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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11204
AMERISERV FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-1424278
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
MAIN & FRANKLIN STREETS, P.O. BOX 430, JOHNSTOWN, 15907-0430
PENNSYLVANIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (814) 533-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $2.50 PAR VALUE SHARE PURCHASE RIGHTS
(TITLE OF CLASS) (TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.) $63,618,700.65 as of January 31,
2002.
NOTE -- If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13, or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. [ ] Yes [ ] No
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date. 13,681,441 shares were outstanding as of January 31,
2002.
DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents
if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) Any annual report to
security holders; (2) Any proxy or information statement; and (3) Any prospectus
filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The
listed documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24, 1980).
Portions of the annual shareholders' report for the year ended December 31,
2001, are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders' meeting are
incorporated by reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Exhibit Index is located on page 76.
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FORM 10-K INDEX
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 10
Item 6. Selected Consolidated Financial Data........................ 11
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 14
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 34
Item 8. Consolidated Financial Statements and Supplementary Data.... 34
Item 9. Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure.................................... 75
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 75
Item 11. Executive Compensation...................................... 75
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 75
Item 13. Certain Relationships and Related Transactions.............. 75
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K......................................... 75
Signatures.................................................. 78
1
PART I
ITEM 1. BUSINESS
GENERAL
AmeriServ Financial, Inc. (the Company) is a financial holding company
(pursuant to the Gramm-Leach-Bliley Act), organized under the Pennsylvania
Business Corporation Law. The Company became a holding company upon acquiring
all of the outstanding shares of AmeriServ Financial Bank (the Bank) on January
5, 1983. The Company also acquired all of the outstanding shares of Three Rivers
Bank and Trust Company (Three Rivers Bank) in June 1984, McKeesport National
Bank (McKeesport Bank) in December 1985 (which was subsequently merged into
Three Rivers Bank), Community Bancorp, Inc. in March 1992 (which was also
subsequently merged into Three Rivers Bank in July 1997), and Johnstown Savings
Bank (JSB) in June 1994 (which was immediately merged into AmeriServ Financial
Bank). Immediately following the acquisition of JSB, AmeriServ Financial Bank
caused the intracompany transfer by Standard Mortgage Corporation of Georgia, a
wholly-owned subsidiary of JSB, of all its assets, subject to all of its
liabilities, to SMC Acquisition Corporation, an indirect subsidiary of
Community. SMC Acquisition Corporation was renamed Standard Mortgage Corporation
of Georgia (SMC) and is a mortgage banking company organized under the laws of
the State of Georgia that services residential mortgage loans. In addition, the
Company formed AmeriServ Life Insurance Company (AmeriServ Life) in October
1987, AmeriServ Trust and Financial Services Company (the Trust Company) in
October 1992, and AmeriServ Associates, Inc. (AmeriServ Associates), in January
1997. AmeriServ Associates is a registered investment advisory firm that
administers investment portfolios, offers operational support systems and
provides asset and liability management services to small and mid-sized
financial institutions.
On April 1, 2000, the Company executed its Board approved tax-free spin-off
of its Three Rivers Bank subsidiary. Shareholders received one share of the new
Three Rivers Bancorp (NASDAQ: TRBC) common stock for every two shares of
AmeriServ Financial common stock that they owned. The distribution of the Three
Rivers Bancorp shares did not change the number of the Company's common shares
outstanding. SMC, previously a subsidiary of Three Rivers Bank, was internally
spun-off from Three Rivers Bank to the Company prior to consummation of the
Three Rivers Bank spin-off. In the fourth quarter of 2001, SMC was sold by the
Company to the Bank. For more detailed pro forma information see Note #25.
The Company's principal activities consist of owning and operating its four
wholly owned subsidiary entities. At December 31, 2001, the Company had, on a
consolidated basis, total assets, deposits, and shareholders' equity of $1.20
billion, $676 million and $79 million, respectively. The Company and the
subsidiary entities derive substantially all of their income from banking and
bank-related services. The Company functions primarily as a coordinating and
servicing unit for its subsidiary entities in general management, accounting and
taxes, loan review, auditing, investment accounting, marketing and insurance
risk management.
AMERISERV FINANCIAL BANKING SUBSIDIARY
AmeriServ Financial Bank
AmeriServ Financial Bank is a state bank chartered under the Pennsylvania
Banking Code of 1965, as amended. Through 24 locations in Allegheny, Blair,
Cambria, Centre, Dauphin, Somerset, and Westmoreland Counties, Pennsylvania,
AmeriServ Financial Bank conducts a general banking business. It is a
full-service bank offering (i) retail banking services, such as demand, savings
and time deposits, money market accounts, secured and unsecured loans, mortgage
loans, safe deposit boxes, holiday club accounts, collection services, money
orders, and traveler's checks; (ii) lending, depository and related financial
services to commercial, industrial, financial, and governmental customers, such
as real estate-mortgage loans, short- and medium-term loans, revolving credit
arrangements, lines of credit, inventory and accounts receivable financing,
commercial equipment lease financing, real estate-construction loans, business
savings accounts, certificates of deposit, wire transfers, night depository, and
lock box services;
2
AmeriServ Financial Bank also operates 30 automated bank teller machines
(ATMs) through its 24-Hour Banking Network which is linked with STAR, a regional
ATM network and CIRRUS, a national ATM network. AmeriServ Financial Bank also
has two wholly owned mortgage banking subsidiaries -- SMC and AmeriServ Mortgage
Company. AmeriServ Mortgage Company originates and sells retail mortgage loans
primarily in west-central Pennsylvania. SMC is a residential mortgage loan
servicer based in Atlanta, GA. AmeriServ Financial Bank's deposit base is such
that loss of one depositor or a related group of depositors would not have a
materially adverse effect on its business. In addition, the loan portfolio is
also diversified so that one industry or group of related industries does not
comprise a material portion of the loan portfolio. AmeriServ Financial Bank's
business is not seasonal nor does it have any risks attendant to foreign
sources.
AmeriServ Financial Bank is subject to supervision and regular examination
by the Federal Reserve and the Pennsylvania Department of Banking. Various
federal and state laws and regulations govern many aspects of its banking
operations. The following is a summary of key data (dollars in thousands) and
ratios at December 31, 2001:
Headquarters................................................ Johnstown, PA
Chartered................................................... 1933
Total Assets................................................ $1,186,396
Total Investment Securities................................. $ 487,754
Total Loans (net of unearned income)........................ $ 599,481
Total Deposits.............................................. $ 676,346
Total Net Income............................................ $ 6,444
Asset Leverage Ratio........................................ 6.92%
2001 Return on Average Assets............................... 0.52%
2001 Return on Average Equity............................... 6.37%
Total Full-time Equivalent Employees........................ 437
AMERISERV FINANCIAL NON-BANKING SUBSIDIARIES
AmeriServ Trust and Financial Services Company
AmeriServ Trust and Financial Services Company is a trust company organized
under Pennsylvania law in October 1992. The Trust Company offers a complete
range of trust and financial services and has $1.2 billion in assets under
management. The Trust Company also offers the ERECT Funds and BUILD Fund which
are collective investment funds for trade union controlled pension fund assets.
Additionally, AmeriServ Financial Services Corporation was formed on May 23,
1997 and engages in the sale of annuities, mutual funds, and insurance.
AmeriServ Life
AmeriServ Life is a captive insurance company organized under the laws of
the State of Arizona. AmeriServ Life engages in underwriting as reinsurer of
credit life and disability insurance within the Company's market area.
Operations of AmeriServ Life are conducted in each office of the Company's
banking subsidiary. AmeriServ Life is subject to supervision and regulation by
the Arizona Department of Insurance, the Insurance Department of the
Commonwealth of Pennsylvania, and the Federal Reserve. At December 31, 2001,
AmeriServ Life had total assets of $2.7 million and total shareholder's equity
of $1.6 million.
MONETARY POLICIES
Commercial banks are affected by policies of various regulatory authorities
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the Board of Governors are: open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, and changes in reserve requirements on bank deposits. These
means are used in varying combinations to influence overall growth of
3
bank loans, investments, and deposits, and may also affect interest rate charges
on loans or interest paid for deposits. The monetary policies of the Board of
Governors have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.
COMPETITION
The subsidiary entities face strong competition from other commercial
banks, savings banks, savings and loan associations, and several other financial
or investment service institutions for business in the communities they serve.
Several of these institutions are affiliated with major banking and financial
institutions which are substantially larger and have greater financial resources
than the subsidiary entities. As the financial services industry continues to
consolidate, the scope of potential competition affecting the subsidiary
entities will also increase. For most of the services that the subsidiary
entities perform, there is also competition from credit unions and issuers of
commercial paper and money market funds. Such institutions, as well as brokerage
houses, consumer finance companies, insurance companies, and pension trusts, are
important competitors for various types of financial services. In addition,
personal and corporate trust investment counseling services are offered by
insurance companies, other firms, and individuals.
MARKET AREA
The Company's local economy, while continuing to expand and diversify, has
not been immune to the national economic slowdown. The economy in Cambria and
Somerset counties continues to perform below that of the national economy.
Nationally, the rate of unemployment at year-end 2001 amounted to 5.3%, while
the unemployment rate in the Cambria/Somerset market was 1.0% higher at 6.3%.
While economic conditions were noticeably slower at the end of the year from the
beginning, loan demand in our market remained relatively brisk. Overall,
economic conditions in Johnstown Metro are expected to experience little change
in 2002 and may experience some modest improvement if an economic recovery takes
hold.
Economic conditions are better in the State College area which comprises
Centre County. The unemployment rate at 3.2% is well below the national average.
The State College market presents the Company with a more vibrant economic
market and a different demographic. The 18 to 34 year old age group makes up a
much greater percentage of the population in State College than in the
Cambria/Somerset market, while the population of people 50 years of age or older
is significantly less in State College. Overall, the opportunities presented in
the market are quite different, challenging and provide a promising source of
business to profitably grow the Company.
During 2001, the Company expanded through its union niche offices into
Harrisburg in Dauphin County to the east of Johnstown and west into Pittsburgh
in Allegheny County. These counties provide the Company with more vibrant
economic markets. We expect these areas to respond quite positively to economic
improvements throughout 2002. The unemployment rate was 3.5% at year-end in
Dauphin County, while Allegheny County was at 4.3%.
Nationally, consumer confidence remains stunningly high at yearend 2001.
The consumer is expected to slowly push the national economy back into positive
expansion. Low energy costs, coupled with expected business inventory
replacement and a very accommodative Federal Reserve holding short interest
rates at record low levels, should be sufficient stimulus to maintain a strong
consumer confidence and produce a slow, positive economic expansion in 2002.
The bank's loans and deposits are expected to show parallel growth with the
economy. Record loan prepayments experienced over most of 2001 are expected to
materially slow as the interest rate yield curve shifts to a much steeper
position. Based upon current economic conditions, the Company expects loans to
grow slowly over 2002. Customer deposits are expected to continue to grow as
well. This growth is reflective of the drop in consumer confidence in the equity
markets that is expected to remain troublesome throughout the year 2002.
4
EMPLOYEES
The Company employed approximately 540 persons as of December 31, 2001, in
full- and part-time positions. Approximately 308 non-supervisory employees of
AmeriServ Financial Bank are represented by the United Steelworkers of America,
AFL-CIO-CLC, Local Union 2635-06/07. AmeriServ Financial Bank and such employees
are parties to a labor contract pursuant to which employees have agreed not to
engage in any work stoppage during the term of the contract which will expire on
October 15, 2003. AmeriServ Financial Bank has not experienced a work stoppage
since 1979. The Company successfully negotiated a four-year collective
bargaining agreement with the local union which took effect October 16, 1999.
Key provisions of the most recent contract include: A modernized profit sharing
formula, 2% contribution to the 401(k) account for each union employee,
increased staffing flexibility and wage increases of 3% in each of the first
three years and 4% in the fourth year.
COMMITMENTS AND LINES OF CREDIT
The Company's subsidiaries are obligated under commercial, standby, and
trade-related irrevocable letters of credit aggregating $10.0 million at
December 31, 2001. In addition, the Company's AmeriServ Financial Bank
subsidiary has issued lines of credit to customers generally for periods of up
to one year. Borrowings under such lines of credit are usually for the working
capital needs of the borrower. At December 31, 2001, AmeriServ Financial Bank
had unused loan commitments of approximately $145.6 million. The Company has
ample liquidity available to fund all outstanding loan commitments if they were
fully drawn upon.
STATISTICAL DISCLOSURES FOR BANK HOLDING COMPANIES
The following Guide 3 information is included in this Form 10-K as listed
below:
I. Distribution of Assets, Liabilities, and Stockholders'
Equity; Interest Rates and Interest Differential
Information. Information required by this section is
presented on pages 19-21 and 29-31.
II. Investment Portfolio
Information required by this section is presented on pages
5, 6, 45, 46 and 47.
III. Loan Portfolio
Information required by this section appears on pages 7, 8,
47, 48 and 49.
IV. Summary of Loan Loss Experience
Information required by this section is presented on pages
21-25 and 48.
V. Deposits
Information required by this section follows on pages 8, 9
and 51.
VI. Return on Equity and Assets
Information required by this section is presented on page
12.
VII. Short-Term Borrowings
Information required by this section is presented on page
50.
INVESTMENT PORTFOLIO
Investment securities held to maturity are carried at amortized cost while
investment securities classified as available for sale are reported at fair
value. At December 31, 2001, 100% of the securities portfolio was classified as
available for sale.
5
The following table sets forth the cost basis and market value of AmeriServ
Financial's investment portfolio as of the periods indicated:
Investment Securities Available for Sale at:
DECEMBER 31,
----------------------------------
2001 2000 1999
-------- -------- ----------
(IN THOUSANDS)
Cost Basis:
U.S. Treasury........................................... $ 10,972 $ 10,820 $ 15,855
U.S. Agency............................................. 850 35,507 43,599
State and municipal..................................... 1,012 39,398 156,256
Mortgage-backed securities.............................. 439,591 419,669 943,474
Other securities........................................ 46,154 50,793 82,568
-------- -------- ----------
Total cost basis of investment securities available for
sale.................................................... $498,579 $556,187 $1,241,752
======== ======== ==========
Total market value of investment securities available for
sale.................................................... $498,626 $550,232 $1,187,335
The total securities portfolio decreased by approximately $52 million
between December 31, 2000 and December 31, 2001. This decrease was due to
management's decision to delever the securities portfolio through a combination
of securities sales and cash flow from mortgage-backed securities pay-downs. The
Company used this cash from the securities portfolio to primarily paydown
short-term borrowings. The total securities portfolio decreased by $637 million
between December 31, 1999 and December 31, 2000. $465 million of this decline
was due to the spin-off of Three Rivers Bank. The remainder of the decrease was
due to management's decision to delever the securities portfolio. The Company
used this cash from the securities portfolio to primarily paydown short-term
borrowings and reduce the Company's exposure to rising short-term interest
rates.
At December 31, 2001, investment securities having a book value of $253.5
million were pledged as collateral for public funds, and FHLB borrowings.
The Company and its subsidiaries, collectively, did not hold securities of
any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10%
of shareholders' equity at December 31, 2001.
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain minor exceptions, prohibits the
purchase of any investment security below a Moody's Investor Service or Standard
& Poor's rating of A. At December 31, 2001, 94.4% of the portfolio was rated AAA
compared to 96.5% at December 31, 2000. Approximately 5.0% was rated below A or
unrated at December 31, 2001.
6
LOAN PORTFOLIO
The following table sets forth the Company's loans by major category as of
the dates set forth below:
AT DECEMBER 31
------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ---------- ---------- --------
(IN THOUSANDS)
Commercial....................... $123,523 $116,615 $ 152,042 $ 139,751 $143,113
Commercial loans secured by real
estate......................... 209,483 193,912 406,927 341,842 302,620
Real estate-mortgage(1).......... 231,728 242,370 452,507 449,875 440,734
Consumer......................... 36,186 35,749 70,983 88,812 95,272
-------- -------- ---------- ---------- --------
Loans.......................... 600,920 588,646 1,082,459 1,020,280 981,739
Less: Unearned income.......... 7,619 8,012 8,408 5,276 5,327
-------- -------- ---------- ---------- --------
Loans, net of unearned
income...................... $593,301 $580,634 $1,074,051 $1,015,004 $976,412
======== ======== ========== ========== ========
---------------
(1) At December 31, 2001 and 2000, real estate-construction loans constituted
5.6% and 3.0% of the Company's total loans, net of unearned income,
respectively.
Total loans, net of unearned income, increased by $13 million between
December 31, 2000, and December 31, 2001. This growth occurred in commercial
mortgage loans which increased by $15.6 million, or 2.6%, and commercial loans
which grew by $6.9 million, or a 1.2%. Total loans, net of unearned income,
decreased by $493 million between December 31, 1999, and December 31, 2000.
Approximately $476 million of this decline resulted from the spin-off of Three
Rivers Bank. The remainder of the decline was due primarily to lower balances of
residential mortgage and consumer loans as new loan production was lower in 2000
as a result of the higher interest rate environment.
The amount of loans outstanding by category as of December 31, 2001, which
are due in (i) one year or less, (ii) more than one year through five years, and
(iii) over five years, are shown in the following table. Loan balances are also
categorized according to their sensitivity to changes in interest rates.
MORE THAN
ONE ONE YEAR
YEAR THROUGH OVER TOTAL
OR LESS FIVE YEARS FIVE YEARS LOANS
------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
COMMERCIAL...................................... $34,555 $ 79,894 $ 9,074 $123,523
COMMERCIAL LOANS SECURED BY REAL ESTATE......... 19,033 105,544 84,906 209,483
REAL ESTATE-MORTGAGE............................ 20,831 34,231 176,666 231,728
CONSUMER........................................ 10,929 4,481 20,776 36,186
------- -------- -------- --------
TOTAL........................................... 85,348 224,150 291,422 600,920
======= ======== ======== ========
LOANS WITH FIXED-RATE........................... 37,489 189,661 195,887 423,037
LOANS WITH FLOATING-RATE........................ 47,859 34,489 95,535 177,883
------- -------- -------- --------
TOTAL........................................... 85,348 224,150 291,422 600,920
======= ======== ======== ========
PERCENT COMPOSITION OF MATURITY................. 14.2% 37.3% 48.5% 100.0%
FIXED-RATE LOANS AS A PERCENTAGE OF TOTAL
LOANS......................................... 70.4%
FLOATING-RATE LOANS AS A PERCENTAGE OF TOTAL
LOANS......................................... 29.6%
The loan maturity information is based upon original loan terms and is not
adjusted for principal paydowns and rollovers. In the ordinary course of
business, loans maturing within one year may be renewed, in whole or in part, as
to principal amount at interest rates prevailing at the date of renewal.
At December 31, 2001, 70.4% of total loans were fixed-rate which was
comparable with the prior year. The stability in the fixed-rate percentage
between years reflects customer preference for fixed-rate loans in
7
lower interest rate environments. Also, a good portion of the commercial real
estate loan growth has occurred in the one to five year fixed-rate area. For
additional information regarding interest rate sensitivity, see Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations -- Interest Rate Sensitivity.
COMMERCIAL
This category includes credit extensions and leases to commercial and
industrial borrowers. Business assets, including accounts receivable, inventory
and/or equipment, typically secure these credits. In appropriate instances,
extensions of credit in this category are subject to collateral advance
formulas. Balance sheet strength and profitability are considered when analyzing
these credits, with special attention given to historical, current and
prospective sources of cash flow, and the ability of the customer to sustain
cash flow at acceptable levels. Policy permits flexibility in determining
acceptable debt service coverage ratios, with a minimum level of 1.1 to 1
desired. Personal guarantees are frequently required; however, as the financial
strength of the borrower increases, our ability to obtain personal guarantees
decreases. In addition to economic risk, this category is impacted by the
management ability of the borrower and industry risk, which are also considered
during the underwriting process.
COMMERCIAL LOANS SECURED BY REAL ESTATE
This category includes various types of loans, including acquisition and
construction of investment property, owner-occupied property and operating
property. Maximum term, minimum cash flow coverage, leasing requirements,
maximum amortization and maximum loan to value ratios are controlled by Credit
Policy and follow industry guidelines and norms, and regulatory limitations.
Personal guarantees are normally required during the construction phase on
construction credits, and are frequently obtained on mid to smaller commercial
real estate loans. In addition to economic risk, this category is subject to
geographic and portfolio concentration risk, which are monitored and considered
at underwriting.
REAL ESTATE -- MORTGAGE
This category includes mortgages that are secured by residential property.
Underwriting of loans within this category is pursuant to Freddie Mac/Fannie Mae
underwriting guidelines, with the exception of CRA loans, which exhibit more
liberal standards. The major risk in this category is that a significant
downward economic trend would increase unemployment and cause payment default.
CONSUMER
This category includes consumer installment loans and revolving credit
plans. Underwriting is pursuant to industry norms and guidelines and is achieved
through a process, which is inclusive of the Fair Isaac Credit Scoring program.
The major risk in this category is a significant economic downturn.
DEPOSITS
The following table sets forth the average balance of the Company's
deposits and the average rates paid thereon for the past three calendar years:
2001 2000 1999
---------------- ---------------- ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- ---------- ----
(IN THOUSANDS, EXCEPT RATES)
Demand -- non-interest bearing........ $ 91,033 --% $105,824 --% $ 170,891 --%
Demand -- interest bearing............ 47,530 0.91 58,424 0.97 93,399 0.99
Savings............................... 91,926 1.52 112,829 1.57 171,783 1.63
Money markets......................... 134,799 2.71 142,903 4.65 182,395 3.60
Other time............................ 303,135 5.30 383,657 5.28 619,392 5.03
-------- -------- ----------
Total deposits........................ $668,423 3.73% $803,637 4.19% $1,237,860 3.86%
======== ======== ==========
8
Total average deposits decreased by $135 million in 2001, but $143 million
of this decline was due to the April 1, 2000, spin-off of Three Rivers Bank.
Excluding TRB, there was an $8 million increase in average deposits due to the
addition of two new union niche offices and the opening of a full service branch
in State College. This more than offset the sale of $15.7 million of deposits
with the Company's Coalport office. Total average deposits decreased by $434
million in 2000 due to the spin-off of Three Rivers Bank.
The following table indicates the maturities and amounts of certificates of
deposit issued in denominations of $100,000 or more as of December 31, 2001:
MATURING IN:
(IN THOUSANDS)
--------------
Three months or less........................................ $11,860
Over three through six months............................... 12,052
Over six through twelve months.............................. 2,900
Over twelve months.......................................... 3,295
-------
Total....................................................... $30,107
=======
ITEM 2. PROPERTIES
The principal offices of the Company and AmeriServ Financial Bank occupy a
five-story building at the corner of Main and Franklin Streets in Johnstown plus
several floors of the building adjacent thereto. The Company occupies the main
office and its subsidiary entities have 16 other locations which are owned in
fee. Twelve additional locations are leased with terms expiring from March 31,
2002 to August 31, 2011.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
both management and legal counsel, there is no present basis to conclude that
the resolution of these claims will have a material adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
As of January 31, 2002, the Company had 5,013 shareholders of its Common
Stock. Other information required by this section is presented on pages 60, 61
and 62.
COMMON STOCK
AmeriServ Financial, Inc's Common Stock is traded on the NASDAQ National
Market System under the symbol ASRV. The following table sets forth the actual
high and low closing prices and the cash dividends declared per share for the
periods indicated:
CLOSING PRICES
---------------- CASH DIVIDENDS
HIGH LOW DECLARED
------ ------ --------------
YEAR ENDED DECEMBER 31, 2001:
$ 4.63 $ 3.88 $0.09
FIRST QUARTER...........................................
5.80 4.20 0.09
SECOND QUARTER..........................................
5.90 4.60 0.09
THIRD QUARTER...........................................
4.80 4.30 0.09
FOURTH QUARTER..........................................
Year ended December 31, 2000:
$12.61 $ 8.25 $0.15
First Quarter...........................................
7.00 3.38 0.09
Second Quarter..........................................
5.00 3.56 0.09
Third Quarter...........................................
4.50 3.78 0.09
Fourth Quarter..........................................
The following table sets forth the high and low closing prices and the cash
dividends declared per share for the periods indicated with the First Quarter of
2000 adjusted for the spin-off of Three Rivers Bank:
CLOSING PRICES
---------------- CASH DIVIDENDS
HIGH LOW DECLARED
------ ------ --------------
YEAR ENDED DECEMBER 31, 2001:
$ 4.63 $ 3.88 $0.09
FIRST QUARTER...........................................
5.80 4.20 0.09
SECOND QUARTER..........................................
5.90 4.60 0.09
THIRD QUARTER...........................................
4.80 4.30 0.09
FOURTH QUARTER..........................................
Year ended December 31, 2000:
$ 6.45 $ 4.21 $0.09
First Quarter...........................................
7.00 3.38 0.09
Second Quarter..........................................
5.00 3.56 0.09
Third Quarter...........................................
4.50 3.78 0.09
Fourth Quarter..........................................
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED TEN-YEAR CONSOLIDATED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income.............. $ 81,659 $ 107,298 $ 165,188 $ 158,958 $ 154,788
Total interest expense............. 53,461 69,839 99,504 93,728 87,929
---------- ---------- ---------- ---------- ----------
Net interest income................ 28,198 37,459 65,684 65,230 66,859
Provision for loan losses........ 1,350 2,096 1,900 600 158
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................. 26,848 35,363 63,784 64,630 66,701
Total non-interest income.......... 18,075 16,609 24,374 23,689 20,203
Total non-interest expense......... 42,536 51,734 60,815 59,520 54,104
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 2,387 238 27,343 28,799 32,800
Provision (benefit) for income
taxes.......................... 412 (1,478) 6,922 7,655 9,303
---------- ---------- ---------- ---------- ----------
Income before extraordinary item,
cumulative effect of change in
accounting principle............. 1,975 1,716 20,421 21,144 23,497
Cumulative effect of change in
accounting principle........... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income......................... $ 1,975 $ 1,716 $ 20,421 $ 21,144 $ 23,497
========== ========== ========== ========== ==========
Net income applicable to common
stock............................ $ 1,975 $ 1,716 $ 20,421 $ 21,144 $ 23,497
========== ========== ========== ========== ==========
PER COMMON SHARE DATA:(1)
Basic earnings per share........... $ 0.15 $ 0.13 $ 1.53 $ 1.51 $ 1.56
Diluted earnings per share......... 0.15 0.13 1.52 1.48 1.54
Cash dividends declared............ 0.36 0.42 0.59 0.60 0.53
Book value at period end........... 5.83 5.83 8.46 10.48 10.77
========== ========== ========== ========== ==========
BALANCE SHEET AND OTHER DATA:
Total assets....................... $1,198,859 $1,254,261 $2,467,479 $2,377,081 $2,239,110
Loans and loans held for sale, net
of unearned income............... 599,481 590,271 1,095,804 1,066,321 989,575
Allowance for loan losses.......... 5,830 5,936 10,350 10,725 12,113
Investment securities available for
sale............................. 498,626 550,232 1,187,335 661,491 580,115
Investment securities held to
maturity......................... -- -- -- 508,142 536,608
Deposits........................... 676,346 659,064 1,230,941 1,176,291 1,139,527
Total borrowings................... 424,665 500,580 1,099,842 1,026,570 913,056
Stockholders' equity............... 79,490 78,407 112,557 141,670 158,180
Full-time equivalent employees..... 475 477 745 762 765
========== ========== ========== ========== ==========
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income.............. $ 137,333 $ 129,715 $ 102,811 $ 85,735 $ 82,790
Total interest expense............. 76,195 73,568 46,993 36,250 38,349
---------- ---------- ---------- ---------- ----------
Net interest income................ 61,138 56,147 55,818 49,485 44,441
Provision for loan losses........ 90 285 (2,765) 2,400 2,216
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................. 61,048 55,862 58,583 47,085 42,225
Total non-interest income.......... 18,689 16,543 8,187 10,150 8,346
Total non-interest expense......... 52,474 50,557 49,519 40,715 36,248
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 27,263 21,848 17,251 16,520 14,323
Provision (benefit) for income
taxes.......................... 7,244 6,045 5,931 5,484 5,440
---------- ---------- ---------- ---------- ----------
Income before extraordinary item,
cumulative effect of change in
accounting principle............. 20,019 15,803 11,320 11,036 8,883
Cumulative effect of change in
accounting principle........... -- -- -- 1,452 --
---------- ---------- ---------- ---------- ----------
Net income......................... $ 20,019 $ 15,803 $ 11,320 $ 12,488 $ 8,883
========== ========== ========== ========== ==========
Net income applicable to common
stock............................ $ 20,019 $ 15,803 $ 11,320 $ 12,385 $ 7,710
========== ========== ========== ========== ==========
PER COMMON SHARE DATA:(1)
Basic earnings per share........... $ 1.28 $ 0.96 $ 0.73 $ 0.93 $ 0.89
Diluted earnings per share......... 1.28 0.96 0.73 0.91 0.84
Cash dividends declared............ 0.46 0.35 0.32 0.29 0.25
Book value at period end........... 9.97 9.45 8.19 8.22 7.69
========== ========== ========== ========== ==========
BALANCE SHEET AND OTHER DATA:
Total assets....................... $2,087,112 $1,885,372 $1,788,890 $1,241,521 $1,139,855
Loans and loans held for sale, net
of unearned income............... 939,726 834,634 868,004 727,186 648,915
Allowance for loan losses.......... 13,329 14,914 15,590 15,260 13,752
Investment securities available for
sale............................. 455,890 427,112 259,462 428,712 366,888
Investment securities held to
maturity......................... 546,318 463,951 524,638 -- --
Deposits........................... 1,138,738 1,177,858 1,196,246 1,048,866 997,591
Total borrowings................... 770,102 534,182 432,735 60,322 48,461
Stockholders' equity............... 151,917 150,492 137,136 116,615 82,971
Full-time equivalent employees..... 759 742 780 665 644
========== ========== ========== ========== ==========
11
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SELECTED FINANCIAL RATIOS:
Return on average total equity..... 2.44% 2.11% 15.48% 14.13% 15.00%
Return on average assets........... 0.15 0.11 0.83 0.93 1.09
Loans and loans held for sale, net
of unearned income, as a percent
of deposits, at period end....... 88.64 89.56 89.02 87.09 86.84
Ratio of average total equity to
average assets................... 6.32 5.20 5.39 6.58 7.28
Common stock cash dividends as a
percent of net income applicable
to common stock.................. 247.29 327.27 38.51 41.00 34.00
Common and preferred stock cash
dividends as a percent of net
income........................... 247.29 327.27 38.51 41.00 34.00
Interest rate spread............... 2.08 2.26 2.59 2.58 2.97
Net interest margin................ 2.45 2.63 2.96 3.17 3.43
Allowance for loan losses as a
percentage of loans and loans
held for sale, net of unearned
income, at period end............ 0.97 1.01 0.94 1.01 1.22
Non-performing assets as a
percentage of loans and loans
held for sale and other real
estate owned, at period end...... 1.67 1.01 1.21 0.77 0.89
Net charge-offs as a percentage of
average loans and loans held for
sale............................. 0.26 0.21 0.21 0.19 0.14
Ratio of earnings to fixed charges
and preferred dividends:(2)
Excluding interest on deposits..... 1.07X 1.01x 1.47x 1.54x 1.72x
Including interest on deposits..... 1.04 1.00 1.27 1.31 1.37
One year GAP ratio, at period
end.............................. 1.30 1.01 0.59 1.03 0.88
========== ========== ========== ========== ==========
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SELECTED FINANCIAL RATIOS:
Return on average total equity..... 13.36% 11.03% 8.92% 11.46% 11.41%
Return on average assets........... 1.03 0.87 0.75 1.03 0.85
Loans and loans held for sale, net
of unearned income, as a percent
of deposits, at period end....... 82.52 70.86 72.56 69.33 65.05
Ratio of average total equity to
average assets................... 7.69 7.85 8.39 8.96 7.48
Common stock cash dividends as a
percent of net income applicable
to common stock.................. 35.28 36.43 44.57 32.28 27.16
Common and preferred stock cash
dividends as a percent of net
income........................... 35.28 36.43 44.57 32.84 37.64
Interest rate spread............... 3.06 2.94 3.47 3.72 3.93
Net interest margin................ 3.52 3.45 4.03 4.34 4.58
Allowance for loan losses as a
percentage of loans and loans
held for sale, net of unearned
income, at period end............ 1.42 1.79 1.80 2.10 2.12
Non-performing assets as a
percentage of loans and loans
held for sale and other real
estate owned, at period end...... 0.92 1.13 0.91 0.89 1.58
Net charge-offs as a percentage of
average loans and loans held for
sale............................. 0.20 0.08 0.04 0.13 0.58
Ratio of earnings to fixed charges
and preferred dividends:(2)
Excluding interest on deposits..... 1.79x 1.77x 2.34x 5.26x 4.05x
Including interest on deposits..... 1.36 1.30 1.37 1.45 1.36
One year GAP ratio, at period
end.............................. 0.79 0.86 0.79 1.10 1.14
========== ========== ========== ========== ==========
---------------
(1) All per share and share data have been adjusted to reflect a 3 for 1 stock
split in the form of a 200% stock dividend which was distributed on July 31,
1998, to shareholders of record on July 16, 1998.
(2) The ratio of earnings to fixed charges and preferred dividends is computed
by dividing the sum of income before taxes, fixed charges, and preferred
dividends by the sum of fixed charges and preferred dividends. Fixed charges
represent interest expense and are shown as both excluding and including
interest on deposits.
12
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
2001 QUARTER ENDED
----------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME............................... $18,923 $20,565 $20,997 $21,174
NON-INTEREST INCOME........................... 4,778 5,311 3,656 4,330
------- ------- ------- -------
TOTAL REVENUE................................. 23,701 25,876 24,653 25,504
------- ------- ------- -------
INTEREST EXPENSE.............................. 11,883 13,698 13,821 14,059
PROVISION FOR LOAN LOSSES..................... 390 315 330 315
NON-INTEREST EXPENSE.......................... 10,940 11,628 9,708 10,260
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.................... 488 235 794 870
PROVISION (BENEFIT) FOR INCOME TAXES........ 87 (5) 156 174
------- ------- ------- -------
NET INCOME.................................... $ 401 $ 240 $ 638 $ 696
------- ------- ------- -------
BASIC EARNINGS PER COMMON SHARE............... $ 0.03 $ 0.02 $ 0.05 $ 0.05
DILUTED EARNINGS PER COMMON SHARE............. 0.03 0.02 0.05 0.05
CASH DIVIDENDS DECLARED PER COMMON SHARE...... 0.09 0.09 0.09 0.09
======= ======= ======= =======
2000 QUARTER ENDED
----------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income............................... $21,414 $22,039 $22,373 $41,472
Non-interest income........................... 3,970 4,447 4,291 3,901
-------- ------- ------- -------
Total revenue................................. 25,384 26,486 26,664 45,373
-------- ------- ------- -------
Interest expense.............................. 14,390 14,701 14,635 26,113
Provision for loan losses..................... 1,424 249 174 249
Non-interest expense.......................... 12,691 10,280 11,766 16,997
-------- ------- ------- -------
Income (loss) before income taxes............. (3,121) 1,256 89 2,014
Provision (benefit) for income taxes........ (1,163) 203 79 (597)
-------- ------- ------- -------
Net income (loss)............................. $(1,958) $ 1,053 $ 10 $ 2,611
-------- ------- ------- -------
Basic earnings per common share............... $ (0.15) $ 0.08 $ -- $ 0.20
Diluted earnings per common share............. (0.15) 0.08 -- 0.20
Cash dividends declared per common share...... 0.09 0.09 0.09 0.15
======== ======= ======= =======
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (M. D. & A.)
The following discussion and analysis of financial condition and results of
operations of AmeriServ Financial should be read in conjunction with the
consolidated financial statements of AmeriServ Financial, including the related
notes thereto, included elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
PERFORMANCE OVERVIEW. . .The following tables summarize some of the
Company's key performance indicators for each of the past three years. The
Company successfully spun-off its Three Rivers Bank subsidiary on April 1, 2000.
Consequently, the Company's financial results for 2001 exclude Three Rivers Bank
while the financial results for 2000 include Three Rivers Bank for the first
quarter of that year. The financial results for 1999 include Three Rivers Bank
for the entire period. The pro forma results exclude Three Rivers Bank from all
financial data to allow for more meaningful comparability. Cash performance
results exclude amortization related to goodwill and core deposit intangibles
net of applicable income tax effects. While mortgage servicing impairment
charges are non-cash at the time of recognition, they are by industry definition
not excluded from cash performance.
YEAR ENDED DECEMBER 31
-------------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND RATIOS)
Net income.................................................. $1,975 $ 1,716 $20,421
Diluted earnings per share.................................. 0.15 0.13 1.52
Return on average equity.................................... 2.44% 2.11% 15.48%
CASH PERFORMANCE DATA:
Cash earnings............................................... $4,440 $ 4,116 $23,127
Cash earnings per diluted share............................. 0.33 0.31 1.72
Return on average equity.................................... 5.50% 5.06% 17.53%
PRO FORMA
YEAR ENDED DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND RATIOS)
Total interest income....................................... $81,659 $89,198 $94,371
Total interest expense...................................... 53,461 58,828 58,422
Net interest income......................................... 28,198 30,370 35,949
Provision for loan losses................................... 1,350 1,946 1,600
Total non-interest income................................... 18,075 15,986 18,721
Total non-interest expense.................................. 42,536 45,262 39,787
Net income.................................................. $ 1,975 $ 184 $10,451
Diluted earnings per share.................................. 0.15 0.02 0.78
Return on average equity.................................... 2.44% 0.26% 13.70%
CASH PERFORMANCE DATA:
Cash earnings............................................... $ 4,440 $ 2,589 $12,865
Cash earnings per diluted share............................. 0.33 0.19 0.96
Return on average equity.................................... 5.50% 3.70% 16.86%
The Company's net income for 2001 totaled $2.0 million or $0.15 per diluted
share. The 2001 financial performance represents an improvement from both the
$1.7 million or $0.13 per diluted share actual performance and the $184,000 or
$0.02 per diluted share pro forma performance for 2000. Cash earnings per share
for 2001 totaled $0.33 compared to $0.31 on an actual basis and $0.19 on a pro
forma basis for 2000. The
14
return on equity performance comparatives are also favorable despite higher
average equity balances in 2001. The higher equity balances reflect increased
other comprehensive income within the capital section of the balance sheet due
to the improvement in value of the available for sale investment securities
portfolio as a result of the lower interest rate environment experienced in
2001.
Factors that contributed to the higher net income in 2001 included
increased non-interest income, lower non-interest expense, and a reduced
provision for loan losses. Specifically, non-interest income increased by $1.5
million on an actual basis and $2.1 million on a pro forma basis due primarily
to increased gains generated on asset sales in 2001. Non-interest expense
declined by $9.2 million on an actual basis and $2.6 million on a pro forma
basis in 2001. The lower non-interest expense was driven primarily by reduced
salaries and employee benefit costs and the non-recurrence of $2.6 million in
costs incurred for the Three Rivers Bank spin-off during 2000. The provision for
loan losses declined by $746,000 in 2001 as the Company took action to
strengthen its allowance for loan losses in the fourth quarter of 2000 due to a
problem commercial trucking lease that the Company worked out during 2001.
These positive items were partially offset by reduced net interest income
and higher income tax expense. An 18 basis point reduction in the net interest
margin and a reduced level of earning assets caused net interest income to
decline by $9.3 million on an actual basis and $2.2 million on a pro forma basis
from the 2000 level. The higher income tax expense reflects a more typical
income tax provision in 2001. The Company benefited from a reduction in income
tax expense of $925,000 on an actual basis and $275,000 on a pro forma basis in
2000 due to the successful conclusion of an Internal Revenue Service examination
of the Company's tax returns.
The Company's net income for 2000 totaled $1.7 million or $0.13 per diluted
share. AmeriServ Financial expensed all costs incurred to complete the Three
Rivers Bank spin-off during 2000. These non-recurring spin-off costs amounted to
$2.6 million. The Company's 2000 financial performance was also negatively
impacted by a $1.5 million charge to exit the wholesale mortgage production
business. This charge was recorded in the fourth quarter of 2000 due to the
December 20th receipt of a favorable supplemental private letter ruling from the
IRS which ensured that the tax-free treatment of the Three Rivers Bank spin-off
would not be jeopardized by this action. On a pro forma basis, the Company's
earnings totaled $184,000 or $0.02 per diluted share for the year 2000. The
Company's financial performance for the year 2000 on both an actual and pro
forma basis represents a decrease from the $20.4 million or $1.52 per diluted
share actual performance or $10.5 million or $0.78 per diluted share pro forma
performance for 1999.
Other factors that contributed to the lower earnings in 2000 included
reduced net interest income, an increased loan loss provision, and a lower level
of non-interest income. The lower non-interest income resulted primarily from
reduced gains on asset sales as the Company benefited from a $1.6 million gain
on the sale of its credit card portfolio and a $540,000 gain on the sale of a
small marginally profitable branch office in 1999. The higher interest rate
environment in 2000 also contributed to reduced gains on mortgage loan sales and
the realization of $952,000 in losses on investment security sales due to the
Company's decision to delever its balance sheet. A 33 basis point reduction in
the net interest margin and a reduced level of earning assets caused net
interest income to decline by $28 million on an actual basis and $5.6 million
from the pro forma 1999 level. Actions taken by the Company to strengthen its
allowance for loan losses in the fourth quarter of 2000 contributed to the
higher loan loss provision. These negative items were partially offset by
reduced income tax expense.
NET INTEREST INCOME AND MARGIN. . .The Company's net interest income
represents the amount by which interest income on earning assets exceeds
interest paid on interest bearing liabilities. Net interest income is a primary
source of the Company's earnings; it is affected by interest rate fluctuations
as well as changes in the amount and mix of earning assets and interest bearing
liabilities. The following tables
15
summarize the Company's net interest income performance for each of the past
three years on both an actual and pro forma basis:
YEAR ENDED DECEMBER 31
-------------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
Interest income............................................. $81,659 $107,298 $165,188
Interest expense............................................ 53,461 69,839 99,504
------- -------- --------
Net interest income......................................... 28,198 37,459 65,684
Tax-equivalent adjustment................................... 1,023 1,688 3,079
------- -------- --------
Net tax-equivalent interest income.......................... $29,221 $ 39,147 $ 68,763
Net interest margin......................................... 2.45% 2.63% 2.96%
PRO FORMA
YEAR ENDED DECEMBER 31
-----------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
Interest income............................................. $81,659 $89,198 $94,371
Interest expense............................................ 53,461 58,828 58,422
------- ------- -------
Net interest income......................................... 28,198 30,370 35,949
Tax-equivalent adjustment................................... 1,023 1,481 2,138
------- ------- -------
Net tax-equivalent interest income.......................... $29,221 $31,851 $38,087
Net interest margin......................................... 2.45% 2.59% 2.88%
2001 NET INTEREST PERFORMANCE OVERVIEW. . .The Company's 2001 net interest
income on a tax-equivalent basis decreased by $2.6 million or 8.3% from the pro
forma 2000 level due to a combination of a reduced net interest margin and a
lower volume of earning assets. A 14 basis point drop in the net interest margin
was caused by a 44 basis point decrease in the earning asset yield which more
than offset a decline of 27 basis points in the cost of funds. The lower volume
of earning assets resulted from a decline in both average loans and investment
securities outstanding. Accelerated asset prepayments were a key factor
responsible for both the lower earning asset yield and the drop in total earning
assets. The trends noted on a pro forma basis were also experienced on an actual
basis with the volume of earning asset shrinkage magnified due to the spin-off
of Three Rivers Bank. On an actual basis tax-equivalent net interest income
declined by $9.9 million or 25.4%.
COMPONENT CHANGES IN NET INTEREST INCOME: 2001 VERSUS 2000. . .Regarding
the separate components of net interest income, the Company's total
tax-equivalent interest income for 2001 decreased by $8.0 million or 8.8% when
compared to the 2000 pro forma level. This decrease was due to a $37 million
decline in the volume of earning assets and a 44 basis point drop in the earning
asset yield. Within the earning asset base, the yield on the total investment
securities portfolio dropped by 43 basis points to 6.09% while the yield on the
total loan portfolio decreased by 31 basis points to 7.97%. Both of these
declines reflect the lower interest rate environment in place in 2001 as the
Federal Reserve reduced the federal funds rate by an unprecedented 475 basis
points during 2001 in an effort to stimulate economic growth.
These significant rate reductions caused accelerated asset prepayments as
borrowers elected to refinance their higher fixed rate loans into lower cost
borrowings. Total average loans outstanding were $40 million or 6.7% lower in
2001 when compared to 2000. Within the loan portfolio, $18 million of this
decline in average loans outstanding resulted from the Company's decision to
exit the wholesale mortgage production business. The remainder of the decline is
due to loan pay-offs exceeding new production due to the previously mentioned
heightened prepayment activity. Average investment securities outstanding
declined by a more modest $9 million or 1.4% due predominantly to fourth quarter
activity. The Company realized $1.1 million of security gains by taking
advantage of the lower interest rate environment to reposition and reduce the
size of its investment portfolio during the fourth quarter of 2001.
16
The Company's total interest expense for 2001 decreased by $5.4 million or
9.1% when compared to the 2000 pro forma level. This reduction in interest
expense was due to a lower volume of interest bearing liabilities (specifically
borrowed funds) and a reduced cost of funds. Total average borrowed funds were
$48 million lower in 2001 as fewer borrowings were needed to fund a smaller
earning asset base.
The total cost of funds declined by 27 basis points to 4.89% and was driven
down by a reduced cost of deposits. Specifically, the cost of interest bearing
deposits decreased by 46 basis points to 3.73% due to a lower cost for money
market deposits. The lower deposit costs did not have any negative impact on the
Company's deposit generation strategies as total average deposits were $8
million or 1.1% higher in 2001 compared to 2000.(See further discussion under
Balance Sheet section of the MD&A).
The Company's cost of FHLB advances and other short-term borrowings
averaged 6.05% in 2001 compared to 6.02% in pro forma 2000. The modest increase
in borrowing cost during a period of sharply declining interest rates reflects
strategies previously executed by the Company to hedge and fix its borrowings
cost. Fixed rate swaps, which had protected the Company during the rising
interest rate environment in the year 2000, kept the cost of funds from reducing
proportionately during this year. However, the late October 2001 maturity of
$100 million of interest rate swaps that had fixed the Company's cost of certain
borrowings at 6.42% helped reverse the quarterly net interest margin compression
trend that the Company had experienced during the first three quarters of 2001.
Specifically, the Company's net interest margin expanded by 14 basis points to
2.49% during the fourth quarter of 2001. Looking into 2002, the Company expects
to get further significant cost of funds relief in April 2002 when an $80
million interest rate swap that has fixed the cost of certain borrowings at
6.92% will mature. Assuming a minimum 300 basis point reduction in cost due to
the expiration of this interest rate swap, the Company will realize a $2.4
million interest expense reduction over a twelve-month period. This interest
rate swap maturity, combined with anticipated loan and deposit growth, should
cause net interest margin expansion in 2002.
It is recognized that interest rate risk does exist from the Company's use
of borrowed funds to purchase investment securities to leverage the balance
sheet. To neutralize a portion of this risk, the Company has executed hedging
transactions which help fix the variable funding costs associated with the use
of short-term borrowings to fund earning assets. (See further discussion under
Note #21.)
Additionally, the maximum amount of leveraging the Company can execute is
controlled by internal policy requirements to maintain a minimum asset leverage
ratio of no less than 6.0% (see further discussion under Capital Resources), to
limit net interest income variability to +\-7.5% and net income variability to
+\-20% over a twelve month period(see further discussion under Interest Rate
Sensitivity), and to limit total FHLB advances and short-term borrowings to no
more than 40% of total assets. As a result of investment security sales executed
during the fourth quarter of 2001, the Company's ratio of FHLB advances and
short-term borrowings to total assets declined to 32.5% at December 31, 2001
compared to 37.0% at December 31, 2000. The total revenue contribution from
leverage assets (including investment security gains and losses) amounted to
$1.6 million in 2001 compared to $1.7 million for the 2000 pro forma results.
Since its inception in 1995, the leverage program has produced total pre-tax
revenue of $32.6 million.
2000 NET INTEREST PERFORMANCE OVERVIEW. . .The Company's pro forma net
interest income on a tax-equivalent basis decreased by $6.2 million or 16.4%
from 1999 due to a combination of a reduced net interest margin and a lower
volume of earning assets. A 29 basis point drop in the net interest margin was
caused by a 45 basis point increase in the cost of funds due to higher costs for
both borrowings and deposits. This increase in the cost of funds more than
offset the benefit of a 10 basis point increase in the earning asset yield due
to a higher loan portfolio yield. The lower volume of earning assets resulted
from a reduced volume of investment securities due to management's decision to
delever the balance sheet in 2000. The same trends noted on a pro forma basis
were also experienced on an actual basis with the volume of earning asset
shrinkage magnified due to the spin-off of Three Rivers Bank. On an actual basis
tax-equivalent net interest income declined by $29.6 million or 43%.
COMPONENT CHANGES IN NET INTEREST INCOME: 2000 VERSUS 1999. . .Regarding
the separate components of net interest income, the Company's total pro forma
tax-equivalent interest income for 2000 decreased by $5.8 million or 6.0% when
compared to 1999. This decrease was due to the previously
17
mentioned decline in the volume of earning assets. Total average earning assets
were $96 million lower in 2000 due to a $104 million or 14.6% decrease in
investment securities which more than offset a $5 million or 0.8% increase in
total loans. Management delevered the securities portfolio through a combination
of securities sales and cash flow from mortgage-backed securities pay-downs. The
Company used this cash from the securities portfolio to primarily paydown
short-term borrowings and reduce the Company's exposure to rising short-term
interest rates. Within the loan portfolio, the Company was able to achieve
modest loan growth in the commercial and commercial mortgage loan categories
which more than offset lower balances of residential mortgage and consumer loans
due to the higher interest rate environment. This shift within the loan
portfolio towards higher yielding commercial loans was a key factor contributing
to the 16 basis point improvement in the total loan portfolio yield to 8.28%.
The yield on total investment securities decreased by 11 basis points to 6.52%
as during the majority of 2000 slower prepayment speeds extended the duration of
the portfolio and limited opportunities to purchase new higher yielding
securities. The Company, however, was able to execute some investment portfolio
repositioning strategies late in the fourth quarter which shortened the duration
of the portfolio in 2001. The same factors causing the pro forma decrease in
interest income also contributed to a $57.9 million or 35% decrease in actual
interest income. The main factor causing the decrease in actual interest income,
however, was a lower earning asset base due to the TRB spin-off.
The Company's actual interest expense for 2000 declined by $29.7 million or
30% due to the TRB spin-off. The Company's total pro forma interest expense for
2000 increased by $406,000 when compared to 1999. This higher pro forma interest
expense was due primarily to a 45 basis point increase in the cost of funds to
5.16% which caused interest expense to rise by $5.6 million. Interest rates,
particularly short-term rates such as fed funds and 90 day libor, were 125 basis
points higher in 2000 compared to 1999. These higher interest rates contributed
to a 58 basis point increase in the cost of borrowings to 6.02% and a 44 basis
point increase in the cost of interest bearing deposits to 4.19%. This increased
interest expense resulting from higher rates more than offset a $5.2 million
reduction in interest expense resulting from a lower volume of interest bearing
liabilities. Specifically, total borrowed funds were $90 million lower in 2000
due to the previously discussed balance sheet deleverage strategy.
Despite the increased use of off-balance sheet products to hedge borrowing
costs and the deleverage of the borrowed funds position, the net spread earned
on the Company's leveraged assets declined from 1.04% in 1999 to 0.45% in 2000.
The total revenue contribution (including security gains and losses) from the
leveraged assets declined from $10.4 million in 1999 to $1.8 million in 2000. On
a pro forma basis, the revenue contribution from leveraged assets declined by
$5.0 million from $6.7 million in 1999 to $1.7 million in 2000.
The tables that follow provide an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities, and
stockholders' equity, (ii) interest income earned on interest earning assets and
interest expense paid on interest bearing liabilities, (iii) average yields
earned on interest earning assets and average rates paid on interest bearing
liabilities, (iv) interest rate spread (the difference between the average yield
earned on interest earning assets and the average rate paid on interest bearing
liabilities), and (v) net interest margin (net interest income as a percentage
of average total interest earning assets). For purposes of these tables, loan
balances 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 non-accrual loans as cash is received. Additionally, a tax rate of
approximately 35% is used to compute tax-equivalent yields. The pro forma table
excludes Three Rivers Bank.
18
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ ------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning assets:
Loans, net of unearned
income................. $ 563,392 $ 45,568 7.97% $ 722,663 $ 60,517 8.25% $1,063,409 $ 87,544 8.12%
Deposits with banks...... 17,173 552 3.17 5,729 212 3.64 4,115 121 2.91
Federal funds sold and
securities purchased
under agreements to
resell................. 1,087 32 2.97 1,056 70 6.54 -- -- --
Investment securities:
Available for sale..... 599,427 36,530 6.09 741,335 48,187 6.50 736,221 47,113 6.40
Held to maturity....... -- -- -- -- -- -- 502,239 33,489 6.67
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total investment
securities............... 599,427 36,530 6.09 741,335 48,187 6.50 1,238,460 80,602 6.50
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
TOTAL INTEREST EARNING
ASSETS/ INTEREST
INCOME................... 1,181,079 82,682 6.97 1,470,783 108,986 7.37 2,305,984 168,267 7.27
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Non-interest earning
assets:
Cash and due from
banks.................. 21,627 24,725 38,585
Premises and equipment... 13,348 14,918 18,835
Other assets............. 68,192 63,191 96,675
Allowance for loan
losses................. (5,798) (6,705) (10,998)
---------- ---------- ----------
TOTAL ASSETS............... $1,278,448 $1,566,912 $2,449,081
========== ========== ==========
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand............... $ 47,530 $ 434 0.91% $ 58,424 $ 569 0.97% $ 93,399 $ 925 0.99%
Savings................ 91,926 1,401 1.52 112,829 1,775 1.57 171,783 2,802 1.63
Money market........... 134,799 3,654 2.71 142,903 6,650 4.65 182,395 6,305 3.46
Other time............. 303,135 16,053 5.30 383,657 20,275 5.28 619,392 31,118 5.03
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest bearing
deposits............. 577,390 21,542 3.73 697,813 29,269 4.19 1,066,969 41,150 3.86
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings............... 54,217 1,950 3.60 119,184 6,858 5.67 215,613 11,037 5.12
Advances from Federal Home
Loan Bank................ 423,767 26,961 6.36 508,503 30,608 6.02 795,720 43,946 5.52
Guaranteed junior
subordinated deferrable
interest debentures...... 34,500 2,960 8.58 34,500 2,960 8.58 34,500 2,960 8.58
Long-term debt............. 2,543 48 1.89 4,037 144 3.57 8,336 411 4.93
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
TOTAL INTEREST BEARING
LIABILITIES/INTEREST
EXPENSE.................. 1,092,417 53,461 4.89 1,364,037 69,839 5.11 2,121,138 99,504 4.69
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Non-interest bearing
liabilities:
Demand deposits.......... 91,033 105,824 170,891
Other liabilities........ 14,217 15,628 25,125
Stockholders' equity..... 80,781 81,423 131,927
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..... $1,278,448 $1,566,912 $2,449,081
========== ========== ==========
Interest rate spread....... 2.08 2.26 2.59
Net interest income/net
interest margin.......... 29,221 2.45% 39,147 2.63% 68,763 2.96%
Tax-equivalent
adjustment............... (1,023) (1,688) (3,079)
-------- -------- --------
Net interest income........ $ 28,198 $ 37,459 $ 65,684
======== ======== ========
19
PRO FORMA
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ ------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning assets:
Loans, net of unearned
income.................... $ 563,392 $45,568 7.97% $ 603,761 $50,743 8.28% $ 599,093 $49,208 8.12%
Deposits with banks......... 17,173 552 3.17 5,543 207 3.68 3,232 97 2.95
Federal funds sold and
securities purchased under
agreements to resell...... 1,087 32 2.97 1,055 70 6.54 -- -- --
Investment securities:
Available for sale........ 599,427 36,530 6.09 608,018 39,659 6.52 711,793 47,204 6.63
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total investment
securities................ 599,427 36,530 6.09 608,018 39,659 6.52 711,793 47,204 6.63
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
TOTAL INTEREST EARNING ASSETS/
INTEREST INCOME............. 1,181,079 82,682 6.97 1,218,377 90,679 7.41 1,314,118 96,509 7.31
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest earning assets:
Cash and due from banks..... 21,627 20,802 21,582
Premises and equipment...... 13,348 13,568 13,743
Other assets................ 68,192 59,415 73,061
Allowance for loan losses... (5,798) (5,442) (5,187)
---------- ---------- ----------
TOTAL ASSETS.................. $1,278,448 $1,306,720 $1,417,317
========== ========== ==========
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand... $ 47,530 $ 434 0.91% $ 47,909 $ 479 1.00% $ 49,630 $ 497 1.00%
Savings................... 91,926 1,401 1.52 96,758 1,461 1.51 105,278 1,589 1.51
Money market.............. 134,799 3,654 2.71 130,060 6,282 4.83 124,848 4,609 3.69
Other time................ 303,135 16,053 5.30 301,143 15,972 5.27 303,478 15,175 5.00
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest bearing
deposits................ 577,390 21,542 3.73 575,870 24,194 4.19 583,234 21,870 3.75
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings.................. 54,217 1,950 3.60 105,927 6,100 5.76 153,878 7,798 5.07
Advances from Federal Home
Loan Bank................... 423,767 26,961 6.36 418,907 25,484 6.08 461,013 25,661 5.57
Guaranteed junior subordinated
deferrable interest
debentures.................. 34,500 2,960 8.58 34,500 2,960 8.58 34,500 2,960 8.58
Long-term debt................ 2,543 48 1.89 3,466 90 2.60 5,637 133 2.36
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES/ INTEREST
EXPENSE..................... 1,092,417 53,461 4.89 1,138,670 58,828 5.16 1,238,262 58,422 4.71
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest bearing
liabilities:
Demand deposits............. 91,033 84,989 87,449
Other liabilities........... 14,217 13,069 15,304
Stockholders' equity........ 80,781 69,992 76,302
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $1,278,448 $1,306,720 $1,417,317
========== ========== ==========
Interest rate spread.......... 2.08 2.25 2.60
Net interest income/net
interest margin............. 29,221 2.45% 31,851 2.59% 38,087 2.88%
Tax-equivalent adjustment..... (1,023) (1,481) (2,138)
------- ------- -------
Net interest income........... $28,198 $30,370 $35,949
======= ======= =======
20
The average balance and yield on taxable securities was $571 million and
6.10%, $666 million and 6.53%, and $1,075 million and 6.49% for 2001, 2000, and
1999, respectively. The average balance and tax-equivalent yield on tax-exempt
securities was $29 million and 6.0%, $74 million and 6.21%, and $163 million and
6.57% for 2001, 2000, and 1999, respectively.
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The table below sets forth
an analysis of volume and rate changes in net interest income on a
tax-equivalent basis. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates. Changes in
net interest income that could not be specifically identified as either a rate
or volume change were allocated proportionately to changes in volume and changes
in rate.
2001 VS. 2000 2000 VS. 1999
----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- -------- -------- ------- --------
(IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned income.................. $(12,954) $(1,995) $(14,949) $(28,448) $ 1,421 $(27,027)
Deposits with banks............................ 363 (23) 340 56 35 91
Federal funds sold and securities purchased
under agreements to resell................... 2 (40) (38) 70 -- 70
Investment securities.......................... (8,768) (2,889) (11,657) (32,415) -- (32,415)
-------- ------- -------- -------- ------- --------
TOTAL INTEREST INCOME.......................... (21,357) (4,947) (26,304) (60,737) 1,456 (59,281)
-------- ------- -------- -------- ------- --------
INTEREST PAID ON:
Interest bearing demand deposits............... (101) (34) (135) (338) (18) (356)
Savings deposits............................... (319) (55) (374) (928) (99) (1,027)
Money market................................... (359) (2,637) (2,996) (586) 931 345
Other time deposits............................ (4,300) 78 (4,222) (12,623) 1,780 (10,843)
Federal funds purchased, securities sold under
agreements to repurchase, and other
short-term borrowings........................ (2,939) (1,969) (4,908) (5,407) 1,228 (4,179)
Advances from Federal Home Loan Bank........... (5,517) 1,870 (3,647) (17,806) 4,468 (13,338)
Long-term debt................................. (42) (54) (96) (174) (93) (267)
-------- ------- -------- -------- ------- --------
TOTAL INTEREST EXPENSE......................... (13,577) (2,801) (16,378) (37,862) 8,197 (29,665)
-------- ------- -------- -------- ------- --------
CHANGE IN NET INTEREST INCOME.................. $ (7,780) $(2,146) $ (9,926) $(22,875) $(6,741) $(29,616)
======== ======= ======== ======== ======= ========
LOAN QUALITY. . .AmeriServ Financial's written lending policies require
underwriting, loan documentation, and credit analysis standards to be met prior
to funding any loan. After the loan has been approved and funded, continued
periodic credit review is required. Credit reviews are mandatory for all
commercial loans and for all commercial mortgages in excess of $500,000 within a
12-month period. In addition, due to the secured nature of residential mortgages
and the smaller balances of individual installment loans, sampling techniques
are used on a continuing basis for credit reviews in these loan areas. The
following table sets forth information concerning AmeriServ Financial's loan
delinquency and other non-performing assets. At all dates
21
presented, the Company had no troubled debt restructurings which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates:
AT DECEMBER 31
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Total loan delinquency (past due 30 to 89 days)............. $11,905 $ 6,424 $ 9,931
Total non-accrual loans..................................... 9,303 5,803 4,928
Total non-performing assets(1).............................. 10,044 5,961 13,359
Loan delinquency as a percentage of total loans and loans
held for sale, net of unearned income..................... 1.99% 1.09% 0.91%
Non-accrual loans as a percentage of total loans and loans
held for sale, net of unearned income..................... 1.55 0.98 0.45
Non-performing assets as a percentage of total loans and
loans held for sale, net of unearned income, and other
real estate owned......................................... 1.67 1.01 1.21
---------------
(1) Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments of which some are insured for credit loss,
and (iii) other real estate owned. All loans, except for loans that are
insured for credit loss, are placed on non-accrual status immediately upon
becoming 90 days past due in either principal or interest.
The Company's level of non-performing assets totaled $10.0 million or 1.67%
of total loans at December 31, 2001 compared to $6.0 million or 1.01% of total
loans at year-end 2000. The $4 million increase is due to a combination of
higher non-accrual commercial and residential mortgage loans due to the weaker
economic conditions in 2001. These weaker economic conditions also contributed
to the increase in total loan delinquency.
Of the Company's total $10.0 million of non-performing assets, $6.1 million
are commercial loans and leases with the remaining $3.9 million related to
residential mortgage loans. There are 43 properties included in the $3.9 million
of non-performing residential mortgages. All properties delinquent 60 days or
more have been evaluated in conjunction with FFIEC regulations. Any charge-downs
required based on this evaluation process occurred prior to December 31, 2001.
The Company will seek to restore payments or foreclose upon the remaining
balances. Minimal losses are expected from this portfolio, because historically
residential mortgage losses for the Company have been less than 0.04%.
The $6.1 million in non-performing commercial loans and leases at December
31, 2001 include 10 accounts. Two of the 10 accounts total $5.5 million and
represent 90% of the commercial non-performing balance. The first account is to
a local logging company with $2.4 million in loans outstanding. This borrower
declared Chapter 11 bankruptcy in the third quarter of 2001 as a result of a
significant decline in business due to the slowing economy. The Company's
position is secured by the lumber mill and related equipment along with
government guarantees on portions of the loan balance from both the Small
Business Administration and a program administered by the U.S. Department of
Agriculture. Inventory and receivables also secure a portion of the loan
balance. Consequently, the Company believes its exposure to loss is limited due
to the strong government guarantee position and therefore it has established an
allocation of $220,000 within the loan loss reserve for this credit. It is
expected that based upon the closure of the business in January 2002 that this
will be converted to a Chapter 7 liquidation.
The second large commercial non-performing account is a lease for $3.1
million to AG Industries(AGI). AGI is a national company servicing contracts for
hot metal companies such as National Steel, USX, and Weirton Steel. AGI filed
for Chapter 11 bankruptcy on December 15, 2001. The Company's collateral is
cranes and other steel servicing equipment located in five different AGI plants,
four of which are operating at break-even or better. While a specific allocation
within the loan loss reserve of $821,000 had been established for this credit as
of December 31, 2001, more recent information now indicates that the Company's
losses may
22
only be $200,000 to $400,000. In addition, it is anticipated that the sale of
AGI assets could reduce the Company's non-performing assets by $3.1 million.
Between December 31, 1999, and December 31, 2000, total loan delinquency as
a percentage of total loans increased modestly to 1.09%. Non-performing assets
as a percentage of total loans declined from 1.21% to 1.01%. During the fourth
quarter of 2000, one problem commercial lease with a balance of $3.2 million was
transferred to non-accrual status. This commercial lease was to a trucking
company which ceased business operations near year-end 2000; the lease was
secured by titles to Mack tractors and flatbed trailers. The Company recorded a
charge-off of $600,000 on this lease in the fourth quarter of 2000 and
established approximately $800,000 of specific allocations within the loan loss
reserve on this credit at December 31, 2000. The Company successfully completed
the workout of this problem credit during 2001 as all remaining repossessed
trucks were sold. The final charge-off amounted to $875,000 which was comparable
with the specific reserve allocation.
The non-performing asset level at December 31, 1999 was largely due to a $6
million construction loan on a completed assisted living facility which Three
Rivers Bank took possession of in the fourth quarter of 1999. A $500,000
charge-off on this property was recorded when it was moved into other real
estate owned. This problem asset remained with Three Rivers Bank after the April
1, 2000, spin-off.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. . .As described in more detail in
Note #1, the Company uses a comprehensive methodology and procedural discipline
to maintain an allowance for loan losses to absorb inherent losses in the loan
portfolio. The allowance can be summarized into three elements; 1) reserves
established on specifically identified problem loans, 2) formula driven general
reserves established for loan categories based upon historical loss experience
and other qualitative factors which include delinquency and non-performing loan
trends, economic trends, concentrations of credit, trends in loan volume,
experience and depth of management, examination and audit results, effects of
any changes in lending policies, and trends in policy exceptions, and 3) a
general unallocated reserve which provides conservative positioning in the event
of variance from our assessment of the previously listed qualitative factors,
provides protection against credit risks resulting from other inherent risk
factors contained in the bank's loan portfolio, and recognizes the model and
estimation risk associated with the specific and formula driven allowances. Note
that the qualitative factors used in the formula driven general reserves are
evaluated quarterly (and revised if necessary) by the Company's management to
establish allocations which accommodate each of the listed risk factors. The
following table sets forth changes in the allowance for loan losses and certain
ratios for the periods ended:
YEAR ENDED DECEMBER 31
------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year..... $ 5,936 $ 10,350 $ 10,725 $ 12,113 $ 13,329
Reduction due to spin-off of
TRB............................ -- (5,028) -- -- --
-------- -------- ---------- ---------- --------
Charge-offs:
Commercial.................. 1,147 792 1,802 899 1,040
Real estate-mortgage........ 220 1,038 625 359 202
Consumer.................... 453 332 576 1,260 1,255
-------- -------- ---------- ---------- --------
Total charge-offs...... 1,820 2,162 3,003 2,518 2,497
-------- -------- ---------- ---------- --------
23
YEAR ENDED DECEMBER 31
------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Recoveries:
Commercial.................. 133 53 295 113 529
Real estate-mortgage........ 65 451 199 132 262
Consumer.................... 166 176 234 285 332
-------- -------- ---------- ---------- --------
Total recoveries....... 364 680 728 530 1,123
-------- -------- ---------- ---------- --------
Net charge-offs.................. 1,456 1,482 2,275 1,988 1,374
Provision for loan losses........ 1,350 2,096 1,900 600 158
-------- -------- ---------- ---------- --------
Balance at end of year........... $ 5,830 $ 5,936 $ 10,350 $ 10,725 $ 12,113
======== ======== ========== ========== ========
Loans and loans held for sale,
net of unearned income:
Average for the year........... $563,392 $722,633 $1,063,409 $1,019,215 $960,673
At December 31................. 599,481 590,271 1,095,804 1,066,321 989,575
As a percent of average loans and
loans held for sale:
Net charge-offs................ 0.26% 0.21% 0.21% 0.19% 0.14%
Provision for loan losses...... 0.24 0.29 0.18 0.06 0.02
Allowance for loan losses...... 1.03 0.82 0.97 1.05 1.26
Allowance as a percent of each of
the following:
Total loans and loans held for
sale, net of unearned
income...................... 0.97% 1.01% 0.94% 1.01% 1.22%
Total delinquent loans (past
due 30 to 89 days).......... 48.97 92.40 104.22 69.52 60.90
Total non-accrual loans........ 62.67 102.29 210.02 206.01 187.80
Total non-performing assets.... 58.04 99.58 77.48 130.22 136.75
Allowance as a multiple of net
charge-offs.................... 4.01X 4.01x 4.55x 5.39x 8.82x
Total classified loans........... $ 13,758 $ 11,544 $ 24,049 $ 28,307 $ 26,184
The Company's provision for loan losses in 2001 totaled $1.4 million or
0.24% of average loans which was comparable with the 2001 net charge-offs of
$1.5 million or 0.26% of average loans. For the year 2000, the Company recorded
a provision of $2.1 million or 0.29% of average loans which exceeded the net
charge-offs of $1.5 million or 0.21% of average loans. The higher provision in
2000 was needed to strengthen the reserve for the previously discussed problem
commercial trucking lease which the Company worked out of in 2001. For the year
1999, the provision totaled $1.9 million or 0.18% of average loans compared to
net charge-offs of $2.3 million or 0.21% of average loans.
Overall, the Company's allowance for loan losses provided 58.0% coverage of
non-performing assets and 62.7% coverage of non-accrual loans at December 31,
2001, compared to 99.6% coverage of non-performing assets and 102.3% coverage of
non-accrual loans at December 31, 2000. The decreased coverage between 2000 and
2001 was caused by the increased level of non-accrual loans which was explained
in detail in the loan quality section of the MD&A. The overall balance in the
allowance for loan losses at December 31, 2001 totaled $5.8 million or 0.97% of
total loans which was down slightly from the allowance of $5.9 million or 1.01%
of total loans at December 31, 2000.
Looking into 2002, the Company expects to receive a significant recovery of
$450,000 on a loan that had been previously charged-off. The recovery amount was
awarded by the court and legal documents have been executed. Approximately
$350,000 of this recovery has already been received in the first quarter of
2002. However, even with this recovery, the Company still plans to increase its
provision for loan losses to further
24
strengthen its allowance for loan losses as needed in 2002. The 2002 provision
should approximate $2 million and assumes a continued difficult economic climate
for at least the first half of 2002. AmeriServ Financial management is unable to
determine in what loan category future charge-offs and recoveries may occur.
The following schedule sets forth the allocation of the allowance for loan
losses among various categories. This allocation is determined by using the
consistent quarterly procedural discipline that was previously discussed. The
entire allowance for loan losses is available to absorb future loan losses in
any loan category.
AT DECEMBER 31
-----------------------------------------------------------------
2001 2000 1999
------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
AMOUNT TO LOANS AMOUNT TO LOANS AMOUNT TO LOANS
------ ---------- ------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial........... $1,706 20.6% $ 1,390 19.8% $ 1,991 13.9%
Commercial loans
secured by real
estate............. 2,874 34.9 1,465 32.8 2,928 37.1
Real
estate-mortgage.... 403 39.7 390 42.7 791 43.3
Consumer............. 596 4.8 506 4.7 631 5.7
Allocation to general
risk............... 251 2,185 4,009
------ ------- -------
Total................ $5,830 $ 5,936 $10,350
====== ======= =======
AT DECEMBER 31
-------------------------------------------
1998 1997
-------------------- --------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY CATEGORY
AMOUNT TO LOANS AMOUNT TO LOANS
------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial........... $ 1,379 13.1% $ 1,670 14.4%
Commercial loans
secured by real
estate............. 2,082 32.1 2,543 30.6
Real
estate-mortgage.... 1,038 47.0 414 45.9
Consumer............. 1,563 7.8 1,506 9.1
Allocation to general
risk............... 4,663 5,980
------- -------
Total................ $10,725 $12,113
======= =======
Even though residential real estate-mortgage loans comprise 40% of the
Company's total loan portfolio, only $403,000 or 6.9% of the total allowance for
loan losses is allocated against this loan category. The residential real
estate-mortgage loan allocation is based primarily upon the Company's five-year
historical average of actual loan charge-offs experienced in that category and
other qualitative factors. The disproportionately higher allocations for
commercial loans and commercial loans secured by real estate reflect the
increased credit risk associated with this type of lending, the Company's
historical loss experience in these categories, and other qualitative factors.
The Company strengthened its allocations to the commercial segments of the loan
portfolio during 2001 and 2000. Factors considered by the Company that led to
increased qualitative allocations to the commercial segments of the portfolio
included: the slowing of the national and regional economies which began in the
second half of 2000 and accelerated throughout 2001, the increase in
concentration risk among our 25 largest borrowers compared to total loans, and
the overall growth in the average size associated with these credits.
Additionally, at December 31, 2001 the Company also specifically provided
$821,000 for the AGI commercial lease and $220,000 for the lumber company
credit. These specific allocations combined with the increased allocations for
the qualitative factors mentioned above caused the decline in the portion of the
reserve allocated to general risk between 2000 and 2001.
In addition to the specific and formula-driven reserve calculations, the
Company has consistently established a general unallocated reserve to provide
for risk inherent in the loan portfolio as a whole. Management believes that its
judgment with respect to the establishment of the reserve allocated to general
risk has been validated by experience and prudently reflects the model and
estimation risk associated with the specific and formula driven allowances. The
Company determines the unallocated reserve based on a variety of factors, some
of which also are components of the formula-driven methodology. These include,
without limitation, the previously mentioned qualitative factors along with
general economic data, management's assessment of the direction of interest
rates, and credit concentrations. In conjunction with the establishment of the
general unallocated reserve, the Company also looks at the total allowance for
loan losses in relation to the size of the total loan portfolio, the level of
non-performing assets, and its coverage of these items as compared to peer
comparable banking companies.
Based on the Company's loan loss reserves methodology and the related
assessment of the inherent risk factors contained within the Company's loan
portfolio, management believes that the allowance for loan losses was adequate
for each of the fiscal years presented in the table above.
25
NON-INTEREST INCOME. . .Non-interest income for 2001 totaled $18.1 million
which represented a $1.5 million increase from the actual 2000 performance and a
$2.1 million increase from the pro forma 2000 results. Factors contributing to
the increase between years included:
- the Company realized $1.9 million of security gains by taking advantage
of the lower interest rate environment to reposition and reduce the size
of its investment security portfolio during 2001. Many of the securities
sold in 2001 were mortgage-backed securities that were projected to
experience accelerated prepayments due to the downward movements in
interest rates. The Company also liquidated the majority of its
tax-exempt securities in order to help shorten the overall portfolio
duration. During 2000, the Company realized $952,000 in losses on
investment security sales with the proceeds used to deleverage the
balance sheet and pay down borrowings due to higher short-term interest
rates. When the 2001 gain is compared to the 2000 loss, this represents a
net favorable change of $2.9 million on an actual basis or $2.4 million
on a pro forma basis.
- a $1.4 million gain realized on the successful sale of the Company's
Coalport Office to CSB Bank of Curwensville. The Company captured an
8.875% core deposit premium on the sale of approximately $15.7 million of
deposits. As the only AmeriServ Financial Office in Clearfield County,
the Coalport Office no longer strategically fit the new and expanding
geographic footprint for AmeriServ Financial. Key elements of this new
footprint include a greater retail presence in State College and a focus
on union specialty branch offices.
- a $1 million decrease in gains realized on loans held for sale due
primarily to the Company's exit from the wholesale mortgage production
business.
- a $299,000 decrease in trust fees due largely to a decline in the market
value of trust assets due to lower equity values and the loss of one
larger corporate trust relationship.
- a $505,000 decrease in net mortgage servicing fees due to fewer loans
serviced and increased amortization expense on mortgage servicing rights
due to accelerated prepayment speeds on mortgage loans resulting from the
lower interest rate environment. The following chart highlights some of
the key information related to SMC's mortgage servicing (MSR) portfolio.
AT DECEMBER 31
----------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES AND
PREPAYMENT DATA)
MSR portfolio balance....................................... $594,948 $655,403
Fair value of MSRs based upon discounted cash flow of
servicing portfolio....................................... 7,828 9,969
Fair value as a percentage of MSR balance................... 1.32% 1.52%
PSA prepayment speed........................................ 272 216
Weighted average portfolio interest rate.................... 7.28% 7.53%
A rollforward of the MSRs is as follows:
(IN THOUSANDS)
Balance as of December 31, 2000............................. $ 9,911
Acquisition of servicing rights............................. 2,290
Impairment charge........................................... (2,510)
Sale of servicing rights.................................... (301)
Amortization of servicing rights............................ (1,562)
-------
Balance as of December 31, 2001............................. $ 7,828
=======
Non-interest income as a percentage of total revenue averaged 39.1% in 2001
compared to 30.7% for 2000. Excluding investment security transactions, the
percentages were 36.4% in 2001 and 31.9% in 2000. To provide a longer term
perspective for this comparison, the ratio of non-interest income to total
revenue
26
averaged 28.3% for the full year 1997. The continued growth and diversification
of non-interest income is a key post spin-off strategic goal of AmeriServ
Financial.
Non-interest income for 2000 totaled $16.6 million which represented a $7.8
million decrease from the actual 1999 performance of $24.4 million. On a pro
forma basis, non-interest income for 2000 totaled $16.0 million which
represented a $2.7 million decrease from the pro forma 1999 performance of $18.7
million. Factors contributing to the reduced non-interest income in 2000
included:
- a $2.9 million decrease in gains realized on loans held for sale due in
part to the non-recurrence of a $1.6 million gain on the sale of the
Company's credit card portfolio in 1999. The remainder of the decrease
was caused by a significant drop in mortgage refinancing activity which
reduced both the volume and spread on loan sales into the secondary
market in 2000. The following table reflects the impact of these
reductions:
2000 1999 DIFFERENCE
------------ ------------ -------------
Mortgage loans sold............. $220,000,000 $426,000,000 $(206,000,000)
Gain on mortgage loans sold..... 1,157,000 2,373,000 (1,216,000)
Spread earned on loans sold..... 53b.p. 56b.p. (3 b.p.)
- the non-recurrence of a $540,000 gain recognized on the sale of a
marginally profitable branch office in 1999.
- a $952,000 loss realized on the sale of $242 million of investment
securities in 2000. The Company used the proceeds from the sale primarily
to paydown short-term borrowings and delever its balance sheet. This
balance sheet repositioning strategy helped reduce the Company's exposure
to rising short-term interest rates. When compared to the $436,000 gain
realized in 1999, this represents a net unfavorable change of $1.4
million.
- a $175,000 increase in trust fees to $5.1 million due to the continued
profitable expansion of the trust company's business.
- a $65,000 or 8.2% increase in net mortgage servicing fees in 2000 due to
reduced amortization expense on mortgage servicing rights as the higher
interest rate environment caused a slowdown in mortgage prepayment
speeds.
NON-INTEREST EXPENSE. . .Non-interest expense for 2001 totaled $42.5
million which represented a $9.2 million decrease from the actual 2000
performance and a $2.7 million decrease from the pro forma 2000 results. Factors
contributing to the lower non-interest expense in 2001 included:
- a $3.7 million decrease in salaries and employee benefits (a $1.2 million
decline on a pro forma basis) in 2001. The pro forma decline is due to 14
fewer FTE employees, reduced medical insurance premiums, and lower
incentive compensation. The lower average employee base in 2001 resulted
primarily from the Company's exit from the wholesale mortgage production
business and fewer employees at the Parent Company after the Three Rivers
Bank spin-off.
- there were $2.6 million in costs related to the Three Rivers Bank
spin-off recognized in 2000 compared to none in 2001.
- a $2.2 million increase in the non-cash impairment charge for mortgage
servicing rights to $2.5 million in 2001. This impairment charge reflects
a reduced value for the mortgage servicing asset resulting from an
increase in mortgage prepayment speeds due to the unprecedented declines
in interest rates that occurred throughout 2001. The Company would be
subject to additional impairment charges in 2002 if mortgage rates were
to decline further.
- the Company was able to reverse in 2001 $274,000 of the $1.5 million in
costs previously accrued in 2000 for the wholesale mortgage production
exit that were not realized. This represents a net favorable expense
change of $1.8 million between years.
27
The remainder of the decline in actual non-interest expense is due to Three
Rivers Bank expenses being included in the first quarter of 2000 and not at all
in 2001. The exit from the wholesale mortgage production business had a
favorable impact on reducing several non-interest expense categories when
compared to the pro forma 2000 expenses.
Non-interest expense for 2000 totaled $50.2 million which represented a
$10.6 million decrease from the actual 1999 performance of $60.8 million. On a
pro forma basis, non-interest expense for 2000 totaled $45.2 million which
represented a $5.4 million increase from the pro forma 1999 performance of $39.8
million. Factors significantly impacting non-interest expenses in 2000 included:
- the recognition of $2.6 million in costs related to the spin-off of Three
Rivers Bank to the Company's shareholders. These costs included
investment banking fees, legal and accounting fees, severance and
personnel costs, certain investor relations and shareholder costs, and
system and facility changes.
- the recognition of a $1.5 million charge in the fourth quarter of 2000 to
exit the wholesale mortgage production business. This charge reflected
costs for employee severance, fixed asset disposal, lease termination,
professional fees, and other items associated with exiting the wholesale
mortgage production business. A total of 25 employees or 5.2% of the
Company's total workforce were released as a result of this strategic
decision. The Company's mortgage banking subsidiary, Standard Mortgage
Corporation, lacked the scale necessary to profitably compete in this
line of business. The exit charge was recorded in the fourth quarter of
2000 due to the December 20th receipt of a favorable supplemental private
letter ruling from the IRS which ensured that the tax-free treatment of
the Three Rivers Bank spin-off would not be jeopardized by this action.
- a $8.8 million decrease in salaries and employee benefits (a $2.0 million
decline on a pro forma basis) in 2000. The pro forma decline is due to 23
fewer full-time equivalent employees (FTE) and reduced incentive
compensation and pension/profit-sharing expense. The lower employee base
resulted primarily from a downsizing of the mortgage banking
operation(prior to the announced decision to exit wholesale mortgage
production) due to reduced production volumes, fewer employees at the
Parent Company, and the Company's ability to defer new hires scheduled to
fill certain open positions. Salary and benefits expense was negatively
impacted by $322,000 due to the severance costs associated with
downsizing several divisions within the Parent Company and the
nonrecurring signing bonus paid to the CEO in conjunction with his
voluntary four year base salary freeze.
- a net unfavorable shift of $1.1 million on the Company's impairment
reserve for mortgage servicing rights. In 2000, the Company recorded an
impairment charge of $339,000 on mortgage serving rights compared to a
benefit of $776,000 in 1999.
The remainder of the decline in actual non-interest expense is due to Three
Rivers Bank expenses being included for only one quarter of 2000 compared to the
full year in 1999. On a pro forma basis, equipment expense did increase due to
higher technology related expenses while professional fees also increased due to
higher legal and other professional fees.
INCOME TAX EXPENSE. . .The Company recognized an income tax expense of
$412,000 or a 17.3% effective tax rate in 2001 compared to a benefit for income
taxes of $1.5 million in 2000. During the first quarter of 2000, the Internal
Revenue Service completed its examination of the Company's tax returns through
the 1997 tax year. As a result of the successful conclusion of this examination,
the Company was able to reduce its income tax expense by $925,000 due to the
reversal of a valuation allowance and accrued income taxes. Excluding this item,
the Company's tax provision for 2000 amounted to a benefit of $553,000. This
benefit resulted from the fact that the Company's level of tax-free income
exceeded its taxable income for the year. The Company's provision for income
taxes for 1999 was $6.9 million reflecting an effective tax rate of 25.3%.
28
NET OVERHEAD BURDEN. . .The Company's efficiency ratio (non-interest
expense divided by total revenue) averaged 89.9% in 2001 compared to a 92.8%
efficiency ratio reported for 2000. The amortization of intangible assets also
created a $2.7 million non-cash charge that negatively impacts the efficiency
ratio. The efficiency ratio for 2001, stated on a cash basis excluding the
intangible amortization, was 84.2% or approximately 6.0% lower than the reported
efficiency ratio. The Company's efficiency ratio was also negatively impacted by
the Three Rivers Bank spin-off as all interest costs associated with the
guaranteed junior subordinated deferrable interest debentures ($2.9 million
annually) remained with the Company.
The Company projects that its total non-interest expense will decline in
2002. This reflects the Company's focus on pursuing optimal use of the
infrastructure investments made in 2001. The strategies to achieve growth and
revenue targets will be executed in an efficient manner with cost control always
a focal point. Consequently, the Company expects its efficiency ratio to improve
in 2002.
SEGMENT RESULTS. . .Note #22 presents the results of the Company's key
business segments and identifies their net income contribution and risk-adjusted
return on equity performance. When comparing 2001 to 2000, the Trust segment
again produced the highest ROE averaging 28.2% in 2001 compared to 35.2% in
2000. Trust's net income contribution of $857,000 in 2001 was down from the
$1,151,000 income contribution for 2000 due to a decline in the market value of
trust assets and the loss of one larger corporate trust relationship. The income
contribution and ROE within retail banking increased to $5.7 million and 20.6%
respectively due to increased non-interest income, lower non-interest expenses,
and the gain realized on the Coalport branch sale. This represents the second
consecutive year of improving profitability for the retail banking segment.
Commercial Lending ROE increased from 10.5% to 12.4% due to a reduced loan loss
provision and lower non-interest expense.
The Company has experienced earnings pressure in mortgage banking as that
division lost $2.3 million in 2001 due to the unwinding of the unprofitable
wholesale mortgage production business which amounted to approximately $250,000
and a $2.5 million impairment charge recognized on mortgage servicing rights on
a pre-tax basis. The ROE in the investment/parent segment declined to (15.4%)
due to reduced net interest income earned on leveraged assets in 2001 which
offset the benefit of higher non-interest income resulting from investment
security gains. The Three Rivers Bank spin-off also negatively impacted the
investment/parent performance as all interest costs associated with the
Company's guaranteed junior subordinated deferrable interest debentures remained
with AmeriServ Financial while this segment lost the net interest income benefit
provided from TRB's investment portfolio.
BALANCE SHEET . . . The Company's total consolidated assets were $1.20
billion at December 31, 2001, compared with $1.25 billion at December 31, 2000,
which represents a decrease of $55 million or 4.4%. This decline in assets
occurred primarily in the securities portfolio. Total investment securities
decreased by $52 million as the Company took advantage of the lower interest
rate environment to reposition and reduce the size of its investment security
portfolio during the fourth quarter of 2001. Loans and loans held for sale
totaled $599 million at December 31, 2001, which represented an increase of $9
million or 1.5% from year-end 2000. The Company enters 2002 with positive loan
momentum as total loans grew by a more meaningful $29 million or 5.0% during the
second half of 2001.
The Company's deposits totaled $676 million at the end of 2001, which
represented an increase of $17 million or 2.6% when compared to the end of 2000.
This solid growth in deposits occurred even after the sale of approximately $15
million of deposits associated with the Company's Coalport Branch in the third
quarter of 2001. Factors contributing to the growth included $11 million of
deposits from the Company's two new union niche offices, $4 million from the
full service community office opened in State College, the acquisition of $6
million of escrow deposits from its mortgage banking operation, and increased
market share within the Company's core Cambria County market. As a result of a
combination of deposit growth and deleverage of the investment securities
portfolio, the Company's total borrowed funds declined by $76 million or 15.2%
between years.
INTEREST RATE SENSITIVITY . . . Asset/liability management involves
managing the risks associated with changing interest rates and the resulting
impact on the Company's net interest income, net income and capital. The
management and measurement of interest rate risk at AmeriServ Financial is
performed by
29
using the following tools: 1) simulation modeling which analyzes the impact of
interest rate changes on net interest income, net income and capital levels over
specific future time periods. The simulation modeling forecasts earnings under a
variety of scenarios that incorporate changes in the absolute level of interest
rates, the shape of the yield curve, prepayments and changes in the volumes and
rates of various loan and deposit categories. The simulation modeling also
incorporates all hedging activity as well as assumptions about reinvestment and
the repricing characteristics of certain assets and liabilities without stated
contractual maturities; 2) market value of portfolio equity sensitivity
analysis, and 3) static GAP analysis which analyzes the extent to which interest
rate sensitive assets and interest rate sensitive liabilities are matched at
specific points in time. The overall interest rate risk position and strategies
are reviewed by senior management and the Company's Board of Directors on an
ongoing basis.
The following table presents a summary of the Company's static GAP
positions at December 31, 2001:
OVER OVER
3 MONTHS 6 MONTHS
3 MONTHS THROUGH THROUGH OVER
INTEREST SENSITIVITY PERIOD OR LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL
--------------------------- -------- -------- --------- -------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
RATE SENSITIVE ASSETS:
LOANS............................. $127,467 $ 50,324 $ 80,930 $334,930 $ 593,651
INVESTMENT SECURITIES............. 105,444 63,369 82,143 247,670 498,626
SHORT TERM ASSETS................. 660 -- -- -- 660
OTHER ASSETS...................... -- -- 27,289 -- 27,289
-------- -------- --------- -------- ----------
TOTAL RATE SENSITIVE ASSETS..... $233,571 $113,693 $ 190,362 $582,600 $1,120,226
-------- -------- --------- -------- ----------
RATE SENSITIVE LIABILITIES:
DEPOSITS:
NON-INTEREST BEARING DEPOSITS... $ -- $ -- $ -- $ 94,891 $ 94,891
NOW AND SUPER NOW............... -- -- -- 48,776 48,776
MONEY MARKET.................... 138,247 -- -- -- 138,247
OTHER SAVINGS................... -- -- -- 92,382 92,382
CERTIFICATES OF DEPOSIT OF
$100,000 OR MORE............. 11,860 12,052 2,900 3,295 30,107
OTHER TIME DEPOSITS............. 47,449 40,131 83,674 100,689 271,943
-------- -------- --------- -------- ----------
TOTAL DEPOSITS............... 197,556 52,183 86,574 340,033 676,346
BORROWINGS........................ 105,363 9 10,016 309,277 424,665
-------- -------- --------- -------- ----------
TOTAL RATE SENSITIVE
LIABILITIES................ $302,919 $ 52,192 $ 96,590 $649,310 $1,101,011
OFF-BALANCE SHEET HEDGES.......... 80,000 (80,000) -- -- --
-------- -------- --------- -------- ----------
INTEREST SENSITIVITY GAP:
INTERVAL........................ 10,652 (18,499) 93,772 (66,710) --
CUMULATIVE...................... $ 10,652 $ (7,847) $ 85,925 $ 19,215 $ 19,215
======== ======== ========= ======== ==========
PERIOD GAP RATIO.................. 1.05X 0.86X 1.97X 0.90X
CUMULATIVE GAP RATIO.............. 1.05 0.98 1.19 1.02
RATIO OF CUMULATIVE GAP TO TOTAL
ASSETS.......................... 0.89% (0.65)% 7.17% 1.60%
When December 31, 2001, is compared to December 31, 2000, the Company's one
year cumulative GAP ratio became more positive due to increased asset
sensitivity resulting from heightened prepayment speeds on mortgage backed
securities.
A portion of the Company's funding base is low cost core deposit accounts
which do not have a specific maturity date. The accounts that comprise these low
cost core deposits include passbook savings accounts, money market accounts, NOW
accounts, and daily interest savings accounts. At December 31, 2001, the
30
balance in these accounts totaled $279 million or 23% of total assets. Within
the above static GAP table, approximately $138 million or 49% of these core
deposits are assumed to be rate sensitive liabilities which reprice in one year
or less; this assumption is based upon historical experience in varying interest
rate environments and is reviewed annually for reasonableness.
Management places primary emphasis on simulation modeling to manage and
measure interest rate risk. The Company's asset liability management policy
seeks to limit net interest income variability over the first twelve months of
the forecast period to +/-7.5% and net income variability to +/-20.0% based upon
varied economic rate forecasts which include interest rate movements of up to
200 basis points and alterations of the shape of the yield curve. Additionally,
the Company also uses market value sensitivity measures to further evaluate the
balance sheet exposure to changes in interest rates. The Company monitors the
trends in market value of portfolio equity sensitivity analysis on a quarterly
basis.
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income, net income and market value of portfolio equity.
The interest rate scenarios in the table compare the Company's base forecast or
most likely rate scenario to scenarios which reflect ramped increases and
decreases in interest rates of 200 basis points along with performance in a
stagnant rate scenario with interest rates held flat at the December 31, 2001,
levels. The Company's most likely rate scenario is based upon published economic
consensus estimates which currently project an increasing interest rate scenario
in the second half of 2002. Each rate scenario contains unique prepayment and
repricing assumptions which are applied to the Company's expected balance sheet
composition that was developed under the most likely interest rate scenario for
the simulations and to the Company's existing balance sheet composition for
market value of portfolio equity analysis.
MARKET
VARIABILITY OF VALUE OF
NET INTEREST VARIABILITY OF PORTFOLIO
INTEREST RATE SCENARIO INCOME NET INCOME EQUITY
---------------------- -------------- -------------- ---------
BASE..................................................... 0% 0% 0%
FLAT..................................................... 1.8 (10.6) (25.6)
200 BP INCREASE.......................................... (4.3) 0.1 4.4
200 BP DECREASE.......................................... (0.3) (24.4) (33.1)
As indicated in the table, the maximum negative variability of the
Company's net income of (24.4%) occurred in a 200 basis downward rate shock and
reflects further impairment of mortgage servicing rights in a falling interest
rate environment. Net income in this forecast was also negatively impacted by
the Company's inability to further reduce certain core deposit costs given the
historic lows of current interest rates. Finally, this sensitivity analysis is
limited by the fact that it does not include all balance sheet repositioning
actions the Company may take should severe movements in interest rates occur
such as lengthening or shortening the duration of the securities portfolio or
entering into additional hedging transactions. These actions would likely reduce
the variability of each of the factors identified in the above table but the
cost associated with the repositioning would most likely negatively impact net
income.
Within the investment portfolio at December 31, 2001, 100% of the portfolio
is classified as available for sale. The available for sale classification
provides management with greater flexibility to manage the securities portfolio
to better achieve overall balance sheet rate sensitivity goals and provide
liquidity to fund loan growth if needed. The mark to market of the available for
sale securities does inject more volatility in the book value of equity but has
no impact on regulatory capital. Furthermore, it is the Company's intent to
continue to diversify its loan portfolio to increase liquidity and rate
sensitivity and to better manage AmeriServ Financial's long-term interest rate
risk by continuing to sell newly originated fixed-rate 30-year mortgage loans.
LIQUIDITY. . .Financial institutions must maintain liquidity to meet
day-to-day requirements of depositor and borrower customers, take advantage of
market opportunities, and provide a cushion against unforeseen needs. Liquidity
needs can be met by either reducing assets or increasing liabilities. Sources of
asset liquidity are provided by short-term investment securities, time deposits
with banks, federal funds sold, banker's acceptances, and commercial paper.
These assets totaled $67 million at December 31, 2001,
31
compared to $111 million at December 31, 2000. Maturing and repaying loans, as
well as the monthly cash flow associated with mortgage-backed securities are
other significant sources of asset liquidity for the Company.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the Federal Home Loan Bank systems. The
Company utilizes a variety of these methods of liability liquidity. At December
31, 2001, the Company's subsidiaries had approximately $55 million of unused
lines of credit available under informal arrangements with correspondent banks.
These lines of credit enable the Company's banking subsidiary to purchase funds
for short-term needs at current market rates. Additionally, the Company's
subsidiary bank is a member of the Federal Home Loan Bank which provides the
opportunity to obtain intermediate to longer term advances up to approximately
80% of its investment in assets secured by one- to four-family residential real
estate. This would suggest a remaining current total available Federal Home Loan
Bank aggregate borrowing capacity of approximately $196 million. The Company has
ample liquidity available to fund all outstanding loan commitments if they were
fully drawn upon.
Liquidity can be also be analyzed by utilizing the Consolidated Statement
of Cash Flows. Cash equivalents decreased by $7 million from December 31, 2000,
to December 31, 2001, due primarily to $59 million of cash used by financing
activities. This more than offset $38 million of cash provided by investing
activities and $14 million of cash provided by operating activities. Within
investing activities, cash proceeds from investment security maturities and
sales exceeded new investment security purchases by $57 million. Cash advanced
for new loan fundings and purchases totaled $167 million and was $5 million more
than the cash received from loan principal payments and sales. Within financing
activities, net short-term borrowings and Federal Home Loan Bank advances were
paid down by $74 million. The Company used $8 million of cash to pay common
dividends to shareholders and service the dividend on the guaranteed junior
subordinated deferrable interest debentures.
CAPITAL RESOURCES. . .As presented in Note #23, the Company continues to be
considered well-capitalized as the asset leverage ratio was 7.17% and the Tier 1
capital ratio was 13.58% at December 31, 2001. The Company currently targets an
operating range of approximately 7.0%-7.50% for the asset leverage ratio because
management and the Board of Directors believes that this level provides a
balance between regulatory capital requirements and shareholder value needs.
Note that the impact of other comprehensive income(loss) is excluded from the
regulatory capital ratios. At December 31, 2001, accumulated other comprehensive
income amounted to ($771,000). Additionally, the Company generated approximately
$2.7 million of tangible capital in 2001 due to the amortization of intangible
assets.
AmeriServ Financial focuses on providing a better than peer common dividend
as a key means to enhance shareholder value. For 2001, the Company paid out in
dividends 109% of its reported cash earnings per share. With a stable dividend
and an expected increase in earnings in the year 2002, the Company expects that
its dividend payout ratio will return to a more typical level of approximately
75% of cash earnings in 2002. The Company currently does not anticipate resuming
its treasury stock repurchase program in 2002.
The Company exceeds all regulatory capital ratios for each of the periods
presented. Furthermore, both the Company and its subsidiary bank are considered
"well capitalized" under all applicable FDIC regulations. It is the Company's
intent to maintain the FDIC "well capitalized" classification to ensure the
lowest deposit insurance premium.
The Company has declared seven quarterly $0.09 Common Stock cash dividends
per share since the April 1, 2000, spin-off of Three Rivers Bank. On an
annualized basis assuming a $4.50 market price, this equates to an 8.0% dividend
yield. The Company's Board of Directors believes that a better than peer common
dividend is a key component of total shareholder return particularly for retail
shareholders. The Company intends to maintain its annual common stock cash
dividend at the current $0.36 per share.
FORWARD LOOKING STATEMENT. . .The Company's focus in 2002 will be on
optimizing the numerous strategic initiatives that began after the April 1,
2000, spin-off of Three Rivers Bank and continued throughout 2001. These
initiatives, while negatively impacting the Company's financial performance over
the
32
past seven quarters, were critical to position the new AmeriServ Financial with
a strong foundation for longer term profitable growth, geographic expansion, and
revenue diversification. Some of the important strategic accomplishments since
April 1, 2000 have included: 1) the deliberate development of a unique union
niche strategy to better leverage the Company's position as one of only 13
unionized banks in the country, 2) the previously discussed branch realignment
which includes a greater retail presence in the demographically attractive State
College market and the opening of union specialty branch offices, 3) the exit
from the unprofitable wholesale mortgage production operation at Standard
Mortgage Company, 4) numerous technological investments which included the
introduction of new teller and platform automation systems which provide
customer contact personnel with better data to more effectively serve customer
needs and the development of a fully transactional internet banking web site,
and 5) the required name change of the Company from USBANCORP to AmeriServ
Financial which provides the Company with a name that better fits its strategic
positioning as a quality focused full financial services provider and allows the
Company to expand beyond its traditional west-central Pennsylvania market
without violating federal trademark laws.
In light of this clear corporate focus on earnings optimization and cash
flow improvement for 2002, the Company established a range of $0.36 to $0.38 for
net income per share for 2002. On a cash basis, the Company projects an earnings
range of $0.45 to $0.47 per share for the year 2002.
This Form 10-K contains various forward-looking statements and includes
assumptions concerning the Company's beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions, operations, future results,
and prospects, including statements that include the words may, could, should,
would, believe, expect, anticipate, estimate, intend, plan or similar
expressions. These forward-looking statements are based upon current
expectations and are subject to risk and uncertainties. In connection with the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
the Company provides the following cautionary statement identifying important
factors (some of which are beyond the Company's control) which could cause the
actual results or events to differ materially from those set forth in or implied
by the forward-looking statements and related assumptions.
Such factors include the following: (i) risk resulting from the
Distribution and the operation of Three Rivers Bank as a separate independent
company, (ii) the effect of changing regional and national economic conditions;
(iii) the effects of trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System;
(iv) significant changes in interest rates and prepayment speeds; (v) inflation,
stock and bond market, and monetary fluctuations; (vi) credit risks of
commercial, real estate, consumer, and other lending activities; (vii) changes
in federal and state banking and financial services laws and regulations; (viii)
the presence in the Company's market area of competitors with greater financial
resources than the Company; (ix) the timely development of competitive new
products and services by the Company and the acceptance of those products and
services by customers and regulators (when required); (x) the willingness of
customers to substitute competitors' products and services for those of the
Company and vice versa; (xi) changes in consumer spending and savings habits;
(xii) unanticipated regulatory or judicial proceedings; and (xiii) other
external developments which could materially impact the Company's operational
and financial performance.
The foregoing list of important factors is not exclusive, and neither such
list nor any forward-looking statement takes into account the impact that any
future acquisition may have on the Company and on any such forward-looking
statement.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see Interest Rate Sensitivity in the MD&A presented on pages 28 to
30. The Company's principal market risk exposure is to interest rates.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31
------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 28,461 $ 35,109
Interest bearing deposits................................... 660 763
Investment securities:
Available for sale........................................ 498,626 550,232
Loans held for sale......................................... 6,180 9,637
Loans....................................................... 600,920 588,646
Less: Unearned income..................................... 7,619 8,012
Allowance for loan losses........................... 5,830 5,936
---------- ----------
Net loans................................................... 587,471 574,698
---------- ----------
Premises and equipment...................................... 13,466 13,530
Accrued income receivable................................... 6,667 8,593
Mortgage servicing rights................................... 7,828 9,911
Goodwill and core deposit intangibles....................... 17,326 20,058
Bank owned life insurance................................... 27,289 26,042
Other assets................................................ 4,885 5,688
---------- ----------
TOTAL ASSETS................................................ $1,198,859 $1,254,261
========== ==========
LIABILITIES
Non-interest bearing deposits............................... $ 94,891 $ 89,057
Interest bearing deposits................................... 581,455 570,007
---------- ----------
Total deposits.............................................. 676,346 659,064
---------- ----------
Federal funds purchased and securities sold under agreements
to repurchase............................................. 6,667 8,096
Other short-term borrowings................................. 6,187 42,989
Advances from Federal Home Loan Bank........................ 377,311 413,351
Guaranteed junior subordinated deferrable interest
debentures................................................ 34,500 34,500
Long-term debt.............................................. -- 1,644
---------- ----------
Total borrowed funds........................................ 424,665 500,580
---------- ----------
Other liabilities........................................... 18,358 16,210
---------- ----------
TOTAL LIABILITIES........................................... 1,119,369 1,175,854
---------- ----------
Commitments and contingent liabilities (Note #16)
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized;
there were no shares issued and outstanding on December
31, 2001, and 2000........................................ -- --
Common stock, par value $2.50 per share; 24,000,000 shares
authorized; 17,733,330 shares issued and 13,642,411
outstanding on December 31, 2001; 17,542,724 shares issued
and 13,451,805 shares outstanding on December 31, 2000.... 44,333 43,857
Treasury stock at cost, 4,090,919 shares on December 31,
2001 and 2000............................................. (65,824) (65,824)
Surplus..................................................... 66,423 66,016
Retained earnings........................................... 35,329 38,238
Accumulated other comprehensive (loss) income............... (771) (3,880)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................. 79,490 78,407
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,198,859 $1,254,261
========== ==========
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans:
Taxable................................................... $ 43,076 $ 57,434 $ 84,585
Tax exempt................................................ 1,810 2,339 2,250
Deposits with banks......................................... 552 212 121
Federal funds sold and securities purchased under agreements
to resell................................................. 32 70 --
Investment securities:
Available for sale........................................ 36,189 47,243 46,506
Held to maturity.......................................... -- -- 31,726
----------- ----------- -----------
Total Interest Income....................................... 81,659 107,298 165,188
----------- ----------- -----------
INTEREST EXPENSE
Deposits.................................................... 21,542 29,269 41,150
Federal funds purchased and securities sold under agreements
to repurchase............................................. 132 1,600 3,438
Other short-term borrowings................................. 1,818 5,258 7,599
Advances from Federal Home Loan Bank........................ 26,961 30,608 43,946
Guaranteed junior subordinated deferrable interest
debentures................................................ 2,960 2,960 2,960
Long-term debt.............................................. 48 144 411
----------- ----------- -----------
Total Interest Expense...................................... 53,461 69,839 99,504
----------- ----------- -----------
Net Interest Income......................................... 28,198 37,459 65,684
Provision for loan losses................................. 1,350 2,096 1,900
----------- ----------- -----------
Net Interest Income after Provision for Loan Losses......... 26,848 35,363 63,784
----------- ----------- -----------
NON-INTEREST INCOME
Trust fees.................................................. 4,759 5,058 4,883
Net gains on loans held for sale............................ 718 1,764 4,645
Net realized gains (losses) on investment securities........ 1,913 (952) 436
Wholesale cash processing fees.............................. -- 120 603
Service charges on deposit accounts......................... 2,175 2,222 3,563
Net mortgage servicing fees................................. 349 854 789
Bank owned life insurance................................... 1,247 1,308 1,668
Gain on sale of branch...................................... 1,396 -- 540
Other income................................................ 5,518 6,235 7,247
----------- ----------- -----------
Total Non-Interest Income................................... 18,075 16,609 24,374
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits.............................. 19,585 23,305 32,091
Net occupancy expense....................................... 2,758 3,415 4,602
Equipment expense........................................... 2,940 3,549 4,211
Professional fees........................................... 2,936 2,831 3,332
Supplies, postage, and freight.............................. 1,550 1,856 2,718
Miscellaneous taxes and insurance........................... 1,482 1,545 1,810
FDIC deposit insurance expense.............................. 122 162 272
Amortization of goodwill and core deposit intangibles....... 2,732 2,858 3,135
Impairment charge (credit) for mortgage servicing rights.... 2,510 339 (776)
Spin-off costs.............................................. -- 2,552 --
Wholesale mortgage production exit costs.................... (274) 1,498 --
Other expense............................................... 6,195 7,824 9,420
----------- ----------- -----------
Total Non-Interest Expense.................................. 42,536 51,734 60,815
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.................................. 2,387 238 27,343
Provision (benefit) for income taxes...................... 412 (1,478) 6,922
----------- ----------- -----------
NET INCOME.................................................. $ 1,975 $ 1,716 $ 20,421
=========== =========== ===========
PER COMMON SHARE DATA:
Basic:
Net income.............................................. $ 0.15 $ 0.13 $ 1.53
Average number of shares outstanding.................... 13,566,712 13,370,426 13,340,204
Diluted:
Net income.............................................. $ 0.15 $ 0.13 $ 1.52
Average number of shares outstanding.................... 13,570,214 13,373,560 13,451,166
Cash dividends declared..................................... $ 0.36 $ 0.42 $ 0.59
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
-------------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS)
COMPREHENSIVE INCOME
Net income..................................................
$ 1,975 $ 1,716 $ 20,421
Other comprehensive income, before tax:
Gains on cashflow hedges arising during period............
329 -- --
Unrealized holding gains (losses) arising during period...
7,831 18,933 (50,124)
Less: reclassification adjustment for gains (losses)
included in net income.................................
1,913 (952) 436
------- -------- --------
Other comprehensive income (loss), before tax:..............
6,247 19,885 (50,560)
Income tax expense (credit) related to items of other
comprehensive income......................................
2,124 5,767 (12,802)
------- -------- --------
Other comprehensive income (loss), net of tax...............
4,123 14,118 (37,758)
Cumulative effect of change in accounting principle, net of
tax.......................................................
(1,014) -- --
------- -------- --------
Comprehensive income (loss).................................
$ 5,084 $ 15,834 $(17,337)
======= ======== ========
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of period............................. $ -- $ -- $ --
Balance at end of period................................... -- -- --
-------- -------- --------
COMMON STOCK
Balance at beginning of period............................. 43,857 43,476 43,375
Stock options exercised/new shares issued.................. 476 381 101
-------- -------- --------
Balance at end of period................................... 44,333 43,857 43,476
-------- -------- --------
TREASURY STOCK
Balance at beginning of period............................. (65,824) (65,725) (61,521)
Treasury stock, at cost.................................... -- (99) (4,204)
-------- -------- --------
Balance at end of period................................... (65,824) (65,824) (65,725)
-------- -------- --------
CAPITAL SURPLUS
Balance at beginning of period............................. 66,016 65,686 65,495
Stock options exercised/new shares issued.................. 407 330 191
-------- -------- --------
Balance at end of period................................... 66,423 66,016 65,686
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............................. 38,238 104,294 91,737
Net income................................................. 1,975 1,716 20,421
Spin-off of Three Rivers Bank.............................. -- (62,156) --
Cash dividends declared.................................... (4,884) (5,616) (7,864)
-------- -------- --------
Balance at end of period................................... 35,329 38,238 104,294
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period............................. (3,880) (35,174) 2,584
Spin-off of Three Rivers Bank.............................. -- 17,176 --
Cumulative effect of change in accounting principle, net of
tax...................................................... (1,014) -- --
Other comprehensive income (loss), net of tax.............. 4,123 14,118 (37,758)
-------- -------- --------
Balance at end of period................................... (771) (3,880) (35,174)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY................................. $ 79,490 $ 78,407 $112,557
======== ======== ========
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income..............................................
$ 1,975 $ 1,716 $ 20,421
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................
1,350 2,096 1,900
Depreciation and amortization expense.................
1,775 2,248 2,656
Amortization expense of goodwill and core deposit
intangibles........................................
2,732 2,858 3,135
Amortization expense of mortgage servicing rights.....
1,562 1,747 2,618
Impairment charge (credit) for mortgage servicing
rights.............................................
2,510 339 (776)
Net amortization of investment securities.............
2,217 527 152
Net realized (gains) losses on investment
securities.........................................
(1,913) 952 (436)
Net realized gains on loans held for sale.............
(718) (1,764) (4,645)
Origination of mortgage loans held for sale...........
(88,118) (191,749) (403,673)
Sales of mortgage loans held for sale.................
90,224 220,346 426,240
Decrease in accrued income receivable.................
1,926 1,251 500
Increase (decrease) in accrued expense payable........
(1,443) (112) 1,918
--------- --------- ---------
Net cash provided by operating activities...............
14,079 40,455 50,010
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of investment securities and other short-term
investments -- available for sale.....................
(612,485) (142,560) (394,195)
Purchase of investment securities and other short-term
investments -- held to maturity.......................
-- -- (104,527)
Proceeds from maturities of investment securities and
other short-term investments -- available for sale....
208,683 104,682 93,650
Proceeds from maturities of investment securities and
other short-term investments -- held to maturity......
-- -- 99,949
Proceeds from sales of investment securities and other
short-term investments -- available for sale..........
461,119 242,664 212,461
Proceeds from sales of investment securities and other
short-term investments -- held to maturity............
-- -- 15,959
Long-term loans originated..............................
(138,366) (129,016) (414,016)
Loans held for sale.....................................
(6,180) (9,637) (21,753)
Principal collected on long-term loans..................
158,397 145,087 362,168
Loans purchased or participated.........................
(28,385) (21,441) (9,743)
Loans sold or participated..............................
3,728 4,729 18,366
Net (increase) decrease in credit card receivables and
other short-term loans................................
(1,248) 6,116 15,298
Purchases of premises and equipment.....................
(2,427) (3,610) (3,861)
Sale/retirement of premises and equipment...............
716 1,559 288
Net decrease in assets held in trust for collateralized
mortgage obligation...................................
-- 1,726 1,117
Decrease (increase) in mortgage servicing rights........
(1,989) 1,513 845
Net increase in other assets............................
(3,350) (14,659) (11,341)
--------- --------- ---------
Net cash provided (used) by investing activities........
$ 38,213 $ 187,153 $(139,335)
========= ========= =========
See accompanying notes to consolidated financial statements.
38
YEAR ENDED DECEMBER 31
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit..........
$ 177,631 $ 225,346 $ 487,877
Payments for maturing certificates of deposit...........
(173,111) (228,771) (467,790)
Net increase in demand and savings deposits.............
12,762 11,446 34,563
Net decrease in federal funds purchased, securities sold
under agreements to repurchase, and other short-term
borrowings............................................
(38,231) (6,842) (129,165)
Net principal (repayments) borrowings on advances from
Federal Home Loan Bank................................
(36,040) (223,772) 204,608
Repayments of long-term debt............................
(1,644) (3,297) (2,171)
Common stock dividends paid.............................
(4,884) (5,616) (8,673)
Guaranteed junior subordinated deferrable interest
debenture dividends paid..............................
(2,916) (2,916) (2,916)
Proceeds from dividend reinvestment and stock purchase
plan and stock options exercised......................
883 711 292
Purchases of treasury stock.............................
-- (99) (4,204)
Net increase (decrease) in other liabilities............
6,507 3,619 (6,602)
--------- --------- ---------
Net cash (used) provided by financing activities........
(59,043) (230,191) 105,819
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH EQUIVALENTS.............
(6,751) (2,583) 16,494
NET TRANSFER TO THREE RIVERS BANK.......................
-- (16,979) --
CASH EQUIVALENTS AT JANUARY 1...........................
35,872 55,434 38,940
--------- --------- ---------
CASH EQUIVALENTS AT DECEMBER 31.........................
$ 29,121 $ 35,872 $ 55,434
========= ========= =========
See accompanying notes to consolidated financial statements.
39
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND NATURE OF OPERATIONS:
AmeriServ Financial, Inc. (the Company) is a financial holding company
(pursuant to the Gramm-Leach-Bliley Act), headquartered in Johnstown,
Pennsylvania. Through its banking subsidiary the Company operates 24 banking
locations in seven Pennsylvania counties. These offices provide a full range of
consumer, mortgage, commercial, and trust financial products.
PRINCIPLES OF CONSOLIDATION:
On April 24, 2001, at the annual shareholders' meeting USBANCORP, Inc.
announced that it has changed its name effective May 7, 2001, to AmeriServ
Financial, Inc. The 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 (Trust Company), AmeriServ Associates, Inc., (AmeriServ Associates) and
AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a state-chartered
full service bank with 24 locations in Pennsylvania. The Trust Company offers a
complete range of trust and financial services and has $1.2 billion in assets
under management. The Trust Company also offers the ERECT and BUILD Funds which
are collective investment funds for trade union controlled pension fund assets.
In the fourth quarter of 2001 Standard Mortgage Corporation of Georgia (SMC) was
sold by the Company to the Bank. SMC is a mortgage banking company whose
business includes the servicing of mortgage loans. AmeriServ Associates, based
in State College, is a registered investment advisory firm that provides
investment portfolio and asset/liability management services to small and mid-
sized financial institutions. AmeriServ Life is a captive insurance company that
engages in underwriting as a reinsurer of credit life and disability insurance.
On April 1, 2000, the Company successfully completed the tax-free spin-off
of its Pittsburgh based Three Rivers Bank (TRB) subsidiary to its shareholders.
(See Note #25.) To facilitate an orderly transition, the Company and Three
Rivers Bank entered into a Services Agreement whereby the Company is continuing
to provide certain services such as asset/liability management on an outsourced
basis to Three Rivers Bank. The cost and related expense associated with
providing these services is being paid by Three Rivers Bank at a fair market
value rate.
Intercompany accounts and transactions have been eliminated in preparing
the consolidated financial statements. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results may differ from these estimates. The Company's most significant estimate
is the allowance for loan losses.
INVESTMENT SECURITIES:
Securities are classified at the time of purchase as investment securities
held to maturity if it is management's intent and the Company has the ability to
hold the securities until maturity. These held to maturity securities are
carried on the Company's books at cost, adjusted for amortization of premium and
accretion of discount which is computed using the level yield method which
approximates the effective interest method. Alternatively, securities are
classified as available for sale if it is management's intent at the time of
purchase to hold the securities for an indefinite period of time and/or to use
the securities as part of the Company's asset/liability management strategy.
Securities classified as available for sale include securities which may be sold
to effectively manage interest rate risk exposure, prepayment risk, and other
factors (such as liquidity requirements). These available for sale securities
are reported at fair value with unrealized
40
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate appreciation (depreciation) excluded from income and credited
(charged) to accumulated other comprehensive income within stockholders' equity
on a net of tax basis. Any security classified as trading assets are reported at
fair value with unrealized aggregate appreciation (depreciation) included in
current income on a net of tax basis. The Company presently does not engage in
trading activity. Realized gain or loss on securities sold was computed upon the
adjusted cost of the specific securities sold.
LOANS:
Interest income is recognized using methods which approximate a level yield
related to principal amounts outstanding. The Company's subsidiaries discontinue
the accrual of interest income when loans, except for loans that are insured for
credit loss, become 90 days past due in either principal or interest. In
addition, if circumstances warrant, the accrual of interest may be discontinued
prior to 90 days. In all cases, payments received on non-accrual loans are
credited to principal until full recovery of principal has been recognized; it
is only after full recovery of principal that any additional payments received
are recognized as interest income. The only exception to this policy is for
residential mortgage loans wherein interest income is recognized on a cash basis
as payments are received. A non-accrual commercial loan is placed on accrual
status after becoming current and remaining current for twelve consecutive
payments. Residential mortgage loans are placed on accrual status upon becoming
current.
LOAN FEES:
Loan origination and commitment fees, net of associated direct costs, are
deferred and amortized into interest and fees on loans over the loan or
commitment period. Fee amortization is determined by the effective interest
method.
MORTGAGE LOANS HELD FOR SALE:
Newly originated fixed-rate residential mortgage loans are classified as
held for sale, if it is management's intent to sell these residential mortgage
loans. The residential mortgage loans held for sale are carried at the lower of
aggregate cost or market value.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to operations over the estimated useful
lives of the premises and equipment using the straight-line method. Useful lives
of up to 45 years for buildings and up to 12 years for equipment are utilized.
Leasehold improvements are amortized using the straight-line method over the
terms of the respective leases or useful lives of the improvements, whichever is
shorter. Maintenance, repairs, and minor alterations are charged to current
operations as expenditures are incurred.
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFF PROCEDURES:
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Company anticipates that credit losses
will be experienced in the normal course of business. Accordingly, the Company
consistently applies a comprehensive methodology and procedural discipline to
perform an analysis which is updated on a quarterly basis at the Bank level to
determine both the adequacy of the allowance for loan losses and the necessary
provision for loan losses to be charged against earnings. This methodology
includes:
- A detailed review of all criticized and impaired loans to determine if
any specific reserve allocations are required on an individual loan
basis. The specific reserve established for these criticized and impaired
41
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loans is based on careful analysis of the loan's performance, the related
collateral value, cash flow considerations and the financial capability
of any guarantor.
- The application of formula driven reserve allocations for all commercial
and commercial real-estate loans are calculated by using a three-year
migration analysis of net losses incurred within each risk grade for the
entire commercial loan portfolio. The difference between estimated and
actual losses is reconciled through the dynamic nature of the migration
analysis.
- The application of formula driven reserve allocations to installment and
mortgage loans which are based upon historical charge-off experience for
those loan types. The residential mortgage loan allocation is based upon
the Company's five-year historical average of actual loan charge-offs
experienced in that category. The same methodology is used to determine
the allocation for consumer loans except the allocation is based upon an
average of the most recent actual three-year historical charge-off
experience for consumer loans.
- The application of formula driven reserve allocations to all outstanding
loans and certain unfunded commitments is based upon review of historical
losses and qualitative factors, which include but are not limited to,
economic trends, delinquencies, concentrations of credit, trends in loan
volume, experience and depth of management, examination and audit
results, effects of any changes in lending policies and trends in policy
exceptions.
- The maintenance of a general unallocated reserve to accommodate inherent
risk in the Company's portfolio that is not identified through the
Company's specific loan and portfolio segment reviews discussed above.
Management recognizes that there may be events or economic factors that
have occurred affecting specific borrowers or segments of borrowers that
may not yet be fully reflected in the information that the Company uses
for arriving at reserves for a specific loan or portfolio segment.
Therefore, the Company and its Board of Directors believe a general
unallocated reserve is needed to recognize the estimation risk associated
with the specific and formula driven allowances. In conjunction with the
establishment of the general unallocated reserve, the Company also looks
at the total allowance for loan losses in relation to the size of the
total loan portfolio, the level of non-performing assets and its coverage
of these items as compared to peer banks.
After completion of this process, a formal meeting of the Loan Loss Reserve
Committee is held to evaluate the adequacy of the reserve. The Company believes
that the procedural discipline, systematic methodology, and comprehensive
documentation of this quarterly process is in full compliance with all
regulatory requirements and provides appropriate support for accounting
purposes.
When it is determined that the prospects for recovery of the principal of a
loan have significantly diminished, the loan is immediately charged against the
allowance account; subsequent recoveries, if any, are credited to the allowance
account. In addition, non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are considered losses when
they are 90 days past due, except loans that are insured for credit loss.
The Company's policy is to individually review, as circumstances warrant,
each of its commercial and commercial mortgage loans to determine if a loan is
impaired. At a minimum, credit reviews are mandatory for all commercial and
commercial mortgage loans with balances in excess of $500,000 within a 12 month
period. The Company has also identified two pools of small dollar value
homogeneous loans which are evaluated collectively for impairment. These
separate pools are for residential mortgage loans and consumer loans. Individual
loans within these pools are reviewed and removed from the pool if factors such
as significant delinquency in payments of 90 days or more, bankruptcy, or other
negative economic concerns indicate impairment.
42
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASED AND ORIGINATED MORTGAGE SERVICING RIGHTS:
The Company recognizes as assets the rights to service mortgage loans for
others whether the servicing rights are acquired through purchases or
originations. Purchased mortgage servicing rights are capitalized at cost. For
loans originated and sold where servicing rights have been retained, the Company
allocates the cost of originating the loan to the loan (without the servicing
rights) and the servicing rights retained based on their relative fair market
values if it is practicable to estimate those fair values. Where it is not
practicable to estimate the fair values, the entire cost of originating the loan
is allocated to the loan without the servicing rights. For purposes of
evaluating and measuring impairment, the Company stratifies the rights based on
risk characteristics. If the discounted projected net cash flows of a stratum
are less than the carrying amount of the stratum, the stratum is written down to
the amount of the discounted projected net cash flows through a valuation
account. This writedown is recorded in the line item on the Consolidated
Statement of Income titled Impairment charge for mortgage servicing rights. The
Company has determined that the predominant risk characteristics of its
portfolio are loan type and interest rate. For the purposes of evaluating
impairment, the Company has stratified its portfolio in 200 basis point tranches
by loan type. Mortgage servicing rights are amortized in proportion to, and over
the period of, estimated net servicing income. The value of mortgage servicing
rights is subject to interest rate and prepayment risk. It is likely that the
value of these assets will decrease if prepayments occur at greater than the
expected rate.
TRUST FEES:
All trust fees are recorded on the cash basis which approximates the
accrual basis for such income.
EARNINGS PER COMMON SHARE:
Basic earnings per share includes only the weighted average common shares
outstanding. Diluted earnings per share includes the weighted average common
shares outstanding and any dilutive common stock equivalent shares in the
calculation. Treasury shares are treated as retired for earnings per share
purposes. Options to purchase 505,429, 508,700 and 224,025 shares of common
stock were outstanding during 2001, 2000 and 1999, respectively, but were not
included in the computation of diluted earnings per common share as the options'
exercise prices were greater than the average market price of the common stock
for the respective periods.
COMPREHENSIVE INCOME:
For the Company, comprehensive income includes net income and unrealized
holding gains and losses from available for sale investment securities and
derivatives that qualify as cashflow hedges. The balances of other accumulated
comprehensive loss were $(771,000), $(3,880,000) and $(35,174,000) at December
31, 2001, 2000 and 1999, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS:
On a consolidated basis, cash equivalents include cash and due from banks,
interest bearing deposits with banks, and federal funds sold and securities
purchased under agreements to resell. For the Parent Company, cash equivalents
also include short-term investments. The Company made $482,000 in income tax
payments in 2001; $787,000 in 2000; and $4,927,000 in 1999. The Company made
total interest expense payments of $54,904,000 in 2001; $75,867,000 in 2000; and
$97,586,000 in 1999.
43
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
INTEREST RATE CONTRACTS:
The Company uses various interest rate contracts, such as interest rate
swaps, caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. These
interest rate contracts function as hedges against specific assets or
liabilities on the Consolidated Balance Sheet. The fair value of these contracts
is recorded in the Company's balance sheet, with the offset to accumulated other
comprehensive income (loss), net of tax. It is the Company's policy not to
terminate hedge transactions prior to their expiration date.
For interest rate swaps, the interest differential to be paid or received
is accrued by the Company and recognized as an adjustment to interest income or
interest expense of the underlying assets or liabilities being hedged. Because
only interest payments are exchanged, the cash requirement and exposure to
credit risk are significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest rate caps or
floors is deferred and amortized to interest income or interest expense over the
term of the contract. Unamortized premiums related to the purchase of caps and
floors are included in Other assets on the Consolidated Balance Sheet.
RISK MANAGEMENT OVERVIEW:
Risk identification and management are essential elements for the
successful management of the Company. In the normal course of business, the
Company is subject to various types of risk, including interest rate, credit,
and liquidity risk. The Company controls and monitors these risks with policies,
procedures, and various levels of managerial and Board oversight. The Company's
objective is to optimize profitability while managing and controlling risk
within Board approved policy limits.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the magnitude, direction, and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets, liabilities, and hedges. The
Company uses its asset liability management policy and hedging policy to control
and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers, purchasing securities, and entering into certain off-balance sheet
loan funding commitments. The Company's primary credit risk occurs in the loan
portfolio. The Company uses its credit policy and disciplined approach to
evaluating the adequacy of the allowance for loan losses to control and manage
credit risk. The Company's investment policy and hedging policy strictly limit
the amount of credit risk that may be assumed in the investment portfolio and
through hedging activities.
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well
as, the obligations to depositors and debtholders. The Company uses its asset
liability management policy and contingency funding plan to control and manage
liquidity risk.
RECENT ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations (FASB #141) and
No. 142, Goodwill and Other Intangible Assets (FASB #142). FASB #141 requires
all business combinations initiated after June 30, 2001, to be accounted for
using the purchase method. Under FASB #142, goodwill and intangible assets with
indefinite
44
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lives are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives. The amortization provisions of FASB #142 apply to goodwill and
intangible assets acquired prior to July 1, 2001. The Company adopted FASB #142
effective January 1, 2002. The Company incurs annual goodwill amortization of
$1.3 million that will cease in 2002. The Company is currently evaluating the
effect that adoption of the provisions of FASB #142 that are effective January
1, 2002, will have on its results of operations and financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (FASB #144).
FASB #144 supercedes FASB #121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and provides further
guidance regarding the accounting and disclosure of long-lived assets. The
Company adopted FASB #144 effective January 1, 2002, and does not believe the
prospective adoption of this standard will have a material impact on its results
of operation or financial position.
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2001, and 2000, included $6,656,000
and $5,710,000, respectively, of reserves required to be maintained under
Federal Reserve Bank regulations.
3. INTEREST BEARING DEPOSITS WITH BANKS
The book value of interest bearing deposits with domestic banks are as
follows:
AT DECEMBER 31
--------------
2001 2000
----- -----
(IN THOUSANDS)
Total....................................................... $660 $763
==== ====
All interest bearing deposits are with domestic banks and mature within
three months. The Company had no deposits in foreign banks nor in foreign
branches of United States banks.
4. INVESTMENT SECURITIES
The book and market values of investment securities are summarized as
follows:
Investment securities available for sale:
AT DECEMBER 31, 2001
---------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
U.S. TREASURY...................................... $ 10,972 $ 9 $ (40) $ 10,941
U.S. AGENCY........................................ 850 10 -- 860
STATE AND MUNICIPAL................................ 1,012 1 (21) 992
U.S. AGENCY MORTGAGE-BACKED SECURITIES............. 439,591 1,829 (1,413) 440,007
OTHER SECURITIES(1)................................ 46,154 -- (328) 45,826
-------- ------ ------- --------
TOTAL.............................................. $498,579 $1,849 $(1,802) $498,626
======== ====== ======= ========
45
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities available for sale:
AT DECEMBER 31, 2000
-------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury................................... $ 10,820 $ 3 $ (11) $ 10,812
U.S. Agency..................................... 35,507 4 (219) 35,292
State and municipal............................. 39,398 14 (1,052) 38,360
U.S. Agency mortgage-backed securities.......... 419,669 1,014 (4,618) 416,065
Other securities(1)............................. 50,793 5 (1,095) 49,703
---------- ------ -------- ----------
Total........................................... $ 556,187 $1,040 $ (6,995) $ 550,232
========== ====== ======== ==========
---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
All purchased investment securities are recorded on settlement date which
is not materially different from the trade date. Realized gains and losses are
calculated by the specific identification method.
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investors Service or
Standard & Poor's rating of A. At December 31, 2001, 94.4% of the portfolio was
rated AAA as compared to 96.5% at December 31, 2000. Approximately 5.0% of the
portfolio was rated below A or unrated on December 31, 2001.
The book value of securities pledged to secure public and trust deposits,
and certain Federal Home Loan Bank borrowings was $253,453,000 at December 31,
2001, and $313,602,000 at December 31, 2000. The Company realized $2,827,000,
$914,000 and $624,000 of gross investment security gains and $914,000,
$1,866,000 and $525,000 of gross investment security losses on available for
sale securities in 2001, 2000, and 1999 respectively. The Company realized
$355,000 of gross investment security gains and $18,000 of gross investment
security losses on held to maturity securities in 1999.
The following table sets forth the contractual maturity distribution of the
investment securities, book and market values, and the weighted average yield
for each type and range of maturity as of December 31, 2001. Yields are not
presented on a tax-equivalent basis, but are based upon book value and are
weighted for the scheduled maturity. Average maturities are based upon the
original contractual maturity dates with the exception of mortgage-backed
securities and asset-backed securities for which the average lives were used. At
December 31, 2001, the Company's consolidated investment securities portfolio
had a modified duration of approximately 2.47 years.
46
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities available for sale:
AT DECEMBER 31, 2001
------------------------------------------------------------------------------------
AFTER 1 YEAR AFTER 5 YEARS
BUT WITHIN BUT WITHIN
WITHIN 1 YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------------- --------------- -------------- -------------- ---------------
(IN THOUSANDS, EXCEPT YIELDS)
BOOK VALUE
U.S. TREASURY.......................... $ 733 2.00% $ 10,239 3.91% $ -- --% $ -- --% $ 10,972 3.78%
U.S. AGENCY............................ -- -- 850 7.08 -- -- -- -- 850 7.08
STATE AND MUNICIPAL.................... -- -- 220 4.95 792 5.44 -- -- 1,012 5.33
U.S. AGENCY MORTGAGE-BACKED
SECURITIES........................... 37,841 4.41 289,835 6.09 78,357 5.43 33,558 5.60 439,591 5.79
OTHER SECURITIES(1).................... 38,529 3.85 6,625 7.28 1,000 4.70 -- -- 46,154 4.34
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
TOTAL INVESTMENT SECURITIES AVAILABLE
FOR SALE............................. $77,103 4.10% $307,769 6.04% $80,149 5.42% $33,558 5.60% $498,579 5.61%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
MARKET VALUE
U.S. TREASURY.......................... $ 733 $ 10,208 $ -- $ -- $ 10,941
U.S. AGENCY............................ -- 860 -- -- 860
STATE AND MUNICIPAL.................... -- 221 771 -- 992
U.S. AGENCY MORTGAGE-BACKED
SECURITIES........................... 37,774 290,736 78,110 33,387 440,007
OTHER SECURITIES(1).................... 38,529 6,297 1,000 -- 45,826
------- -------- ------- ------- --------
TOTAL INVESTMENT SECURITIES AVAILABLE
FOR SALE............................. $77,036 $308,322 $79,881 $33,387 $498,626
======= ======== ======= ======= ========
---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
5. LOANS
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Commercial.................................................. $123,523 $116,615
Commercial loans secured by real estate..................... 209,483 193,912
Real estate-mortgage........................................ 231,728 242,370
Consumer.................................................... 36,186 35,749
-------- --------
Loans....................................................... 600,920 588,646
Less: Unearned income....................................... 7,619 8,012
-------- --------
Loans, net of unearned income............................... $593,301 $580,634
======== ========
Real estate construction loans comprised 5.6% and 3.0% of total loans net
of unearned income at December 31, 2001 and 2000, respectively. The Company has
no direct credit exposure to foreign countries. Additionally, the Company has no
significant industry lending concentrations. As of December 31, 2001, loans to
customers engaged in similar activities and having similar economic
characteristics, as defined by standard industrial classifications, did not
exceed 10% of total loans. In the ordinary course of business, the subsidiaries
have transactions, including loans, with their officers, directors, and their
affiliated companies. These transactions were on substantially the same terms as
those prevailing at the time for comparable transactions
47
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with unaffiliated parties and do not involve more than the normal credit risk.
These loans totaled $3,912,000 and $2,671,000 at December 31, 2001 and 2000,
respectively. An analysis of these related party loans follows:
YEAR ENDED DECEMBER 31
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Balance January 1........................................... $ 2,671 $ 4,779
New loans................................................... 11,437 13,507
Payments.................................................... (10,196) (15,615)
-------- --------
Balance December 31......................................... $ 3,912 $ 2,671
======== ========
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31
-----------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Balance January 1........................................... $ 5,936 $10,350 $10,725
Reduction due to spin-off of TRB............................ -- (5,028) --
Provision for loan losses................................... 1,350 2,096 1,900
Recoveries on loans previously charged-off.................. 364 680 728
Loans charged-off........................................... (1,820) (2,162) (3,003)
------- ------- -------
Balance December 31......................................... $ 5,830 $ 5,936 $10,350
======= ======= =======
7. NON-PERFORMING ASSETS
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) loans which are contractually past due 90 days or more as to
interest or principal payments some of which are insured for credit loss, and
(iii) other real estate owned (real estate acquired through foreclosure,
in-substance foreclosures and repossessed assets).
The following table presents information concerning non-performing assets:
AT DECEMBER 31
--------------------------------------------
2001 2000 1999 1998 1997
------- ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans............................... $ 9,303 $5,803 $ 4,928 $5,206 $6,450
Loans past due 90 days or more.................. 208 -- 1,305 1,579 1,601
Other real estate owned......................... 533 158 7,126 1,451 807
------- ------ ------- ------ ------
Total non-performing assets..................... $10,044 $5,961 $13,359 $8,236 $8,858
======= ====== ======= ====== ======
Total non-performing assets as a percent of
loans and loans held for sale, net of unearned
income, and other real estate owned........... 1.67% 1.01% 1.21% 0.77% 0.89%
======= ====== ======= ====== ======
The Company is unaware of any additional potential problem loans which are
required to either be charged-off or added to the non-performing asset totals
disclosed above. Other real estate owned is recorded at the lower of 1) fair
value minus estimated costs to sell, or 2) carrying cost.
48
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For impaired loans, the measurement of impairment may be based upon: 1) the
present value of expected future cash flows discounted at the loan's effective
interest rate; 2) the observable market price of the impaired loan; or 3) the
fair value of the collateral of a collateral dependent loan.
The Company had loans totaling $11,893,000 and $3,165,000 being
specifically identified as impaired and a corresponding allocation reserve of
$1,424,000 and $600,000 at December 31, 2001 and 2000, respectively. The average
outstanding balance for loans being specifically identified as impaired was
$7,897,000 for 2001 and $2,580,000 for 2000. All of the impaired loans are
collateral dependent, therefore the fair value of the collateral of the impaired
loans is evaluated in measuring the impairment. The interest income recognized
on impaired loans during 2001 was $399,000, and there was no income recognized
during 2000.
The following table sets forth, for the periods indicated, (i) the gross
interest income that would have been recorded if non-accrual loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period, (ii)
the amount of interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans.
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999 1998 1997
---- ----- ---- ----- -----
(IN THOUSANDS)
Interest income due in accordance with original
terms............................................ $340 $ 464 $494 $ 367 $ 472
Interest income recorded........................... (19) (139) (20) (134) (132)
---- ----- ---- ----- -----
Net reduction in interest income................... $321 $ 325 $474 $ 233 $ 340
==== ===== ==== ===== =====
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
AT DECEMBER 31,
------------------
2001 2000
------- -------
(IN THOUSANDS)
Land........................................................ $ 1,714 $ 1,714
Premises.................................................... 20,123 19,913
Furniture and equipment..................................... 16,842 15,531
Leasehold improvements...................................... 840 650
------- -------
Total at cost............................................... 39,519 37,808
Less: Accumulated depreciation and amortization............. 26,053 24,278
------- -------
Net book value.............................................. $13,466 $13,530
======= =======
49
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND
OTHER SHORT-TERM BORROWINGS
The outstanding balances and related information for federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings are summarized as follows:
AT DECEMBER 31, 2001
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
BALANCE.................................................. $ 6,275 $ 392 $ 6,187
MAXIMUM INDEBTEDNESS AT ANY MONTH END.................... 11,050 424 116,463
AVERAGE BALANCE DURING YEAR.............................. 2,889 275 51,053
AVERAGE RATE PAID FOR THE YEAR........................... 4.22% 2.72% 3.57%
AVERAGE RATE ON YEAR END BALANCE......................... 1.82 1.25 1.50
AT DECEMBER 31, 2000
----------------------------------------
SECURITIES OTHER
FEDERAL SOLD UNDER SHORT-
FUNDS AGREEMENTS TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance.................................................. $ 7,765 $ 331 $ 42,989
Maximum indebtedness at any month end.................... 59,715 1,113 213,826
Average balance during year.............................. 25,453 627 93,104
Average rate paid for the year........................... 6.10% 3.38% 5.57%
Average rate on year end balance......................... 6.56 3.00 5.10
AT DECEMBER 31, 1999
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance.................................................. $15,300 $ 1,069 $ 84,874
Maximum indebtedness at any month end.................... 65,600 37,087 218,204
Average balance during year.............................. 56,396 10,548 148,668
Average rate paid for the year........................... 5.13% 4.69% 4.99%
Average rate on year end balance......................... 4.75 3.00 3.07
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances. Collateral related to securities sold under agreements to repurchase
are maintained within the Company's investment portfolio.
These borrowing transactions can range from overnight to one year in
maturity. The average maturity was 16 days at the end of 2001, 92 days at the
end of 2000 and 89 days at the end of 1999.
50
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DEPOSITS
The following table sets forth the balance of the Company's deposits:
AT DECEMBER 31
------------------------------------
2001 2000 1999
-------- ---------- ----------
(IN THOUSANDS)
Demand:
Non-interest bearing.................................... $ 94,891 $ 89,057 $ 160,253
Interest bearing........................................ 48,776 46,440 88,661
Savings................................................. 92,382 90,886 162,653
Money market............................................ 138,247 135,151 177,935
Certificates of deposit in denominations of $100,000 or
more.................................................. 30,107 21,010 90,921
Other time.............................................. 271,943 276,520 550,518
-------- ---------- ----------
Total deposits.......................................... $676,346 $ 659,064 $1,230,941
======== ========== ==========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31
-----------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Interest bearing demand..................................... $ 434 $ 570 $ 928
Savings..................................................... 1,401 1,775 2,799
Money market................................................ 3,654 6,650 6,302
Certificates of deposit in denominations of $100,000 or
more...................................................... 1,281 2,223 2,596
Other time.................................................. 14,772 18,051 28,525
------- ------- -------
Total interest expense...................................... $21,542 $29,269 $41,150
======= ======= =======
The following table sets forth the balance of other time deposits maturing
in the periods presented:
YEAR
---- (IN THOUSANDS)
2002........................................................ $171,254
2003........................................................ 66,129
2004........................................................ 11,718
2005........................................................ 10,516
2006 and after.............................................. 12,326
51
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ADVANCES FROM FEDERAL HOME LOAN BANK, GUARANTEED JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES AND LONG-TERM DEBT
Advances from the Federal Home Loan Bank consist of the following:
AT DECEMBER 31, 2001
-------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
-------- ------------- --------
(IN THOUSANDS)
Overnight................................................... --% $ --
2002........................................................ 3.23 102,500
2003........................................................ 4.62 48,750
2004........................................................ -- --
2005........................................................ 6.74 15,000
2006 and after.............................................. 5.98 211,061
---- --------
Total advances.............................................. 5.09 377,311
---- --------
Total FHLB borrowings....................................... 5.09% $377,311
==== ========
AT DECEMBER 31, 2000
-------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
-------- ------------- --------
(IN THOUSANDS)
Overnight................................................... 6.64% $ 29,365
2001........................................................ 6.39 171,250
2002........................................................ 6.14 12,500
2003........................................................ 6.14 53,750
2004........................................................ -- --
2005 and after.............................................. 6.18 175,851
---- --------
Total advances.............................................. 6.29 413,351
---- --------
Total FHLB borrowings....................................... 6.31% $442,716
==== ========
All Federal Home Loan Bank stock, along with an interest in unspecified
mortgage loans and mortgage-backed securities, with an aggregate statutory value
equal to the amount of the advances, have been pledged as collateral to the
Federal Home Loan Bank of Pittsburgh.
GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
On April 28, 1998, the Company completed a $34.5 million public offering of
8.45% Trust Preferred Securities, which represent undivided beneficial interests
in the assets of a Delaware business trust, AmeriServ Financial Capital Trust I.
The Trust Preferred Securities will mature on September 30, 2028, and are
callable at par at the option of the Company after September 30, 2003. Proceeds
of the issue were invested by AmeriServ Financial Capital Trust I in Junior
Subordinated Debentures issued by AmeriServ Financial, Inc. Net proceeds from
the $34.5 million offering were used for general corporate purposes, including
the repayment of debt, the repurchase of AmeriServ Financial common stock, and
investments in and advances to the Company's subsidiaries. Unamortized deferred
issuance costs associated with the Trust Preferred Securities amounted to $1.2
million as of December 31, 2001, and are being amortized on a straight line
basis over the term of the issue. The Trust Preferred securities are listed on
NASDAQ under the symbol ASRVP.
52
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the occurrence of certain events, specifically a tax event or a
capital treatment event, the Company may redeem in whole, but not in part, the
Guaranteed Junior Subordinated Deferrable Interest Debentures prior to September
30, 2028. A tax event means that the interest paid by the Company on the
subordinated debentures will no longer be deductible for federal income tax
purposes. A capital treatment event means that the Trust Preferred Securities no
longer qualify as Tier 1 capital for purposes of the capital adequacy guidelines
of the Federal Reserve. Proceeds from any redemption of the subordinated
debentures would cause mandatory redemption of the Trust Preferred Securities.
LONG-TERM DEBT:
The Company's long-term debt consisted of the following:
AT DECEMBER 31
----------------
200 2000
------ ------
(IN THOUSANDS)
Bank note................................................... $ -- $1,644
------ ------
Total long-term debt........................................ $ -- $1,644
====== ======
The bank note payable by Standard Mortgage Corporation was a $7.5 million
non-revolving commercial loan commitment which was payable monthly in fixed
principal installments of $156,250 through November 25, 2001. This note was paid
off in 2001.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB #107, Disclosures about Fair Value of Financial Instruments, requires
all entities to disclose the estimated fair value of its financial instrument
assets and liabilities. For the Company, as for most financial institutions,
approximately 95% of its assets and liabilities are considered financial
instruments. Many of the Company's financial instruments, however, lack an
available trading market characterized by a willing buyer and willing seller
engaging in an exchange transaction. Therefore, significant estimations and
present value calculations were used by the Company for the purpose of this
disclosure.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. Management believes that cash, cash equivalents, and
loans and deposits with floating interest rates have estimated fair values which
approximate the recorded book balances. The estimation methodologies used, the
estimated fair values, and recorded book balances at December 31, 2001 and 2000,
were as follows:
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
2001 2000
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Investment securities....................... $498,626 $498,626 $550,232 $550,232
======== ======== ======== ========
53
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities.
2001 2000
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Deposits with stated maturities............. $307,296 $302,051 $302,575 $297,531
Short-term borrowings....................... 181,667 181,667 292,461 292,461
All other borrowings........................ 252,981 242,998 212,045 208,119
======== ======== ======== ========
Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the recorded
book balance.
2001 2000
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Deposits with no stated maturities.......... $374,295 $374,295 $361,533 $361,533
======== ======== ======== ========
The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is based upon the
treasury yield curve adjusted for non-interest operating costs, credit loss, and
assumed prepayment risk.
2001 2000
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Net loans (including loans held for sale)... $599,993 $599,481 $600,796 $590,271
======== ======== ======== ========
Purchased and originated mortgage servicing rights have been valued by an
independent third party using a methodology which incorporates a discounted
after-tax cash flow of the servicing (loan servicing fees and other related
ancillary fee income less the costs of servicing the loans). This valuation also
assumes current PSA prepayment speeds which are based upon industry data
collected on mortgage prepayment trends. For further discussion see Note #1.
2001 2000
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Purchased and originated mortgage servicing
rights.................................... $7,828 $7,828 $9,969 $9,911
====== ====== ====== ======
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. No
disclosure of the relationship value of the Company's deposits is required by
FASB #107, however, management believes the relationship value of these core
deposits is significant. Based upon the Company's most recent sales and
acquisitions and other limited secondary market transactions involving similar
deposits, management estimates the relationship value of these funding
liabilities to range between $34 million to $68 million less than their
estimated fair value shown at December 31, 2001. The estimated fair value of
instruments used for hedging purposes is estimated by financial modeling
performed by an independent third party. These values
54
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represent the estimated amount the Company would receive or pay, to terminate
the agreements, considering current interest rates, as well as the
creditworthiness of the counterparties.
There is no material difference between the notional amount and the
estimated fair value of the off-balance sheet items which total $145.6 million
at December 31, 2001, and are primarily comprised of unfunded loan commitments
which are generally priced at market at the time of funding.
Management believes that the disclosed fair values between financial
institutions may not be comparable due to the wide range of assumptions,
methodologies and other uncertainties in estimating fair values, given the
absence of active secondary markets for many of the financial instruments. This
lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
13. INCOME TAXES
The provision for federal income taxes is summarized below:
YEAR ENDED DECEMBER 31
---------------------------
2001 2000 1999
------ ------- ------
(IN THOUSANDS)
Current..................................................... $ (897) $ (535) $5,403
Deferred.................................................... 1,309 (943) 1,519
------ ------- ------
Income tax provision (benefit).............................. $ 412 $(1,478) $6,922
====== ======= ======
55
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation between the federal statutory tax rate and the Company's
effective consolidated income tax rate is as follows:
YEAR ENDED DECEMBER 31
------------------------------------------------------
2001 2000 1999
--------------- --------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ----- ------- ---- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Tax expense based on federal statutory
rate................................ $ 835 35.0% $ 84 N/M $ 9,570 35.0%
State income taxes.................... 13 0.5 -- " 13 0.1
Tax exempt income..................... (843) (35.3) (1,717) " (3,359) (12.3)
Goodwill and acquisition related
costs............................... 442 18.5 469 " 469 1.7
Non-deductible spin-off charges....... -- -- 455 " -- --
Reversal of tax liability............. -- -- (600) " -- --
Reversal of valuation allowance....... -- -- (325) " -- --
Other................................. (35) (1.4) 156 " 229 0.8
----- ----- ------- --- ------- -----
Total (benefit) provision for income
taxes............................... $ 412 17.3% $(1,478) N/M $ 6,922 25.3%
===== ===== ======= === ======= =====
---------------
N/M -- not meaningful.
Deferred income taxes result from temporary differences in the recognition
of revenue and expense for tax and financial reporting purposes. The following
table presents the impact on the income tax provision of the principal timing
differences and the tax effect of each (bracketed amounts represent future
income tax return deductions):
YEAR ENDED DECEMBER 31
----------------------------
2001 2000 1999
------- ------- ------
(IN THOUSANDS)
Provision (benefit) for possible loan losses................ $ 2 $ (178) $ 131
Net operating loss and wholesale exit charge................ 1,774 (1,773) --
Lease accounting............................................ 1,394 1,380 1,356
Accretion (amortization) of discounts on securities, net.... (88) (126) 506
Core deposit and mortgage servicing intangibles............. (1,433) (106) (351)
Deferred loan fees.......................................... 30 42 89
Other, net.................................................. (370) (182) (212)
------- ------- ------
Total............................................. $ 1,309 $ (943) $1,519
======= ======= ======
56
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001 and 2000, deferred taxes are included in the
accompanying consolidated balance sheet. The following table highlights the
major components comprising the deferred tax assets and liabilities for each of
the periods presented:
AT DECEMBER 31
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Deferred Assets:
Provision for loan losses................................. $ 2,040 $ 2,042
Net operating loss and wholesale exit charge.............. -- 1,773
Unrealized investment security (gains) losses............. (9) 2,087
Deferred loan fees........................................ 52 82
Other..................................................... 1,008 798
-------- --------
Total assets...................................... 3,091 6,782
-------- --------
Deferred Liabilities:
Accumulated depreciation.................................. (438) (595)
Accretion of discount..................................... (1,810) (1,898)
Lease accounting.......................................... (7,478) (6,080)
Core deposit and mortgage servicing intangibles........... (357) (1,791)
Other..................................................... -- (4)
-------- --------
Total liabilities................................. (10,083) (10,368)
-------- --------
Net deferred liability...................................... $ (6,992) $ (3,586)
======== ========
The change in the net deferred liability during 2001 and 2000 was
attributed to the following:
YEAR ENDED DECEMBER 31
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Investment write-ups due to SFAS#115, charge to equity...... $ (2,097) $ (7,737)
Transfer to TRB............................................. -- (9,430)
Reversal of valuation allowances............................ -- 325
Deferred (provision) benefit for income taxes............... (1,309) 943
-------- --------
Net decrease................................................ $ (3,406) $(15,899)
======== ========
14. PENSION AND PROFIT SHARING PLANS
The Company has a trusteed, noncontributory defined benefit pension plan
covering all employees who work at least 1,000 hours per year and who have not
yet reached age 60 at their employment date. The benefits of the plan are based
upon the employee's years of service and average annual earnings for the highest
five consecutive calendar years during the final ten year period of employment.
The Company's funding policy has been to contribute annually an amount within
the statutory range of allowable minimum and maximum actuarially determined
tax-deductible contributions. Plan assets are primarily debt securities
(including U.S. Agency and Treasury 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.
57
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension Benefits:
YEAR ENDED DECEMBER 31
-----------------------
2001 2000
--------- ---------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Change in benefit obligation:
Benefit obligation at beginning of year..................... $ 9,431 $ 7,641
Service cost................................................ 581 458
Interest cost............................................... 662 635
Additional liabilities due to transfer between AmeriServ
Financial Bank and TRB.................................... -- 151
Plan amendment.............................................. 363 --
Deferred asset (loss) gain.................................. (217) 1,266
Benefits paid............................................... (930) (653)
Expenses paid............................................... (38) (67)
------- -------
Benefit obligation at end of year........................... $ 9,852 $ 9,431
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.............. $ 8,495 $ 8,548
Additional assets due to transfer between AmeriServ
Financial Bank and TRB.................................... -- 298
Actual return on plan assets................................ (197) (370)
Employer contributions...................................... -- 739
Benefits paid............................................... (930) (653)
Expenses paid............................................... (38) (67)
------- -------
Fair value of plan assets at end of year.................... $ 7,330 $ 8,495
======= =======
Funded status of the plan -- underfunded.................... $(2,522) $ (936)
Unrecognized transition asset............................... (193) (360)
Unrecognized prior service cost............................. (1) (210)
Unrecognized actuarial loss................................. 2,353 1,672
------- -------
Net (accrued liability) prepaid benefit cost................ $ (363) $ 166
======= =======
Components of net periodic benefit cost:
Service cost................................................ $ 581 $ 458
Interest cost............................................... 662 635
Expected return on plan assets.............................. (718) (702)
Amortization of prior year service cost..................... 4 (17)
Amortization of transition asset............................ (17) (30)
------- -------
Net periodic benefit cost................................... $ 512 $ 344
======= =======
Weighted-average assumptions
Discount rate............................................... 7.00% 7.25%
Expected return on plan assets.............................. 8.00 8.00
Rate of compensation increase............................... 3.00 3.50
At December 31, 2001, the accrued benefit obligation for the plan was
$7,958,000 which was greater than the fair value of the plan assets which
totaled $7,330,000.
In addition, the Bank has a trusteed, deferred profit sharing plan with
contributions made by the Bank based upon income as defined by the plan. All
employees of the Bank and the Company who work over 1,000
58
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hours per year participate in the plan beginning on January 1 following six
months of service. Contributions to this profit sharing plan were $95,000 in
2001 and $111,000 in 2000. Plan assets are primarily debt securities (including
U.S. Agency and Treasury 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.
Except for the above pension benefits, the Company has no significant
additional exposure for any other post-retirement or post-employment benefits.
15. LEASE COMMITMENTS
The Company's obligation for future minimum lease payments on operating
leases at December 31, 2001, is as follows:
FUTURE MINIMUM
YEAR LEASE PAYMENTS
---- --------------
(IN THOUSANDS)
2002........................................................ $2,155
2003........................................................ 1,666
2004........................................................ 933
2005........................................................ 668
2006 and thereafter (in total).............................. 1,661
In addition to the amounts set forth above, certain of the leases require
payments by the Company for taxes, insurance, and maintenance.
Rent expense included in total non-interest expense amounted to $491,000,
$577,000 and $634,000, in 2001, 2000, and 1999, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of their customers. These risks derive from
commitments to extend credit and standby letters of credit. Such commitments and
standby letters of credit involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated financial statements.
Commitments to extend credit are obligations to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. Collateral which secures
these types of commitments is the same as for other types of secured lending
such as accounts receivable, inventory, and fixed assets.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
normal business activities, bond financings, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Letters of credit are issued both
on an unsecured and secured basis. Collateral securing these types of
transactions is similar to collateral securing the Bank's commercial loans.
The Company's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit and standby letters of credit
is represented by their contractual amounts. The Bank uses the same credit and
collateral policies in making commitments and conditional obligations as for all
other lending. The Company had outstanding various commitments to extend credit
approximating $145,645,000 and standby letters of credit of $9,950,000 as of
December 31, 2001.
59
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company is also subject to a number of asserted and
unasserted potential claims encountered in the normal course of business. In the
opinion of the Company, neither the resolution of these claims nor the funding
of these credit commitments will have a material adverse effect on the Company's
consolidated financial position or results of operation.
17. STOCK COMPENSATION PLANS
In 2001, the Company's Board of Directors adopted a shareholder approved
Stock Incentive Plan (the Plan) authorizing the grant of options or restricted
stock covering 800,000 shares of common stock. This Plan replaces the expired
1991 Stock Option Plan. Under the Plan, options or restricted stock can be
granted (the Grant Date) to directors, officers, and employees that provide
services to the Company and its affiliates, as selected by a committee of the
Board of Directors. The Company accounts for this Plan under APB Opinion #25,
Accounting for Stock Issued to Employees. The option price at which a stock
option may be exercised shall be not less than 100% of the fair market value per
share of common stock on the Grant Date. The maximum term of any option granted
under the Plan cannot exceed 10 years. Generally, under the Plan on or after the
first anniversary of the Grant Date, one-third of such options may be exercised.
On or after the second anniversary of the Grant Date, two-thirds of such options
may be exercised minus the aggregate number of such options previously
exercised. On or after the third anniversary of the Grant Date, the remainder of
the options may be exercised. Had compensation cost for these plans been
determined consistent with FASB #123, Accounting for Stock-Based Compensation,
the Company's net income and earnings per share would have changed to the
following pro forma amounts:
YEAR ENDED DECEMBER 31
-------------------------------------
2001 2000 1999
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
As reported............................................... $1,975 $1,716 $20,421
Pro forma................................................. 1,899 1,657 20,381
Basic earnings per share:
As reported............................................... 0.15 0.13 1.53
Pro forma................................................. 0.14 0.12 1.53
Diluted earnings per share:
As reported............................................... 0.15 0.13 1.52
Pro forma................................................. 0.14 0.12 1.52
Because the FASB #123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
60
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's Stock Incentive Plan at December
31, 2001, 2000, and 1999, and changes during the years then ended is presented
in the table and narrative following:
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- ------- --------
Outstanding at beginning of
year....................... 531,378 $5.54 369,331 $6.43 445,903 $11.09
Granted...................... 13,000 4.81 389,687 4.86 9,100 17.22
Exercised.................... (5,690) 4.31 (25,147) 4.91 (56,170) 7.85
Forfeited.................... (11,507) 6.39 (202,493) 5.86 (29,502) 10.21
-------- -------- -------
Outstanding at end of year... 527,181 5.51 531,378 5.54 369,331 10.71
======== ======== =======
Exercisable at end of year... 251,037 6.18 148,524 7.66 347,034 10.05
Weighted average fair value
of options granted since
1-1-95..................... $2.19 $5.56 $ 7.03
A total of 251,037 of the 527,181 options outstanding at December 31, 2001,
have exercise prices between $4.02 and $15.69, with a weighted average exercise
price of $6.18 and a weighted average remaining contractual life of 6.2 years.
All of these options are exercisable. The remaining 276,144 options have
exercise prices between $4.02 and $10.42, with a weighted average exercise price
of $4.91 and a weighted average remaining contractual life of 8.6 years. During
2001, three option grants totaling 13,000 shares were issued, in 2000 nine
option grants totaling 389,687 shares were issued, and in 1999 two option grants
totaling 9,100 shares were issued. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 2001, 2000, and 1999, respectively:
risk-free interest rates ranging from 4.07% to 4.97% for 2001 options, 5.69% to
6.61% for 2000 options, and 5.29% and 4.49% for 1999 options; expected dividend
yields of 8.00% for 2001 options, 8.50% for 2000 options, and 3.75% and 3.00%
for 1999 options: expected lives of 7.0 years for all the 2001, 2000, and 1999
options; expected volatility ranging from 29.76% to 30.71% for 2001 options,
23.09% to 29.20% for 2000 options, and 23.00% and 21.69% for 1999 options.
As part of the supplemental executive retirement plan (SERP) approved for
the Chairman & CEO by the Board of Directors on January 26, 2001, and described
in the 2001 proxy statement, the Chairman received a restricted stock award of
156,000 shares of ASRV common stock as a funding vehicle for the SERP. The
shares funding the SERP will vest over a fifteen-year period. No award shares
will vest during the first five-year period. On the fifth anniversary of the
award, one-third of the award shares will vest; thereafter, additional shares
equal to one-fifteenth of the award will vest on each anniversary of the award.
Dividends on the award shares will accrue but not be paid until the fifth
anniversary of the award, at which time accrued and unpaid dividends on vested
shares will be paid to the Chairman. Thereafter, the Chairman will be entitled
to receive current and unpaid dividends on vested award shares. The Company
recognized $45,000 of compensation expense for the SERP in 2001.
18. DIVIDEND REINVESTMENT PLAN
The Company's Dividend Reinvestment and Common Stock Purchase Plan provides
each record holder of Common Stock with a simple and convenient method of
purchasing additional shares without payment of any brokerage commissions,
service charges or other similar expense. A participant in the Plan may purchase
shares of Common Stock by electing either to (1) reinvest dividends on all of
his or her shares of Common Stock or (2) make optional cash payments of not less
than $10 and up to a maximum of $2,000 per month and
61
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to receive regular dividend payments on his or her other shares. A
participant may withdraw from the Plan at any time.
In the case of purchases from AmeriServ Financial, Inc. of treasury or
newly-issued shares of Common Stock, the average market price is determined by
averaging the high and low sale price of the Common Stock as reported on the
NASDAQ on the relevant investment date. At December 31, 2001, the Company had
478,653 unissued reserved shares available under the Plan. In the case of
purchases of shares of Common Stock on the open market, the average market price
will be the weighted average purchase price of shares purchased for the Plan in
the market for the relevant investment date.
19. SHAREHOLDER RIGHTS PLAN
Each share of the Company's Common Stock has attached to it one right (a
"Right") issued pursuant to a Rights Agreement, dated February 24, 1995 (the
"Rights Agreement"). Each Right entitles the holder to buy one-hundredth of a
share of the Company's Series C Junior Participating Preferred Stock at a price
of $21.67, subject to adjustment (the "Exercise Price"). The Rights become
exercisable if a person, group, or other entity acquires or announces a tender
offer for 19.9% or more of the Company's Common Stock. They are also exercisable
if a person or group who becomes a beneficial owner of at least 10% of the
Company's Common Stock is declared by the Board of Directors to be an "adverse
person" (as defined in the Rights Agreement). Under the Rights Agreement, any
person, group, or entity is deemed to be a beneficial owner of the Company's
Common Stock when such person or any of such person's affiliates or associates,
directly or indirectly, has the right to acquire or to vote the shares of the
Company's Common Stock (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement, or
understanding (whether or not in writing) or upon the exercise of conversion
rights, exchange rights, rights, warrants or options. The Rights Agreement
excludes from the definition of "beneficial owner", holders of revocable proxies
that (A) arise solely from a revocable proxy given in response to a public proxy
or consent solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (B) is not also then reportable
by such person on Schedule 13D under the Exchange Act (or any comparable or
successor report). After the Rights become exercisable, the Rights (other than
rights held by a 19.9% beneficial owner or an "adverse person") entitle the
holders to purchase, under certain circumstances, either the Company's Common
Stock or common stock of the potential acquirer having a value equal to twice
the Exercise Price. The Company is entitled to redeem the Rights at $0.00033 per
Right at any time until the twentieth business day following a public
announcement that a 19.9% position has been acquired or the Board of Directors
has designated a holder of the Company's Common Stock an "adverse person". The
Rights attached to the shares of AmeriServ Common Stock outstanding on March 15,
1995, will expire on February 25, 2005.
20. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
AmeriServ Financial's balance sheet shows both tangible assets (such as
loans, buildings, and investments) and intangible assets (such as goodwill). The
Company now carries $9.7 million of goodwill and $7.6 million of core deposit
intangible assets on its balance sheet. The majority of these intangible assets
came from the 1994 Johnstown Savings Bank acquisition, and the 1999 acquisition
of two First Western Branches.
The Company is amortizing core deposit intangibles over periods ranging
from five to ten years while goodwill was being amortized over a 15 year life.
The straight-line method of amortization is being used for both of these
categories of intangibles. The amortization expense of these intangible assets
reduced 2001 diluted earnings per share by $0.18. It is important to note that
this intangible amortization expense is not a
62
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future cash outflow. The following table reflects the future amortization
expense of the core deposit intangible assets:
YEAR EXPENSE
---- --------------
(IN THOUSANDS)
2002........................................................ $1,432
2003........................................................ 1,432
2004........................................................ 1,007
2005........................................................ 865
2006 and after.............................................. 2,847
======
A reconciliation of the Company's intangible asset balances for 2001 and
2000 is as follows:
AT DECEMBER 31
------------------
2001 2000
------- -------
(IN THOUSANDS)
Balance January 1........................................... $20,058 $25,655
Reduction due to spin-off of TRB............................ -- (2,739)
Amortization expense........................................ (2,732) (2,858)
------- -------
Balance December 31......................................... $17,326 $20,058
======= =======
Intangible assets are reviewed for possible impairment if events or changed
circumstances may affect the underlying basis of the asset. The Company uses an
estimate of the undiscounted future earnings over the remaining life of the
intangibles in measuring whether these assets are recoverable. Starting in 2002,
$1.3 million of annual goodwill amortization will cease to be recognized in
future years.
21. DERIVATIVE HEDGING INSTRUMENTS
The Company uses various interest rate contracts, such as interest rate
swaps, caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. On January
1, 2001, the Company adopted FASB #133, Accounting for Derivative Instruments
and Hedging Activities. At December 31, 2001 and 2000, the Company had interest
rate swap agreements that effectively convert a notional amount of $80 million
and $180 million, respectively, from floating-rates to fixed-rates. The
agreement outstanding at December 31, 2001, matures in April 2002. The Company
would have paid $1,231,000 and $1,556,000 to settle its interest rate swap
agreements at December 31, 2001 and 2000, respectively, which represents the
fair value of these agreements. At December 31, 2001, the Company had recorded
other liabilities of $1,231,000 and a decrease in other comprehensive income of
$800,000, net of tax, as a result of this standard. A summary of the Company's
derivative hedging transactions are as follows:
BORROWED FUNDS HEDGES:
The Company had entered into several interest rate swaps to hedge
short-term borrowings used to leverage the balance sheet. Specifically, FHLB
advances which reprice between 30 days and 90 days are being used to fund
fixed-rate agency mortgage-backed securities with durations ranging from two to
five years. Under these swap agreements, the Company pays a fixed-rate of
interest and receives a floating-rate which resets either monthly or quarterly.
63
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the interest rate swap and cap transactions
which impacted the Company's 2001 performance:
FIXED FLOATING INCREASE
NOTIONAL START TERMINATION RATE RATE REPRICING IN INTEREST
AMOUNT DATE DATE PAID RECEIVED FREQUENCY EXPENSE
----------- -------- ----------- ----- -------- --------- -----------
$40,000,000.. 4-11-00 4-13-01 6.25% N.A.% Expired $ 58,413
50,000,000.. 10-25-99 10-25-01 6.41 4.72 Expired 696,259
50,000,000.. 10-25-99 10-25-01 6.42 4.72 Expired 697,414
80,000,000.. 4-13-00 4-15-02 6.93 4.31 Quarterly 2,120,191
----------
$3,572,277
==========
N.A. -- not applicable.
The Company believes that its exposure to credit loss in the event of
non-performance by any of the counterparties (which currently include Wachovia)
in the interest rate swap agreements is remote. The Company monitors and
controls all derivative products with a comprehensive Board of Director approved
hedging policy. This policy permits a total maximum notional amount outstanding
of $500 million for interest rate swaps, and interest rate caps/floors. The
Company had no interest rate caps outstanding at December 31, 2001 and no
interest rate floors outstanding at December 31, 2001, or December 31, 2000.
22. SEGMENT RESULTS
The financial performance of the Company is also monitored by an internal
funds transfer pricing profitability measurement system which produces line of
business results and key performance measures. The Company's major business
units include retail banking, commercial lending, mortgage banking, trust and
financial services, other fee based businesses 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. Capital has been allocated among the
businesses on a risk-adjusted basis. The businesses are match-funded and
interest rate risk is centrally managed and accounted for within the
investment/parent business segment. The key performance measures the Company
focuses on for each business segment are net income and risk-adjusted return on
equity.
Retail banking includes the deposit-gathering branch franchise along with
lending to both individuals and small businesses. Lending activities include
residential mortgage loans, direct consumer loans, and small business commercial
loans. Commercial lending to businesses includes commercial loans, commercial
real-estate loans, and commercial leasing (excluding certain small business
lending through the branch network). Mortgage banking includes the servicing of
mortgage loans (the Company completed its exit from the wholesale mortgage
production business in 2001). The trust segment has three primary business
divisions, institutional trust, personal trust, and financial services.
Institutional trust products and services include 401(k) plans, defined benefit
and defined contribution employee benefit plans, individual retirement accounts,
and collective investment funds for trade union pension funds. Personal trust
products and services include personal portfolio investment management, estate
planning and administration, custodial services and pre-need trusts. Financial
services includes the sale of mutual funds, annuities, and insurance products.
Other fee based businesses include AmeriServ Associates, AmeriServ Life, and
several other smaller fee generating business lines such as a debt collection
agency. 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.
64
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contribution of the major business segments to the consolidated results
for the full years of 2001, 2000 and 1999 were as follows:
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
RETAIL BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
NET INTEREST INCOME................ $ 24,504 $ 5,972 $ 211 $ 211 $ (4,184) $ 134 $ 26,848
NON-INTEREST INCOME................ 7,153 704 1,502 5,015 2,948 753 18,075
NON-INTEREST EXPENSE............... 23,717 4,053 5,222 4,058 4,862 624 42,536
-------- -------- ------- ------ -------- ------ ----------
INCOME (LOSS) BEFORE INCOME
TAXES............................ 7,940 2,623 (3,509) 1,168 (6,098) 263 2,387
INCOME TAXES (BENEFIT)............. 2,285 719 (1,189) 311 (1,802) 88 412
-------- -------- ------- ------ -------- ------ ----------
NET INCOME (LOSS).................. $ 5,655 $ 1,904 $(2,320) $ 857 $ (4,296) $ 175 $ 1,975
======== ======== ======= ====== ======== ====== ==========
AVERAGE COMMON EQUITY.............. $ 27,390 $ 15,332 $ 5,300 $3,042 $ 27,859 $1,858 $ 80,781
RISK-ADJUSTED RETURN ON EQUITY..... 20.6% 12.4% (43.8)% 28.2% (15.4)% 9.4% 2.4%
TOTAL ASSETS....................... $383,276 $293,603 $18,454 $1,854 $498,626 $3,046 $1,198,859
======== ======== ======= ====== ======== ====== ==========
65
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
RETAIL BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
Net interest income................ $ 25,206 $ 7,421 $ 937 $ 252 $ 1,410 $ 137 $ 35,363
Non-interest income................ 5,153 820 4,095 5,313 218 1,010 16,609
Non-interest expense............... 26,824 5,800 8,063 4,106 6,195 746 51,734
-------- -------- ------- ------ -------- ------ ----------
Income (loss) before income
taxes............................ 3,535 2,441 (3,031) 1,459 (4,567) 401 238
Income taxes (benefit)............. 715 215 (1,213) 308 (1,636) 133 (1,478)
-------- -------- ------- ------ -------- ------ ----------
Net income (loss).................. $ 2,820 $ 2,226 $(1,818) $1,151 $ (2,931) $ 268 $ 1,716
======== ======== ======= ====== ======== ====== ==========
Average common equity.............. $ 19,065 $ 21,240 $ 7,542 $3,274 $ 28,643 $1,660 $ 81,424
Risk-adjusted return on equity..... 14.8% 10.5% (24.1)% 35.2% (10.2)% 16.1% 2.1%
Total assets....................... $409,786 $263,828 $25,524 $1,795 $550,232 $3,096 $1,254,261
======== ======== ======= ====== ======== ====== ==========
66
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE INVESTMENT/ OTHER FEE
RETAIL BANKING LENDING BANKING TRUST PARENT BASED TOTAL
-------------- ---------- -------- ------ ----------- --------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
Net interest income................ $ 35,273 $ 12,725 $ 1,163 $ 126 $ 14,400 $ 97 $ 63,784
Non-interest income................ 10,686 784 5,865 5,271 633 1,135 24,374
Non-interest expense............... 40,095 6,627 7,045 4,004 2,051 993 60,815
-------- -------- ------- ------ ---------- ------ ----------
Income (loss) before income
taxes............................ 5,864 6,882 (17) 1,393 12,982 239 27,343
Income taxes....................... 1,504 1,809 13 344 3,186 66 6,922
-------- -------- ------- ------ ---------- ------ ----------
Net income (loss).................. $ 4,360 $ 5,073 $ (30) $1,049 $ 9,796 $ 173 $ 20,421
======== ======== ======= ====== ========== ====== ==========
Average common equity.............. $ 46,511 $ 26,943 $ 8,320 $3,650 $ 45,042 $1,462 $ 131,928
Risk-adjusted return on equity..... 9.4% 18.8% (0.4)% 28.7% 21.7% 11.8% 15.5%
Total assets....................... $723,926 $498,288 $53,312 $1,693 $1,187,335 $2,925 $2,467,479
======== ======== ======= ====== ========== ====== ==========
67
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. 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 judgements by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. As of December 31, 2001, the Company met all capital
adequacy requirements to which it was subject. As of December 31, 2001 and 2000,
the Federal Reserve categorized the Company as Well Capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Company's classification category.
AS OF DECEMBER 31, 2001
--------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT RATIOS)
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED......................... $102,482 15.70% $52,208 8.00% $65,260 10.00%
AMERISERV FINANCIAL BANK............. 90,140 13.90 51,892 8.00 64,865 10.00
TIER 1 CAPITAL (TO RISK WEIGHTED
ASSETS) CONSOLIDATED................. 88,642 13.58 26,104 4.00 39,156 6.00
AMERISERV FINANCIAL BANK............. 84,310 13.00 25,946 4.00 38,919 6.00
TIER 1 CAPITAL (TO AVERAGE ASSETS)
CONSOLIDATED......................... 88,642 7.17 49,473 4.00 61,841 5.00
AMERISERV FINANCIAL BANK............. 84,310 6.92 48,761 4.00 60,951 5.00
68
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 2000
------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (to Risk Weighted Assets)
Consolidated........................... $101,726 15.97% $50,958 8.00% $63,698 10.00%
AmeriServ Financial Bank............... 88,128 14.31 49,278 8.00 61,597 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated........................... 81,516 12.80 25,479 4.00 38,219 6.00
AmeriServ Financial Bank............... 82,293 13.36 24,639 4.00 36,958 6.00
Tier 1 Capital (to Average Assets)
Consolidated........................... 81,516 6.66 48,932 4.00 61,165 5.00
AmeriServ Financial Bank............... 82,293 6.92 47,602 4.00 59,503 5.00
24. BRANCH SALE
On September 27, 2001, the Company and CSB Bank of Curwensville, completed
the sale of the Company's Coalport office. As the only Company office in
Clearfield County, the Coalport office no longer strategically fit the new and
expanding geographic foot print for the Company. The Company received an 8.875%
core deposit premium or $1.4 million on the sale of approximately $15.7 million
of deposits.
25. TAX-FREE SPIN-OFF OF THREE RIVERS BANK
On April 1, 2000, the Company executed its Board approved tax-free spin-off
of its Three Rivers Bank subsidiary. Shareholders received one share of the new
Three Rivers Bancorp (NASDAQ: TRBC) common stock for every two shares of
AmeriServ Financial common stock that they owned. The distribution of the Three
Rivers Bancorp shares did not change the number of AmeriServ Financial common
shares outstanding. Standard Mortgage Corporation (SMC), a mortgage banking
company, previously a subsidiary of Three Rivers Bank, was internally spun-off
from Three Rivers Bank to the Company prior to consummation of the Three Rivers
Bank spin-off.
The accompanying AmeriServ Financial Pro Forma Condensed Consolidated
Financial Statement should be read in conjunction with the historical
consolidated financial statements and notes thereto. The AmeriServ Financial pro
forma condensed consolidated income statement assumes that the dividend to
shareholders occurred on January 1, 2000. The pro forma condensed consolidated
financial information is presented for informational purposes only and does not
purport to reflect the results of operations of AmeriServ Financial or Three
Rivers Bancorp or the results of operations that would have occurred had
AmeriServ Financial or Three Rivers Bancorp been operated as a separate,
independent company. The pro forma adjustments to the accompanying historical
consolidated statements of income are set forth below.
69
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
AMERISERV THREE RIVERS AMERISERV
FINANCIAL BANCORP FINANCIAL
HISTORICAL HISTORICAL PRO FORMA
PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
2000 2000 ADJUSTMENT 2000
------------ ------------ ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total interest income..................... $107,298 $18,100 $ -- $89,198
Total interest expense.................... 69,839 11,011 -- 58,828
-------- ------- ------- -------
Net interest income....................... 37,459 7,089 -- 30,370
Provision for loan losses................. 2,096 150 -- 1,946
-------- ------- ------- -------
Net interest income after provision for
loan losses............................. 35,363 6,939 -- 28,424
Total non-interest income................. 16,609 623 -- 15,986
Total non-interest expense................ 51,734 6,589 117(A) 45,262
-------- ------- ------- -------
Income (loss) before income taxes......... 238 973 (117) (852)
Benefit for income taxes.................. (1,478) (477) (35)(B) (1,036)
-------- ------- ------- -------
Net income (loss)......................... $ 1,716 $ 1,450 $ (82) $ 184
======== ======= ======= =======
Diluted earnings per share................ $ 0.13 -- $ (0.11) $ 0.02
Average diluted shares outstanding........ 13,374 -- -- 13,374
Notes to unaudited pro forma condensed consolidated financial statements:
(A) To record the additional incremental expenses AmeriServ Financial
incurred that were previously allocated to and paid by Three Rivers Bank.
(B) To record the income tax impact of the above expenses at the
statutory tax rate.
26. PARENT COMPANY FINANCIAL INFORMATION
The Parent Company functions primarily as a coordinating and servicing unit
for all subsidiary entities. Provided services include general management,
accounting and taxes, loan review, auditing, investment advisory, marketing,
insurance risk management, general corporate services, and financial and
strategic planning. The following financial information relates only to the
Parent Company operations:
BALANCE SHEET
AT DECEMBER 31
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 6,532 $ 651
Equity investment in banking subsidiaries................... 101,636 98,249
Equity investment in non-banking subsidiaries............... 3,360 11,492
Guaranteed junior subordinated deferrable interest debenture
issuance costs............................................ 1,192 1,237
Other assets................................................ 1,518 1,716
-------- --------
TOTAL ASSETS................................................ $114,238 $113,345
======== ========
70
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
LIABILITIES
Short-term borrowings....................................... $ -- $ --
Guaranteed junior subordinated deferrable interest
debentures................................................ 34,500 34,500
Other liabilities........................................... 248 438
-------- --------
TOTAL LIABILITIES........................................... 34,748 34,938
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity.................................. 79,490 78,407
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $114,238 $113,345
======== ========
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS)
INCOME
Inter-entity management and other fees...................... $ 3,077 $ 3,223 $ 4,035
Dividends from subsidiaries................................. 7,200 12,897 17,061
Interest and dividend income................................ 75 58 20
------- -------- --------
TOTAL INCOME................................................ 10,352 16,178 21,116
------- -------- --------
EXPENSE
Interest expense............................................ 2,961 3,101 3,304
Salaries and employee benefits.............................. 1,929 2,355 2,968
Other expense............................................... 1,436 3,617 1,397
------- -------- --------
TOTAL EXPENSE............................................... 6,326 9,073 7,669
------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES.................................... 4,026 7,105 13,447
Benefit for income taxes.................................... 984 1,615 1,299
Equity in undistributed (losses) income of subsidiaries..... (3,035) (7,004) 5,713
------- -------- --------
NET INCOME.................................................. $ 1,975 $ 1,716 $ 20,459
======= ======== ========
STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Net income.................................................. $ 1,975 $ 1,716 $ 20,459
Adjustment to reconcile net income to net cash provided by
operating activities:
Equity in undistributed losses (income) of subsidiaries..... 3,035 7,004 (5,713)
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 5,010 $ 8,720 $ 14,746
------- -------- --------
71
AMERISERV FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31
-------------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS)
INVESTING AND FINANCING ACTIVITIES
Inter company sale of subsidiary............................ $ 4,867 $ -- $ --
Common stock cash dividends paid............................ (4,884) (5,616) (11,586)
Proceeds from issuance of common stock...................... 896 883 292
Guaranteed junior subordinated deferrable interest
debentures dividends paid................................. (2,916) (2,916) (2,916)
Purchases of treasury stock................................. -- (99) (4,204)
Net decrease in borrowings.................................. -- (3,500) (1,300)
Investment in subsidiaries.................................. (55) (75) (50)
Other -- net................................................ 2,963 2,968 5,009
------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING AND FINANCING
ACTIVITIES................................................ 871 (8,355) (14,755)
------- -------- --------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS................. 5,881 365 (9)
CASH EQUIVALENTS AT JANUARY 1............................... 651 286 295
------- -------- --------
CASH EQUIVALENTS AT DECEMBER 31............................. $ 6,532 $ 651 $ 286
======= ======== ========
The ability of the subsidiary bank to upstream cash to the Parent Company
is restricted by regulations. Federal law prevents the Parent Company from
borrowing from its subsidiary bank unless the loans are secured by specified
assets. Further, such secured loans are limited in amount to ten percent of the
subsidiary banks' capital and surplus. In addition, the Bank is subject to legal
limitations on the amount of dividends that can be paid to their shareholder.
The dividend limitation generally restricts dividend payments to a bank's
retained net income for the current and preceding two calendar years. Cash may
also be upstreamed to the Parent Company by the subsidiaries as an inter-entity
management fee. At December 31, 2001, the subsidiary bank was permitted to
upstream an additional $1,418,000 in cash dividends to the Parent Company. The
subsidiary bank also had a combined $98,359,000 of restricted surplus and
retained earnings at December 31, 2001.
To facilitate an orderly spin-off transition, the Company and TRB entered
into a Services Agreement whereby AmeriServ Financial has provided certain
services such as audit, loan review and asset/liability management on an
outsourced basis to TRB. The Company received $557,000, and $985,000 in 2001 and
2000, respectively, for these services. The Company anticipates that this
agreement will expire in 2002.
72
STATEMENT OF MANAGEMENT RESPONSIBILITY
January 22, 2002
To the Stockholders and
Board of Directors of
AmeriServ Financial, Inc.
Management of AmeriServ Financial, Inc. and its subsidiaries have prepared
the consolidated financial statements and other information in the Annual Report
and Form 10-K in accordance with generally accepted accounting principles and
are responsible for its accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities, and
programs of internal audit. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
Company affairs are conducted with the highest ethical standards. The Company's
Code of Conduct, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information, and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent public accountants to discuss audit, financial reporting, and
related matters. Arthur Andersen LLP and the Company's internal auditors have
direct access to the Audit Committee.
/S/ ORLANDO B. HANSELMAN /S/ JEFFERY A. STOPKO
Orlando B. Hanselman Jeffrey A. Stopko
Chairman, Senior Vice President &
President & CEO Chief Financial Officer
73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
To the Stockholders and Board of Directors of AmeriServ Financial, Inc.:
We have audited the accompanying consolidated balance sheets of AmeriServ
Financial, Inc. (a Pennsylvania corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriServ Financial, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note #21 to the financial statements, effective January 1,
2001, the Company changed its method of accounting for derivative instruments
and hedging activities.
/S/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
January 22, 2002
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable for the years presented.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this section relative to Directors of the
Registrant is presented in the Proxy Statement for the Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented in the Proxy Statement
for the Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this section is presented in the Proxy Statement
for the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this section is presented in the Proxy Statement
for the Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS FILED:
The consolidated financial statements listed below are from the 2001 Form
10-K and Part II -- Item 8. Page references are to said Form 10-K.
CONSOLIDATED FINANCIAL STATEMENTS:
AmeriServ Financial, Inc. and Subsidiaries
Consolidated Balance Sheet, 34
Consolidated Statement of Income, 35
Consolidated Statement of Comprehensive Income, 36
Consolidated Statement of Changes in Stockholders' Equity, 37
Consolidated Statement of Cash Flows, 38-39
Notes to Consolidated Financial Statements, 40
Statement of Management Responsibility, 73
Report of Independent Public Accountants, 74
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
These schedules are not required or are not applicable under Securities and
Exchange Commission accounting regulations and therefore have been omitted.
REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the quarter ended December 31, 2001.
75
EXHIBITS:
The exhibits listed below are filed herewith or to other filings.
EXHIBIT PRIOR FILING OR EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER HEREIN
------- ----------- -----------------------
3.1 Articles of Incorporation, as amended on March 23, Exhibit 3.1 to 2001 Form 10-K
2001. Filed on March 19, 2002
3.2 Bylaws, as amended and restated on January 25, 2002. Exhibit 3.2 to 2001 Form 10-K
Filed on March 19, 2002
4.1 Rights Agreement, dated as of February 24, 1995, Exhibit 4.1 to 2000 Form 10-K
between AmeriServ Financial, Inc. and AmeriServ Dated March 21, 2001
Trust and Financial Services Company, as Rights
Agent.
10.1 Corporate Separation Agreement between AmeriServ Exhibit 2.1 to Form 8-K
Financial, Inc. and Three Rivers Bancorp. Filed on April 14, 2000
10.2 Tax Separation Agreement between AmeriServ Exhibit 2.2 to Form 8-K
Financial, Inc. and Three Rivers Bancorp. Filed on April 14, 2000
10.3 Services Agreement between AmeriServ Financial, Inc. Exhibit 10.1 to Form 10-Q
and Three Rivers Bancorp. Filed on November 13, 2000
10.4 Agreement, dated October 25, 1994, between AmeriServ Exhibit 10.4 to 2000 Form 10-K
Financial, Inc. and Orlando B. Hanselman. Filed March 21, 2001
10.5 2001 Stock Incentive Plan dated February 23, 2001. 2000 Proxy Statement
Filed March 16, 2001
10.6 Agreement, dated December 1, 1994, between AmeriServ Exhibit 10.6 to 2000 Form 10-K
Financial, Inc. and Ronald W. Virag. Filed March 21, 2001
10.7 2001 Supplemental Executive Retirement Plan dated Below
January 26, 2001, between AmeriServ Financial, Inc.
and Orlando B. Hanselman.
22 Subsidiaries of the Registrant. Below
24.1 Consent of Arthur Andersen LLP Below
76
EXHIBIT A
(22) SUBSIDIARIES OF THE REGISTRANT
PERCENT OF JURISDICTION
NAME OWNERSHIP OF ORGANIZATION
---- ---------- ---------------
AmeriServ Financial Bank........................... 100% Commonwealth of Pennsylvania
Main and Franklin Streets
P.O. Box 520
Johnstown, PA 15907
AmeriServ Life Insurance Company................... 100% State of Arizona
101 N. First Avenue #2460
Phoenix, AZ 85003
AmeriServ Trust and Financial Services Company..... 100% Commonwealth of Pennsylvania
Main and Franklin Streets
P.O. Box 520
Johnstown, PA 15907
AmeriServ Associates, Inc. ........................ 100% Commonwealth of Pennsylvania
120 Regent Court, Suite 102
State College, PA 16801
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AmeriServ Financial, Inc.
(Registrant)
By: /s/ ORLANDO B. HANSELMAN
-------------------------------------
Orlando B. Hanselman
Chairman, President
and Chief Executive Officer
Date: February 22, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 22, 2002:
/s/ ORLANDO B. HANSELMAN Chairman, President and Chief Executive Officer; Director
------------------------------------------------
Orlando B. Hanselman
/s/ JEFFREY A. STOPKO Senior Vice President and Chief Financial Officer
------------------------------------------------
Jeffrey A. Stopko
/s/ J. MICHAEL ADAMS, JR. Director
------------------------------------------------
J. Michael Adams, Jr.
/s/ EDWARD J. CERNIC, SR. Director
------------------------------------------------
Edward J. Cernic, Sr.
/s/ DANIEL R. DEVOS Director
------------------------------------------------
Daniel R. DeVos
/s/ JAMES C. DEWAR Director
------------------------------------------------
James C. Dewar
Director
------------------------------------------------
Bruce E. Duke, III, M.D.
/s/ JAMES M. EDWARDS, SR. Director
------------------------------------------------
James M. Edwards, Sr.
/s/ KIM W. KUNKLE Director
------------------------------------------------
Kim W. Kunkle
/s/ MARGARET A. O'MALLEY Director
------------------------------------------------
Margaret A. O'Malley
/s/ REV. CHRISTIAN R. ORAVEC Director
------------------------------------------------
Rev. Christian R. Oravec
Director
------------------------------------------------
Mark E. Pasquerilla
/s/ HOWARD M. PICKING, III Director
------------------------------------------------
Howard M. Picking, III
Director
------------------------------------------------
Sara A. Sargent
/s/ THOMAS C. SLATER Director
------------------------------------------------
Thomas C. Slater
/s/ ROBERT L. WISE Director
------------------------------------------------
Robert L. Wise
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AMERISERV FINANCIAL BANK
OFFICE LOCATIONS
* Main Office Downtown
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907-0520
1-800-837-BANK(2265)
+* Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1286
+* University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3280
* East Hills Office
1219 Scalp Avenue
Johnstown, PA 15904-3182
* Eighth Ward Office
1059 Franklin Street
Johnstown, PA 15905-4303
* West End Office
163 Fairfield Avenue
Johnstown, PA 15906-2392
* Carrolltown Office
101 Main Street
Carrolltown, PA 15722-0507
* Northern Cambria Office
4206 Crawford Avenue Suite 1
Northern Cambria, PA
15714-1342
* Ebensburg Office
104 S. Center Street
Ebensburg, PA 15931-0209
+* Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-0418
Nanty Glo Office
928 Roberts Street
Nanty Glo, PA 15943-1303
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1255
+* Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-9998
* Seward Office
#1, Roadway Plaza
Seward, PA 15954-9501
* Windber Office
1501 Somerset Avenue
Windber, PA 15963-1745
Central City Office
104 Sunshine Avenue
Central City, PA 15926-1129
+* Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
* Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
+* South Atherton Office
734 South Atherton Street
State College, PA 16801-4628
* Harrisburg Office
231 State Street
Harrisburg, PA 17101-1110
* Pittsburgh Office
60 Boulevard of the Allies
Suite 100
Pittsburgh, PA 15222-1241
* AmeriServ Leasing
Williamsburg Place Office Building
244 Center Road, Suite 304-201
Monroeville, PA 15146-1710
* Greensburg Branch Office
Oakley Park II, Route 30 East
Greensburg, PA 15601-9560
* = 24-Hour ATM Banking Available
+ = Seven Day a Week Banking Available
REMOTE ATM
BANKING LOCATIONS
Main Office, Main & Franklin
Streets, Johnstown
Lee Hospital, Main Street,
Johnstown
The Galleria, Johnstown
Johnstown Cambria County
Airport
6-2-Go Shop, Nanty Glo
Gogas Service Station, Cairnbrook
AMERISERV MORTGAGE
COMPANY LOCATIONS
Greensburg Office
Oakley Park II, Route 30 East
Greensburg, PA 15601-9560
Mt. Nittany Mortgage Company
2300 South Atherton Street
State College, PA 16801-7613
Altoona Office
87 Logan Boulevard
Altoona, PA 16602-3123
79
SHAREHOLDER INFORMATION
SECURITIES MARKETS
AmeriServ Financial, Inc. Common Stock is publicly traded and quoted on the
NASDAQ National Market System. The common stock is traded under the symbol of
"ASRV." The listed market makers for the stock are:
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (212) 908-4156
Legg Mason Wood Walker, Inc.
969 Eisenhower Boulevard
Oak Ridge East
Johnstown, PA 15904
Telephone: (814) 266-7900
F. J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103-3913
Telephone: (215) 563-8500
Keefe Bruyette & Woods, Inc.
787 Seventh Avenue
4th Floor
New York, NY 10019
Telephone: (800) 966-1559
CIBC World Markets
425 Lexington Avenue
New York, NY 10017
Telephone: (212) 667-7000
Parker/Hunter, Inc.
416 Main Street
Johnstown, PA 15901
Telephone: (814) 535-8403
Sandler O'Neill & Partners, L.P.
919 Third Avenue
6th Floor
New York, NY 10022
Telephone: (800) 635-6860
Weeden & Co. L.P.
145 Mason Street
Greenwich, CT 06830
Telephone: (203) 861-7600
CORPORATE OFFICES
The corporate offices of AmeriServ Financial, Inc. are located at 216
Franklin Street, Johnstown, PA 15901. Mailing address:
P.O. Box 430
Johnstown, PA 15907-0430
(814) 533-5300
AGENTS
The transfer agent and registrar for AmeriServ Financial, Inc.'s common
stock is:
Fleet National Bank
c/o EquiServe
150 Royall Street
Canton, MA 02021
Investor Relations Number: 1-800-730-4001
Internet Address: http://www.EquiServe.com
SHAREHOLDER DATA
As of January 31, 2001, there were 5,013 shareholders of common stock and
13,681,441 shares outstanding. Of the total shares outstanding, approximately
808,116 or 6% are held by insiders (directors and executive officers) while
approximately 3,672,245 or 27% are held by institutional investors (mutual
funds, employee benefit plans, etc.).
DIVIDEND REINVESTMENT
Shareholders seeking information about AmeriServ Financial, Inc.'s dividend
reinvestment plan should contact Betty L. Jakell, Executive Office, at (814)
533-5158
INFORMATION
Analysts, investors, shareholders, and others seeking financial data about
AmeriServ Financial, Inc. or any of its subsidiaries' annual and quarterly
reports, proxy statements, 10-K, 10-Q, 8-K, and call reports -- are asked to
contact Jeffrey A. Stopko, Senior Vice President & Chief Financial Officer at
(814) 533-5310 or by e-mail at JStopko@AMERISERVFINANCIAL.com.
80