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Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended June 30, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transaction 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Main & Franklin Streets, P.O. Box 430, Johnstown, PA   15907-0430
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (814) 533-5300

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 1, 2012

Common Stock, par value $0.01   19,284,521

 

 

 


Table of Contents

AmeriServ Financial, Inc.

INDEX

 

     Page No.  

PART I. FINANCIAL INFORMATION:

  

Item 1. Financial Statements

  

Consolidated Balance Sheets (Unaudited) – June 30, 2012 and December 31, 2011

     3   

Consolidated Statements of Operations (Unaudited) – Three and Six months ended June  30, 2012 and 2011

     4   

Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six months ended June 30, 2012 and 2011

     5   

Consolidated Statements of Cash Flows (Unaudited) – Six months ended June 30, 2012 and 2011

     6   

Notes to Unaudited Consolidated Financial Statements

     7   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   

Item 3. Quantitative and Qualitative Disclosure About Market Risk

     47   

Item 4. Controls and Procedures

     47   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     48   

Item 1A. Risk Factors

     48   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     48   

Item 3. Defaults Upon Senior Securities

     48   

Item 4. Mine Safety Disclosures

     48   

Item 5. Other Information

     49   

Item 6. Exhibits

     49   

 

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Table of Contents

Item 1. Financial Statements

AmeriServ Financial, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     June 30, 2012     December 31, 2011  

ASSETS

    

Cash and due from depository institutions

   $ 19,817      $ 26,938   

Interest bearing deposits

     10,310        1,716   

Short-term investments in money market funds

     3,848        6,129   
  

 

 

   

 

 

 

Total cash and cash equivalents

     33,975        34,783   

Investment securities:

    

Available for sale

     176,896        182,923   

Held to maturity (fair value $15,457 on June 30,

2012 and $12,914 on December 31, 2011)

     14,895        12,280   

Loans held for sale

     6,009        7,110   

Loans

     685,323        664,189   

Less:              Unearned income

     517        452   

Allowance for loan losses

     13,317        14,623   
  

 

 

   

 

 

 

Net loans

     671,489        649,114   

Premises and equipment, net

     10,885        10,674   

Accrued interest income receivable

     3,159        3,216   

Goodwill

     12,613        12,613   

Bank owned life insurance

     35,779        35,351   

Net deferred tax asset

     11,364        12,681   

Federal Home Loan Bank stock

     5,317        5,891   

Federal Reserve Bank stock

     2,125        2,125   

Prepaid federal deposit insurance

     1,614        1,814   

Other assets

     10,982        8,501   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 997,102      $ 979,076   
  

 

 

   

 

 

 

LIABILITIES

    

Non-interest bearing deposits

   $ 155,797      $ 141,982   

Interest bearing deposits

     698,220        674,438   
  

 

 

   

 

 

 

Total deposits

     854,017        816,420   
  

 

 

   

 

 

 

Short-term borrowings

     —          15,765   

Advances from Federal Home Loan Bank

     3,000        6,000   

Guaranteed junior subordinated deferrable interest debentures

     13,085        13,085   
  

 

 

   

 

 

 

Total borrowed funds

     16,085        34,850   
  

 

 

   

 

 

 

Other liabilities

     16,190        15,454   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     886,292        866,724   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value; $1,000 per share liquidation preference; 2,000,000 shares authorized; 21,000 shares issued and outstanding on June 30, 2012 and December 31, 2011.

     21,000        21,000   

Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,398,540 shares issued and 19,284,521 outstanding on June 30, 2012; 26,397,040 shares issued and 20,921,021 outstanding on December 31, 2011

     264        264   

Treasury stock at cost, 7,114,019 shares on June 30, 2012 and 5,476,019 shares on December 31, 2011

     (73,302     (69,241

Capital surplus

     145,070        145,061   

Retained earnings

     21,400        18,928   

Accumulated other comprehensive loss, net

     (3,622     (3,660
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     110,810        112,352   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 997,102      $ 979,076   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three months ended     Six months ended  
     June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

INTEREST INCOME

        

Interest and fees on loans

   $ 8,552      $ 8,804      $ 17,281      $ 17,887   

Interest bearing deposits

     5        —          6        —     

Short-term investments in money market funds

     7        2        10        5   

Federal funds sold

     —          3        —          7   

Investment securities:

        

Available for sale

     1,210        1,617        2,489        3,028   

Held to maturity

     111        104        223        199   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Income

     9,885        10,530        20,009        21,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

        

Deposits

     1,668        2,106        3,430        4,400   

Short-term borrowings

     —          1        4        2   

Advances from Federal Home Loan Bank

     16        57        36        112   

Guaranteed junior subordinated deferrable interest debentures

     280        280        560        560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Expense

     1,964        2,444        4,030        5,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     7,921        8,086        15,979        16,052   

Provision (credit) for loan losses

     (500     (1,175     (1,125     (1,775
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES

     8,421        9,261        17,104        17,827   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME

        

Trust fees

     1,628        1,617        3,325        3,173   

Investment advisory fees

     177        198        370        396   

Net realized gains (losses) on investment securities

     12        —          12        (358

Net gains on sale of loans

     251        155        527        417   

Service charges on deposit accounts

     517        549        1,052        1,021   

Bank owned life insurance

     212        218        427        435   

Other income

     936        717        1,694        1,475   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

     3,733        3,454        7,407        6,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSE

        

Salaries and employee benefits

     5,976        5,574        11,962        11,074   

Net occupancy expense

     702        742        1,431        1,499   

Equipment expense

     473        411        924        840   

Professional fees

     937        911        1,860        1,891   

Supplies, postage and freight

     200        220        433        459   

Miscellaneous taxes and insurance

     355        331        710        680   

Federal deposit insurance expense

     114        460        243        922   

Other expense

     1,310        1,228        2,618        2,431   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

     10,067        9,877        20,181        19,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

PRETAX INCOME

     2,087        2,838        4,330        4,590   

Provision for income tax expense

     655        900        1,333        1,389   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

     1,432        1,938        2,997        3,201   

Preferred stock dividends and accretion of preferred stock discount

     262        290        525        580   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

   $ 1,170      $ 1,648      $ 2,472      $ 2,621   
  

 

 

   

 

 

   

 

 

   

 

 

 

PER COMMON SHARE DATA:

        

Basic:

        

Net income

   $ 0.06      $ 0.08      $ 0.12      $ 0.12   

Average number of shares outstanding

     19,584        21,208        20,132        21,208   

Diluted:

        

Net income

   $ 0.06      $ 0.08      $ 0.12      $ 0.12   

Average number of shares outstanding

     19,652        21,236        20,186        21,233   

Cash dividends declared

   $ 0.00      $ 0.00      $ 0.00      $ 0.00   

See accompanying notes to unaudited consolidated financial statements.

 

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

COMPREHENSIVE INCOME

        

Net income

   $ 1,432      $ 1,938      $ 2,997      $ 3,201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax:

        

Pension obligation change for defined benefit plan

     254        201        (148     506   

Income tax effect

     (86     (68     50        (172

Unrealized holding gains on available for sale securities arising during period

     281        2,161        218        1,661   

Income tax effect

     (97     (735     (74     (565

Reclassification adjustment for losses (gains) on available for sale securities included in net income

     (12     —          (12     358   

Income tax effect

     4        —          4        (123
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     344        1,559        38        1,665   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,776      $ 3,497      $ 3,035      $ 4,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six months ended  
     June 30, 2012     June 30, 2011  

OPERATING ACTIVITIES

    

Net income

   $ 2,997      $ 3,201   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision (credit) for loan losses

     (1,125     (1,775

Depreciation expense

     766        743   

Net amortization of investment securities

     533        301   

Net realized (gains) losses on investment securities available for sale

     (12     358   

Net gains on sale of loans

     (527     (417

Amortization of deferred loan fees

     (86     (134

Origination of mortgage loans held for sale

     (39,517     (23,964

Sales of mortgage loans held for sale

     41,145        29,300   

Decrease (increase) in accrued interest income receivable

     57        (461

Decrease in accrued interest expense payable

     (492     (976

Earnings on bank owned life insurance

     (427     (435

Deferred income taxes

     1,247        2,205   

Stock based compensation expense

     9        11   

Decrease in prepaid Federal Deposit Insurance

     200        872   

Net (increase) decrease in other assets

     (1,698     3,141   

Net increase (decrease) in other liabilities

     1,077        (1,745
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,147        10,225   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchases of investment securities – available for sale

     (27,237     (63,412

Purchases of investment securities – held to maturity

     (3,583     (1,991

Proceeds from sales of investment securities – available for sale

     4,221        16,518   

Proceeds from maturities of investment securities – available for sale

     28,730        22,693   

Proceeds from maturities of investment securities – held to maturity

     964        710   

Proceeds from redemption of regulatory stock

     574        705   

Long-term loans originated

     (124,086     (58,217

Principal collected on long-term loans

     103,653        77,660   

Loans purchased or participated

     (10,000     (3,500

Loans sold or participated

     8,500        —     

Sale of other real estate owned

     24        588   

Purchases of premises and equipment

     (977     (803
  

 

 

   

 

 

 

Net cash used in investing activities

     (19,217     (9,049
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Net increase in deposit balances

     37,613        7,317   

Net decrease in other short-term borrowings

     (15,765     (4,550

Principal repayments on advances from Federal Home Loan Bank

     (3,000     (28

Purchases of treasury stock

     (4,061     —     

Preferred stock dividends

     (525     (525
  

 

 

   

 

 

 

Net cash provided by financing activities

     14,262        2,214   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (808     3,390   

CASH AND CASH EQUIVALENTS AT JANUARY 1

     34,783        19,337   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT JUNE 30

   $ 33,975      $ 22,727   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service Bank with 18 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $1.4 billion that are not recognized on the Company’s balance sheet at June 30, 2012. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

In addition, the Parent Company is an administrative group that provides support in such areas as audit, finance, investments, loan review, general services, and marketing. Significant intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements.

 

2. Basis of Preparation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting only of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

3. Accounting Policies

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Additional disclosures have been provided in Note 16.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a

 

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single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments in this Update should be applied retrospectively, and early adoption is permitted. The Company has elected to provide the separate statement disclosure.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. This ASU is not expected to have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

4. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. Options and warrants to purchase 244,083 common shares, at exercise prices ranging from $2.75 to $6.10, and 1,478,417 common shares, at exercise prices ranging from $2.20 to $6.10, were outstanding as of June 30, 2012 and 2011, respectively,

 

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but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Dividends and accretion of discount on preferred shares are deducted from net income in the calculation of earnings per common share.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2012      2011      2012      2011  
     (In thousands, except per share data)  

Numerator:

           

Net income

   $ 1,432       $ 1,938       $ 2,997       $ 3,201   

Preferred stock dividends and accretion of preferred stock discount

     262         290         525         580   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 1,170       $ 1,648       $ 2,472       $ 2,621   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average common shares outstanding (basic)

     19,584         21,208         20,132         21,208   

Effect of stock options/warrants

     68         28         54         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding (diluted)

     19,652         21,236         20,186         21,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic

   $ 0.06       $ 0.08       $ 0.12       $ 0.12   

Diluted

     0.06         0.08         0.12         0.12   

 

5. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits, federal funds sold and short-term investments in money market funds. The Company made $35,000 in income tax payments in the first six months of 2012 as compared to $19,000 for the first six months of 2011. The Company made total interest payments of $4,522,000 in the first six months of 2012 compared to $6,050,000 in the same 2011 period. The Company had non-cash transfers to other real estate owned (OREO) in the amounts of $770,000 and $58,000 in the first six months of 2012 and 2011, respectively.

 

6. Investment Securities

The cost basis and fair values of investment securities are summarized as follows (in thousands):

Investment securities available for sale (AFS):

 

     June 30, 2012  
     Cost
Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Agency

   $ 7,248       $ 70       $ (1   $ 7,317   

U.S. Agency mortgage- backed securities

     156,701         6,960         (26     163,635   

Corporate bonds

     5,991         —           (47     5,944   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 169,940       $ 7,030       $ (74   $ 176,896   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Investment securities held to maturity (HTM):

 

     June 30, 2012  
     Cost
Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Agency mortgage- backed securities

   $ 10,895       $ 638       $ —        $ 11,533   

Other securities

     4,000         —           (76     3,924   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 14,895       $ 638       $ (76   $ 15,457   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities available for sale (AFS):

 

     December 31, 2011  
     Cost
Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Agency

   $ 10,689       $ 48       $ (28   $ 10,709   

U.S. Agency mortgage- backed securities

     165,484         6,737         (7     172,214   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 176,173       $ 6,785       $ (35   $ 182,923   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities held to maturity (HTM):

 

     December 31, 2011  
     Cost
Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Agency mortgage- backed securities

   $ 9,280       $ 643       $ —        $ 9,923   

Other securities

     3,000         —           (9     2,991   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 12,280       $ 643       $ (9   $ 12,914   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 Investor’s Service or Standard & Poor’s rating of “A.” At June 30, 2012, 94.6% of the portfolio was rated “AAA” as compared to 98.4% at December 31, 2011. 1.1% of the portfolio was either rated below “A” or unrated at June 30, 2012. The Company has no exposure to subprime mortgage loans in the investment portfolio. At June 30, 2012, the Company’s consolidated investment securities portfolio had a modified duration of approximately 1.47 years. Total proceeds from the sale of AFS securities were $4.2 million for the second quarter and first six months of 2012. The Company had $59,000 of gross investment security gains and $47,000 of gross investment security losses in the second quarter and first six months of 2012 compared to no gross investment security gains or losses in the second quarter of 2011 and $358,000 of gross investment security losses for the first six months of 2011.

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 $95,922,000 at June 30, 2012 and $83,235,000 at December 31, 2011.

The following tables present information concerning investments with unrealized losses as of June 30, 2012 and December 31, 2011 (in thousands):

Investment securities available for sale:

 

     June 30, 2012  
     Less than 12 months     12 months or longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Agency

   $ 1,248       $ (1   $ —         $ —        $ 1,248       $ (1

U.S. Agency mortgage-backed securities

     10,066         (21     469         (5     10,535         (26

Corporate bonds

     5,944         (47     —           —          5,944         (47
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 17,258       $ (69   $ 469       $ (5   $ 17,727       $ (74
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Investment securities held to maturity:

 

       June 30, 2012  
       Less than 12 months      12 months or longer        Total  
       Fair
Value
       Unrealized
Losses
     Fair
  Value  
       Unrealized
Losses
       Fair
Value
       Unrealized
Losses
 

Other securities

     $ 2,924         $ (76    $ —           $ —           $ 2,924         $ (76
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 2,924         $ (76    $ —           $ —           $ 2,924         $ (76
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Investment securities available for sale:

 

       December 31, 2011  
       Less than 12 months      12 months or longer        Total  
       Fair
Value
       Unrealized
Losses
     Fair
  Value  
       Unrealized
Losses
       Fair
Value
       Unrealized
Losses
 

U.S. Agency

     $ 3,161         $ (28    $ —           $ —           $ 3,161         $ (28

U.S. Agency mortgage-backed securities

       613           (7      —             —             613           (7
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 3,774         $ (35    $ —           $ —           $ 3,774         $ (35
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Investment securities held to maturity:

 

       December 31, 2011  
       Less than 12 months      12 months or longer        Total  
       Fair
Value
       Unrealized
Losses
     Fair
  Value  
       Unrealized
Losses
       Fair
Value
       Unrealized
Losses
 

Other securities

     $ 1,991         $ (9    $ —           $ —           $ 1,991         $ (9
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 1,991         $ (9    $ —           $ —           $ 1,991         $ (9
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 15 positions that are considered temporarily impaired at June 30, 2012. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

Contractual maturities of securities at June 30, 2012, are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Investment securities available for sale:

 

     June 30, 2012  

Cost Basis

   U. S. Agency      U.S. Agency
Mortgage-
Backed
Securities
     Corporate
Bonds
     Total Investment
Securities
Available For Sale
 

After 1 year but within 5 years

   $ 7,248       $ —         $ 5,991       $ 13,239   

After 5 years but within 10 years

     —           14,006         —           14,006   

After 10 years but within 15 years

     —           73,138         —           73,138   

Over 15 years

     —           69,557         —           69,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,248       $ 156,701       $ 5,991       $ 169,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     June 30, 2012  

Fair Value

   U.S. Agency      U.S. Agency
Mortgage-
Backed
Securities
     Corporate
Bonds
     Total Investment
Securities
Available For Sale
 

After 1 year but within 5 years

   $ 7,317       $ —         $ 5,944       $ 13,261   

After 5 years but within 10 years

     —           14,881         —           14,881   

After 10 years but within 15 years

     —           76,219         —           76,219   

Over 15 years

     —           72,535         —           72,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,317       $ 163,635       $ 5,944       $ 176,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

 

     June 30, 2012  

Cost Basis

   U.S. Agency
Mortgage-
Backed
Securities
     Other
Securities
     Total Investment
Securities Held
To Maturity
 

Within 1 year

   $ —         $ 1,000       $ 1,000   

After 1 year but within 5 years

     —           3,000         3,000   

Over 15 years

     10,895         —           10,895   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,895       $ 4,000       $ 14,895   
  

 

 

    

 

 

    

 

 

 

 

     June 30, 2012  

Fair Value

   U.S. Agency
Mortgage-
Backed
Securities
     Other
Securities
     Total Investment
Securities Held
To Maturity
 

Within 1 year

   $ —         $ 1,000       $ 1,000   

After 1 year but within 5 years

     —           2,924         2,924   

Over 15 years

     11,533         —           11,533   
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,533       $ 3,924       $ 15,457   
  

 

 

    

 

 

    

 

 

 

 

7. Loans

The loan portfolio of the Company consists of the following (in thousands):

 

     June 30, 2012      December 31, 2011  

Commercial

   $ 95,444       $ 83,124   

Commercial loans secured by real estate

     357,810         349,778   

Real estate – mortgage

     214,110         212,663   

Consumer

     17,442         18,172   
  

 

 

    

 

 

 

Loans, net of unearned income

   $ 684,806       $ 663,737   
  

 

 

    

 

 

 

Loan balances at June 30, 2012 and December 31, 2011 are net of unearned income of $517,000 and $452,000, respectively. Real estate-construction loans comprised 2.2%, and 1.9% of total loans, net of unearned income, at June 30, 2012 and December 31, 2011, respectively. The Company has no exposure to subprime mortgage loans in the loan portfolio.

 

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Table of Contents
8. Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three month periods ending June 30, 2012 and 2011 (in thousands).

 

     Balance at
March 31,  2012
     Charge-
Offs
    Recoveries      Provision
(Credit)
    Balance at
June 30,  2012
 

Commercial

   $ 2,483       $ —        $ 90       $ (221   $ 2,352   

Commercial loans secured by real estate

     8,555         (31     170         (316     8,378   

Real estate- mortgage

     1,250         (99     5         50        1,206   

Consumer

     166         (107     11         85        155   

Allocation for general risk

     1,324         —          —           (98     1,226   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 13,778       $    (237   $ 276       $    (500   $ 13,317   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Balance at
March 31,  2011
     Charge-
Offs
    Recoveries      Provision
(Credit)
    Balance at
June 30,  2011
 

Commercial

   $ 5,687       $ (243   $ 364       $ (1,254   $ 4,554   

Commercial loans secured by real estate

     9,108         —          65         54        9,227   

Real estate- mortgage

     1,250         (29     2         71        1,294   

Consumer

     198         (77     26         46        193   

Allocation for general risk

     1,782         —          —           (92     1,690   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 18,025       $    (349   $ 457       $ (1,175   $ 16,958   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the six month periods ending June 30, 2012 and 2011(in thousands).

 

     Balance at
December 31, 2011
     Charge-
Offs
    Recoveries      Provision
(Credit)
    Balance at
June 30,  2012
 

Commercial

   $ 2,365       $ (99   $ 112       $ (26   $ 2,352   

Commercial loans secured by real estate

     9,400         (172     200         (1,050     8,378   

Real estate- mortgage

     1,270         (139     29         46        1,206   

Consumer

     174         (134     22         93        155   

Allocation for general risk

     1,414         —          —           (188     1,226   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 14,623       $    (544   $ 363       $ (1,125   $ 13,317   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Balance at
December 31, 2010
     Charge-
Offs
    Recoveries      Provision
(Credit)
    Balance at
June 30,  2011
 

Commercial

   $ 3,851       $ (942   $ 524       $ 1,121      $ 4,554   

Commercial loans secured by real estate

     12,717         (638     66         (2,918     9,227   

Real estate- mortgage

     1,117         (40     26         191        1,294   

Consumer

     206         (110     82         15        193   

Allocation for general risk

     1,874         —          —           (184     1,690   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 19,765       $ (1,730   $ 698       $ (1,775   $ 16,958   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The credit provision for loan losses reflects the Company’s sustained asset quality improvements. The provision also benefited from lower historical loss factors and a decrease in certain qualitative factors to recognize the Company’s improved asset quality.

The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).

 

     At June 30, 2012  
     Commercial      Commercial
Loans Secured
by Real Estate
     Real Estate-
Mortgage
     Consumer      Total  

Individually evaluated for impairment

   $ —         $ 3,053       $ —         $ —         $ 3,053   

Collectively evaluated for impairment

     95,444         354,757         214,110         17,442         681,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 95,444       $ 357,810       $ 214,110       $ 17,442       $ 684,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     At June 30, 2012  
     Commercial      Commercial
Loans Secured
by Real Estate
     Real Estate-
Mortgage
     Consumer      Allocation for
General Risk
     Total  

Specific reserve allocation

   $ —         $ 891       $ —         $ —         $ —         $ 891   

General reserve allocation

     2,352         7,487         1,206         155         1,226         12,426   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 2,352       $ 8,378       $ 1,206       $ 155       $ 1,226       $ 13,317   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
     Commercial      Commercial
Loans Secured
by Real Estate
     Real Estate-
Mortgage
     Consumer      Total  

Individually evaluated for impairment

   $ —         $ 3,870       $ —         $ —         $ 3,870   

Collectively evaluated for impairment

     83,124         345,908         212,663         18,172         659,867   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 83,124       $ 349,778       $ 212,663       $ 18,172       $ 663,737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
     Commercial      Commercial
Loans Secured
by Real Estate
     Real Estate-
Mortgage
     Consumer      Allocation for
General Risk
     Total  

Specific reserve allocation

   $ —         $ 968       $ —         $ —         $ —         $ 968   

General reserve allocation

     2,365         8,432         1,270         174         1,414         13,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 2,365       $ 9,400       $ 1,270       $ 174       $ 1,414       $ 14,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The segments of the Company’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The loan categories used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The overall risk profile for the commercial loan segment is driven by non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, as the majority of the commercial portfolio is centered in these types of accounts. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates for possible impairment any individual loan in the commercial segment with a loan balance in excess of $100,000 that is in nonaccrual status or classified as a Troubled Debt Restructure (TDR). Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a TDR.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs for collateral dependant loans. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need

 

14


Table of Contents

and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The need for an updated appraisal on collateral dependent loans is determined on a case by case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Assigned Risk Department to support the value of the property.

When reviewing an appraisal associated with an existing collateral real estate dependent transaction, the Bank’s internal Assigned Risk Department must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:

 

   

the passage of time;

 

   

the volatility of the local market;

 

   

the availability of financing;

 

   

natural disasters;

 

   

the inventory of competing properties;

 

   

new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank;

 

   

changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or

 

   

environmental contamination.

The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Assigned Risk Department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Bank’s Assigned Risk Department personnel rests with the Assigned Risk Department and not the originating account officer.

 

15


Table of Contents

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).

 

     June 30, 2012  
     Impaired Loans with
Specific Allowance
     Impaired
Loans with no
Specific
Allowance
     Total Impaired Loans  
     Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 

Commercial loans secured by real estate

   $ 2,553       $ 891       $ 500       $ 3,053       $ 3,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 2,553       $ 891       $ 500       $ 3,053       $ 3,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Impaired Loans with
Specific Allowance
     Impaired
Loans with no
Specific
Allowance
     Total Impaired Loans  
     Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 

Commercial loans secured by real estate

   $ 2,836       $ 968       $ 1,034       $ 3,870       $ 4,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 2,836       $ 968       $ 1,034       $ 3,870       $ 4,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Average loan balance:

           

Commercial

   $ —         $ 1,424       $ 17       $ 2,344   

Commercial loans secured by real estate

     3,350         4,435         3,506         6,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average investment in impaired loans

   $ 3,350       $ 5,859       $ 3,523       $ 9,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized:

           

Commercial

   $ —         $ —         $ —         $ 20   

Commercial loans secured by real estate

     —           —           —           153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on a cash basis on impaired loans

   $ —         $ —         $ —         $ 173   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass 6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the

 

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Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2012 requires review of a minimum 55% of the commercial loan portfolio.

In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $1,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Company’s Loan Loss Reserve Committee on a quarterly basis.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands).

 

     June 30, 2012  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 95,088       $ 67       $ 289       $ —         $ 95,444   

Commercial loans secured by real estate

     316,310         21,701         19,446         353         357,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 411,398       $ 21,768       $ 19,735       $ 353       $ 453,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 80,175       $ 2,186       $ 763       $ —         $ 83,124   

Commercial loans secured by real estate

     305,066         28,138         16,244         330         349,778   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 385,241       $ 30,324       $ 17,007       $ 330       $ 432,902   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolios (in thousands).

 

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Table of Contents

 

     June 30, 2012  
     Performing      Non-Performing  

Real estate- mortgage

   $ 212,437       $ 1,673   

Consumer

     17,442         —     
  

 

 

    

 

 

 

Total

   $ 229,879       $ 1,673   
  

 

 

    

 

 

 

 

     December 31, 2011  
     Performing      Non-Performing  

Real estate- mortgage

   $ 211,458       $ 1,205   

Consumer

     18,172         —     
  

 

 

    

 

 

 

Total

   $ 229,630       $ 1,205   
  

 

 

    

 

 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).

 

     June 30, 2012  
     Current      30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
Past Due
     Total
Past Due
     Total
Loans
     90 Days
Past Due

and Still
Accruing
 

Commercial

   $ 95,058       $ 386       $ —         $ —         $ 386       $ 95,444       $ —     

Commercial loans secured by real estate

     356,850         —           —           960         960         357,810         —     

Real estate- mortgage

     211,325         2,502         223         60         2,785         214,110         —     

Consumer

     17,398         38         6         —           44         17,442         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 680,631       $ 2,926       $ 229       $ 1,020       $ 4,175       $ 684,806       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Current      30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
Past Due
     Total
Past Due
     Total
Loans
     90 Days
Past Due

and Still
Accruing
 

Commercial

   $ 83,124       $ —         $ —         $ —         $ —         $ 83,124       $ —     

Commercial loans secured by real estate

     347,671         650         —           1,457         2,107         349,778         —     

Real estate- mortgage

     209,060         2,133         629         841         3,603         212,663         —     

Consumer

     18,115         57         —           —           57         18,172         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 657,970       $ 2,840       $ 629       $ 2,298       $ 5,767       $ 663,737       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.

 

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Table of Contents

The Company uses a comprehensive methodology and procedural discipline to maintain an ALL 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) an allowance 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, non-performing and TDR loans, loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and 3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company’s loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. 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.

“Pass” rated credits are segregated from “Criticized” and “Classified” credits for the application of qualitative factors.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

 

9. Non-performing Assets Including Troubled Debt Restructurings (TDR)

The following table presents information concerning non-performing assets including TDR (in thousands, except percentages):

 

     June 30, 2012     December 31, 2011  

Non-accrual loans

    

Commercial

   $ —        $ —     

Commercial loans secured by real estate

     2,466        3,870   

Real estate-mortgage

     1,673        1,205   
  

 

 

   

 

 

 

Total

     4,139        5,075   
  

 

 

   

 

 

 

Past due 90 days and still accruing

    

Real estate-mortgage

     —          —     
  

 

 

   

 

 

 

Total

     —          —     
  

 

 

   

 

 

 

Other real estate owned

    

Commercial loans secured by real estate

     697        20   

Real estate-mortgage

     153        104   
  

 

 

   

 

 

 

Total

     850        124   
  

 

 

   

 

 

 

TDR’s not in non-accrual

     88        —     
  

 

 

   

 

 

 

Total non-performing assets including TDR

   $ 5,077      $ 5,199   
  

 

 

   

 

 

 

Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned

     0.74     0.78

Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Bank’s objective in offering a troubled debt restructure is to increase the probability of repayment of the borrower’s loan.

 

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Table of Contents

To be considered a TDR, both of the following criteria must be met:

 

   

the borrower must be experiencing financial difficulties; and

 

   

the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would not otherwise be considered.

Factors that indicate a borrower is experiencing financial difficulties include, but are not limited to:

 

   

the borrower is currently in default on their loan(s);

 

   

the borrower has filed for bankruptcy;

 

   

the borrower has insufficient cash flows to service their loan(s); and

 

   

the borrower is unable to obtain refinancing from other sources at a market rate similar to rates available to a non-troubled debtor.

Factors that indicate that a concession has been granted include, but are not limited to:

 

   

the borrower is granted an interest rate reduction to a level below market rates for debt with similar risk; or

 

   

the borrower is granted a material maturity date extension, or extension of the amortization plan to provide payment relief. For purposes of this policy, a material maturity date extension will generally include any maturity date extension, or the aggregate of multiple consecutive maturity date extensions, that exceed 120 days. A restructuring that results in an insignificant delay in payment, i.e. 120 days or less, is not necessarily a TDR. Insignificant payment delays occur when the amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value, and will result in an insignificant shortfall in the originally scheduled contractual amount due, and/or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the original maturity or the original amortization.

The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the modification. No single factor is determinative of whether a restructuring is a TDR. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean that the borrower is experiencing financial difficulty. Accordingly, determination of whether a modification is a TDR involves a large degree of judgment.

Any loan modification where the borrower’s aggregate exposure is at least $250,000 and where the loan currently maintains a criticized or classified risk rating, i.e. Special Mention, Substandard or Doubtful, or where the loan will be assigned a criticized or classified rating after the modification is evaluated to determine the need for TDR classification.

The following table details the TDRs at June 30, 2012 (dollars in thousands).

 

Loans in accrual status

  # of Loans     Current Balance    

Concession Granted

Commercial loan secured by real estate

    1      $ 88      Extension of maturity date

 

Loans in non-accrual status

  # of Loans     Current Balance    

Concession Granted

Commercial loan secured by real estate

    2      $ 1,504      Extension of maturity date

 

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Table of Contents

The following table details the TDRs at December 31, 2011 (dollars in thousands).

 

Loans in non-accrual status

  # of Loans     Current Balance    

Concession Granted

Commercial loan secured by real estate

    5      $ 2,870      Extension of maturity date

In all instances where loans have been modified in troubled debt restructurings the pre- and post-modified balances are the same.

Once a loan is classified as a TDR, this classification will remain until documented improvement in the financial position of the account supports confidence that all principal and interest will be paid according to terms. Additionally, the customer must have re-established a track record of timely payments according to the restructured contract terms for a minimum of six consecutive months prior to consideration for removing the loan from TDR status. However, a loan will continue to be on non-accrual status until, consistent with our policy, the borrower has made a minimum of six consecutive payments in accordance with the terms of the loan.

During the first six months of 2012, the Company had one restructured commercial real-estate loan, that was transferred during the past 12 months into non-accrual status, that subsequently defaulted, and was sold to an independent party for $275,000. The Company charged down the loan by $32,000 to facilitate the sale. A second TDR loan with a balance of $398,000 was also sold to an independent party in the second quarter of 2012. Overall, the Company realized a net-charge-off of $305,000 on this problem credit when compared to its original balance of $703,000. The Company also took ownership of another TDR commercial real-estate property with a balance of approximately $600,000 (after a previous $386,000 charge-down in 2011) and moved the property into other real estate owned in the second quarter of 2012.

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 fair value minus estimated costs to sell.

The following table sets forth, for the periods indicated, (1) 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, (2) the amount of interest income actually recorded on such loans, and (3) the net reduction in interest income attributable to such loans (in thousands).

 

     Three months
ended June 30,
     Six months ended
June 30,
 
     2012      2011      2012      2011  

Interest income due in accordance with original terms

   $ 55       $ 94       $ 118       $ 229   

Interest income recorded

     —           —           —           (173
  

 

 

    

 

 

    

 

 

    

 

 

 

Net reduction in interest income

   $ 55       $ 94       $ 118       $ 56   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
10. Federal Home Loan Bank Borrowings

Total Federal Home Loan Bank (FHLB) borrowings and advances consist of the following (in thousands, except percentages):

 

     At June 30, 2012  

Type

   Maturing    Amount      Weighted
Average Rate
 

Open Repo Plus

   Overnight    $ —           —  

Advances

   2012      3,000         1.97   
     

 

 

    

Total advances

        3,000         1.97   
     

 

 

    

Total FHLB borrowings

      $ 3,000         1.97
     

 

 

    

 

     At December 31, 2011  

Type

   Maturing    Amount      Weighted
Average Rate
 

Open Repo Plus

   Overnight    $ 15,765         0.34

Advances

   2012      6,000         1.30   
     

 

 

    

Total advances

        6,000         1.30   
     

 

 

    

Total FHLB borrowings

      $ 21,765         0.60
     

 

 

    

The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance.

 

11. Preferred Stock

SBLF:

On August 11, 2011, pursuant to the Small Business Lending Fund (SBLF), the Company issued and sold to the US Treasury 21,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E Preferred Stock) for the aggregate proceeds of $21 million. The SBLF is a voluntary program sponsored by the US Treasury that encourages small business lending by providing capital to qualified community banks at favorable rates. The interest rate on the Series E Preferred Stock had been initially set at 5% per annum and may be decreased to as low as 1% per annum if growth thresholds are met for qualified outstanding small business loans. The Company used the proceeds from the Series E Preferred Stock issued to the US Treasury to repurchase all 21,000 shares of its outstanding preferred shares previously issued to the US Treasury under the TARP Capital Purchase Program.

The Series E Preferred Stock has an aggregate liquidation preference of approximately $21 million and qualifies as Tier 1 Capital for regulatory purposes. The terms of the Series E Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The dividend rate, as a percentage of the liquidation amount, may fluctuate while the Series E Preferred Stock is outstanding based upon changes in the level of “qualified small business lending” (“QSBL”) by the Bank from its average level of QSBL at each of the four quarter ends leading up to June 30, 2010 (the “Baseline”) as follows:

 

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Table of Contents

 

Dividend Period Annualized

      

Beginning

  

Ending

   Annualized
Dividend Rate
 

August 11, 2011

   December 31, 2011      5.0

January 1, 2012

   December 31, 2013      1.0% to 5.0

January 1, 2014

   February 7, 2016      1.0% to 7.0 %(1) 

February 8, 2016

   Redemption      9.0 %(2) 

 

(1) Between January 1, 2014 and February 7, 2016, the dividend rate will be fixed at a rate in such range based upon the level of percentage change in QSBL between September 30, 2013 and the Baseline.
(2) Beginning on February 8, 2016, the dividend rate will be fixed at nine percent (9%) per annum.

In addition to the applicable dividend rates described above, beginning on January 1, 2014 and on all dividend payment dates thereafter ending on April 1, 2016, if we fail to increase our level of QSBL compared to the Baseline, we will be required to pay a quarterly lending incentive fee of 0.5% of the liquidation value. As of June 30, 2012, the Company had increased its QSBL to a level that permits the dividend rate to drop to 1% beginning October 1, 2012.

As long as shares of Series E Preferred Stock remain outstanding, we may not pay dividends to our common shareholders (nor may we repurchase or redeem any shares of our common stock) during any quarter in which we fail to declare and pay dividends on the Series E Preferred Stock and for the three successive quarters following such failure. In addition, under the terms of the Series E Preferred Stock, we may only declare and pay dividends on our common stock (or repurchase shares of our common stock), if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least ninety percent (90%) of Tier 1 capital as of June 30, 2011, excluding any charge-offs and redemptions of the Series E Preferred Stock (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning January 1, 2014, based upon the extent by which, if at all, the QSBL at September 30, 2013 has increased over the Baseline.

We may redeem the Series E Preferred Stock at any time at our option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, subject to the approval of our federal banking regulator.

 

12. Regulatory Capital

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 consolidated financial statements.

 

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Table of Contents

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 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of June 30, 2012, the Federal Reserve categorized the Company as Well Capitalized under the regulatory framework for prompt corrective action. The Company believes that no conditions or events have occurred that would change this conclusion. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.84% at June 30, 2012 (in thousands, except ratios).

 

     At June 30, 2012  
     Actual     For Capital
Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total Capital (To Risk Weighted Assets)

               

Consolidated

   $ 120,616         16.41   $ 58,813         8.00   $ 73,516         10.00

AmeriServ Financial Bank

     102,812         14.09        58,378         8.00        72,973         10.00   

Tier 1 Capital (To Risk Weighted Assets)

               

Consolidated

     111,366         15.15        29,406         4.00        44,109         6.00   

AmeriServ Financial Bank

     93,629         12.83        29,189         4.00        43,784         6.00   

Tier 1 Capital (To Average Assets)

               

Consolidated

     111,366         11.60        38,400         4.00        48,000         5.00   

AmeriServ Financial Bank

     93,629         9.96        37,596         4.00        46,996         5.00   

 

     At December 31, 2011  
     Actual     For Capital
Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Amount     Ratio      Amount  

Total Capital (To Risk Weighted Assets)

               

Consolidated

   $ 120,315         17.60   $ 54,702         8.00   $ 68,377         10.00

AmeriServ Financial Bank

     101,406         14.96        54,231         8.00        67,789         10.00   

Tier 1 Capital (To Risk Weighted Assets)

               

Consolidated

     111,683         16.33        27,351         4.00        41,026         6.00   

AmeriServ Financial Bank

     92,847         13.70        27,116         4.00        40,673         6.00   

Tier 1 Capital (To Average Assets)

               

Consolidated

     111,683         11.66        38,317         4.00        47,896         5.00   

AmeriServ Financial Bank

     92,847         9.90        37,498         4.00        46,872         5.00   

 

13. 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, and investment/parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.

 

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Table of Contents

Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Commercial banking to businesses includes commercial loans, and commercial real-estate loans. The trust segment contains our wealth management businesses which includes the Trust Company, West Chester Capital Advisors, our registered investment advisory firm and financial services. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. 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 for the three and six months ended June 30, 2012 and 2011 were as follows (in thousands):

 

     Three months ended
June 30, 2012
    Six months ended
June 30, 2012
    June 30,
2012
 
     Total revenue     Net income (loss)     Total revenue     Net income (loss)     Total assets  

Retail banking

   $ 6,697      $ 786      $ 13,400      $ 1,627      $ 336,726   

Commercial banking

     3,650        1,301        7,244        2,547        464,209   

Trust

     1,975        246        3,952        498        4,376   

Investment/Parent

     (668     (901     (1,210     (1,675     191,791   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 11,654      $ 1,432      $ 23,386      $ 2,997      $ 997,102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three months ended
June 30, 2011
    Six months ended
June 30, 2011
    June 30,
2011
 
     Total revenue     Net income (loss)     Total revenue     Net income (loss)     Total assets  

Retail banking

   $ 6,438      $ 405      $ 12,737      $ 592      $ 315,310   

Commercial banking

     3,641        1,992        6,989        3,550        436,561   

Trust

     1,905        262        3,724        445        4,252   

Investment/Parent

     (444     (721     (839     (1,386     198,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 11,540      $ 1,938      $ 22,611      $ 3,201      $ 954,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $144.0 million and standby letters of credit of $11.0 million as of June 30, 2012. 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.

Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operation or cash flows.

 

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15. Pension Benefits

The Company has a noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year. The participants shall have a vested interest in their accrued benefit after five full years of service. 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. Plan assets are primarily debt securities (including US 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 plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three and six months ended June 30, 2012 and 2011 were as follows (in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Components of net periodic benefit cost

        

Service cost

   $ 373      $ 303      $ 746      $ 606   

Interest cost

     299        301        598        602   

Expected return on plan assets

     (406     (393     (812     (786

Amortization of prior year service cost

     (5     2        (10     4   

Amortization of transition asset

     (4     (4     (8     (8

Recognized net actuarial loss

     262        203        524        406   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 519      $ 412      $ 1,038      $ 824   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16. Disclosures About Fair Value Measurements

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined within this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

 

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The fair value of the swap asset and liability is based on an external derivative valuation model using data inputs as of the valuation date and classified Level 2.

The following tables present the assets reported on the consolidated balance sheets at their fair value as of June 30, 2012 and December 31, 2011, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Assets and Liability Measured on a Recurring Basis

Assets and liability measured at fair value on a recurring basis are summarized below (in thousands):

 

     Fair Value Measurements at June 30, 2012 Using  
     Total      (Level 1)     

(Level 2)

   (Level 3)  

U.S. Agency securities

   $ 7,317       $ —         $7,317    $ —     

U.S. Agency mortgage-backed securities

     163,635         —         163,635      —     

Corporate bonds

     5,944         —         5,944      —     

Fair value of swap asset

     266         —         266      —     

Fair value of swap liability

     266         —         266      —     

 

     Fair Value Measurements at December 31, 2011 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

U.S. Agency securities

   $ 10,709       $ —         $ 10,709       $ —     

U.S. Agency mortgage-backed securities

     172,214         —           172,214         —     

Fair value of swap asset

     346         —           346         —     

Fair value of swap liability

     346         —           346         —     

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At June 30, 2012, impaired loans with a carrying value of $3.1 million were reduced by a specific valuation allowance totaling $891,000 resulting in a net fair value of $2.2 million. At December 31, 2011, impaired loans with a carrying value of $3.9 million were reduced by a specific valuation allowance totaling $968,000 resulting in a net fair value of $2.9 million.

Other real estate owned (OREO) is measured at fair value based on appraisals, less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

Assets Measured on a Non-recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 

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     Fair Value Measurements at June 30, 2012 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

   $ 2,162       $ —         $ —         $ 2,162   

Other real estate owned

     850         —           —           850   
     Fair Value Measurements at December 31, 2011 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

   $ 2,902       $ —         $ —         $ 2,902   

Other real estate owned

     124         —           —           124   

 

June 30, 2012    Quantitative Information About Level 3 Fair Value Measurements
     Fair Value
Estimate
    

Valuation

Techniques

  

Unobservable

Input

  

Range

Impaired loans

   $ 2,162      

Appraisal of collateral(1)

  

Appraisal adjustments(2)

Liquidation expenses(2)

  

1% to -35%

1% to -15%

Other real estate owned

     850      

Appraisal of collateral (1), (3)

      1% to -20%

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) 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 based on US GAAP measurements, and recorded book balances at June 30, 2012 and December 31, 2011, were as follows (in thousands):

 

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     June 30, 2012  
     Carrying
Value
     Fair Value      (Level 1)      (Level 2)      (Level 3)  

FINANCIAL ASSETS:

              

Cash and cash equivalents

   $ 33,975       $ 33,975       $ 33,975       $ —         $ —     

Investment securities

     191,791         192,353         —           188,429         3,924   

Regulatory stock

     7,442         7,442         7,442         —           —     

Loans held for sale

     6,009         6,099         6,099         —           —     

Loans, net of allowance for loan loss and unearned income

     671,489         680,394         —           —           680,394   

Accrued income receivable

     3,159         3,159         3,159         —           —     

Bank owned life insurance

     35,779         35,779         35,779         —           —     

Fair value swap asset

     266         266         —           266         —     

FINANCIAL LIABILITIES:

              

Deposits with no stated maturities

   $ 517,930       $ 517,930       $ 517,930       $ —         $ —     

Deposits with stated maturities

     336,087         341,718         —           —           341,718   

All other borrowings

     16,085         21,035         —           —           21,035   

Accrued interest payable

     2,031         2,031         2,031         —           —     

Fair value swap liability

     266         266         —           266         —     

 

     December 31, 2011  
     Carrying
Value
     Fair Value  

FINANCIAL ASSETS:

     

Cash and cash equivalents

   $ 34,783       $ 34,783   

Investment securities

     195,203         195,837   

Regulatory stock

     8,016         8,016   

Loans held for sale

     7,110         7,195   

Loans, net of allowance for loan loss and unearned income

     649,114         655,357   

Accrued income receivable

     3,216         3,216   

Bank owned life insurance

     35,351         35,351   

Fair value swap asset

     346         346   

FINANCIAL LIABILITIES:

     

Deposits with no stated maturities

   $ 482,859       $ 482,859   

Deposits with stated maturities

     333,561         338,683   

Short-term borrowings

     15,765         15,765   

All other borrowings

     19,085         23,606   

Accrued interest payable

     2,523         2,523   

Fair value swap liability

     346         346   

The fair value of cash and cash equivalents, regulatory stock, accrued income receivable, short-term borrowings, and accrued interest payable are equal to the current carrying value.

The fair value of investment securities is equal to the available quoted market price for similar securities. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Level 3 security is valued by discounted cash flows using the US Treasury rate for the remaining term of the security.

Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment with an investor. All loans in the held for sale account conform to Fannie Mae underwriting guidelines, with the specific intent of the loan being purchased by an investor at the predetermined rate structure. Loans in the held for sale account have specific delivery dates that must be executed to protect the pricing commitment (typically a 30, 45, or 60 day lock period).

 

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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, current market prices and assumed prepayment risk.

The fair value of bank owned life insurance is based upon the cash surrender value of the underlying policies and matches the book value.

Deposits 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. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

The fair value of all other borrowings is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

The fair values of the swaps used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.

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.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“M.D.& A.”)

….2012 SECOND QUARTER SUMMARY OVERVIEW…. AmeriServ Financial, Inc. reported net income of $1,432,000 or $0.06 per diluted common share for the second quarter of 2012. This level of net income reflected a reduction of $506,000 or $0.02 per diluted common share from the second quarter of 2011. This decline was the result of a lower negative provision from AmeriServ’s still strong loan loss reserve. But on an operational basis, it was another good quarter. The key elements of our business lines continue to be positive as we execute our 2012-2015 Strategic Plan.

During the second quarter we repurchased 1,183,000 common shares at a price of just $2.52, contributing to an increase in the tangible book value of every remaining share from $3.84 to $4.00. When combined with the previous share repurchases in 2011 and the first quarter of 2012, the gain in the tangible book value of every remaining common share has increased by 32 cents or 8.7% since June 30, 2011. We believe this program, along with the improved performance of the Company, are the primary reasons for the 44.6% increase in the market price of AmeriServ’s common shares over the past 12 months.

In spite of the continuation of a lackluster economy, the Company increased its net loans for the

 

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fifth consecutive quarter. The $19.5 million increase in the second quarter of 2012 is reminiscent of the pre-recessionary years of 2007 and 2008. This loan growth in such a lackluster economy is a real tribute to the hard working AmeriServ Commercial Relationship Officers. These gains result from their relentless business development efforts throughout the entire region served by AmeriServ, including from our new loan production offices.

Concurrent with this net loan growth, the deposit base of the Company has also grown. The Company recorded a record level of deposits on the last day of the second quarter with a gain of $37 million since January 1, 2012. These gains, which began in 2011, could reflect a continued “flight to quality” caused by the gloomy economic forecasts of the media. We are very pleased that AmeriServ is viewed as a safe repository for funds by our customers.

It has been our pledge to pursue a careful containment of risk during these volatile times. As evidence of this, at the end of the second quarter –

 

 

AmeriServ capital well exceeded every regulatory guideline

 

 

AmeriServ liquidity was so deep during the quarter that it has become a frequent seller of overnight funds in the open market

 

 

AmeriServ asset quality remained strong and was buttressed by loan loss reserve coverage of 315% of non-performing loans, irrespective of the value of pledged collateral.

We are especially pleased with our residential mortgage lending team. Thus far in 2012, AmeriServ has originated $52 million of residential mortgage loans to families throughout the region. This represents a 52.6% increase over the origination volumes in the first 6 months of 2011. As dictated by our policies, the majority of these new mortgages conform to governmental standards and are sold immediately into the governmental secondary market.

The AmeriServ Trust and Financial Services Company concluded the second quarter of 2012 more than 25% ahead of the first 6 months of 2011 in reported net income. This reflects a growth of Trust revenues of over 7% while expenses grew by 4%. This subsidiary continues to post a dramatic recovery from the financial crisis which has done such harm to so many investors.

It is a fact that the road ahead is not without challenges. Unemployment in the region is still too high, and growth in the economy too hard to find. We worry about the disturbing headlines concerning the missteps of the “Too Big to Fail” megabanks. These tales have become a continuing challenge for the regulatory agencies both in the U.S. and abroad. There is also the worrisome issue of the debt crisis in Europe, and the confusion surrounding this nation’s fiscal policy. We do express our concern on these issues to our regulators, but we realize that it is our responsibility to always remember that the safety of this franchise is our responsibility and no one else’s.

It is sometimes interesting to look back at the recent history of AmeriServ. It was necessary in 2004 and 2005 to restructure a balance sheet which contained too much risk for a company the size of AmeriServ. But now, since 2006, AmeriServ has reported positive earnings in 5 of the last 6 years. In 2009, we experienced a serious loss, but this was the price of building the necessary balance sheet strength while the depth of the recession threatened the entire financial services industry. However, as of the close of the second quarter 2012, it is apparent that AmeriServ is more than just a survivor. The challenge now is to continue to improve revenue and earnings while always carefully managing risk. We all recognize that banking is a risk business, but it is our responsibility to receive payment for bearing the risks which we are willing to accept and to refuse to accept risks that we believe could harm the franchise.

 

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Previously, we commented about the U.S. Treasury designating AmeriServ as a participant in its Small Business Lending Fund. The Treasury provided $21 million in capital to AmeriServ in return for issuance of an equal amount of preferred stock at an annual interest rate of just 5%. However, the Treasury also promised that if AmeriServ increased its loans to small businesses the Treasury would reduce that 5% interest rate as a reward. We are pleased to announce that based on our small business loan growth since the program began in August 2011, AmeriServ is scheduled to receive the maximum interest rate reduction of 4% effective in the 4th quarter of 2012. We intend to work hard to continue to grow these small business loans and keep the dividend on this $21 million of Treasury Funds at the SBLF program minimum of 1%.

While the road ahead is not clear, we believe that AmeriServ has not just weathered the storm but is poised to continue its improvement. It does appear that the turnaround is over and AmeriServ is now ready to be measured against similar sized community banks in the industry. AmeriServ is not perfect, but we believe our company grows stronger every day.

THREE MONTHS ENDED JUNE 30, 2012 VS. THREE MONTHS ENDED JUNE 30, 2011

.....PERFORMANCE OVERVIEW.....The following table summarizes some of the Company’s key performance indicators (in thousands, except per share and ratios).

 

     Three months ended
June 30, 2012
    Three months ended
June 30, 2011
 

Net income

   $ 1,432      $ 1,938   

Diluted earnings per share

     0.06        0.08   

Return on average assets (annualized)

     0.59     0.81

Return on average equity (annualized)

     5.19     7.11

The Company reported its ninth consecutive profitable quarter in the second quarter of 2012 by reporting net income of $1,432,000 or $0.06 per diluted common share. This represents a decrease of $506,000, or $0.02 per diluted common share from the second quarter 2011. The improvements in asset quality continued to result in a credit provision for loan losses in the second quarter of 2012, but at a lesser level than in the second quarter of 2011. Second quarter 2012 net income was also negatively impacted by reduced net interest income and a modest increase in non-interest expense. These negative items were partially offset by higher non-interest income and reduced income tax expense.

Diluted earnings per share in the second quarter of 2012 were negatively impacted by the preferred stock dividend related to the US Treasury SBLF program which amounted to $262,000 and reduced the amount of net income available to common shareholders. However, during the second quarter of 2012, the Company did experience strong loan growth in loan categories that qualify for the SBLF. As a result of this loan growth, the dividend rate that AmeriServ currently pays on the SBLF preferred stock will drop from 5% to 1%—the lowest rate available under the SBLF program. This lower preferred dividend rate will increase quarterly net income available to common shareholders by $210,000 beginning in the fourth quarter of 2012.

.....NET INTEREST INCOME AND MARGIN.....The Company’s net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities. Net interest income is a primary source of the Company’s earnings, and

 

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it is affected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities. The following table compares the Company’s net interest income performance for the second quarter of 2012 to the second quarter of 2011 (in thousands, except percentages):

 

     Three months ended
June 30, 2012
    Three months ended
June 30, 2011
    $ Change     % Change  

Interest income

   $ 9,885      $ 10,530      $ (645     (6.1 )% 

Interest expense

     1,964        2,444        (480     (19.6
  

 

 

   

 

 

   

 

 

   

Net interest income

   $ 7,921      $ 8,086      $ (165     (2.0
  

 

 

   

 

 

   

 

 

   

Net interest margin

     3.59     3.71     (0.12     N/M   

N/M—not meaningful

The Company’s net interest income in the second quarter of 2012 decreased by $165,000, or 2.0%, when compared to the second quarter of 2011. The second quarter 2012 net interest margin of 3.59% was 12 basis point lower than the 3.71% margin for last year’s second quarter. The decreased net interest income and net interest margin in 2012 reflects the challenges of a flatter yield curve which has caused interest revenue to decrease to greater extent than interest expense. Also, the second quarter 2012 net interest margin was negatively impacted by a build-up in short-term liquidity as the Company positioned its balance sheet for strong loan fundings that occurred late in the quarter. Specifically, total loans outstanding have increased for five consecutive quarters and now are $34.0 million, or 5.2%, higher than they were at June 30, 2011. This loan growth reflects the successful results of the Company’s more intensive sales calling efforts with an emphasis on generating commercial loans and owner occupied commercial real estate loans which qualify as SBLF loans, particularly through its new loan production offices. Strong commercial loan pipelines suggest that the Company should be able to continue to grow the loan portfolio during the second half of 2012.

Despite this growth in loans, total interest revenue dropped by $645,000 between years and reflects the lower interest rate environment and flatter yield curve. Interest revenue has also been negatively impacted by increased premium amortization on mortgage backed securities due to faster mortgage prepayment speeds. However, careful management of funding costs has allowed the Company to mitigate a significant portion of this drop in interest revenue during the past year. Specifically, interest expense in the second quarter of 2012 declined by $480,000 from the same prior year quarter due to the Company’s proactive efforts to reduce deposit and borrowing costs. Even with this reduction in deposit costs, the Company still experienced solid growth in deposits which increased by $44 million or 5.4% over the past 12 months.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended June 30, 2012 and June 30, 2011 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) the Company’s 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) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables, loan balances do include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Additionally, a tax rate of 34% is used to compute tax-equivalent yields.

 

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Three months ended June 30 (In thousands, except percentages)

 

     2012     2011  
     Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
 

Interest earning assets:

            

Loans and loans held for sale, net of unearned income

   $ 669,307      $ 8,558        5.08   $ 651,036      $ 8,812        5.38

Interest bearing deposits

     7,359        5        0.27        1,701        —          0.01   

Short-term investment in money market funds

     13,775        7        0.20        3,243        2        0.28   

Federal funds sold

     —          —          —          9,173        3        0.10   

Investment securities – AFS

     176,258        1,210        2.75        199,010        1,617        3.25   

Investment securities – HTM

     13,676        111        3.25        8,965        104        4.64   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total investment securities

     189,934        1,321        2.78        207,975        1,721        3.31   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest earning assets/interest income

     880,375        9,891        4.49        873,128        10,538        4.84   

Non-interest earning assets:

            

Cash and due from banks

     16,072            15,012       

Premises and equipment

     10,928            10,494       

Other assets

     81,557            79,008       

Allowance for loan losses

     (13,839         (18,061    
  

 

 

       

 

 

     

TOTAL ASSETS

   $ 975,093          $ 959,581       
  

 

 

       

 

 

     

Interest bearing liabilities:

            

Interest bearing deposits:

            

Interest bearing demand

   $ 59,441      $ 28        0.19   $ 57,237      $ 31        0.21

Savings

     85,406        50        0.24        81,898        63        0.31   

Money markets

     206,443        225        0.44        192,072        271        0.57   

Other time

     334,128        1,365        1.64        351,153        1,741        1.99   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing deposits

     685,418        1,668        0.98        682,360        2,106        1.24   

Short-term borrowings:

            

Other short-term borrowings

     440        —          0.25        869        1        0.64   

Advances from Federal Home Loan Bank

     4,140        16        1.59        9,729        57        2.29   

Guaranteed junior subordinated deferrable interest debentures

     13,085        280        8.57        13,085        280        8.57   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing liabilities/interest expense

     703,083        1,964        1.12        706,043        2,444        1.39   

Non-interest bearing liabilities:

            

Demand deposits

     145,738            132,578       

Other liabilities

     15,375            11,583       

Shareholders’ equity

     110,897