Annual Statements Open main menu

AMERISERV FINANCIAL INC /PA/ - Quarter Report: 2010 June (Form 10-Q)

Converted by EDGARwiz


                                              UNITED STATES

                    SECURITIES AND EXCHANGE COMMISSION

                                      Washington, D.C. 20549


                                                  FORM 10-Q

                                                  

X

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

Act of 1934


For the period ended                June 30, 2010                           


Transition Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934


For the transaction period from                                      to                           _        

                                                                 

Commission File Number                      0-11204                                            

                                                 AmeriServ Financial, Inc.                                           

                                          (Exact name of registrant as specified in its charter)


                    Pennsylvania                                                                               25-1424278                

(State or other jurisdiction of incorporation                            (I.R.S. Employer Identification No.)

 or organization)                                                                  



Main & Franklin Streets, P.O. Box 430, Johnstown, PA                                15907-0430

(Address of principal executive offices)                                                               (Zip Code)

                           

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                    

                    X     Yes    

       No


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period) that the registrant was required to submit and post such files).


                           Yes    

       No


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


Large accelerated filer X    Accelerated filer X    Non-accelerated filer X    Smaller reporting company X


Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

                    X Yes                                                X No  


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


               Class                           

           

                                        Outstanding at August 2, 2010    

Common Stock, par value $0.01

             21,223,942

per share                         



AmeriServ Financial, Inc.


INDEX


PART I.   FINANCIAL INFORMATION:

 Page No.

 

 

Item 1. Financial Statements

 

Consolidated Balance Sheets (Unaudited) -

June 30, 2010 and December 31, 2009

 

        3

 

 

Consolidated Statements of Operations (Unaudited) -

Three and Six Months Ended June 30, 2010 and 2009


        4

 

 

Consolidated Statements of Cash Flows (Unaudited) -

Six Months Ended June 30, 2010 and 2009


        5

 

 

Notes to Unaudited Consolidated Financial Statements

        6

 

 

Item 2.  Management's Discussion and Analysis of Financial

   Condition and Results of Operations


      20

 

 

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

      38

 

 

Item 4T.  Controls and Procedures

      38

 

 

PART II.   OTHER INFORMATION

      

 

 

Item 1.  Legal Proceedings

      39

 

 

Item 1A.  Risk Factors

      39

 

 

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

      39

 

 

Item 3.  Defaults Upon Senior Securities

      39

 

 

Item 4.  (Removed and Reserved)

      39

 

 

Item 5.  Other Information

      39

 

 

Item 6.  Exhibits

      40





2





      Item 1. Financial Statements      

                                                                                        AmeriServ Financial, Inc.

                                                                 CONSOLIDATED BALANCE SHEETS

                                                                                      

(In thousands)

  (Unaudited)

 

 

June 30, 2010

December 31, 2009

 

 

 

 

 

ASSETS

 

 

 

Cash and due from depository institutions

$      17,596

$     20,835

 

Interest bearing deposits

1,713

        1,707

 

Federal funds sold

10,160

-

 

Short-term investments in money market funds

         4,216

      3,766

 

   Total cash and cash equivalents

33,685

26,308

 

Investment securities:

 

 

 

Available for sale

148,096

   131,272

 

Held to maturity (market value $9,540 on

June 30, 2010 and $11,996 on December 31, 2009)

 

8,961

    

11,611

 

Loans held for sale

5,073

        3,790

 

Loans

689,473

  719,785

 

Less:     Unearned income

558

671

 

Allowance for loan losses

        20,737

        19,685

 

Net loans

668,178

  699,429

 

Premises and equipment, net

 10,422

 9,229

 

Accrued income receivable

3,703

      3,589

 

Goodwill

12,950

12,950

 

Bank owned life insurance

34,202

33,690

 

Net deferred tax asset

  15,411

15,925

 

Regulatory stock

9,739

9,739

 

Prepaid federal deposit insurance

3,916

4,538

 

Other assets

         7,946

         7,956

 

TOTAL ASSETS

$   962,282

$   970,026

 

 

 

 

 

LIABILITIES

 

 

 

Non-interest bearing deposits

$   128,277

$   118,232

 

Interest bearing deposits

    680,900

    667,779

 

Total deposits

    809,177

    786,011

 

 

 

 

 

Short-term borrowings

 -

25,775

 

Advances from Federal Home Loan Bank

17,777

     25,804

 

Guaranteed junior subordinated deferrable interest

debentures


     13,085


     13,085

 

Total borrowed funds

     30,862

       64,664

 

Other liabilities

     14,220

     12,097

 

TOTAL LIABILITIES

   854,259

   862,772

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

Preferred stock, no par value; $1,000 per share liquidation

 preference; 2,000,000 shares authorized; there

 were 21,000 shares issued and outstanding



20,724



20,558

 

Common stock, par value $0.01 per share; 30,000,000   

               shares authorized; 26,412,561 shares issued

               and 21,223,942 outstanding on June 30,

               2010; 26,410,528 shares issued and

               21,221,909 outstanding on December 31,

               2009






264






264

 

Treasury stock at cost, 5,188,619 shares on

               June 30, 2010 and December 31, 2009


(68,659)


(68,659)

 

Capital surplus

144,746

   144,873

 

Retained earnings

13,624

 14,591

 

Accumulated other comprehensive loss, net

      (2,676)

     (4,373)

 

TOTAL SHAREHOLDERS' EQUITY

    108,023

   107,254

 

TOTAL LIABILITIES AND

SHAREHOLDERS' EQUITY


$  962,282


$ 970,026

 

See accompanying notes to unaudited consolidated financial statements.




3





                                                      

AmeriServ Financial, Inc.

                                                CONSOLIDATED STATEMENTS OF OPERATIONS

   (In thousands)                           

    (Unaudited)


                                                                                 

 

       Three months ended

 

       Six months ended

 

June 30,

June 30,

June 30,

June 30,

                                                                                 

2010

2009

2010

2009

INTEREST INCOME

 

 

 

 

Interest and fees on loans

$    9,984

$  10,544

$    20,004

$  20,893

Interest bearing deposits

    -

1

    1

2

Short-term investments in money market funds

4

8

7

22

Federal funds sold

1

-

2

-

Investment securities:

 

 

 

 

Available for sale

   1,353

1,337

   2,675

2,735

Held to maturity

       108

       165

       226

       338

Total Interest Income

         11,450

  12,055

         22,915

  23,990

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

Deposits                                                                

  2,833

3,404

  5,760

6,659

Short-term borrowings

4

71

13

200

Advances from Federal Home Loan Bank

     125

129

     253

259

Guaranteed junior subordinated deferrable interest

debentures

 

       280

 

      280

 

       560

 

      560

Total Interest Expense

    3,242

   3,884

    6,586

   7,678

  

 

 

 

 

NET INTEREST INCOME

   8,208

8,171

   16,329

16,312

Provision for loan losses

  _1,200

    3,300

  _4,250

    5,100

NET INTEREST INCOME AFTER PROVISION FOR

LOAN LOSSES

  

    7,008


   4,871

  

  12,079


   11,212

 

 

 

 

 

NON-INTEREST INCOME

 

 

 

 

Trust fees

1,373

1,438

2,827

2,997

Net realized gains on investment securities

 42

63

 107

164

Net gains on loans held for sale

     159

163

     290

281

Service charges on deposit accounts

   611

710

   1,183

1,383

Investment advisory fees

  167

152

  354

289

Bank owned life insurance

 258

254

 512

504

Other income

      778

     711

   1,415

   1,434

Total Non-Interest Income

   3,388

  3,491

   6,688

   7,052

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

Salaries and employee benefits

  5,236

4,983

  10,435

10,075

Net occupancy expense

   639

641

   1,375

1,363

Equipment expense

427

442

845

857

Professional fees

    1,114

873

    2,216

1,793

Supplies, postage and freight

 257

268

 541

562

Miscellaneous taxes and insurance

    353

329

    707

673

FDIC deposit insurance expense

   341

691

   672

723

Amortization of core deposit intangibles

-

-

-

108

Other expense

    1,419

    1,409

    2,759

    2,644

Total Non-Interest Expense

    9,786

    9,636

  19,550

  18,798

 

 

 

 

 

PRETAX INCOME (LOSS)

       610

        (1,274)

       (783)

        (534)

Income tax expense (benefit)

       133

     (335)

     (342)

     (128)

NET INCOME (LOSS)  

        477

     (939)

        (441)

     (406)

 

 

 

 

 

Preferred stock dividends

       262

       263

       525

       522

NET INCOME (LOSS) AVAILABLE TO COMMON

SHAREHOLDERS


$     215  


$ (1,202)


$    (966)  


$   (928)

 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

Basic:

 

 

 

 

Net income (loss)

$       0.01

$    (0.06)

$     (0.05)

$    (0.04)

Average number of shares outstanding

21,224

21,151

21,224

21,144

Diluted:

 

 

 

 

Net income (loss)

$        0.01

$    (0.06)

$     (0.05)

$    (0.04)

Average number of shares outstanding

21,245

21,152

21,231

21,144

Cash dividends declared

 $       0.00

 $      0.00

 $       0.00

 $      0.00


See accompanying notes to unaudited consolidated financial statements.




4





AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   Six Months ended

Six Months ended

 

June 30, 2010

June 30, 2009

OPERATING ACTIVITIES

 

 

Net loss

$   (441)

$      (406)   

Adjustments to reconcile net loss to net cash

 

 

   provided by (used in) operating activities:

 

 

Provision for loan loss

4,250

5,100

Depreciation expense

    739

  813

Amortization expense of core deposit intangibles

      -

108

Net amortization of investment securities

        135

 61

Net realized gains on investment securities available for sale

(107)

   (164)

Net realized gains on loans held for sale

(290)

(281)

Amortization of deferred loan fees

(224)

(257)

Origination of mortgage loans held for sale

(26,507)

(41,740)

Sales of mortgage loans held for sale

25,514

36,182

Increase in accrued interest income receivable

  (114)

  (321)

Decrease in accrued interest expense payable

(1,033)

(530)

Earnings on bank owned life insurance

(512)

(504)

Deferred income taxes

514

155

Stock based compensation expense

            39

           50

Net increase in other assets

      (940)

(1,024)

Net increase in other liabilities

       409

            1

Net cash provided by (used in) operating activities

    1,432

  (2,757)

 

 

 

INVESTING ACTIVITIES

 

 

Purchases of investment securities - available for sale

(40,890)

(17,241)

Purchases of investment securities - held to maturity

(1,123)

-

Proceeds from sales of investment securities – available for sale

1,801

4,746

Proceeds from maturities of investment securities – available for sale

     27,559

17,580

Proceeds from maturities of investment securities – held to maturity

 3,769

2,251

Long-term loans originated

 (36,698)

(75,628)

Principal collected on long-term loans

 65,574

65,436

Loans purchased or participated

(1,345)

(20,500)

Loans sold or participated

  -

3,950

Net (increase) decrease in other short-term loans

    (16)

174

Purchases of premises and equipment

    (1,932)

        (326)

Net cash provided by (used in) investing activities

    16,699

   (19,558)

 

 

 

FINANCING ACTIVITIES

 

 

Net increase in deposit accounts

  23,572

90,549

Net decrease in other short-term borrowings

(25,775)

(76,052)

Principal borrowings on advances from Federal Home Loan Bank

  34,000

   -

Principal repayments on advances from Federal Home Loan Bank

(42,026)

(24)

Preferred stock dividends

       (525)

      (426)

Net cash (used in) provided by  financing activities

   (10,754)

    14,047

 

 

 

NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS

7,377

(8,268)

CASH AND CASH EQUIVALENTS AT JANUARY 1

   26,308

  35,124

CASH AND CASH EQUIVALENTS AT JUNE 30

$ 33,685

$26,856


See accompanying notes to unaudited consolidated financial statements.




5





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.

Principles of Consolidation


The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (Bank), AmeriServ Trust and Financial Services Company (Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life).  The Bank is a state-chartered full service bank with 18 locations in Pennsylvania.  The Trust Company offers a complete range of trust and financial services and administers assets valued at $1.3 billion that are not recognized on the Company’s balance sheet at June 30, 2010.  AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.  


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


2.

Basis of Preparation


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


For further information, refer to the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.


3.

Accounting Policies


In December 2009, the FASB issued ASU 2009-16, Accounting for Transfer of Financial Assets.  ASU 2009-16 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  ASU 2009-16 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years.  The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.


In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.




In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.


In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend.  ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and was applied on a retrospective basis.  The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.


In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption.  The Company is currently evaluating the impact the adoption of this guidance will have on the Company’s financial position or results of operations.


4.

Earnings Per Common Share


Basic earnings per share include only the weighted average common shares outstanding.  Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation.  Treasury shares are treated as retired for earnings per share purposes. Options and warrants to purchase 1,570,209 common shares, at exercise prices ranging from $1.80 to $6.10, and 1,544,509 common shares, at exercise prices ranging from $2.31 to $6.10, were outstanding as of June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per common share because to do so would be antidilutive.  Dividends on preferred shares are deducted from net income in the calculation of earnings per common share.






 

 

Three months ended

June 30,

 

Six months ended

June 30,

 

2010

2009

2010

2009

 

 

                      (In thousands, except per share data)

 

 

Numerator:

 

 

 

 

Net income (loss)

$     477

$     (939)

$    (441)

$     (406)

Preferred stock dividends

       262

       263

       525

       522

Net Income (loss) available to common

  shareholders


$     215


$ (1,202)


$    (966)


$    (928)

 

 

 

 

 

Denominator:

 

 

 

 

Weighted average common shares

 

 

 

 

  outstanding (basic)

21,224

21,151

21,224

21,144

Effect of stock options/warrants

          21

           1

           7

           -

Weighted average common shares

 

 

 

 

  outstanding (diluted)

  21,245

 21,152

  21,231

 21,144

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

    Basic

$0.01

$(0.06)

$(0.05)

$(0.04)

    Diluted

0.01

(0.06)

(0.05)

(0.04)


5.

Comprehensive Income (Loss)


For the Company, comprehensive income includes net income and unrealized holding gains and losses from available for sale investment securities and the pension obligation change for the defined benefit plan.  The changes in other comprehensive income are reported net of income taxes, as follows (in thousands):

                                                

                                             

 

 

Three months ended

 

Six months ended

 

 

June 30,

June 30,

 

 

2010

2009

2010

2009

 

 

 

 

 

Net income (loss)

$     477

$   (939)

$   (441)

$   (406)

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

     Pension obligation change for defined benefit plan

 142

 118

 284

 236

        Income tax effect

       (48)

       (40)

       (97)

       (80)

Reclassification adjustment for gains on

    available for sale securities included in net

    income (loss)



   (42)



   (63)



   (107)



   (164)

        Income tax effect

14

21

36

56

Unrealized holding gains (losses) on available for sale

   securities arising during period


 2,016


 (347)


 2,395


 694

        Income tax effect

     (685)

       118

     (814)

     (236)

Other comprehensive income (loss)

    1,397

     (193)

    1,697

       506

 

 

 

 

 

Comprehensive income (loss)

$   1,874

$(1,132)

$   1,256

$     100


6.

Consolidated Statement of Cash Flows


On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits, federal funds sold and short-term investments in money market funds.  The Company made $69,000 in income tax payments in the first six months of 2010 as compared to $111,000 for the first six months of 2009.  The Company made total interest payments of $7,619,000 in the first six months of 2010 compared to $8,208,000 in the same 2009 period.



7.

Investment Securities


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


Investment securities available for sale (AFS):                                

    

 

          June 30, 2010

 

Gross      

Gross      

 

 

Cost  

Unrealized

Unrealized

Fair   

 

      Basis

      Gains   

    Losses   

      Value   

  U.S. Agency

$   19,899

$      172

$           -

$   20,071

  U.S. Agency mortgage- backed  securities

 123,067

     4,964

         (6)

  128,025

       Total

$142,966

$   5,136

$        (6)

$ 148,096

   

Investment securities held to maturity (HTM):                          

          June 30, 2010

 

Gross      

Gross      

 

 

Cost  

Unrealized

Unrealized

Fair   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Agency mortgage- backed securities

$  7,961

$      591

$          -

$  8,552

  Other securities

    1,000

            -

      (12)

       988

       Total

$  8,961

$      591

$    (12)

$  9,540

    

Investment securities available for sale (AFS):                                      

 

          December 31, 2009

 

Gross      

Gross      

 

 

Cost  

Unrealized

Unrealized

Fair   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Agency

$  12,342

$       26

$      (76)

$  12,292

  U.S. Agency mortgage-backed securities

  116,088

    3,128

      (236)

  118,980

       Total

$128,430

$ 3,154

$    (312)

$131,272


Investment securities held to maturity (HTM):                          

          December 31, 2009

 

Gross      

Gross      

 

 

Cost  

Unrealized

Unrealized

Fair   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Treasury

$    3,009

$        13

$         -

$     3,022

  U.S. Agency mortgage-backed securities

7,602

373

-

7,975

  Other securities

      1,000

             -

       (1)

         999

       Total

$  11,611

$      386

$     (1)

$  11,996


Maintaining investment quality is a primary objective of the Company's investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody's Investor's Service or Standard & Poor's rating of "A."  At June 30, 2010 and December 31, 2009, 99.3% of the portfolio was rated "AAA".  None of the portfolio was rated below “A” or unrated at June 30, 2010.  At June 30, 2010, the Company’s consolidated investment securities portfolio had a modified duration of approximately 2.0 years.  Total proceeds from the sale of AFS securities were $1.8 million in the first six months of 2010.  The gross gains on investment security sales in the first six months of 2010 were $107,000.  


The following tables present information concerning investments with unrealized losses as of June 30, 2010 and December 31, 2009 (in thousands):


Investment securities available for sale:  

          June 30, 2010

Less than 12 months

 

12 months or longer

 

Total

 

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

Losses

Value

Losses

Value

Losses

 

  

   

 

  

 

  

  U.S. Agency mortgage-

 

 

 

 

 

 

     backed securities

$    1,543

$        (6)

$          -

$         -

$   1,543

$        (6)

       Total

$    1,543

$        (6)

$          -

$         -

$   1,543

$        (6)

   


Investment securities held to maturity:

          June 30, 2010

Less than 12 months

 

12 months or longer

 

Total

 

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

Losses

Value

Losses

Value

Losses

  Other securities

$           -

$           -

$     988

$     (12)

$     988

$     (12)

       Total

$           -

$           -

$     988

$     (12)

$     988

$     (12)


Investment securities available for sale:  

          December 31, 2009

Less than 12 months

 

12 months or longer

 

Total

 

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

Losses

Value

Losses

Value

Losses

  U.S. Agency

 $  7,424

      $     (76)

 $         -

 $         -

$   7,424

      $     (76)

  U.S. Agency mortgage-

 

 

 

 

 

 

     backed securities

  17,525

    (236)

          -

          -

   17,525

     (236)

       Total

$ 24,949

$   (312)

$         -

$         -

$ 24,949

$   (312)


Investment securities held to maturity:                          

          December 31, 2009

Less than 12 months

 

12 months or longer

 

Total

 

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

Losses

Value

Losses

Value

Losses

  Other securities

$           -

$           -

$     999

$       (1)

$     999

$       (1)

       Total

$           -

$           -

$     999

$       (1)

$     999

$       (1)


The unrealized losses are primarily a result of increases in market yields from the time of purchase.  In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase.  There are 2 positions that are considered temporarily impaired at June 30, 2010.  Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired.  Management has also concluded that based on current information they expect to continue to receive scheduled interest payments as well as the entire principal balance.  Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.


Contractual maturities of securities at June 30, 2010, are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.  


Maturity

 

Available for Sale

Held to Maturity

 

 

Cost  

Fair   

Cost  

Fair   

 

      Basis    

      Value   

      Basis    

      Value   

0-1 year

   $    2,075

      $    2,093

$           -

$           -

1-5 years

11,898

11,996

1,000

988

5-10 years

27,815

29,106

             -

             -

Over 10 years

  101,178

  104,901

    7,961

    8,552

       Total

$142,966

$148,096

$   8,961

$   9,540


8.

Loans


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


 

June 30,

         2010

December 31,

         2009

 

     Commercial

$  82,174

$    96,158

 

     Commercial loans secured by real estate

382,779

396,787

 

     Real estate – mortgage

205,353

207,221

 

     Consumer

     19,167

     19,619

 

       Total loans

689,473

  719,785

 

     Less:  Unearned income

         558

         671

 

     Loans, net of unearned income

$  688,915

$  719,114

 


Real estate-construction loans comprised 5.6%, and 6.8% of total loans, net of unearned income, at June 30, 2010 and December 31, 2009, respectively.  The Company has no exposure to sub prime mortgage loans in either the loan or investment portfolios.  


9.

Allowance for Loan Losses


An analysis of the changes in the allowance for loan losses follows (in thousands, except ratios):


 

 

           Three months ended

 

Six months ended

 

                    June 30,

 

 

June 30,

 

2010

2009

2010

2009

Balance at beginning of period

  $ 21,516

$   10,661

  $ 19,685

$   8,910

Charge-offs:

 

 

 

 

     Commercial

(166)

(638)

(205)

(641)

     Commercial loans secured by real estate

      (1,758)

(200)

      (2,951)

(237)

     Real estate-mortgage

  (78)

(41)

  (158)

(67)

     Consumer   

            (50)

        (69)

           (134)

      (120)

     Total charge-offs

            (2,052)

      (948)

         (3,448)

   (1,065)

Recoveries:

 

 

 

 

     Commercial

49

567

153

569

     Commercial loans secured by real estate

    -

-

   37

5

     Real estate-mortgage

   3

4

   5

22

     Consumer     

           21

          22

           55

          65

     Total recoveries

           73

        593

         250

        661

 

 

 

 

 

Net charge-offs

   (1,979)

(355)

   (3,198)

(404)

Provision for loan losses

     1,200

     3,300

     4,250

     5,100

Balance at end of period

  $ 20,737

$ 13,606

  $ 20,737

$ 13,606

 

 

 

 

 

As a percent of average loans and loans held

 

 

 

 

     for sale, net of unearned income:

 

 

 

 

     Annualized net charge-offs

  1.13%

0.19%

  0.91%

0.11%

     Annualized provision for loan losses

0.68

1.81

1.20

1.42

Allowance as a percent of loans and loans

 

 

 

 

     held for sale, net of unearned income

 

 

 

 

     at period end               

 2.99

1.84

2.99`

1.84


10.

Non-performing Assets


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



   

 

June 30,

2010

 

December 31,         2009

Non-accrual loans

 

 

 

 

    Commercial

 

$   3,146

 

$     3,375

    Commercial loans secured by real estate

 

14,549

 

11,716

    Real estate-mortgage

 

1,088

 

1,639

    Consumer

 

        401

 

         386

Total

 

   19,184

 

     17,116

 

 

 

 

 

Other real estate owned

 

 

 

 

    Commercial loans secured by real estate

 

       405

 

 871

Real estate-mortgage

 

        226

 

       350

Total

 

        631

 

    1,221

 

 

 

 

 

    Total non-performing assets

 

$19,815

 

$  18,337

    Total non-performing assets as a percent of loans and      loans held for sale, net of unearned income,

     and other real estate owned

 

2.85%

 

2.53%

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 (in thousands).


 

        Three months ended

 

        Six months ended

 

                                                        

June 30,

 

June 30,

 

                                                     

2010

2009

2010

2009

Interest income due in accordance

 

 

 

 

   with original terms

$      293

$       61

$      537

$     110

Interest income recorded

      (121)

            -

      (242)

           -

Net reduction in interest income

$      172

$        61

$      295

$    110


11.

Federal Home Loan Bank Borrowings


Total Federal Home Loan Bank (FHLB) borrowings and advances consist of the following at June 30, 2010, (in thousands, except percentages):


 

 

 

Weighted

Type

Maturing

Amount

Average Rate

Open Repo Plus

Overnight

$           -

    -%

 

 

 

 

Advances

2010

       8,000

3.34     

 

2012

      4,000

1.82

 

2013

5,000

2.04

 

2016 and after

        777

6.44

 

 

   17,777

2.77

        

 

 

 

Total FHLB borrowings

 

  $ 17,777

2.77%


Total Federal Home Loan Bank (FHLB) borrowings and advances consisted of the following at December 31, 2009, (in thousands, except percentages):


 

 

 

Weighted

Type

Maturing

Amount

Average Rate

Open Repo Plus

Overnight

$ 25,775

    0.62%

 

 

 

 

Advances

2010

       22,000

1.67     

 

2012

      3,000

1.97

 

2016 and after

        804

6.44

 

 

   25,804

1.85

        

 

 

 

Total FHLB borrowings

 

  $ 51,579

1.24%


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


12.

Preferred Stock


On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (initially introduced as the Troubled Asset Relief Program or “TARP”) was enacted.  On October 14, 2008, the U.S. Treasury announced its intention to inject capital into financial institutions under the TARP Capital Purchase Program (the “CPP”).  The CPP is a voluntary program designed to provide capital to healthy, well managed financial institutions in order to increase the availability of credit to businesses and individuals and help stabilize the U.S. financial system.  


On December 19, 2008, the Company sold to the U.S. Treasury for an aggregate purchase price of $21 million in cash 21,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series D.  In conjunction with the purchase of these senior preferred shares, the U.S. Treasury also received a warrant to purchase up to 1,312,500 shares of the Company’s common stock. The warrant has a term of 10 years and is exercisable at any time, in whole or in part, at an exercise price of $2.40 per share. The $21 million in proceeds was allocated to the Series D Preferred Stock and the warrant based on their relative fair values at issuance (approximately $20.4 million was allocated to the Series D Preferred Stock and approximately $600,000 to the warrant).  The difference between the initial value allocated to the Series D Preferred Stock of approximately $20.4 million and the liquidation value of $21 million will be charged to surplus over the first three years of the contract.  Cumulative dividends on Series D Preferred Stock are payable quarterly at 5% through December 19, 2013 and at a rate of 9% thereafter.  As a result of the decision by the Company to accept a preferred stock investment under the U.S. Treasury’s CPP for a period of three years the Company is no longer permitted to repurchase common stock or declare and pay dividends on common stock without the consent of the U.S. Treasury.


13.

Regulatory Capital


The Company is subject to various capital requirements administered by the federal banking agencies.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.


Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.  As of June 30, 2010, the Federal Reserve categorized the Company as Well Capitalized under the regulatory framework for prompt corrective action.  The Company believes that no conditions or events have occurred that would change this conclusion.  To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.  Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.83% at June 30, 2010.















 



Actual

 


For Capital Adequacy

Purposes

 

To Be Well Capitalized Under Prompt Corrective Action Provisions

June 30, 2010

Amount

Ratio

Amount

Ratio

Amount

Ratio

 

 

 

(In thousands, except ratios)

 

 

 

Total Capital (to Risk

  Weighted Assets)

 

 

 

 

 

 

Consolidated

$112,401

15.90%

$  56,565

   8.00%

$ 70,706

10.00%

Bank

 90,001

12.90  

55,802

       8.00

69,752

10.00   

 

 

 

 

 

 

 

Tier 1 Capital (to Risk

  Weighted Assets)

 

 

 

 

 

 

Consolidated

 103,405

14.62  

   28,282

 4.00  

  42,424

 6.00   

Bank

81,123

11.63  

27,901

 4.00  

41,851

 6.00   

 

 

 

 

 

 

 

Tier 1 Capital (to

  Average Assets)

 

 

 

 

 

 

Consolidated

103,405

11.08

        37,340

4.00

46,674

5.00

Bank

81,123

8.93

        36,347

4.00

45,434

5.00


14.

Segment Results


The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures.  The Company's major business units include retail banking, commercial lending, trust, and investment/parent. The reported results reflect the underlying economics of the business segments.  Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services.  The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment.  The key performance measure the Company focuses on for each business segment is net income contribution.


Retail banking includes the deposit-gathering branch franchise, lending to both individuals and small businesses, and financial services.  Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans.  Financial services include the sale of mutual funds, annuities, and insurance products.  Commercial lending to businesses includes commercial loans, and commercial real-estate loans.  The trust segment contains our wealth management businesses, which include the Trust Company and West Chester Capital Advisors, our registered investment advisory firm.  Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts.  Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment.  The Wealth management businesses also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in real estate investments and construction projects that utilize union labor.  The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on the guaranteed junior subordinated deferrable interest debentures, and centralized interest rate risk management.  Inter-segment revenues were not material.





The contribution of the major business segments to the consolidated results of operations for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands):


 

 

Three months ended

 

Six months ended

June 30,

 

 

June 30, 2010

 

June 30, 2010

 2010

 

Total revenue

Net income (loss)

Total revenue

Net income (loss)

Total assets

Retail banking

$    6,413

$        341

$    12,404

$        494

$    329,573

Commercial lending

3,350

266

6,666

(806)

472,181

Trust

1,560

47

3,218

69

3,471

Investment/Parent

         273

       (177)

          729

       (198)

     157,057

Total

$  11,596

$        477

$   23,017

$     (441)

$   962,282


 

 

Three months ended

 

Six months ended

June 30,

 

 

June 30, 2009

 

June 30, 2009

 2009

 

Total revenue

Net income (loss)

Total revenue

Net income (loss)

Total assets

Retail banking

$    6,316

$          96

$  12,329

$      473

$   329,005

Commercial lending

3,063

(1,319)

6,060

(1,620)

510,270

Trust

1,607

104

3,319

248

3,505

Investment/Parent

         676

          180

      1,656

        493

     136,119

Total

$  11,662

$     (939)

$  23,364

$    (406)

$   978,899

  

15.

Commitments and Contingent Liabilities


The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts.  The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.  The Company had various outstanding commitments to extend credit approximating $96.3 million and standby letters of credit of $11.5 million as of June 30, 2010.  


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


16.

Pension Benefits


The Company has a noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year.  The benefits of the plan are based upon the employee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. Plan assets are primarily debt securities (including U.S. Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments.  The net periodic pension cost for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands):









 

Three months ended

 

Six months ended

 

                                                        

June 30,

 

June 30,      

 

                                                     

2010

2009

2010

2009

Components of net periodic benefit cost

 

 

 

 

   Service cost

$    255

$   232

$    510

$   464

   Interest cost

265

234

530

468

   Expected return on plan assets

(309)

(308)

(618)

(616)

   Amortization of prior year service cost

4

3

8

6

   Amortization of transition asset

(4)

(4)

(8)

(8)

   Recognized net actuarial loss

      142

    119

      284

    238

Net periodic pension cost

$    353

$  276

$    706

$  552


17.

Disclosures About Fair Value Measurements


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


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


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


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


Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.  This applies to all available for sale securities except U.S. Treasury and equity securities which are considered to be Level 1.


Residential real estate loans held for sale are carried at fair value on a recurring basis. Residential real estate loans are valued based on quoted market prices from purchase commitments from market participants and are classified as Level 1.


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


The following tables present the assets reported on the balance sheet at their fair value as of June 30, 2010 and December 31, 2009, by level within the fair value hierarchy.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


Assets Measured on a Recurring Basis


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


 

 

 

Fair Value Measurements at June 30, 2010 Using

 

 




Total

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)


Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

 

 

 

 

 

      U.S. Agency securities

      $  20,071

$            -

        $   20,071

$       -

      U.S. Agency mortgage-backed

          securities


        128,025   


        -


 128,025


  -

     Loans held for sale

            5,073

5,073

-

-

     Fair value of swap asset

               439

-

439

-


 

 

 

Fair Value Measurements at December 31, 2009 Using

 

 




Total

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)


Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

 

 

 

 

 

      U.S. Agency securities

       $   12,292   

$         -

$   12,292

$ -

      U.S. Agency mortgage-backed

          securities


          118,980


-


118,980


-

      Loans held for sale

              3,790

3,790

-

-

      Fair value of swap asset

                 154

-

154

-


Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral.  Collateral values are estimated using Level 2 inputs based on observable market data which at times are discounted.  At June 30, 2010, impaired loans with a carrying value of $17.7 million were reduced by a specific valuation allowance totaling $6.3 million resulting in a net fair value of $11.4 million.


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


Assets Measured on a Non-recurring Basis


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


 

 

 

Fair Value Measurements at June 30, 2010 Using

 

 




Total

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)


Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

 

 

 

 

 

     Impaired loans

      $   11,435

$    -  

$ 11,435

$        -

     Other real estate owned

                631

 -

631

 -




 

 

 

Fair Value Measurements at December 31, 2009 Using

 

 




Total

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)


Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

 

 

 

 

 

     Impaired loans

       $10,091

$        -

       $10,091

$        -

     Other real estate owned

           1,221

     -

           1,221

 -


DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS


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


Estimated fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values based off of US GAAP measurements, and recorded book balances at June 30, 2010 and December 31, 2009, were as follows (in thousands):


 

June 30, 2010

December 31, 2009

 

 

Estimate Fair Value

Recorded Book Balance

Estimate Fair Value

Recorded Book Balance

FINANCIAL ASSETS:





Cash and cash equivalents

 $    33,685

$ 33,685

 $    26,308

 $    26,308

Investment securities

  157,635

157,057

  143,268

  142,883

Regulatory stock

          9,739

               9,739

        9,739

             9,739

Net loans (including loans held for sale), net of allowance for loan loss

 673,932

673,251

699,770

703,219

Accrued income receivable

           3,703

              3,703

           3,589

           3,589

Bank owned life insurance

         34,202

            34,202

         33,690

         33,690

Fair value swap asset

            439

                 439

         154

         154

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

Deposits with no stated maturities

 $ 444,707

$444,707

 $ 433,220

 $ 433,220

Deposits with stated maturities

 368,424

364,470

 357,275

 352,791

Short-term borrowings

-

-

25,775

25,775

All other borrowings

 34,276

30,862

41,272

38,889

Accrued interest payable

        3,103

           3,103

       4,136

       4,136

Fair value swap liability

              439

                  439

             154

             154

 

 

 

 

 

The fair value of cash and cash equivalents is equal to the current carrying value.


The fair value of investment securities is equal to the available quoted market price.  


The fair value of regulatory stock is equal to the current carrying value.


The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.


The fair value of accrued income receivable is equal to the current carrying value.

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


Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.


The fair value of short-term borrowings is equal to the current carrying value.


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


The fair value of accrued interest payable is equal to the current carrying value.


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


Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.

 




6





Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("M.D.& A.")


2010 SECOND QUARTER SUMMARY OVERVIEW….. The recession continues.  From its beginnings in the narrow field of sub-prime mortgages in 2007, it has become a global calamity which even strains the financial capabilities of sovereign nations.  We are told regularly that the worst is now behind us and that the latest legislative act or administrative regulation will set us on the right track.  But unemployment in the nation is still at 9.5%, in Pennsylvania it is 9.1% and in the primary markets served by AmeriServ it was 10.0% on May 30, 2010.  All of this is to say that here at AmeriServ we are continuing on the same course.  Our Asset Quality Task Force meets weekly to search out new signs of weakening loans.  As always, should new weaknesses appear, we will dedicate a portion of our strong capital to the task of building reserves to counterbalance these weaknesses.  In times such as these, we must exercise great care to work to help troubled customers who are experiencing difficulties while always remembering to protect the AmeriServ franchise from the type of severe losses that so many community banks are reporting.


Considering the difficulties of these times, AmeriServ reported for the second quarter 2010 net income of $477,000 or $ 0.01 per share.  This represented a substantial turnaround from the 2010 first quarter loss of $918,000 or $ 0.06 per share.   While this means that for the first six months of the year 2010, AmeriServ has now reported a net loss of $441,000 or $0.05 per share, it also means that after four consecutive quarters of losses AmeriServ has returned to profitability. We do believe that this bottom line turnaround of $1.4 million from first quarter to second quarter is an indication that our heightened vigilance is having a positive effect.  But please understand that this welcome return to profitability has not led to any celebrations or any relaxation of our vigilance.  We will spend our days attempting to build on top of this turnaround quarter.


Still, it is encouraging to note that during the second quarter 2010 non-performing assets declined by over $500,000 from March 31 and that the quarterly provision to the allowance for loan losses was smaller by $1.9 million.  This marks the third consecutive quarter during which we have been able to reduce the absolute dollar level provided to the allowance for loan losses.  One of the tangible benefits of the Asset Quality Task Force is its ability to regularly gauge the quality of the portfolio as a whole while also being able to recommend a very specific level of action on a specific loan.  


The impact of the recession can be noticed in the very real decline in customers seeking loans.  During the second quarter, loans decreased by $19 million which is the second consecutive quarter of decline.  Yet deposits continued to grow.  The $7 million of deposit growth caused the Loan-to-Deposit ratio to drop to 85.8% which indicates we have strong liquidity on our balance sheet.


A few other interesting points in the quarter –


·

Total FHLB borrowings now amount to just 1.85% of total assets because deposit growth has been so strong.


·

The net interest margin reached 3.83%, the highest level of any quarter since the fourth quarter of 2008.  This has allowed us to report a consistent level of net interest income during a period in which earning assets declined.


·

As loans have declined, so investments have grown by $9 million during the second quarter.


During 2010 while the Asset Quality Task Force has continued to focus on asset quality, the rest of the Company has been taking actions to upgrade management and to fix anything that needs to be fixed.  A recession is a perfect time to rebuild and retool so that the Company will be ready to move ahead when the long awaited recovery really appears.  We also continue to carefully monitor the following key metrics which are important indicators of our overall balance sheet strength.


·

The coverage ratio of Non-Performing Loans by the Allowance for Loan Losses was 108.1% on June 30, 2010.


·

The Company’s regulatory capital ratios throughout the second quarter of 2010 are meaningfully in excess of the well capitalized requirements.


·

The Company continues to have strong liquidity on both sides of its balance sheet.


These are not easy times for any of us.  During these difficult times we have been communicating to our elected leaders to trust American toughness, to not encumber us with bureaucratic rules and, most of all, do not enact new rules that punish the innocent with or instead of the guilty.  We know that the future of AmeriServ as an employer, as an investment, as a source of strength for the region, requires hard work and careful planning.  The board of directors and management team believe that we are ready for the challenge.  Our goal is a strong future for AmeriServ in a strong and vibrant America.

   

THREE MONTHS ENDED JUNE 30, 2010 VS. THREE MONTHS ENDED JUNE 30, 2009


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

 

 

 Three months ended

  Three months ended

 

June 30, 2010

June 30, 2009

   Net income (loss)

$       477

$      (939)

   Diluted earnings (loss) per share

 0.01

(0.06)

   Return on average assets (annualized)

 0.20%

(0.39)%

   Return on average equity (annualized)

 1.79%

(3.29)%


The Company reported second quarter 2010 net income of $477,000 or $0.01 per diluted common share.  This represents an increase of $1.4 million from the second quarter 2009 net loss of $939,000 or $0.06 per diluted common share.  Stabilization in our asset quality allowed us to record a lower provision for loan losses which was an important factor causing the increase in earnings between periods.  Diluted earnings per share were impacted by the preferred dividend requirement on the CPP preferred stock which amounted to $262,000 and reduced the amount of net income available to common shareholders.         


.....NET INTEREST INCOME AND MARGIN.....The Company's net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities.  Net interest income is a primary source of the Company's earnings, and it is affected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities.  The following table compares the Company's net interest income performance for the second quarter of 2010 to the second quarter of 2009 (in thousands, except percentages):



Three months ended

June 30, 2010

Three months ended

June 30, 2009


 Change


% Change

Interest income

$ 11,450

$ 12,055

$  (605)

(5.0)%

Interest expense

     3,242

     3,884

    (642)

      (16.5)

Net interest income

 $   8,208

$   8,171

$      37

        0.5

 

 

 

 

 

Net interest margin

3.83%

3.66%

0.17

N/M

N/M - not meaningful


The Company’s net interest income in the second quarter of 2010 was comparable with the prior year second quarter as it increased by only $37,000 or 0.5%.  The Company’s second quarter 2010 net interest margin of 3.83% was 17 basis points better than the 2009 second quarter margin of 3.66% and five basis points better than the more recent first quarter 2010 net interest margin of 3.78%.  The improved margin performance and stable level of net interest income is reflective of the Company’s strong liquidity position and its ability to reduce its funding costs during a period of deposit growth.  Specifically, total deposits averaged $802 million in the second quarter of 2010, an increase of $34 million or 4.4% over the second quarter of 2009.  The Company believes that uncertainties in the economy have contributed to growth in money market accounts, certificates of deposit and demand deposits as consumers and businesses have looked for safety in well capitalized community banks like AmeriServ Financial.  The net interest margin also benefitted from approximately $150,000 in loan prepayment penalties in 2010 as the Company has focused on reducing its commercial real estate exposure during this period of economic weakness.  Overall, total average loans outstanding have dropped by $29 million or 4.0% since December 31, 2009.  We believe that this declining loan trend will continue and it will have a negative impact on the net interest margin in the second half of 2010.

  

.....COMPONENT CHANGES IN NET INTEREST INCOME..…Regarding the separate components of net interest income, the Company's total interest income for the second quarter of 2010 decreased by $605,000 or 5.0% when compared to the same 2009 quarter. This decrease was due to a six basis point decline in the earning asset yield to 5.36% and a $19.2 million or 2.2% drop in average earning assets between periods due to the previously mentioned decline in loans.  Within the earning asset base, the yield on the total loan portfolio decreased by 11 basis points to 5.61% while the yield on total investment securities dropped by 35 basis points to 3.80%. Both of these yield declines reflect the impact of the lower interest rate environment that has now been in place for well over 18 months.  New investment securities and loans that are being booked typically have yields that are below the rate on the maturing instruments that they are replacing.

       

The Company's total interest expense for the second quarter of 2010 decreased by $642,000 or 16.5% when compared to the same 2009 quarter.  This decrease in interest expense was due to a lower cost of funds as the cost of interest bearing liabilities declined by 31 basis points to 1.82%.  Management’s decision to reduce interest rates paid on all deposit categories has not had any negative impact on deposit growth as consumers have sought the safety provided by well-capitalized community banks like AmeriServ Financial.  This decrease in funding costs was aided by a drop in interest expense associated with a $19.5 million decrease in the volume of interest bearing liabilities.  Specifically, the average balance of all FHLB borrowings declined by $45.7 million, but was partially offset by a $26.2 million increase in interest bearing deposits.  Additionally, the Company’s funding mix also benefited from a $7.8 million increase in non-interest bearing demand deposits. Overall, in the second quarter of 2010 the Company had the discipline to further reduce its use of borrowings as a funding source as wholesale borrowings averaged only 2.1% of total assets.       

        

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended June 30, 2010 and June 30, 2009 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) AmeriServ Financial's interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) AmeriServ Financial's net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables, loan balances do include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received.  Additionally, a tax rate of 34% is used to compute tax-equivalent yields.




7






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


 

 

2010

 

 

 

2009

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Average

Income/

Yield/

 

Average

Income/

Yield/

 

 

Balance

Expense

Rate

 

Balance

Expense

Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

Loans and loans held for sale,

  net of unearned income


$705,288


$  9,992


5.61


%


$732,568


$ 10,553


5.72


%

Interest bearing deposits

    1,743

  -

0.02

 

1,715

1

0.23

 

Short-term investment in money

  market funds


3,403


4


0.42

 


10,579


8


0.29

 

Federal funds sold

2,683

1

0.11

 

-

-

-

 

Investment securities – AFS

147,761

   1,353

3.75

 

130,256

1,337

4.11

 

Investment securities – HTM

    9,629

    108

4.55

 

  14,607

   165

4.52

 

Total investment securities

157,390

 1,461

3.80

 

144,863

1,502

4.15

 

Total interest earning

   assets/interest income


870,507


11,458


5.36

 


889,725


12,064


5.42

 

Non-interest earning assets:

 

 

 

 

 

 

 

 

Cash and due from banks

14,534

 

 

 

14,005

 

 

 

Premises and equipment

 9,940

 

 

 

9,122

 

 

 

Other assets

79,894

 

 

 

72,074

 

 

 

Allowance for loan losses

  (22,075)

 

 

 

 (11,101)

 

 

 

TOTAL ASSETS

$952,800

 

 

 

$973,825

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

   Interest bearing demand

$   58,361

$     45

0.31

%

$   61,316

$     64

0.42

%

   Savings

 78,778

126

0.64

 

72,988

138

0.76

 

   Money markets

183,850

  451

0.98

 

171,019

704

1.65

 

   Other time

  357,938

  2,211

2.48

 

 347,422

 2,498

2.88

 

Total interest bearing deposits

678,927

 2,833

1.67

 

652,745

3,404

2.09

 

Short-term borrowings:

 

 

 

 

 

 

 

 

Federal funds purchased,   

   securities sold under        

   agreements to repurchase and    other short-term borrowings




 2,140




     4




0.70

 




52,358




71




0.55

 

Advances from Federal  

   Home Loan Bank


18,332


 125


2.73

 


13,840


129


3.74

 

Guaranteed junior subordinated     deferrable interest debentures


   13,085


   280


8.57

 


  13,085


   280


8.57

 

Total interest bearing

   liabilities/interest expense


  712,484


 3,242


1.82

 


732,028


3,884


2.13

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

Demand deposits

123,064

 

 

 

115,248

 

 

 

Other liabilities

 10,625

 

 

 

11,914

 

 

 

Shareholders' equity

  106,627

 

 

 

  114,635

 

 

 

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY


$952,800

 

 

 


$973,825

 

 

 

Interest rate spread

 

 

3.54

 

 

 

3.29

 

Net interest income/

   Net interest margin

 


 8,216


3.83


%

 


8,180


3.66


%

Tax-equivalent adjustment

 

        (8)

 

 

 

        (9)

 

 

Net Interest Income

 

$  8,208

 

 

 

$  8,171

 

 





…..PROVISION FOR LOAN LOSSES..... The Company appropriately strengthened its allowance for loan losses over the past year in response to ongoing careful monitoring of the commercial loan and commercial real estate portfolios.  A weak economic environment caused higher levels of nonperforming loans and classified loans.  When determining the provision for loan losses, the Company considers a number of factors some of which include periodic credit reviews, non-performing, delinquency and charge-off trends, concentrations of credit, loan volume trends and broader local and national economic trends.  


The Company recorded a $1.2 million provision for loan losses in the second quarter of 2010 compared to a $3.3 million provision in the second quarter of 2009, or a decrease of $2.1 million.  For the second quarter 2010, net charge-offs amounted to $2.0 million or 1.13% of total loans compared to net charge-offs of $355,000 or 0.19% of total loans for the second quarter 2009.  The higher net charge-offs in the second quarter of 2010 relate primarily to a $1.8 million charge-down of a non-performing student housing project which we currently expect to resolve through a note sale during the second half of 2010.  The original balance of this loan was $5 million.  Overall, during the second quarter, total non-performing assets declined modestly to $19.8 million or 2.85% of total loans.  In summary, the allowance for loan losses provided 108% coverage of non-performing loans at June 30, 2010 compared to 115% coverage of non-performing loans at December 31, 2009.

 

.....NON-INTEREST INCOME.....Non-interest income for the second quarter of 2010 totaled $3.4 million; a decrease of $103,000 or 3.0% from the second quarter 2009 performance.  Factors contributing to this reduced level of non-interest income in 2010 included:


*  a $65,000 decrease in trust fees as a result of reductions in the market value of real estate assets managed due to lower values in the union specialty real estate funds in 2010.  


*  a $99,000 decline in deposit service charges due to a reduced volume of overdraft fees.  Customers have maintained higher balances in their checking accounts which has resulted in fewer overdraft fees in 2010.  

   

.....NON-INTEREST EXPENSE.....Non-interest expense for the second quarter of 2010 totaled $9.8 million and increased by $150,000 or 1.6% from the prior year’s second quarter. Factors contributing to the higher non-interest expense in 2010 included:


*   a $253,000 or 5.1% increase in salaries and employee benefits expense due to increased medical insurance costs and higher pension expense in 2010.


*  a $241,000 increase in professional fees due primarily to increased consulting expenses and recruitment costs in the Trust company and higher legal fees and workout costs at the Bank in 2010.


*   a $350,000 decrease in FDIC deposit insurance expense due to the recognition of a special five basis point or $435,000 assessment in the second quarter of 2009 to strengthen the deposit insurance fund.



       


SIX MONTHS ENDED JUNE 30, 2010 VS. SIX MONTHS ENDED JUNE 30, 2009


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

 

 

 Six months ended

  Six months ended

 

June 30, 2010

June 30, 2009

   Net loss

$       (441)

$      (406)

   Diluted loss per share

 (0.05)

(0.04)

   Return on average assets (annualized)

 (0.09)%

(0.08)%

   Return on average equity (annualized)

 (0.83)%

(0.72)%


The Company reported for the first six months of 2010 a net loss of $441,000 or $0.05 per diluted common share which was comparable with the net loss of $406,000 or $0.04 per diluted common share reported for the first six months of 2009.  The benefit of a lower loan loss provision in 2010 was offset by higher non-interest expense and a reduced amount of non-interest income.  Diluted earnings per share also declined by the preferred dividend requirement on the CPP preferred stock which amounted to $525,000 and increased the amount of the net loss available to common shareholders.         


.....NET INTEREST INCOME AND MARGIN..... The following table compares the Company's net interest income performance for the first six months of 2010 to the first six months of 2009 (in thousands, except percentages):



Six months ended

June 30, 2010

Six months ended

June 30, 2009


 Change


% Change

Interest income

$  22,915

$ 23,990

$    (1,075)

(4.5)%

Interest expense

      6,586

     7,678

     (1,092)

      (14.2)

Net interest income

 $ 16,329

$ 16,312

$           17

        0.1

 

 

 

 

 

Net interest margin

3.81%

3.69%

0.12

N/M

N/M - not meaningful


The Company’s net interest income in the first half of 2010 was comparable with the same prior year period as it increased by only $17,000 or 0.1%.  Careful management of funding costs during a period when interest revenues are declining has allowed the Company to increase its net interest margin by 12 basis points to 3.81% for the first six months of 2010.  This relative stability in net interest income and improved margin performance is reflective of the Company’s strong liquidity position and its ability to reduce its funding costs during a period of deposit growth.  Specifically, total deposits averaged $795 million in the first six months of 2010, an increase of $53 million or 7.1% over the first half of 2009.  Overall, these effective balance sheet management strategies caused the cost of funds to decrease by 28 basis points while the earning asset yield dropped by a lesser amount of nine basis points.

  

.....COMPONENT CHANGES IN NET INTEREST INCOME..…Regarding the separate components of net interest income, the Company's total interest income for the first six months of 2010 decreased by $1.1 million or 4.5% when compared to the same 2009 period. This decrease was due to a nine basis point decline in the earning asset yield to 5.36% coupled with a drop in average earning assets which was $10.5 million between periods.  Within the earning asset base, the yield on the total loan portfolio decreased by 16 basis points to 5.61% while the yield on total investment securities dropped by 39 basis points to 3.80%.  Both of these yield declines reflect the impact of the lower interest rate environment that has now been in place for well over 18 months.  New investment securities and loans that are being booked typically have yields that are below the rate on the maturing instruments that they are replacing. Also the asset mix shifted with fewer dollars invested in loans and more dollars invested in lower yielding short duration investment securities also negatively impacts the earning asset yield.  We expect this trend to continue during the second half of 2010 as we are focused on reducing our exposure to commercial real estate.  Consequently, we expect to book fewer new commercial real estate loans which will cause the loan portfolio to shrink further through normal amortization and some anticipated early loan pay-offs.  

       

The Company's total interest expense for the first half of 2010 decreased by $1.1 million or 14.2% when compared to the same 2009 period.  This decrease in interest expense was due to a lower cost of funds as the cost of interest bearing liabilities declined by 28 basis points to 1.85%.  Management’s decision to reduce interest rates paid on all deposit categories has not had any negative impact on deposit growth as consumers have sought the safety provided by well-capitalized community banks like AmeriServ Financial.   This decrease in funding costs was aided by a drop in interest expense associated with an $11.0 million decrease in the volume of interest bearing liabilities.  Specifically, the average balance of all FHLB borrowings declined by $58.2 million, but was partially offset by a $47.3 million increase in interest bearing deposits.         

        

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the six month periods ended June 30, 2010 and June 30, 2009.  For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 23.   




8






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


 

 

2010

 

 

 

2009

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Average

Income/

Yield/

 

Average

Income/

Yield/

 

 

Balance

Expense

Rate

 

Balance

Expense

Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

Loans and loans held for sale,

  net of unearned income


$711,267


$  20,021


5.61


%


$723,410


$ 20,913


5.77


%

Interest bearing deposits

    1,776

  1

0.12

 

1,731

2

0.23

 

Short-term investment in money

  market funds


3,925


7


0.37

 


11,051


22


0.40

 

Federal funds sold

2,539

2

0.11

 

28

-

0.19

 

Investment securities – AFS

142,803

   2,675

3.70

 

131,369

2,735

4.07

 

Investment securities – HTM

  10,091

    226

4.48

 

  15,295

   338

4.42

 

Total investment securities

152,894

 2,901

3.80

 

146,664

3,073

4.19

 

Total interest earning

   assets/interest income


872,401


22,932


5.36

 


882,884


24,010


5.45

 

Non-interest earning assets:

 

 

 

 

 

 

 

 

Cash and due from banks

14,984

 

 

 

14,747

 

 

 

Premises and equipment

 9,694

 

 

 

9,284

 

 

 

Other assets

79,769

 

 

 

71,539

 

 

 

Allowance for loan losses

  (21,434)

 

 

 

 (10,123)

 

 

 

TOTAL ASSETS

$955,414

 

 

 

$968,331

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

   Interest bearing demand

$   57,863

$     90

0.31

%

$   61,836

$     139

0.45

%

   Savings

 77,032

245

0.64

 

72,373

272

0.76

 

   Money markets

185,563

  897

0.97

 

156,231

1,285

1.66

 

   Other time

  354,084

  4,528

2.58

 

 336,821

 4,963

2.97

 

Total interest bearing deposits

674,542

 5,760

1.72

 

627,261

6,659

2.14

 

Short-term borrowings:

 

 

 

 

 

 

 

 

Federal funds purchased,   

   securities sold under        

   agreements to repurchase and    other short-term borrowings




 3,815




     13




0.68

 




73,629




200




0.54

 

Advances from Federal  

   Home Loan Bank


25,413


 253


1.99

 


13,847


259


3.76

 

Guaranteed junior subordinated     deferrable interest debentures


   13,085


   560


8.57

 


  13,085


   560


8.57

 

Total interest bearing

   liabilities/interest expense


  716,855


 6,586


1.85

 


727,822


7,678


2.13

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

Demand deposits

120,009

 

 

 

114,273

 

 

 

Other liabilities

 11,623

 

 

 

12,090

 

 

 

Shareholders' equity

  106,927

 

 

 

  114,146

 

 

 

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY


$955,414

 

 

 


$968,331

 

 

 

Interest rate spread

 

 

3.51

 

 

 

3.32

 

Net interest income/

   Net interest margin

 


 16,346


3.81


%

 


16,332


3.69


%

Tax-equivalent adjustment

 

       (17)

 

 

 

       (20)

 

 

Net Interest Income

 

$ 16,329

 

 

 

$ 16,312

 

 





…..PROVISION FOR LOAN LOSSES.....  The Company recorded a $4.3 million provision for loan losses in the first half of 2010 compared to a $5.1 million provision in the first half of 2009, or a decrease of $850,000.  Actual credit losses realized through charge-offs in 2010, however, are running below the provision level but are higher than the prior year.  For the first six months of 2010, net charge-offs amounted to $3.2 million or 0.91% of total loans compared to net charge-offs of $404,000 or 0.11% of total loans for the first half of 2009.  The higher charge-offs in 2010 primarily relate to two non-performing commercial real-estate loans, one of which was completely resolved in the first quarter and the second of which relates to a student housing project which the Company currently expects to resolve through a note sale during the second half of 2010.  The allowance for loan losses was 2.99% of total loans at June 30, 2010, compared to 2.72% of total loans at December 31, 2009.

 

.....NON-INTEREST INCOME.....Non-interest income for the first six months of 2010 totaled $6.7 million; a decrease of $364,000 or 5.2% from the first six months 2009 performance.  Factors contributing to this reduced level of non-interest income in 2010 included:


*  a $200,000 decline in deposit service charges due to a reduced volume of overdraft fees.  Customers have maintained higher balances in their checking accounts which has resulted in fewer overdraft fees in 2010.  Volumes were also impacted by both winter weather related issues and a greater negative media focus on this product.  


*  a $170,000 decrease in trust fees as a result of reductions in the market value of certain real estate assets we manage in our specialty real estate funds in 2010.

 

*  a $65,000 increase in investment advisory fees due to improved equity values in the first half of 2010 when compared to 2009.

   

.....NON-INTEREST EXPENSE.....Non-interest expense for the first six months of 2010 totaled $19.6 million and increased by $752,000 or 4.0% from the prior year’s first six months. Factors contributing to the higher non-interest expense in 2010 included:


*   a $360,000 or 3.6% increase in salaries and employee benefits expense due to increased medical insurance costs and higher pension expense in 2010.  


*  a $423,000 increase in professional fees due primarily to increased consulting expenses and recruitment costs in the Trust company and higher legal fees and workout costs at the Bank.


*   a $115,000 increase in other expenses as a result of increased funding of the Company’s reserve for unfunded commitments in 2010.


.....INCOME TAX EXPENSE.....The Company recorded an income tax benefit of $342,000 in the first half of 2010 which reflects an estimated effective tax rate of approximately 43.7%. The income tax benefit recorded in the first half of 2009 was $128,000 and reflected an effective tax rate of approximately 24.0%.  The Company’s deferred tax asset was $15.4 million at June 30, 2010 and relates primarily to net operating loss carryforwards and the allowance for loan losses.


…..SEGMENT RESULTS.….Retail banking’s net income contribution was $341,000 and $494,000 in the second quarter and first six months of 2010 compared to $96,000 and $473,000   for the same comparable periods of 2009.  The improved performance in 2010 is due to increased net interest income generated on the higher level of deposits and a lower provision for loan losses.  These positive items more than offset reduced revenue from overdraft fees and deposit service charges.


The commercial lending segment reported for 2010 a net income for the second quarter of $266,000 and a net loss of $806,000 for the first six months compared to net losses of $1.3 million in the second quarter and $1.6 million for the first six months of 2009.  The increased earnings in 2010 was caused primarily by a reduced provision for loan losses due to the previously discussed stabilization in asset quality.  


The trust segment’s net income contribution in the second quarter amounted to $47,000 and $69,000 for the first half of 2010 compared to $104,000 and $248,000 for the same 2009 periods.  The major reason for the decrease between years was due to less trust revenue as a result of declines experienced in the real estate markets during the past year.  Specifically, the most significant decline has been in the value of real-estate assets in the Build and Erect Funds (funds that invest union pension dollars in real estate investments and construction projects that utilize union labor) where the market value of assets has declined from $221 million at June 30, 2009 to $184 million at June 30, 2010.   This segment has also experienced an increase in non-interest expenses due to increased legal, consulting fees and recruitment costs.


The investment/parent segment reported net losses of $177,000 in the second quarter and $198,000 for the first six months of 2010 compared to the net income earned of $180,000 and $493,000 realized in the same periods  of 2009.  The weaker performance in 2010 reflects lower non-interest revenue and higher non-interest expense.  For example, the Company realized $107,000 of investment security gains in the first half of 2010 compared to gains of $164,000 realized in the first half of 2009.  Also, declining yields in the investment securities portfolio have also negatively impacted this segment.


.....BALANCE SHEET.....The Company's total consolidated assets were $962 million at June 30, 2010, which was down modestly by $7.7 million or 0.8% from the $970 million level at December 31, 2009. The Company’s loans totaled $694 million at June 30, 2010, a decrease of $28.9 million or 4.0% as a result of net portfolio run-off since year-end.  We plan to further reduce our commercial real estate loan concentration through the funding of fewer new commercial real estate loans in the second half of 2010 so we expect the loan portfolio to shrink further this year.  Investment securities, fed funds sold, and short-term money market investments increased by $24.8 million so far in 2010 due to principal repayments in the loan portfolio being reinvested in the investment securities portfolio.  We also expect this trend to continue in the second half of 2010.     

  

The Company’s deposits totaled $809 million at June 30, 2010, which was $23.2 million or 2.9% higher than December 31, 2009, due to an increase in almost all deposit categories.  We believe that uncertainties in the financial markets and the economy have contributed to growth in our deposits as consumers and businesses have looked for safety in well capitalized community banks like AmeriServ Financial.  As a result of this deposit growth, we were able to reduce total FHLB borrowings by $33.8 million during the first half of 2010.  Total FHLB borrowings now represent only 1.8% of total assets compared to 5.3% at December 31, 2009.  The Company’s total shareholders’ equity has increased by $769,000 since year-end 2009 mainly due to the increase in market value of the securities portfolio in the first half of 2010.  The Company continues to be considered well capitalized for regulatory purposes with an asset leverage ratio at June 30, 2010 of 11.08%. The Company’s tangible book value per common share at June 30, 2010 was $3.50, and its tangible common equity to tangible assets ratio was 7.83%.


.....LOAN QUALITY.....The following table sets forth information concerning the Company’s loan delinquency, non-performing assets, and classified assets (in thousands, except percentages):

 

 

 

 

 

June 30,

December 31,

June 30,

 

2010

2009

2009

  Total loan delinquency (past

 

 

 

         due 30 to 89 days)

$  4,244

$  11,408

$  6,843

  Total non-accrual loans

 19,184

17,116

11,832

  Total non-performing assets*

19,815

  18,337

14,670

 

 

 

 

Loan delinquency, as a percentage

      of total loans and loans held for

      sale, net of unearned income



0.61%



1.58%



0.93%

   Non-accrual loans, as a percentage

        of total loans and loans held for

        sale, net of unearned income



2.76



2.37



1.60

  Non-performing assets, as a

        percentage of total loans and loans

        held for sale, net of unearned income,

        and other real estate owned




2.85




2.53




1.98

   Non-performing assets as a percentage

        of total assets


2.06


1.89


1.50

Total classified loans (loans rated substandard or doubtful)


45,960

  

48,689


25,426

        *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, and (iii) other real estate owned.   

  

As a result of the recessionary economy, non-performing assets have trended upward over the past year and now total $19.8 million or 2.85% of total loans.  The following three credits comprise the majority of the non-performing asset balance:  1) In response to the 2009 Shared National Credit Examination, the Company transferred a $10 million commercial loan relationship to a borrower in the restaurant industry to non-accrual status.  The Company restructured this loan at its maturity by entering into a forbearance agreement with the borrower to make reduced payments over a six-month period in an effort to give the borrower greater flexibility to restructure its operations to improve its cash flows during this difficult economic period.  The Company has never had any payment delinquency with this borrower.  Recently, the borrower has resumed making normal principal and interest payments in accordance with a new loan agreement and has paid down the balance of the loan to $8.4 million.  A $3.4 million specific reserve has been established against this credit.  We currently anticipate that this loan will be removed from non-performing assets by year-end 2010.  2) A $2.8 million loan to a borrower in the heavy construction equipment rental business. This borrower was experiencing cash flow difficulties that caused payment delinquency.  We were able to obtain $120,000 in payments from the borrower during the second quarter of 2010.  A $1.1 million specific reserve has been established against this credit.   3) In the first quarter of 2010, we transferred a $5 million commercial real estate loan that is secured by newly constructed student housing into non-accrual status since the project has not yet stabilized to support the required principal payments on the loan.  We are a participant in this loan with two larger banks and our share represents 12.5% of the total loan balance.  During the second quarter we charged this loan down by $1.8 million and continue to maintain a $925,000 specific reserve allocation.  We currently expect this problem credit to be resolved through a note sale during the second half of 2010.    



The remainder of the increase in classified loans was caused by the downgrade of the rating classification of several commercial loans that are experiencing operating weakness in the recessionary economy but are still performing.  However, overall loan delinquency levels have been relatively consistent and moved back below 1.0% as of June 30, 2010.   We continue to closely monitor the portfolio given the weakness in the economy and the number of relatively large-sized commercial and commercial real estate loans within the portfolio.  As of June 30, 2010, the 25 largest credits represented 33.5% of total loans outstanding. Additionally, the Company had no performing loans that were considered restructured for the periods presented.


.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth the allowance for loan losses and certain ratios for the periods ended (in thousands, except percentages):


 

June 30,  

December  31,

June 30,  

 

2010

2009

2009

Allowance for loan losses

$20,737

$19,685

$13,606

Allowance for loan losses as  

 

 

 

   a percentage of each of

 

 

 

   the following:

 

 

 

       total loans and loans held for sale,

 

 

 

         net of unearned income

      2.99%

      2.72%

1.84%

       total delinquent loans

 

 

 

         (past due 30 to 89 days)

488.62

172.55

198.83

       total non-accrual loans

   108.10

115.01

114.99

       total non-performing assets

   104.65

107.35

  92.75

  

The allowance for loan losses provided 108% coverage of non-accrual loans at June 30, 2010 compared to 115% coverage at December 31, 2009, and June 30, 2009.  The allowance for loan losses to total loans ratio increased to 2.99% since year-end 2009 as the loan loss provision exceeded net charge-offs in the first half of 2010 and the size of the loan portfolio has declined.  The Company decided to build its allowance for loan losses over the past year due to the increase in non-performing loans, the downgrade of the rating classification of numerous performing commercial loans, and the weakness in the local and national economies.


.....LIQUIDITY.....The Bank’s liquidity position has been strong during the last several years.  Our core retail deposit base remained stable throughout the early part of this period and has recently shown nice growth, which has been more than adequate to fund the Bank’s operations.  Cash flow from maturities, prepayments and amortization of securities was also used to either fund loan growth or paydown borrowings.  We strive to operate our loan to deposit ratio in a range of 85% to 95%.  At June 30, 2010, the Bank’s loan to deposit ratio was 85.8%.


Liquidity can be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents increased by $7.4 million from December 31, 2009, to June 30, 2010, due to $16.7 million of cash provided by investing activities and $1.4 million of cash provided by operating activities.  This was partially offset by $10.8 million of cash used in financing activities.  Within investing activities, cash used for new investment security purchases exceeded maturities and sales by $8.9 million.  Cash advanced for new loan fundings and purchases totaled $38 million and was $27.5 million lower than the $65.6 million of cash received from loan principal payments and sales.  Within financing activities, deposits increased by $23.6 million, which was used to help pay down short-term borrowings by $25.8 million.   


The Parent Company had $17.5 million of cash, short-term investments, and securities at June 30, 2010, which was down $2.4 million from the year-end 2009 total.  We have elected to retain $14 million of the total $21 million in funds received from the CPP preferred stock at the Parent Company to provide us with greater liquidity and financial flexibility.  ($7 million of the CPP funds were downstreamed to our subsidiary bank to help the Bank maintain compliance with our own internal capital guidelines.)  Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the Parent.  At June 30, 2010, however, the subsidiary bank did not have any cash available for immediate dividends to the Parent under the applicable regulatory formulas because of the loss it incurred in 2009. The Bank will not provide any dividend support to the Parent Company in 2010.  As such, the Parent Company will use its ample supply of cash and short term investments to continue to meet its trust preferred debt service requirements and preferred stock dividends which approximate $2.1 million annually.  


.....CAPITAL RESOURCES.....The Company continues to be considered well capitalized as the asset leverage ratio was 11.08% and the risk based capital ratio was 15.9% at June 30, 2010. Note that the impact of other comprehensive loss is excluded from the regulatory capital ratios.  At June 30, 2010, accumulated other comprehensive loss amounted to $2.7 million.  The Company’s tangible common equity to tangible assets ratio was 7.83% at June 30, 2010.  We anticipate that our strong capital ratios should grow modestly in the second half of 2010 due to the retention of all earnings and no expected balance sheet growth which will be partially offset by preferred dividend requirements.


Our decision to accept the $21 million CPP preferred stock investment in December 2008 did strengthen our capital ratios.  However as a result of this decision, for a period of three years we are no longer permitted to repurchase stock or declare and pay common dividends without the consent of the U.S. Treasury. The Company presently does not expect to repay any portion of the CPP preferred stock investment prior to 2012 given the uncertainties in the economy and the need for the subsidiary bank to return to sustained profitability.


.....INTEREST RATE SENSITIVITY.....The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity.  The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points.  Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low level of interest rates.  Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.


Interest Rate

Scenario

Variability of Net Interest Income

Change in Market Value of Portfolio Equity

 

 

 

200bp increase

7.9%

14.0%

100bp increase

6.3

11.0

100bp decrease

                  (11.3)

(19.6)


The variability of net interest income is negative in the 100 basis point downward rate scenario as the Company has more exposure to assets repricing downward to a greater extent than liabilities due to the absolute low level of interest rates with the fed funds rate currently at 0.25%.  The variability of net interest income is positive in the upward rate shocks as the Company has better diversified its loan portfolio over the past year with the interest rate on more loans now tied to LIBOR.  Also, the Company expects that it will not have to reprice its core deposit accounts up as quickly when interest rates rise.  The market value of portfolio equity increases in the upward rate shocks due to the improved value of the Company’s core deposit base. Negative variability of market value of portfolio equity occurs in the downward rate shock due to a reduced value for core deposits.   

     

.....OFF BALANCE SHEET ARRANGEMENTS…..The Bank incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The Company had various outstanding commitments to extend credit approximating $96.3 million and standby letters of credit of $11.5 million as of June 30, 2010.


.....CRITICAL ACCOUNTING POLICIES AND ESTIMATES.....The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles and conform to general practices within the banking industry.  Accounting and reporting policies for the allowance for loan losses, goodwill, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments.  Application of assumptions that differ from actual performance could result in material changes in the Company’s financial position or results of operation.


Account Allowance for Loan Losses


Balance Sheet Reference Allowance for Loan Losses


Income Statement Reference – Provision for Loan Losses


Description


The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors.  However, this evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience.  This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios.  All of these factors may be susceptible to significant change.  Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management’s judgment concerning those trends.


Commercial loans and commercial mortgages are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan loss.  Approximately $18.2 million, or 88%, of the total allowance for credit losses at June 30, 2010 has been allocated to these two loan categories.  This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods.


Account — Goodwill and core deposit intangibles


Balance Sheet Reference — Goodwill and core deposit intangibles


Income Statement Reference Goodwill impairment and amortization of core deposit intangibles


Description


The Company considers our accounting policies related to goodwill and core deposit intangibles to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex.  As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.


The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third party sources, when available.  When third party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques.  The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes.  The Company routinely utilizes the services of an independent third party that is regarded within the banking industry as an expert in valuing core deposits to monitor the ongoing value and changes in the Company’s core deposit base.  These core deposit valuation updates are based upon specific data provided from statistical analysis of the Bank’s own deposit behavior to estimate the duration of these non-maturity deposits combined with market interest rates and other economic factors.


Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired.  The Company’s goodwill relates to value inherent in the banking business and the value is dependent upon the Company’s ability to provide quality, cost-effective services in the face of free competition from other market participants on a regional basis.  This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of the Company’s services.  As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted and the loyalty of the Company’s depositors over a longer time frame.  The quality and value of a Company’s assets is also an important factor to consider when performing goodwill impairment testing.  A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective value added services over sustained periods can lead to impairment of goodwill.


Goodwill which has an indefinite useful life is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value.  The Company’s testing in 2009 indicated that its goodwill was not impaired.  However, deteriorating economic conditions could result in impairment, which would adversely affect earnings in future periods.  During the third quarter of 2009, the Company did reduce the goodwill allocated to West Chester Capital Advisors (WCCA) by $547,000.  This reduction resulted from a purchase price adjustment as the principals of WCCA did not fully earn a deferred contingent payment that had been accrued for at the time of acquisition.     


Account — Income Taxes


Balance Sheet Reference — Deferred Tax Asset and Current Taxes Payable


Income Statement Reference — Provision for Income Taxes


Description


The provision for income taxes is the sum of income taxes both currently payable and deferred. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities as measured by the enacted tax rates that management estimates will be in effect when the differences reverse.  


In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related time of expected reversal.  Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets.  If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.   Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances.  As of June 30, 2010, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and no valuation allowances were needed.


In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due.  If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.  We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.  


ACCOUNT Investment Securities


BALANCE SHEET REFERENCE — Investment Securities


INCOME STATEMENT REFERENCE — Net realized gains (losses) on investment securities  


DESCRIPTION


Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment.  The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery.  A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations.  At June 30, 2010, all of the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies, the U.S. Treasury or government sponsored agencies.  The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase.  In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase.   Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired.  Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance.  Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.


.....FORWARD LOOKING STATEMENT.....


THE STRATEGIC FOCUS:


The challenge for the future is to improve earnings performance to peer levels through a disciplined focus on community banking and improving the profitability of our Trust Company.  In accordance with our strategic plan, AmeriServ will maintain its focus as a community bank delivering banking and trust services to the best of our ability. This Company will not succumb to the lure of quick fixes and fancy financial gimmicks.  It is our plan to continue to build AmeriServ into a potent banking force in this region and in this industry.  Our focus encompasses the following:


• Customer Service - it is the existing and prospective customer that AmeriServ must satisfy. This means good products and fair prices. But it also means quick response time and professional competence.  It means speedy problem resolution and a minimizing of bureaucratic frustrations.  AmeriServ is training and motivating its staff to meet these standards.


• Revenue Growth - It is necessary for AmeriServ to focus on growing revenues. This means loan growth, deposit growth and fee growth. It also means close coordination between all customer service areas so as many revenue producing products as possible can be presented to existing and prospective customers. The Company’s Strategic Plan contains action plans in each of these areas. This challenge will be met by seeking to exceed customer expectations in every area. An examination of the peer bank database provides ample proof that a well executed community banking business model can generate a reliable and rewarding revenue stream.


• Expense Rationalization – despite the set back in 2009 due to higher FDIC insurance and OREO expense, AmeriServ Financial remains focused on trying to rationalize expenses.  This has not been a program of broad based cuts, but has been targeted so AmeriServ stays strong but spends less. However, this initiative takes on new importance because it is critical to be certain that future expenditures are directed to areas that are playing a positive role in the drive to improve revenues.


This Form 10-Q contains various forward-looking statements and includes assumptions concerning the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results, and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions. These forward-looking statements are based upon current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.


Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (iii) significant changes in interest rates and prepayment speeds; (iv) inflation, stock and bond market, and monetary fluctuations; (v) credit risks of commercial, real estate, consumer, and other lending activities; (vi) changes in federal and state banking and financial services laws and regulations; (vii) the presence in the Company’s market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors’ products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) unanticipated regulatory or judicial proceedings; and (xii) other external developments which could materially impact the Company’s operational and financial performance.


The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement.


Item 3.....QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.....The Company manages market risk, which for the Company is primarily interest rate risk, through its asset liability management process and committee, see further discussion in Interest Rate Sensitivity section of this M.D. & A.  


Item 4T.....CONTROLS AND PROCEDURES.....(a) Evaluation of Disclosure Controls and Procedures.  The Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2010, pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2010, are effective.


(b) Changes in Internal Controls.  There have been no changes in AmeriServ Financial Inc.’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.







Part II     Other Information


Item 1.   Legal Proceedings


There are no material proceedings to which the Company or any of our subsidiaries are a party or by which, to the Company’s’ knowledge, we, or any of our subsidiaries, are threatened.  All legal proceedings presently pending or threatened against the Company or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.


Item 1A.   Risk Factors


   There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.


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


As a result of the decision by the Company to accept a preferred stock investment under the U.S. Treasury’s CPP for a period of three years the Company is no longer permitted to repurchase stock or declare and pay dividends on common stock without the consent of the U.S. Treasury.


Item 3.   Defaults Upon Senior Securities


   None


Item 4.   (Removed and Reserved)



Item 5.   Other Information


   None





9





Item 6.   Exhibits

 

 3.1

Amended and Restated Articles of Incorporation as amended through December 23, 2009, exhibit 3.1 to Form 8-K filed on December 23, 2009.

 

 

 3.2

Bylaws, as amended and restated on December 17, 2009, Exhibit 3.2 to the Form 8-K filed December 23, 2009.

 

 

 3.3

Certificate of Designation of Rights of Fixed Rate Cumulative Perpetual Preferred Stock, Series D (Incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.)

 

 

15.1

Report of S.R. Snodgrass, A.C. regarding unaudited interim financial statement

information.

 

 

31.1

Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

   

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

AmeriServ Financial, Inc.  

 

Registrant

 

 

Date: August 6, 2010

/s/Glenn L. Wilson

 

Glenn L. Wilson

 

President and Chief Executive Officer

 

 

Date: August 6, 2010

/s/Jeffrey A. Stopko

 

Jeffrey A. Stopko

 

Executive Vice President and Chief Financial Officer





10





Exhibit 99.1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Audit Committee

AmeriServ Financial, Inc.


We have reviewed the accompanying consolidated balance sheet of AmeriServ Financial, Inc. and its consolidated subsidiaries as of June 30, 2010; the related consolidated statements of operations for the three- and six-month periods ended June 30, 2010 and 2009; and the consolidated statement of cash flows for the six-month periods ended June 30, 2010 and 2009.  These consolidated financial statements are the responsibility of the Company’s management.


We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.


Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with U.S. generally accepted accounting principles.


We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 26, 2010, we expressed an unqualified opinion on those consolidated financial statements.



/s/S.R. Snodgrass, A.C.



Wexford, PA

August 5, 2010









11





Exhibit 15.1



August 5, 2010




AmeriServ Financial, Inc.

216 Franklin Street

PO Box 520

Johnstown, PA 15907-0520


We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of AmeriServ Financial, Inc. for the period ended June 30, 2010, as indicated in our report dated August 5, 2010.  Because we did not perform an audit, we expressed no opinion on that information.


We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, is incorporated by reference in the following Registration Statements:


Registration Statement No. 33-56604 on Form S-3

Registration Statement No. 33-53935 on Form S-8

Registration Statement No. 33-55207 on Form S-8

Registration Statement No. 33-55211 on Form S-8

Registration Statement No. 333-67600 on Form S-8

Registration Statement No. 333-50225 on Form S-3

Registration Statement No. 333-121215 on Form S-3

Registration Statement No. 333-129009 on Form S-3


We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.


Sincerely,


/s/S.R. Snodgrass, A.C.











12





Exhibit 31.1       

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF

1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Glenn L. Wilson, certify that:


1.  I have reviewed this quarterly report on Form 10-Q of AmeriServ Financial, Inc. (ASF);


2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of ASF as of, and for, the periods presented in this report;


4.  ASF’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for ASF and have:


(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to ASF, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of ASF's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in ASF's internal control over financial reporting that occurred during ASF's most recent fiscal quarter (ASF's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, ASF's internal control over financial reporting; and


5.  ASF's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to ASF's auditors and the audit committee of ASF's board of directors:


(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect ASF's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in ASF's internal control over financial reporting.


Date: August 6, 2010

/s/Glenn L. Wilson

 

Glenn L. Wilson

 

President & CEO





13





Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF

1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Jeffrey A. Stopko, certify that:


1.  I have reviewed this quarterly report on Form 10-Q of AmeriServ Financial, Inc. (ASF);


2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of ASF as of, and for, the periods presented in this report;


4.  ASF’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for ASF and have:


(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to ASF, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of ASF's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in ASF's internal control over financial reporting that occurred during ASF's most recent fiscal quarter (ASF's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, ASF's internal control over financial reporting; and


5.  ASF's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to ASF's auditors and the audit committee of ASF's board of directors:


(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect ASF's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in ASF's internal control over financial reporting.


Date: August 6, 2010

/s/Jeffrey A. Stopko

 

Jeffrey A. Stopko

 

Executive Vice President & CFO





14





Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of AmeriServ Financial, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn L. Wilson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:


1).

The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and


2).

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/Glenn L. Wilson

Glenn L. Wilson

President and

Chief Executive Officer

August 6, 2010

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of AmeriServ Financial, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey A. Stopko, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:


1).

The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and


2).

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/Jeffrey A. Stopko

Jeffrey A. Stopko

Executive Vice President and

Chief Financial Officer

August 6, 2010






15