnings
performance.
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,
---------------------------
2006 2005 2004
------ ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
Income (loss) from continuing operations $2,332 $(9,022) $(8,526)
Diluted earnings (loss) per share from continuing operations 0.11 (0.44) (0.58)
Return on average equity from continuing operations 2.74% (10.63)% (11.44)%
NET INCOME (LOSS):
Net income (loss) $2,332 $(9,141) $(9,719)
Diluted earnings (loss) per share 0.11 (0.45) (0.66)
Return on average equity 2.74% (10.77)% (13.04)%
The Company reported net income of $2.3 million or $0.11 per diluted share
for 2006. The Company increased earnings in 2006 by generating more revenue from
traditional community banking and its trust company while reducing its
non-interest expense base. This revenue improvement was evidenced by increased
levels of both net interest income and non-interest income. The Company also
benefited from a negative loan loss provision for the second consecutive year in
2006 due to the demonstrated sustained improvement in its asset quality. The
Company's financial performance was negatively impacted by increased income tax
expense in 2006 after recording an income tax benefit in 2005 due to the large
pre-tax loss realized last year.
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 improvement. 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 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.
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,
---------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
Interest income $46,565 $45,865 $50,104
Interest expense 22,087 21,753 26,638
------- ------- -------
Net interest income 24,478 24,112 23,466
Tax-equivalent adjustment 96 108 117
------- ------- -------
Net tax-equivalent interest income $24,574 $24,220 $23,583
======= ======= =======
Net interest margin 3.12% 2.76% 2.28%
22
2006 NET INTEREST PERFORMANCE OVERVIEW... The Company's 2006 net interest
income on a tax equivalent basis increased by $354,000 or 1.5% from 2005. This
improvement reflects the benefit of an increased net interest margin which has
more than offset a reduced level of average earning assets. Specifically, the
net interest margin increased by 36 basis points to 3.12% while average earning
assets declined by $91 million or 10.4%. 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. Wholesale borrowings
averaged only 3.9% of total assets in 2006 compared to 15.8% of total assets in
2005 while investment securities as a percentage of total assets has declined
from 36.5% to 25.4% during this same period. 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 $564 million in 2006, a $39 million or
7.4% increase from 2005. This loan growth was driven by increased commercial and
commercial real estate loans. Total deposits averaged $735 million in 2006, a
$35 million or 5.0% increase from 2005 due primarily to increased deposits from
the trust company's operations and increased certificates of deposit as
customers have demonstrated a preference for this product due to higher
short-term interest rates. Overall, the Company has been able to generate
increased net interest income from a smaller but stronger balance sheet despite
the negative impact resulting from a flat to inverted yield curve which has
pressured the Company's net interest margin throughout 2006.
COMPONENT CHANGES IN NET INTEREST INCOME: 2006 VERSUS 2005...Regarding the
separate components of net interest income, the Company's total interest income
for 2006 increased by $688,000 or 1.5% when compared to 2005. This increase was
due to a 69 basis point increase in the earning asset yield to 5.93%, but was
partially offset by a $91 million decrease in average earning assets. Within the
earning asset base, the yield on the total loan portfolio increased by 39 basis
points to 6.64% and reflects the higher interest rate environment in 2006 which
has allowed the Company to book new loans at rates moderately higher than those
currently in the portfolio. The yield on the total investment securities
portfolio increased by 26 basis points to 3.96% due to the repricing of variable
rate securities in the higher rate environment and reduced amortization expense
on the Company's lower balance of mortgage-backed securities.
The $91 million decline in average earning assets was due to a $130 million
or 37% reduction in average investment securities partially mitigated by a $39
million increase in average loans. The average investment securities decline in
2006 reflects the impact of the Company's deleveraging and balance sheet
repositioning strategies which began in the second half of 2004 and continued
throughout 2005. This repositioning involved selling investment securities and
using the proceeds to retire borrowings. The increase in average loans reflects
successful commercial loan growth as the Company was able to generate new
business particularly in commercial real estate loans. This commercial loan
growth led to a greater composition of loans in the earning asset mix that
favorably impacted the Company's net interest margin.
The Company's total interest expense for 2006 increased by $334,000 or 1.5%
when compared to 2005. This increase in interest expense was due to a higher
cost of funds which more than offset the decline in total average interest
bearing liabilities which were $87 million lower in 2006. We deleveraged our
balance sheet by reducing high cost FHLB debt and trust preferred securities in
the second half of 2005.
The total cost of funds for 2006 increased by 41 basis points to 3.26% and
was driven up by higher short-term interest rates and increased deposits when
compared to 2005. Specifically, total average deposits increased by $35 million
or 5.0% compared to 2005, while the cost of interest bearing deposits increased
by 87 basis points to 3.05%. The increased cost of deposits reflects the higher
short-term interest rate environment as well as a customer movement of funds
from lower cost savings and demand deposit accounts into higher yielding
certificates of deposit.
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.
23
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.
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.
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,
--------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------- ---------------------------- ------------------------------
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 $564,173 $37,693 6.64% $525,401 $33,055 6.25% $ 496,912 $30,414 5.99%
Deposits with banks 706 23 3.26 770 6 0.78 6,276 59 0.94
Federal funds sold 62 3 5.21 -- -- -- 68 1 0.91
Investment securities:
Available for sale 197,256 7,868 3.92 326,533 11,926 3.65 493,478 18,333 3.72
Held to maturity 24,448 1,074 4.39 25,422 986 3.88 34,480 1,414 4.10
-------- ------- -------- ------- ---------- -------
Total investment securities 221,704 8,942 3.96 351,955 12,912 3.70 527,958 19,747 3.74
-------- ------- -------- ------- ---------- -------
TOTAL INTEREST EARNING
ASSETS/ INTEREST INCOME 786,645 46,661 5.93 878,126 45,973 5.24 1,031,214 50,221 4.85
-------- ------- -------- ------- ---------- -------
Non-interest earning assets:
Cash and due from banks 18,841 21,449 21,793
Premises and equipment 8,324 9,365 10,493
Other assets 68,920 63,401 61,952
Assets of discontinued
operations -- 1,135 2,891
Allowance for loan losses (8,750) (9,613) (10,674)
-------- -------- ----------
TOTAL ASSETS $873,980 $963,863 $1,117,669
======== ======== ==========
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 57,817 $ 606 1.05% $ 54,695 $ 227 0.41% $ 53,502 $ 154 0.29%
Savings 81,964 643 0.78 96,819 829 0.86 104,187 928 0.89
Money market 172,029 5,741 3.34 156,932 3,256 2.07 120,280 1,340 1.11
Other time 319,220 12,242 3.83 284,951 8,673 3.04 279,458 7,914 2.83
-------- ------- -------- ------- ---------- -------
Total interest
bearing deposits 631,030 19,232 3.05 593,397 12,985 2.18 557,427 10,336 1.85
-------- ------- -------- ------- ---------- -------
Federal funds purchased and
other short-term borrowings 32,821 1,672 5.09 78,152 2,599 3.32 128,017 2,098 1.64
Advances from Federal Home
Loan Bank 967 63 6.45 73,924 4,510 6.10 208,444 11,218 5.38
Guaranteed junior
subordinated deferrable
interest debentures 13,085 1,120 8.57 19,345 1,659 8.58 34,842 2,986 8.57
-------- ------- -------- ------- ---------- -------
TOTAL INTEREST BEARING
LIABILITIES/INTEREST
EXPENSE 677,903 22,087 3.26 764,818 21,753 2.85 928,730 26,638 2.84
-------- ------- -------- ------- ---------- -------
Non-interest bearing
liabilities:
Demand deposits 104,266 107,018 106,249
Liabilities of
discontinued operations -- 379 498
Other liabilities 6,765 6,780 7,635
Stockholders' equity 85,046 84,868 74,557
-------- -------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $873,980 $963,863 $1,117,669
======== ======== ==========
Interest rate spread 2.67 2.39 2.01
Net interest income/net
interest margin 24,574 3.12% 24,220 2.76% 23,583 2.28%
Tax-equivalent adjustment (96) (108) (117)
------- ------- -------
Net interest income $24,478 $24,112 $23,466
======= ======= =======
25
The average balance and yield on taxable securities was $222 million and
3.96%, $352 million and 3.70% and $528 million and 3.74% for 2006, 2005, and
2004, 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.
2006 VS. 2005 2005 VS. 2004
--------------------------- ---------------------------
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 $ 2,513 $ 2,125 $ 4,638 $ 1,503 $ 1,138 $ 2,641
Deposits with banks -- 17 17 (44) (9) (53)
Federal funds sold 3 -- 3 (1) -- (1)
Investment securities:
Available for sale (4,990) 932 (4,058) (6,115) (292) (6,407)
Held to maturity (36) 124 88 (355) (73) (428)
------- ------- ------- ------- ------- -------
Total investment securities (5,026) 1,056 (3,970) (6,470) (365) (6,835)
------- ------- ------- ------- ------- -------
Total interest income (2,510) 3,198 688 (5,012) 764 (4,248)
------- ------- ------- ------- ------- -------
INTEREST PAID ON:
Interest bearing demand deposits 13 366 379 4 69 73
Savings deposits (116) (70) (186) (67) (32) (99)
Money market 337 2,148 2,485 499 1,417 1,916
Other time deposits 1,139 2,430 3,569 153 606 759
Federal funds purchased and other short-term borrowings (1,964) 1,037 (927) (307) 808 501
Advances from Federal Home Loan Bank (4,721) 274 (4,447) (8,463) 1,755 (6,708)
Guaranteed junior subordinated deferrable interest debentures (537) (2) (539) (1,330) 3 (1,327)
------- ------- ------- ------- ------- -------
Total interest expense (5,849) 6,183 334 (9,511) 4,626 (4,885)
------- ------- ------- ------- ------- -------
Change in net interest income $ 3,339 $(2,985) $ 354 $ 4,499 $(3,862) $ 637
======= ======= ======= ======= ======= =======
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,
------------------------
2006 2005 2004
------ ------ ------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Total loan delinquency (past due 30 to 89 days) $2,991 $4,361 $3,311
Total non-accrual loans 2,286 4,149 3,869
Total non-performing assets(1) 2,292 4,315 3,894
Loan delinquency as a percentage of total loans and loans
held for sale, net of unearned income 0.51% 0.79% 0.64%
Non-accrual loans as a percentage of total loans and loans
held for sale, net of unearned income 0.39 0.75 0.74
Non-performing assets as a percentage of total loans and
loans held for sale, net of unearned income, and other
real estate owned 0.39 0.78 0.75
(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 improvement between 2006 and 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 three years and reflect the improved loan
portfolio quality. Non-performing asset levels also declined by $2.0 million
between 2006 and 2005 to $2.3 million or 0.39% of total loans due to the
successful work-out of the Company's largest problem credit during 2006.
26
Overall, the Company had one loan totaling $1.3 million at December 31,
2006, that had been restructured which involved 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, 2006, the 25 largest credits represented 31.5% 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 $761,000 general risk reserve within the allowance
for loan losses at December 31, 2006.
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 risk 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,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year $ 9,143 $ 9,893 $ 11,682 $ 10,035 $ 5,830
Transfer to reserve for unfunded loan commitments -- -- (122) (139) --
-------- -------- -------- -------- --------
Charge-offs:
Commercial (769) (214) (1,107) (425) (5,119)
Commercial loans secured by real estate (2) (113) (1,928) (172) --
Real estate-mortgage (76) (145) (139) (331) (516)
Consumer (397) (403) (867) (645) (348)
-------- -------- -------- -------- --------
Total charge-offs (1,244) (875) (4,041) (1,573) (5,983)
-------- -------- -------- -------- --------
Recoveries:
Commercial 115 77 410 170 584
Commercial loans secured by real estate 41 15 7 2 --
Real estate-mortgage 19 52 65 63 160
Consumer 143 156 134 163 179
-------- -------- -------- -------- --------
Total recoveries 318 300 616 398 923
-------- -------- -------- -------- --------
Net charge-offs (926) (575) (3,425) (1,175) (5,060)
Provision for loan losses (125) (175) 1,758 2,961 9,265
-------- -------- -------- -------- --------
Balance at end of year $ 8,092 $ 9,143 $ 9,893 $ 11,682 $ 10,035
======== ======== ======== ======== ========
Loans and loans held for sale, net of unearned income:
Average for the year $567,435 $528,545 $503,742 $525,604 $592,686
At December 31 589,435 550,602 521,416 503,387 572,977
As a percent of average loans and loans held for sale:
Net charge-offs 0.16% 0.11% 0.68% 0.22% 0.85%
Provision for loan losses (0.02) (0.03) 0.35 0.56 1.56
Allowance for loan losses 1.43 1.73 1.96 2.22 1.69
Allowance as a percent of each of the following:
Total loans and loans held for sale, net of unearned income 1.37 1.66 1.90 2.32 1.75
Total delinquent loans (past due 30 to 89 days) 270.54 209.65 298.79 79.82 56.13
Total non-accrual loans 353.98 220.37 255.70 108.36 147.77
Total non-performing assets 353.05 211.89 254.06 102.37 144.10
Allowance as a multiple of net charge-offs 8.74x 15.90x 2.89x 9.94x 1.98x
Total classified loans $ 15,163 $ 20,208 $ 22,921 $ 35,135 $ 20,666
As a result of improved asset quality, we were able to reverse a portion of
the allowance for loan losses into earnings in both 2006 and 2005. The loan loss
provision benefit amounted to $125,000 in 2006 and $175,000 in 2005. Both of
these amounts compare favorably to the $1.8 million loan loss provision
recognized in 2004 as the Company was in the earlier stages of working out of
27
several larger problem credits during that year. Non-performing assets decreased
to $2.3 million or 0.39% of total loans at December 31, 2006 compared to $4.3
million or 0.78% of total loans at December 31, 2005. Classified loans have also
now declined for three consecutive years from a high point of $35.1 million at
December 31, 2003 to $15.2 million at December 31, 2006. For the year ended
December 31, 2006, net charge-offs amounted to $926,000 or 0.16% of total loans
compared to net charge-offs of $575,000 or 0.11% of total loans in 2005, and
$3.4 million or 0.68% of total loans in 2004.
Additionally, at December 31, 2006, the loan loss reserve as a percentage
of total loans amounted to 1.37% compared to 1.66% at December 31, 2005 and
1.90% at December 31, 2004. The drop in this ratio since December 31, 2004 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 353% at December 31, 2006 compared to 212% at December 31,
2005 and 254% at December 31, 2004. The drop in non-performing assets was a key
factor contributing to the improvement in this ratio over the past several
years.
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,
----------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------ ------------------ ------------------ ------------------- -------------------
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 $2,361 15.6% $3,312 14.6% $2,173 13.8% $ 2,623 15.0% $ 1,932 15.6%
Commercial
loans secured
by real estate 3,546 45.8 3,644 45.3 5,519 43.2 7,120 41.0 5,968 38.9
Real
estate-mortgage 424 35.6 381 36.5 346 38.9 376 38.9 469 40.7
Consumer 1,000 3.0 1,022 3.6 1,074 4.1 853 5.1 826 4.8
Allocation to
general risk 761 -- 784 -- 781 -- 710 -- 840 --
------ ------ ------ ------- -------
Total $8,092 100.0% $9,143 100.0% $9,893 100.0% $11,682 100.0% $10,035 100.0%
====== ===== ====== ===== ====== ===== ======= ===== ======= =====
Even though residential real estate-mortgage loans comprise 35.6% of the
Company's total loan portfolio, only $424,000 or 5.2% 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.
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 at
December 31, 2006 to cover losses within the Company's loan portfolio.
NON-INTEREST INCOME. . Non-interest income for 2006 totaled $12.8 million;
a $2.6 million or 25.8% increase from the 2005 performance. Factors contributing
to the net increase in non-interest income in 2006 included:
- the Company realized $2.5 million of investment security losses in
2005 in conjunction with its balance sheet restructuring. There were
no investment security losses realized in 2006.
- a $390,000 or 6.4% increase in trust fees due to continued successful
business development efforts in both the union and traditional trust
product lines. Over the past year, the fair market value of trust
customer assets has grown by 10.7% to $1.8 billion at December 31,
2006.
- a $190,000 increase in bank owned life insurance proceeds due largely
to the payment of a death claim in 2006.
28
- a $104,000 decrease in gains realized on loan sales into the secondary
market due to weaker residential mortgage loan production in 2006.
Overall, there were $5.8 million fewer loans sold into the secondary
market in 2006 when compared to 2005.
- other income declined by $204,000 in 2006 or 7.7% due to reduced
revenues from AmeriServ Associates, a subsidiary that previously
provided asset liability management and investment consulting services
to smaller community banks, that was closed in the second quarter of
2006 because it no longer fit the Company's strategic direction.
Non-interest 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.
NON-INTEREST EXPENSE. . . Non-interest expense for 2006 totaled $34.7
million, a $14.7 million or 29.8% decrease from the 2005 performance. Factors
contributing to the net decrease in non-interest expense in 2006 included:
- the Company incurred $12.3 million in charges related to FHLB
prepayment penalties and interest rate hedge termination costs in
conjunction with its balance sheet restructuring in 2005. There were
no such charges in 2006.
- professional fees decreased by $1.0 million or 24.4% due to lower
legal costs and external audit fees. The Company also experienced a
reduction in costs related to Sarbanes Oxley Section 404 compliance in
2006 as the professional costs associated with the first year
implementation were higher in 2005.
- salaries and employee benefits decreased by $393,000 or 2.1% due
primarily to 17 fewer full time equivalent employees (FTE) in 2006.
The closure of AmeriServ Associates was responsible for a reduction of
8 of these FTE.
- miscellaneous taxes and insurance declined by $195,000 or 11.1% due
largely to reduced premium costs for professional insurance coverage.
- other expenses declined by $433,000 as our continuing focus on cost
reduction and rationalization has resulted in numerous expense
reductions in categories such as collection costs, business
development expenses, telephone costs, and other real estate owned
expense. Also, the Company incurred a $210,000 charge to write-off
unamortized issuance costs related to the redemption of trust
preferred securities in 2005. There was no such charge in 2006.
Overall, the termination of the Memorandum of Understanding in 2006 was a
key factor causing the Company to begin realizing expense savings within
professional fees, other expenses, and FDIC insurance in the second half of the
year. Also, the loss from discontinued operations declined from $119,000 in 2005
to $0 in 2006 as the Company completed the exit from its mortgage servicing
operation in 2005.
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 2005 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.
29
- 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.
INCOME TAX EXPENSE. . . The Company recognized income tax expense of
$420,000 or an effective rate of 15.3% in 2006 compared to an income tax benefit
of approximately $5.9 million for both 2005 and 2004. As part of the 2006 tax
expense, the Company did benefit from the elimination of a $100,000 income tax
valuation allowance related to the deductibility of charitable contributions
that management determined was no longer needed given the level of taxable
income generated by the Company in 2006. As part of the income tax 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'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 $1.3
million in 2006 compared to $499,000 for 2005. The retail banking net income
contribution was up from the prior year due to lower non-interest expense. This
more than offset reduced net interest income. The reduced net interest income
reflected increased deposit costs due to the negative impact that the flat to
inverted yield curve had on shifting customers into higher cost certificates of
deposit. When 2005 is compared to 2004, the retail banking net income
contribution was down $831,000 due to reduced net interest income and lower
non-interest revenue.
The trust segment's net income contribution in 2006 amounted to $1.7
million which was up $303,000 from the prior year due to increased revenue and
controlled expenses. Successful new business development efforts in both the
traditional trust and union product lines contributed to the higher revenue.
Since December 31, 2005, the fair market value of trust customer assets has
increased by $172 million or 10.7% to $1.8 billion at December 31, 2006. The
trust segment's net income contribution in 2005 amounted to $1.4 million. This
represented an increase of $535,000 from the $860,000 net income contribution
earned in 2004 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 investment funds, namely the ERECT and BUILD Funds
are designed to invest union pension dollars in construction projects that
utilize union labor. This unique growth niche has 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 approximately
$400 million at December 31, 2006.
The commercial lending segment's net income contribution in 2006 amounted
to $2.6 million which was up $1.2 million when compared to the net income of
$1.4 million reported in 2005. The improved performance in 2006 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 $38 million or 12.9% during 2006. The improved
asset quality also allowed the Company to release a portion of our allowance for
loan losses into earnings in both 2006 and 2005. When 2005 is compared to 2004,
the commercial lending segment significantly increased its profitability by $1.5
million when compared to the $93,000 net loss experienced in 2004. The 2005 net
income improvement was also caused by increased net interest income and a lower
provision for loan losses.
The investment/parent segment reported a net loss of $3.2 million in 2006
which was significantly less than the net loss of $12.2 million realized in 2005
and the net loss of $10.7 million realized in 2004. Note that the losses in 2005
and 2004 were due primarily to the previously discussed balance sheet
restructuring actions which were executed to reduce the Company's risk profile
and improve our earnings power. Specifically in 2005, these restructuring
actions included $12.3 million of FHLB debt and interest rate hedge prepayment
penalties and $2.6 million of losses realized on investment security sales. In
2004, the Company incurred $12.6 million of FHLB debt prepayment penalties.
There were no such charges realized in 2006. Note that the Company also
benefited from a reduction in interest expense on the guaranteed junior
subordinated debentures that amounted to $539,000 in 2006 and $1.3 million in
2005 as a portion of this high cost debt was retired in conjunction with the
private placement common stock offerings.
The increased net loss in the other fee based segment resulted from the
Company's strategic decision to close AmeriServ Associates in the second quarter
of 2006. This subsidiary previously provided asset liability management and
investment consulting services to smaller community banks. Additionally, 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 to $0 in
2006.
30
For greater discussion on the future strategic direction of the Company's
key business segments, see Forward Looking Statement which begins on page 36.
BALANCE SHEET. . . The Company's total consolidated assets were $896
million at December 31, 2006, compared with $880 million at December 31, 2005,
which represents an increase of $15.8 million or 1.8%. This higher level of
assets resulted primarily from an increased level of loans. The Company's loans
totaled $589 million at December 31, 2006, an increase of $39 million or 7.1%
from year-end 2005 due to commercial and commercial real-estate loan growth.
Investment securities declined by $28 million in 2006 as investment portfolio
cash flow has been used to either paydown borrowings or fund loan growth.
The Company's deposits totaled $742 million at December 31, 2006, which was
$29 million or 4.1% higher than December 31, 2005. $20 million of this increase
was caused by greater Trust Company controlled money market deposits in the
Bank. The remainder of the deposit increase was due to increased certificates of
deposit as customers have opted for this product given higher short-term
interest rates. Total borrowed funds decreased by $14 million due to the
previously discussed strategy to reduce the Company's borrowed funds with
investment securities cash flow if this cash is not first needed to fund loans.
Total stockholders' equity remained constant at approximately $85 million at
December 31, 2006 and December 31, 2005, as the capital provided from the 2005
private placement basically offset the $9.1 million net loss experienced during
2005. In 2006, a $2.4 million decline in accumulated other comprehensive income
due to the recognition of a minimum pension liability resulting from the
adoption of FAS #158 was basically offset by $2.3 million of retained net
income. The Company continues to be considered well capitalized for regulatory
purposes with an asset leverage ratio at December 31, 2006 of 10.54%. The
Company's book value per share at December 31, 2006 was $3.82.
LIQUIDITY. . The Bank's liquidity position has been sufficient during the
last several years when the Bank was undergoing a turnaround and return to
traditional community banking. 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 adversely affected the Bank's liquidity.
Both the maturing securities and the securities sold were pledged as collateral
for FHLB borrowings. However, the cash flow from the maturities and the sale of
securities was used to reduce FHLB advances and therefore these transactions did
not require that replacement securities be pledged and did not otherwise
adversely affect Bank liquidity. We expect that liquidity will continue to be
adequate as we 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 increased by $2.7 million from December
31, 2005, to December 31, 2006, due primarily to $7.6 million of cash provided
by financing activities and $5.1 million of cash provided by operating
activities. This was offset by $10.0 million of cash used in investing
activities. Within investing activities, proceeds from investment security
maturities exceeded cash used for limited purchases of new investment securities
by $31 million. This reflected the Company's ongoing strategy of using cash from
the investment portfolio to fund loans. Cash advanced for new loan fundings and
purchases totaled $152 million and was $39 million more than the cash received
from loan principal payments and sales. Within financing activities, the Company
experienced a net $23 million growth in deposits with these funds used to
paydown short-term borrowings and fund loans as the Company has consciously
reduced its interest rate risk position by eliminating debt.
The Company used $1.0 million of cash to service the dividend on the
guaranteed junior subordinated deferrable interest debentures (trust preferred
securities) in 2006. This was $530,000 less than the cash used for this purpose
in 2005 due to the retirement of $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 completed in 2005 and 2004 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. The parent company had $3.2 million of cash at December 31,
2006.
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 reinstatement of any common dividend or treasury stock
repurchase program is dependent upon the subsidiary bank maintaining and
improving profitability so that it can resume upstreaming dividends to the
parent company under applicable law. The subsidiary bank must first recoup $6.5
million in net losses that it incurred over the past two years before it can
consider resuming dividend upstreams or wait until the first quarter of 2008
when prior losses are no longer factored into the regulatory dividend upstream
calculation.
31
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 $8 million at December 31, 2006 compared to $26 million at
December 31, 2005. 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, 2006, the bank had immediately
available $218 million of overnight borrowing capability at the FHLB and a $10
million unsecured federal funds line with a correspondent bank. 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 10.54% at December 31, 2006 compared
to 10.24% at December 31, 2005. Note that the impact of other comprehensive loss
is excluded from the regulatory capital ratios. At December 31, 2006,
accumulated other comprehensive loss amounted to $6.4 million. Additionally, the
amortization of $865,000 of core deposit intangible assets has favorably
impacted tangible capital. The tangible equity to asset ratio was 8.29% at
December 31, 2006. We anticipate that we will further build our capital ratios
during 2007 due to the retention of earnings and limited change in the overall
size of the balance sheet.
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, 2006:
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 $221,085 $ 25,963 $ 48,326 $285,969 $581,343
Investment securities 38,503 11,262 13,897 138,493 202,155
Short-term assets 413 -- -- -- 413
Bank owned life insurance -- -- 32,256 -- 32,256
-------- -------- -------- -------- --------
Total rate sensitive assets $260,001 $ 37,225 $ 94,479 $424,462 $816,167
-------- -------- -------- -------- --------
RATE SENSITIVE LIABILITIES:
Deposits:
Non-interest bearing deposits $ -- $ -- $ -- $107,559 $107,559
NOW and Super NOW 8,850 -- -- 59,608 68,458
Money market 151,666 -- -- 12,041 163,707
Other savings 18,613 -- -- 55,839 74,452
Certificates of deposit of $100,000 or more 17,424 3,413 5,629 4,114 30,580
Other time deposits 83,941 26,591 96,330 90,137 296,999
-------- -------- -------- -------- --------
Total deposits 280,494 30,004 101,959 329,298 741,755
Borrowings 49,101 11 22 13,988 63,122
-------- -------- -------- -------- --------
Total rate sensitive liabilities $329,595 $ 30,015 $101,981 $343,286 $804,877
-------- -------- -------- -------- --------
INTEREST SENSITIVITY GAP:
Interval (69,594) 7,210 (7,502) 81,176 --
Cumulative $(69,594) $(62,384) $(69,886) $ 11,290 $ 11,290
======== ======== ======== ======== ========
Period GAP ratio 0.79X 1.24X 0.93X 1.24X
Cumulative GAP ratio 0.79 0.83 0.85 1.02
Ratio of cumulative GAP to total assets (7.77)% (6.96)% (7.80)% 1.26%
When December 31, 2006, is compared to December 31, 2005, the ratio of the
cumulative GAP to total assets up to the one year time frame became more
negative increasing from -5.15% to -7.80%. This increase was due to customer
preference for shorter term certificates of deposit in 2006 as a result of the
inverted yield curve with short term rates higher than intermediate to longer
term interest rates.
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
---------------------- -------------- ----------------
200 bp increase (0.4)% 7.1%
100 bp increase 1.0 4.6
100 bp decrease (0.2) (9.7)
200 bp decrease (3.7) (28.5)
As indicated in the table, the 2005 balance sheet restructuring has sharply
reduced the earnings volatility in the Company's balance sheet as a result of
the Company's reduced level of borrowed funds. The variability of net interest
income is 1.0% or less in both of the 100 basis point interest rate shock
scenarios. The market value of portfolio equity increased by 4.6% in a 100 basis
point upward
33
rate shock due to increased value of the Company's core deposit base. Negative
variability of market value of portfolio equity occurred in both downward rate
shocks due to a reduced value for core deposits.
Within the investment portfolio at December 31, 2006, 90% of the portfolio
is classified as available for sale and 10% as held to maturity. The available
for sale classification provides management with greater flexibility to manage
the securities portfolio to better achieve overall balance sheet rate
sensitivity goals and provide liquidity to fund loan growth if needed. The mark
to market of the available for sale securities does inject more volatility in
the book value of equity but has no impact on regulatory capital. Furthermore,
it is the Company's intent 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, 2006, 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 $ 29,615 $ 48,853 $ 13,278 $ 91,746
Commercial loans secured by real estate 47,363 90,993 131,425 269,781
Real estate-mortgage 47,920 84,898 77,268 210,086
Consumer 3,591 5,456 9,289 18,336
-------- -------- -------- --------
Total $128,489 $230,200 $231,260 $589,949
======== ======== ======== ========
Loans with fixed-rate $ 64,725 $162,014 $130,394 $357,133
Loans with floating-rate 63,764 68,186 100,866 232,816
-------- -------- -------- --------
Total $128,489 $230,200 $231,260 $589,949
======== ======== ======== ========
Percent composition of maturity 21.8% 39.0% 39.2% 100.0%
Fixed-rate loans as a percentage of total loans 60.5%
Floating-rate loans as a percentage of total loans 39.5%
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, 2006, significant fixed and determinable contractual obligations to third
parties by payment date. Further discussion of the nature of each obligation is
included in the referenced note to the consolidated financial statements.
PAYMENTS DUE IN
--------------------------------------------------------------------------
NOTE ONE YEAR ONE TO THREE THREE TO FIVE OVER FIVE
REFERENCE OR LESS YEARS YEARS YEARS TOTAL
--------- -------- ------------ ------------- --------- --------
(IN THOUSANDS)
Deposits without a stated maturity 8 $414,176 $ -- $ -- $ -- $414,176
Certificates of deposit* 8 242,054 53,985 24,811 31,946 352,796
Borrowed funds* 10 51,827 115 144 968 53,054
Guaranteed junior subordinated deferrable
interest debentures* 10 -- -- -- 34,369 34,369
Pension obligation 13 1,500 -- -- -- 1,500
Lease commitments 14 828 954 693 673 3,148
* Includes interest based upon interest rates in effect at December 31, 2006.
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
34
outstanding commitments to extend credit approximating $125,863,000 and standby
letters of credit of $8,472,000 as of December 31, 2006. 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,
2006, there were no interest rate contracts outstanding.
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 $5.8 million, or
72%, of the total allowance for credit losses at December 31, 2006 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) #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, 2006, we
believe that all of the deferred tax assets recorded on our balance sheet will
ultimately be recovered.
35
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 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.
ACCOUNT -- Investment Securities
BALANCE SHEET REFERENCE -- Investment Securities
INCOME STATEMENT REFERENCE -- Net realized gains (losses) on investment
securities
DESCRIPTION
Available-for-sale and held-to-maturity securities are reviewed quarterly
for possible other-than-temporary impairment. The review includes an analysis of
the facts and circumstances of each individual investment such as the severity
of loss, the length of time the fair value has been below cost, the expectation
for that security's performance, the creditworthiness of the issuer and the
Company's intent and ability to hold the security to recovery. A decline in
value that is to be considered to be other-than-temporary is recorded as a loss
within non-interest income in the Consolidated Statements of Operation. At
December 31, 2006, 100% of the unrealized losses in the available-for-sale
security portfolio were comprised of securities issued by Government agencies,
U.S. Treasury or Government sponsored agencies. The Company believes the price
movements in these securities are dependent upon the movement in market interest
rates. The Company's management also maintains the intent and ability to hold
securities in an unrealized loss position to the earlier of the recovery of
losses or maturity.
FORWARD LOOKING STATEMENT. . .
THE STRATEGIC FOCUS:
During the three-year life of the MOU, the focus of the company was on
satisfying the regulatory criticisms and improving the quality of the balance
sheet. But now the emphasis has changed. 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. Our new focus encompasses the
following:
- Customer Service - it is the existing and prospective customer that
AmeriServ must now satisfy. This means good products and fair prices. But
it also means quick response time and professional competence. It means
speedy problem resolution and a minimizing of bureaucratic frustrations.
AmeriServ is training and motivating its staff to meet these standards.
- Revenue Growth - the competitors of AmeriServ have been able to strengthen
their position while AmeriServ concentrated on the provisions of the MOU.
However, it is now necessary for AmeriServ to focus on growing revenues.
This means loan growth, deposit growth and fee growth. It also means close
coordination between all customer service areas so as many revenue
producing products as possible can be presented to existing and prospective
customers. The Company's Strategic Plan contains action plans in each of
these areas. This challenge will be met by seeking to exceed customer
expectations in every area. An examination of the peer bank database
provides ample proof that a well executed community banking business model
can generate a reliable and rewarding revenue stream.
- Expense Rationalization - a quick review of recent AmeriServ financial
statements tells the story of a continuing process of expense
rationalization. This has not been a program of broad based cuts but has
been targeted so AmeriServ stays strong but spends less. However, this
initiative takes on new importance because it is critical to be certain
that future expenditures are directed to areas that are playing a positive
role in the drive to improve revenues.
Each of the preceding charges has become the focus at AmeriServ,
particularly in the three major customer service, revenue generating areas.
1. THE RETAIL BANK -- this business unit has emerged from the past
difficulties strong and eager to grow. It has new powers in that it
now includes Consumer Lending and Residential Mortgages. But more
importantly, it has a solid array of banking services, and a broad
distribution of community offices in its primary market. This business
unit will provide a solid foundation for the company as it presents
its new, positive face to the community.
36
2. COMMERCIAL LENDING -- this business unit is already in a growth mode.
It has totally revised procedures and has recruited an experienced
professional staff. But it also has the skills and energy to provide
financial advice and counsel. The challenge is to shorten response
time, to eliminate bureaucracy and to always understand the needs of
the customer. This business unit has already proven its value, while
now only in the earliest stages of working to maximize its potential.
3. TRUST COMPANY -- the Trust Company has already proven its ability to
grow its assets under management along with its fees. It has
restructured itself into a true 21st Century business model which has
improved its marketplace focus. It has a positive investment
performance record which enables it to excel in traditional trust
functions such as wealth management. But also, it has shown creativity
in building a position of substance in the vast world of union managed
pension funds. Resources will continue to be channeled to the Trust
Company so that this kind of creativity can continue to lead to new
opportunities.
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) 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.
37
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
-------------------
2006 2005
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 23,491 $ 20,762
Interest bearing deposits 413 199
-------- --------
Cash and due from depository institutions 23,904 20,961
-------- --------
Investment securities:
Available for sale 181,498 201,569
Held to maturity (market value $20,460 at December 31, 2006 and $30,206 at December 31, 2005) 20,657 30,355
Loans held for sale 358 98
Loans 589,591 551,335
Less: Unearned income 514 831
Allowance for loan losses 8,092 9,143
-------- --------
Net loans 580,985 541,361
-------- --------
Premises and equipment, net 8,562 8,689
Accrued income receivable 4,165 4,125
Goodwill 9,544 9,544
Core deposit intangibles 1,838 2,703
Bank owned life insurance 32,256 31,640
Net deferred tax asset 15,837 14,976
Assets related to discontinued operations -- 329
Other assets 16,388 13,826
-------- --------
TOTAL ASSETS $895,992 $880,176
======== ========
LIABILITIES
Non-interest bearing deposits $107,559 $109,274
Interest bearing deposits 634,196 603,381
-------- --------
Total deposits 741,755 712,655
-------- --------
Short-term borrowings 49,091 63,184
Advances from Federal Home Loan Bank 946 987
Guaranteed junior subordinated deferrable interest debentures 13,085 13,085
-------- --------
Total borrowed funds 63,122 77,256
-------- --------
Liabilities related to discontinued operations -- 14
Other liabilities 6,431 5,777
-------- --------
TOTAL LIABILITIES 811,308 795,702
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized; there were no shares issued and
outstanding on December 31, 2006, and 2005 -- --
Common stock, par value $2.50 per share; 30,000,000 shares authorized; 26,247,013 shares issued and
22,156,094 shares outstanding on December 31, 2006; 26,203,192 shares issued and 22,112,273 shares
outstanding on December 31, 2005 65,618 65,508
Treasury stock at cost, 4,090,919 shares on December 31, 2006 and 2005 (65,824) (65,824)
Capital surplus 78,739 78,620
Retained earnings 12,568 10,236
Accumulated other comprehensive loss, net (6,417) (4,066)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 84,684 84,474
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $895,992 $880,176
======== ========
See accompanying notes to consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------
2006 2005 2004
------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans:
Taxable $37,366 $ 32,685 $ 30,012
Tax exempt 231 262 285
Deposits with banks 23 6 59
Federal funds sold 3 -- 1
Investment securities:
Available for sale 7,868 11,926 18,333
Held to maturity 1,074 986 1,414
------- -------- --------
Total Interest Income 46,565 45,865 50,104
------- -------- --------
INTEREST EXPENSE
Deposits 19,232 12,985 10,336
Short-term borrowings 1,672 2,599 2,098
Advances from Federal Home Loan Bank 63 4,510 11,218
Guaranteed junior subordinated deferrable interest debentures 1,120 1,659 2,986
------- -------- --------
Total Interest Expense 22,087 21,753 26,638
------- -------- --------
Net Interest Income 24,478 24,112 23,466
Provision for loan losses (125) (175) 1,758
------- -------- --------
Net Interest Income after Provision for Loan Losses 24,603 24,287 21,708
------- -------- --------
NON-INTEREST INCOME
Trust fees 6,519 6,129 5,363
Net gains on loans held for sale 105 209 351
Net realized gains (losses) on investment securities -- (2,499) 816
Service charges on deposit accounts 2,561 2,700 2,806
Bank owned life insurance 1,207 1,017 1,108
Other income 2,449 2,653 3,568
------- -------- --------
Total Non-Interest Income 12,841 10,209 14,012
------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 18,669 19,062 19,013
Net occupancy expense 2,410 2,552 2,636
Equipment expense 2,349 2,509 2,578
Professional fees 3,208 4,242 3,697
Supplies, postage, and freight 1,167 1,154 1,192
Miscellaneous taxes and insurance 1,567 1,762 1,747
FDIC deposit insurance expense 192 289 287
Amortization of core deposit intangibles 865 865 1,150
Federal Home Loan Bank and hedge prepayment penalties -- 12,287 12,637
Other expense 4,265 4,698 5,154
------- -------- --------
Total Non-Interest Expense 34,692 49,420 50,091
------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,752 (14,924) (14,371)
Provision (benefit) for income taxes 420 (5,902) (5,845)
------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,332 (9,022) (8,526)
LOSS FROM DISCONTINUED OPERATIONS NET OF TAX BENEFIT $(0), $(61), AND $(648),
RESPECTIVELY -- (119) (1,193)
------- -------- --------
NET INCOME (LOSS) $ 2,332 $ (9,141) $ (9,719)
======= ======== ========
PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic:
Income (loss) $ 0.11 $ (0.44) $ (0.58)
Average number of shares outstanding 22,141 20,340 14,783
Diluted:
Income (loss) $ 0.11 $ (0.44) $ (0.58)
Average number of shares outstanding 22,149 20,340 14,783
PER COMMON SHARE DATA:
Basic:
Net income (loss) $ 0.11 $ (0.45) $ (0.66)
Average number of shares outstanding 22,141 20,340 14,783
Diluted:
Net income (loss) $ 0.11 $ (0.45) $ (0.66)
Average number of shares outstanding 22,149 20,340 14,783
Cash dividends declared $ 0.00 $ 0.00 $ 0.00
See accompanying notes to consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005 2004
------ ------- --------
(IN THOUSANDS)
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $2,332 $(9,141) $ (9,719)
Other comprehensive income (loss)
Unrealized holding gains (losses) on available for
sale securities arising during period 1,309 (3,605) (2,882)
Income tax effect (444) 1,226 1,008
Reclassification adjustment for losses (gains)
on available for sale securities included in
net loss -- 2,499 (816)
Income tax effect -- (850) 286
------ ------- --------
Other comprehensive income (loss) 865 (730) (2,404)
------ ------- --------
Comprehensive income (loss) $3,197 $(9,871) $(12,123)
====== ======= ========
See accompanying notes to consolidated financial statements.
40
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of period $ -- $ -- $ --
Balance at end of period -- -- --
-------- -------- --------
COMMON STOCK
Balance at beginning of period 65,508 59,522 45,121
Stock options exercised/new shares issued 110 67 72
Shares issued from private offerings -- 5,919 14,329
-------- -------- --------
Balance at end of period 65,618 65,508 59,522
-------- -------- --------
TREASURY STOCK
Balance at beginning of period (65,824) (65,824) (65,824)
-------- -------- --------
Balance at end of period (65,824) (65,824) (65,824)
-------- -------- --------
CAPITAL SURPLUS
Balance at beginning of period 78,620 75,480 66,809
Stock options exercised/new shares issued 64 66 77
Stock option expense due to FAS #123R 55 -- --
Shares issued from private offerings, net of
issuance costs -- 3,074 8,594
-------- -------- --------
Balance at end of period 78,739 78,620 75,480
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period 10,236 19,377 29,096
Net income (loss) 2,332 (9,141) (9,719)
-------- -------- --------
Balance at end of period 12,568 10,236 19,377
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (4,066) (3,336) (932)
Cumulative effect of adoption of change in
accounting for pension obligation, net of
tax effect (3,216) -- --
Other comprehensive income (loss) 865 (730) (2,404)
-------- -------- --------
Balance at end of period (6,417) (4,066) (3,336)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $ 84,684 $ 84,474 $ 85,219
======== ======== ========
See accompanying notes to consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------
2006 2005 2004
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) ........................................ $ 2,332 $ (9,141) $ (9,719)
Loss from discontinued operations ........................ -- (119) (1,193)
--------- --------- ---------
Income (loss) from continuing operations ................. 2,332 (9,022) (8,526)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in)
operating activities:
Provision for loan losses ................................ (125) (175) 1,758
Depreciation and amortization expense .................... 1,700 1,817 1,867
Amortization expense of core deposit intangibles ......... 865 865 1,150
Net amortization of investment securities ................ 597 1,560 2,237
Net realized losses (gains) on investment securities --
available for sale .................................... -- 2,499 (816)
Net realized gains on loans held for sale ................ (105) (209) (351)
Amortization of deferred loan fees ....................... (393) (421) (281)
Loss on prepayment of interest rate swaps ................ -- 5,825 --
Origination of mortgage loans held for sale .............. (11,714) (16,807) (28,257)
Sales of mortgage loans held for sale .................... 11,454 17,298 27,510
Write-off of debt issuance costs ......................... -- 210 476
(Increase) decrease in accrued interest receivable ....... (40) 163 634
Increase (decrease) in accrued interest payable .......... 1,029 (707) (207)
Net increase in other assets ............................. (1,148) (10,605) (846)
Net increase in other liabilities ........................ 627 889 1,901
--------- --------- ---------
Net cash provided by (used in) operating activities from
continuing operations ................................. 5,079 (6,820) (1,751)
Net cash used in operating activities from discontinued
operations ............................................ -- (597) (254)
--------- --------- ---------
Net cash provided by (used in) operating activities ...... 5,079 (7,417) (2,005)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of investment securities -- available for sale .. (8,823) (32,469) (311,410)
Purchase of investment securities -- held to maturity .... (1,500) -- (17,050)
Proceeds from maturities of investment securities --
available for sale .................................... 29,721 60,086 76,999
Proceeds from maturities of investment securities -- held
to maturity ........................................... 11,104 3,701 6,497
Proceeds from sales of investment securities -- available
for sale .............................................. -- 132,595 391,488
Long-term loans originated ............................... (142,247) (119,012) (188,874)
Principal collected on long-term loans ................... 112,027 110,991 145,339
Loans purchased or participated .......................... (10,004) (22,104) (9,437)
Loans sold or participated ............................... 1,600 1,000 31,500
Net increase in other short-term loans ................... (377) (497) (83)
Purchases of premises and equipment ...................... (1,597) (1,028) (766)
Proceeds from sale of premises and equipment ............. 50 210 216
--------- --------- ---------
Net cash (used in) provided by investing activities from
continuing operations ................................. (10,046) 133,473 124,419
Net cash provided by investing activities from
discontinued operations ............................... -- -- 915
--------- --------- ---------
Net cash (used in) provided by investing activities ...... $ (10,046) $ 133,473 $ 125,334
--------- --------- ---------
See accompanying notes to consolidated financial statements.
(continued on next page)
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued from previous page)
YEAR ENDED DECEMBER 31
---------------------------------
2006 2005 2004
--------- --------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts .............. $ 22,608 $ 68,264 $ (10,206)
Net (decrease) increase in other short-term borrowings ... (14,093) (88,751) 7,292
Net principal repayments on advances from Federal Home
Loan Bank ............................................. (41) (100,039) (130,037)
Cancellation payment of interest rate swaps .............. -- (5,825) --
Guaranteed junior subordinated deferrable interest
debenture dividends paid .............................. (1,016) (1,546) (2,860)
Redemption of guaranteed junior subordinated deferrable
interest debentures ................................... -- (7,200) (14,215)
Proceeds from dividend reinvestment and stock purchase
plan and stock options exercised ...................... 173 133 149
Private placement issuance of common stock ............... -- 10,300 25,792
Costs associated with private placement .................. -- (1,482) (2,687)
-------- --------- ---------
Net cash provided by (used in) financing activities ...... 7,631 (126,146) (126,772)
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 2,664 (90) (3,443)
CASH AND CASH EQUIVALENTS AT JANUARY 1 ................... 21,240 21,330 24,773
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 ................. $ 23,904 $ 21,240 $ 21,330
======== ========= =========
See accompanying notes to consolidated financial statements.
43
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 2006, 2005 AND 2004
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 21 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 administers assets
valued at approximately $1.8 billion at December 31, 2006. 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 21 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 23).
AmeriServ Associates, based in State College, was a registered investment
advisory firm that provided investment portfolio and asset/liability management
services to small and mid-sized financial institutions. As of June 30, 2006, the
Company closed this subsidiary since it no longer fit the Company's strategic
direction. 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 does not engage in trading activity. Realized gains or losses on
securities sold are computed upon the adjusted cost of the specific securities
sold. Available-for-sale and held-to-maturity securities are reviewed quarterly
for possible other-than-temporary impairment. The review includes an analysis of
the facts and circumstances of each individual investment such as the severity
of loss, the length of time the fair value has been below cost, the expectation
for that security's performance, the creditworthiness of the issuer and the
Company's intent and ability to hold the security to recovery.
LOANS:
Interest income is recognized using methods which approximate a level yield
related to principal amounts outstanding. The Bank discontinues the accrual of
interest income when loans 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
44
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.
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.
- Management recognizes that there may be events or economic factors
that have occurred affecting specific borrowers or segments of
borrowers that may not yet be fully reflected in the information that
the Company uses for arriving at reserves for a specific loan or
portfolio segment. Therefore, the Company believes an allocation for
general risk is needed to recognize the estimation risk associated
with the specific and formula driven allowances.
After completion of this process, a formal meeting of the Loan Loss Reserve
Committee is held to evaluate the adequacy of the reserve.
45
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.
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 on the Consolidated Balance Sheet at their cash
surrender value, or the amount that can be realized. Income from these policies
and changes in the cash surrender value are recorded in bank owned life
insurance within non-interest income.
INTANGIBLE ASSETS:
Core deposit intangible assets are amortized over their useful lives, which
do not exceed 10 years. Prior to January 1 2002, goodwill was amortized using
the straight-line method over a period of 15 years. Beginning in 2002, the
Company ceased amortizing goodwill in accordance with Financial Accounting
Statement #142 (FAS #142). Goodwill and core deposit intangibles are reviewed
for impairment at least on an annual basis or when events occur that could
result in impairment.
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
predominant risk characteristics of its portfolio were loan type and interest
rate. For the purposes of evaluating impairment, the
46
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 23). 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 213,974, 134,349 and 131,095 shares of
common stock were outstanding during 2006, 2005 and 2004, 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:
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (FAS) #123(R) "Share-Based Payment" using the "modified prospective"
method. Under this method, awards that are granted, modified, or vested after
December 15, 2005, are measured and accounted for in accordance with FAS
#123(R). As a result of this adoption the Company recognized $56,000 of pretax
compensation expense for the year 2006. The fair value of each option grant is
estimated on the grant date using the Black-Scholes option pricing model with
the following assumptions used for the grants: risk-free interest rates ranging
from 3.41% to 4.70%; expected lives of 10 years; expected volatility ranging
from 33.39% to 39.65% and expected dividend yields of 0%. Prior to the adoption,
employee compensation expense under stock options was reported using the
intrinsic value method.
The Company had stock based compensation plans, which are described more
fully in Note 17 Stock Compensation Plans. Prior to FAS #123(R), the Company
accounted for these plans under Accounting Principles Board Opinion #25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation expense had 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 (FAS)
#123, "Accounting for Stock-Based Compensation," to stock compensation plans.
PRO FORMA NET LOSS
AND LOSS PER SHARE
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net loss, as reported $(9,022) $(8,526)
Less: Total stock compensation expense determined
under the fair value method for all awards,
net of related tax effects (74) (72)
------- -------
Pro forma net loss $(9,096) $(8,598)
======= =======
Loss per share:
Basic as reported $ (0.44) $ (0.58)
Basic pro forma (0.45) (0.58)
Diluted as reported (0.44) (0.58)
Diluted pro forma (0.45) (0.58)
COMPREHENSIVE LOSS:
For the Company, comprehensive loss includes net income and unrealized
holding gains and losses from available for sale investment securities. The
balances of accumulated other comprehensive loss were $(6,417,000), $(4,066,000)
and $(3,336,000) at December 31, 2006, 2005 and 2004, 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.
47
The Company made $169,000 in income tax payments in 2006; $54,000 in 2005; and
$3,837,000 in 2004. The Company made total interest payments of $21,058,000 in
2006; $22,460,000 in 2005; and $26,845,000 in 2004.
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 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, 2006
or December 31, 2005.
RECENT ACCOUNTING STANDARDS:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting ("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 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 #154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion #20, Accounting Changes, and FAS #3,
Reporting Accounting Changes in Interim financial statements." Under the
provisions of FAS #154, voluntary changes in accounting principles are applied
retrospectively to prior periods' financial statements unless it would be
impractical. FAS #154 supersedes APB opinion #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 #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 #154 are effective for
accounting changes made in fiscal years beginning after December 15, 2005. The
adoption of this standard did not 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 (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 adoption of this FSP did not have a
significant impact on our consolidated financial statements, results of
operations or liquidity of the Company. At December 31, 2006, gross unrealized
losses on investment securities were $5.2 million.
48
In February 2006, the FASB issued FAS #155, "Accounting for Certain Hybrid
Instruments, as an amendment of FASB Statements operations. #133 and 140". FAS
#155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
This statement is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006. The adoption of this standard did not have a material impact on the
Company's results of
In March 2006, the FASB issued FAS #156, "Accounting for Servicing of
Financial Assets". This Statement, which is an amendment to FAS #140, will
simplify the accounting for servicing assets and liabilities, such as those
common with mortgage securitization activities. Specifically, FAS #156 addresses
the recognition and measurement of separately recognized servicing assets and
liabilities and provides an approach to simplify efforts to obtain hedge-like
(offset) accounting. FAS #156 also clarifies when an obligation to service
financial assets should be separately recognized as a servicing asset or a
servicing liability, requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable, and
permits an entity with a separately recognized servicing asset or servicing
liability to choose either of the amortization or fair value methods for
subsequent measurement. The provisions of FAS #156 are effective as of the
beginning of the first fiscal year that begins after September 15, 2006. The
adoption of this standard did not have a material impact on the Company's
results of operations.
In June 2006, the FASB issued FASB Interpretation #48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes". FIN 48 is an interpretation of FAS
#109, "Accounting for Income Taxes", and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in
accounting for income taxes. This Interpretation clarifies that management is
expected to evaluate an income tax position taken or expected to be taken for
likelihood of realization before recording any amounts for such position in the
financial statement. FIN 48 requires expanded disclosure with respect to income
tax positions taken that are not certain to be realized. This Interpretation is
effective for fiscal years beginning after December 15, 2006, and will require
management to evaluate every open tax position that exists in every jurisdiction
on the date of initial adoption. The Company is currently evaluating the impact
the adoption of the standard will have on the Company's results of operations or
financial condition.
In September 2006, the FASB issued FAS #157, "Fair Value Measurements",
which provides enhanced guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards require or permit
assets or liabilities to be measured at fair value. The Standard does not expand
the use of fair value in any new circumstances. FAS #157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. Early adoption is permitted. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-5 ("EITF 06-5"), Accounting for Purchases of
Life Insurance--Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin #85-4, Accounting for Purchases of Life Insurance. EITF
06-5 states that a policyholder should consider any additional amounts included
in the contractual terms of the insurance policy other than the cash surrender
value in determining the amount that could be realized under the insurance
contract. EITF 06-5 also states that a policyholder should determine the amount
that could be realized under the life insurance contract assuming the surrender
of an individual-life by individual-life policy (or certificate by certificate
in a group policy). EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the adoption
of the standard will have on the Company's results of operations or financial
condition.
In September 2006, the FASB issued FAS #158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements # 87, 88, 106 and 132(R)." FAS #158 requires that a company recognize
the overfunded or underfunded status of its defined benefit post retirement
plans (other than multiemployer plans) as an asset or liability in its statement
of financial position and that it recognize changes in the funded status in the
year in which the changes occur through other comprehensive income. FAS #158
also requires the measurement of defined benefit plan assets and obligations as
of the fiscal year-end, in addition to footnote disclosures. On December 31,
2006, the Company adopted FAS #158, except for the measurement provisions, which
are effective for fiscal years ending after December 15, 2008. The adoption of
the remaining provisions of the standard is not expected to have a material
effect on the Company's results of operations or financial position.
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2006 and 2005, included $8,481,000
and $8,162,000, respectively, of reserves required to be maintained under
Federal Reserve Bank regulations.
49
3. INVESTMENT SECURITIES
The cost basis and market values of investment securities are summarized as
follows:
Investment securities available for sale:
AT DECEMBER 31, 2006
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST BASIS GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury $ 6,011 $-- $ (164) $ 5,847
U.S. Agency 57,636 7 (1,021) 56,622
U.S. Agency mortgage-backed securities 113,460 22 (3,800) 109,682
Equity investment in Federal Home Loan Bank
and Federal Reserve Bank Stocks 5,355 -- -- 5,355
Other securities 3,962 30 -- 3,992
-------- --- ------- --------
Total $186,424 $59 $(4,985) $181,498
======== === ======= ========
Investment securities held to maturity:
AT DECEMBER 31, 2006
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST BASIS GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury $ 3,220 $-- $ (69) $ 3,151
U.S. Agency 3,471 -- (75) 3,396
U.S. Agency mortgage-backed securities 7,216 -- (53) 7,163
Other securities 6,750 -- -- 6,750
------- --- ----- -------
Total $20,657 $-- $(197) $20,460
======= === ===== =======
Investment securities available for sale:
AT DECEMBER 31, 2005
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
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
======== === ======= ========
Investment securities held to maturity:
AT DECEMBER 31, 2005
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST 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
======= === ===== =======
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, 2006, 94.8% of the portfolio was
rated AAA as compared to 95.5% at December 31, 2005. Less than 1.0% of the
50
portfolio was rated below A or unrated on December 31, 2006. 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, 2006.
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 $182,552,000 at December 31, 2006, and $210,085,000 at December
31, 2005. The Company had realized no security gains or losses on available for
sale securities in 2006. The Company realized $78,000 and $1,768,000 of gross
investment security gains and $2,577,000 and $952,000 of gross investment
security losses on available for sale securities in 2005 and 2004, respectively.
On a net basis, the realized (losses) gains amounted to ($1,649,000), and
$539,000 in 2005 and 2004, respectively, after factoring in tax (benefit)
expense of ($850,000) and $277,000 for each of those same years. The Company
realized no gross investment security gains and losses on held to maturity
securities in 2006, 2005 or 2004. Proceeds from sales of investment securities
during 2006, 2005 and 2004 were $0, $133 million and $391 million, respectively.
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, 2006. 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, 2006, the
Company's consolidated investment securities portfolio had a modified duration
of approximately 2.39 years. The weighted average expected maturity for
available for sale securities at December 31, 2006 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 1.8, 2.1, 4.1, 1.0, and 0.2 years,
respectively. The weighted average expected maturity for held to maturity
securities at December 31, 2006 for U.S. Treasury, U.S. Agency, U.S. Agency
Mortgage-Backed and other securities was 2.8, 5.9, 5.3 and 2.3 years.
Investment securities available for sale:
AT DECEMBER 31, 2006
----------------------------------------------------------------------------------------
AFTER 1 YEAR AFTER 5 YEARS
BUT WITHIN BUT WITHIN
WITHIN 1 YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
--------------- ---------------- --------------- -------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- ------- ----- ------ ----- -------- -----
(IN THOUSANDS, EXCEPT YIELDS)
COST BASIS
U.S. Treasury $ -- --% $ 6,011 3.11% $ -- --% $ -- --% $ 6,011 3.11%
U.S. Agency 24,597 4.14 33,039 4.96 -- -- -- -- 57,636 4.61
U.S. Agency mortgage-
backed securities 200 2.80 94,650 4.02 11,716 4.11 6,894 4.27 113,460 4.04
Equity investment in
Federal Home Loan Bank
and Federal Reserve Bank
Stocks 5,355 5.25 -- -- -- -- -- -- 5,355 5.25
Other securities 3,962 4.45 -- -- -- -- -- -- 3,962 4.45
------- -------- ------- ------ -------- ----
Total investment securities
available for sale $34,114 4.34% $133,700 4.21% $11,716 4.11% $6,894 4.27% $186,424 4.23%
======= ======== ======= ====== ======== ====
FAIR VALUE
U.S. Treasury $ -- $ 5,847 $ -- $ -- $ 5,847
U.S. Agency 24,568 32,054 -- -- 56,622
U.S. Agency mortgage-
backed securities 199 91,464 11,355 6,664 109,682
Equity investment in
Federal Home Loan Bank
and Federal Reserve Bank
Stocks 5,355 -- -- -- 5,355
Other securities 3,992 -- -- -- 3,992
------- -------- ------- ------ --------
Total investment securities
available for sale $34,114 $129,365 $11,355 $6,664 $181,498
======= ======== ======= ====== ========
51
Investment securities held to maturity:
AT DECEMBER 31, 2006
----------------------------------------------------------------------------------------
AFTER 5 YEARS
AFTER 1 YEAR BUT BUT WITHIN
WITHIN 1 YEAR WITHIN 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
--------------- ---------------- --------------- -------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- ------- ----- ------ ----- -------- -----
(IN THOUSANDS, EXCEPT YIELDS)
COST BASIS
U.S. Treasury $ -- --% $ 3,220 3.97% $ -- --% $-- --% $ 3,220 3.97%
U.S. Agency -- -- -- -- 3,471 5.22 -- -- 3,471 5.22
U.S. Agency mortgage-backed
securities -- -- 6,047 5.46 1,169 -- -- -- 7,216 5.47
Other securities 1,000 6.51 5,750 5.89 -- 5.52 -- 6,750 5.98
------ ------- ---- ------ --- ------- ----
Total investment securities
held to maturity $1,000 6.51% $15,017 5.31% $4,640 5.30% $-- --% $20,657 5.36%
====== ======= ==== ====== === ======= ====
FAIR VALUE
U.S. Treasury $ -- $ 3,151 $ -- $-- $ 3,151
U.S. Agency -- -- 3,396 -- 3,396
U.S. Agency mortgage-backed
securities -- 6,004 1,159 -- 7,163
Other securities 1,000 5,750 -- -- 6,750
------ ------- ------ --- -------
Total investment securities
held to maturity $1.000 $14,905 $4,555 $-- $20,460
====== ======= ====== === =======
The following tables present information concerning investments with
unrealized losses as of December 31, 2006 (in thousands):
Investment securities available for sale:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------- --------------------- ---------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
------ ---------- -------- ---------- -------- ----------
U.S. Treasury $ 996 $(2) $ 4,851 $ (162) $ 5,847 $ (164)
U.S. Agency -- -- 49,554 (1,021) 49,554 (1,021)
U.S. Agency mortgage-backed securities 1,948 (5) 105,151 (3,795) 107,099 (3,800)
------ --- -------- ------- -------- -------
Total investment securities available for sale $2,944 $(7) $159,556 $(4,978) $162,500 $(4,985)
====== === ======== ======= ======== =======
Investment securities held to maturity:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------- --------------------- ---------------------
COST UNREALIZED COST UNREALIZED COST UNREALIZED
BASIS LOSSES BASIS LOSSES BASIS LOSSES
------ ---------- -------- ---------- -------- ----------
U.S. Treasury $ -- $ -- $ 3,151 $ (69) $ 3,151 $ (69)
U.S. Agency -- -- 3,396 (75) 3,396 (75)
U.S. Agency mortgage-backed securities 3,005 (17) 4,158 (36) 7,163 (53)
------ ---- ------- ----- ------- -----
Total investment securities held to maturity $3,005 $(17) $10,705 $(180) $13,710 $(197)
====== ==== ======= ===== ======= =====
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
-------------------- --------------------- ---------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR 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)
====== ==== ====== ===== ======= =====
52
For fixed maturity investments with unrealized losses due to interest rates
where the Company has the positive intent and ability to hold the investment for
a period of time sufficient to allow a market recovery, declines in value below
cost are not assumed to be other than temporary. There are 50 positions that are
temporarily impaired at December 31, 2006. The Company reviews its position
quarterly and has asserted that at December 31, 2006, the declines outlined in
the above table represent temporary declines and the Company does have the
intent and ability to hold those securities to maturity or to allow a market
recovery.
4. LOANS
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31,
-------------------
2006 2005
-------- --------
(IN THOUSANDS)
Commercial $ 91,746 $ 80,629
Commercial loans secured by real estate 269,781 249,204
Real estate-mortgage 209,728 201,111
Consumer 18,336 20,391
-------- --------
Loans 589,591 551,335
Less: Unearned income 514 831
-------- --------
Loans, net of unearned income $589,077 $550,504
======== ========
Real estate construction loans comprised 4.4% and 5.5% of total loans net
of unearned income at December 31, 2006 and 2005, respectively. The Company has
no direct credit exposure to foreign countries. Additionally, the Company has no
significant industry lending concentrations. As of December 31, 2006 and 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
$3,977,000 and $4,250,000 at December 31, 2006 and 2005, respectively. An
analysis of these related party loans follows:
YEAR ENDED
DECEMBER 31,
---------------
2006 2005
------ ------
(IN THOUSANDS)
Balance January 1 $4,250 $4,147
New loans 350 555
Payments (623) (452)
------ ------
Balance December 31 $3,977 $4,250
====== ======
5. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31,
--------------------------
2006 2005 2004
------- ------ -------
(IN THOUSANDS)
Balance January 1 $ 9,143 $9,893 $11,682
Provision for loan losses (125) (175) 1,758
Recoveries on loans previously charged-off 318 300 616
Loans charged-off (1,244) (875) (4,041)
Transfer to reserve for unfunded loan commitments -- -- (122)
------- ------ -------
Balance December 31 $ 8,092 $9,143 $ 9,893
======= ====== =======
6. NON-PERFORMING ASSETS
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) loans which are contractually past due 90 days or more as to
interest or principal payments, and (iii) other real estate owned (real estate
acquired through foreclosure, in-substance foreclosures and repossessed assets).
53
The following tables present information concerning non-performing assets:
AT DECEMBER 31,
------------------------
2006 2005 2004
------ ------ ------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
NON-ACCRUAL LOANS
Commercial $ 494 $2,315 $ 802
Commercial loans secured by real estate 195 318 606
Real estate-mortgage 1,050 1,070 2,049
Consumer 547 446 412
------ ------ ------
Total $2,286 $4,149 $3,869
------ ------ ------
PAST DUE 90 DAYS OR MORE AND STILL ACCRUING
Consumer $ 3 $ 31 $ --
------ ------ ------
Total $ 3 $ 31 $ --
------ ------ ------
OTHER REAL ESTATE OWNED
Real estate-mortgage $ 3 $ 130 $ 15
Consumer -- 5 10
------ ------ ------
Total $ 3 $ 135 $ 25
------ ------ ------
TOTAL NON-PERFORMING ASSETS $2,292 $4,315 $3,894
====== ====== ======
Total non-performing assets as a percent of
loans and loans held for sale, net of
unearned income, and other real estate
owned 0.39% 0.78% 0.75%
Total restructured loans $1,302 $ 258 $5,685
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 $9,582,000 and $14,825,000 being
specifically identified as impaired and a corresponding allocation reserve of
$1,835,000 and $2,560,000 at December 31, 2006 and 2005, respectively. The
average outstanding balance for loans being specifically identified as impaired
was $10,872,000 for 2006 and $12,388,000 for 2005. 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 2006, 2005 and 2004 was $725,000, $833,000 and
$635,000, 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.
YEAR
ENDED DECEMBER 31,
------------------
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
Interest income due in accordance with original terms $214 $213 $469
Interest income recorded (55) (12) (19)
---- ---- ----
Net reduction in interest income $159 $201 $450
==== ==== ====
7. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
AT DECEMBER 31,
-----------------
2006 2005
------- -------
(IN THOUSANDS)
Land $ 1,714 $ 1,714
Premises 19,198 18,547
Furniture and equipment 15,087 16,608
Leasehold improvements 618 1,072
------- -------
Total at cost 36,617 37,941
Less: Accumulated depreciation and amortization 28,055 29,252
------- -------
Net book value $ 8,562 $ 8,689
======= =======
54
The Company recorded depreciation expense was $1.7 million, $1.8 million
and $1.9 million at December 31, 2006, 2005 and 2004, respectively.
8. DEPOSITS
The following table sets forth the balance of the Company's deposits:
AT DECEMBER 31,
-------------------
2006 2005
-------- --------
(IN THOUSANDS)
Demand:
Non-interest bearing $107,559 $109,274
Interest bearing 58,047 54,067
Savings 74,452 87,702
Money market 174,118 172,569
Certificates of deposit in denominations of $100,000 or more 30,580 33,836
Other time 296,999 255,207
-------- --------
Total deposits $741,755 $712,655
======== ========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
Interest bearing demand $ 606 $ 227 $ 154
Savings 644 829 928
Money market 5,743 3,256 1,340
Certificates of deposit in denominations of $100,000 or more 1,894 1,378 1,167
Other time 10,345 7,295 6,747
------- ------- -------
Total interest expense $19,232 $12,985 $10,336
======= ======= =======
The following table sets forth the balance of other time deposits and
certificates of deposit of $100,000 or more as of December 31, 2006 maturing in
the periods presented:
OTHER CERTIFICATES OF DEPOSIT
YEAR TIME DEPOSITS OF $100,000 OR MORE
---- ------------- -----------------------
(IN THOUSANDS)
2007 $206,862 $26,466
2008 32,808 3,001
2009 12,620 108
2010 12,281 200
2011 7,874 547
2012 and after 24,554 258
-------- -------
Total $296,999 $30,580
======== =======
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, 2006.
MATURING IN:
(IN THOUSANDS)
--------------
Three months or less $17,424
Over three through six months 3,413
Over six through twelve months 5,629
Over twelve months 4,114
-------
Total $30,580
=======
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:
55
AT DECEMBER 31, 2006
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $49,091
Maximum indebtedness at any month end -- 61,728
Average balance during year 43 32,778
Average rate paid for the year 5.69% 5.10%
Interest rate on year end balance -- 5.48
AT DECEMBER 31, 2005
----------------------
FEDERAL OTHER
FUNDS SHORT-TERM
PURCHASED BORROWINGS
--------- ----------
(IN THOUSANDS,
EXCEPT RATES)
Balance $ -- $ 63,184
Maximum indebtedness at any month end -- 150,552
Average balance during year 1 78,151
Average rate paid for the year 4.94% 3.32%
Interest rate on year end balance -- 4.25
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances.
These borrowing transactions can range from overnight to one year in
maturity. The average maturity was three days at the end of 2006 and 2005.
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.
10. 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, 2006
-----------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
-------- ------------- -------
(IN THOUSANDS)
Overnight 5.48% $49,091
2011 and after 6.45 946
-------
Total FHLB borrowings 5.50% $50,037
=======
AT DECEMBER 31, 2005
-----------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
-------- ------------- -------
(IN THOUSANDS)
Overnight 4.25% $63,184
2011 and after 6.45 987
-------
Total FHLB borrowings 4.28% $64,171
=======
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
56
longer-term advances based upon the Bank's investment in assets secured by one-
to four-family residential real estate. At December 31, 2006, the bank had
immediately available $218 million of overnight borrowing capability at the
FHLB. On January 11, 2007, the Bank was released from full collateral delivery
status by the FHLB due to its improved financial condition.
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
$334,000 as of December 31, 2006 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 #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.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
For the Company, as for most financial institutions, approximately 90% of
its assets and liabilities are considered financial instruments. Many of the
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, 2006 and 2005, were as follows:
2006 2005
------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities $201,958 $202,155 $231,775 $231,924
Net loans (including loans held for sale),
net of allowance for loan loss 579,691 581,343 545,448 550,602
FINANCIAL LIABILITIES:
Deposits with no stated maturities $414,176 $414,176 $423,612 $423,612
Deposits with stated maturities 326,752 327,579 286,987 289,043
Short-term borrowings 49,091 49,091 63,184 63,184
All other borrowings 16,181 14,031 16,554 14,072
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.
57
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.
There is not a material difference between the notional amount and the
estimated fair value of the off-balance sheet items which total $125.9 million
at December 31, 2006, 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.
12. INCOME TAXES
The expense (benefit) for income taxes is summarized below:
YEAR ENDED DECEMBER 31,
-------------------------
2006 2005 2004
----- ------- -------
(IN THOUSANDS)
Current $ 76 $ (471) $ (87)
Deferred 344 (5,431) (5,758)
---- ------- -------
Income tax expense (benefit) from continuing operations 420 (5,902) (5,845)
Deferred income tax benefit from discontinued operations -- (61) (648)
---- ------- -------
Income tax expense (benefit) $420 $(5,963) $(6,493)
==== ======= =======
The reconciliation between the federal statutory tax rate and the Company's
effective consolidated income tax rate is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2006 2005 2004
-------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Income tax expense (benefit) based on federal statutory rate $ 936 34.0% $(5,074) (34.0)% $(4,864) (34.0)%
Tax exempt income (478) (17.4) (424) (2.8) (461) (3.2)
Reversal of valuation allowance (100) (3.6) -- -- -- --
Reversal of contingency reserves -- -- (475) (3.2) (680) (4.7)
Other 62 2.3 71 0.5 160 1.1
----- ------- -------
Income tax expense (benefit) from continuing operations 420 15.3 (5,902) (39.6) (5,845) (40.8)
Income tax benefit from discontinued operations -- -- (61) (33.9) (648) (35.2)
----- ------- -------
Total expense (benefit) for income taxes $ 420 15.3% $(5,963) (39.5)% $(6,493) (40.1)%
===== ======= =======
58
December 31, 2006 and 2005, 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,
-----------------
2006 2005
------- -------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Allowance for loan losses $ 2,863 $ 3,193
Premises and equipment 431 --
Accrued pension obligation 108 --
Unrealized investment security losses 1,675 2,127
Net operating loss carryforwards 10,318 12,232
Alternative minimum tax credits 994 872
Other 274 355
------- -------
Total tax assets 16,663 18,779
------- -------
DEFERRED TAX LIABILITIES:
Investment accretion (26) (8)
Lease accounting (702) (2,239)
Prepaid pension obligation -- (1,405)
Other (98) (51)
------- -------
Total tax liabilities (826) (3,703)
Valuation allowance -- (100)
------- -------
Net deferred tax asset $15,837 $14,976
======= =======
As part of the 2006 tax expense, the Company did benefit from the
elimination of a $100,000 income tax valuation allowance related to the
deductibility of charitable contributions that management determined was no
longer needed given the level of taxable income generated by the Company in
2006.
The change in net deferred tax assets and liabilities consist of the
following:
YEAR ENDED
DECEMBER 31,
---------------
2006 2005
------ ------
(IN THOUSANDS)
Investment write-(ups)downs due to FAS #115, charged to equity $ (452) $ 382
Cumulative effect of adoption of change in accounting for pension obligation 1,657 --
Reversal of valuation allowance 100 --
Deferred (provision) benefit for income taxes (444) 5,492
------ ------
Net increase $ 861 $5,874
====== ======
The Company has alternative minimum tax credit carryforwards of
approximately $994,000 at December 31, 2006. These credits have an indefinite
carryforward period. The Company also has a $30.3 million net operating loss
carryforward that will begin to expire in the year 2024.
13. EMPLOYEE BENEFIT PLANS
PENSION PLANS:
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 valued at $656,000
and is limited to 10% of the plans assets), mutual funds, and short-term cash
equivalent instruments.
59
PENSION BENEFITS:
YEAR ENDED
DECEMBER 31,
-----------------
2006 2005
------- -------
(IN THOUSANDS,
EXCEPT
PERCENTAGES)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $14,158 $13,256
Service cost 882 855
Interest cost 816 806
Deferred asset gain 85 688
Benefits paid (531) (1,447)
------- -------
Benefit obligation at end of year $15,410 $14,158
------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $12,956 $11,984
Actual return on plan assets 1,166 455
Employer contributions 1,500 2,000
Benefits paid (531) (1,447)
Expenses paid -- (36)
------- -------
Fair value of plan assets at end of year 15,091 12,956
------- -------
Funded status of the plan--under funded $ (319) $(1,202)
======= =======
AMOUNTS NOT YET RECOGNIZED AS A COMPONENT OF
NET PERIODIC PENSION COST:
Amounts recognized in accumulated other
comprehensive income (loss) consists of:
Transition asset (109) --
Prior service cost (17) --
Net actuarial loss 4,998 --
Amounts not recognized in accumulated other
comprehensive income (loss) consists of:
Transition asset -- (126)
Prior service cost -- (12)
Net actuarial loss -- 5,469
------- -------
Total $ 4,872 $ 5,331
======= =======
The following table sets forth the incremental effect of applying FAS #158,
"Employers' Accounting for Defined Benefit Pension and Other Post-Retirement
Plans", on individual line items in the Consolidated Balance Sheet at December
31, 2006:
BEFORE AFTER
APPLICATION APPLICATION
OF FASB #158 ADJUSTMENTS OF FASB #158
------------ ----------- ------------
(IN THOUSANDS)
Deferred tax asset $ 14,181 $ 1,656 $ 15,837
Other assets 20,941 (4,553) 16,388
Total assets 898,889 (2,897) 895,992
Other liabilities 6,112 319 6,431
Total liabilities 810,989 319 811,308
Accumulated other comprehensive income (loss) (3,201) (3,216) (6,417)
Total stockholders' equity 87,900 (3,216) 84,684
Total liabilities and stockholders' equity 898,889 (2,897) 895,992
YEAR ENDED
DECEMBER 31,
-----------------
2006 2005
------- -------
(IN THOUSANDS)
ACCUMULATED BENEFIT OBLIGATION:
Accumulated benefit obligation $13,486 $12,300
======= =======
YEAR ENDED DECEMBER 31,
-------------------------
2006 2005 2004
------- ------ ------
(IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 882 $ 855 $ 840
Interest cost 816 806 734
Expected return on plan assets (1,007) (924) (875)
Amortization of prior year service cost 4 4 4
Amortization of transition asset (17) (17) (17)
Recognized net actuarial loss 398 383 339
------- ------ ------
Net periodic pension cost $ 1,076 $1,107 $1,025
======= ====== ======
60
The estimated net loss, prior service cost and transition asset for the
defined benefit pension plan that will amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next year
are $378,000, $4,000, and ($17,000), respectively.
YEAR ENDED
DECEMBER 31,
------------------
2006 2006 2006
---- ---- ----
(PERCENTAGES)
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 6.00% 6.00% 6.00%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 2.50 2.50 3.00
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.
PLAN ASSETS:
The plan's measurement date is December 31, 2006. This plan's asset
allocations at December 31, 2006 and 2005, by asset category are as follows:
ASSET CATEGORY: 2006 2005
--------------- ---- ----
Equity securities 64% 59%
Debt securities 36 41
--- ---
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, 2006, 4.4% 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
2007 will be comparable with recent years of approximately $1.5 million.
ESTIMATED FUTURE BENEFIT PAYMENTS:
The following benefit payments, which reflect future service, as
appropriate, are expected to be paid (in thousands).
2007 $ 1,265
2008 1,288
2009 1,329
2010 1,699
2011 1,848
Years 2012--2016 10,835
401(k) PLAN:
The Bank maintains a qualified 401(k) plan that allows for participation by
Bank employees. Under the plan, employees may elect to make voluntary, pretax
contributions to their accounts, and the Bank contributes 4% of salaries for
union members who are in the plan. Contributions by the Bank charged to
operations were $195,000 and $201,000 for the years ended December 31, 2006 and
2005, respectively. The fair value of plan assets includes $580,000 pertaining
to the value of the Company's common stock that is held by the plan at December
31, 2006.
Except for the above benefit plans, the Company has no significant
additional exposure for any other post-retirement or post-employment benefits.
61
14. LEASE COMMITMENTS
The Company's obligation for future minimum lease payments on operating
leases at December 31, 2006, is as follows:
FUTURE MINIMUM
YEAR LEASE PAYMENTS
---- --------------
(IN THOUSANDS)
2007 $828
2008 496
2009 458
2010 394
2011 299
2012 and thereafter 673
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 $423,000, $388,000 and
$366,000, in 2006, 2005, and 2004, respectively.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of its customers. These risks derive from
commitments to extend credit and standby letters of credit. Such commitments and
standby letters of credit involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated financial statements.
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. At December 31, 2006 the Company had various outstanding
commitments to extend credit approximating $125,863,000 and standby letters of
credit of $8,472,000, compared to commitments to extend credit of $98,294,000
and standby letters of credit of $10,230,000 at December 31, 2005. Standby
letters of credit had terms ranging from 1 to 4 years. Standby letters of credit
of approximately $5.6 million were secured as of December 31, 2006 and
approximately $7.9 million at December 31, 2005. The carrying amount of the
liability for AmeriServ obligations related to standby letters of credit was
$330,000 at December 31, 2006 and $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, results of
operation or cash flows.
16. PRIVATE PLACEMENT OFFERINGS
On September 27, 2005, the Company entered into agreements with
institutional investors for a $10.3 million private placement of common stock.
The agreements secured commitments from these investors to purchase 2.4 million
of the Company'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
62
Preferred Securities, which resulted 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 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.
17. STOCK COMPENSATION PLANS
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (FAS) #123(R) "Share-Based Payment" using the "modified perspective"
method. Under this method, awards that are granted, modified, or settled after
December 31, 2005, are measured and accounted for in accordance with FAS
#123(R). As a result of this adoption the Company recognized $56,000 of pretax
compensation expense for the year 2006.
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 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, 2006, 2005, and 2004, and changes during the years then ended is presented
in the table and narrative following:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2006 2005 2004
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------- -------- ------- --------
Outstanding at beginning of year 372,645 $5.33 393,848 $5.31 337,136 $5.13
Granted 1,233 4.70 11,492 5.34 75,000 6.00
Exercised (21,667) 3.21 (3,352) 4.27 (2,386) 3.07
Forfeited (105,003) 6.46 (29,343) 5.23 (15,902) 4.97
-------- ------- ----- ------- -----
Outstanding at end of year 247,208 5.03 372,645 5.33 393,848 5.31
======== ======= ===== ======= =====
Exercisable at end of year 223,314 4.93 303,653 5.25 285,195 5.30
Weighted average fair value of options granted
in current year $2.69 $2.99 $3.38
63
A total of 223,314 of the 247,208 options outstanding at December 31, 2006,
have exercise prices between $2.31 and $6.21, with a weighted average exercise
price of $4.93 and a weighted average remaining contractual life of 4.65 years.
Options outstanding at December 31, 2006 reflect option ranges of: $2.31 to
$3.49 totaling 13,334 options which have a weighted average exercise price of
$2.71 and a weighted average remaining contractual life of 6.1 years; and $4.02
to $6.21 totaling 209,980 options which have a weighted average exercise price
of $5.07 and a weighted average remaining contractual life of 4.6 years. All of
these options are exercisable. The remaining 23,894 options have exercise prices
between $4.70 and $6.10, with a weighted average exercise price of $5.97 and a
weighted average remaining contractual life of 7.5 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 2006, 2005,
2004, and 2003, respectively: risk-free interest rate for 2006 options was
4.70%, and 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 2006, 2005, 2004 and 2003 options; expected
volatility of 37.22% for 2006 options, and 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 2006, 2005,
2004, and 2003 options.
18. 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, 2006, the Company issued
22,154 shares and had 113,069 unissued reserved shares available under the
Purchase Plan. In the 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.
19. 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 2 years.
As of December 31, 2006, the Company's core deposit intangibles had an
original cost of $17.6 million with accumulated amortization of $15.7 million.
The weighted average amortization period of the Company's core deposit
intangibles at December 31, 2006, is 2.10 years. Estimated amortization expense
for the next three years is summarized as follows (in thousands):
YEAR EXPENSE
---- --------------
(IN THOUSANDS)
2007 $865
2008 865
2009 108
A reconciliation of the Company's intangible asset balances for 2006 and
2005 is as follows (in thousands):
AT DECEMBER 31,
---------------------------------
2006 2005 2006 2005
------ ------ ------ ------
CORE DEPOSIT
INTANGIBLES GOODWILL
--------------- ---------------
Balance January 1 $2,703 $3,568 $9,544 $9,544
Amortization expense (865) (865) -- --
------ ------ ------ ------
Balance December 31 $1,838 $2,703 $9,544 $9,544
====== ====== ====== ======
64
20. DERIVATIVE HEDGING INSTRUMENTS
The Company can use various interest rate contracts, such as interest rate
swaps, caps, floors and swaptions to help manage interest rate and market
valuation risk exposure, which is incurred in normal recurrent banking
activities. The Company can use derivative instruments, primarily interest rate
swaps, to manage interest rate risk and match the rates on certain assets by
hedging the fair value of certain fixed rate debt, which converts the debt to
variable rates and by hedging the cash flow variability associated with certain
variable rate debt by converting the debt to fixed rates. During the third
quarter of 2005, the increasing short-term interest rate environment caused the
Company to exit all hedging transactions with the counter parties and incur a
pretax prepayment penalty of $5.8 million.
The following table summarizes the interest rate swap transactions that
impacted the Company's 2005 and 2004 performance:
2005
INCREASE
FIXED FLOATING (DECREASE)
NOTIONAL RATE RATE REPRICING IN INTEREST
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
=========
2004
FIXED FLOATING DECREASE
NOTIONAL RATE RATE REPRICING IN INTEREST
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, 2006 and December 31, 2005.
21. SEGMENT RESULTS
The financial performance of the Company is also monitored by an internal
funds transfer pricing profitability measurement system which produces line of
business results and key performance measures. The Company's major business
units include retail banking, commercial lending, trust, other fee based
businesses and investment/parent. The Company sold its remaining mortgage
servicing rights in December 2004 and discontinued the operations of this
non-core business (mortgage banking) in 2005(see Note 23). The reported results
reflect the underlying economics of the business segments. Expenses for
centrally provided services are allocated based upon the cost and estimated
usage of those services. The businesses are match-funded and interest rate risk
is centrally managed and accounted for within the investment/parent business
segment. The key performance measure the Company focuses on for each business
segment is net income contribution.
Retail banking includes the deposit-gathering branch franchise, lending to
both individuals and small businesses, and financial services. Lending
activities include residential mortgage loans, direct consumer loans, and small
business commercial loans. Financial services include the sale of mutual funds,
annuities, and insurance products. Commercial lending to businesses includes
commercial loans, 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. As of June 30, 2006, the
Company closed AmeriServ Associates since it no longer fit the Company's
strategic direction. 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.
65
The contribution of the major business segments to the consolidated results of
operations were as follows:
YEAR ENDED DECEMBER 31, 2006
------------------------------------------------------------------------------
RETAIL COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------- ---------- -------- ------ ----------- --------- --------
(IN THOUSANDS)
Net interest income $ 18,772 $ 7,328 $ -- $ 343 $ (2,015) $ 50 $ 24,478
Provision for loan loss (34) (91) -- -- -- -- (125)
Non-interest income 5,607 540 -- 6,521 48 125 12,841
Non-interest expense 22,814 4,735 -- 4,291 2,546 306 34,692
-------- -------- ---- ------ -------- ------ --------
Income (loss) before income
taxes 1,599 3,224 -- 2,573 (4,513) (131) 2,752
Income taxes (benefit) 310 626 -- 875 (1,346) (45) 420
-------- -------- ---- ------ -------- ------ --------
Net income (loss) $ 1,289 $ 2,598 $ -- $1,698 $ (3,167) $ (86) $ 2,332
======== ======== ==== ====== ======== ====== ========
Total assets $355,799 $331,849 $ -- $2,716 $204,344 $1,284 $895,992
======== ======== ==== ====== ======== ====== ========
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
======== ======== ======= ====== ======== ====== ==========
22. REGULATORY MATTERS
The Company announced on February 21, 2006, that the Federal Reserve Bank
of Philadelphia and the Pennsylvania Department of Banking have terminated the
Memorandum of Understanding (MOU) that the Company had been operating under
since February 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 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
66
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, 2006 and 2005, the Federal Reserve
categorized the Company as Well Capitalized under the regulatory framework for
prompt corrective action. The Company believes that no conditions or events have
occurred that would change this conclusion. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table.
AS OF DECEMBER 31, 2006
-----------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)
Consolidated $99,881 15.34% $52,097 8.00% $65,121 10.00%
AmeriServ Financial Bank 91,555 14.25 51,391 8.00 64,239 10.00
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 91,737 14.09 26,048 4.00 39,073 6.00
AmeriServ Financial Bank 83,520 13.00 25,696 4.00 38,543 6.00
Tier 1 Capital (To Average Assets)
Consolidated 91,737 10.54 34,800 4.00 43,500 5.00
AmeriServ Financial Bank 83,520 9.70 34,428 4.00 43,035 5.00
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
23. DISCONTINUED OPERATIONS
As of December 28, 2004, SMC entered into an agreement to sell its
remaining mortgage servicing rights. This action resulted in the closing of this
non-core business which exposed the Company to greater balance sheet market risk
and earnings volatility. The assets and liabilities are separately identified in
the December 31, 2005 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 are as follows:
AT DECEMBER 31, 2005
--------------------
(IN THOUSANDS)
Cash and due from banks $279
Other assets 50
Other liabilities (14)
----
Net assets of discontinued operations $315
====
67
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:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004
------- -------
(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
Loss on sale of mortgage servicing rights -- (376)
Other income 311 300
------- -------
Total Non-Interest Income 361 103
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 240 786
Net occupancy expense 208 179
Equipment expense 49 237
Professional fees 22 30
Supplies, postage, and freight 23 109
Miscellaneous taxes and insurance (1) 4
Impairment credit for mortgage servicing rights -- (26)
Other expense -- 625
------- -------
Total Non-Interest Expense 541 1,944
------- -------
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (180) (1,841)
Benefit for income taxes (61) (648)
------- -------
LOSS FROM DISCONTINUED OPERATIONS $ (119) $(1,193)
======= =======
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS:
Basic:
Net loss $ (0.01) $ (0.08)
Average number of shares outstanding 20,340 14,783
Diluted:
Net loss $ (0.01) $ (0.08)
Average number of shares outstanding 20,340 14,783
24. 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,
-----------------
2006 2005
------- -------
(IN THOUSANDS)
ASSETS
Cash and investments $ 3,212 $ 2,492
Equity investment in banking subsidiaries 88,468 88,746
Equity investment in non-banking subsidiaries 4,645 4,906
Guaranteed junior subordinated deferrable interest
debenture issuance costs 334 349
Other assets 1,717 1,594
------- -------
TOTAL ASSETS $98,376 $98,087
======= =======
LIABILITIES
Guaranteed junior subordinated deferrable interest
debentures $13,085 $13,085
Other liabilities 607 528
------- -------
TOTAL LIABILITIES 13,692 13,613
------- -------
STOCKHOLDERS' EQUITY
Total stockholders' equity 84,684 84,474
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,376 $98,087
======= =======
68
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------
2006 2005 2004
------ ------- -------
(IN THOUSANDS)
INCOME
Inter-entity management and other fees $2,351 $ 2,411 $ 2,351
Dividends from non-banking subsidiaries 1,722 1,186 1,017
Interest and dividend income 120 94 29
------ ------- -------
TOTAL INCOME 4,193 3,691 3,397
------ ------- -------
EXPENSE
Interest expense 1,121 1,659 2,985
Salaries and employee benefits 2,008 1,834 1,899
Dividends downstreamed to banking subsidiary -- 1,000 4,000
Dividends downstreamed to non-banking subsidiaries -- 1,000 250
Other expense 1,184 1,532 1,815
------ ------- -------
TOTAL EXPENSE 4,313 7,025 10,949
------ ------- -------
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES (120) (3,334) (7,552)
Benefit for income taxes 640 837 1,693
Equity in undistributed earnings of subsidiaries 1,812 (6,644) (3,860)
------ ------- -------
NET INCOME (LOSS) $2,332 $(9,141) $(9,719)
====== ======= =======
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
2006 2005 2004
------- ------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $ 2,332 $(9,141) $ (9,719)
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Equity in undistributed (gains) losses of
subsidiaries (1,812) 6,644 3,860
Other -- net 1,043 1,422 2,916
------- ------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,563 (1,075) (2,943)
------- ------- --------
INVESTING ACTIVITIES
Purchase of short-term investments - available for
sale (3,112) -- --
------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,112) -- --
------- ------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 173 133 149
Proceeds from private offering, net of issuance
costs -- 8,818 23,105
Guaranteed junior subordinated deferrable interest
debentures dividends paid (1,016) (1,546) (2,860)
Retirement of Trust Preferred Securities -- (7,200) (14,215)
------- ------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (843) 205 6,179
------- ------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,392) (870) 3,236
CASH AND CASH EQUIVALENTS AT JANUARY 1 2,492 3,362 126
------- ------- --------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 100 $ 2,492 $ 3,362
======= ======= ========
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, 2006, the subsidiary bank was not permitted to
upstream any cash dividends to the parent company. The subsidiary bank had a
combined $77,691,000 of restricted surplus and retained earnings at December 31,
2006.
69
25. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
2006 QUARTER ENDED
---------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $12,077 $11,895 $11,414 $11,179
Interest expense 6,181 5,796 5,223 4,887
------- ------- ------- -------
Net interest income 5,896 6,099 6,191 6,292
Provision for loan losses (75) -- (50) --
------- ------- ------- -------
Net interest income after provision for loan losses 5,971 6,099 6,241 6,292
Non-interest income 3,084 3,247 3,268 3,242
Non-interest expense 8,493 8,564 8,777 8,858
------- ------- ------- -------
Income before income taxes 562 782 732 676
Provision (benefit) for income taxes (19) 139 164 136
------- ------- ------- -------
Net income $ 581 $ 643 $ 568 $ 540
======= ======= ======= =======
Basic earnings per common share 0.03 0.03 0.03 0.02
Diluted earnings per common share 0.03 0.03 0.03 0.02
Cash dividends declared per common share 0.00 0.00 0.00 0.00
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 23).
26. SUBSEQUENT EVENT
The Company announced on January 22, 2007, that it has signed a Definitive
Agreement to acquire West Chester Capital Advisors (WCCA) of West Chester,
Pennsylvania. WCCA is registered investment advisor with expertise in large cap
stocks, and currently has $215 million in assets under management. WCCA was
formed in 1994.
When the acquisition is completed, WCCA will be a wholly owned subsidiary
of AmeriServ Financial Bank. Because this will be a cash transaction, the
Company will not be issuing any stock to execute the purchase. Therefore, there
will be no ownership dilution to current AmeriServ stockholders, and the Company
expects the transaction to be accretive to earnings in year one. The transaction
which is subject to regulatory approval, is scheduled to close sometime during
the first quarter 2007.
70
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, 2006, 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, 2006, its system of internal control over financial reporting is
effective and meets the criteria of the "Internal Control - Integrated
Framework". S.R. Snodgrass A.C., 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
February 22, 2007
71
STATEMENT OF MANAGEMENT RESPONSIBILITY
February 22, 2007
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. S.R. Snodgrass A.C. 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
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
AmeriServ Financial, Inc.
We have audited the consolidated balance sheet of AmeriServ Financial, Inc. and
subsidiaries as of December 31, 2006, and the related consolidated statements of
operation, comprehensive loss, changes in stockholders' equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
accompanying consolidated financial statements of AmeriServ Financial, Inc. and
subsidiaries as of December 31, 2005, and for each of the years in the two-year
period ended December 31, 2005, were audited by other auditors whose report
thereon dated March 6, 2006, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with the standards of the Public Company
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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmeriServ Financial,
Inc. and subsidiaries as of December 31, 2006, and the consolidated results of
their operations and cash flows in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, AmeriServ
Financial, Inc. changed its method of accounting for defined benefit pension
plans as of December 31, 2006, in accordance with Financial Accounting Standards
Board Statement No. 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of AmeriServ
Financial, Inc.'s and subsidiaries' internal control over financial reporting as
of December 31, 2006, based on criteria established in "Internal
Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our report dated February 26, 2007,
expressed an unqualified opinion on management's assessment of the effectiveness
of AmeriServ Financial, Inc.'s and subsidiaries' internal control over financial
reporting and an unqualified opinion on the effectiveness of AmeriServ
Financial, Inc.'s and subsidiaries' internal control over financial reporting.
/s/ S. R. Snodgrass, A.C.
Wexford, Pennsylvania
February 26, 2007
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
AmeriServ Financial, Inc.
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. (the "Company") maintained effective internal control
over financial reporting as of December 31, 2006, based on criteria established
in "Internal Control--Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). AmeriServ Financial,
Inc.'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 opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that AmeriServ Financial, Inc.
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also in our opinion, AmeriServ Financial, Inc., maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
AmeriServ Financial, Inc. and subsidiaries as of December 31, 2006, and the
related consolidated statement of operations, changes in stockholders' equity,
and cash flows for the year then ended, and our report dated February 26, 2007,
expressed an unqualified opinion.
/s/ S. R. Snodgrass, A.C.
Wexford, Pennsylvania
February 26, 2007
74
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 sheet of AmeriServ
Financial, Inc. and subsidiaries (the "Company") as of December 31, 2005, and
the related consolidated statements of operations, comprehensive loss, changes
in stockholders' equity, and cash flows for each of the two 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 the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
-------------------------
Pittsburgh, Pennsylvania
March 6, 2006
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of December 31, 2006,
an evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, on the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation,
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2006.
Disclosure controls and procedures are the controls and other procedures
that are designed to ensure that the information required to be disclosed by the
Company in its reports filed and submitted under the Securities Exchange Act of
1934, as amended ("Exchange Act") is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in its reports filed under the Exchange
Act is accumulated and communicated to the Company's management, including the
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Exchange Act. Management's assessment of internal control
over financial reporting for the fiscal year ended December 31, 2006 is included
in Item 8.
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.
76
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 2006 Form
10-K and Part II -- Item 8. Page references are to said Form 10-K.
CONSOLIDATED FINANCIAL STATEMENTS:
AmeriServ Financial, Inc. and Subsidiaries
Consolidated Balance Sheets, 38
Consolidated Statements of Operations, 39
Consolidated Statements of Comprehensive Loss, 40
Consolidated Statements of Changes in Stockholders' Equity, 41
Consolidated Statements of Cash Flows, 42-43
Notes to Consolidated Financial Statements, 44
Report on Management's Assessment of Internal Control Over Financial
Reporting, 71
Statement of Management Responsibility, 72
Independent Registered Public Accounting Firm Opinion on Internal
Control Over Financial Reporting, 73
Report of Independent Registered Public Accounting Firm, 74
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.
77
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 Incorporation as amended through January 5, Exhibit 3.1 to 2004 Form 10-K Filed
2005. on March 10, 2005
3.2 Bylaws, as amended and restated on January 26, 2005. Exhibit 3.2 to January 26, 2005 Form
8-K Filed on January 26, 2005
10.3 Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Jeffrey A. Exhibit 10.1 to Form 10-Q Filed
Stopko. August 14, 2002
10.5 2001 Stock Incentive Plan dated February 23, 2001. 2000 Proxy Statement Filed March 16,
2001
10.6 Agreement, dated December 1, 1994, between AmeriServ Financial, Inc. and Ronald Exhibit 10.6 to 2000 Form 10-K Filed
W. Virag. March 21, 2001
10.7 Agreement, dated February 1, 2004, between AmeriServ Financial, Inc. and Allan Exhibit 10.7 to 2003 Form 10-K Filed
R. Dennison March 23, 2004
10.8 Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Dan L. Exhibit 10.8 to 2004 Form 10-K Filed
Hummel March 10, 2005
21 Subsidiaries of the Registrant. Below
23 Consent of Independent Registered Public Accounting Firm Below
31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Below
section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Below
section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section Below
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section Below
906 of the Sarbanes-Oxley Act of 2002.
78
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
79
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 22, 2007
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 22, 2007:
/s/ Craig G. Ford Chairman
--------------------------------- Director
Craig G. Ford
/s/ Allan R. Dennison President, CEO & Director
---------------------------------
Allan R. Dennison
/s/ J. Michael Adams, Jr. Director
---------------------------------
J. Michael Adams, Jr.
/s/ Edward J. Cernic, Sr. Director
---------------------------------
Edward J. Cernic, Sr.
/s/ Daniel R. DeVos Director
---------------------------------
Daniel R. DeVos
/s/ James C. Dewar Director
---------------------------------
James C. Dewar
/s/ Bruce E. Duke, III Director
---------------------------------
Bruce E. Duke, III, M.D.
/s/ James M. Edwards, Sr. Director
---------------------------------
James M. Edwards, Sr.
/s/ Kim W. Kunkle Director
---------------------------------
Kim W. Kunkle
/s/ Jeffrey A. Stopko SVP & CFO
---------------------------------
Jeffrey A. Stopko
/s/ Margaret A. O'Malley Director
---------------------------------
Margaret A. O'Malley
/s/ Very Rev. Christian R. Oravec Director
---------------------------------
Very Rev. Christian R. Oravec
/s/ Mark E. Pasquerilla Director
---------------------------------
Mark E. Pasquerilla
/s/ Howard M. Picking, III Director
---------------------------------
Howard M. Picking, III
/s/ Sara A. Sargent Director
---------------------------------
Sara A. Sargent
/s/ Thomas C. Slater Director
---------------------------------
Thomas C. Slater
/s/ Robert L. Wise Director
---------------------------------
Robert L. Wise
80
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
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
* Seward Office
6858 Route 711, Suite 1
Seward, PA 15954-9501
81
* 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
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
Pittsburgh Loan Center
300 Penn Center Boulevard
Suite 613
Pittsburgh, PA 15235-5507
82
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: (973) 549-4217
UBS Financial Services, Inc.
1407 Eisenhower Boulevard
Johnstown, PA 15904
Telephone: (814) 269-9211
Keefe Bruyette & Woods, Inc.
787 Seventh Avenue
Equitable Bldg -- 4th Floor
New York, NY 10019
Telephone: (800) 966-1559
Knight Trading Group, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (800) 544-7508
Parker/Hunter, Inc.
416 Main Street
Johnstown, PA 15901
Telephone: (215) 665-6000
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.
83