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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
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 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 an accelerated filer (as
described in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value was $77,546,953.20 as of June 30, 2004.
Excluding affiliates, the aggregate market value was less than $75 million.
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.) $102,939,115.14 as of January 31,
2005.
NOTE -- If a determination as to whether a particular person or entity is
an affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
Applicable only to registrants involved in bankruptcy proceedings during
the preceding five years: Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date. 19,720,137 shares were outstanding as of January 31,
2005.
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,
2004, 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 65.
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FORM 10-K INDEX
Page No.
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PART I
Item 1. Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 10
Item 6. Selected Consolidated Financial Data 11
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Consolidated Financial Statements and Supplementary Data 31
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 64
Item 9A. Controls and Procedures 64
Item 9B. Other Information 64
PART III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 64
Item 13. Certain Relationships and Related Transactions 64
Item 14. Principal Accounting Fees and Services 64
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K 65
Signatures 67
1
PART I
ITEM 1. BUSINESS
GENERAL
AmeriServ Financial, Inc. (the Company) is a bank holding company,
organized under the Pennsylvania Business Corporation Law. The Company became a
holding company upon acquiring all of the outstanding shares of AmeriServ
Financial Bank (the Bank) on January 5, 1983. The Company's other wholly owned
subsidiaries include AmeriServ Trust and Financial Services Company (the Trust
Company) formed in October 1992, AmeriServ Life Insurance Company (AmeriServ
Life) formed in October 1987, and AmeriServ Associates, Inc. (AmeriServ
Associates), formed in January 1997.
The Company's principal activities consist of owning and operating its four
wholly owned subsidiary entities. At December 31, 2004, the Company had, on a
consolidated basis, total assets, deposits, and shareholders' equity of $1.0
billion, $644 million and $85 million, respectively. The Company and the
subsidiary entities 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. 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
AmeriServ Financial Bank is a state bank chartered under the Pennsylvania
Banking Code of 1965, as amended. Through 23 locations in Allegheny, Cambria,
Centre, Dauphin, 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. AmeriServ Financial Bank also operates 26
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.
AmeriServ Financial Bank also has a wholly owned mortgage banking
subsidiary -- Standard Mortgage Corporation of Georgia (SMC). SMC is a
residential mortgage loan servicer based in Atlanta, GA. 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 it did not have the
scale nor the earnings power to absorb the volatility and risk associated with
this business line. Additionally, AmeriServ Financial Services Corporation was
formed on May 23, 1997 and engages in the sale of annuities, mutual funds, and
insurance. On December 31, 2004, the Company merged Ameriserv Financial Services
Corporation into the Bank.
AmeriServ Financial 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. AmeriServ Financial Bank's business is not seasonal nor does
it have any risks attendant to foreign sources.
AmeriServ Financial Bank is subject to supervision and regular examination
by the Federal Reserve and the Pennsylvania Department of Banking. See Note #24,
Regulatory Matters, for a discussion of the Memorandum Of Understanding which
the Company and its Board of Directors entered into with its primary regulators
in 2003. 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, 2004:
Headquarters Johnstown, PA
- ------------ -------------
Chartered 1933
Total Assets $1,000,725
Total Investment Securities $ 394,503
Total Loans (net of unearned income) $ 521,416
Total Deposits $ 644,391
Total Net Loss $ (8,020)
Asset Leverage Ratio 8.51%
2004 Return on Average Assets (0.61)%
2004 Return on Average Equity (6.64)%
Total Full-time Equivalent Employees 318
2
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, 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. 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 loans,
which exhibit more liberal standards. The major risk in this category is that a
significant downward economic trend would increase unemployment and cause
payment default.
Consumer
This category includes consumer installment loans and revolving credit
plans. Underwriting is pursuant to industry norms and guidelines and is achieved
through a process, which is inclusive of the Fair Isaac Credit Scoring program.
The major risk in this category is a significant economic downturn.
MAJOR TYPES OF INVESTMENTS AND THE ASSOCIATED INVESTMENT POLICIES
The investment securities portfolio of the Company and its subsidiaries is
managed to optimize total return over the long term in a prudent manner that is
consistent with proper bank asset/liability management and current banking
practices. The objectives of portfolio management include consideration of
proper liquidity levels, interest rate and market valuation sensitivity, and
profitability. The investment portfolios of the Company and subsidiaries are
proactively managed in accordance with federal and state laws and regulations in
accordance with generally accepted accounting practices.
The investment portfolio is primarily made up of AAA Agency Mortgage-backed
securities. 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 which are
reflective of the conservative investment policies of commercial banks.
3
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS, INCLUDING REPAYMENTS AND
MATURITIES OF LOANS, SALES AND MATURITIES OF INVESTMENTS AND FHLB ADVANCES
Deposits
AmeriServ Financial Bank has a loyal core deposit base made up of
traditional commercial bank products that exhibits very little fluctuation,
other than Jumbo CDs, which demonstrate some seasonality. The deposit base has
remained relatively stable over the last several years.
Borrowings
AmeriServ Financial Bank uses both overnight borrowings and term advances
from the Federal Home Loan Bank of Pittsburgh for liquidity management purposes.
The FHLB borrowings are typically used to fund investments in mortgage-backed
securities. Recently, the Company has been de-levering its balance sheet and
reducing its level of borrowings through investment portfolio cash flow and
security sales.
Loans
During the periods presented herein, new loan funding has remained equal to
or less than loan payments and payoffs, and has had limited effect on liquidity.
The Company believes it will be able to fund anticipated loan growth generally
from investment securities portfolio cash flow and deposit growth.
Secondary Marketing Activities
The Residential Lending department of AmeriServ Financial Bank continues to
originate one-to-four family mortgage loans for both outside investors in the
secondary market and for the AmeriServ portfolio. Mortgages sold on the
secondary market are sold to investors on a "flow" basis: Mortgages are priced
and delivered on a "best efforts" pricing, with servicing released to the
investor. Freddie Mac guidelines are used in underwriting all mortgages. The
mortgages with longer terms such as 20-year, 30-year, FHA, and VA loans are
usually sold. The remaining production of the department includes Adjustable
Rate Mortgages, 10-year, 15-year, and bi-weekly mortgages. These loans are
usually kept in the AmeriServ portfolio. In recent times the mortgages
retained/mortgages sold ratio has been approximately 55/45.
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 administers assets valued at approximately
$1.3 billion by providing a wide spectrum of services which include trust and
estate administration, union collective investment funds (ERECT and BUILD
Funds), pension, profit sharing, 401(k) and 403(b) plans as well as custom
designed accounts and non-qualified plans for special purposes. At December 31,
2004, AmeriServ Trust and Financial Services had total assets of $1.7 million
and total shareholder's equity of $1.5 million. The Trust Company is subject to
regulation and supervision by the Federal Reserve Bank of Philadelphia and the
Commonwealth of Pennsylvania.
In addition to developing an experienced professional staff, the Trust
Company has made a commitment to state-of-the-art systems and software. This
fiscal and philosophical commitment generates a high degree of staff and client
satisfaction while producing timely and accurate reports and statements.
The diversification of the revenue-generating divisions within the trust
company is one of the primary reasons for its successful growth. The specialized
union collective funds are expected to continue to be the growth leaders in both
assets under administration and revenue production. Other trust company niches
include the cemetery and funeral pre-need accounts and special needs trusts. The
common element in each of these specialties is the diverse geographical areas
from which the business originates. The union funds have attracted several
international labor unions as investors as well as many local unions from a
number of states. The focus of the trust company continues to be on the union
collective investment funds, namely the ERECT and BUILD Funds which are designed
to invest union pension dollars in construction projects that utilize union
labor. At the end of 2004, assets in these funds totaled approximately $345
million.
Currently the trust company is working closely with Labor-Management Fund
Advisors, LLC, the underwriter and real estate advisor for the BUILD Funds to
merge the individual state BUILD Funds of Michigan, Illinois, Indiana and Ohio
into the BUILD Fund of America. The consolidation of the individual funds will
provide greater liquidity, better geographic and property-type project
diversification, and the opportunity to compete for larger projects. Even after
the merger of the funds into the BUILD Fund of America, the Fund's philosophy
and pledge to reinvest in the areas served by the unions who invest in the BUILD
Fund will be strictly maintained.
4
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 2004, the trust company continued to be a major contributor of earnings
to the corporation. Gross revenue in 2004 amounted to $5.4 million which
represents an increase of $370,000 or 7.4% over 2003. Expenses were contained
within budgeted levels resulting in net income of $807,000 which represents an
increase of $72,000 or 9.8% over 2003.
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, 2004,
AmeriServ Life had total assets of $1.6 million and total shareholder's equity
of $1.2 million and recorded net income of $40,000.
AmeriServ Associates
AmeriServ Associates is a registered investment advisory firm that
administers investment portfolios, offers operational support systems and
provides asset and liability management services to small and mid-sized
financial institutions. At December 31, 2004, AmeriServ Associates had total
assets of $272,000 and total shareholder's equity of $246,000 and recorded net
income of $80,000.
MONETARY POLICIES
Commercial banks are affected by policies of various regulatory authorities
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the Board of Governors are: open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, and changes in reserve requirements on bank deposits. These
means are used in varying combinations to influence overall growth of bank
loans, investments, and deposits, and may also affect interest rate charges on
loans or interest paid for deposits. The monetary policies of the Board of
Governors have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.
COMPETITION
The subsidiary entities face strong competition from other commercial
banks, savings banks, savings and loan associations, and several other financial
or investment service institutions for business in the communities they serve.
Several of these institutions are affiliated with major banking and financial
institutions which are substantially larger and have greater financial resources
than the subsidiary entities. As the financial services industry continues to
consolidate, the scope of potential competition affecting the subsidiary
entities will also increase. For most of the services that the subsidiary
entities perform, there is also competition from credit unions and issuers of
commercial paper and money market funds. Such institutions, as well as brokerage
houses, consumer finance companies, insurance companies, and pension trusts, are
important competitors for various types of financial services. In addition,
personal and corporate trust investment counseling services are offered by
insurance companies, other firms, and individuals.
MARKET AREA
The Company's local economy has not seen vibrant economic growth compared
to national economic growth as reflected by the strong national Gross Domestic
Product (GDP) of recent quarters. The economy in Cambria and Somerset counties
continue to perform below the 5.2% national unemployment average with local
unemployment at 7.4%. Johnstown's unemployment rate remains near the highest of
all regions of the Commonwealth. Local market conditions have improved in recent
quarters but change comes slowly. Jobs in the area have actually declined in
absolute number from last year's total. Near-term expectations for future
employment point to better days ahead as a result of several recent
announcements which included the relocation of an alternative energy
manufacturer to the area, a continued increase in defense related jobs and a
likely up tick in employment within the mining industry. In 2003, the Company
redefined its primary lending market as approximately a 100-mile radius from
Johnstown. This area would include the Johnstown Metro Area, along with State
College and Pittsburgh. Local loan demand is growing and we expect that given
our renewed strategic focus on commercial lending, the Company will experience
loan growth in 2005. Overall, economic conditions in the Johnstown Metro Area
are expected to slowly improve throughout 2005.
Economic conditions are much better in the State College area located in
Centre County. The unemployment rate in the area is 3.8%, 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 different demographic. The 18 to 34
year old age group makes up a much greater percentage of the population in State
College than in the Cambria/Somerset market, while the population of people 50
years of age or older is significantly less in State College. 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 promising. Most economists
remain hopeful that the economy will continue to grow while inflation and
interest rates remain at low levels for most of the year.
5
EMPLOYEES
The Company employed 459 people as of December 31, 2004, in full- and
part-time positions. Approximately 272 non-supervisory employees of AmeriServ
Financial Bank are represented by the United Steelworkers of America,
AFL-CIO-CLC, Local Union 2635-06/07. The Bank successfully negotiated a new
three-year labor contract with the Steelworkers Local on October 15, 2004 that
will expire on October 15, 2007. AmeriServ Financial Bank has not experienced a
work stoppage since 1979. AmeriServ Financial Bank is one of 13
union-represented banks nationwide.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), among other things, identifies five capital categories for insured
depository institutions: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. It requires U.S. federal bank regulatory agencies to implement
systems for "prompt corrective action" for insured depository institutions that
do not meet mimimum capital requirements based on these categories. The FDICIA
imposes progressively more restrictive constraints on operations, management and
capital distributions, depending on the category in which an institution is
classified. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits and on other aspects of its operations.
The FDICIA generally prohibits a bank from paying any dividend or making any
capital distribution or paying any management fee to its holding company if the
bank would therafter be undercapitalized. An undercapitalized bank must develop
a capital restoration plan, and its parent holding company must guarantee the
bank's compliance with the plan up to the lesser of 5% of the bank's assets at
the time it became undercapitalized and the amount needed to comply with the
plan.
As of December 31, 2004, the Company believes that its bank subsidiary was
well capitalized, based on the prompt corrective action ratios and guidelines
described above. A bank's capital category is determined solely for the purpose
of applying the prompt corrective action regulations, and the capital category
may not constitute an accurate representation of the bank's overall financial
condition or prospects for other purposes.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002, which 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 will implement a
program designed to comply with Section 404 of the Sarbanes-Oxley Act. This
program will include 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. The company
presently estimates that it will incur incremental costs of $500,000 to $700,000
to achieve Section 404 compliance.
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 GLB Act.
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 17-18, and 23-26.
II. Investment Portfolio Information required by this section is
presented on pages 7 and 42-45.
III. Loan Portfolio Information required by this section appears on
pages 7-8, 18 and 19.
IV. Summary of Loan Loss Experience Information required by this
section is presented on pages 19-21.
V. Deposits Information required by this section follows on page
8-9.
VI. Return on Equity and Assets Information required by this section
is presented on page 12.
VII. Short-Term Borrowings Information required by this section is
presented on page 9-10.
6
INVESTMENT PORTFOLIO
Investment securities held to maturity are carried at amortized cost while
investment securities classified as available for sale are reported at fair
value. The following table sets forth the cost basis and market value of
AmeriServ Financial's investment portfolio as of the periods indicated:
Investment securities available for sale at:
AT DECEMBER 31,
------------------------------
COST BASIS: 2004 2003 2002
- ----------- -------- -------- --------
(IN THOUSANDS)
U.S. Treasury $ 10,071 $ 9,498 $ 12,514
U.S. Agency 33,219 13,508 5,600
Mortgage-backed securities 305,986 469,086 430,541
Equity investment in Federal Home Loan Bank and Federal
Reserve Bank Stocks 17,059 22,942 21,554
Other securities (1) 12,381 10,974 11,563
-------- -------- --------
Total cost basis of investment securities available for sale $378,716 $526,008 $481,772
======== ======== ========
Total market value of investment securities available for sale $373,584 $524,573 $490,701
======== ======== ========
(1) Other investment securities include asset-backed securities and corporate
notes and bonds.
Investment securities held to maturity at:
AT DECEMBER 31,
---------------------------
COST BASIS: 2004 2003 2002
- ----------- ------- ------- -------
(IN THOUSANDS)
U.S. Treasury $ 3,348 $ 1,155 $ --
U.S. Agency 11,522 8,096 --
Mortgage-backed securities 12,565 18,838 15,077
------- ------- -------
Total cost basis of investment securities held to maturity $27,435 $28,089 $15,077
======= ======= =======
Total market value of investment securities held to maturity $27,550 $28,095 $15,320
======= ======= =======
LOAN PORTFOLIO
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
Commercial $ 72,011 $ 75,738 $ 89,127 $123,523 $116,615
Commercial loans secured by real estate 225,661 206,204 222,854 209,483 193,912
Real estate-mortgage(1) 201,406 194,605 229,154 231,728 242,370
Consumer 23,285 28,343 32,506 36,186 35,749
-------- -------- -------- -------- --------
Loans 522,363 504,890 573,641 600,920 588,646
Less: Unearned income 1,634 2,926 4,881 7,619 8,012
-------- -------- -------- -------- --------
Loans, net of unearned income $520,729 $501,964 $568,760 $593,301 $580,634
======== ======== ======== ======== ========
(1) At December 31, 2004 and 2003, real estate-construction loans constituted
6.3% and 3.2% 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,
-------------------------------------------
2004 2003 2002 2001 2000
------ ------- ------ ------ ------
(IN THOUSANDS)
Non-accrual loans
Commercial $ 802 $ 3,282 $1,783 $4,201 $3,166
Commercial loans secured by real estate 606 5,262 1,864 1,887 --
Real estate-mortgage 2,049 1,495 2,784 2,964 2,282
Consumer 412 742 360 251 355
------ ------- ------ ------ ------
Total non-accrual loans $3,869 $10,781 $6,791 $9,303 $5,803
------ ------- ------ ------ ------
AT DECEMBER 31,
--------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
Past due 90 days or more and still accruing
Commercial $-- $58 $-- $188 $--
Commercial loans secured by real estate -- 10 48 -- --
Real estate-mortgage -- -- -- -- --
Consumer -- 30 2 20 --
--- --- --- ---- ---
Total loans past due 90 day or more $-- $98 $50 $208 $--
--- --- --- ---- ---
7
AT DECEMBER 31,
---------------------------------
2004 2003 2002 2001 2000
----- ---- ---- ---- ----
(IN THOUSANDS)
Other real estate owned
Commercial $-- $ -- $ -- $ -- $ --
Commercial loans secured by real estate -- 255 -- -- 148
Real estate-mortgage 15 248 89 512 10
Consumer 10 29 34 21 --
--- ---- ---- ---- ----
Total other real estate owned $25 $532 $123 $533 $158
--- ---- ---- ---- ----
AT DECEMBER 31,
--------------------------------------------
2004 2003 2002 2001 2000
------ ------- ------ ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Total non-performing assets $3,894 $11,411 $6,964 $10,044 $5,961
====== ======= ====== ======= ======
Total non-performing assets as a percent of
loans and loans held for sale, net of
unearned income, and other real estate owned 0.75% 2.26% 1.22% 1.67% 1.01%
Total restructured loans $5,685 $ 698 $ -- $ 269 $ 287
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,
-------------------------------------
2004 2003 2002 2001 2000
----- ----- ----- ----- -----
(IN THOUSANDS)
Interest income due in accordance with original
terms $469 $ 670 $470 $340 $ 464
Interest income recorded (19) (119) (14) (19) (139)
---- ----- ---- ---- -----
Net reduction in interest income $450 $ 551 $456 $321 $ 325
==== ===== ==== ==== =====
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,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
Non-interest bearing $106,249 --% $104,330 --% $105,830 --%
Interest bearing 53,502 0.29 51,872 0.39 49,681 0.50
Savings 104,187 0.89 103,450 0.92 100,454 1.32
Money market 120,280 1.11 123,845 1.06 129,902 1.09
Other time 279,458 2.83 282,838 3.20 300,683 4.34
-------- -------- --------
Total deposits $663,676 1.85 $666,335 2.05 $686,550 2.76
======== ======== ========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Interest bearing demand $ 154 $ 201 $ 249
Savings 928 948 1,329
Money market 1,340 1,309 1,423
Certificates of deposit in denominations of $100,000 or more 1,167 998 1,127
Other time 6,747 8,047 11,926
------- ------- -------
Total interest expense $10,336 $11,503 $16,054
======= ======= =======
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, 2004:
8
MATURING IN:
(IN THOUSANDS)
--------------
Three months or less $ 8,445
Over three through six months 13,819
Over six through twelve months 6,077
Over twelve months 6,753
-------
Total $35,094
=======
FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND
OTHER SHORT-TERM BORROWINGS
The outstanding balances and related information for federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings from continuing operations are summarized as follows:
AT DECEMBER 31, 2004
--------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance $ -- $-- $151,935
Maximum indebtedness at any month end -- -- 170,989
Average balance during year 7 -- 128,010
Average rate paid for the year 2.32% --% 1.61%
Interest rate on year end balance -- -- 2.25
AT DECEMBER 31, 2003
--------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance $ -- $-- $144,643
Maximum indebtedness at any month end 12,500 -- 159,260
Average balance during year 1,732 -- 104,048
Average rate paid for the year 1.41% --% 1.38%
Interest rate on year end balance -- -- 1.06
AT DECEMBER 31, 2002
--------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance $ 9,225 $ -- $ 91,563
Maximum indebtedness at any month end 14,200 327 121,211
Average balance during year 2,645 64 50,818
Average rate paid for the year 1.93% 1.07% 1.77%
Interest rate on year end balance 1.50 -- 1.48
The outstanding balances and related information for federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings from discontinued operations are summarized as follows:
AT DECEMBER 31, 2002
--------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance $-- $-- $ --
Maximum indebtedness at any month end -- -- 5,609
Average balance during year -- -- 3,106
Average rate paid for the year --% --% 2.02%
Interest rate on year end balance -- -- --
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances. Collateral related to securities sold under agreements to repurchase
are maintained within the Company's investment portfolio.
9
These borrowing transactions can range from overnight to one year in
maturity. The average maturity was three days at the end of 2004 and two days at
the end of 2003 and 2002.
ITEM 2. PROPERTIES
The principal offices of the Company and AmeriServ Financial Bank occupy
the five-story AmeriServ Financial building at the corner of Main and Franklin
Streets in Johnstown plus nine floors of the building adjacent thereto. The
Company occupies the main office and its subsidiary entities have 16 other
locations which are owned in fee. Twelve additional locations are leased with
terms expiring from February 14, 2004 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 or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 2004 a Special Meeting of the Shareholders was held to vote
on two issues. The results are as follows:
% OF VOTED
VOTES CAST SHARES
---------- ----------
APPROVAL OF THE ISSUANCE OF 2,936,533 SHARES OF THE CORPORATION'S
COMMON STOCK TO INSTITUTIONAL INVESTORS AT A PRICE OF $4.50.
For 7,251,083 52.7
Against 797,031 5.8
Abstain 2,084,757 15.1
No vote 3,626,965 26.4
% OF VOTED
VOTES CAST SHARES
---------- ----------
APPROVE AMENDMENT OF THE CORPORATION'S ARTICLE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 24 MILLION SHARES TO 30 MILLION SHARES.
For 12,696,610 92.3
Against 783,178 5.7
Abstain 282,047 2.0
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of January 31, 2005, the Company had 4,659 shareholders of its Common
Stock. On February 28, 2003, the Company and the Bank entered into a Memorandum
of Understanding (MOU) with the Federal Reserve Bank of Philadelphia (Federal
Reserve) and the Pennsylvania Department of Banking (Department). Under the
terms of the MOU, the Company and the Bank cannot declare dividends, the Company
may not redeem any of its own stock, and the Company cannot incur any additional
debt other than in the ordinary course of business, in each case, without the
prior written approval of the Federal Reserve and the Department. Accordingly,
the Board of Directors of the Company cannot reinstate the previously suspended
common stock dividend, or reinstitute its stock repurchase program without the
concurrence of the Federal Reserve and the Department.
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, 2004:
First Quarter $6.48 $4.94 $0.00
Second Quarter 6.15 5.45 0.00
Third Quarter 5.56 4.77 0.00
Fourth Quarter 5.30 4.68 0.00
Year ended December 31, 2003
First Quarter $3.90 $2.41 $0.00
Second Quarter 3.90 3.10 0.00
Third Quarter 4.17 3.46 0.00
Fourth Quarter 5.16 4.27 0.00
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000*
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income $ 50,104 $ 55,005 $ 65,915 $ 81,198 $ 105,554
Total interest expense 26,638 30,360 38,584 53,211 69,032
Net interest income 23,466 24,645 27,331 27,987 36,522
Provision for loan losses 1,758 2,961 9,265 1,350 2,096
Net interest income after provision for loan losses 21,708 21,684 18,066 26,637 34,426
Total non-interest income 14,012 16,995 18,653 16,864 13,187
Total non-interest expense 50,091 35,902 40,406 37,460 44,045
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes (14,371) 2,777 (3,687) 6,041 3,568
Provision (benefit) for income taxes (5,845) 587 (1,692) 1,600 (113)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (8,526) 2,190 (1,995) 4,441 3,681
Loss from discontinued operations, net of income taxes ** (1,193) (1,641) (3,157) (2,466) (1,965)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (9,719) $ 549 $ (5,152) $ 1,975 $ 1,716
========== ========== ========== ========== ==========
PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic earnings (loss) per share $ (0.58) $ 0.16 $ (0.15) $ 0.33 $ 0.28
Diluted earnings (loss) per share (0.58) 0.16 (0.15) 0.33 0.28
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS:
Basic loss per share $ (0.08) $ (0.12) $ (0.23) $ (0.18) $ (0.15)
Diluted loss per share (0.08) (0.12) (0.23) (0.18) (0.15)
PER COMMON SHARE DATA:
Basic earnings (loss) per share $ (0.66) $ 0.04 $ (0.37) $ 0.33 $ 0.28
Diluted earnings (loss) per share (0.66) 0.04 (0.37) 0.33 0.28
Cash dividends declared 0.00 0.00 0.30 0.36 0.42
Book value at period end 4.32 5.32 5.77 6.01 5.83
BALANCE SHEET AND OTHER DATA:
Total assets $1,009,232 $1,148,782 $1,175,825 $1,192,590 $1,228,839
Loans and loans held for sale, net of unearned income 521,416 503,387 572,977 599,481 577,588
Allowance for loan losses 9,893 11,682 10,035 5,830 5,936
Investment securities available for sale 373,584 524,573 490,701 498,626 550,232
Investment securities held to maturity 27,435 28,089 15,077 -- --
Deposits 644,391 654,597 669,929 676,346 659,064
Total borrowings 273,246 410,206 410,135 418,478 485,312
Stockholders' equity 85,219 74,270 77,756 79,490 70,047
Full-time equivalent employees 406 413 422 475 477
* The Company spun-off its Three Rivers Bank subsidiary on April 1, 2000.
** Discontinued operations relate to Standard Mortgage Corporation, the
Company's mortgage servicing subsidiary, which sold all of its remaining
mortgage servicing rights effective December 28, 2004.
11
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
2004 2003 2002 2001 2000*
------ ----- ------- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL RATIOS:
Return on average total equity (11.44)% 2.85% (2.39)% 5.33% 4.52%
Return on average assets (0.76) 0.19 (0.17) 0.35 0.24
Loans and loans held for sale, net of unearned income,
as a percent of deposits, at period end 80.92 76.90 85.53 88.64 87.64
Ratio of average total equity to average assets 6.67 6.67 7.02 6.58 5.27
Common stock cash dividends as a percent of net income (loss)
applicable to common stock -- -- (204.35) 109.98 152.57
Interest rate spread 2.01 2.02 2.17 2.08 2.26
Net interest margin 2.28 2.31 2.51 2.45 2.63
Allowance for loan losses as a percentage of loans and
loans held for sale, net of unearned income, at period end 1.90 2.32 1.75 0.97 1.03
Non-performing assets as a percentage of loans and loans held
for sale and other real estate owned, at period end 0.75 2.26 1.22 1.67 1.01
Net charge-offs as a percentage of average loans and loans held for sale 0.68 0.22 0.85 0.26 0.21
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits 0.12X 1.15x 0.84x 1.19x 1.09x
Including interest on deposits 0.46 1.09 0.90 1.11 1.05
Cumulative one year GAP ratio, at period end 0.78 0.96 1.44 1.30 1.01
* The Company spun-off its Three Rivers Bank subsidiary on April 1, 2000.
(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.
12
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
2004 QUARTER ENDED
-----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 11,865 $12,698 $12,622 $12,919
Interest expense 6,176 7,046 6,709 6,707
-------- ------- ------- -------
Net interest income 5,689 5,652 5,913 6,212
Provision for loan losses 1,115 -- 259 384
-------- ------- ------- -------
Net interest income after provision for loan losses 4,574 5,652 5,654 5,828
Non-interest income 2,643 4,069 3,361 3,939
Non-interest expense 23,026 9,044 8,837 9,184
-------- ------- ------- -------
Income (loss) before income taxes (15,809) 677 178 583
Provision (benefit) for income taxes (5,592) (324) (55) 126
-------- ------- ------- -------
Income (loss) from continuing operations (10,217) 1,001 233 457
Income (loss) from discontinued operations, net of income taxes* (724) (259) 21 (231)
-------- ------- ------- -------
Net income (loss) $(10,941) $ 742 $ 254 $ 226
======== ======= ======= =======
Basic earnings (loss) per common share from continuing
operations $ (0.59) $ 0.07 $ 0.02 $ 0.03
Diluted earnings (loss) per common share from continuing
operations (0.59) 0.07 0.02 0.03
Basic earnings (loss) per common share (0.64) 0.05 0.02 0.02
Diluted earnings (loss) per common share (0.64) 0.05 0.02 0.02
Cash dividends declared per common share 0.00 0.00 0.00 0.00
2003 QUARTER ENDED
-----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $12,957 $13,079 $14,226 $14,743
Interest expense 7,089 7,383 7,792 8,096
------- ------- ------- -------
Net interest income 5,868 5,696 6,434 6,647
Provision for loan losses 384 384 534 1,659
------- ------- ------- -------
Net interest income after provision for loan losses 5,484 5,312 5,900 4,988
Non-interest income 3,731 3,817 4,921 4,526
Non-interest expense 8,909 8,933 9,056 9,004
------- ------- ------- -------
Income before income taxes 306 196 1,765 510
Provision (benefit) for income taxes (15) (55) 492 165
------- ------- ------- -------
Income from continuing operations 321 251 1,273 345
Loss from discontinued operations, net of income taxes * (141) (2) (358) (1,140)
------- ------- ------- -------
Net income (loss) $ 180 $ 249 $ 915 $ (795)
======= ======= ======= =======
Basic earnings per common share from continuing operations $ 0.02 $ 0.02 $ 0.09 $ 0.02
Diluted earnings per common share from continuing operations 0.02 0.02 0.09 0.02
Basic earnings (loss) per common share 0.01 0.02 0.07 (0.06)
Diluted earnings (loss) per common share 0.01 0.02 0.07 (0.06)
Cash dividends declared per common share 0.00 0.00 0.00 0.00
* Discontinued operations relate to Standard Mortgage Corporation, the
Company's mortgage servicing subsidiary, which sold all of its remaining
mortgage servicing rights effective December 28, 2004.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (M. D. & A.)
The following discussion and analysis of financial condition and results of
operations of AmeriServ Financial should be read in conjunction with the
consolidated financial statements of AmeriServ Financial, including the related
notes thereto, included elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
2004 SUMMARY OVERVIEW:
The fourth quarter of the year 2004 was a time of significant activity at
AmeriServ. The challenge was to complete the previously announced capital
offering and its related actions while at the same time maintaining a day-to-day
focus on the Turnaround activities. These two activities are discussed
separately so the reader can better appreciate their long-term significance.
First, following the positive vote by shareholders on December 10,
2004, the capital offering was completed. AmeriServ received $25.8 million
through the issuance of 5,731,533 shares of common stock to seven institutional
investors. The Company put these proceeds to work as follows. First, the Company
retired $125 million in Federal Home Loan Bank (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. The
outstanding FHLB borrowings have now been reduced by more than $140 million
since their recent peak in July 2004. Second, in mid-December, management
completed the necessary steps to retire $15.3 million of its outstanding Trust
Preferred securities. This $35 million issue, dating from 1998, carries an 8.45%
annual interest cost for AmeriServ. Therefore, this action reduces the annual
debt service requirement by more than $1.2 million. The Company wrote-off
$476,000 of unamortized issuance costs in conjunction with this transaction
which is included within other expense. The Company also sold all remaining
mortgage servicing rights and took the necessary steps to terminate operations
at Standard Mortgage Corporation in Atlanta, Georgia. The cost of this closing
was approximately $800,000 in 2004, but the closing eliminates an activity that
lost $1.2 million in 2004 and $1.6 million in 2003. Management can now focus on
the role of AmeriServ as a leading community bank in the region. Finally, the
Company also improved its position by strengthening capital at the bank,
restoring cash reserves at the parent company and proceeding with the closing of
the outpost branch office in Harrisburg, Pennsylvania. The Company incurred
$170,000 of costs in conjunction with the Harrisburg transaction which is
reflected in other expense.
The execution of these initiatives should result in significant future
improvement in AmeriServ's results, but the cost of correcting these structural
impediments was considerable. The combined cost of these actions was in excess
of $14 million. This meant that even after applying income tax benefit, the loss
for the fourth quarter was $10.9 million or $0.64 per diluted share. This loss
ended the string of consecutive profitable quarters at six. This fourth quarter
loss also caused a net loss for the full year of $9.7 million or $0.66 per
diluted share compared to net income of $549,000 or $0.04 per diluted share in
2003. Most importantly, these corrective actions now permit management more
resources to fully focus on community banking by reducing the expense impact of
these outmoded strategies and complex financing programs.
It is critically important that the Company remained focused on
improving its community banking activities. As planned, the lending functions
are replacing the investment functions as the key to profitability. The level of
loans outstanding closed 2004 at the highest level since mid-2003. Additionally,
the level of non-performing assets reached the lowest level since late 2001.
This improvement in asset quality has had a positive impact on key measures used
to judge lending performance. It is also important to note that while fourth
quarter expenses were inflated by the charges described earlier, the level of
expenses in 2004 (excluding these charges) were only marginally higher than in
2003. This is an indication that the focus on controlling expenses that was
initiated in 2002 continues. We believe that these expense reductions have not
impaired customer service.
The Company is also pleased with the performance of AmeriServ Trust
Company. This business unit now manages $1.3 billion and continues to be one the
larger trust companies between Harrisburg and Pittsburgh. The Trust Company also
continues to increase its profitability, surpassing 2003 by 9.8% in net income
contribution. The Retail Bank experienced a deposit decline in the fourth
quarter by 3% as large denomination certificates of deposit declined. These
volatile deposits peaked in the third quarter and are expected to return to
AmeriServ during 2005.
Perhaps it would be best at this point to step back and look at the
AmeriServ fourth quarter results from a less detailed perspective. It should be
said that this is a company that labored mightily in 2003 and 2004 to stabilize
itself in the face of serious difficulties. The series of profitable quarters
that began in the second quarter of 2003 demonstrated that the Board and the
restructured management team were taking effective actions. This culminated in
the strong vote of confidence from the institutional investment community who
provided the capital to permit a substantial balance sheet restructuring. This
attack has now been made and AmeriServ has become a smaller - but stronger -
company with a reduced risk profile. The task now is to fully focus on the
fundamental elements of community banking. This is the future for AmeriServ. The
future lies in providing a full line of banking products to the consumers and
businesses in the area and it lies in continuing to pursue the exciting growth
track of the Trust Company.
14
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,
---------------------------
2004 2003 2002
------- ------ -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Net income (loss) $(8,526) $2,190 $(1,995)
Diluted earnings (loss) per share (0.58) 0.16 (0.15)
Return on average equity (11.44) 2.85 (2.43)
NET INCOME (LOSS):
Net income (loss) $(9,719) $ 549 $(5,152)
Diluted earnings (loss) per share (0.66) 0.04 (0.37)
Return on average equity (13.04)% 0.71% (6.18)%
The Company reported a net loss of $9.7 million or $0.66 per share in 2004
due largely to increased non-interest expense related to the balance sheet
repositioning actions taken during the fourth quarter and discussed above. The
2004 performance was also negatively impacted by reduced net interest income and
lower non-interest revenue when compared to 2003. These negative items were
partially offset by a reduced loan loss provision and an increased income tax
benefit. A net loss of $1.2 million from discontinued operations is also
reflected in the Company's 2004 performance.
The Company reported net income of $549,000 or $0.04 per share in 2003.
This represented a turnaround from the net loss of $5.2 million or $0.37 per
share in 2002. The sharply improved net income in 2003 when compared to 2002
resulted from reduced non-interest expenses and a lower provision for loan
losses. These positive items more than offset reduced revenue from both net
interest income and non-interest income and a lower income tax benefit.
The Company's 2002 performance was negatively impacted by an increased
provision for loan losses and higher non-interest expense. Specifically, the
provision for loan losses totaled $9.3 million in 2002. The higher 2002
provision reflected actions taken to strengthen the allowance for loan losses as
a result of continued weakness in the economy and deterioration in credit
quality. The Company incurred a $3.2 million loss from discontinued operations
in 2002 due in part to heightened mortgage servicing impairment charges.
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,
-----------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
Interest income $50,104 $55,005 $65,915
Interest expense 26,638 30,360 38,584
------- ------- -------
Net interest income 23,466 24,645 27,331
Tax-equivalent adjustment 117 39 72
------- ------- -------
Net tax-equivalent interest income $23,583 $24,684 $27,403
======= ======= =======
Net interest margin 2.28% 2.31% 2.51%
2004 NET INTEREST PERFORMANCE OVERVIEW. . .The Company's 2004 net interest
income on a tax-equivalent basis decreased by $1.1 million or 4.5% from 2003 due
to a lower level of earning assets and a three basis point decline in the net
interest margin to 2.28%. Loan portfolio shrinkage combined with a reduced level
of investment securities resulting from the Company's decision to delever its
balance sheet in the fourth quarter of 2004 caused the reduction in earning
assets. The modest decline in the net interest margin was due to the earning
asset yield declining to a greater extent than the cost of funds in 2004, due to
the flattening of the yield curve.
COMPONENT CHANGES IN NET INTEREST INCOME: 2004 VERSUS 2003. . .Regarding
the separate components of net interest income, the Company's total interest
income for 2004 decreased by $4.9 million or 8.9% when compared to 2003. This
decrease was due to a $32.5 million decline in average earning assets and a 30
basis point drop in the earning asset yield to 4.85%. Within the earning asset
base, the yield on the total investment securities portfolio dropped by 25 basis
points to 3.74% while the yield on the total loan portfolio decreased by 31
basis points to 5.99%. Both of these declines reflect the impact of asset
prepayments as borrowers have elected to refinance their higher fixed rate loans
into lower cost loans over the past several years. Additionally, a lower level
of higher yielding commercial loans has had a negative impact on the total loan
portfolio yield.
15
The $32.5 million decline in the volume of earning assets was due to a
$19.3 million or 3.7% decrease in average loans and a $14.2 million or 2.6%
decrease in average investment securities. The decline in average loans reflect
the results of heightened prepayment pressures experienced throughout 2003.
While the Company has experienced new commercial loan growth in the fourth
quarter of 2004, its full impact will not be felt until 2005. This commercial
loan growth should lead to a greater composition of loans in the earning asset
mix which should contribute to improving net interest income and net interest
margin as the Company moves into 2005. The decline in average investment
securities represents the results of the deleveraging strategy in the fourth
quarter of 2004 in which the Company reduced the size of its securities
portfolio by approximately $125 million in order to prepay certain high cost
FHLB advances. However, because this deleveraging occurred late in the year its
effect on average investment securities was diminished. The deleveraging will
also have a favorable impact on the Company's net interest margin in 2005.
The Company's total interest expense for 2004 decreased by $3.7 million or
12.3% when compared to 2003. This reduction in interest expense was due to a
lower volume of interest bearing liabilities and a reduced cost of funds. Total
average interest bearing liabilities were $38.7 million or 4.0% lower in 2004 as
fewer deposits and borrowings were needed to fund the smaller earning asset
base. The total cost of funds declined by 29 basis points to 2.84% and was
driven down by a reduced cost of both deposits and borrowings. Specifically, the
cost of interest bearing deposits decreased by 20 basis points to 1.85% and the
cost of short-term borrowings and FHLB advances declined by 31 basis points to
3.96%. The reduced deposit cost was caused by lower rates paid particularly for
certificates of deposits. The lower cost of borrowings reflects the downward
repricing of maturing FHLB advances to lower current market rates and the full
year favorable impact that the fair value hedges had on reducing interest
expense by $1.6 million in 2004 compared to $451,000 in 2003. (See Note #22,
Derivative Hedging Instruments, for further discussion).
As a result of the deleveraging strategy, the Company reduced its ratio of
FHLB advances and short-term borrowings to total assets to 25.1% at December 31,
2004 compared to 32.7% at December 31, 2003. The Company plans to continue to
reduce the size of its leverage program in 2005 by redeploying funds derived
from the paydowns of investment securities into the loan portfolio or to repay
debt.
2003 NET INTEREST PERFORMANCE OVERVIEW. . .The Company's 2003 net interest
income on a tax-equivalent basis decreased by $2.7 million or 10.0% from 2002
due to a lower level of earning assets and a 20 basis point drop in the net
interest margin to 2.31%. Loan portfolio shrinkage experienced during 2003 was a
predominant factor contributing to both the lower level of earning assets and
the net interest margin contraction. The overall net decrease in average loans
outstanding reflects significant prepayments caused by the low interest rate
environment and the Company's internal focus on improving asset quality. The
Company completed the restructuring of its lending division during the third
quarter of 2003 and did report modest growth in total loans in the fourth
quarter of 2003.
Additionally, the net interest margin compression also reflects increased
mortgage-related cash flows in the investment securities portfolio as a result
of the record level of mortgage refinancings in 2003. This reduced the
securities portfolio yield due in part to accelerated amortization of premiums
on mortgage-backed securities to correlate with the heightened prepayments and
the reinvestment of this cash into new shorter duration securities with lower
yields.
COMPONENT CHANGES IN NET INTEREST INCOME: 2003 VERSUS 2002. . .Regarding
the separate components of net interest income, the Company's total
tax-equivalent interest income for 2003 decreased by $10.9 million or 16.6% when
compared to 2002. This decrease was due to a $24.1 million decline in earning
assets and a 91 basis point drop in the earning asset yield to 5.15%. Within the
earning asset base, the yield on the total investment securities portfolio
dropped by 107 basis points to 3.99% while the yield on the total loan portfolio
decreased by 63 basis points to 6.30%. Both of these declines reflect the low
interest rate environment in place in 2003 as the Federal Reserve reduced the
federal funds rate by 550 basis points since the beginning of 2001 in an effort
to stimulate economic growth. These significant rate reductions caused
accelerated asset prepayments as borrowers elected to refinance their higher
fixed rate loans into lower cost loans. Additionally, floating or variable rate
assets also repriced downward.
The $24.1 million decline in the volume of earning assets was due to a $69
million or 11.8% decrease in average loans outstanding which more than offset
growth in both available for sale (AFS) and held to maturity (HTM) investment
securities. The loan decline in 2003 reflected the heightened prepayment
pressures and occurred in both commercial loans and residential mortgage loans.
The drop in residential mortgage loans was also partially due to the Company's
decision to sell approximately $62 million or 61% of new mortgage loan
production into the secondary market for interest rate risk management purposes.
The drop in commercial loans was also caused by reduced new loan production as
management was inwardly focused on reorganizing its commercial lending division
during 2003. This reorganization included the hiring of a new chief lending
officer in February of 2003 and the hiring of four experienced commercial
lenders through the end of the third quarter of 2003.
The Company's total interest expense for 2003 decreased by $8.2 million or
21.3% when compared to 2002. This reduction in interest expense was due to a
lower volume of interest bearing liabilities and a reduced cost of funds. Total
average interest bearing liabilities were $23.8 million or 2.4% lower in 2003 as
fewer deposits and borrowings were needed to fund a smaller earning asset base.
The total cost of funds declined by 76 basis points to 3.13% and was driven
down by a reduced cost of both deposits and borrowings. Specifically, the cost
of interest bearing deposits decreased by 71 basis points to 2.05% and the cost
of short-term borrowings and FHLB advances declined by 89 basis points to 4.29%.
The reduced deposit cost was caused by lower rates paid particularly for savings
accounts and certificates of deposit. The lower cost of borrowings reflects the
downward repricing of maturing FHLB advances to lower current market rates as a
result of the previously discussed decline in interest rates and the favorable
impact that fair value hedges had on reducing interest expense. The Company's
ratio of FHLB advances and short-term borrowings to total assets averaged 32.7%
in 2003 which was comparable with the 31.9% average in 2002.
16
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.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
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 $ 496,912 $30,414 5.99% $ 516,250 $33,346 6.30% $ 585,646 $41,082 6.93%
Deposits with banks 6,276 59 0.94 5,294 54 1.01 14,859 281 1.89
Federal funds sold and
securities purchased
under agreements to
resell 68 1 0.91 29 -- 0.96 542 9 1.56
Investment securities:
Available for sale 493,478 18,333 3.72 517,030 20,548 3.97 486,217 24,585 5.06
Held to maturity 34,480 1,414 4.10 25,159 1,096 4.40 594 30 5.09
---------- ------- ---------- ------- ---------- -------
Total investment securities 527,958 19,747 3.74 542,189 21,644 3.99 486,811 24,615 5.06
---------- ------- ---------- ------- ---------- -------
TOTAL INTEREST EARNING
ASSETS/ INTEREST INCOME 1,031,214 50,221 4.85 1,063,762 55,044 5.15 1,087,858 65,987 6.06
---------- ------- ---------- ------- ---------- -------
Non-interest earning
assets:
Cash and due from banks 21,793 22,371 22,700
Premises and equipment 10,493 11,950 13,165
Other assets 62,450 59,964 63,617
Net average assets of
discontinued
operations 2,393 6,041 5,971
Allowance for loan
losses (10,674) (11,431) (5,997)
---------- ---------- ----------
TOTAL ASSETS $1,117,669 $1,152,657 $1,187,314
========== ========== ==========
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 53,502 $ 154 0.29% $ 51,872 $ 201 0.39% $ 49,681 $ 249 0.50%
Savings 104,187 928 0.89 103,450 948 0.92 100,454 1,329 1.32
Money market 120,280 1,340 1.11 123,845 1,309 1.06 129,902 1,423 1.09
Other time 279,458 7,914 2.83 282,838 9,045 3.20 300,683 13,053 4.34
---------- ------- ---------- ------- ---------- -------
Total interest
bearing deposits 557,427 10,336 1.85 562,005 11,503 2.05 580,720 16,054 2.76
---------- ------- ---------- ------- ---------- -------
Federal funds purchased,
securities sold under
agreements to
repurchase, and other
short-term borrowings 128,017 2,098 1.64 105,780 1,464 1.37 53,527 952 1.77
Advances from Federal Home
Loan Bank 208,444 11,218 5.38 265,184 14,433 5.44 322,557 18,618 5.77
Guaranteed junior
subordinated deferrable
interest debentures 34,842 2,986 8.57 34,500 2,960 8.58 34,500 2,960 8.58
---------- ------- ---------- ------- ---------- -------
TOTAL INTEREST BEARING
LIABILITIES/INTEREST
EXPENSE 928,730 26,638 2.84 967,469 30,360 3.13 991,304 38,584 3.89
---------- ------- ---------- ------- ---------- -------
Non-interest bearing
liabilities:
Demand deposits 106,249 104,330 105,830
Other liabilities 8,133 3,961 6,856
Stockholders' equity 74,557 76,897 83,324
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,117,669 $1,152,657 $1,187,314
========== ========== ==========
Interest rate spread 2.01 2.02 2.17
Net interest income/net
interest margin 23,583 2.28% 24,684 2.31% 27,403 2.51%
Tax-equivalent adjustment (117) (39) (72)
------- ------- -------
Net interest income $23,466 $24,645 $27,331
======= ======= =======
The average balance and yield on taxable securities was $528 million and
3.74%, $542 million and 3.99% and $486 million and 5.06% for 2004, 2003, and
2002, respectively. The Company had no tax-exempt securities in 2004 or 2003.
The average balance and tax-equivalent yield on tax-exempt securities was $1
million and 5.5% for 2002.
17
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.
2004 VS. 2003 2003 vs. 2002
--------------------------- ----------------------------
INCREASE (DECREASE) Increase (decrease)
DUE TO CHANGE IN: due to change in:
--------------------------- ----------------------------
AVERAGE Average
VOLUME RATE TOTAL Volume Rate Total
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned income $(1,267) $(1,665) $(2,932) $(4,378) $(3,358) $ (7,736)
Deposits with banks 8 (3) 5 (132) (95) (227)
Federal funds sold and securities
purchased under agreements to
resell 1 -- 1 (6) (3) (9)
Investment securities:
Available for sale (930) (1,285) (2,215) 1,683 (5,720) (4,037)
Held to maturity 390 (72) 318 1,070 (4) 1,066
------- ------- ------- ------- ------- --------
Total investment securities (540) (1,357) (1,897) 2,753 (5,724) (2,971)
------- ------- ------- ------- ------- --------
Total interest income (1,798) (3,025) (4,823) (1,763) (9,180) (10,943)
------- ------- ------- ------- ------- --------
INTEREST PAID ON:
Interest bearing demand deposits 7 (54) (47) 12 (60) (48)
Savings deposits 6 (26) (20) 42 (423) (381)
Money market (49) 80 31 (72) (42) (114)
Other time deposits (106) (1,025) (1,131) (739) (3,269) (4,008)
Federal funds purchased, securities
sold under agreements to
repurchase, and other short-term
borrowings 327 307 634 666 (154) 512
Advances from Federal Home Loan Bank (3,057) (158) (3,215) (3,167) (1,018) (4,185)
Trust Preferred 26 -- 26 -- -- --
------- ------- ------- ------- ------- --------
Total interest expense (2,846) (876) (3,722) (3,258) (4,966) (8,224)
------- ------- ------- ------- ------- --------
Change in net interest income $ 1,042 $(2,143) $(1,101) $ 1,495 $(4,214) $ (2,719)
======= ======= ======= ======= ======= ========
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,
--------------------------
2004 2003 2002
------ ------- -------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Total loan delinquency (past due 30 to 89 days) $3,311 $14,636 $17,878
Total non-accrual loans 3,869 10,781 6,791
Total non-performing assets(1) 3,894 11,411 6,964
Loan delinquency as a percentage of total loans and loans held for sale,
net of unearned income 0.64% 2.91% 3.12%
Non-accrual loans as a percentage of total loans and loans held for sale,
net of unearned income 0.74 2.14 1.19
Non-performing assets as a percentage of total loans and loans held for
sale, net of unearned income, and other real estate owned 0.75 2.26 1.22
- ----------
(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 since December 31, 2003. This improvement resulted from
the Company's significant focus on improving asset quality as one of the core
strategies of the Turnaround. Total loan delinquency declined by $11.3 million
from year-end 2003 primarily due to successful collection efforts and improved
loan portfolio quality. Loan delinquency levels have now remained below 1% for
the past nine consecutive months. Non-accrual and non-performing asset levels
also declined by $6.9 million and $7.5 million, respectively, from December 31,
2003 due to the successful work-out of the Company's two largest problem credits
during 2004.
18
Between December 31, 2002, and December 31, 2003, total loan delinquency
decreased by $3.2 million to 2.91% of total loans. This decline was due
primarily to the transfer of a $4.8 million commercial mortgage loan into
non-accrual status. The transfer of this $4.8 million commercial mortgage loan
into non-accrual status was also the primary cause of the noted increase in
non-accrual loans and non-performing assets and the corresponding ratios. This
loan was to a borrower in the personal care industry and was supported by an 80%
deficiency guarantee by the U.S. Department of Agriculture and secured by a
first mortgage on the personal care facility. The 20% unguaranteed portion was
rated doubtful and the Company had established an allocation of $500,000 within
the allowance for loan losses for this credit at December 31, 2003. The Company
took possession of the facility in the first quarter of 2004 and transferred the
property into other real estate owned and continued to list it as a
non-performing asset until it was successfully sold in the third quarter of
2004.
In addition, a commercial loan to a borrower in the paper manufacturing
industry was successfully restructured under new ownership and was no longer
delinquent by the end of the first quarter of 2004. Overall, the Company had two
loans totaling $5.7 million at December 31, 2004, that have been restructured
that involved forgiving a portion of interest or principal on these loans or
granting loan rates less than that of the market rate. The Company has
established an allocation of $413,000 within the allowance for loan losses for
these restructured loans.
While the Company is pleased with this improvement in asset quality, it
continues to closely monitor the portfolio given the number of relatively large
sized commercial loans within the portfolio. As of December 31, 2004, the 25
largest credits represented 36.9% of total loans outstanding. This portfolio
characteristic combined with the lack of seasoning of recent new loan production
are some of the factors that the Company considered in maintaining a $781,000
general unallocated reserve within the allowance for loan losses at December 31,
2004.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. . .As described in more detail in
the Critical Accounting Policies and Estimates section of this M.D.&A., the
Company uses a comprehensive methodology and procedural discipline to maintain
an allowance for loan losses to absorb inherent losses in the loan portfolio.
The Company believes this is a critical accounting policy since it involves
significant estimates and judgments. The allowance consists of three elements;
1) reserves established on specifically identified problem loans, 2) formula
driven general reserves established for loan categories based upon historical
loss experience and other qualitative factors which include delinquency and
non-performing loan trends, economic trends, concentrations of credit, trends in
loan volume, experience and depth of management, examination and audit results,
effects of any changes in lending policies, and trends in policy, financial
information, and documentation exceptions, and 3) a general unallocated reserve
which provides adequate positioning in the event of variance from our assessment
of the previously listed qualitative factors, provides protection against credit
risks resulting from other inherent risk factors contained in the bank's loan
portfolio, and recognizes the model and estimation risk associated with the
specific and formula driven allowances. Note that the qualitative factors used
in the formula driven general reserves are evaluated quarterly (and revised if
necessary) by the Company's management to establish allocations which
accommodate each of the listed risk factors.
The actions taken to strengthen the allowance for loan losses over the past
several years resulted from a concerted effort to carefully review the Company's
loan portfolio in light of deterioration in credit quality and weakness in the
economy. Additionally, in the fourth quarter of 2002, the Company concluded that
although its credit and credit administration policies were sound, adherence to
these policies had not been consistent. This resulted in incomplete or dated
information in credit files. The obtaining of updated borrower financial
information and its subsequent analysis led to rating downgrades for numerous
credits which contributed to an increased level of classified loans. Since
December 31, 2003, however, classified loans decreased by $12.2 million or 34.8%
to $22.9 million. The Company has noted a stabilization in classified loans over
2004 and has kept its borrower financial information current and exceptions
within policy guidelines during 2004. Specifically, at December 31, 2004, the
loan loss reserve as a percentage of total loans amounted to 1.90% compared to
2.32% at December 31, 2003 and 1.75% at December 31, 2002. The drop in this
ratio since December 31, 2003 is due to a decrease in the size of the loan loss
reserve combined with a modest increase in total loans. The Company's loan loss
reserve coverage of non-performing assets improved to 254% at December 31, 2004
compared to 102% at December 31, 2003 and 144% at December 31, 2002. The
significant drop in non-performing assets was a key factor contributing to the
improvement in this ratio in 2004. The following table sets forth changes in the
allowance for loan losses and certain ratios for the periods ended.
19
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year $ 11,682 $ 10,035 $ 5,830 $ 5,936 $ 10,350
Reduction due to spin-off of Three Rivers Bank -- -- -- -- (5,028)
Transfer to reserve for unfunded loan
commitments (122) (139) -- -- --
-------- -------- -------- -------- --------
Charge-offs:
Commercial (1,107) (425) (5,119) (1,147) (792)
Commercial loans secured by real estate (1,928) (172) -- -- (764)
Real estate-mortgage (139) (331) (516) (220) (274)
Consumer (867) (645) (348) (453) (332)
-------- -------- -------- -------- --------
Total charge-offs (4,041) (1,573) (5,983) (1,820) (2,162)
-------- -------- -------- -------- --------
Recoveries:
Commercial 410 170 584 133 53
Commercial loans secured by real estate 7 2 -- -- 310
Real estate-mortgage 65 63 160 65 141
Consumer 134 163 179 166 176
-------- -------- -------- -------- --------
Total recoveries 616 398 923 364 680
-------- -------- -------- -------- --------
Net charge-offs (3,425) (1,175) (5,060) (1,456) (1,482)
Provision for loan losses 1,758 2,961 9,265 1,350 2,096
-------- -------- -------- -------- --------
Balance at end of year $ 9,893 $ 11,682 $ 10,035 $ 5,830 $ 5,936
======== ======== ======== ======== ========
Loans and loans held for sale, net of unearned
income:
Average for the year $503,742 $525,604 $592,686 $566,884 $709,013
At December 31 521,416 503,387 572,977 599,481 577,588
As a percent of average loans and loans held for
sale:
Net charge-offs 0.68% 0.22% 0.85% 0.26% 0.21%
Provision for loan losses 0.35 0.56 1.56 0.24 0.30
Allowance for loan losses 1.96 2.22 1.69 1.03 0.84
Allowance as a percent of each of the
following:
Total loans and loans held for sale, net of
unearned income 1.90 2.32 1.75 0.97 1.03
Total delinquent loans (past due 30 to 89 days) 298.79 79.82 56.13 48.97 92.40
Total non-accrual loans 255.70 108.36 147.77 62.67 102.29
Total non-performing assets 254.06 102.37 144.10 58.04 99.58
Allowance as a multiple of net charge-offs 2.89X 9.94x 1.98x 4.01x 4.01x
Total classified loans $ 22,921 $ 35,135 $ 20,666 $ 13,758 $ 11,544
The Company's provision for loan losses totaled $1.8 million or 0.35% of
total loans for the year of 2004. This represented a decrease of $1.2 million
from the 2003 provision of $3.0 million or 0.56% of total loans. Net charge-offs
for 2004 totaled $3.4 million or 0.68% of total average loans compared to net
charge-offs of $1.2 million or 0.22% of total average loans in 2003. The higher
net charge-offs in 2004 reflect a $914,000 charge-off realized in the third
quarter as a result of the successful sale of a $4.3 million non-performing
asset, a $625,000 write-down of a $4.8 million loan on a personal care facility
that was moved into other real estate owned in the first quarter of 2004 and
subsequently sold in the third quarter, and $251,000 increase in net charge-offs
on consumer loans. The consumer loan charge-offs were higher than typical due to
the charge-off of a few larger consumer loans.
Overall, as a result of the net charge-offs exceeding the provision, the
balance in the allowance for loan losses decreased by $1.8 million during 2004
to total $9.9 million at December 31, 2004. This decline in the balance of the
allowance for loan losses and lower provision largely reflects the improvement
in the Company's asset quality in 2004 as the charge-offs incurred largely
relate to loans that were previously reserved for and worked-out.
The Company's provision for loan losses for 2003 totaled $3.0 million or
0.56% of average loans with a sizable portion of the funding occurring in the
first quarter. This represented a significant decrease of $6.3 million from the
2002 provision of $9.3 million or 1.56% of total loans. Net charge-offs were
also lower in 2003 totaling $1.2 million or 0.22% of average loans compared to
net charge-offs of $5.1 million or 0.85% of average loans in 2002. As a result
of the provision exceeding net charge-offs, the balance in the allowance for
loan losses increased by $1.6 million during 2003. The allowance for loan losses
to total loans ratio increased to 2.32% at December 31, 2003, due to the net
paydown of the loan portfolio and the building of the allowance for loan losses
to address credit quality deterioration.
20
The following schedule sets forth the allocation of the allowance for loan
losses among various 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,
-------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- -------------------- -------------------- ------------------- -------------------
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 $2,173 13.8% $ 2,623 15.0% $ 1,932 15.6% $1,706 20.6% $1,390 19.8%
Commercial loans
secured by
real estate 5,519 43.2 7,120 41.0 5,968 38.9 2,874 34.9 1,465 32.8
Real estate-mortgage 346 38.9 376 38.9 469 40.7 403 39.7 390 42.7
Consumer 1,074 4.1 853 5.1 826 4.8 596 4.8 506 4.7
Allocation to
general risk 781 710 840 251 2,185
------ ------- ------- ------ ------
Total $9,893 $11,682 $10,035 $5,830 $5,936
====== ======= ======= ====== ======
Even though residential real estate-mortgage loans comprise 39% of the
Company's total loan portfolio, only $346,000 or 3.5% of the total allowance for
loan losses is allocated against this loan category. The residential real
estate-mortgage loan allocation is based primarily 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.
The Company strengthened its allocations to the commercial and commercial real
estate segments of the loan portfolio during the past three years. Factors
considered by the Company that led to increased qualitative allocations to the
commercial segments of the portfolio included: the slowing of the national and
regional economies and its corresponding impact on the Company's loan
delinquency trends (mainly in 2003 and 2002), the increase in concentration risk
among our 25 largest borrowers compared to total loans, and the overall growth
in the average size associated with these credits.
In addition to the specific and formula-driven reserve calculations, the
Company has consistently established a general unallocated reserve to provide
for risk inherent in the loan portfolio as a whole. Management believes that its
judgment with respect to the establishment of the reserve allocated to general
risk has been validated by experience and prudently reflects the model and
estimation risk associated with the specific and formula driven allowances. The
Company determines the unallocated reserve based on a variety of factors, some
of which also are components of the formula-driven methodology. These include,
without limitation, the previously mentioned qualitative factors along with
general economic data, management's assessment of the direction of interest
rates, and credit concentrations. In conjunction with the establishment of the
general unallocated reserve, the Company also looks at the total allowance for
loan losses in relation to the size of the total loan portfolio and the level of
non-performing assets.
Based on the Company's loan loss reserve methodology and the related
assessment of the inherent risk factors contained within the Company's loan
portfolio, management believes that the allowance for loan losses was adequate
for each of the fiscal years presented in the table above.
NON-INTEREST INCOME. . .Non-interest income for 2004 totaled $14.0 million;
a $3.0 million or 17.6% decrease from the 2003 performance. Factors contributing
to the lower non-interest income in 2004 included:
- a $3.0 million or 78.5% decrease in gains realized on investment
security sales as the higher interest rate environment in 2004 limited
the Company's ability to capture profits on prepaying securities.
Also, the Company incurred $460,000 in losses on security sales in the
fourth quarter of 2004 by selling $47 million of the longest duration
securities in its investment portfolio as part of its balance sheet
repositioning actions.
- a $281,000 or 44.5% decrease in gains realized on the sale of mortgage
loans into the secondary market as a result of reduced mortgage
refinancing activity in 2004.
- a $374,000 or 11.8% reduction in service charges on deposit accounts
due to fewer overdraft penalty fees as it appears certain customers
have adjusted their banking behavior to minimize overdraft charges.
- a $370,000 or 7.4% increase in trust fees due to continued successful
union related new business development efforts particularly with the
BUILD and ERECT Funds.
- a $379,000 or 11.9% increase in other income due largely to a gain
realized on the sale of the Company's largest other real-estate owned
property in the third quarter of 2004.
21
Non-interest income for 2003 totaled $17.0 million; a $1.7 million or 8.9%
decrease from the 2002 performance. Factors contributing to the lower
non-interest income in 2003 included:
- a $507,000 decrease in gains realized on the sale of investment
securities as a steeper yield curve in the second half of 2003 limited
the Company's ability to capture profits on prepaying securities.
- a $277,000 drop in revenue from bank owned life insurance due to the
receipt of a death benefit for an employee insured under the program
in the prior year.
- a $1.3 million decrease in other income resulting from the Company's
decision to exit the merchant card business in the fourth quarter of
2002, reduced revenue generated from the sale of annuities and a
decline in revenue related to mortgage loan sales into the secondary
market in the second half of 2003.
- a $321,000 or 6.9% increase in trust fees due to successful business
development efforts related to union collective investment funds and
improving equity market values that have increased the value of trust
assets on which fees are assessed.
NON-INTEREST EXPENSE. . . Non-interest expense for 2004 totaled $50.1 million, a
$14.2 million or 39.5% increase from the 2003 performance. Factors contributing
to the higher non-interest expense in 2004 included:
- a $12.6 million penalty realized on the prepayment of $125 million of
FHLB convertible advances as part of the Company's balance sheet
deleveraging strategy.
- salaries and employee benefits increased by $1.0 million or 5.6% due
to higher medical insurance costs resulting from premium increases,
higher pension expense, and the payment of a lump sum bonus to union
employees in the fourth quarter of 2004 as a result of the new
collective bargaining agreement. These higher costs offset the benefit
of reduced salary expense due to 11 fewer average full-time equivalent
employees when compared to 2003 and lower incentive compensation
expense.
- a $282,000 decrease in amortization of core deposit intangibles as the
premium associated with the 1994 acquisition of Johnstown Savings Bank
has been fully recognized.
- a $992, 000 or 19.2% increase in other expense due largely to the
write-off of $476,000 of unamortized issuance costs related to the
redemption of $15.3 million of trust preferred securities and the
accrual of $170,000 in costs associated with the Harrisburg branch
office closing.
Non-interest expense for 2003 totaled $35.9 million; a $4.5 million or
11.2% decrease from the 2002 performance. This decline reflected the Company's
continued focus in 2003 on reducing and containing expenses. Factors
contributing to the decrease in non-interest expense in 2003 included:
- a $1.4 million or 7.2% decrease in salaries and employee benefits as
on average there were 32 fewer full time equivalent employees when
compared to 2002. The lower salaries expense was partially offset by
higher medical insurance costs as a result of premium increases and
increased pension expense.
- the Company also recorded in the third quarter of 2002 a $920,000
restructuring charge associated with implementing its earnings
improvement program. There was no such charge in 2003. In 2003 the
Company paid $462,000 for items associated with the restructuring
charge. The remaining liability at December 31, 2003 totaled $93,000
which was paid in 2004.
- a $2.3 million decline in other expenses due to cost cutting in
numerous expense categories some of the larger of which included
advertising expense, merchant card expense, business development
expense, and education expense.
INCOME TAX EXPENSE. . .The Company recognized, as part of continuing
operations, an income tax benefit of $5.8 million or an effective tax rate of
(40.8)% in 2004. The Company recognized a provision for income taxes of $587,000
or an effective tax rate of 21.1% in 2003 compared to an income tax benefit of
$1.7 million or a (45.4%) effective tax rate in 2002. The higher tax benefit in
2004 was due to the pre-tax loss that resulted largely from the FHLB prepayment
penalty and the reversal of $680,000 of prior year tax contingencies. The lower
tax benefit in 2003 was due to the Company's improved earnings performance. The
Company's largest source of tax-free income is from bank owned life insurance.
22
SEGMENT RESULTS. . .Note #23 to the Consolidated Financial Statements
presents the results of the Company's key business segments and identifies their
net income contribution. Retail banking was again the largest net income
contributor earning $1.3 million in 2004. The retail banking net income
contribution was down $2.2 million from the prior year due to reduced net
interest income and lower non-interest revenue. When 2003 is compared to 2002,
the retail banking net income contribution is down approximately $523,000 due to
reduced net interest income.
The trust segment's net income contribution in 2004 amounted to $860,000.
This represents an increase of $71,000 from the $789,000 net income contribution
earned in 2003 due to an increase in fee revenue. The higher fee revenue was due
to successful business development efforts related to union collective
investment funds and improving equity market values that have increased the
value of trust assets on which fees are assessed. In the future, the trust
segment will continue to focus on increasing the fee revenue generated from
union business activities, particularly the ERECT and BUILD Funds, which are
collective investment funds for trade union pension funds. The value of assets
in these funds has increased by 30% during 2004 and totaled $343 million at
December 31, 2004.
The Company discontinued its mortgage banking segment which had net losses
of $1.2 million in 2004 and $1.6 million in 2003. On December 28, 2004, the SMC
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 it did not have the scale nor the earnings
power to absorb the volatility and risk associated with this business line. The
2004 performance included on a pretax basis $376,000 loss on the sale of
mortgage servicing rights, $380,000 of costs related to employee severance and
$65,000 of costs incurred for the write-off of its remaining fixed assets. The
2003 loss largely resulted from a $758,000 loss realized on the sale of mortgage
servicing rights and $390,000 impairment charge on mortgage servicing rights.
The commercial lending segment lost $93,000 in 2004, which represented an
improvement from the $594,000 net loss experienced in 2003. The loss in both
periods resulted primarily from a high provision for loan losses; although the
size of the provision expense did decline by $711,000 between years. The 2003
performance reflects reduced net interest income due to fewer loans outstanding
as a result of the previously discussed inward corporate focus on improving
asset quality and significant prepayments caused by the low interest rate
environment.
The net loss in the investment/parent segment amounted to $10.7 million and
was due primarily to the $12.6 million FHLB prepayment penalty that was
previously discussed. The Company also experienced a $1.0 million decrease in
the revenue contribution from leveraged assets due largely to fewer investment
security gains.
For greater discussion on the future strategic direction of the Company's
key business segments, see Forward Looking Statement which begins on page 29.
BALANCE SHEET. . .The Company's total consolidated assets were $1.010
billion at December 31, 2004, compared with $1.149 billion at December 31, 2003,
which represents a decrease of $139.1 million or 12.1%. This lower level of
assets resulted from a $151.6 million or 27.4% decline in investment securities
as the Company reduced the size of its leverage program in the fourth quarter of
2004 as part of its balance sheet repositioning strategies. This reduction in
securities more than offset loan growth of $18.0 million or 3.5% due to
increased new commercial loan production.
The Company's deposits totaled $644 million at the end of 2004, which
represented a decrease of $10.2 million or 1.6% when compared to the end of 2003
due to jumbo certificate of deposit run-off and reduced money market account
balances. The Company was able to reduce the size of its borrowings by $137
million between years due to the deleveraging strategy. Total stockholders'
equity increased by $10.9 million as a result of the successful $25.8 million
private placement common stock offering. The capital provided from this private
placement more than offset the $9.7 million net loss for the year and a drop in
accumulated other comprehensive income due to a lower value of the AFS
investment securities portfolio. The Company significantly strengthened its
capital position in 2004 as the asset leverage ratio was 9.20% at December 31,
2004 compared to 7.55% at December 31, 2003.
LIQUIDITY. . .The Bank's liquidity position has been sufficient even during
the last two years when the Bank has experienced poor operating results. Our
core deposit base has remained stable throughout this period and has been
adequate to fund the Bank's operations. Neither the sales of investment
securities nor the use of the proceeds from such sales and cash flow from
prepayments and amortization of securities to redeem Federal Home Loan Bank
advances has materially affected the Bank's liquidity. The securities sold were
pledged as collateral for FHLB borrowings, but the proceeds from the sale of
securities was used to reduce FHLB advances and therefore these sales did not
require that replacement securities be pledged and did not otherwise adversely
affect Bank liquidity. In addition, although the Bank incurred a loss in 2004 in
an amount greater than the $4.0 million of capital injected into the Bank, the
reduction in the size of the Bank from the deleveraging steps taken has resulted
in improvement in the Bank's capital ratios and the Bank remains
well-capitalized under all applicable regulatory guidelines. The Bank's Tier 1
leverage ratio increased from 7.97% at December 31, 2003 to 8.51% at December
31, 2004. The Company believes the Bank will continue to have adequate liquidity
as it further deleverages its balance sheet in 2005.
Liquidity can also be analyzed by utilizing the Consolidated Statement of
Cash Flows. Cash and cash equivalents decreased by $4.1 million from December
31, 2003, to December 31, 2004, due primarily to $129 million of cash used by
operating and financing activities. This was partially offset by $124 million of
cash provided by investing activities. Within investing activities, proceeds
from investment security maturities and sales exceeded cash used to purchase new
investment securities by $146.5 million. Cash advanced for new loan fundings and
purchases totaled $226.6 million and were $21.9 million more than the cash
received from loan principal payments. Within financing activities, the Company
paid down $130 million of FHLB advances and retired $15.3 million of trust
preferred securities. Recent indications from the FHLB suggest that the
remaining $100 million of convertible advances that mature in 2010 would only be
called if interest rates were to rise over 400 basis points from December 31,
2004 levels.
23
There was no cash used for common stock cash dividends in 2004 or 2003. The
Company used $2.9 million of cash to service the dividend on the guaranteed
junior subordinated deferrable interest debentures (trust preferred securities)
in each of the years presented. As a result of the successful $25.8 million
private placement of common stock, the liquidity position of the parent company
has improved significantly. 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. Dividend payments from
non-bank subsidiaries and the settlement of the inter-company tax position, also
provide ongoing cash to the parent. Longer term, however, the payment of the
trust preferred dividend is dependent upon the subsidiary bank returning to
profitability so that it can resume upstreaming dividends to the parent company.
The subsidiary bank must first recoup the $8.0 million net loss that it incurred
for the year ended December 31, 2004 before it can consider resuming dividend
upstreams. The Company views the ability to defer interest payments on the trust
preferred securities, which is permitted under the trust indenture, as the least
favorable alternative to maintaining parent company liquidity because the
payments are cumulative and interest immediately begins to accrue on the unpaid
amount at a rate of 8.45% along with the reputational risk associated with the
deferral.
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 $27 million at December 31, 2004 which was down from the $62
million at December 31, 2003 level due to the deleveraging strategy. 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, 2004, the bank had immediately
available $54 million of overnight borrowing capability at the FHLB. The Company
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. Furthermore, both the Company and its subsidiary
bank are considered "well capitalized" under applicable FDIC regulations. The
Company anticipates that it will build its capital ratios during 2005 due to the
retention of earnings and further deleverage of the balance sheet. As presented
in Note #24 to the Consolidated Financial Statements, the Company's asset
leverage ratio was 9.20% and the Tier 1 capital ratio was 15.83% at December 31,
2004. This represented meaningful improvements from 2003 due to the successful
private placement of common stock and shrinkage in the size of the balance
sheet. Note that the impact of other comprehensive income (loss) is excluded
from the regulatory capital ratios. At December 31, 2004, accumulated other
comprehensive loss amounted to $3.3 million. Additionally, the Company generated
approximately $1.2 million of tangible capital in 2004 due to the amortization
of core deposit intangible assets.
The Company announced on January 24, 2003 that it suspended its common
stock cash dividend. The Company had declared and paid common stock cash
dividends of $0.30 per share in 2002. While the Company had not repurchased any
of its own shares since the year 2000, the Company has also suspended its
treasury stock repurchase program. For so long as the Company and the Board are
parties to the Memorandum Of Understanding (MOU), reinstatement of either the
common stock dividend or the treasury stock repurchase program will require the
prior written approval of the Company's primary regulators -- the Federal
Reserve Bank of Philadelphia and the Pennsylvania Department of Banking. (See
Note #24 Regulatory Matters, for further discuss of the Memorandum Of
Understanding.) The Company believes it is in compliance with the requirements
of the MOU.
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 all 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.
24
The following table presents a summary of the Company's static GAP
positions at December 31, 2004:
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 $ 196,522 $ 30,396 $ 53,168 $231,437 $511,523
Investment securities 39,733 10,558 21,782 328,946 401,019
Short-term assets 199 -- -- -- 199
Bank owned life insurance -- -- 30,623 -- 30,623
--------- --------- --------- -------- --------
Total rate sensitive assets $ 236,454 $ 40,954 $ 105,573 $560,383 $943,364
--------- --------- --------- -------- --------
RATE SENSITIVE LIABILITIES:
Deposits:
Non-interest bearing deposits $ -- $ -- $ -- $100,702 $100,702
NOW and Super NOW 8,869 -- -- 55,474 64,343
Money market 80,018 -- -- 30,727 110,745
Other savings 24,750 -- -- 74,248 98,998
Certificates of deposit of $100,000 or more 8,445 13,819 6,077 6,753 35,094
Other time deposits 36,224 30,995 28,667 138,623 234,509
--------- --------- --------- -------- --------
Total deposits 158,306 44,814 34,744 406,527 644,391
Borrowings 151,944 9 20 121,273 273,246
--------- --------- --------- -------- --------
Total rate sensitive liabilities $ 310,250 $ 44,823 $ 34,764 $527,800 $917,637
--------- --------- --------- -------- --------
Off balance sheet hedges: (100,000) -- -- 100,000 --
--------- --------- --------- -------- --------
INTEREST SENSITIVITY GAP:
Interval (173,796) (3,869) 70,809 132,583 --
Cumulative $(173,796) $(177,665) $(106,856) $ 25,727 $ 25,727
========= ========= ========= ======== ========
Period GAP ratio 0.58X 0.91X 3.04X 1.31X
Cumulative GAP ratio 0.58 0.61 0.78 1.03
Ratio of cumulative GAP to total assets (17.22)% (17.60)% (10.59)% 2.55%
When December 31, 2004, is compared to December 31, 2003, the Company's
one-year cumulative GAP ratio remained negative due primarily to the execution
of fair value hedges that converted certain fixed rate borrowings into variable
rate borrowings.
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 +/--7.5% which include interest rate movements of at
least 200 basis points. Under the current historically low interest rate
environment, a declining 200 basis point or greater scenario is improbable and
therefore is of limited value. 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 increases of 200 basis points and immediate interest
rate decreases 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 (5.5)% 7.0%
100 bp decrease (0.2)% (14.1)%
25
As indicated in the table, market value of portfolio equity increased by
7.0% under a 200 basis point increase scenario due primarily to the increased
value of the Company's core deposit base. Variability of net interest income is
negative in the 200 basis point upward rate shock due to the immediate repricing
of certain short-term borrowings and less benefit from existing cash flow
hedges. The negative variability of net interest income of (0.2)% and market
value of portfolio equity of (14.1)% occurred in a 100 basis point downward rate
shock and reflects a reduced value for core deposits and a greater liability for
the remaining fixed rate FHLB advances. Net interest income in the declining
rate forecast was also negatively impacted by the Company's inability to further
reduce certain core deposit costs given the low current interest rates. Note the
fair value hedges executed in 2003 helped reduce the Company's exposure to flat
and declining interest rates. The Company uses 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. The impact of
these fair value hedges reduced interest expense in 2004 by $1.6 million.
Finally, this sensitivity analysis is limited by the fact that it does not
include all balance sheet repositioning actions the Company may take should
severe movements in interest rates occur such as lengthening or shortening the
duration of the securities portfolio or entering into additional hedging
transactions. These actions would likely reduce the variability of each of the
factors identified in the above table but the cost associated with the
repositioning would most likely negatively impact net income.
Within the investment portfolio at December 31, 2004, 93% of the portfolio
is classified as available for sale and 7% 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 as needed. The mark
to market of the available for sale securities does inject more volatility in
the book value of equity but has no impact on regulatory capital. Furthermore,
it is the Company's intent to continue to manage its long-term interest rate
risk by continuing to sell newly originated fixed-rate 30-year mortgage loans
into the secondary market.
The amount of loans outstanding by category as of December 31, 2004, 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 $20,313 $ 44,182 $ 7,516 $ 72,011
Commercial loans secured by real estate 11,347 136,870 77,444 225,661
Real estate-mortgage 17,390 45,599 138,417 201,406
Consumer 5,818 10,441 7,026 23,285
------- -------- -------- --------
Total $54,868 $237,092 $230,403 $522,363
======= ======== ======== ========
Loans with fixed-rate $14,257 $133,816 $158,607 $306,680
Loans with floating-rate 40,611 103,276 71,796 215,683
------- -------- -------- --------
Total $54,868 $237,092 $230,403 $522,363
======= ======== ======== ========
Percent composition of maturity 10.5% 45.4% 44.1% 100.0%
Fixed-rate loans as a percentage of total loans 58.7%
Floating-rate loans as a percentage of total loans 41.3%
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, 2004, significant fixed and determinable contractual obligations to third
parties by payment date. Further discussion of the nature of each obligation is
included in the referenced note to the consolidated financial statements.
PAYMENTS DUE IN
--------------------------------------------------------------------------
NOTE ONE YEAR ONE TO THREE THREE TO FIVE OVER FIVE
REFERENCE OR LESS YEARS YEARS YEARS TOTAL
--------- -------- ------------ ------------- --------- --------
(IN THOUSANDS)
Deposits without a stated
maturity 10 $374,788 $ -- $ -- $ -- $374,788
Certificates of deposit 10 124,227 101,016 18,899 25,461 269,603
Borrowed funds 11 151,973 -- -- 100,988 252,961
Guaranteed junior
subordinated deferrable
interest debentures 11 -- -- -- 20,285 20,285
Lease commitments 15 1,195 1,706 654 837 4,392
26
OFF BALANCE SHEET ARRANGEMENTS. . .The Company uses 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. In June 2003, the Company entered into an
interest rate swap with a notional amount of $50 million, inclusive of a
swaption feature, effectively hedging a $50 million FHLB convertible advance
with a fixed cost of 6.10% that is callable quarterly with a seven-year
maturity. The Company receives a fixed rate of 2.58% and makes variable rate
payments based on 90-day LIBOR. In December 2003, the Company entered into an
interest rate swap with a notional amount of $50 million, inclusive of a
swaption feature, effectively hedging a $50 million FHLB convertible advance
with a fixed cost of 5.89% that is callable quarterly with a six-year maturity.
The Company will receive a fixed rate of 5.89% and will make variable rate
payments based on 90-day LIBOR plus 246 basis points. The swaps are carried at
their fair values and the carrying amount of the FHLB advances includes the
change in their fair values since the inception of the hedge. Because the hedges
are considered highly effective and qualify for the shortcut method of
accounting treatment, changes in the swap's fair value exactly offset the
corresponding changes in the fair value of the FHLB advances and as a result,
the change in fair value does not have any impact on net income. The favorable
impact that the fair value hedges had on reducing interest expense amounted to
$1.6 million in 2004 and $491,000 in 2003.
The Bank incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of their customers. These risks derive from
commitments to extend credit and standby letters of credit. Such commitments and
standby letters of credit involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated financial statements. The
Company's exposure to credit loss in the event of nonperformance by the other
party to these commitments to extend credit and standby letters of credit is
represented by their contractual amounts. The Bank uses the same credit and
collateral policies in making commitments and conditional obligations as for all
other lending. The Company had various outstanding commitments to extend credit
approximating $74,165,000 and standby letters of credit of $3,310,000 as of
December 31, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. . .The accounting and reporting
policies of the Company are in accordance with GAAP and conform to general
practices within the banking industry. Accounting and reporting policies for the
allowance for loan losses, mortgage servicing rights and income taxes are deemed
critical because they involve the use of estimates and require significant
management judgments. Application of assumptions different than those used by
the Company could result in material changes in the Company's financial position
or results of operation.
ACCOUNT -- Allowance for Loan Losses
BALANCE SHEET REFERENCE -- Allowance for Loan Losses
INCOME STATEMENT REFERENCE -- Provision for Loan Losses
DESCRIPTION
The allowance for loan losses is calculated with the objective of
maintaining reserve levels believed by management to be sufficient to absorb
estimated probable credit losses. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the credit portfolio and other
relevant factors. However, this evaluation is inherently subjective as it
requires material estimates, including, among others, likelihood of customer
default, loss given default, exposure at default, the amounts and timing of
expected future cash flows on impaired loans, value of collateral, estimated
losses on consumer loans and residential mortgages, and general amounts for
historical loss experience. This process also considers economic conditions,
uncertainties in estimating losses and inherent risks in the various credit
portfolios. All of these factors may be susceptible to significant change. Also,
the allocation of the allowance for credit losses to specific loan pools is
based on historical loss trends and management's judgment concerning those
trends.
Commercial and commercial mortgages are the largest category of credits and
the most sensitive to changes in assumptions and judgments underlying the
determination of the allowance for loan loss. Approximately $7.7 million, or
78%, of the total allowance for credit losses at December 31, 2004 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 -- Mortgage Servicing Rights
BALANCE SHEET REFERENCE -- Mortgage Servicing Rights
INCOME STATEMENT REFERENCE -- Net Mortgage Servicing Fees and Impairment
Charge for Mortgage Servicing Rights
DESCRIPTION
Mortgage servicing rights ("MSR") are intangible assets that represent the
value of rights that arise from the servicing of mortgage loan contracts. While
servicing is inherent in most financial assets, it becomes a distinct asset when
(a) contractually separated from the underlying financial asset by sale or
securitization of the asset with servicing retained or (b) through the separate
purchase and assumption of the servicing. The Company's MSR asset value (both
originated and purchased) arises from estimates of future revenues from
contractually specified servicing fees, interest income and other ancillary
revenues, net of estimated operating expenses, which are expected to yield an
acceptable level of risk adjusted return for the servicer.
27
The fair value of the Company's MSR asset is estimated using a discounted
cash flow methodology, which calculates the net present value of future cash
flows of the servicing portfolio over the estimated life of the asset based on
various assumptions and market factors, the most significant of which include
interest rates for escrow and deposit balance earnings, estimated prepayment
speeds, estimated servicing costs, portfolio stratification, and discount rates.
The reasonableness of these factors is reviewed by management and is based on
expectations of the portfolio, market conditions, and loan characteristics.
The Company's mortgage loan servicing portfolio is subject to various
risks, the most significant being interest rate and prepayment risk, which
subject the MSR asset to impairment risk. While the MSR asset is amortized over
its estimated life in proportion to estimated net servicing income, it is also
tested for impairment at a strata level on a quarterly basis. If the estimated
fair value of the MSR is less than the carrying value, an impairment loss would
be recognized in the current period; however, any fair value in excess of the
cost basis would be recorded as a recovery of a previously recorded impairment
loss.
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 No. 109, "Accounting
for Income Taxes" the provision for income taxes is the sum of income taxes both
currently payable and deferred. The changes in deferred tax assets and
liabilities are determined based upon the changes in differences between the
basis of asset and liabilities for financial reporting purposes and the basis of
assets and liabilities as measured by the enacted tax rates that management
estimates will be in effect when the differences reverse.
In relation to recording the provision for income taxes, mamagement must
estimate the future tax rates applicable to the reversal of tax differences,
make certain assumptions regarding whether tax differences atr permanent of
temporary and the related time of expected reversal. Also, estimates are made as
to whether taxable orperating 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, 2004, we
believe that all of the deferred tax assets recorded on our balance sheet except
for $80,000 will ultimately be recovered.
In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
liabilities for anticipated tax audit issues based on our estimate of whether,
and the extent to which, additional taxes will be due. If we ultimately
determine that payment of these amounts is unnecessary, we reverse the liability
and recognize a tax benefit during the period in which we determine that the
liability is no longer necessary. We record an additional charge in our
provision for taxes in the period in which we determine that the recorded tax
liability is less than we expect the ultimate assessment to be.
RECENT ACCOUNTING STANDARDS...In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which revises SFAS No. 123, "Accounting for Stock-Based Compensation,"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employess."
This Statement focuses primarily on accounting transactions in which an entity
obtains employee services in share-based payment transactions. This Statement
requires an entity to recognize the cost of employee services received in
share-based payment transactions and measure the cost on a grant-date fair value
of the award period. That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award. The
provisions of SFAS No. 123 (revised 2004) will be effective for the Company's
financial statements issued for periods beginning after June 15, 2005. The
methodology and timing of adoption has not yet been determined.
In March 2004, FASB ratified the consensus reached by the Emerging Issues
Task Force Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" (EITF 03-1). EITF 03-1 provides guidance for
determining when an investment is considered impaired, whether impairment is
other-than-temporary and measurements of an impairment loss. In September 2004,
FASB issued FSP 03-1-1, which delayed the effective date for the measurement and
recognition guidance contained in paragraphs 10-20 of Issue 03-1 due to
additional proposed guidance. At December 31, 2004, gross unrealized losses on
available for sale securities was $5.2 million. The Company is continuing to
evaluate the impact of EITF 03-1. The amount of other-than-temporary impairment
to be recognized, if any, will be dependent on market conditions, management's
intent and ability to hold investments until a forecasted recovery, and the
finalization of the proposed guidance by the FASB.
28
FORWARD LOOKING STATEMENT. . .
THE NEW STRATEGIC FOCUS:
The stabilizing of the Company in 2003 and the infusion of new capital in
2004 has enabled the Board and management to examine the franchise in some
detail. It is a fact that AmeriServ has already begun to articulate and to
execute its strategy for the future. The Company is coalescing around a
back-to-basics concentration on community banking. It believes that it possesses
a solid franchise and can create greater institutional value. AmeriServ has
three strong business units that management and Board believe can perform at a
higher level of profitability.
1. THE RETAIL BANK -- When the asset leverage program is extracted, the
Retail Bank remains a strong $800 million bank buoyed by approximately
$650 million in core deposits. This retail bank operates 22 branches
and has been consistently profitable. It is a fact that this type of
banking in the region has been in a state of change in recent years.
There have been mergers, divestitures, branch closings, name changes,
etc. Unfortunately for AmeriServ, during this period, its focus has
been diluted by a spin-off, a name change, operating losses and
regulatory criticisms. However, as AmeriServ emerges from its
Turnaround it now finds itself to be the largest independent, locally
managed bank in its primary retail market area. It also has discovered
that, in spite of its recent difficulties, its core customers have
remained loyal and supportive. The Company believes that its Retail
Bank has a powerful future ahead. It has a solid product mix, it has a
strong sales ethic, and it intends to build an equally strong service
culture. AmeriServ recognizes that its primary market is experiencing
weakness, but it believes that as it sharpens its community banking
skills, good products and exemplary personal service will enable the
Retail Bank to establish a strong base for the Company as a whole.
2. COMMERCIAL LENDING -- This business unit was completely restructured
in 2003, after experiencing serious difficulties in 2001 and 2002. It
has a new chief lending officer and almost an entirely new staff of
experienced professional lenders. The newly formed team had its first
year of operation in 2004 and helped the Company achieve loan growth
of 3.6%. The unit is focused on the stated primary lending market of
an approximate 100-mile radius from Johnstown. It is mounting an
energetic customer calling effort to build its loan balances. It has
also reengineered its lending procedures. The Company can provide the
unit with the capacity to grow substantially and its new procedures
should permit it to increase its margins and build permanent
relationships. As this unit emerges, it bears little resemblance to
its former self and is poised to generate increased loan outstandings
in 2005 and be a strong future contributor to the Company's revenue
stream.
3. TRUST COMPANY -- This business unit has a unique business opportunity.
It has all of the activities expected of a bank trust department and
we believe it is proficient in each of them. In addition, it has a
unique capability that sets it apart from almost all other trust
operations. As a part of one of only 13 unionized banks in the nation,
this unit has developed a strategy and a set of products that leverage
that unusual situation. It has been quite successful in building
products that serve the union managed pension funds that are a
significant facet of certain segments of the American labor scene.
These products have no geographic restrictions, nor do they require
major commitments of AmeriServ's capital. They do, however, require
skilled professionals to market and manage the trust company's
capabilities. As the Company strengthens, resources will be channeled
to the Trust Company so that it can become a greater force in this
discrete market niche.
The Company has re-affirmed its roots as a community bank. It has
strengthened its core units: the Retail Bank, the Commercial Lending and the
Trust Company. It has contained and/or corrected its troubled units. The Company
recognizes that it suffered from a lack of focus and poor execution. However,
the speed with which the Company took steps to right itself in 2003 and the
success of the private placement common stock offering in 2004 that helped the
Company address some longstanding structural impediments, indicates that, with a
commitment to focus, it can meet challenges.
Therefore, the future direction of AmeriServ Financial, Inc. will be
highlighted by efforts to continue to strengthen its balance sheet, to control
and leverage its non-interest expenses and to place strong emphasis on its three
key business units. The Board and management commit that the focus will be
clear, the planning will be extensive, the execution will be precise and the
results will be measured. The fundamental goal is to build an increasing level
of net income from these core units.
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.
29
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 M. D. & A. presented on pages
24-26. The Company's principal market risk exposure is to interest rates.
30
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
-----------------------
2004 2003
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 20,374 $ 24,100
Interest bearing deposits 199 289
Investment securities:
Available for sale 373,584 524,573
Held to maturity (market value $27,550 at December 31, 2004 and $28,095 at
December 31, 2003) 27,435 28,089
Loans held for sale 687 1,423
Loans 522,363 504,890
Less: Unearned income 1,634 2,926
Allowance for loan losses 9,893 11,682
---------- ----------
Net loans 510,836 490,282
---------- ----------
Premises and equipment, net 9,688 10,941
Accrued income receivable 4,288 4,922
Goodwill 9,544 9,544
Core deposit intangibles 3,568 4,719
Bank owned life insurance 30,623 29,515
Deferred tax asset 9,102 2,087
Assets related to discontinued operations 1,941 3,841
Other assets 8,107 14,710
---------- ----------
TOTAL ASSETS $1,009,976 $1,149,035
---------- ----------
LIABILITIES
Non-interest bearing deposits $ 100,702 $ 103,982
Interest bearing deposits 543,689 550,615
---------- ----------
Total deposits 644,391 654,597
Other short-term borrowings 151,935 144,643
Advances from Federal Home Loan Bank 101,026 231,063
Guaranteed junior subordinated deferrable interest debentures 20,285 34,500
---------- ----------
Total borrowed funds 273,246 410,206
---------- ----------
Liabilities related to discontinued operations 744 253
Other liabilities 6,376 9,709
---------- ----------
TOTAL LIABILITIES 924,757 1,074,765
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized; there were no shares
issued and outstanding on December 31, 2004, and 2003 -- --
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
23,808,760 shares issued and 19,717,841 outstanding on December 31, 2004;
18,048,518 shares issued and 13,957,599 shares outstanding on
December 31, 2003 59,522 45,121
Treasury stock at cost, 4,090,919 shares on December 31, 2004 and 2003 (65,824) (65,824)
Capital surplus 75,480 66,809
Retained earnings 19,377 29,096
Accumulated other comprehensive loss, net (3,336) (932)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 85,219 74,270
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,009,976 $1,149,035
========== ==========
See accompanying notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans:
Taxable $ 30,012 $33,209 $40,410
Tax exempt 285 98 612
Deposits with banks 59 54 281
Federal funds sold and securities purchased under agreements to resell 1 -- 9
Investment securities:
Available for sale 18,333 20,548 24,573
Held to maturity 1,414 1,096 30
-------- ------- -------
Total Interest Income 50,104 55,005 65,915
-------- ------- -------
INTEREST EXPENSE
Deposits 10,336 11,503 16,054
Federal funds purchased and securities sold under agreements to
repurchase -- 25 52
Other short-term borrowings 2,098 1,439 900
Advances from Federal Home Loan Bank 11,218 14,433 18,618
Guaranteed junior subordinated deferrable interest debentures 2,986 2,960 2,960
-------- ------- -------
Total Interest Expense 26,638 30,360 38,584
-------- ------- -------
Net Interest Income 23,466 24,645 27,331
Provision for loan losses 1,758 2,961 9,265
-------- ------- -------
Net Interest Income after Provision for Loan Losses 21,708 21,684 18,066
-------- ------- -------
NON-INTEREST INCOME
Trust fees 5,363 4,993 4,672
Net gains on loans held for sale 351 632 779
Net realized gains on investment securities 816 3,787 4,294
Service charges on deposit accounts 2,806 3,180 2,906
Bank owned life insurance 1,108 1,214 1,491
Other income 3,568 3,189 4,511
-------- ------- -------
Total Non-Interest Income 14,012 16,995 18,653
-------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 19,013 17,997 19,402
Net occupancy expense 2,636 2,635 2,677
Equipment expense 2,578 2,694 2,761
Professional fees 3,697 3,780 3,792
Supplies, postage, and freight 1,192 1,370 1,397
Miscellaneous taxes and insurance 1,747 1,631 1,549
FDIC deposit insurance expense 287 201 116
Amortization of core deposit intangibles 1,150 1,432 1,432
Restructuring costs -- -- 920
Federal Home Loan Bank prepayment penalties 12,637 -- --
Other expense 5,154 4,162 6,360
-------- ------- -------
Total Non-Interest Expense 50,091 35,902 40,406
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (14,371) 2,777 (3,687)
Provision (benefit) for income taxes (5,845) 587 (1,692)
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (8,526) 2,190 (1,995)
LOSS FROM DISCONTINUED OPERATIONS NET OF TAX BENEFIT $(648),
$(800), AND $(1,733), RESPECTIVELY (1,193) (1,641) (3,157)
NET INCOME (LOSS) $ (9,719) $ 549 $(5,152)
======== ======= =======
PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic:
Net income (loss) $ (0.58) $ 0.16 $ (0.15)
Average number of shares outstanding 14,783 13,940 13,782
Diluted:
Net income (loss) $ (0.58) $ 0.16 $ (0.15)
Average number of shares outstanding 14,783 13,948 13,782
PER COMMON SHARE DATA:
Basic:
Net income (loss) $ (0.66) $ 0.04 $ (0.37)
Average number of shares outstanding 14,783 13,940 13,782
Diluted:
Net income (loss) $ (0.66) $ 0.04 $ (0.37)
Average number of shares outstanding 14,783 13,948 13,782
Cash dividends declared $ 0.00 $ 0.00 $ 0.30
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003 2002
-------- -------------- -------
(IN THOUSANDS)
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (9,719) $ 549 $(5,152)
Other comprehensive income (loss), before tax:
Gains on cash flow hedges arising during period -- -- 1,231
Income tax effect -- -- (419)
Unrealized holding gains (losses) on available for sale securities
arising during period (2,882) (6,578) 13,026
Income tax effect 1,008 2,303 (4,428)
Reclassification adjustment for gains on available for sale
securities included in net loss (816) (3,787) (4,294)
Income tax effect 286 1,325 1,460
-------- ------- -------
Other comprehensive income (loss), net of tax (2,404) (6,737) 6,576
-------- ------- -------
Comprehensive income (loss) $(12,123) $(6,188) $ 1,424
======== ======= =======
See accompanying notes to consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
-------- -------------- --------
(IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of period $ -- $ -- $ --
Balance at end of period -- -- --
-------- -------- --------
COMMON STOCK
Balance at beginning of period 45,121 44,973 44,333
Stock options exercised/new shares issued 72 148 640
Shares issued from private offering 14,329 -- --
-------- -------- --------
Balance at end of period 59,522 45,121 44,973
-------- -------- --------
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 66,809 66,755 66,423
Stock options exercised/new shares issued 77 54 332
Shares issued from private offering net of issuance costs 8,594 -- --
-------- -------- --------
Balance at end of period 75,480 66,809 66,755
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period 29,096 28,547 37,829
Net income (loss) (9,719) 549 (5,152)
Cash dividends declared -- -- (4,130)
-------- -------- --------
Balance at end of period 19,377 29,096 28,547
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period (932) 5,805 (771)
Other comprehensive income (loss), net of tax (2,404) (6,737) 6,576
-------- -------- --------
Balance at end of period (3,336) (932) 5,805
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $ 85,219 $ 74,270 $ 80,256
======== ======== ========
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
--------- -------------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (8,526) $ 2,190 $ (1,995)
Adjustments to reconcile net income (loss) from continuing operations to
net cash provided by (used in) operating activities:
Provision for loan losses 1,758 2,961 9,265
Depreciation and amortization expense 1,867 1,976 1,799
Amortization expense of core deposit intangibles 1,150 1,432 1,432
Net amortization of investment securities 2,237 3,083 2,044
Net realized gains on investment securities-- available for sale (816) (3,787) (4,294)
Net realized gains on loans held for sale (351) (632) (779)
Amortization of deferred loan fees (281) (261) (380)
Gain on the sale of fixed assets -- (34) --
Origination of mortgage loans held for sale (28,257) (60,643) (78,211)
Sales of mortgage loans held for sale 27,510 62,014 75,957
Write-off of debt issuance costs 476 -- --
Decrease in accrued income receivable 634 1,147 598
Decrease in accrued expense payable (207) (1,316) (1,735)
Net increase in other assets (846) (4,416) (7,475)
Net increase (decrease) in other liabilities 1,901 (2,185) 4,023
--------- --------- ---------
Net cash (used in) provided by operating activities (1,751) 1,529 249
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of investment securities and other short-term investments--
available for sale (311,410) (618,232) (721,380)
Purchase of investment securities and other short-term investments--
held to maturity (17,050) (19,377) (15,077)
Proceeds from maturities of investment securities and other short-term
investments-- available for sale 76,999 145,811 156,684
Proceeds from maturities of investment securities and other short-term
investments-- held to maturity 6,497 6,621 --
Proceeds from sales of investment securities and other short-term
investments-- available for sale 391,488 428,633 583,755
Long-term loans originated (188,874) (111,249) (179,188)
Principal collected on long-term loans 145,339 194,623 207,729
Loans purchased or participated (9,437) (15,340) (10,910)
Loans sold or participated 31,500 -- 5,900
Net decrease (increase) in other short-term loans (83) (758) 566
Purchases of premises and equipment (766) (919) (1,173)
Proceeds from sale/retirement of premises and equipment 216 325 --
--------- --------- ---------
Net cash provided by investing activities $ 124,419 $ 10,138 $ 26,906
--------- --------- ---------
See accompanying notes to consolidated financial statements.
35
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
--------- -------------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES
Net decrease in deposits accounts $ (10,206) $(15,332) $ (6,417)
Net increase in federal funds purchased, securities sold under
agreements to repurchase, and other short-term borrowings 7,292 43,855 87,934
Net principal repayments on advances from Federal Home Loan Bank (130,037) (43,784) (102,464)
Common stock dividends paid -- -- (4,130)
Guaranteed junior subordinated deferrable interest debenture dividends
paid (2,860) (2,916) (2,916)
Redemption of Guaranteed junior subordinated deferrable interest
debentures (14,215) -- --
Proceeds from dividend reinvestment and stock purchase plan and stock
options exercised 149 202 972
Private placement issuance of common stock 25,792 -- --
Costs associated with private placement (2,687) -- --
--------- -------- ---------
Net cash used in financing activities (126,772) (17,975) (27,021)
--------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS (4,104) (6,308) 134
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 661 3,907 (2,081)
CASH AND CASH EQUIVALENTS AT JANUARY 1 24,773 27,174 29,121
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 21,330 $ 24,773 $ 27,174
--------- -------- ---------
See accompanying notes to consolidated financial statements.
36
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003 AND 2002
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 23 banking locations in six Pennsylvania counties. These
offices provide a full range of consumer, mortgage, and commercial financial
products. The AmeriServ Trust and Financial Services Company (Trust Company)
offers a complete range of trust and financial services and has $1.3 billion in
assets under management. The Trust Company also offers 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 23 locations in Pennsylvania. Standard Mortgage
Corporation of Georgia (SMC), a subsidiary of the Bank, is a mortgage banking
company whose business includes the servicing of mortgage loans. On December 28,
2004, the Company entered into an agreement to sell its remaining mortgage
servicing rights and discontinue operations of this non-core business. AmeriServ
Associates, based in State College, is a registered investment advisory firm
that provides investment portfolio and asset/liability management services to
small and mid-sized financial institutions. AmeriServ Life is a captive
insurance company that engages in underwriting as a reinsurer of credit life and
disability insurance.
Intercompany accounts and transactions have been eliminated in preparing
the consolidated financial statements. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America (generally accepted accounting principles, or GAAP) requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results may
differ from these estimates and the differences may be material to the
consolidated financial statements. The Company's most significant estimate is
the allowance for loan losses.
INVESTMENT SECURITIES:
Securities are classified at the time of purchase as investment securities
held to maturity if it is management's intent and the Company has the ability to
hold the securities until maturity. These held to maturity securities are
carried on the Company's books at cost, adjusted for amortization of premium and
accretion of discount which is computed using the level yield method which
approximates the effective interest method. Alternatively, securities are
classified as available for sale if it is management's intent at the time of
purchase to hold the securities for an indefinite period of time and/or to use
the securities as part of the Company's asset/liability management strategy.
Securities classified as available for sale include securities which may be sold
to effectively manage interest rate risk exposure, prepayment risk, and other
factors (such as liquidity requirements). These available for sale securities
are reported at fair value with unrealized aggregate appreciation (depreciation)
excluded from income and credited (charged) to accumulated other comprehensive
income (loss) within stockholders' equity on a net of tax basis. Any securities
classified as trading assets are reported at fair value with unrealized
aggregate appreciation (depreciation) included in income on a net of tax basis.
The Company presently does not engage in trading activity. Realized gain or loss
on securities sold is computed upon the adjusted cost of the specific securities
sold.
LOANS:
Interest income is recognized using methods which approximate a level yield
related to principal amounts outstanding. The Company's subsidiaries discontinue
the accrual of interest income when loans, except for loans that are insured for
credit loss, become 90 days past due in either principal or interest. In
addition, if circumstances warrant, the accrual of interest may be discontinued
prior to 90 days. Payments received on non-accrual loans are credited to
principal until full recovery of principal has been recognized; it is only after
full recovery of principal that any additional payments received are recognized
as interest income. The only exception to this policy is for residential
mortgage loans wherein interest income is recognized on a cash basis as payments
are received. A non-accrual commercial loan is placed on accrual status after
becoming current and remaining current for twelve consecutive payments.
Residential mortgage loans are placed on accrual status upon becoming current.
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.
37
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:
- A detailed review of all criticized and impaired loans with balances
over $250,000 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 under SFAS # 114, 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 are calculated 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 dynamic nature
of the migration analysis.
- The application of formula driven reserve allocations to consumer and
mortgage loans which are based upon historical net charge-off
experience for those loan types. The residential mortgage loan
allocation is based upon the Company's five-year historical average of
actual loan net charge-offs experienced in that category. The same
methodology is used to determine the allocation for consumer loans
except the allocation is based upon an average of the most recent
actual three-year historical net charge-off experience for consumer
loans.
- The application of formula driven reserve allocations to all
outstanding loans is based upon review of historical losses and
qualitative factors, which include but are not limited to, economic
trends, delinquencies, concentrations of credit, trends in loan
volume, experience and depth of management, examination and audit
results, effects of any changes in lending policies and trends in
policy, financial information and documentation exceptions.
- The maintenance of a general unallocated reserve to accommodate
inherent risk in the Company's portfolio that is not identified
through the Company's specific loan and portfolio segment reviews
discussed above. Management recognizes that there may be events or
economic factors that have occurred affecting specific borrowers or
segments of borrowers that may not yet be fully reflected in the
information that the Company uses for arriving at reserves for a
specific loan or portfolio segment. Therefore, the Company and its
Board of Directors believe a general unallocated reserve is needed to
recognize the estimation risk associated with the specific and formula
driven allowances. In conjunction with the establishment of the
general unallocated reserve, the Company also looks at the total
allowance for loan losses in relation to the size of the total loan
portfolio and the level of non-performing assets.
After completion of this process, a formal meeting of the Loan Loss Reserve
Committee is held to evaluate the adequacy of the reserve.
When it is determined that the prospects for recovery of the principal of a
loan have significantly diminished, the loan is immediately charged against the
allowance account; subsequent recoveries, if any, are credited to the allowance
account. In addition, non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are considered losses when
they are 90 days past due, except loans that are insured for credit loss or
loans secured by residential real estate.
The Company's policy is to individually review, as circumstances warrant,
each of its commercial and commercial mortgage loans to determine if a loan is
impaired. At a minimum, credit reviews are mandatory for all commercial and
commercial mortgage loans with balances in excess of $250,000 within a 12-month
period. The Company defines classified loans as those loans rated substandard
and 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.
38
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 included in the provision for loan losses and a separate reserve is
recorded within the liabilities section of the consolidated balance sheet in
other liabilities.
TRUST FEES:
All trust fees are recorded on the cash basis which approximates the
accrual basis for such income.
BANK-OWNED LIFE INSURANCE:
The Company has purchased life insurance policies on certain employees.
These policies are recorded in other assets at their cash surrender value, or
the amount that can be realized. Income from these policies and changes in the
cash surrender value are recorded in bank owned life insurance within
non-interest income.
INTANGIBLE ASSETS:
Core deposit intangible assets are amortized over their useful lives, which
do not exceed 10 years. Prior to January 1 2002, goodwill was amortized using
the straight-line method over a period of 15 years. Beginning in 2002, the
Company ceased amortizing goodwill in accordance with a new accounting
pronouncement. Goodwill is reviewed for impairment on an annual basis.
PURCHASED AND ORIGINATED MORTGAGE SERVICING RIGHTS:
The Company recognizes as assets the rights to service mortgage loans for
others whether the servicing rights are acquired through purchases or
originations. Purchased mortgage servicing rights are capitalized at cost. For
loans originated and sold where servicing rights have been retained, the Company
allocates 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 is practicable to estimate those fair values. Where it is not
practicable to estimate the fair values, the entire cost of originating the loan
is allocated to the loan without the servicing rights.
The fair value of originated MSRs is 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 are determined based on current market
conditions. The expected and actual rates of mortgage loan prepayments are the
most significant factors driving the value of MSRs. Increases in mortgage loan
prepayments reduce estimated future net servicing cash flows because the life of
the underlying loan is reduced. In determining the fair value of the MSRs,
mortgage interest rates, which are used to determine prepayment rates, and
discount rates are held constant over the estimated life of the portfolio.
Expected mortgage loan prepayment rates are derived from a third-party model and
adjusted to reflect AmeriServ's actual prepayment experience.
For purposes of evaluating and measuring impairment, the Company stratifies
the rights based on risk characteristics. If the discounted projected net cash
flows of a stratum are less than the carrying amount of the stratum, the stratum
is written down to the amount of the discounted projected net cash flows through
a valuation account. The Company has determined that the predominant risk
characteristics of its portfolio are loan type and interest rate. For the
purposes of evaluating impairment, the Company has stratified its portfolio in
200 basis point tranches by loan type. Mortgage servicing rights are 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 are recorded in individual lines on the Consolidated Statement of
Operations within the Discontinues Operations Note #25. The value of mortgage
servicing rights is subject to interest rate and prepayment risk. It is likely
that the value of these assets will decrease if interest rates decline and
prepayments occur at greater than the expected rate and conversely the value of
servicing increases if interest rates rise and prepayment speeds slow.
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 dilutive common stock equivalent shares in the
calculation. Treasury shares are treated as retired for earnings per share
purposes. Options to purchase 131,095, 307,136 and 474,534 shares of common
stock were outstanding during 2004, 2003 and 2002, 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.
39
STOCK-BASED COMPENSATION:
At December 31, 2004, the Company had stock based compensation plans, which
are described more fully in Note #18 Stock Compensation Plans. The Company
accounts for these plans under Accounting Principles Board Opinion #25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation expense has been reflected in net income as
all rights and options to purchase the Company's stock granted under these plans
had an exercise price equal to the market value of the underlying stock on the
date of grant. The following table illustrates the income from continuing
operations and earnings per share as if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS)
#123R, "Accounting for Stock-Based Compensation," as amended, to stock
compensation plans.
PRO FORMA INCOME (LOSS)
AND EARNINGS (LOSS) PER SHARE
YEAR ENDED DECEMBER 31,
-------------------------
2004 2003 2002
------- ----- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income (loss), as reported $(9,719) $ 549 $(5,152)
Less: Total stock compensation expense determined under the fair value
method for all awards, net of related tax effects (72) (35) (58)
------- ----- -------
Pro forma income (loss) $(9,791) $ 514 $(5,210)
======= ===== =======
Earnings (loss) per share:
Basic as reported $ (0.66) $0.04 $ (0.37)
Basic pro forma (0.66) 0.04 (0.38)
Diluted as reported (0.66) 0.04 (0.37)
Diluted pro forma (0.66) 0.04 (0.38)
COMPREHENSIVE INCOME (LOSS):
For the Company, comprehensive income (loss) includes net income and
unrealized holding gains and losses from available for sale investment
securities and derivatives that qualify as cash flow hedges. The balances of
accumulated other comprehensive income (loss) were $(3,336,000), $(932,000) and
$5,805,000 at December 31, 2004, 2003 and 2002, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS:
On a consolidated basis, cash and cash equivalents include cash and due
from banks, interest bearing deposits with banks, and federal funds sold and
securities purchased under agreements to resell. For the parent company, cash
and cash equivalents also include short-term investments. The Company made
$3,837,000 in income tax payments in 2004; $119,000 in 2003; and $519,000 in
2002. The Company made total interest expense payments of $26,845,000 in 2004;
$31,676,000 in 2003; and $40,382,000 in 2002.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases 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 uses 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 also 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, it involves 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 is 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 is 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 caps or floors in place at December 31, 2004 or 2003.
40
RECENT ACCOUNTING STANDARDS:
In December 2003, the FASB issued Interpretation #46 (Revised 2003)
"Consolidation of Variable Interest Entities", (FIN 46-R). FIN 46-R addresses
the requirement for business enterprises to consolidate any variable interest
entities in which they are determined to be the primary economic beneficiary as
a result of their variable economic interest. FIN 46-R requires disclosures
about the variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. The Company
does have a variable interest entity. The adoption of FIN 46R caused the Company
to deconsolidate its capital trust subsidiary which caused a $1.1 million
increase to the guaranteed junior subordinated deferrable interest debentures.
This deconsolidation also caused a $90,000 increase in other income and a
similar increase in the interest expense on guaranteed junior subordinated
deferrable interest debentures.
In April 2003, the FASB issued SFAS #149, "Amendments of Statement #133 on
Derivative Instruments and Hedging Activities". SFAS #149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement #133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS #149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS #149 did not
have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS #150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS #150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
#150 was effective for instruments entered into or modified after May 31, 2003,
and otherwise was effective for the first interim period beginning after June
15, 2003. The adoption of SFAS #150 did not have a material impact on the
Company's consolidated financial statements.
In December 2003, the FASB issued SFAS #132, (Revised 2003) "Employers'
Disclosures about Pensions and Other Postretirement Benefits". This Statement
amends Statements #87, "Employers' Accounting for Pensions", #88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits", and #106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". However, the Statement does not change the
recognition and measurement requirements of those Statements. This Statement
retains the disclosure requirements contained in SFAS #132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which it replaces
and requires additional disclosure. Additional new disclosure includes actual
mix of plan assets by category, a description of investment strategies and
policies used, a narrative description of the basis for determining the overall
expected long-term rate of return on asset assumptions and aggregate expected
contributions. See Note #14, Pension and Profit Sharing Plans, for additional
discussion.
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued AICPA Statement of
Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in
a Transfer" (SOP 03-3), to address accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows
expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to such loans and debt securities
purchased or acquired in purchase business combinations and does not apply to
originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts that may be recognized for
certain loans and debt securities. Additionally, SOP 03-3 requires that the
excess of contractual cash flows over cash flows expected to be collected
(nonaccretable difference) not be recognized as and adjustment of yield or
valuation allowance, such as the allowance for loan losses. Subsequent to the
initial investment, increases in expected cash flows generally should be
recognized prospectively through adjustment of the yield on the loan or debt
security over its remaining life. Decreases in expected cash flows should be
recognized as impairment. SOP 03-3 is effective for loans and debt securities
acquired in fiscal years beginning after December 15, 2004, with early
application encouraged. The impact of this new pronouncement is not expected to
be material to the Company's financial condition, results of operations or cash
flows.
The EITF has reached consensus on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments", as
it applies to investments accounted for under FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115), and cost method
investments accounted for under Accounting Principles Board Opinions No. 18,
"The Equity Method of Accounting for Investments in Common Stock" (APB 18). The
consensus was ratified by the FASB on November 25, 2003 and March 31, 2004, for
FAS 115 and APB 18 investments, respectively. Subsequent to these ratifications,
the FASB issued a Staff Position, FSP EITF 03-1-1, on September 30, 2004, to
defer indefinitely the effective date for recognition and impairment guidance
under the EITF, but not the quantitative and qualitative disclosure requirements
on unrealized loss positions for all marketable equity securities, debt
securities and cost method investments for which an other-than-temporary
impairment has not been recognized. These disclosures, which are applicable to
annual financial statements for fiscal years ending after June 15, 2004, are
presented in Note #4, Investment Securities. The amount of other-than-temporary
impairment to be recognized, if any, will be dependent on market conditions, the
Company's intent and ability to hold investments until a forecasted recovery and
the finalization of the proposed guidance by the FASB.
In March 2004, the SEC issued Staff Accounting Bulletin #105, "Application
of Accounting Principles to Loan Commitments" (SAB 105). This bulletin was
issued to inform registrants of the SEC's view that the fair value of the
recorded loan commitments, which are required to follow derivative accounting
under FAS #133, "Accounting for Derivative Instruments and Hedging Activities,"
should not consider the expected future cash flows related to the associated
servicing of the future loan. The provisions of SAB 105 must be applied to loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The adoption of this Staff Accounting Bulletin in the second quarter of
2004 did not have a material impact on the Company.
41
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS #123 (revised 2004), "Share-Based Payment," which revises SFAS #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 on a 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
provisions of SFAS #123 (revised 2004) will be effective for the Company's
financial statements issued for periods beginning after June 15, 2005. The
Company is currently working on the methodology to be used for the adoption of
this standard, but does not believe it will have a material impact on the
Company's financial condition, results of operations, or cash flows.
RECLASSIFICATIONS:
Certain items in the prior-year financial statements were reclassified to
conform to the current year presentation, specifically loans held for sale.
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2004, and 2003, included $7,264,000
and $7,255,000, respectively, of reserves required to be maintained under
Federal Reserve Bank regulations.
3. INTEREST BEARING DEPOSITS WITH BANKS
The book value of interest bearing deposits with domestic banks is as
follows:
AT DECEMBER 31,
---------------
2004 2003
---- ----
(IN THOUSANDS)
Total $199 $289
All interest bearing deposits are with domestic banks and mature within six
months. The Company had no deposits in foreign banks nor in foreign branches of
United States banks. To be in compliance with Housing and Urban Development and
Arizona Department of Insurance rules minimum balances are maintained at
appropriate institutions.
4. INVESTMENT SECURITIES
The cost basis and market values of investment securities are summarized as
follows:
Investment securities available for sale:
AT DECEMBER 31, 2004
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST BASIS GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury $ 10,071 $ 1 $ (90) $ 9,982
U.S. Agency 33,219 20 (356) 32,883
U.S. Agency mortgage-backed securities 305,986 48 (4,794) 301,240
Equity investment in Federal Home Loan Bank and Federal
Reserve Bank Stocks 17,059 -- -- 17,059
Other securities(1) 12,381 39 -- 12,420
-------- ---- ------- --------
Total $378,716 $108 $(5,240) $373,584
======== ==== ======= ========
(1) Other investment securities include asset-backed securities and corporate
notes and bonds.
Investment securities held to maturity:
AT DECEMBER 31, 2004
-------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED MARKET
BASIS GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
U.S. Treasury $ 3,348 $ 46 $ (1) $ 3,393
U.S. Agency 11,522 31 (161) 11,392
U.S. Agency mortgage-backed securities 12,565 200 -- 12,765
------- ---- ----- -------
Total $27,435 $277 $(162) $27,550
======= ==== ===== =======
42
Investment securities available for sale:
AT DECEMBER 31, 2003
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST BASIS GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury $ 9,498 $ 131 $ (32) $ 9,597
U.S. Agency 13,508 3 (33) 13,478
U.S. Agency mortgage-backed securities 469,086 1,535 (3,051) 467,570
Equity investment in Federal Home Loan Bank and Federal
Reserve Bank Stocks 22,942 -- -- 22,942
Other securities(1) 10,974 32 (20) 10,986
-------- ------ ------- --------
Total $526,008 $1,701 $(3,136) $524,573
======== ====== ======= ========
(1) Other investment securities include asset-backed securities and corporate
notes and bonds.
Investment securities held to maturity:
AT DECEMBER 31, 2003
-------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED MARKET
BASIS GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
U.S. Treasury $ 1,155 $ 6 $ -- $ 1,161
U.S. Agency 8,096 -- (138) 7,958
U.S. Agency mortgage-backed securities 18,838 138 -- 18,976
------- ---- ----- -------
Total $28,089 $144 $(138) $28,095
======= ==== ===== =======
All purchased and sold investment securities are recorded on the settlement
date which is not materially different from the trade date. Realized gains and
losses are calculated by the specific identification method.
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, 2004, 96.4% of the portfolio was
rated AAA as compared to 97.6% at December 31, 2003. 1.9% of the portfolio was
rated below A or unrated on December 31, 2004. 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, 2004.
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 $365,173,000 at December 31, 2004, and $485,057,000 at December
31, 2003. The Company realized $1,768,000, $4,409,000 and $5,047,000 of gross
investment security gains and $952,000, $622,000 and $753,000 of gross
investment security losses on available for sale securities in 2004, 2003, and
2002, respectively. On a net basis, the realized gains amounted to $539,000,
$2.5 million and $2.8 million in 2004, 2003, and 2002, respectively, after
factoring in tax expense of $277,000, $1.3 million and $1.5 million for each of
those same years. The Company realized no gross investment security gains and
losses on held to maturity securities in 2004, 2003 or 2002.
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, 2004. 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 and asset-backed securities for which the average lives were used. At
December 31, 2004, the Company's consolidated investment securities portfolio
had a modified duration of approximately 2.92 years. The weighted average
expected maturity for available for sale securities at December 31, 2004 for
U.S. Treasury, U.S. Agency, U.S. Agency Mortgage-Backed, Federal Home Loan Bank
Stock and Federal Reserve Bank Stock, and other securities was 5.3, 5.1, 4.2,
1.0, and 1.4 years, respectively. The weighted average expected maturity for
held to maturity securities at December 31, 2004 for U.S. Treasury, U.S. Agency,
and U.S. Agency Mortgage-Backed securities was 9.6, 5.9 and 7.7 years.
43
Investment securities available for sale:
AT DECEMBER 31, 2004
----------------------------------------------------------------------------------------
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 $ 198 7.30% $ 5,027 3.11% $ 4,846 4.06% $-- --% $ 10,071 3.65%
U.S. Agency 1,305 2.81 10,550 4.43 21,364 4.04 -- -- 33,219 4.12
U.S. Agency mortgage- 4.22
backed securities -- -- 249,007 3.85 56,979 4.22 -- -- 305,986 3.92
Equity investment in
Federal Home Loan
Bank and Federal
Reserve Bank Stocks 17,059 1.89 -- -- -- -- -- -- 17,059 1.89
Other securities(1) 6,631 2.17 -- -- 5,750 3.27 -- -- 12,381 3.02
------- -------- ------- --- --------
Total investment
securities available
for sale $25,193 2.22% $264,584 3.86% $88,939 4.11% $-- --% $378,716 3.81%
======= ======== ======= === ========
MARKET VALUE
U.S. Treasury $ 199 $ 4,954 $ 4,829 $-- $ 9,982
U.S. Agency 1,304 10,514 21,065 -- 32,883
U.S. Agency mortgage-
backed securities -- 245,368 55,872 -- 301,240
Equity investment in
Federal Home Loan
Bank and Federal
Reserve Bank Stocks 17,059 -- -- 17,059
Other securities(1) 6,670 -- 5,750 -- 12,420
------- -------- ------- --- --------
Total investment
securities available
for sale $25,232 $260,836 $87,516 $-- $373,584
======= ======== ======= === ========
(1) Other investment securities include asset-backed securities and corporate
notes and bonds.
Investment securities held to maturity:
AT DECEMBER 31, 2004
-------------------------------------------------------------------------------------
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 $-- --% $ 3,348 3.98% $ -- --% $-- --% $ 3,348 3.98%
U.S. Agency -- -- 8,056 1.61 3,466 5.22 -- -- 11,522 2.72
U.S. Agency mortgage
-backed securities -- -- 12,565 5.27 -- -- -- -- 12,565 5.27
--- ------- ------ --- -------
Total investment
securities held to
maturity $-- --% $23,969 3.86% $3,466 5.22% $-- --% $27,435 4.04%
=== ======= ====== === =======
MARKET VALUE
U.S. Treasury $-- $ 3,393 $ -- $-- $ 3,393
U.S. Agency -- 7,895 3,497 -- 11,392
U.S. Agency mortgage
-backed securities -- 12,765 -- -- 12,765
--- ------- ------ --- -------
Total investment
securities held to
maturity $-- $24,053 $3,497 $-- $27,550
=== ======= ====== === =======
44
The following tables present information concerning investments with
unrealized losses as of December 31, 2004 (in thousands):
Investment securities available for sale:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------- -------------------- ---------------------
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- ------- ---------- -------- ----------
U.S. Treasury $ 9,783 $ (90) $ -- $ -- $ 9,783 $ (90)
U.S. Agency 31,778 (356) -- -- 31,778 (356)
U.S. Agency mortgage-backed
securities 234,460 (3,260) 61,261 (1,534) 295,721 (4,794)
-------- ------- ------- ------- -------- -------
Total investment securities
available for sale $276,021 $(3,706) $61,261 $(1,534) $337,282 $(5,240)
======== ======= ======= ======= ======== =======
Investment securities held to maturity:
12 MONTHS OR
LESS THAN 12 MONTHS LONGER TOTAL
------------------- ------------------- -------------------
COST UNREALIZED COST UNREALIZED COST UNREALIZED
BASIS LOSSES BASIS LOSSES BASIS LOSSES
------ ---------- ------ ---------- ------ ----------
U.S. Treasury $1,132 $(1) $ -- $ -- $1,132 $ (1)
U.S. Agency -- -- 8,056 (161) 8,056 (161)
------ --- ------ ----- ------ -----
Total investment securities held to
maturity $1,132 $(1) $8,056 $(161) $9,188 $(162)
====== === ====== ===== ====== =====
In March 2004, the FASB's Emerging Issues Task Force (EITF) reached a
consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and requires
certain disclosures for debt and equity investments accounted for under the cost
method. Annual disclosures about unrealized losses on available for sale
securities that have not been recognized as other-than-temporary impairments
that were required under an earlier EITF 03-1 consensus remain in effect. The
amount of any other-than-temporary impairment, if any, that may need to be
recognized upon our adoption of EITF 03-1 will depend on market conditions and
our intent and ability to hold "underwater" investments until value is restored.
At December 31, 2004, the total after-tax net unrealized loss on such
investments was $3.6 million. Given the quality of the investment portfolio
(greater than 96% rated AAA), the Company believes the unrealized losses that
have existed for greater than 12 months are temporary in nature and resulted
from interest rate movements.
5. LOANS
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Commercial $ 72,011 $ 75,738
Commercial loans secured by real estate 225,661 206,204
Real estate-mortgage 201,406 194,605
Consumer 23,285 28,343
-------- --------
Loans 522,363 504,890
Less: Unearned income 1,634 2,926
-------- --------
Loans, net of unearned income $520,729 $501,964
======== ========
Real estate construction loans comprised 6.3% and 3.2% of total loans net
of unearned income at December 31, 2004 and 2003, respectively. The Company has
no direct credit exposure to foreign countries. Additionally, the Company has no
significant industry lending concentrations. As of December 31, 2004, loans to
customers engaged in similar activities and having similar economic
characteristics, as defined by standard industrial classifications, did not
exceed 10% of total loans. In the ordinary course of business, the subsidiaries
have transactions, including loans, with their officers, directors, and their
affiliated companies. These transactions were on substantially the same terms as
those prevailing at the time for comparable transactions with unaffiliated
parties and do not involve more than the normal credit risk. These loans totaled
$4,147,000 and $1,819,000 at December 31, 2004 and 2003, respectively. An
analysis of these related party loans follows:
YEAR ENDED
DECEMBER 31,
-----------------
2004 2003
------- -------
(IN THOUSANDS)
Balance January 1 $1,819 $ 2,427
New loans 3,242 3,671
Payments (914) (4,279)
------ -------
Balance December 31 $4,147 $ 1,819
====== =======
45
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Balance January 1 $11,682 $10,035 $ 5,830
Provision for loan losses 1,758 2,961 9,265
Recoveries on loans previously charged-off 616 398 923
Loans charged-off (4,041) (1,573) (5,983)
Transfer to reserve for unfunded loan commitments (122) (139) --
------- ------- -------
Balance December 31 $ 9,893 $11,682 $10,035
======= ======= =======
7. NON-PERFORMING ASSETS
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) loans which are contractually past due 90 days or more as to
interest or principal payments some of which are insured for credit loss, and
(iii) other real estate owned (real estate acquired through foreclosure,
in-substance foreclosures and repossessed assets).
The following tables present information concerning non-performing assets:
AT DECEMBER 31,
-------------------------
2004 2003 2002
------ ------- ------
(IN THOUSANDS)
Non-accrual loans
Commercial $ 802 $ 3,282 $1,783
Commercial loans secured by real estate 606 5,262 1,864
Real estate-mortgage 2,049 1,495 2,784
Consumer 412 742 360
------ ------- ------
Loans $3,869 $10,781 $6,791
------ ------- ------
AT DECEMBER 31,
------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Past due 90 days or more and still accruing
Commercial $-- $58 $--
Commercial loans secured by real estate -- 10 48
Real estate-mortgage -- -- --
Consumer -- 30 2
--- --- ---
Loans $-- $98 $50
--- --- ---
AT DECEMBER 31,
------------------
2004 2003 2002
---- -----------
(IN THOUSANDS)
Other real estate owned
Commercial $-- $ -- $ --
Commercial loans secured by real estate -- 255 --
Real estate-mortgage 15 248 89
Consumer 10 29 34
--- ---- ----
Loans $25 $532 $123
--- ---- ----
AT DECEMBER 31,
-------------------------
2004 2003 2002
------ ------- ------
(IN THOUSANDS)
Total non-performing assets $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 0.75% 2.26% 1.22%
Total restructured loans $5,685 $ 698 $ --
The Company is unaware of any additional loans which are required to either
be charged-off or added to the non-performing asset totals disclosed above.
Other real estate owned is recorded at the lower of 1) fair value minus
estimated costs to sell, or 2) carrying cost.
46
The Company had loans totaling $11,974,000 and $13,232,000 being
specifically identified as impaired and a corresponding allocation reserve of
$2,713,000 and $2,459,000 at December 31, 2004 and 2003, respectively. The
average outstanding balance for loans being specifically identified as impaired
was $11,257,000 for 2004 and $12,532,000 for 2003. 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 2004, 2003 and 2002 was $635,000, $408,000 and
$435,000, 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,
-----------------------
2004 2003 2002
---- ----- ----
(IN THOUSANDS)
Interest income due in accordance with original terms $469 $ 670 $470
Interest income recorded (19) (119) (14)
---- ----- ----
Net reduction in interest income $450 $ 551 $456
==== ===== ====
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
AT DECEMBER 31,
-----------------
2004 2003
------- -------
(IN THOUSANDS)
Land $ 1,714 $ 1,714
Premises 19,709 19,478
Furniture and equipment 17,101 16,502
Leasehold improvements 1,061 1,277
------- -------
Total at cost 39,585 38,971
Less: Accumulated depreciation and amortization 29,897 28,030
------- -------
Net book value $ 9,688 $10,941
======= =======
9. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE,
AND OTHER SHORT-TERM BORROWINGS
The outstanding balances and related information for federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings are summarized as follows:
AT DECEMBER 31, 2004
--------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance $ -- $-- $151,935
Maximum indebtedness at any month end -- -- 170,989
Average balance during year 7 -- 128,010
Average rate paid for the year 2.32% --% 1.61%
Interest rate on year end balance -- -- 2.25
AT DECEMBER 31, 2003
--------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance $ -- $-- $144,643
Maximum indebtedness at any month end 12,500 -- 159,260
Average balance during year 1,732 -- 104,048
Average rate paid for the year 1.41% --% 1.38%
Interest rate on year end balance -- -- 1.06
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances. Collateral related to securities sold under agreements to repurchase
are maintained within the Company's investment portfolio.
These borrowing transactions can range from overnight to one year in
maturity. The average maturity was three days at the end of 2004 and two days at
the end of 2003.
47
The Company's subsidiary bank is a member of the Federal Home Loan Bank
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. DEPOSITS
The following table sets forth the balance of the Company's deposits:
AT DECEMBER 31,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Demand:
Non-interest bearing $100,702 $103,982
Interest bearing 53,909 51,658
Savings 98,998 104,351
Money market 121,179 117,529
Certificates of deposit in
denominations of $100,000 or more 35,094 39,949
Other time 234,509 237,128
-------- --------
Total deposits $644,391 $654,597
======== ========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Interest bearing demand $ 154 $ 201 $ 249
Savings 928 948 1,329
Money market 1,340 1,309 1,423
Certificates of deposit in
denominations of $100,000 or more 1,167 998 1,127
Other time 6,747 8,047 11,926
------- ------- -------
Total interest expense $10,336 $11,503 $16,054
======= ======= =======
The following table sets forth the balance of other time deposits and
certificates of deposit of $100,000 or more as of December 31, 2004 maturing in
the periods presented:
CERTIFICATES OF
DEPOSIT
YEAR OTHER TIME DEPOSITS OF $100,000 OR MORE
- ---- ------------------- -------------------
(IN THOUSANDS)
2005 $95,886 $28,341
2006 57,889 1,855
2007 39,343 1,929
2008 9,667 2,434
2009 6,598 200
2010 and after 25,126 335
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, 2004.
MATURING IN:
(IN THOUSANDS)
--------------
Three months or less $ 8,445
Over three through six months 13,819
Over six through twelve months 6,077
Over twelve months 6,753
-------
Total $35,094
=======
48
11. ADVANCES FROM FEDERAL HOME LOAN BANK AND GUARANTEED JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
Advances from the Federal Home Loan Bank (FHLB) consist of the following:
AT DECEMBER 31, 2004
------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- --------
(IN THOUSANDS)
Overnight 2.25% $151,935
2010 6.00 100,000
2011 and after 6.45 1,026
--------
Total advances 6.00 101,026
--------
Total FHLB borrowings 3.75% $252,961
========
AT DECEMBER 31, 2003
------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------------------
(IN THOUSANDS)
Overnight 1.06% $144,643
2004 1.21 5,000
2005 6.74 15,000
2010 5.98 210,000
2011 and after 6.45 1,063
--------
Total advances 5.93 231,063
--------
Total FHLB borrowings 4.05% $375,706
========
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. The $100 million of advances mature in
2010 and are callable quarterly at the discretion of the FHLB. If any FHLB
advances are called, the Company would have to replace these funds with debt
that would most likely have a higher cost than the called instrument.
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. 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 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, 2004,
the bank had immediately available $54 million of overnight borrowing capability
at the FHLB.
GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
On April 28, 1998, the Company completed a $34.5 million public offering of
8.45% Trust Preferred Securities, which represent undivided beneficial interests
in the assets of a Delaware business trust, AmeriServ Financial Capital Trust I.
The Trust Preferred Securities will mature on June 30, 2028, and are callable at
par at the option of the Company after June 30, 2003. Proceeds of the issue were
invested by AmeriServ Financial Capital Trust I in Junior Subordinated
Debentures issued by AmeriServ Financial, Inc. Net proceeds from the $34.5
million offering were used for general corporate purposes, including the
repayment of debt, the repurchase of AmeriServ Financial common stock, and
investments in and advances to the Company's subsidiaries. Unamortized deferred
issuance costs associated with the Trust Preferred Securities amounted to
$582,000 as of December 31, 2004 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. Under FIN 46-R, AmeriServ Financial Capital Trust I was
deconsolidated in the first quarter of 2004. The Company used $15.3 million of
proceeds from a private placement of common stock to redeem Trust Preferred
Securities in the fourth quarter of 2004.
Upon the occurrence of certain events, specifically a tax event or a
capital treatment event, the Company may redeem in whole, or in part, the
Guaranteed Junior Subordinated Deferrable Interest Debentures prior to June 30,
2028. A tax event means that the interest paid by the Company on the
subordinated debentures will no longer be deductible for federal income tax
purposes. A capital treatment event means that the Trust Preferred Securities no
longer qualify as Tier 1 capital for purposes of the capital adequacy guidelines
of the Federal Reserve. Proceeds from any redemption of the subordinated
debentures would cause mandatory redemption of the Trust Preferred Securities.
As a result of dividend payments from non-bank subsidiaries, the settlement
of the inter-company tax position and the retention of some proceeds from the
private placement sale of the Company's common stock management believes that
the parent company will have adequate cash to continue to make the reduced
dividend payments on the trust preferred securities. Longer term, however, the
payment of the trust preferred dividend is dependent upon the subsidiary bank
maintaining profitability so that it can resume upstreaming dividends to the
parent company. The subsidiary bank must first recoup the $8.0 million net loss
that it incurred for the year ended December 31, 2004 before it can consider
resuming dividend upstreams. The Company views the deferral of interest payments
on the trust preferred securities, which is permitted under the indenture, as
the least favorable alternative to maintaining parent company liquidity because
the payments are cumulative and interest immediately begins to accrue on the
unpaid amount at a rate of 8.45% along with the reputational risk associated
with the deferral.
49
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS #107, "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Company, as for most financial
institutions, approximately 95% of its assets and liabilities are considered
financial instruments. Many of the Company's financial instruments, however,
lack an available trading market characterized by a willing buyer and willing
seller engaging in an exchange transaction. Therefore, significant estimates and
present value calculations were used by the Company for the purpose of this
disclosure.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology the Company believes is suitable
for each category of financial instruments. Management believes that cash, cash
equivalents, and loans and deposits with floating interest rates have estimated
fair values which approximate the recorded book balances. The estimation
methodologies used, the estimated fair values, and recorded book balances at
December 31, 2004 and 2003, were as follows:
2004 2003
------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities $401,134 $406,151 $552,668 $552,662
Net loans (including loans held for sale) 520,724 521,416 507,261 503,387
Mortgage servicing rights -- -- 1,718 1,718
FINANCIAL LIABILITIES:
Deposits with no stated maturities $374,787 $374,787 $377,520 $377,520
Deposits with stated maturities 268,543 269,604 282,843 277,077
Short-term borrowings 151,935 151,935 144,643 144,643
All other borrowings 132,426 121,311 297,076 265,563
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest rate swaps $ (4,077) $ -- $ (1,142) $ --
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. The net loan portfolio has been
valued using a present value discounted cash flow. The discount rate used in
these calculations is based upon the treasury yield curve adjusted for
non-interest operating costs, credit loss, and assumed prepayment risk.
Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities. Financial instrument liabilities with
no stated maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance.
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values. The Company's remaining assets and
liabilities which are not considered financial instruments have not been valued
differently than has been customary under historical cost accounting. The
estimated fair value of instruments used for hedging purposes is estimated by
financial modeling performed by an independent third party. These values
represent the estimated amount the Company would receive or pay, to terminate
the agreements, considering current interest rates, as well as the
creditworthiness of the counterparties.
There is not a material difference between the notional amount and the
estimated fair value of the off-balance sheet items which total $74.2 million at
December 31, 2004, 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.
13. INCOME TAXES
The benefit for income taxes is summarized below:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Current $ (87) $ 5,504 $ (541)
Deferred (5,758) (4,917) (1,151)
------- ------- -------
Income tax expense (benefit) from continuing operations (5,845) 587 (1,692)
Income tax benefit from discontinued operations (648) (800) (1,733)
------- ------- -------
Income tax benefit $(6,493) $ (213) $(3,425)
======= ======= =======
50
The reconciliation between the federal statutory tax rate and the Company's
effective consolidated income tax rate is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2004 2003 2002
--------------- -------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ----- ------ ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Tax expense (benefit) based on
federal statutory rate $(4,864) (34.0)% $ 918 35.0% $(1,269) (35.0)%
Tax exempt income (461) (3.2) (449) (16.2) (570) (15.3)
Goodwill and acquisition related
costs -- -- 70 2.5 -- --
Reversal of contingency reserves (680) (4.7) -- -- -- --
Other 160 1.1 48 1.7 147 3.9
------- ----- ----- ----- ------- -----
Income tax expense (benefit) from
continuing operations (5,845) (40.8) 587 21.1 (1,692) (45.4)
Income tax benefit from
discontinued operations (648) (35.2) (800) (32.8) (1,733) (35.4)
------- ----- ----- ----- ------- -----
Total benefit for income taxes $(6,493) (40.1)% $(213) (63.4)% $(3,425) (39.9)%
------- ----- ----- ----- ------- -----
At December 31, 2004 and 2003, 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,
-----------------
2004 2003
------- -------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Provision for loan losses $ 3,452 $ 4,137
Mortgage servicing rights 1,129 1,706
Unrealized investment security losses 1,745 502
Net operating loss carryforwards 6,720 296
Alternative minimum tax credits 872 1,027
Other 254 221
------- -------
Total tax assets 14,172 7,889
------- -------
DEFERRED TAX LIABILITIES:
Accumulated depreciation (646) (428)
Accretion of discount (8) (13)
Lease accounting (3,064) (3,902)
Core deposit and mortgage servicing intangibles -- (172)
Pension (1,122) (1,164)
Other (150) (123)
------- -------
Total tax liabilities (4,990) (5,802)
Valuation allowance (80) --
------- -------
Net deferred tax asset $ 9,102 $ 2,087
======= =======
The change in net deferred tax assets and liabilities consist of the
following:
YEAR ENDED
DECEMBER 31,
---------------
2004 2003
------ ------
(IN THOUSANDS)
Investment write-downs due to SFAS #115, charged to equity $1,257 $3,627
Deferred benefit for income taxes 5,758 4,917
------ ------
Net increase $7,015 $8,544
====== ======
The Company has alternative minimum tax credit carryforwards of
approximately $872,000 at December 31, 2004. These credits have an indefinite
carryforward period. The Company also has a $19.8 million net operating loss
carryforward that will begin to expire in the year 2023.
14. PENSION PLAN
The Company has a trusteed, noncontributory defined benefit pension plan
covering all employees who work at least 1,000 hours per year and who have not
yet reached age 60 at their employment date. The benefits of the plan are based
upon the employee's years of service and average annual earnings for the highest
five consecutive calendar years during the final ten year period of employment.
The Company's funding policy has been to contribute annually an amount within
the statutory range of allowable minimum and maximum actuarially determined
tax-deductible contributions. Plan assets are primarily debt securities
(including U.S. Treasury and Agency securities, corporate notes and bonds),
listed common stocks (including shares of AmeriServ Financial, Inc. common stock
which is limited to 10% of the plans assets), mutual funds, and short-term cash
equivalent instruments.
51
PENSION BENEFITS:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $13,119 $10,900
Service cost 840 730
Interest cost 734 738
Deferred asset gain (loss) (595) 2,016
Benefits paid (842) (1,265)
------- -------
Benefit obligation at end of year $13,256 $13,119
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $10,949 $ 8,993
Actual return on plan assets 938 1,674
Employer contributions 1,000 1,600
Benefits paid (842) (1,265)
Expenses paid (61) (53)
------- -------
Fair value of plan assets at end of year $11,984 $10,949
======= =======
Funded status of the plan--under funded $(1,272) $(2,170)
Unrecognized transition asset (143) (160)
Unrecognized prior service cost (8) (3)
Unrecognized actuarial loss 4,658 5,594
------- -------
Net prepaid benefit cost as recognized in other
assets on the consolidated balance sheet $ 3,235 $ 3,261
======= =======
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
------ ----- ------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 840 $ 730 $ 672
Interest cost 734 738 684
Expected return on plan assets (875) (827) (678)
Amortization of prior year service cost 4 4 4
Amortization of transition asset (17) (17) (17)
Recognized net actuarial loss 339 203 32
------ ----- -----
Net periodic pension cost $1,025 $ 831 $ 697
====== ===== =====
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 6.00% 6.75% 7.00%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 3.00 3.00 3.00
To determine the benefit obligation as of the date of each balance sheet,
the Company used the same rates disclosed in the above table with the following
exceptions: a discount rate of 6.00% was used as of December 31, 2003 and a 2.5%
rate of compensation increase was used as of December 31, 2004. The Company has
assumed an 8% long-term expected return on plan assets. This assumption was
based upon the plan's historical investment performance over a longer-term
period of 14 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, 2004. This plan's asset
allocations at December 31, 2004 and 2003, by asset category are as follows:
ASSET CATEGORY: 2004 2003
- --------------- ---- ----
Equity securities 63% 37%
Debt securities 37 47
Cash and equivalents -- 16
--- ---
Total 100% 100%
=== ===
52
The investment strategy objective for the pension plan is balanced 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, 2004, 5.7% 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 no contribution to be made to the AmeriServ
Financial Bank Pension Plan in 2005 based on its prepaid status.
ESTIMATED FUTURE BENEFIT PAYMENTS:
The following benefit payments, which reflect future service, as
appropriate, are expected to be paid (in thousands).
2005 $1,066
2006 1,211
2007 1,337
2008 1,346
2009 1,390
Years 2010--2014 9,203
Except for the above pension benefits, the Company has no significant
additional exposure for any other post-retirement or post-employment benefits.
15. LEASE COMMITMENTS
The Company's obligation for future minimum lease payments on operating
leases at December 31, 2004, is as follows:
FUTURE MINIMUM
YEAR LEASE PAYMENTS
- ---- --------------
(IN THOUSANDS)
2005 $1,195
2006 965
2007 741
2008 323
2009 331
2010 and thereafter 837
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 $366,000,
$368,000 and $401,000, in 2004, 2003, and 2002, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of their 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.
53
The Company's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit and standby letters of credit
is represented by their contractual amounts. The Bank uses the same credit and
collateral policies in making commitments and conditional obligations as for all
other lending. The Company had various outstanding commitments to extend credit
approximating $74,165,000 and standby letters of credit of $3,310,000 as of
December 31, 2004. Standby letters of credit had terms ranging from 1 to 4
years. The aggregate maximum amount of future payments AmeriServ could be
required to make under outstanding standby letters of credit was $3,310,000 at
December 31, 2004. Assets valued, as of December 31, 2004 at approximately $3.0
million secured certain specifically identified standby letters of credit. The
carrying amount of the liability for AmeriServ obligations related to standby
letters of credit was $261,000 at December 31, 2004.
Pursuant to its bylaws, the Company provides indemnification to its
directors and officers against certain liabilities incurred as a result of their
service on behalf of the Company. In connection with this indemnification
obligation, the Company advances on behalf of covered individuals costs incurred
in defending against certain claims.
Additionally, the Company is also subject to a number of asserted and
unasserted potential claims encountered in the normal course of business. In the
opinion of the Company, neither the resolution of these claims nor the funding
of these credit commitments will have a material adverse effect on the Company's
consolidated financial position or results of operation.
17. PRIVATE PLACEMENT OFFERING
On October 8, 2004, the Company announced that it entered into definitive
agreements with institutional investors on a $25.8 million private placement of
common stock. The Company secured commitments from investors to purchase 5.7
million shares at a price of $4.50 per share. The private placement 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 $23.1 million after payment of
offering expenses of $2.8 million and used the net 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.
18. STOCK COMPENSATION PLANS
In 2001, the Company's Board of Directors adopted a shareholder approved
Stock Incentive Plan (the Plan) authorizing the grant of options or restricted
stock covering 800,000 shares of common stock. This Plan replaced the expired
1991 Stock Option Plan. Under the Plan, options or restricted stock can be
granted (the Grant Date) to directors, officers, and employees that provide
services to the Company and its affiliates, as selected by the compensation
committee of the Board of Directors. The Company accounts for this Plan under
Accounting Principles Board Opinion #25, "Accounting for Stock Issued to
Employees". The option price at which a stock option may be exercised shall not
be less than 100% of the fair market value per share of common stock on the
Grant Date. The maximum term of any option granted under the Plan cannot exceed
10 years. Generally, under the Plan on or after the first anniversary of the
Grant Date, one-third of such options may be exercised. On or after the second
anniversary of the Grant Date, two-thirds of such options may be exercised minus
the aggregate number of such options previously exercised. On or after the third
anniversary of the Grant Date, the remainder of the options may be exercised.
A summary of the status of the Company's Stock Incentive Plan at December
31, 2004, 2003, and 2002, and changes during the years then ended is presented
in the table and narrative following:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002
------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- ------- --------
Outstanding at beginning of year 337,136 $5.13 499,534 $5.43 527,181 $5.51
Granted 75,000 6.00 32,557 4.07 43,000 3.64
Exercised (2,386) 3.07 -- -- (21,401) 4.63
Forfeited (15,902) 4.97 (194,955) 5.71 (49,246) 5.16
------- -------- ------- -----
Outstanding at end of year 393,848 5.31 337,136 5.13 499,534 5.43
======= ======== ======= =====
Exercisable at end of year 285,195 5.30 279,454 5.40 344,180 5.84
Weighted average fair value of options
granted in current year $3.38 $2.15 $0.76
54
A total of 285,195 of the 393,848 options outstanding at December 31, 2004,
have exercise prices between $2.31 and $15.69, with a weighted average exercise
price of $5.30 and a weighted average remaining contractual life of 5.0 years.
Options outstanding at December 31, 2004 reflect option ranges of: $2.31 to
$2.90 totaling 15,554 options which have a weighted average exercise price of
$2.70 and a weighted average remaining contractual life of 7.7 years; $3.20 to
$6.39 totaling 256,441 options which have a weighted average exercise price of
$5.06 and a weighted average remaining contractual life of 4.9 years; and $10.42
to $15.69 totaling 13,200 options which have a weighted average exercise price
of $13.06 and a weighted average remaining contractual life of 3.8 years. All of
these options are exercisable. The remaining 108,653 options have exercise
prices between $2.31 and $6.10, with a weighted average exercise price of $5.34
and a weighted average remaining contractual life of 9.0 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 2004,
2003, and 2002, respectively: risk-free interest rates ranging from 3.50% to
4.20% for 2004 options, 3.40% to 4.40% for 2003 options, and 3.04% to 5.07% for
2002 options; expected lives of 10.0 years for 2004, 2003 and 2002 options;
expected volatility ranging from 39.24% to 39.65% for 2004 options, 33.39% to
33.64% for 2003 options, and 30.21% to 34.31% for 2002 options; and expected
dividend yields of 0% for 2004 and 2003 options (because the MOU prohibits the
payment of dividends), 5.11% to 12.41% for 2002 options.
19. DIVIDEND REINVESTMENT PLAN
The Company's Dividend Reinvestment and Common Stock Purchase Plan (the
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 Plan
may purchase shares of Common Stock by electing either to (1) reinvest dividends
on all of his or her shares of Common Stock 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 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, 2004, the Company had
158,543 unissued reserved shares available under the 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 Plan in
the market for the relevant investment date.
20. SHAREHOLDER RIGHTS PLAN
Each share of the Company's Common Stock has attached to it one right (a
"Right") issued pursuant to a Rights Agreement, dated February 24, 1995 (the
"Rights Agreement"). Each Right entitles the holder to buy one-hundredth of a
share of the Company's Series C Junior Participating Preferred Stock at a price
of $21.67, subject to adjustment (the "Exercise Price"). The Rights become
exercisable if a person, group, or other entity acquires or announces a tender
offer for 19.9% or more of the Company's Common Stock. They are also exercisable
if a person or group who becomes a beneficial owner of at least 10% of the
Company's Common Stock is declared by the Board of Directors to be an "adverse
person" (as defined in the Rights Agreement). Under the Rights Agreement, any
person, group, or entity is deemed to be a beneficial owner of the Company's
Common Stock when such person or any of such person's affiliates or associates,
directly or indirectly, has the right to acquire or to vote the shares of the
Company's Common Stock (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement, or
understanding (whether or not in writing) or upon the exercise of conversion
rights, exchange rights, rights, warrants or options. The Rights Agreement
excludes from the definition of "beneficial owner", holders of revocable proxies
that (A) arise solely from a revocable proxy given in response to a public proxy
or consent solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (B) is not also then reportable
by such person on Schedule 13D under the Exchange Act (or any comparable or
successor report). After the Rights become exercisable, the Rights (other than
rights held by a 19.9% beneficial owner or an "adverse person") entitle the
holders to purchase, under certain circumstances, either the Company's Common
Stock or common stock of the potential acquirer having a value equal to twice
the Exercise Price. The Company is entitled to redeem the Rights at $0.00033 per
Right at any time until the twentieth business day following a public
announcement that a 19.9% position has been acquired or the Board of Directors
has designated a holder of the Company's Common Stock an "adverse person". The
Rights attached to the shares of AmeriServ Common Stock outstanding on March 15,
1995, expired on February 25, 2005. The Company is exploring the renewal of the
plan.
21. 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). On January 1, 2002, the Company adopted SFAS #142, Goodwill
and Other Intangible Assets under which goodwill and other intangible assets
with indefinite lives are not amortized. Such intangibles were evaluated for
impairment at the reporting unit level as of January 1, 2002 (any such
impairment at the date of adoption would have been reflected as a change in
accounting principle). In addition, each year, the Company evaluates the
intangible assets for impairment with any resulting impairment reflected as an
operating expense. The Company's only intangible, other than goodwill, is its
core deposit intangible, which the Company currently believes has a finite life.
The Company completed its initial goodwill impairment test based on data from
June 30, 2002. This evaluation indicated that there was no impairment of the
Company's goodwill.
During the first quarter of 2003, under SFAS #142 the Company had a
triggering event specific to the mortgage banking segment level. This event was
the sale of approximately 69% of its total servicing portfolio. As a result, the
Company reevaluated the $199,000 of goodwill that was allocated to the mortgage
banking segment and determined that it was impaired based upon its analysis of
the projected future cash flows in this business segment. The resulting
impairment charge eliminated all goodwill allocated to this segment and has been
reflected as an operating expense for the year. The Company's remaining 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.
55
As of December 31, 2004, the Company's core deposit intangibles had an
original cost of $17.6 million with accumulated amortization of $14.0 million.
The weighted average amortization period of the Company's core deposit
intangibles at December 31, 2004, is 3.50 years. Estimated amortization expense
for the next five years is summarized as follows (in thousands):
YEAR EXPENSE
- ---- --------------
(IN THOUSANDS)
2005 $865
2006 865
2007 865
2008 865
2009 108
A reconciliation of the Company's intangible asset balances for 2004 and
2003 is as follows (in thousands):
AT DECEMBER 31,
-----------------------------------
2004 2003 2004 2003
------- ------- ------ ------
CORE DEPOSIT
INTANGIBLES GOODWILL
Balance January 1 $ 4,719 $ 6,151 $9,544 $9,743
Goodwill impairment loss -- -- -- (199)
Amortization expense (1,151) (1,432) -- --
------- ------- ------ ------
Balance December 31 $ 3,568 $ 4,719 $9,544 $9,544
======= ======= ====== ======
22. DERIVATIVE HEDGING INSTRUMENTS
The Company uses 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. On January 1, 2001, the Company adopted SFAS #133, "Accounting for
Derivative Instruments and Hedging Activities". The Company uses derivative
instruments, primarily interest rate swaps, to manage interest rate risk and
match the rates on certain assets by hedging the fair value of certain fixed
rate debt, which converts the debt to variable rates and by hedging the cash
flow variability associated with certain variable rate debt by converting the
debt to fixed rates. A summary of the Company's derivative hedging transactions
is as follows:
FAIR VALUE HEDGES:
In June 2003, the Company entered into an interest rate swap with a
notional amount of $50 million, inclusive of a swaption feature, effectively
hedging a $50 million FHLB convertible advance with a fixed cost of 6.10% that
is callable quarterly with a seven-year maturity. The Company receives a fixed
rate of 2.58% and makes variable rate payments based on 90-day LIBOR. In
December 2003, the Company entered into an interest rate swap with a notional
amount of $50 million, inclusive of a swaption feature, effectively hedging a
$50 million FHLB convertible advance with a fixed cost of 5.89% that is callable
quarterly with a six-year maturity. The Company will receive a fixed rate of
5.89% and will make variable rate payments based on 90-day LIBOR plus 246 basis
points. The swaps are carried at their fair values and the carrying amount of
the FHLB advances includes the change in their fair values since the inception
of the hedge. Because the hedges are considered highly effective and qualify for
the shortcut method of accounting treatment, changes in the swap's fair value
offset the corresponding changes in the fair value of the FHLB advances and as a
result, the change in fair value does not have any impact on net income. The
Company performed effectiveness testing by isolating the change in value of the
interest rate swaps and swaptions and comparing that to the change in value of
the FHLB convertible advances that were hedged. The effectiveness test results
for 2004 were 97.1% and 86.6% compared to 101.9% and 87.2% for 2003.
The following table summarizes the interest rate swap transactions that
impacted the Company's 2004 and 2003 performance:
FIXED FLOATING DECREASE IN
NOTIONAL TERMINATION RATE RATE REPRICING INTEREST
2004 HEDGE TYPE AMOUNT START DATE DATE RECEIVED PAID FREQUENCY EXPENSE
- ---- ---------- ----------- ---------- ----------- -------- -------- --------- -----------
FAIR VALUE $50,000,000 6-09-03 9-22-10 2.58% 1.47% QUARTERLY $ (564,000)
FAIR VALUE 50,000,000 12-11-03 1-11-10 5.89 3.91 QUARTERLY (1,001,000)
-----------
$(1,565,000)
===========
FIXED FLOATING DECREASE IN
NOTIONAL TERMINATION RATE RATE REPRICING INTEREST
2003 HEDGE TYPE AMOUNT START DATE DATE RECEIVED PAID FREQUENCY EXPENSE
- ---- ---------- ----------- ---------- ----------- -------- -------- --------- -----------
Fair Value $50,000,000 6-09-03 9-22-10 2.58% 1.10% Quarterly $(422,000)
Fair Value 50,000,000 12-11-03 1-11-10 5.89 3.63 Quarterly (69,000)
---------
$(491,000)
=========
The Company believes that its exposure to credit loss in the event of
nonperformance by its counterparties (which are Regions Bank and Citigroup,
Inc.) is remote. 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 caps or floors outstanding
at December 31, 2004 and 2003.
56
23. 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, mortgage banking, other
fee based businesses and investment/parent (includes leverage program). 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. Capital has been allocated among the
businesses on a risk-adjusted basis with a primary focus on credit risk. 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). Mortgage
banking includes the servicing of mortgage loans (the Company completed its exit
from the wholesale mortgage production business in 2001). On December 28, 2004,
the Company entered into an agreement to sell its mortgage servicing rights and
discontinue operations of this non-core business. The trust segment has two
primary business divisions, institutional trust and personal trust.
Institutional trust products and services include 401(k) plans, defined benefit
and defined contribution employee benefit plans, individual retirement accounts,
and collective investment funds for trade union pension funds. Personal trust
products and services include personal portfolio investment management, estate
planning and administration, custodial services and pre-need trusts. Other fee
based businesses include AmeriServ Associates and AmeriServ Life. The
investment/parent includes the net results of investment securities and
borrowing activities, general corporate expenses not allocated to the business
segments, interest expense on guaranteed junior subordinated deferrable interest
debentures, and centralized interest rate risk management. Inter-segment
revenues were not material.
The contribution of the major business segments to the consolidated results of
operations were as follows:
YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
RETAIL BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
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 $ 1,197 $1,691 $401,019 $1,920 $1,009,232
YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
RETAIL BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
Net interest income $ 23,756 $ 3,925 $ -- $ 83 $ (3,167) $ 48 $ 24,645
Provision for loan loss 965 1,996 -- -- -- -- 2,961
Non-interest income 7,399 292 -- 4,993 3,456 855 16,995
Non-interest expense 25,333 3,037 -- 3,899 2,943 690 35,902
-------- -------- ------- ------ -------- ------ ----------
Income (loss) before income taxes 4,857 (816) -- 1,177 (2,654) 213 2,777
Income taxes (benefit) 1,353 (222) -- 388 (1,004) 72 587
-------- -------- ------- ------ -------- ------ ----------
Income (loss) from continuing
operations 3,504 (594) -- 789 (1,650) 141 2,190
Loss from discontinued operations -- -- (1,641) -- -- -- (1,641)
-------- -------- ------- ------ -------- ------ ----------
Net income (loss) $ 3,504 $ (594) $(1,641) $ 789 $ (1,650) $ 141 $ 549
======== ======== ======= ====== ======== ====== ==========
Total assets $363,982 $224,714 $ 3,588 $1,605 $552,662 $2,221 $1,148,782
57
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
RETAIL BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
Net interest income $ 25,237 $ 5,408 $ -- $ 122 $ (3,536) $ 100 $ 27,331
Provision for loan loss 1,239 8,026 -- -- -- -- 9,265
Non-interest income 8,211 472 -- 4,750 4,485 735 18,653
Non-interest expense 26,505 3,973 -- 4,157 5,082 689 40,406
-------- -------- ------- ------ -------- ------ ----------
Income (loss) before income taxes 5,704 (6,119) -- 715 (4,133) 146 (3,687)
Income taxes (benefit) 1,677 (2,301) -- 229 (1,347) 50 (1,692)
-------- -------- ------- ------ -------- ------ ----------
Income (loss) from continuing
operations 4,027 (3,818) -- 486 (2,786) 96 (1,995)
Loss from discontinued operations -- -- (3,157) -- -- -- (3,157)
-------- -------- ------- ------ -------- ------ ----------
Net income (loss) $ 4,027 $ (3,818) $(3,157) $ 486 $ (2,786) $ 96 $ (5,152)
======== ======== ======= ====== ======== ====== ==========
Total assets $397,884 $258,870 $ 8,493 $1,829 $505,778 $2,971 $1,175,825
24. REGULATORY MATTERS
On February 28, 2003, the Company and the Bank entered into a Memorandum of
Understanding (MOU) with the Federal Reserve Bank of Philadelphia (Federal
Reserve) and the Pennsylvania Department of Banking (Department). Under the
terms of the MOU, the Company and the Bank cannot declare dividends, the Company
may not redeem any of its own stock, and the Company cannot incur any additional
debt other than in the ordinary course of business, in each case, without the
prior written approval of the Federal Reserve and the Department. Accordingly,
the Board of Directors of the Company cannot reinstate the previously suspended
common stock dividend, or reinstitute its stock repurchase program without the
concurrence of the Federal Reserve and the Department. Other provisions of the
MOU require the Company and the Bank to: (i) improve credit quality and credit
administration practices, (ii) improve data security and disaster recovery
procedures, (iii) make periodic reports to the Federal Reserve and the
Department regarding compliance with the MOU, and (iv) appoint a committee of
independent directors to monitor compliance with the MOU. In addition to those
specific actions required by the MOU, changes made by the Board of Directors in
response to the MOU included: (i) accepting the resignation of the previous
chairman, president, chief executive officer, chief operating officer, chief
lending officer and chief operating officer of the Trust company, (ii) enhanced
board oversight, including separation of the chairman's function from the duties
of the president and chief executive officer, (iii) retention of a new
management team, including a new president and chief executive officer and a new
chief lending officer, (iv) a comprehensive review of the loan portfolio, and
(v) a restructuring of the loan department, both with respect to personnel and
operations. The MOU will remain in effect until modified or terminated by the
Federal Reserve and the Department. The Company believes that it is in material
compliance with the MOU.
The Company is subject to various capital requirements administered by the
federal banking agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. As of December 31, 2004 and 2003, the Federal Reserve
categorized the Company as Well Capitalized under the regulatory framework for
prompt corrective action. As of March 10, 2005, 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, 2004
------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)
Consolidated $103,286 17.08% $48,369 8.00% $60,461 10.00%
AmeriServ Financial Bank 94,804 15.88 47,774 8.00 59,718 10.00
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 95,728 15.83 24,185 4.00 36,277 6.00
AmeriServ Financial Bank 87,339 14.63 23,887 4.00 35,831 6.00
Tier 1 Capital (To Average Assets)
Consolidated 95,728 9.20 41,637 4.00 52,047 5.00
AmeriServ Financial Bank 87,339 8.51 41,069 4.00 51,336 5.00
58
AS OF DECEMBER 31, 2003
------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ------- ------
(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)
Consolidated $103,286 16.45% $50,218 8.00% $62,773 10.00%
AmeriServ Financial Bank 98,021 15.68 50,005 8.00 62,507 10.00
Tier 1 Capital (To Risk Weighted Assets)
Consolidated 86,004 13.70 25,109 4.00 37,664 6.00
AmeriServ Financial Bank 90,208 14.43 25,003 4.00 37,504 6.00
Tier 1 Capital (To Average Assets)
Consolidated 86,004 7.55 45,536 4.00 56,920 5.00
AmeriServ Financial Bank 90,208 7.97 45,293 4.00 56,616 5.00
25. DISCONTINUED OPERATIONS
As of December 28, 2004, SMC entered into an agreement to sell its
remaining mortgage servicing rights. This action will result in the closing of
this non-core business which exposed the Company to greater balance sheet market
risk and earnings volatility. As a result of this transaction all assets and all
liabilities of SMC are reported as discontinued operations as of December 31,
2004. Thus these assets and liabilities are not included in the December 31,
2004 and 2003 Consolidated Balance Sheets. SMC expects to complete the transfer
of all files related to the servicing rights in the first quarter of 2005. The
major asset and liability categories of net discontinued operations as of
December 31, 2004 and 2003 are as follows (in thousands):
AT DECEMBER 31, 2004 AT DECEMBER 31, 2003
-------------------- --------------------
Cash and due from banks $ 757 $ 384
Premises and equipment -- 200
Mortgage servicing rights -- 1,718
Other assets 1,184 1,539
Other liabilities (744) (253)
------ ------
Net assets of discontinued operations $1,197 $3,588
====== ======
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,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME
Investment securities available for sale $ -- $ -- $ 100
Total Interest Income -- -- 100
INTEREST EXPENSE
Other short-term borrowings -- -- 63
Total Interest Expense -- -- 63
Net Interest Income -- -- 37
Provision for loan losses -- -- --
------- ------- -------
Net Interest Income after Provision for Loan Losses -- -- 37
NON-INTEREST INCOME
Net mortgage servicing fees 179 250 413
Loss on sale of mortgage servicing rights (376) (758) --
Other income 300 442 621
------- ------- -------
Total Non-Interest Income 103 (66) 1,034
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 786 926 1,195
Net occupancy expense 179 181 183
Equipment expense 237 257 283
Professional fees 30 38 51
Supplies, postage, and freight 109 128 139
Miscellaneous taxes and insurance 4 28 10
Impairment charge (credit) for mortgage servicing rights (26) 390 3,698
Other expense 625 427 402
------- ------- -------
Total Non-Interest Expense 1,944 2,375 5,961
------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (1,841) (2,441) (4,890)
Benefit for income taxes (648) (800) (1,733)
------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS $(1,193) $(1,641) $(3,157)
======= ======= =======
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS:
Basic:
Net loss $ (0.08) $ (0.12) $ (0.23)
Diluted:
Net loss $ (0.08) $ (0.12) $ (0.23)
59
26. MORTGAGE SERVICING RIGHTS PORTFOLIO
On December 28, 2004, SMC entered into an agreement to sell its remaining
mortgage servicing rights. A rollforward of the mortgage servicing rights is as
follows:
2004 2003
------- -------
(IN THOUSANDS)
January 1 balance ................. $ 1,718 $ 6,917
Acquisition of servicing rights.... -- 675
Impairment charge.................. (26) (390)
Net sale of servicing rights....... (1,239) (4,710)
Amortization of servicing rights... (453) (774)
December 31 balance ............... $ -- $ 1,718
27. 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, 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,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 3,362 $ 126
Equity investment in banking subsidiaries 97,091 103,561
Equity investment in non-banking subsidiaries 3,936 2,707
Guaranteed junior subordinated deferrable interest debenture issuance costs 582 1,102
Other assets 1,255 1,657
-------- --------
TOTAL ASSETS $106,226 $109,153
======== ========
LIABILITIES
Guaranteed junior subordinated deferrable interest debentures $ 20,285 $ 34,500
Other liabilities 722 383
-------- --------
TOTAL LIABILITIES 21,007 34,883
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity 85,219 74,270
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $106,226 $109,153
======== ========
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
INCOME
Inter-entity management and other fees $ 2,351 $ 2,277 $ 2,418
Dividends from non-banking subsidiaries 1,017 1,589 386
Interest and dividend income 29 6 62
------- ------- -------
TOTAL INCOME 3,397 3,872 2,866
------- ------- -------
EXPENSE
Interest expense 2,985 2,960 2,960
Salaries and employee benefits 1,899 1,739 2,017
Dividends downstreamed to banking subsidiary 4,000 -- --
Dividends downstreamed to non-banking subsidiaries 250 -- --
Other expense 1,815 1,412 1,940
------- ------- -------
TOTAL EXPENSE 10,949 6,111 6,917
------- ------- -------
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
LOSS OF SUBSIDIARIES (7,552) (2,239) (4,051)
Benefit for income taxes 1,693 1,301 1,497
Equity in undistributed gains (losses) of subsidiaries (3,860) 1,487 (2,598)
------- ------- -------
NET INCOME (LOSS) $(9,719) $ 549 $(5,152)
======= ======= =======
60
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- ------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $ (9,719) $ 549 $(5,152)
Adjustment to reconcile net income (loss) to net cash (used) provided by
operating activities:
Equity in undistributed losses (gains) of subsidiaries 3,860 (1,487) 2,598
Other -- net 2,916 3,084 2,913
-------- ------- -------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (2,943) 2,146 359
-------- ------- -------
INVESTING ACTIVITIES
NET CASH PROVIDED BY INVESTING ACTIVITIES -- -- --
FINANCING ACTIVITIES
Common stock cash dividends paid -- -- (4,130)
Proceeds from issuance of common stock 149 202 849
Proceeds from private offering, net of issuance costs 23,105 -- --
Guaranteed junior subordinated deferrable interest debentures dividends paid (2,860) (2,916) (2,916)
Retirement of Trust Preferred Securities (14,215) -- --
-------- ------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,179 (2,714) (6,197)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,236 (568) (5,838)
CASH AND CASH EQUIVALENTS AT JANUARY 1 126 694 6,532
-------- ------- -------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 3,362 $ 126 $ 694
======== ======= =======
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, 2004, the subsidiary bank was not permitted to
upstream any cash dividends to the parent company. The subsidiary bank had a
combined $89,341,000 of restricted surplus and retained earnings at December 31,
2004.
61
STATEMENT OF MANAGEMENT RESPONSIBILITY
March 10, 2005
To the Stockholders and
Board of Directors of
AmeriServ Financial, Inc.
Management of AmeriServ Financial, Inc. and its subsidiaries have prepared
the consolidated financial statements and other information in the Annual Report
and Form 10-K in accordance with generally accepted accounting principles and
are responsible for its accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities, and
programs of internal audit. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
Company affairs are conducted with the highest ethical standards. The Company's
Code of Conduct, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information, and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent auditors to discuss audit, financial reporting, and related
matters. Deloitte & Touche LLP and the Company's internal auditors have direct
access to the Audit Committee.
/s/ ALLAN R. DENNISON /s/ JEFFREY A. STOPKO
- ------------------------------------- ----------------------------------------
Allan R. Dennison Jeffrey A. Stopko
President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors of
AmeriServ Financial, Inc.
Johnstown, Pennsylvania
We have audited the accompanying consolidated balance sheets of AmeriServ
Financial, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of operations, comprehensive
income (loss), changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. 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, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 8, 2005
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management carried out an evaluation, under the supervision
and with the participation of the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and the operation of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2004,
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer along with the Chief Financial Officer concluded that the
Company's disclosure controls and procedures as of December 31, 2004, are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act. In the fourth quarter no
changes in the Company's internal control over financial reporting have come to
management's attention that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
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 Proxy Statement for the Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented in 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 Proxy Statement
for the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this section is presented in 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 Proxy Statement
for the Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS FILED:
The consolidated financial statements listed below are from the 2004 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, 31
Consolidated Statements of Operations, 32
Consolidated Statements of Comprehensive Income (Loss), 33
Consolidated Statements of Changes in Stockholders' Equity, 34
Consolidated Statements of Cash Flows, 35-36
Notes to Consolidated Financial Statements, 37
Statement of Management Responsibility, 62
Report of Independent Registered Public Accounting Firm, 63
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.
64
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 Exhibit 3.1 to 2004 Form 10-K
January 5, 2005. Filed 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
4.1 Rights Agreement, dated as of February 24, 1995, between AmeriServ Exhibit 4.1 to 2000 Form 10-K
Financial, Inc. and AmeriServ Trust and Financial Services Company, Dated March 21, 2001
as Rights Agent.
10.3 Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Exhibit 10.1 to Form 10-Q Filed
Jeffrey A. 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 Exhibit 10.6 to 2000 Form 10-K
Financial, Inc. and Ronald W. Virag. Filed March 21, 2001
10.7 Agreement, dated February 1, 2004, between AmeriServ Financial, Inc. Exhibit 10.7 to 2003 Form 10-K
and Allan R. Dennison Filed March 23, 2004
10.8 Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Exhibit 10.8 to 2004 Form 10-K
Dan L. Hummel Filed 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), Below
as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a), Below
as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. section 1350, as Below
adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. section 1350, as Below
adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
65
EXHIBIT A
(21) SUBSIDIARIES OF THE REGISTRANT
PERCENT OF JURISDICTION
NAME OWNERSHIP OF ORGANIZATION
- ---------------------------------------------- ---------- ----------------------------
AmeriServ Financial Bank 100% Commonwealth of Pennsylvania
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907
AmeriServ Life Insurance Company 100% State of Arizona
101 N. First Avenue #2460
Phoenix, AZ 85003
AmeriServ Trust and Financial Services Company 100% Commonwealth of Pennsylvania
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907
AmeriServ Associates, Inc 100% Commonwealth of Pennsylvania
734 South Atherton Street
State College, PA 16801
66
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 28, 2005
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 28, 2005:
/s/ Craig G. Ford Chairman
- -------------------------------------
Craig G. Ford Director
/s/ Allan R. Dennison President, CEO & Director /s/ Jeffrey A. Stopko SVP & CFO
- ------------------------------------- --------------------------------
Allan R. Dennison Jeffrey A. Stopko
/s/ J. Michael Adams, Jr. Director /s/ Margaret A. O'Malley Director
- ------------------------------------- --------------------------------
J. Michael Adams, Jr. Margaret A. O'Malley
/s/ Edward J. Cernic, Sr. Director /s/ Very Rev. Christian R. Oravec Director
- ------------------------------------- ---------------------------------
Edward J. Cernic, Sr. Very Rev. Christian R. Oravec
/s/ Daniel R. DeVos Director /s/ Mark E. Pasquerilla Director
- ------------------------------------- ---------------------------------
Daniel R. DeVos Mark E. Pasquerilla
/s/ James C. Dewar Director /s/ Howard M. Picking, III Director
- ------------------------------------- ---------------------------------
James C. Dewar Howard M. Picking, III
/s/ Bruce E. Duke, III Director /s/ Sara A. Sargent Director
- ------------------------------------- ---------------------------------
Bruce E. Duke, III, M.D. Sara A. Sargent
/s/ James M. Edwards, Sr. Director /s/ Thomas C. Slater Director
- ------------------------------------- ---------------------------------
James M. Edwards, Sr. Thomas C. Slater
/s/ Kim W. Kunkle Director /s/ Robert L. Wise Director
- ------------------------------------- ---------------------------------
Kim W. Kunkle Robert L. Wise
67
AMERISERV FINANCIAL
BANK
OFFICE LOCATIONS
* Main Office Downtown
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907-0520
1-800-837-BANK(2265)
+* Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1211
+* University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3218
* East Hills Teller Express Office
1213 Scalp Avenue
Johnstown, PA 15904-3150
* Eighth Ward Office
1059 Franklin Street
Johnstown, PA 15905-4303
* West End Office
163 Fairfield Avenue
Johnstown, PA 15906-2347
* Carrolltown Office
101 South Main Street
Carrolltown, PA 15722-0507
* Northern Cambria Office
4206 Crawford Avenue Suite 1
Northern Cambria, PA
15714-1342
* Ebensburg Office
104 South Center Street
Ebensburg, PA 15931-0209
+* Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-0418
Nanty Glo Office
928 Roberts Street
Nanty Glo, PA 15943-1303
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1254
+* Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-0393
* Seward Office
6858 Route 711, Suite 1
Seward, PA 15954-9501
* Windber Office
1501 Somerset Avenue
Windber, PA 15963-1745
Central City Office
104 Sunshine Avenue
Central City, PA 15926-1129
* Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
* Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
* South Atherton Office
734 South Atherton Street
State College, PA 16801-4628
* Harrisburg Office
231 State Street
Harrisburg, PA 17101-1110
* 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
Lee Hospital, Main Street, Johnstown
The Galleria, Johnstown
6-2-Go Shop, Nanty Glo
Gogas Service Station, Cairnbrook
AMERISERV RESIDENTIAL
LENDING LOCATIONS
Greensburg Office
Oakley Park II, 4963 Route 30
Greensburg, PA 15601-9560
Altoona Office
87 Logan Boulevard
Altoona, PA 16602-3123
Mt. Nittany Mortgage Company
2300 South Atherton Street
State College, PA 16801-7613
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:
Legg Mason Wood Walker, Inc.
969 Eisenhower Boulevard
Oak Ridge East
Johnstown, PA 15904
Telephone: (814) 266-7900
Boenning & Scattergood
4 Tower Bridge, Suite 300
200 Barr Harbor Drive
West Conshohocken, PA
19428-2979
Telephone: (610) 862-5360
UBF Capital Markets
Newport Financial Center
111 Pavonia Avenue East
Jersey City, NJ 07310
Telephone: (212) 804-3663
Keefe Bruyette & Woods, Inc.
787 Seventh Avenue
Equitable Bldg -- 4th Floor
New York, NY 10019
Telephone: (800) 966-1559
Knight Trading Group, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (800) 544-7508
Parker/Hunter, Inc.
416 Main Street
Johnstown, PA 15901
Telephone: (814) 535-8403
Sandler O'Neill & Partners, L.P.
919 Third Avenue
6th Floor
New York, NY 10022
Telephone: (800) 635-6860
CORPORATE OFFICES
The corporate offices of AmeriServ Financial, Inc. are located at 216
Franklin Street, Johnstown, PA 15901. Mailing address:
P.O. Box 430
Johnstown, PA 15907-0430
(814) 533-5300
AGENTS
The transfer agent and registrar for AmeriServ Financial, Inc.'s common
stock is:
Equiserve Trust Company, N.A.
P O Box 43010
Providence, RI 02940-3023
Shareholder Inquiries: 1-800-730-4001
Internet Address: http://www.EquiServe.com
SHAREHOLDER DATA
As of January 31, 2005, there were 4,659 shareholders of common stock and
19,717,841 shares outstanding. Of the total shares outstanding, approximately
1,240,167 or 6% are held by insiders (directors and executive officers) while
approximately 9,673,125 or 49% are held by institutional investors (mutual
funds, employee benefit plans, etc.).
DIVIDEND REINVESTMENT
Shareholders seeking information about AmeriServ Financial, Inc.'s dividend
reinvestment plan should contact Sharon M. Callihan, Executive Office, at (814)
533-5158.
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.