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ASRV > SEC Filings for ASRV > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for AMERISERV FINANCIAL INC /PA/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AMERISERV FINANCIAL INC /PA/


10-Nov-2011

Quarterly Report


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

2011 THIRD QUARTER SUMMARY OVERVIEW Third quarter of 2011 net income was $1.6 million or $0.05 per share. This represents an improvement of $957,000 over the third quarter of 2010, as well as an achievement of a sixth consecutive profitable quarter. Through the first nine months of 2011, AmeriServ has now earned $4.6 million better than the first nine months of 2010. This places earnings per share at $0.17 as compared with a loss of $0.03 per share during the first nine months of 2010.

Perhaps the most striking improvement is that since September 2010 non-performing assets have been reduced by almost $20 million to just $5.3 million or 0.80% of total loans with only $2.4 million of actual charge-offs. AmeriServ has proven that quick and decisive action to identify potentially troubled loans and careful monitoring by our Asset Quality Task Force is an effective way to minimize income crippling losses. The pursuit of this methodology has permitted a provision reduction of $2.3 million in the allowance for loan losses during 2011 without diminishing the coverage of non-performing assets. Actually, the coverage of non-performing assets has improved from 138% on December 31, 2010 to 301% on September 30, 2011. Those funds transferred back from the allowance for loan losses have become a part of the AmeriServ Financial Bank total of retained earnings, thus further strengthening the Company during these uncertain economic times.

This strengthening has also permitted AmeriServ to concentrate more fully on the business of banking. The result is that loans outstanding increased by $11 million during the third quarter, ending the recession induced decline in loans which began in 2009. Deposit levels also resumed their growth after a decline in the second quarter of 2011. Deposit totals have now increased in five of the last seven quarters. The stronger than anticipated recovery of the Trust Company enabled AmeriServ to report the highest quarterly level of non-interest Income in 2011. A continuing emphasis on efficiency and productivity resulted in the third consecutive quarter of stable operating expenses. The positive force of these improvements can all be traced to a continuing focus on the careful execution of a plan not merely to weather this recession successfully, but to emerge from it stronger so we can be proactive when the long promised recovery period materializes.

Additionally, on August 11, 2011, AmeriServ redeemed its $21 million preferred stock issued to the US Treasury. This transaction related to the Capital Purchase Program, later referred to by the media as TARP. You may recall that following the failure of Lehman Brothers in the fall of 2008, AmeriServ entered into the US Treasury program to protect the franchise during those turbulent times. Those funds are now repaid and, on November 2, 2011, we repurchased the TARP common stock warrant which the US Treasury obtained in 2008 for $825,000. The purchase of this warrant by AmeriServ removes any possibility of the US Treasury acquiring 1.3 million common shares of AmeriServ and thereby protects our shareholders from any dilution of the value of their current holdings. At the same time, AmeriServ applied to be named, and was so designated, as a Small Business Lending Fund Bank by the US Treasury. This designation brought AmeriServ $21 million of US Treasury funding, currently at a rate of 5% per year, through a preferred share issuance. It is most important to note that should AmeriServ increase its small business loans in the near future, under the US Treasury formula, AmeriServ's interest rate on the preferred stock could be reduced to a little as 1% per year. It could go to 9% if our commercial loans do not increase, but this is no worse than if we had not converted from the TARP Program.


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So as to achieve a better rate, AmeriServ's bankers have mounted a strong small business loan development program, supported by a robust multi-media marketing campaign. The records show AmeriServ making as many as 400 business development calls per month so as to support the US Treasury SBLF program, to help small businesses in our region, and to reduce the annual cost of the Treasury funding.

A further word about the Trust Company. New leadership has been in place in the Trust Company since March 2010. Through the first nine months of 2011, the Trust Company has more than doubled the net income reported during the first nine months of 2010. These positive results have been achieved while simultaneously enhancing procedures and systems and beginning a well-coordinated new business development program. Just ahead for the Trust Company is the integration of the skills of the West Chester Capital Advisors with the wealth management skills of the investment department of the Trust Company. This combination will stretch across all of the special investment disciplines that each unit has developed. In such turbulent economic times, it is important that the Trust Company have complete flexibility in providing clients with proven methods for protecting and growing their financial nest eggs.

During this month, the management team placed before the Board of Directors and the regulatory authorities a new Strategic Plan (Plan) for 2012-2015. The Plan continues to maintain a strong and carefully managed balance sheet while seeking to grow revenues and thereby continue to increase earnings. The Plan is structured around seven key strategic initiatives, each of which has its own set of specially designed action plans. The Strategic Planning Team has been putting this Plan together since April in planning sessions where there were no sacred cows or politically correct ground rules. The Board has recently approved the adoption of this Strategic Plan.

But a necessary word of caution - we are pleased to be able to report such progress on so many fronts. However, we also remain aware that it seems quite likely that the difficult economic times will continue, and perhaps have become even more challenging of late. We have learned that problems do not solve themselves and no bank is an island. Therefore our Asset Quality Task Force continues to meet on a regular schedule, searching for any signs of the feared double dip recession in our loan portfolio. AmeriServ also continues to maintain capital ratios well above those required by regulation and has a deep level of liquidity. As a further step, the Board is examining the wisdom of creating a Board level risk committee structured identically to that required by the regulatory authorities of the largest banks in the nation. We have seen hard times and we have watched other banks fall along the way. Therefore we will not sacrifice any of our strength, but we will maintain that strength even as we seek to improve earnings.

THREE MONTHS ENDED SEPTEMBER 30, 2011 VS. THREE MONTHS ENDED SEPTEMBER 30, 2010

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
                                               September 30, 2011               September 30, 2010
Net income                                     $             1,566             $                609
Diluted earnings per share                                    0.05                             0.02
Return on average assets (annualized)                         0.64 %                           0.25 %
Return on average equity (annualized)                         5.52 %                           2.24 %


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The Company reported third quarter 2011 net income of $1.6 million or $0.05 per diluted common share. This represents an increase $957,000 from the third quarter 2010 net income of $609,000 or $0.02 per diluted common share. Continued improvement in asset quality and a higher level of revenue were the key factors causing our increased earnings in the third quarter of 2011. These positive items were partially offset by modestly higher non-interest expense and increased income tax expense. Diluted earnings per share in the third quarter of 2011 were negatively impacted by the accelerated preferred stock discount accretion related to the repayment of the TARP CPP preferred stock which amounted to $267,000 and reduced the amount of net income available to common shareholders.

NET INTEREST INCOME AND MARGIN The Company's net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities. Net interest income is a primary source of the Company's earnings, and it is affected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities. The following table compares the Company's net interest income performance for the third quarter of 2011 to the third quarter of 2010 (in thousands, except percentages):

                                 Three months ended            Three months ended
                                 September  30, 2011           September  30, 2010           $ Change           % Change
Interest income                 $              10,492         $              11,060         $     (568 )             (5.1 )%
Interest expense                                2,374                         3,037               (663 )            (21.8 )

Net interest income             $               8,118         $               8,023         $       95                1.2


Net interest margin                              3.68 %                        3.70 %            (0.02 )              N/M

N/M - not meaningful

The Company's net interest income in the third quarter of 2011 increased by $95,000 or 1.2% from the prior year's third quarter. The Company's third quarter 2011 net interest margin of 3.68% was two basis points lower than the 2010 third quarter margin of 3.70%. The quarterly net interest margin has now operated near the 3.70% level for the past five consecutive quarters. Careful management of funding costs allowed the Company to reduce interest expense to a greater extent than the decline in interest revenue. Specifically, quarterly interest expense has declined by $663,000 since the third quarter of 2010 due to reduced deposit costs and a lower borrowed funds position. This reduction in deposit costs has not impacted average deposit balances which have increased modestly by $3.6 million during this same period. The Company is pleased that there has been $9.7 million of growth in average non-interest bearing demand deposit accounts whose balances have grown by 7.7% since the third quarter of 2010. The Company believes that continued uncertainties in the economy have contributed to growth in deposits as consumers and businesses have looked for safety and liquidity in well capitalized community banks like AmeriServ Financial.

Both net interest income and the net interest margin were negatively impacted by reduced loan balances. Specifically, total loans averaged $663 million in the third quarter of 2011, a decrease of $31 million or 4.5% from the third quarter of 2010. The lower balances reflect the results of the Company's focus on reducing its commercial real estate exposure and problem loans during this period. However, total loan balances appear to have bottomed in the first quarter of 2011. Loans have increased by $23 million over the past two quarters reflecting the successful results of the Company's more intensive calling efforts. The Company has strengthened its excellent liquidity position by reinvesting excess cash in high quality investment securities and


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short-term investments whose average balance has increased by $32 million over this same period.

COMPONENT CHANGES IN NET INTEREST INCOME Regarding the separate components of net interest income, the Company's total interest income for the third quarter of 2011 decreased by $568,000 or 5.1% when compared to the same 2010 quarter. This decrease was due to a 34 basis point decline in the earning asset yield to 4.77%. Within the earning asset base, the yield on the total loan portfolio decreased by 16 basis points to 5.28% while the yield on total investment securities dropped by 27 basis points to 3.21%. New investment securities and loans that are being booked typically have yields that are below the rate on the maturing instruments that they are replacing. Also, this asset mix shift with fewer dollars invested in loans and more dollars invested in lower yielding short duration investment securities also negatively impacts the earning asset yield. Improved commercial loan pipelines suggest that the Company may be able to grow the loan portfolio in the fourth quarter of 2011.

The Company's total interest expense for the third quarter of 2011 decreased by $663,000 or 21.8% when compared to the same 2010 quarter. This decrease in interest expense was due to a lower cost of funds as the cost of interest bearing liabilities declined by 34 basis points to 1.34%. Management's decision to reduce interest rates paid on all deposit categories has not had any negative impact on deposit growth as consumers have sought the safety and liquidity provided by well-capitalized community banks like AmeriServ Financial. This decrease in funding costs was aided by a drop in interest expense associated with a $10.8 million decrease in the volume of interest bearing liabilities. Specifically, the average balance of all FHLB borrowings declined by $4.8 million, and was combined with a $6.0 million decrease in interest bearing deposits. The Company replaced these interest bearing liabilities with non-interest bearing demand deposits which increased by $9.7 million.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended September 30, 2011 and September 30, 2010 setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) AmeriServ Financial's interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) AmeriServ Financial's net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables, loan balances do include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Additionally, a tax rate of 34% is used to compute tax-equivalent yields.


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

                                                        2011                                       2010
                                                       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                         $ 663,230      $   8,895         5.28 %    $ 694,432      $   9,600         5.44 %
Interest bearing deposits                   9,861              4         0.16          1,781             -          0.02
Short-term investment in money market
funds                                       3,547              2         0.24          5,075              5         0.40
Federal funds sold                             -              -            -           6,184              2         0.12
Investment securities - AFS               189,481          1,499         3.16        158,553          1,354         3.41
Investment securities - HTM                 9,747             99         4.06          9,339            107         4.65

Total investment securities               199,228          1,598         3.21        167,892          1,461         3.48

Total interest earning
assets/interest income                    875,866         10,499         4.77        875,364         11,068         5.11
Non-interest earning assets:
Cash and due from banks                    16,228                                     14,889
Premises and equipment                     10,535                                     10,645
Other assets                               79,342                                     80,888
Allowance for loan losses                 (17,032 )                                  (21,173 )

TOTAL ASSETS                            $ 964,939                                  $ 960,613


Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand                 $  59,099      $      35         0.24 %    $  59,014      $      30         0.20 %
Savings                                    83,280             64         0.30         79,038             79         0.40
Money markets                             193,921            272         0.56        187,563            410         0.87
Other time                                346,639          1,667         1.91        363,327          2,149         2.35

Total interest bearing deposits           682,939          2,038         1.18        688,942          2,668         1.54
Short-term borrowings:
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings               227              1         0.64          1,258              2         0.69
Advances from Federal Home Loan Bank        9,715             55         2.29         13,434             87         2.57
Guaranteed junior subordinated
deferrable interest debentures             13,085            280         8.57         13,085            280         8.57

Total interest bearing
liabilities/interest expense              705,966          2,374         1.34        716,719          3,037         1.68
Non-interest bearing liabilities:
Demand deposits                           134,767                                    125,117
Other liabilities                          11,634                                     10,624
Shareholders' equity                      112,572                                    108,153

TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY                                  $ 964,939                                  $ 960,613

Interest rate spread                                                     3.43                                       3.43
Net interest income/Net interest
margin                                                     8,125         3.68 %                       8,031         3.70 %
Tax-equivalent adjustment                                     (7 )                                       (8 )

Net Interest Income                                    $   8,118                                  $   8,023


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PROVISION FOR LOAN LOSSES The improvements in asset quality evidenced by lower levels of non-performing assets and classified loans allowed the Company to reverse a portion of the allowance for loan losses into earnings in 2011 while still increasing the coverage ratio. During the first nine months of 2011, total non-performing assets decreased by $9.0 million or 62.8% to $5.3 million or 0.80% of total loans as a result of successful resolution efforts. Classified loans rated substandard or doubtful also dropped by $13.1 million or 33.1% during this same period. As a result of this improvement, the Company recorded a negative provision for loan losses of $550,000 in the third quarter of 2011 compared to a $1.0 million provision in the third quarter of 2010. Actual credit losses realized through net charge-offs have also declined sharply in 2011. For the third quarter of 2011, net charge-offs totaled $339,000 or 0.20% of total loans which represents a decrease from the third quarter of 2010 when net charge-offs totaled $984,000 or 0.56% of total loans. When determining the provision for loan losses, the Company considers a number of factors some of which include periodic credit reviews, non-performing asset loan delinquency and charge-off trends, concentrations of credit, loan volume trends and broader local and national economic trends. In summary, the allowance for loan losses provided 301% coverage of non-performing loans at September 30, 2011, compared to 145% of non-performing loans at December 31, 2010.

NON-INTEREST INCOME Non-interest income for the third quarter of 2011 totaled $3.5 million; a modest increase of $11,000 or 0.3% from the third quarter 2010 performance. Factors contributing to this higher level of non-interest income in 2011 included:

a $213,000 increase in trust fees as our wealth management and fiduciary businesses benefited from the implementation of new fee schedules in 2011.

a $92,000 decrease in gains realized on residential mortgage loan sales into the secondary market due to a reduced level of mortgage refinancing in the third quarter of 2011 when compared to the prior year.

a $103,000 decrease in other income due to reduced revenue on fixed annuity sales, fewer letter of credit fees and a $26,000 loss realized on the sale of an other real estate owned property in the third quarter of 2011.

NON-INTEREST EXPENSE Non-interest expense for the third quarter of 2011 totaled $9.9 million and increased by $108,000 or 1.1% from the prior year's third quarter. Factors contributing to the higher non-interest expense in 2011 included:

a $287,000 increase in salaries and employee benefits expense due to increased medical insurance costs, higher pension expense and greater incentive compensation expense.

a $168,000 decrease in FDIC expense due to a change in the assessment methodology that benefitted community banks and improvements in our own key asset quality metrics.


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NINE MONTHS ENDED SEPTEMBER 30, 2011 VS. NINE MONTHS ENDED SEPTEMBER 30, 2010

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



                                                 Nine months ended                 Nine months ended
                                                September  30, 2011               September  30, 2010
Net income                                     $               4,767             $                 168
Diluted earnings (loss) per share                               0.17                             (0.03 )
Return on average assets (annualized)                           0.66 %                            0.02 %
Return on average equity (annualized)                           5.81 %                            0.21 %

The Company reported net income of $4.8 million or $0.17 per diluted common share for the first nine months of 2011. This represents an increase of $4.6 million over the net income of $168,000 or ($0.03) per diluted share reported for the same nine month period in 2010. Continued improvements in asset quality were a key factor causing our increased earnings in the first nine months of 2011. This positive item was partially offset by a decline in net interest income attributed primarily to lower loan balances and lower non-interest income resulting from the Company's decision to realize an investment security loss in order to position the portfolio for higher future yields. Earnings were also negatively impacted by moderately higher non-interest expenses and increased income tax expense due to the Company's improved profitability. Diluted earnings per share were impacted by the preferred dividend requirement and the accretion of the preferred stock discount on the CPP preferred stock which amounted to $1.1 million and reduced the amount of net income available to common shareholders.

NET INTEREST INCOME AND MARGIN The following table compares the Company's net interest income performance for the first nine months of 2011 to the first nine months of 2010 (in thousands, except percentages):

                                  Nine months ended             Nine months ended
                                 September  30, 2011           September  30, 2010          $ Change           % Change
Interest income                 $              31,618         $              33,975         $  (2,357 )             (6.9 )%
Interest expense                                7,448                         9,623            (2,175 )            (22.6 )

Net interest income             $              24,170         $              24,352         $    (182 )             (0.7 )


Net interest margin                              3.70 %                        3.77 %           (0.07 )              N/M

N/M - not meaningful

The Company's net interest income in the first nine months of 2011 decreased by $182,000 or 0.7% from the prior year's first nine months. The Company's first nine months 2011 net interest margin of 3.70% was seven basis points lower than the 2010 first nine months margin of 3.77%. Reduced loan balances were the primary factor causing the drop in both net interest income and net interest margin between the first nine month periods. Specifically, total loans averaged $658 million in the first nine months of 2011, a decrease of $47 million or 6.7% from the first nine months of 2010. The Company has strengthened its excellent liquidity position by electing to reinvest these net loan paydowns in high quality investment securities and short-term investments whose average balance has increased by $47 million over this same period.


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Careful management of funding costs has allowed the Company to mitigate a significant portion of the drop in interest revenue during the past twelve months. Specifically, interest expense has declined by $2.2 million since the first nine months of 2010 due to reduced deposit costs and a lower borrowed funds position. This reduction in deposit costs has not impacted average deposit balances which have increased by $14 million or 1.8% during this same period.

COMPONENT CHANGES IN NET INTEREST INCOME Regarding the separate components of net interest income, the Company's total interest income for the first nine months of 2011 decreased by $2.4 million or 6.9% when compared to the same 2010 period. This decrease was due to a 43 basis point decline in the earning asset yield to 4.85% and a modest $587,000 drop in average earning assets between periods due to the previously mentioned decline in loans. Investment securities and short-term investments have grown over this period but not enough to absorb the overall decline in total loans. Within the earning asset base, the yield on the total loan portfolio decreased by 17 basis points to 5.39% while the yield on total investment securities dropped by 44 basis points to 3.24%. New investment securities and loans that are being booked typically have yields that . . .

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