Converted by FileMerlin


                                              

UNITED STATES

                    SECURITIES AND EXCHANGE COMMISSION

                                      Washington, D.C. 20549


                                                  FORM 10-Q/A


                                                  (Mark One)


 

X

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

      

Securities Exchange Act of 1934


For the period ended                         March 31, 2004                           


          Transaction 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 is an accelerated filer (as defined in Exchange Act Rule 12b-2).


                           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 May 3, 2004    

Common Stock, par value $2.50

                13,968,311

per share                         


This amendment No. 1 on Form 10-Q/A is being refiled to reflect the restatement of the Company’s Statements of Cash Flows for the three months ended March 31, 2004 and 2003, as discussed in Note 18 to the Condensed Consolidated Financial Statements included at Item 1.


                                       

AmeriServ Financial, Inc.


                                                     INDEX



PART I.   FINANCIAL INFORMATION:

 Page No.

  

Condensed Consolidated Balance Sheets -

March 31, 2004, and December 31, 2003

 

        3

  

Condensed Consolidated Statements of Operations -

Three months ended March 31, 2004, and 2003


        4

  

Condensed Consolidated Statements of Cash Flows -

Three months ended March 31, 2004, and 2003


        5

  

Notes to Condensed Consolidated Financial Statements


        6

  

Management's Discussion and Analysis of Consolidated Financial

Condition and Results of Operations


      23

  

Controls and Procedures

      37

  

Part II.

Other Information


      38

  




                      





#



                                                                        

      AmeriServ Financial, Inc.

                                                        CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                                      

(Unaudited)

                                                                                                    (In thousands)


 

 

March 31,

December 31,

 

     

2004

2003

 
    

ASSETS

   

Cash and due from banks

$      18,724

$     24,484

 

Interest bearing deposits

  308

289

 

Investment securities:

   

Available for sale

478,330

   524,573

 

Held to maturity (market value $26,973 on

March 31, 2004, and $28,095 on

December 31, 2003)

 


26,650

    


28,089

 

Loans held for sale

1,232

      1,423

 

Loans

504,605

  504,890

 

Less:     Unearned income

2,433

2,926

 

Allowance for loan losses

       11,379

      11,682

 

Net loans

490,793

  490,282

 

Premises and equipment, net

10,699

11,141

 

Accrued income receivable

4,663

      4,922

 

Mortgage servicing rights

 1,493

 1,718

 

Goodwill

9,544

9,544

 

Core deposit intangibles

4,361

4,719

 

Bank owned life insurance

29,791

29,515

 

Other assets

        22,976

        17,187

 

TOTAL ASSETS

$ 1,099,564

$ 1,147,886

 
    

LIABILITIES

   

Non-interest bearing deposits

$     103,581

$   103,982

 

Interest bearing deposits

     552,767

    550,615

 

Total deposits

     656,348

    654,597

 
    

Other short-term borrowings

 92,762

144,643

 

Advances from Federal Home Loan Bank

226,054

231,063

 

Guaranteed junior subordinated deferrable interest

debentures


       35,567


       34,500

 

Total borrowed funds

     354,383

      410,206

 

Other liabilities

       11,112

        8,813

 

TOTAL LIABILITIES

 1,021,843

  1,073,616

 
    

STOCKHOLDERS' EQUITY

   

Preferred stock, no par value; 2,000,000 shares

authorized; there were no shares issued and

outstanding for the periods presented



-



-

 

Common stock, par value $2.50 per share;

24,000,000 shares authorized;

18,056,656 shares issued

and 13,965,737 outstanding

on March 31, 2004; 18,048,518 shares

issued and 13,957,599 outstanding on

December 31, 2003







45,142







45,121

 

Treasury stock at cost, 4,090,919 shares for all

               periods  presented


(65,824)


(65,824)

 

Capital surplus

66,829

   66,809

 

Retained earnings

29,322

 29,096

 

Accumulated other comprehensive income (loss), net

           2,252

           (932)

 

TOTAL STOCKHOLDERS' EQUITY

        77,721

        74,270

 

TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY


$ 1,099,564


$ 1,147,886

 

 

See accompanying notes to condensed consolidated financial statements.

                                                      

AmeriServ Financial, Inc.

                                                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   (In thousands except per share data)                           

    Unaudited


                                                                                 

Three Months Ended

Three Months Ended

  
 

March 31,

March 31,

  

                                                                                 

2004

2003

  

INTEREST INCOME

    

Interest and fees on loans and loans held for sale

$    7,691

$   9,083

  

Deposits with banks

  8

 14

  

Federal funds sold

1

-

  

Investment securities:

    

Available for sale

   4,948

   5,430

  

Held to maturity

      271

       216

  

Total Interest Income

  12,919

   14,743

  
     

INTEREST EXPENSE

    

Deposits                                                                

  2,543

  3,140

  

Federal funds purchased and securities

sold under agreements to repurchase


 -


  8

  

Other short-term borrowings

415

332

  

Advances from Federal Home Loan Bank

     2,986

     3,876

  

Guaranteed junior subordinated deferrable interest

          debentures

 

       763

 

       740

  

Total Interest Expense

    6,707

    8,096

  

  

    

NET INTEREST INCOME

   6,212

   6,647

  

Provision for loan losses

      384

   1,659

  
     

NET INTEREST INCOME AFTER PROVISION FOR

LOAN LOSSES

  

5,828

  

4,988

  

 

    

NON-INTEREST INCOME

    

Trust fees

1,267

1,253

  

    Net realized gains on investment securities

   937

 1,278

  

Net realized gains on loans held for sale

    40

   173

  

Service charges on deposit accounts

   730

   767

  

Net mortgage servicing fees

   52

   71

  

Bank owned life insurance

 275

 298

  

Loss on sale of mortgage servicing

-

(758)

  

Other income

      764

     913

  

Total Non-Interest Income

 4,065

 3,995

  
     

NON-INTEREST EXPENSE

    

Salaries and employee benefits

  4,915

  4,789

  

Net occupancy expense

   757

   752

  

Equipment expense

704

817

  

Professional fees

   804

     903

  

Supplies, postage and freight

 317

 376

  

Miscellaneous taxes and insurance

    442

    420

  

FDIC deposit insurance expense

   72

   28

  

Amortization of core deposit intangibles

358

358

  

Impairment charge for mortgage servicing rights

   100

   366

  

Goodwill impairment loss

-

199

  

Other expense

  1,202

  1,112

  

Total Non-Interest Expense

 $  9,671

 $ 10,120

  




CONTINUED ON NEXT PAGE










CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONTINUED FROM PREVIOUS PAGE

(In thousands, except per share data)

Unaudited

                                    

           

                                                             

Three Months Ended

Three Months Ended

  

                                                    

March 31,

March 31,

  

                                                                                   

2004

2003

  

     

    

INCOME (LOSS) BEFORE INCOME TAXES

 $     222

 $ (1,137)

  

Benefit for income taxes

         (4)

      (342)

  
     

NET INCOME (LOSS)

$     226

$    (795)

  
     

PER COMMON SHARE DATA:

    

Basic:

    

Net income (loss)

$     0.02

$    (0.06)

  

Average shares outstanding

13,962

13,923

  

Diluted:

    

Net income (loss)

$     0.02

$    (0.06)

  

Average shares outstanding

14,026

13,923

  

Cash dividends declared

 $     0.00

 $     0.00

  



See accompanying notes to condensed consolidated financial statements.













































      AmeriServ Financial, Inc.

                                                          

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                    (In thousands)

                                                                                        Unaudited

 

Three months ended

Three months ended

 

March 31, 2004

March 31, 2003

 

(As restated – see Note 18)

 

OPERATING ACTIVITIES

  

Net income (loss)

$      226

$     (795)

Adjustments to reconcile net income (loss) to net cash

  

   used in operating activities:

  

Provision for loan losses

   384

 1,659

Depreciation expense

    527

      556

Amortization expense of core deposit intangibles

      358

      358

Goodwill impairment loss

  -

199

Amortization expense of mortgage servicing rights

    125

      311

Impairment charge for mortgage servicing rights

     100

       366

Net amortization of investment securities

       417

       620

Net realized gains on investment securities

    (937)

    (1,278)

Net realized gains on loans held for sale

(40)

(173)

Loss on sale of mortgage servicing rights

  -

758

Origination of mortgage loans held for sale

(5,678)

(22,851)

Sales of mortgage loans held for sale

 4,637

21,032

Decrease in accrued income receivable

   259

  55  

Increase (decrease) in accrued expense payable

         112

       (612)

Net increase in other assets

      (7,779)

     (1,657)

Net increase (decrease) in other liabilities

      3,983

     (822)

Net cash used in operating activities

    (3,306)

  (2,274)

   

INVESTING ACTIVITIES

  

Purchases of investment securities and other short-term investments -

  

    available for sale

(134,633)

(204,847)

Purchases of investment securities and other short-term investments -

  

    held to maturity

       -

(10,103)

Proceeds from maturities of investment securities and

  

   other short-term investments – available for sale

     15,204

    34,856

Proceeds from maturities of investment securities and

  

   other short-term investments – held to maturity

1,407

231

Proceeds from sales of investment securities and

  

   other short-term investments – available for sale

         171,122

         137,273

Long-term loans originated

 (66,029)

 (25,817)

Principal collected on long-term loans

 38,333

  55,516

Loans purchased or participated

   (690)

   (10,910)

Loans sold or participated

    29,000

  -

Net (increase) decrease in other short-term loans

 (237)

  566

Purchases of premises and equipment

(85)

(57)

Net sale of mortgage servicing rights

            -

      3,268

Net cash provided (used in) by investing activities

  53,392

 (20,024)

   

FINANCING ACTIVITIES

  

Proceeds from sales of certificates of deposit

    99,635

    72,856

Payments for maturing certificates of deposit

 (102,507)

 (76,480)

Net increase in demand and savings deposits

      4,623

   2,798  

Net (decrease) increase in federal funds purchased, securities sold

  

   under agreements to repurchase, and other short-term borrowings

(51,881)

43,950

Net principal repayments of advances from FHLB

    (5,009)

          (23,759)

Net guaranteed junior subordinated deferrable interest debenture dividends paid

      (729)

      (729)

Proceeds from dividend reinvestment, stock

  

   purchase plan, and stock options exercised

           41

         92

Net cash (used in) provided by financing activities

  (55,827)

   18,728

   

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (5,741)

  (3,570)

CASH AND CASH EQUIVALENTS AT JANUARY 1

   24,773

   27,174

CASH AND CASH EQUIVALENTS AT MARCH 31

$ 19,032

$ 23,604


See accompanying notes to condensed consolidated financial statements.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.

Principles of Consolidation


The accompanying condensed 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), AmeriServ Associates, Inc., (AmeriServ Associates) and AmeriServ Life Insurance Company (AmeriServ Life).  The Bank is a state-chartered full service bank with 23 locations in Pennsylvania.  Standard Mortgage Corporation of Georgia (SMC), a subsidiary of the Bank, is a mortgage banking company whose business includes the servicing of mortgage loans. AmeriServ Associates, based in State College, is a registered investment advisory firm that provides investment portfolio and asset/liability management services to small and mid-sized financial institutions.  AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.  The Trust Company offers a complete range of trust and financial services and has $1.3 billion in assets under management.  The Trust Company also offers the ERECT and BUILD Funds which are collective investment funds for trade union controlled pension fund assets.  


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 condensed consolidated financial statements.  


In the first quarter of 2004, the Company adopted FASB Interpretation Number 46-Revised December 2003 (FIN 46-R) “Consolidation of Variable Interest Entities – Revised” which required the Company to deconsolidate its capital trust subsidiary.  This deconsolidation resulted in the Company recording an additional $1.1 million in assets and liabilities that had previously been eliminated in consolidation.  


2.

Basis of Preparation


The unaudited condensed 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/A for the year ended December 31, 2003.






#




3.

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 potentially dilutive common stock equivalent shares in the calculation.  Treasury shares are treated as retired for earnings per share purposes.  Options to purchase 107,857 and 294,476 shares of common stock were outstanding as of March 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per common share as the options’ exercise prices were greater than the average market price of the common stock for the respective periods.


Stock-based Compensation


Employee compensation expense under stock options is reported using the intrinsic value method.  The following pro forma information regarding net income (loss) and earnings (loss) per share assumes stock options granted subsequent to December 31, 1994, had been accounted for under the fair value method and the estimated fair value of the options is amortized to expense over the vesting period.  Compensation expense, net of related tax, of $15,000 and  $11,000 for the three months ended March 31, 2004, and 2003, respectively, is included in the pro forma net income (loss) as reported below (in thousands, except per share data).


  

        Three Months Ended

                March 31,

  
 

2004

2003

  
     

Reported net income(loss)

$226

$(795)

  

Pro forma net income (loss)

211

(806)

  
     

Reported earnings (loss)

     per share

    

    Basic

$0.02

$  (0.06)

  

    Diluted

0.02

           (0.06)

  

Pro forma earnings (loss)

    per share:

    

    Basic

$0.02

$  (0.06)

  

    Diluted

0.02

           (0.06)

  



4.

Comprehensive Income (Loss)


For the Company, comprehensive income (loss) includes net income (loss) and unrealized holding gains and losses from available for sale investment securities and derivatives that qualify as cash flow hedges.  The changes in other comprehensive income (loss) are reported net of income taxes, as follows (in thousands):







                                                

                                             

  

     Three Months Ended

  
 

March 31,

March 31,

  
 

2004

2003

  
     

Net income (loss)

 $   226

 $(795)

  
     

Other comprehensive income (loss), before tax:

    
     

     Unrealized security gains (losses) arising during              period


 5,835  


(1,321)

  

      Less: reclassification adjustment for gains

    

            included in net income (loss)           

             937

           1,278

  

Other comprehensive income (loss), before tax:

 4,898

  (2,599)

  

Income tax expense (benefit) related to items

    

           of other comprehensive income                      

  1,714

            (910)

  

Other comprehensive income (loss), net of tax:

  3,184

  (1,689)

  
     

Comprehensive income (loss)

 $ 3,410  

 $(2,484)

  

 

5.

Condensed Consolidated Statement of Cash Flows


On a consolidated basis, cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks, and federal funds sold and securities purchased under agreements to resell.  For the parent company, cash and cash equivalents also include short-term investments.  The Company made $27,000 in income tax payments in the first three months of 2004 as compared to $7,000 for the first three months of 2003.  Total interest expense paid amounted to $6,572,000 in 2004's first three months compared to $8,708,000 in the same 2003 period.


6.

Investment Securities


Securities are classified at the time of purchase as investment securities held to maturity if it is management’s intent and the Company has the ability to hold the securities until maturity.  These held to maturity securities are carried on the Company’s books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method.  Alternatively, securities are classified as available for sale if it is management’s intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy.  Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements).  These available for sale securities are reported at fair value with unrealized aggregate appreciation/(depreciation) excluded from net income and credited/(charged) to accumulated other comprehensive income (loss) within stockholders' equity on a net of tax basis.  Any securities classified as trading assets are reported at fair value with unrealized aggregate appreciation/(depreciation) are included in income on a net of tax basis.  The Company presently does not engage in trading activities.  The mark-to-market of the available for sale portfolio does inject more volatility in the book value of equity, but has no impact on regulatory capital.  All purchased investment securities are recorded on settlement date which is not materially different from trade date.  Realized gain or loss on securities sold was computed upon the adjusted cost of the specific securities sold.


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


Investment securities available for sale (AFS):                          

      

        

 

          March 31, 2004

 

Gross      

Gross      

 
 

Cost  

Unrealized

Unrealized

Market   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Treasury

$    14,540

$        441

$         -

$    14,981

  U.S. Agency

   17,399

   53

      -

  17,452

  U.S. Agency mortgage-

    

     backed securities

411,545

 3,696

(769)

414,472

  Other securities(1)

     31,382

              43

            -

     31,425

       Total

$ 474,866

$     4,233

$   (769)

$  478,330

(1)Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities.

    

Investment securities held to maturity (HTM):                          


          March 31, 2004

 

Gross      

Gross      

 
 

Cost  

Unrealized

Unrealized

Market   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Treasury

   $    1,149

      $       35

     $       -

   $     1,184

  U.S. Agency

8,086

-

(50)

8,036

  U.S. Agency mortgage-

    

     backed securities

    17,415

       338

           -

     17,753

       Total

$  26,650

$     373

$   (50)

$   26,973

      

Investment securities available for sale (AFS):                          

      

        

 

          December 31, 2003

 

Gross      

Gross      

 
 

Cost  

Unrealized

Unrealized

Market   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Treasury

$     9,498

$        131

$         (32)

$     9,597

  U.S. Agency

 13,508

     3

     (33)

 13,478

  U.S. Agency mortgage-

    

     backed securities

469,086

 1,535

(3,051)

467,570

  Other securities(1)

     33,916

               32

     (20)

     33,928

       Total

$ 526,008

$     1,701

$   (3,136)

$  524,573

(1)Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities.


Investment securities held to maturity (HTM):                          


          December 31, 2003

 

Gross      

Gross      

 
 

Cost  

Unrealized

Unrealized

Market   

 

      Basis    

      Gains   

    Losses   

      Value   

  U.S. Treasury

$     1,155

$         6

$          -

$     1,161

  U.S. Agency

          8,096

                 -

          (138)

          7,958

  U.S. Agency mortgage-

    

     backed securities

    18,838

       138

           -

     18,976

       Total

$  28,089

$     144

$   (138)

$   28,095

    



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 both March 31, 2004, and December 31, 2003, 97.6% of the portfolio was rated "AAA". Less than 1.0% of the portfolio was rated below "A" or unrated at both March 31, 2004, and December 31, 2003.


The following tables present information concerning investments with unrealized losses as of March 31, 2004 (in thousands):


Investment securities available for sale:  


          March 31, 2004

Less than 12 months

 

12 months or longer

 

Total   

 
 

Market   

Unrealized

Market   

Unrealized

Market   

Unrealized

 

      Value   

    Losses   

      Value   

    Losses   

      Value   

    Losses   

  U.S. Agency mortgage-

      

     backed securities

$  91,495

$     (664)

$  24,646

$     (105)

$116,141

$     (769)

       Total

$  91,495

$     (664)

$  24,646

$     (105)

$116,141

$     (769)

    

Investment securities held to maturity:                          


          March 31, 2004

Less than 12 months

 

12 months or longer

 

Total   

 
 

Market   

Unrealized

Market   

Unrealized

Market   

Unrealized

 

      Value   

    Losses   

      Value   

    Losses   

      Value   

    Losses   

  U.S. Agency

$   8,036

$    (50)

$         -

$        -

$   8,036

$    (50)

       Total

$   8,036

$    (50)

$         -

$        -

$   8,036

$    (50)


Given the quality of the investment portfolio (greater than 97% rated AAA), the Company believes that in accordance with Emerging Issues Task Force No. 03-1 and the Company’s investment policy the unrealized losses that have existed for greater than 12 months are temporary in nature and resulted from interest rate movements.  Additionally, the Company believes it has the capability and intent to hold the securities to maturity, if necessary.


7.

Loans Held for Sale


At March 31, 2004, $1,232,000 of certain newly originated fixed-rate residential mortgage loans were classified as held for sale, because it is management's intent to sell these residential mortgage loans.  The residential mortgage loans held for sale are carried at the lower of aggregate cost or market value.  Net realized and unrealized gains and losses are included in "Net realized gains on loans held for sale"; unrealized net valuation adjustments (if any) are recorded in the same line item on the Consolidated Statements of Operations.  Management has identified potential embedded derivatives in certain loan commitments for residential mortgages where the Company has the intent to sell to an outside investor.  Due to the short-term nature of these loan commitments (usually 60 days or less) and the minimal historical dollar amount of commitments outstanding, the corresponding impact on the Company’s financial condition and results of operations has not been material.








8.

Loans


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


 

March 31,

 2004

December 31,

 2003

 

     Commercial

$    70,760

$    75,738

 

     Commercial loans secured

   

        by real estate

208,094

206,204

 

     Real estate – mortgage

198,653

194,605

 

     Consumer

      27,098

      28,343

 

       Loans

504,605

  504,890

 

     Less:  Unearned income

        2,433

        2,926

 

     Loans, net of unearned income

$  502,172

$  501,964

 


Real estate-construction loans comprised 2.2%, and 3.2% of total loans, net of unearned income, at March 31, 2004 and December 31, 2003, respectively.  The Company has no direct credit exposure to foreign countries.


9.

Allowance for Loan Losses and Charge-Off Procedures


As a financial institution which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business.  Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline to perform an analysis which is updated on a quarterly basis at the Bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes:


* a detailed review of all criticized and impaired loans with balances over $250,000 to determine if any specific reserve allocations are required on an individual loan basis.  The specific reserve established for these criticized and impaired loans is based on careful analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor.


*

the application of formula driven reserve allocations for all commercial and commercial real-estate loans are calculated by using a three-year migration analysis of net losses incurred within each risk grade for the entire commercial loan portfolio. The difference between estimated and actual losses is reconciled through the dynamic nature of the migration analysis.


* the application of formula driven reserve allocations to consumer and mortgage loans which are based upon historical net charge-off experience for those loan types. The residential mortgage loan allocation is based upon the Company's five-year historical average of actual loan net charge-offs experienced in that category. The same methodology is used to determine the allocation for consumer loans except the allocation is based upon an average of the most recent actual three-year historical net charge-off experience for consumer loans.



*

the application of formula driven reserve allocations to all outstanding loans is based upon review of historical losses and qualitative factors, which include but are not limited to: economic trends, delinquencies, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions.


*

the maintenance of a general unallocated reserve to accommodate inherent risk in the Company’s portfolio that is not identified through the Company’s specific loan and portfolio segment reviews discussed above.  Management recognizes that there may be events or economic factors that have occurred affecting specific borrowers or segments of borrowers that may not yet be fully reflected in the information that the Company uses for arriving at reserves for a specific loan or portfolio segment. Therefore, the Company and its Board of Directors believe a general unallocated reserve is needed to recognize the estimation risk associated with the specific and formula driven allowances.  In conjunction with the establishment of the general unallocated reserve, the Company also looks at the total allowance for loan losses in relation to the size of the total loan portfolio and the level of non-performing assets.


After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve.  


When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is immediately charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are 90 days past due, except loans that are insured for credit loss.


The Company's policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loans with balances in excess of $250,000 within a 12-month period.  The Company defines classified loans as those loans rated substandard and doubtful.  The Company has also identified two pools of small dollar value homogeneous loans which are evaluated collectively for impairment.  These separate pools are for residential mortgage loans and consumer loans.  Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment.





#




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

 

  

Three Months Ended

  
 

March 31,

March 31,

  
 

      2004

              2003

  

Balance at beginning of period

  $11,682

  $10,035

  

Transfer to reserve for unfunded loan

     commitments


(90)


-

  

Charge-offs:

    

     Commercial and commercial real estate

       (861)

    (32)

  

     Residential mortgage

  (94)

  (151)

  

     Consumer   

         (100)

         (147)

  

     Total charge-offs

    (1,055)

       (330)

  

Recoveries:

    

     Commercial and commercial real estate

   376

   15

  

     Residential mortgage

  31

  12

  

     Consumer     

           51

           24

  

     Total recoveries

         458

          51

  
     

Net charge-offs

   (597)

   (279)

  

Provision for loan losses

          384

      1,659

  

Balance at end of period

  $ 11,379

  $ 11,415

  
     

As a percent of average loans and loans held

    

     for sale, net of unearned income:

    

     Annualized net charge-offs

  0.48%

  0.20%

  

     Annualized provision for loan losses

 0.31

 1.19

  

Allowance as a percent of loans and loans

    

     held for sale, net of unearned income

    

     at period end               

 2.26

 2.06

  

Total classified loans

 $32,345

 $35,217

  

 

    

10.

Components of Allowance for Loan Losses


For impaired loans, the measurement of impairment may be based upon:  1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the observable market price of the impaired loan; or 3) the fair value of the collateral of a collateral dependent loan.   


The Company had loans totaling $6,637,000 and $13,232,000 being specifically identified as impaired and a corresponding reserve allocation of $2,584,000 and $2,459,000 at March 31, 2004, and December 31, 2003, respectively.  The average outstanding balance for loans being specifically identified as impaired was $9,935,000 for the three months of 2004 compared to $9,976,000 for the three months of 2003.  All of the impaired loans are collateral dependent, therefore the fair value of the collateral of the impaired loans is evaluated in measuring the impairment.  The interest income recognized on impaired loans during the first three months of 2004 was $89,000, compared to $116,000 for the first three months of 2003.


The following table sets forth the allocation of the allowance for loan losses among various categories.  This allocation is determined using the quarterly process which was discussed above. This allocation, however, is not necessarily indicative of the specific amount or specific loan category in which future losses may ultimately occur (in thousands, except percentages):

 

  

March 31,

 2004

 

December 31, 2003

  
  

Percent of

 

Percent of

  
  

Loans in

 

Loans in

  
  

Each

 

Each

  
  

Category

 

Category

  
 

Amount

To Loans

Amount

to Loans

  

Commercial

$   1,923

14.1%

$ 2,623

15.0%

  

Commercial loans secured

      

  by real estate

7,236

41.3

7,120

41.0  

  

Real estate - mortgage

384

39.7  

376

38.9

  

Consumer

  803

 4.9  

853

 5.1

  

Allocation to general risk

   1,033

          -

     710

          -

  

     Total

$11,379

   100.0%

$11,682

   100.0%

  


Even though residential real estate-mortgage loans comprise approximately 40% of the Company's total loan portfolio, only $384,000 or 3.4% of the total allowance for loan losses is allocated against this loan category.  The residential real estate-mortgage loan allocation is based upon the Company's five-year historical average of actual loan charge-offs experienced in that category and other qualitative factors.  The disproportionately higher allocations for commercial loans and commercial loans secured by real estate reflect the increased credit risk associated with this type of lending, the Company's historical loss experience in these categories, and other qualitative factors.  


At March 31, 2004, management of the Company believes the allowance for loan losses was adequate to cover losses within the Company's loan portfolio.  The Company's management is unable to determine in what loan category future charge-offs and recoveries may occur.  


11.

Non-performing Assets


Non-performing assets are comprised of (i) loans which are on a non-accrual basis, (ii) loans which are contractually past due 90 days or more as to interest or principal payments some of which are insured for credit loss, and (iii) other real estate owned (real estate acquired through foreclosure, in-substance foreclosures and repossessed assets). Loans are placed on non-accrual status upon becoming 90 days past due in either principal or interest.  In addition, if circumstances warrant, the accrual of interest may be discontinued prior to 90 days.  In all cases, payments received on non-accrual loans are credited to principal until full recovery of principal has been recognized; it is only after full recovery of principal that any additional payments received are recognized as interest income.  The only exception to this policy is for residential mortgage loans wherein interest income is recognized on a cash basis as payments are received.  









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


 

March 31,

December 31,

 
 

2004

2003

 
    

Non-accrual loans

$   8,736

$ 10,781

 

Loans past due 90

   

   days or more

   16

 98     

 

Other real estate owned

       4,730

       532   

 

Total non-performing assets

$ 13,482

$ 11,411

 

Total non-performing assets as a percent

   

   Of loans and loans held for sale, net of

   

   unearned income, and other real estate owned  

2.65%

2.26%

 


The Company is unaware of any additional loans which are required either to be charged-off or added to the non-performing asset totals disclosed above.  Other real estate owned is recorded at the lower of 1) fair value minus estimated costs to sell, or 2) carrying cost.


The following table sets forth, for the periods indicated, (i) the gross interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period, (ii) the amount of interest income actually recorded on such loans, and (iii) the net reduction in interest income attributable to such loans (in thousands).


 

 Three Months Ended

   

                                                         

     March 31,

   

                                                     

2004

2003

  

Interest income due in accordance

    

   with original terms

$127

$ 184

  

Interest income recorded

 (13)

  (66)

  

Net reduction in interest income

$114

$ 118

  


12.

Derivative Hedging Instruments


The Company uses various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities.  The Company uses derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates.  A summary of the Company’s derivative hedge transactions is as follows:


Fair Value Hedges:


In June 2003, the Company entered into an interest rate swap with a notional amount of $50 million, inclusive of a swaption feature, effectively hedging a $50 million FHLB convertible advance with a fixed cost of 6.10% that is callable quarterly with a seven-year maturity.   The Company receives a fixed rate of 2.58% and makes variable rate payments based on 90-day LIBOR.  In December 2003, the Company entered into an interest rate swap with a notional amount of $50 million, inclusive of a swaption feature, effectively hedging a $50 million FHLB convertible advance with a fixed cost of 5.89% that is callable quarterly with a six-year maturity.  The Company receives a fixed rate of 5.89% and makes variable rate payments based on 90-day LIBOR plus 246 basis points.  The swaps are carried at their fair values and the carrying amount of the FHLB advances include the change in their fair values since the inception of the hedge.  Because the hedges are considered highly effective, changes in the swap’s fair value exactly offset the corresponding changes in the fair value of the FHLB advances and as a result, the change in fair value does not have any impact on net income.  


The following table summarizes the interest rate swap transactions that impacted the Company’s first quarter 2004 performance:


2004

       
    

Fixed

Floating

 

Decrease

Hedge

Notional

Start

Termination

Rate

Rate

Repricing

 in Interest

Type

Amount

Date

Date

Received

Paid

Frequency

Expense

        

Fair value

$ 50,000,000

6-09-03

9-22-10

2.58%

1.10%

Quarterly

     $(179,000)

Fair value

$ 50,000,000

12-11-03

1-11-10

5.89%

3.63%

Quarterly

  (291,000)

       

$(470,000)


The Company believes that its exposure to credit loss in the event of nonperformance by its counterparties (which are Regions Bank and Citigroup, Inc.) is remote.  The Company monitors and controls all derivative products with a comprehensive Board of Director approved hedging policy.  This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions.  All hedge transactions must be approved in advance by the Investment Asset/Liability Committee (ALCO) of the Board of Directors.  The Company had no interest rate caps or floors outstanding for the periods presented.


13.

Intangible Assets


The Company’s balance sheet shows both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill and core deposits).  In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) #142, “Goodwill and Other Intangible Assets,” goodwill and other intangible assets with indefinite lives are not amortized.  Instead, such intangibles are evaluated for impairment at the reporting unit level each year in the third quarter. Any resulting impairment would be reflected as an operating expense.  The Company’s only intangible, other than goodwill, is its core deposit intangible, which the Company currently believes has a finite life.  


During the first quarter of 2003, under SFAS #142 the Company had a triggering event specific to the mortgage banking segment level.  This event was the sale of approximately 69% of its total servicing portfolio.  As a result, the Company reevaluated the $199,000 of goodwill that was allocated to the mortgage banking segment and determined that it was impaired based upon its analysis of the projected future cash flows in this business segment.  The resulting impairment charge eliminated all goodwill allocated to this segment and has been reflected as an operating expense for the three months ended March 31, 2003.  The Company’s remaining goodwill of $9.5 million is allocated to the retail banking segment and was evaluated for impairment on its annual impairment evaluation date.  The result of this evaluation indicated that the Company’s goodwill had no impairment.   


As of March 31, 2004, the Company’s core deposit intangibles had an original cost of $17.6 million with accumulated amortization of $13.3 million.  As of December 31, 2003, the Company’s core deposit intangibles had an original cost of $17.6 million with accumulated amortization of $12.9 million.  The weighted average amortization period of the Company’s core deposit intangibles at March 31, 2004, is 4.25 years. Amortization expense for the three months ended March 31, 2004 totaled $358,000. Estimated amortization expense for the remainder of 2004 and the next five years is summarized as follows (in thousands):     


           Remaining 2004

 $    649

                      2005

     865

                      2006

  865

                      2007

    865

                      2008

    865

                      2009

    252

 

 

14.

Federal Home Loan Bank Borrowings


Total Federal Home Loan Bank (FHLB) borrowings consist of the following at March 31, 2004, (in thousands, except percentages):

   

Weighted

Type

Maturing

Amount

Average Rate

Open Repo Plus

Overnight

$    92,762

    1.29%  

    

Advances and wholesale repurchase

 

     

    

   Agreements

2005

15,000

6.74     

 

2010

210,000

5.98     

 

2011 and after

     1,054

6.45     

     

 

 

 

Total advances and wholesale

 

    226,054

6.03   

   repurchase agreements

   

        

   

Total FHLB borrowings

 

  $ 318,816

4.65%

    

All of the above borrowings bear a fixed rate of interest until the next repricing period, with the only exceptions being the Open Repo Plus advances whose rate can change daily.  All FHLB stock, along with an interest in certain mortgage loans and mortgage-backed securities, with an aggregate statutory value equal to the amount of the advances, have been delivered as collateral to the FHLB of Pittsburgh to support these borrowings.


15.

Regulatory Matters


On February 28, 2003, the Company and the Bank entered into a Memorandum of Understanding (MOU) with the Federal Reserve Bank of Philadelphia (Federal Reserve) and the Pennsylvania Department of Banking (Department).  Under the terms of the MOU, the Company and the Bank cannot declare dividends, the Company may not redeem any of its own stock, and the Company cannot incur any additional debt other than in the ordinary course of business, in each case, without the prior written approval of the Federal Reserve and the Department.  Accordingly, the Board of Directors of the Company cannot reinstate the previously suspended common stock dividend, or reinstitute its stock repurchase program without the concurrence of the Federal Reserve and the Department.  Other provisions of the MOU require the Company and the Bank to: (i) improve credit quality and credit administration practices, (ii) improve data security and disaster recovery procedures, (iii) make periodic reports to the Federal Reserve and the Department regarding compliance with the MOU, and (iv) appoint a committee of independent directors to monitor compliance with the MOU.  The MOU will remain in effect until modified or terminated by the Federal Reserve and the Department.  The Company believes it is in compliance with the MOU.


The Company is subject to various capital requirements administered by the federal banking agencies.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's 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 December 31, 2003, the Federal Reserve categorized the Company as Well Capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.




 



Actual

 


For Capital Adequacy

Purposes

 

To Be Well Capitalized Under Prompt Corrective Action Provisions

March 31, 2004

Amount

Ratio

Amount

Ratio

Amount

Ratio

   

(In thousands, except ratios)

   

Total Capital (to Risk

Weighted Assets)

      

                Consolidated

$ 104,532

17.31%

$   48,320

 8.00%

$  60,401

10.00%

                Bank

98,503

16.45  

47,893

 8.00  

59,866

10.00   

       

Tier 1 Capital (to Risk

Weighted Assets)

      

                Consolidated

  86,519

14.32  

   24,160

 4.00  

  36,240

 6.00   

                Bank

91,020

15.20  

23,947

 4.00  

35,920

 6.00   

       

Tier 1 Capital (to

Average Assets)

      

                Consolidated

86,519

7.75

44,659

4.00

55,824

5.00

                Bank

91,020

8.20

44,394

4.00

55,493

5.00



16.

Segment Results


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


Retail banking includes the deposit-gathering branch franchise, lending to both individuals and small businesses, and financial services.  Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans.  Financial services include the sale of mutual funds, annuities, and insurance products.  Commercial lending to businesses includes commercial loans, commercial real-estate loans, and commercial leasing (excluding certain small business lending through the branch network). Mortgage banking includes the servicing of mortgage loans.  The trust segment has two primary business divisions, institutional trust and personal trust. Institutional trust products and services include 401(k) plans, defined benefit and defined contribution employee benefit plans, individual retirement accounts, and collective investment funds for trade union pension funds.  Personal trust products and services include personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts.  Other fee based businesses include AmeriServ Associates and AmeriServ Life.  The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on 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 first three months of 2004 and 2003 were as follows (in thousands, except ratios):


  

Three months  ended

 
  

March 31, 2004

March 31, 2004

 


Total revenue


Net income (loss)


Total assets

Retail banking

$     6,189

$     175

$   360,535

Commercial lending

1,130

(66)

226,992

Mortgage banking

 282

(234)

3,625

Trust

1,288

199

1,303

Other fee based

275

67

2,129

Investment/Parent

    1,113

         85

     504,980

Total

$10,277

$      226

$1,099,564

    
  

Three months  ended

 
  

March 31, 2003

March 31, 2003

 


Total revenue (loss)


Net income (loss)


Total assets

Retail banking

$      7,319

$      808

$   380,633

Commercial lending

1,075

(625)

252,281

Mortgage banking

(179)

(1,193)

 6,855

Trust

1,283

213

1,838

Other fee based

 191

  19

2,326

Investment/Parent

         953

         (17)

     546,427

Total

$10,642

$   (795)

$1,190,360

    

17.

Commitments and Contingent Liabilities


The Bank incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers.  These risks derive from commitments to extend credit and standby letters of credit.  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 Company has various outstanding commitments to extend credit approximating $81.7 million and standby letters of credit of $3.6 million as of March 31, 2004.  Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business.  In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position or results of operations.


18.

Restatement of Statements of Cash Flows


Subsequent to the issuance of the condensed consolidated financial statements for the period ended March 31, 2003, the Company determined that the amounts included in its statements of cash flows for loans held for sale should have been classified as operating activities and combined with origination of mortgage loans held for sale, rather than as investing activities, and that the amounts included for other assets and other liabilities should have been classified as operating activities rather than as investing activities and financing activities, respectively.  As a result, the accompanying condensed consolidated statements of cash flows for the three months ended March 31, 2004 and 2003 have been restated from the amounts previously reported. A summary of the significant effects of the restatement is as follows (in thousands):


For the three   

months ended

March 31, 2004    March 31, 2003


Net cash provided by (used in) operating activities:

As previously reported

      $  1,722

$  3,223

As restated

         (3,306)

 

  (2,274)


Net cash provided by (used in) investing activities:

As previously reported

        44,381

 (24,699)

As restated

        53,392

 (20,024)


Net cash (used in) provided by financing activities:

As previously reported

                   (51,844)

  17,906

As restated

    

         (55,827)

  18,728


#




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


The accompanying Managements Discussion and Analysis of financial condition and results of operations gives effect to the restatement of the Condensed Consolidated Financial Statements for the three months ended March 31, 2004 and 2003, as discussed in Note 18 to the Condensed Consolidated Financial Statements.


2004 FIRST QUARTER SUMMARY OVERVIEW…The Company’s continued focus on the Turnaround, with an ever-increasing emphasis on our community banking strategy, has characterized the recently completed first quarter of 2004. Our forward-looking community banking emphasis is strengthened by a fourth consecutive profitable quarter.  Our core operations appear to be growing stronger. Examples of this recent strengthening include:


*

Average loans outstanding ended the quarter at $504 million - or 2% more than the fourth quarter of 2003.


*

Average deposits ended the quarter at $658 million, a modest increase compared to the fourth quarter of 2003, demonstrating the continued loyalty of our core deposit customers.


*

Net interest income totaled $6.2 million - or 6% over the fourth quarter of 2003 and net interest margin increased by 18 basis points over the same period as loan totals grew and mortgage refinancing diminished.


These favorable trends enabled the Company to report net income of $226,000 or $0.02 per share for the first quarter of 2004. This result reverses the loss of $795,000 - or $0.06 per share - reported in the first quarter of 2003. The Board and management believe this represents a good foundation for the year 2004, yet there are areas that continue to require a high degree of vigilance, such as:


*

Non-performing assets continue at a high level with a net increase of $2.1 million compared to the total at December 31, 2003. This increase reflects the beginning of foreclosure proceedings on a hotel within AmeriServ's primary market area.  It is also important to note that the Company is processing the bids for a closed personal care facility near Pittsburgh that was transferred into other real estate owned in the first quarter of 2004. Our intention is to arrange for the facility to operate once again, and to serve the community as soon as possible. This process is proceeding according to plan.


*

Non-interest income suffered a decline as severe winter weather and a slowdown in the refinancing surge reduced the contribution from the residential mortgage area.


*

Interest rates continued to reflect both economic and geopolitical events creating a continuation of margin pressures at the Company and, for that matter, throughout the banking industry.


Considering these varied, and sometimes counterbalancing trends, the Company continued building on our Turnaround. The Board and management are focusing the Company on its future and the leveraging of the Company's core strengths. As is apparent from this report, the Retail Bank and the Commercial Lending Division have joined the Trust Company in adopting a growth agenda. At the same time, the Board and management continue to pursue additional courses of action to further strengthen the company. It is clear that the $35.6 million of Trust Preferred Securities, with an 8.45% annual interest payment, continues to deny the Company needed cash for operations. Additionally, the long-term Federal Home Loan Bank borrowings required carefully planned hedging strategies twice in 2003 to reduce any potentially negative impact. These areas are under constant evaluation for positive solutions.


THREE MONTHS ENDED MARCH 31, 2004 VS. THREE MONTHS ENDED MARCH 31, 2003


.....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

 

March 31, 2004

March 31, 2003

 Net income (loss)

$ 226

$ (795)

 Diluted earnings (loss) per share

 0.02

(0.06)

 Return on average equity

 1.21%

(4.17)%

   

 The Company completed its fourth consecutive quarter of profitability by reporting net income for the first quarter of 2004 of $226,000 or $0.02 per diluted share.  This represents significant improvement and a dramatic turnaround from the net loss of $795,000 or $0.06 per share reported in the first quarter of 2003.  A reduced provision for loan losses and lower non-interest expense were the key factors responsible for the increased net income in 2004.         

             

.....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; 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 first quarter of 2004 to the first quarter of 2003 (in thousands, except percentages):




Three Months Ended

March 31, 2004

Three Months Ended

March 31, 2003



$ Change



% Change

Interest income

$ 12,919

$ 14,743

$(1,824)

 (12.4)%

Interest expense

    6,707

    8,096

 (1,389)

      (17.2)

Net interest income

 6,212

 6,647

  (435)

        (6.5)

Tax-equivalent adjustment

         30

         13

       17

     130.8

Net tax-equivalent interest income

 $  6,242

 $  6,660

$  (418)

        (6.3)

 

    

Net interest margin

2.39%

2.48%

(0.09)

N/M

N/M - not meaningful


The Company’s net interest income in the first quarter of 2004 decreased by $435,000 from the prior year first quarter due to a reduced level of earning assets and a nine basis point decline in the net interest margin to 2.39%.   Loan portfolio shrinkage experienced during the majority of 2003 was a predominant factor contributing to both the lower level of earning assets and the net interest margin contraction in the first quarter comparisons.    


...COMPONENT CHANGES IN NET INTEREST INCOME... Regarding the separate components of net interest income, the Company's total tax-equivalent interest income for the first quarter of 2004 decreased by $1.8 million or 12.2% when compared to the same 2003 quarter. This decrease was due to a $19.9 million decline in average earning assets and a 61 basis point drop in the earning asset yield to 4.96%.  Within the earning asset base, the yield on the total investment securities portfolio dropped by 69 basis points to 3.85% while the yield on the total loan portfolio decreased by 36 basis points to 6.10%. Both of these declines reflect the lower interest rate environment as the Federal Reserve reduced the federal funds rate by 550 basis points since 2001 in an effort to stimulate economic growth.  These rate reductions have caused accelerated asset prepayments as borrowers have elected to refinance their higher fixed-rate loans into lower cost loans.  Additionally, floating or variable rate assets have also repriced downward.


The $19.9 million decline in the volume of average earning assets was due to a $61.4 million or 11.0% reduction in average loans outstanding which more than offset growth in both available for sale (AFS) and held to maturity (HTM) investment securities.  The average loan decline in the first quarter of 2004 when compared to the prior year first quarter reflected the heightened prepayment pressures experienced throughout 2003 which occurred in both commercial loans and residential mortgage loans.  The decline in commercial loans was also caused by reduced new loan production as management was inwardly focused on reorganizing its commercial lending division during 2003.  The Company did reverse the trend of net loan portfolio shrinkage during the last quarter of 2003 and modestly grew the loan portfolio during the first quarter of 2004 when compared to the most recent quarter.  The Company anticipates that it will achieve meaningful commercial loan growth in 2004.  This commercial loan growth should lead to a greater composition of loans in the earning asset mix which should contribute to improving net interest income and net interest margin during 2004.


The Company's total interest expense for the first quarter of 2004 decreased by $1.4 million or 17.2% when compared to the same 2003 quarter.  This reduction in interest expense was due to a lower volume of interest bearing liabilities and a reduced cost of funds. Total average interest bearing liabilities were $23.9 million or 2.5% lower in the first quarter of 2004 as fewer deposits and borrowings were needed to fund a smaller asset base.


The total cost of funds declined by 55 basis points to 2.84% and was driven down by a reduced cost of both deposits and borrowings.  Specifically, the cost of interest bearing deposits decreased by 38 basis points to 1.85% and the cost of FHLB advances and short-term borrowings declined by 88 basis points to 3.85%.  The reduced deposit cost was caused by lower rates paid particularly for certificates of deposit.  The lower cost of borrowings reflects the downward repricing of maturing FHLB advances to lower current market rates as a result of the previously discussed decline in interest rates and the favorable impact that fair value hedges had on reducing interest expense by $470,000.   


The Company’s ratio of FHLB advances and short-term borrowings to total assets averaged 31.4% for the first quarter of 2004 which was comparable with the 31.2% average for the same 2003 quarter.  The total revenue contribution from leveraged assets (including investment security gains and hedging activity) amounted to $989,000 for the first quarter of 2004 compared to $1.1 million for first quarter of 2003.  The Company presently anticipates that the size of the leverage program in 2004 will be comparable with 2003 and approximate $375 million or 32% of total assets.  Longer term the Company would like to reduce the size of its leverage program to 25% of total assets.

        

The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) 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 include non-accrual loans and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as, interest recorded on non-accrual loans as cash is received.  Additionally, a tax rate of approximately 35% is used to compute tax-equivalent yields.   


#




Three Months Ended March 31  (In thousands, except percentages)


  

2004

   

2003

 
  

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



$  495,728



$  7,721



6.10%

 



$  557,123



$   9,096



6.46%

Deposits with banks

  4,574

  8

0.70  

 

   7,240

 14

0.77  

Federal funds sold

226

 1

0.92

 

      -

 -

   -

Investment securities - AFS

    514,295

   4,948

3.85  

 

    481,548

   5,430

4.51  

Investment securities - HTM

  27,466

    271

3.95

 

  16,288

    216

5.29

Total investment securities

    541,761

 5,219

3.85  

 

497,836

 5,646

4.54  

Total interest earning

   assets/interest income


1,042,289


12,949


4.96

 


1,062,199


14,756


5.57

Non-interest earning assets:

       

Cash and due from banks

22,113

   

23,557

  

Premises and equipment

10,983

   

12,477

  

Other assets

66,455

   

71,235

  

Allowance for loan losses

    (11,457)

   

      (10,272)

  

TOTAL ASSETS

$1,130,383

   

$1,159,196

  
        

Interest bearing liabilities:

       

Interest bearing deposits:

       

   Interest bearing demand

$   51,838

$     35

0.27%

 

$   50,550

$     63

0.50%

   Savings

105,228

233

0.89

 

102,116

236

0.94

   Money markets

120,430

  304

1.02

 

128,232

  350

1.11

   Other time

     274,241

    1,971

2.89

 

     289,213

    2,491

3.49

Total interest bearing deposits

551,737

 2,543

1.85

 

570,111

 3,140

2.23

Short-term borrowings:

       

Federal funds purchased,   

   securities sold under        

   agreements to repurchase and    other short-term borrowings




128,403




     415




1.28

 




93,652




     340




1.41

Advances from Federal  

   Home Loan Bank


226,812


 2,986


5.29

 


268,156


 3,876


5.86

Guaranteed junior subordinated  

   deferrable interest debentures


       35,567


  763


8.58

 


       34,500


     740


8.58

Total interest bearing

   liabilities/interest expense


  942,519


 6,707


2.84

 


    966,419


  8,096


3.39

Non-interest bearing liabilities:

       

Demand deposits

106,344

   

107,847

  

Other liabilities

 6,379

   

  5,192

  

Stockholders' equity

       75,141

   

       79,738

  

TOTAL LIABILITIES AND

   STOCKHOLDERS' EQUITY


$1,130,383

   


$1,159,196

  

Interest rate spread

  

2.12

   

2.17

Net interest income/

   net interest margin

 


 6,242


2.39%

  


 6,660


2.48%

Tax-equivalent adjustment

 

      (30)

   

      (13)

 

Net Interest Income

 

$  6,212

   

$  6,647

 


 


…..PROVISION FOR LOAN LOSSES..... The Company’s provision for loan losses totaled $384,000 or 0.31% of total average loans in the first quarter of 2004.  This represented a decrease of $1.3 million from the first quarter 2003 provision of $1.7 million or 1.19% of total average loans.  The actions taken to build the allowance for loan losses in the first quarter of 2003 reflected deterioration in credit quality that was evidenced by a higher level of classified loans and non-performing assets.  Net charge-offs in the first quarter of 2004 totaled $597,000 or 0.48% of total average loans compared to net charge-offs of $279,000 or 0.20% of total average loans in the first quarter of 2003.  The higher net charge-offs in the first quarter of 2004 reflect a $625,000 write-down of a $4.8 million loan on a personal care facility that was discussed in detail in the Company’s annual report on Form 10-K/A.  The Company took possession of the facility and transferred the property to other real estate owned in the first quarter of 2004.  The Company is currently evaluating bids for the facility and hopes to finalize a sale by the end of the second quarter of 2004.  The Company expects to incur no further loss on this property which currently has a value of $4.2 million.   


Classified loans totaled $32.3 million at March 31, 2004; a decrease of $2.8 million or 7.9% from December 31, 2003.  Non-performing assets, however, increased from $11.4 million at December 31, 2003 to $13.5 million at March 31, 2004 due primarily to the beginning of foreclosure proceedings on a $4.3 million commercial mortgage loan on a hotel within the Company’s primary market area.  As a result of the higher level of non-performing assets, the Company’s loan loss reserve coverage of non-performing assets amounted to 85% at March 31, 2004 compared to 103% at December 31, 2003.  The allowance for loan losses as a percentage of total loans was 2.26% at March 31, 2004 compared to 2.32% at December 31, 2003 and 2.06% at March 31, 2003.  


  The Company applies a consistent methodology and procedural discipline to evaluate the adequacy of the allowance for loan losses on a quarterly basis. (See further discussion in Critical Accounting Policies and Estimates section of this MD&A.)    

   

.....NON-INTEREST INCOME..... Non-interest income for the first quarter of 2004 totaled $4.1 million; a $70,000 or 1.8% increase from the first quarter 2003 performance.  Factors contributing to the higher non-interest income in 2004 included:

     

*  the non-recurrence of a $758,000 loss realized on the sale of approximately 70% of the Company’s mortgage servicing portfolio in the first quarter of 2003. This significant downsizing of the mortgage-servicing asset reduced the level of interest rate risk and earnings volatility of this business on the Company’s financial performance.   


* a $341,000 or 26.7% decrease in gains realized on investment security sales in the first quarter of 2004.

  

* a $133,000 decrease in gains realized on the sale of mortgage loans into the secondary market as a result of reduced mortgage refinancing activity.  This lower level of new mortgage origination activity in the first quarter of 2004 was also the main factor responsible for the $149,000 decrease in other non-interest income.

  

.....NON-INTEREST EXPENSE..... Non-interest expense for the first quarter of 2004 totaled $9.7 million; a $449,000 or 4.4% decrease from the first quarter 2003 performance. This decline reflects the Company’s continued focus on reducing and containing expenses. Factors contributing to the lower non-interest expense in 2004 included:


* a $226,000 reduction in the impairment charge on mortgage servicing rights due to a significantly smaller mortgage-servicing asset in 2004.    


* the Company recognized a $199,000 goodwill impairment loss in the first quarter of 2003 due to the write-off of the goodwill associated with the mortgage banking segment.  There was no such charge in the first quarter of 2004.  

             

* salaries and employee benefits increased by $126,000 or 2.6% due to higher medical insurance costs resulting from premium increases.  These higher health care related costs offset the benefit of reduced salary expense due to six fewer full-time equivalent employees when compared to the first quarter of 2003 and lower incentive compensation expense.

  

.....INCOME TAX EXPENSE..... The Company recognized an income tax benefit of $4,000 or an effective rate of (1.8%) in the first quarter of 2004.  The Company recognized a benefit for income taxes of $342,000 or an effective tax rate of (30.1%) in the first quarter of 2003.  The lower tax benefit in 2004 was due to the Company’s improved earnings performance as the level of tax-free income was relatively consistent between periods.   


…..SEGMENT RESULTS.…. Retail banking’s net income contribution was  $175,000 in the first quarter of 2004.  The retail banking net income contribution is down from the prior year first quarter due to reduced net interest income and lower non-interest revenue.  The reduced net interest income reflects the continuing low interest rate environment that has resulted in less benefit provided for low-cost non-maturity deposits such as demand deposits and savings accounts.  The reduced mortgage origination activity is the primary factor causing the reduction in non-interest revenue.  


The trust segment’s net income contribution in the first quarter of 2004 amounted to $199,000 which was down $14,000 from the prior year.  The trust segment is focused on continuing to increase the fee revenue generated from union business activities, particularly the ERECT and BUILD Funds, which are collective investment funds for trade union controlled pension fund assets.  


The Company has experienced earnings pressure in the mortgage banking segment  which lost $234,000 in the first quarter of 2004.  This loss, however, was reduced significantly from the $1.2 million loss experienced in the first quarter of 2003.  The 2003 loss included a $758,000 loss realized on the sale of 70% of the Company’s mortgage servicing rights, a $366,000 mortgage servicing impairment charge and a $199,000 goodwill impairment loss.  This downsizing of the mortgage servicing asset, however, reduced the size of the mortgage servicing impairment charge in 2004 when compared to the prior year.


The commercial lending segment lost $66,000 in the first quarter of 2004 which represented an improvement from the $625,000 net loss experienced in the first quarter of 2003.   The reduced loss in 2004 was caused by a lower loan loss provision.  The 2004 performance, however, reflects reduced net interest income due to fewer loans outstanding.  The investment/parent segment reported a net income contribution of $85,000 in the first quarter of 2004 compared to a net loss of $17,000 in the first quarter of 2003.  The improved performance was mainly due to an increased net interest income contribution from the investment securities portfolio as a result of a larger portfolio in the first quarter of 2004.  

    

.....BALANCE SHEET.....The Company's total consolidated assets were $1.100 billion at March 31, 2004, compared with $1.148 billion at December 31, 2003, which represents a decrease of $48.3 million or 4.2%. This lower level of assets resulted primarily from a decline in the investment securities portfolio as the Company took advantage of interest rate volatility to position the balance sheet for an expected increase in loans and anticipated higher interest rates.         


The Company’s deposits totaled $656.3 million at March 31, 2004, which was $1.8 million or 0.3% higher than December 31, 2003.  Total borrowed funds decreased by $56.9 million as fewer borrowings were needed to fund the investment securities portfolio.  Total stockholders equity increased by $3.5 million from December 31, 2003, to $77.7 million at March 31, 2004 as a result of an increase in accumulated other comprehensive income due to an improved value of the AFS investment securities portfolio.  The Company continues to be considered well capitalized for regulatory purposes with an asset leverage ratio at March 31, 2004 of 7.75%, compared to a regulatory minimum of 5.0%.  The Company’s book value per share at March 31, 2004 was $5.57.   

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


    
 

March 31,

December 31,

March 31,

 

2004

2003

2003

     Total loan delinquency (past

   

         due 30 to 89 days)

$  7,308

$14,636

$ 13,988

     Total non-accrual loans

 8,736

10,781

11,413

     Total non-performing assets*

13,482

 11,411

11,687

     Loan delinquency, as a

   

        percentage of total loans

        and loans held for sale,

   

        net of unearned income

1.45%

2.91%

2.52%

    Non-accrual loans, as a

        percentage of total loans

   

        and loans held for sale,

   

        net of unearned income

1.74

2.14

2.06

     Non-performing assets, as a

        percentage of total loans and

        loans held for sale, net of

        unearned income, and other

        real estate owned





2.65





2.26





2.10

   

     *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 some of which are insured for credit loss, and (iii) other real estate owned.   


The $7.3 million decline in total loan delinquency between December 31, 2003 and March 31, 2004 was due primarily to the transfer of a $4.3 million commercial mortgage loan on a hotel within the Company’s primary market area into non-accrual status.   The transfer of this loan into non-accrual status was also the main factor responsible for the noted increase in total non-performing assets.  The Company rated this credit as substandard at March 31,2004 and had established an allocation of $1.3 million within the allowance for loan losses for this credit.  


This overshadowed the successful work-out of a $500,000 loan to a borrower in the food service industry and a $1.1 million commercial lease to a borrower in the technology industry.  In addition, a commercial loan to a borrower in the paper manufacturing industry was successfully restructured under new ownership and was no longer delinquent at the end of the first quarter of 2004.  Overall, the Company had two loans totaling $6.0 million at March 31, 2004, that have been restructured that involved forgiving a portion of interest or principal on these loans or granting loan rates less than that of the market rate.  The Company had established an allocation of $620,000 within the allowance for loan losses for these restructured loans.

        


.....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):

    
 

March 31,

December  31,

March 31,

 

2004

2003

2003

Allowance for loan losses

$11,379

$11,682

$11,415

Allowance for loan losses as  

   

   a percentage of each of

   

   the following:

   

     total loans and loans held for sale,

   

       net of unearned income

2.26%

2.32%

2.06%

     total delinquent loans

   

       (past due 30 to 89 days)

155.71

79.82

81.61

     total non-accrual loans

130.25

108.36

100.02

     total non-performing assets

 84.40

102.37

 97.67

  

Since December 31, 2003, the Company’s loan loss reserve coverage of total non-performing assets declined to 84% due to the previously discussed increase in non-performing assets.  The allowance for loan losses to total loans ratio has decreased modestly to 2.26% since year-end 2003 due to a drop in the size of the loan loss reserve combined with little change in the level of total loans outstanding.


.....LIQUIDITY...... Liquidity can be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents decreased by $5.7 million from December 31, 2003, to March 31, 2004, due to $55.8 million of cash used by financing activities and $3.3 million used by operating activities.  This was partially offset by $53.4 million of cash provided by investing activities.  Within investing activities, proceeds from investment security maturities and sales exceeded cash used to purchase new investment securities by $53.1 million.  Cash advanced for new loan fundings and purchases totaled $67.0 million and evenly offset the $67.3 million cash received from loan principal payments and sales.  Within financing activities, payments for maturing certificates of deposit exceeded proceeds from new certificates of deposit by $1.8 million.


The Company used $729,000 of cash to service the dividend on the guaranteed junior subordinated deferrable interest debentures (trust preferred securities) in the first quarter of 2004. As a result of the settlement of the inter-company tax position and dividend upstreams from non-bank subsidiaries, the Parent Company has ample cash to continue to make the dividend payment on the trust preferred securities through the second quarter of 2004.  The Company has also developed a contingency cash flow plan that identifies strategies to continue the trust preferred dividend payments in an uninterrupted manner through the end of 2004.  Note that some of these strategies do require regulatory approval.  Intermediate to longer-term, however, the payment of the trust preferred dividend is dependent upon the subsidiary bank maintaining profitability so that it can resume upstreaming dividends to the Parent Company.  As of March 31, 2004, the subsidiary bank had fully recouped the $2.6 million net loss that it had incurred for the 2002 year and had $155,000 of available dividend capacity to the Parent Company.  Under the terms and conditions of the Memorandum Of Understanding (MOU), the Company anticipates that it will approach its primary regulators to request permission to resume dividend upstreams from the bank in the third quarter of 2004.


.....CAPITAL RESOURCES..... The Company continues to be considered well capitalized as the asset leverage ratio was 7.75% and the Tier 1 capital ratio was 14.32% at March 31, 2004.  Note that the impact of other comprehensive income (loss) is excluded from the regulatory capital ratios. At March 31, 2004, accumulated other comprehensive income amounted to $2.3 million.  Additionally, the Company has generated $358,000 of tangible capital in 2004 due to the amortization of core deposit intangible assets.  


The Company exceeds all regulatory capital ratios for each of the periods presented.  Furthermore, both the Company and the Bank are considered “well capitalized” under all applicable FDIC regulations.  The Company anticipates that it will build its capital ratios during 2004 through the retention of earnings.


As a result of the net loss incurred for the year ended December 31, 2002, the Company announced on January 24, 2003 that it suspended its common stock cash dividend.  While the Company has not repurchased any of its own shares since the year 2000, the Company has also suspended its treasury stock repurchase program.  For so long as the Company and the Board of Directors are parties to the Memorandum of Understanding (MOU), reinstatement of either the common stock dividend or the treasury stock repurchase program will require the prior written approval of the Company’s primary regulators – the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking.  The Company believes it is in compliance with the requirements of the MOU.


.....INTEREST RATE SENSITIVITY..... Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company's net interest income, net income and capital.  The management and measurement of interest rate risk at the Company is performed by using the following tools:  1) simulation modeling which analyzes the impact of interest rate changes on net interest income, net income and capital levels over specific future time periods.  The simulation modeling incorporates changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling also incorporates all hedging activity as well as assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities; 2) market value of portfolio equity sensitivity analysis, and 3) static "GAP" analysis which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time.  The overall interest rate risk position and strategies are reviewed by senior management and the Company's Board of Directors on an ongoing basis.


Management places primary emphasis on simulation modeling to manage and measure interest rate risk.  The Company's asset/liability management policy seeks to limit net interest income variability over the first twelve months of the forecast period to +/- 7.5% which include interest rate movements of at least 200 basis points.  Under the current historically low interest rate environment, a declining 200 basis point or greater scenario is improbable and therefore is of limited value.  Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet exposure to changes in interest rates.  The Company monitors the trends in market value of portfolio equity sensitivity analysis on a quarterly basis.  


The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity.  The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate increases of 200 basis points and immediate interest rate decreases of 100 basis points.  Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.

   

Interest Rate

Scenario

Variability of Net Interest Income

Change In Market Value of Portfolio Equity

   

200bp increase

2.9%

23.0%

100bp decrease

(10.8)%

(30.4)%

   

As indicated in the table, the Company’s balance sheet is better positioned for rising interest rates as both of the measurements are positive in the 200 basis point increase scenario.  The market value of portfolio equity increased by 23.0% due to increased value of the Company’s core deposit base.  The Company’s modeling suggests that the Company will experience earnings pressure in a declining interest rate environment.  Negative variability of net interest income and market value of portfolio equity occurred in a 100 basis point downward rate shock and reflects further impairment of the remaining mortgage servicing rights in a falling interest rate environment along with a reduced value for core deposits and a greater liability for fixed rate FHLB advances.  Net interest income in the declining rate forecast was also negatively impacted by the Company’s inability to further reduce certain core deposit costs given the historic lows of current interest rates. Note that the two fair value hedges executed in 2003 helped reduce the Company’s exposure to flat and declining interest rates.  


.....CONTRACTUAL OBLIGATIONS…..  The following table presents, as of March 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date.


   

Payments Due In

  
 

One Year or     Less

One to Three

Years

Three to Five Years

Over Five Years


Total

   

(In thousands)

  

Deposits without stated maturity

$ 382,143

   $           -

$            -

$             -

$    382,143

Certificates of deposit

143,512

79,956

26,268

24,469

274,205

Borrowed funds

92,799

15,082

     93

210,842

318,816

Guaranteed junior subordinated deferrable interest debentures


  -


   -


  -

 

 35,567


35,567

Lease commitments

       1,200

    1,949

       916

          998

          5,063

Total

$ 619,654

$ 96,987

$ 27,277

$ 271,876

$ 1,015,794

      

.....OFF BALANCE SHEET ARRANGEMENTS….. The Company uses various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities.  At March 31, 2004, the Company had in place $100 million of derivative hedging instruments.


.....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 and mortgage servicing rights are deemed critical because they involve the use of estimates and require significant management judgments.  Application of assumptions different than those used by the Company could result in material changes in the Company’s financial position or results of operation.


Account – Allowance for Loan Losses


Balance Sheet Reference – Allowance for Loan Losses


Income Statement Reference – Provision for Loan Losses


Description


As a financial institution which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business.  Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline to perform an analysis which is updated on a quarterly basis at the Bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes:


- A detailed review of all criticized and impaired loans with balances over $250,000 to determine if any specific reserve allocations are required on an individual loan basis.  The specific reserve established for these criticized and impaired loans is based on careful analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor.



- The application of formula driven reserve allocations for all commercial and commercial real-estate loans are calculated by using a three-year migration analysis of net losses incurred within each risk grade for the entire commercial loan portfolio. The difference between estimated and actual losses is reconciled through the dynamic nature of the migration analysis.


- The application of formula driven reserve allocations to consumer and mortgage loans which are based upon historical net charge-off experience for those loan types. The residential mortgage loan allocation is based upon the Company's five-year historical average of actual loan net charge-offs experienced in that category. The same methodology is used to determine the allocation for consumer loans except the allocation is based upon an average of the most recent actual three-year historical net charge-off experience for consumer loans.


- The application of formula driven reserve allocations to all outstanding loans is based upon review of historical losses and qualitative factors, which include but are not limited to: economic trends, delinquencies, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions.


- The maintenance of a general unallocated reserve to accommodate inherent risk in the Company’s portfolio that is not identified through the Company’s specific loan and portfolio segment reviews discussed above.  Management recognizes that there may be events or economic factors that have occurred affecting specific borrowers or segments of borrowers that may not yet be fully reflected in the information that the Company uses for arriving at reserves for a specific loan or portfolio segment. Therefore, the Company and its Board of Directors believe a general unallocated reserve is needed to recognize the estimation risk associated with the specific and formula driven allowances.  In conjunction with the establishment of the general unallocated reserve, the Company also looks at the total allowance for loan losses in relation to the size of the total loan portfolio and the level of non-performing assets.


After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve.  


When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is immediately charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are 90 days past due, except loans that are insured for credit loss.


The Company's policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loans with balances in excess of $250,000 within a 12-month period.  The Company defines classified loans as those loans rated substandard and doubtful.  The Company has also identified two pools of small dollar value homogeneous loans which are evaluated collectively for impairment.  These separate pools are for residential mortgage loans and consumer loans.  Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment.


The Company believes that it uses the best information available to determine the adequacy of the allowance for loan losses.  However, future adjustments to the allowance for loan losses may be necessary and the results of operations could be significantly and adversely affected if conditions differ substantially from the assumptions used in making the determinations.  

Account – Mortgage Servicing Rights


Balance Sheet Reference – Mortgage Servicing Rights


Income Statement Reference – Net Mortgage Servicing Fees and Impairment Charge for Mortgage Servicing Rights


Description


The Company recognizes as assets the rights to service mortgage loans for others whether the servicing rights are acquired through purchases or originations.  Purchased mortgage servicing rights are capitalized at cost.  For loans originated and sold where servicing rights have been retained, the Company allocates the cost of originating the loan to the loan (without the servicing rights) and the servicing rights retained based on their relative fair market values if it is practicable to estimate those fair values.  Where it is not practicable to estimate the fair values, the entire cost of originating the loan is allocated to the loan without the servicing rights.  For purposes of evaluating and measuring impairment, the Company stratifies the rights based on risk characteristics.  If the discounted projected net cash flows of a stratum are less than the carrying amount of the stratum, the stratum is written down to the amount of the discounted projected net cash flows through a valuation account.  This write down is recorded in the line item on the Consolidated Statements of Operations titled Impairment charge for mortgage servicing rights.  The Company has determined that the predominant risk characteristics of its portfolio are loan type and interest rate.  For the purposes of evaluating impairment, the company has stratified its portfolio in 200 basis point tranches by loan type.  Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income.  The value of mortgage servicing rights is subject interest rate and prepayment risk.  It is likely that the value of these assets will decrease if interest rates decline and prepayments occur at greater than the expected rate and conversely the value of servicing increases if interest rates rise and prepayment speeds slow.


.....FORWARD LOOKING STATEMENT.....This Form 10-Q/A 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.


.....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 as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2004, pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of March 31, 2004, are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be in the Company’s periodic filings under the Exchange Act.


        

(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.



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Part II     Other Information


Item 5.     Other Information


The Company’s chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Form-10-Q/A that is required by Section 906 of the Sarbanes-Oxley Act of 2002.


Item 6.     Exhibits and Reports on Form 8-K

     (a)    Exhibits

  

 3.2

Bylaws, Exhibit 3.2 to the Registrant’s Form 10-Q for the period ended June 30,

  2003.

  

15.1

Report of Deloitte & Touche LLP 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. section1350, as adopted pursuant to section 906

  of the Sarbanes-Oxley Act of 2002.

  

32.2

Certification pursuant to 18 U.S.C. section1350, as adopted pursuant to section 906

  of the Sarbanes-Oxley Act of 2002.

   

     (b)    Reports on Form 8-K:  


 

On January 27, 2004, the Company filed an 8-K announcing its Fourth Quarter and Full-year 2003 results of operations.

  

     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: January 6, 2005

/s/Allan R. Dennison

 

Allan R. Dennison

 

President and Chief Executive Officer

  

Date: January 6, 2005

/s/Jeffrey A. Stopko

 

Jeffrey A. Stopko

 

Senior Vice President and Chief Financial Officer


STATEMENT OF MANAGEMENT RESPONSIBILITY





January 6, 2005



To the Stockholders and

Board of Directors of

AmeriServ Financial, Inc.



Management of AmeriServ Financial, Inc. and its subsidiaries (the “Company”) have prepared the consolidated financial statements and other information in the Form 10-Q in accordance with generally accepted accounting principles and are responsible for its accuracy.


In meeting its responsibilities, management relies on internal accounting and related control systems, which include selection and training of qualified personnel, establishment and communication of accounting and administrative policies and procedures, appropriate segregation of responsibilities, and programs of internal audit.  These systems are designed to provide reasonable assurance that financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against unauthorized use or disposition.  Such assurance cannot be absolute because of inherent limitations in any internal control system.


Management also recognizes its responsibility to foster a climate in which Company affairs are conducted with the highest ethical standards.  The Company's Code of Conduct, furnished to each employee and director, addresses the importance of open internal communications, potential conflicts of interest, compliance with applicable laws, including those related to financial disclosure, the confidentiality of propriety information, and other items.  There is an ongoing program to assess compliance with these policies.


The Audit Committee of the Company's Board of Directors consists solely of outside directors.  The Audit Committee meets periodically with management and the independent accountants to discuss audit, financial reporting, and related matters.  Deloitte & Touche LLP and the Company's internal auditors have direct access to the Audit Committee.


­­­­­­­

/s/Allan R. Dennison

/s/Jeffrey A. Stopko

Allan R. Dennison

Jeffrey A. Stopko

President &

Senior Vice President &

Chief Executive Officer

Chief Financial Officer



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of

AmeriServ Financial, Inc.

Johnstown, Pennsylvania


We have reviewed the accompanying condensed consolidated balance sheet of AmeriServ Financial, Inc. and subsidiaries (the “Corporation”) as of March 31, 2004 and 2003, and the related condensed consolidated statements of operations and cash flows for the three-month periods then ended.  These interim financial statements are the responsibility of the Corporation’s management.


We conducted our reviews 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 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 (United States), 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 such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


As discussed in Note 18, the condensed consolidated statements of cash flows for the three month periods ended March 31, 2004 and 2003 have been restated.


We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Corporation and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 12, 2004 (December 29, 2004 as to Note 28 and January 6, 2005 as to the effects of the restatement discussed in the second paragraph of Note 27), we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph concerning the Corporation’s restatement of certain amounts in the statements of cash flows.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



May 5, 2004 (January 6, 2005 as to the effects of the restatement discussed in Note 18)



 /s/Deloitte & Touche LLP


Pittsburgh, Pennsylvania




Exhibit 15.1



January 6, 2005


AmeriServ Financial, Inc.

P.O. Box 430

216 Franklin Street

Johnstown, Pennsylvania


We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of AmeriServ Financial, Inc. and subsidiaries for the periods ended March 31, 2004 and 2003, as indicated in our report dated May 5, 2004 (January 6, 2005 as to the effects of the restatement discussed in Note 18)(which report contains an explanatory paragraph referring to the restatement discussed in Note 18); 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-QA for the quarter ended March 31, 2004, 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


We also are 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.




/s/ Deloitte & Touche LLP

Pittsburgh, Pennsylvania


#




Exhibit 31.1


I, Allan R. Dennison, Chief Executive Officer of AmeriServ Financial, Inc. (ASF), certify that:


1.  I have reviewed this quarterly report on Form 10-Q/A of 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)) 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) 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

(c) 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: January 6, 2005

/s/Allan R. Dennison

 

Allan R. Dennison

 

President & CEO







Exhibit 31.2


I, Jeffrey A. Stopko, Chief Financial Officer of AmeriServ Financial, Inc. (ASF), certify that:


1.  I have reviewed this quarterly report on Form 10-Q/A of 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)) 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) 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

(c) 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: January 6, 2005

/s/Jeffrey A. Stopko

 

Jeffrey A. Stopko

 

Senior Vice President & CFO



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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/A for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Allan R. Dennison, 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/Allan R. Dennison

Allan R. Dennison

President and

Chief Executive Officer

January 6, 2005

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/A for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey A. Stopko, Senior 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

Senior Vice President and

Chief Financial Officer

January 6, 2005


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