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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the period ended June 30, 2012
For the transaction period from to
Commission File Number 0-11204
AmeriServ Financial, Inc.
(Exact name of registrant as specified in its charter)
Registrants 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.
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 issuers classes of common stock, as of the latest practicable date.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to unaudited consolidated financial statements.
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 Companys 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.
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 Companys Annual Report on Form 10-K for the year ended December 31, 2011.
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
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 entitys 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 Companys 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 Companys financial statements.
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,
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.
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.
The cost basis and fair values of investment securities are summarized as follows (in thousands):
Investment securities available for sale (AFS):
Investment securities held to maturity (HTM):
Investment securities available for sale (AFS):
Investment securities held to maturity (HTM):
Maintaining investment quality is a primary objective of the Companys investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moodys Investors Service or Standard & Poors 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 Companys 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:
Investment securities held to maturity:
Investment securities available for sale:
Investment securities held to maturity:
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:
Investment securities held to maturity:
The loan portfolio of the Company consists of the following (in thousands):
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.
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).
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).
The credit provision for loan losses reflects the Companys sustained asset quality improvements. The provision also benefited from lower historical loss factors and a decrease in certain qualitative factors to recognize the Companys 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).
The segments of the Companys 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 Companys 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 borrowers 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 loans effective interest rate; (b) the loans 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
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 Companys 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 Banks 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 Banks 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 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 Banks Assigned Risk Department personnel rests with the Assigned Risk Department and not the originating account officer.
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).
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).
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
Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Companys 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 Companys 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 Companys 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).
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).
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).
An allowance for loan losses (ALL) is maintained to absorb losses from the loan portfolio. The ALL is based on managements 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.
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 Companys 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 Companys 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.
The following table presents information concerning non-performing assets including TDR (in thousands, except percentages):
Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrowers financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Banks objective in offering a troubled debt restructure is to increase the probability of repayment of the borrowers loan.
To be considered a TDR, both of the following criteria must be met:
Factors that indicate a borrower is experiencing financial difficulties include, but are not limited to:
Factors that indicate that a concession has been granted include, but are not limited to:
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 borrowers 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 borrowers 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).
The following table details the TDRs at December 31, 2011 (dollars in thousands).
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).
Total Federal Home Loan Bank (FHLB) borrowings and advances consist of the following (in thousands, except percentages):
The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance.
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:
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.
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 Companys assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys 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 Companys consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 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 Companys tangible common equity ratio was 7.84% at June 30, 2012 (in thousands, except ratios).
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 Companys 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.
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):
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 Companys 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 Companys consolidated financial position, results of operation or cash flows.
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 employees 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 plans 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):
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 managements 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 bonds terms and conditions, among other things.
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):
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):
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 Companys 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):
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 bonds 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).
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 Companys remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.
.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 AmeriServs 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 AmeriServs common shares over the past 12 months.
In spite of the continuation of a lackluster economy, the Company increased its net loans for the
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
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 nations 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 elses.
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.
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 Companys key performance indicators (in thousands, except per share and ratios).
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 Companys 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 Companys earnings, and
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 Companys net interest income performance for the second quarter of 2012 to the second quarter of 2011 (in thousands, except percentages):
The Companys 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 years 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 Companys 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 Companys 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 Companys 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 Companys 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.
Three months ended June 30 (In thousands, except percentages)