Edgar Filing: AMERISERV FINANCIAL INC /PA/

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-11204

AMERISERV FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA

25-1424278

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

MAIN & FRANKLIN STREETS,

P.O. BOX 430, JOHNSTOWN,

PENNSYLVANIA

15907-0430

(Address of principal executive offices)

(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:


Title Of Each Class		Name Of Each Exchange On Which Registered
None

Securities registered pursuant to Section 12(g) of the Act:


Common Stock, $0.01 Par Value		Share Purchase Rights
(Title of class)		(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No

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. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer ¨		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was $39,140,082 as of June 30, 2009.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 21,223,942 shares outstanding as of January 29, 2010.

DOCUMENTS INCORPORATED BY REFERENCE.

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

Portions of the annual shareholders’ report for the year ended December 31, 2009, are incorporated by reference into Parts I and II.

Portions of the proxy statement for the annual shareholders’ meeting are incorporated by reference in Part III.

Exhibit Index is located on page 84.

FORM 10-K INDEX


		Page No.
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Consolidated Financial Data	15
Item 7.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 8.	Consolidated Financial Statements and Supplementary Data	39
Item 9.	Changes In and Disagreements With Accountants On Accounting and Financial Disclosure	82
Item 9A.(T)	Controls and Procedures	82
Item 9B.	Other Information	82
PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	82
Item 11.	Executive Compensation	82
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	82
Item 13.	Certain Relationships and Related Transactions and Director Independence	83
Item 14.	Principal Accounting Fees and Services	83
PART IV
Item 15.	Exhibits and Consolidated Financial Statement Schedules	83
	Signatures	85

PART I

ITEM 1.

BUSINESS

GENERAL

AmeriServ Financial, Inc. (the Company) is a bank holding company organized under the Pennsylvania Business Corporation Law. The Company became a holding company upon acquiring all of the outstanding shares of AmeriServ Financial Bank (the Bank) on January 5, 1983. The Company’s other wholly owned subsidiaries include AmeriServ Trust and Financial Services Company (the Trust Company) formed in October 1992, and AmeriServ Life Insurance Company (AmeriServ Life) formed in October 1987.

The Company’s principal activities consist of owning and operating its three wholly owned subsidiary entities. At December 31, 2009, the Company had, on a consolidated basis, total assets, deposits, and shareholders’ equity of $970 million, $786 million and $107 million, respectively. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, accounting and taxes, loan review, auditing, investment accounting, marketing and insurance risk management.

As previously stated, the Company is a bank holding company and is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking. The Company is also under the jurisdiction of the Securities and Exchange Commission (SEC) for matters relating to offering and sale of its securities. The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. The Company is listed on the NASDAQ Stock Market under the trading symbol “ASRV,” and is subject to the NASDAQ rules applicable to listed companies.

AMERISERV FINANCIAL BANKING SUBSIDIARY

AmeriServ Financial Bank

The Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended. Through 18 locations in Allegheny, Cambria, Centre, Somerset, and Westmoreland Counties, Pennsylvania, AmeriServ Financial Bank conducts a general banking business. It is a full-service Bank offering (i) retail banking services, such as demand, savings and time deposits, money market accounts, secured and unsecured loans, mortgage loans, safe deposit boxes, holiday club accounts, money orders, and traveler’s checks; (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as real estate-mortgage loans, short- and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services. The Bank also operates 21 automated bank teller machines (ATMs) through its 24-Hour Banking Network that is linked with NYCE, a regional ATM network and CIRRUS, a national ATM network. On March 7, 2007, the Bank completed the acquisition of West Chester Capital Advisors (WCCA). WCCA is a registered investment advisor and as of December 31, 2009 had $100 million in assets under management.

The Bank’s deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio. The Bank’s business is not seasonal nor does it have any risks attendant to foreign sources.

The Bank is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios at December 31, 2009:


Headquarters	Johnstown, PA
Chartered		1933
Total Assets	$	942,633
Total Investment Securities		123,554
Total Loans (net of unearned income)		722,904
Total Deposits		786,211
Total Net Loss		(4,044	)
Asset Leverage Ratio		8.71	%
Return on Average Assets		(0.43	)
Return on Average Equity		(4.10	)
Total Full-time Equivalent Employees		276

RISK MANAGEMENT OVERVIEW:

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, which includes interest rate, credit, and liquidity risk. The Company controls and monitors these risks with policies, procedures, and various levels of managerial and Board oversight.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. The Company uses its asset liability management policy to control and manage interest rate risk.

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors, debtholders and the funding of operating costs. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. The Company’s primary credit risk occurs in the loan portfolio. The Company uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. The Company’s investment policy and hedging policy strictly limit the amount of credit risk that may be assumed in the investment portfolio and through hedging activities. The following summarizes and describes the Company’s various loan categories and the underwriting standards applied to each:

Commercial

This category includes credit extensions to commercial and industrial borrowers. Business assets, including accounts receivable, inventory and/or equipment, typically secure these credits. In appropriate instances, extensions of credit in this category are subject to collateral advance formulas. Balance sheet strength and profitability are considered when analyzing these credits, with special attention given to historical, current and prospective sources of cash flow, and the ability of the customer to sustain cash flow at acceptable levels. Our policy permits flexibility in determining acceptable debt service coverage ratios, with a minimum level of 1.1 to 1 desired. Personal guarantees are frequently required; however, as the financial strength of the borrower increases, the Company’s ability to obtain personal guarantees decreases. In addition to economic risk, this category is impacted by the management ability of the borrower and industry risk, which are also considered during the underwriting process.

Commercial Loans Secured by Real Estate

This category includes various types of loans, including acquisition and construction of investment property, owner-occupied property and operating property. Maximum term, minimum cash flow coverage, leasing requirements, maximum amortization and maximum loan to value ratios are controlled by the Company’s credit policy and follow industry guidelines and norms, and regulatory limitations. Personal guarantees are normally required during the construction phase on construction credits, and are frequently obtained on mid to smaller commercial real estate loans. In addition to economic risk, this category is subject to geographic and portfolio concentration risk, which are monitored and considered in underwriting.

Real Estate — Mortgage

This category includes mortgages that are secured by residential property. Underwriting of loans within this category is pursuant to Freddie Mac/Fannie Mae underwriting guidelines, with the exception of Community Reinvestment Act (CRA) loans, which exhibit more liberal standards. The major risk in this category is that a significant downward economic trend would increase unemployment and cause payment default. The Company does not and has never engaged in subprime residential mortgage lending.

Consumer

This category includes consumer installment loans and revolving credit plans. Underwriting is pursuant to industry norms and guidelines. The major risk in this category is a significant economic downturn.

MAJOR TYPES OF INVESTMENTS AND THE ASSOCIATED INVESTMENT POLICIES

The investment securities portfolio of the Company and its subsidiaries is managed to provide ample liquidity in a manner that is consistent with proper bank asset/liability management and current banking practices. The objectives of portfolio management include consideration of proper liquidity levels, interest rate and market valuation sensitivity, and profitability. The investment portfolios of the Company and its subsidiaries are proactively managed in accordance with federal and state laws and regulations in accordance with generally accepted accounting principles.

The investment portfolio is primarily made up of AAA rated agency mortgage-backed securities and short maturity agency securities. The purpose of this type of portfolio is to generate adequate cash flow to fund potential loan growth, as the market allows. Management strives to maintain a relatively short duration in the portfolio. All holdings must meet standards documented in the AmeriServ Financial Investment Policy.

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS, INCLUDING REPAYMENTS AND MATURITIES OF LOANS, SALES AND MATURITIES OF INVESTMENTS AND FHLB ADVANCES

Deposits

The Bank has a loyal core deposit base made up of traditional commercial bank products that exhibits little fluctuation, other than jumbo CDs, which demonstrate some seasonality. The Bank also utilizes certain Trust Company specialty deposits related to the ERECT Fund as a funding source which serve as an alternative to wholesale borrowings and can exhibit some degree of volatility.

Borrowings

The Bank, when needed, uses both overnight borrowings and term advances from the Federal Home Loan Bank of Pittsburgh for liquidity management purposes. During the past several years the Company has significantly deleveraged its balance sheet and reduced its level of borrowings through investment portfolio cash flow.

Loans

During the periods presented herein, the Company has grown its loan portfolio with no adverse effect on liquidity. The Company believes it will be able to fund anticipated loan growth generally from investment securities portfolio cash flow and deposit growth.

Secondary Market Activities

The Residential Lending department of the Bank continues to originate one-to-four family mortgage loans for customers some of which are sold to outside investors in the secondary market and some of which are retained for the AmeriServ portfolio. Mortgages sold on the secondary market are sold to investors on a “flow” basis: Mortgages are priced and delivered on a “best efforts” pricing basis, with servicing released to the investor. Fannie Mae/Freddie Mac guidelines are used in underwriting all mortgages with the exception of CRA loans. The mortgages with longer terms such as 20-year, 30-year, FHA, and VA loans are usually sold. The remaining production of the department includes construction, adjustable rate mortgages, 10-year, 15-year, and bi-weekly mortgages. These loans are usually kept in the AmeriServ portfolio although during periods of low interest rates 15-year loans are typically sold into the secondary market.

AMERISERV FINANCIAL NON-BANKING SUBSIDIARIES

AmeriServ Trust and Financial Services Company

AmeriServ Trust and Financial Services Company is a trust company organized under Pennsylvania law in October 1992. As one of the larger providers of trust and investment management products and services between Pittsburgh and Harrisburg, AmeriServ Trust and Financial Services Company is committed to delivering personalized, professional service to its clients. Its staff of approximately 44 professionals administer assets valued at approximately $1.4 billion that are not recognized on the Company’s balance sheet at December 31, 2009. The Trust Company focuses on wealth management. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. The Wealth management business also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. Note that the BUILD fund is in the process of liquidation. At December 31, 2009, AmeriServ Trust and Financial Services had total assets of $3.5 million and total shareholder’s equity of $3.1 million. In 2009, the Trust Company contributed earnings to the corporation as its gross revenue amounted to $5.7 million and the net income contribution was $387,000. The Trust Company is subject to regulation and supervision by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking.

AmeriServ Life

AmeriServ Life is a captive insurance company organized under the laws of the State of Arizona. AmeriServ Life engages in underwriting as reinsurer of credit life and disability insurance within the Company’s market area. Operations of AmeriServ Life are conducted in each office of the Company’s banking subsidiary. AmeriServ Life is subject to supervision and regulation by the Arizona Department of Insurance, the Pennsylvania Insurance Department, and the Federal Reserve System. At December 31, 2009, AmeriServ Life had total assets of $778,000 and total stockholders’ equity of $719,000.

MONETARY POLICIES

Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Board of Governors are: open market operations in U.S.

Government securities, changes in the federal funds rate and discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Board of Governors have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

COMPETITION

The subsidiaries face strong competition from other commercial banks, savings banks, credit unions, savings and loan associations, and several other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions which are substantially larger and have greater financial resources than the subsidiary entities. As the financial services industry continues to consolidate, the scope of potential competition affecting the subsidiary entities will also increase. Brokerage houses, consumer finance companies, insurance companies, and pension trusts, are important competitors for various types of financial services. In addition, personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals.

MARKET AREA & ECONOMY

Nationally, the economy is improving, although it may take years to fully emerge from the negative effects of the recent economic downturn. The U.S. economy appears to have exited 2009 on an improving note with 4.0 GDP. This growth rate appears unsustainable and a forward projection of 2.5% growth in the first quarter of 2010 is more in line with the Bloomberg consensus forecast and general expectations. Going forward, the inventory cycle looks promising for growth, and it seems to be improving at a faster pace. Inventories were still being cut sharply in the third quarter of 2009, but if inventories flatten, replacement could contribute as much as 1% to the level of GDP over the first two to three quarters of 2010. The consumer remains a big problem for the economic recovery. Consumer spending is gradually picking up, but most economists are skeptical about its future strength, given that debt burdens are still high, wealth is depleted, and credit remains very tight. The consumer remains very concerned about jobs. The unemployment rate is expected to remain at or near 10% through all of 2010. The Federal Reserve is not expected to change course until it appears that unemployment rate is going to decline. Recent indications show core inflation should remain relatively flat, despite increases in commodity prices, which is expected given the excess capacity in product markets and in the labor market. Getting the housing market back on firm footing is a key ingredient to a lasting recovery. The collapse of the housing market, which dragged down home prices with it, was the catalyst for the longest and worst recession to hit the country since the 1930s. To nurture the recovery, the Federal Reserve is expected to keep its key bank lending rate at a record low near zero and keep it there for an “extended period.” The goal is that low interest rates will entice people and businesses to boost spending, in order to fuel economic growth.

The economy in Cambria and Somerset Counties at the end of 2009 produced seasonally adjusted unemployment rates of 8.8% and 9.2%, respectively, as compared to national and state rates of 10.0% and 8.9%, respectively. Local markets have been negatively impacted by the recessionary conditions that exist in the national economy causing the unemployment rate to increase from last year’s average of 7.9%. The increases in unemployment and the difficulties being experienced by small and medium businesses nationally are also being experienced locally. Johnstown, PA, where AmeriServ Financial, Inc is headquartered, is a leader in defense technology and continues to have a cost of living that is lower than the national average. As of December 31, 2009, total non-farm jobs in Johnstown MSA were 1,800 below the December 2008 level with losses coming from both goods-producing and service-providing industries. However, work on defense projects is expected to contribute to the local economy in the future. Local loan demand slowed in the second half of 2009 after good performance earlier in the year.

Economic conditions are stronger in the State College market but have also been negatively impacted by the struggling national economy. The unemployment rate for the State College MSA reached 6.0% late in 2009, which represents a 0.9% increase since last year, but remains the lowest of all regions in the Commonwealth.

Seasonally adjusted total nonfarm jobs for the MSA increased by 100 since December 2008. The Company plans to open a third branch office in the State College market during 2010 as this area presents the Company with a more vibrant economic market and a much different demographic. A large percentage of the population in State College falls into the 18 to 34 year old age group, while potential customers in the Cambria/Somerset markets tend to be over 50 years of age. Overall, opportunities in the State College market are quite different and challenging, providing a promising source of business to profitably grow the Company.

EMPLOYEES

The Company employed 379 people as of December 31, 2009, in full- and part-time positions. Approximately 208 non-supervisory employees of the Bank are represented by the United Steelworkers, AFL-CIO-CLC, Local Union 2635-06. In 2009, the Bank successfully negotiated a new four year labor contract with the United Steelworkers Local that will expire on October 15, 2013. The contract calls for annual wage increases of 1.5% in the first year, 2.0% in each of the second and third years, and 3.0% in the fourth year. The Bank has not experienced a work stoppage since 1979. The Bank is one of 13 union-represented banks nationwide.

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), among other things, identifies five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. It requires U.S. federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. The FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Unless a bank is well capitalized, it is subject to restrictions on its ability to utilize brokered deposits and on other aspects of its operations. The FDICIA generally prohibits a bank from paying any dividend or making any capital distribution or paying any management fee to its holding company if the bank would thereafter be undercapitalized. An undercapitalized bank must develop a capital restoration plan, and its parent holding company must guarantee the bank’s compliance with the plan up to the lesser of 5% of the bank’s assets at the time it became undercapitalized and the amount needed to comply with the plan.

As of December 31, 2009, the Company believes that its Bank subsidiary was well capitalized, based on the prompt corrective action guidelines described above. A bank’s capital category is determined solely for the purpose of applying the prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

TEMPORARY LIQUIDITY GUARANTEE PROGRAM

On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (TLGP). The TLGP was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury, as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP the FDIC will (1) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before June 30, 2009 and (2) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdraw (NOW) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC-insured institutions through December 31, 2009. Coverage under the TLGP was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. The Company elected to participate in the program that provided full FDIC deposit insurance coverage for all non-interest bearing accounts.

SARBANES-OXLEY ACT OF 2002

The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of the Sarbanes-Oxley Act, written certifications by the Company’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest, among other things, that the Company’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. In response to the Sarbanes-Oxley Act of 2002, the Company adopted a series of procedures to further strengthen its corporate governance practices. The Company also requires signed certifications from managers who are responsible for internal controls throughout the Company as to the integrity of the information they prepare. These procedures supplement the Company’s Code of Conduct Policy and other procedures that were previously in place. In 2005, the Company implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act. This program included the identification of key processes and accounts, documentation of the design of control effectiveness over process and entity level controls, and testing of the effectiveness of key controls.

PRIVACY PROVISIONS OF GRAMM-LEACH-BLILEY ACT

Under the Gramm-Leach-Bliley Act (GLB Act), federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about customers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The privacy provision of the GLB Act affects how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Company believes it is in compliance with the various provisions of the GLB Act.

USA PATRIOT ACT OF 2001

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the Company.

STATISTICAL DISCLOSURES FOR BANK HOLDING COMPANIES

The following Guide 3 information is included in this Form 10-K as listed below:

I.	Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differential Information. Information required by this section is presented on pages 17-22, and 29-30.

II.	Investment Portfolio Information required by this section is presented on pages 10 and 51-54.

III.	Loan Portfolio Information required by this section appears on pages 10-11 and 24-25.

IV.	Summary of Loan Loss Experience Information required by this section is presented on pages 25-26.

V.	Deposits Information required by this section follows on page 12.

VI.	Return on Equity and Assets Information required by this section is presented on page 16.

VII.	Short-Term Borrowings Information required by this section is presented on page 12.

INVESTMENT PORTFOLIO

Investment securities classified as held to maturity are carried at amortized cost while investment securities classified as available for sale are reported at fair market value. The following table sets forth the cost basis and fair market value of the Company’s investment portfolio as of the periods indicated:

Investment securities available for sale at:


	AT DECEMBER 31,
COST BASIS:	2009		2008		2007
	(IN THOUSANDS)
U.S. Treasury	$	—	$	—	$	6,006
U.S. Agency		12,342		10,387		37,255
U.S. Agency mortgage-backed securities		116,088		114,380		98,484
Other securities		—		24		25

Total cost basis of investment securities available for sale	$	128,430	$	124,791	$	141,770

Total fair value of investment securities available for sale	$	131,272	$	126,781	$	140,582

Investment securities held to maturity at:


	AT DECEMBER 31,
COST BASIS:	2009		2008		2007
	(IN THOUSANDS)
U.S. Treasury	$	3,009	$	3,082	$	3,153
U.S. Agency		—		—		3,473
U.S. Agency mortgage-backed securities		7,602		9,562		6,157
Other securities		1,000		3,250		5,750

Total cost basis of investment securities held to maturity	$	11,611	$	15,894	$	18,533

Total fair value of investment securities held to maturity	$	11,996	$	16,323	$	18,378

LOAN PORTFOLIO

The loan portfolio of the Company consisted of the following:


	AT DECEMBER 31,
	2009		2008		2007		2006		2005
	(IN THOUSANDS)
Commercial	$	96,158	$	110,197	$	118,936	$	91,746	$	80,629
Commercial loans secured by real estate(1)		396,787		353,870		285,115		269,781		249,204
Real estate-mortgage(1)		207,221		218,928		214,839		209,728		201,111
Consumer		19,619		23,804		16,676		18,336		20,391

Loans		719,785		706,799		635,566		589,591		551,335
Less: Unearned income		671		691		471		514		831

Loans, net of unearned income	$	719,114	$	706,108	$	635,095	$	589,077	$	550,504

(1)	For each of the periods presented beginning with December 31, 2009, real estate-construction loans constituted 6.8%, 6.2%, 5.5%, 4.4% and 5.5% of the Company’s total loans, net of unearned income, respectively.

NON-PERFORMING ASSETS

The following table presents information concerning non-performing assets:


	AT DECEMBER 31,
	2009			2008			2007			2006			2005
	(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans
Commercial	$	3,375		$	1,128		$	3,553		$	494		$	2,315
Commercial loans secured by real estate		11,716			484			225			195			318
Real estate-mortgage		1,639			1,313			875			1,050			1,070
Consumer		386			452			585			547			446

Total		17,116			3,377			5,238			2,286			4,149

Past due 90 days or more and still accruing
Consumer		—			—			—			3			31

Total		—			—			—			3			31

Other real estate owned
Commercial loans secured by real estate		871			701			—			—			—
Real estate-mortgage		350			494			42			3			130
Consumer		—			—			—			—			5

Total		1,221			1,195			42			3			135

Total non-performing assets	$	18,337		$	4,572		$	5,280		$	2,292		$	4,315

Total non-performing assets as a percent of loans and loans held for sale, net of unearned income, and other real estate owned		2.53	%		0.65	%		0.83	%		0.39	%		0.78	%
Total restructured loans (included in non-accrual loans above)	$	9,602		$	1,360		$	1,217		$	1,302		$	258

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

The following table sets forth, for the periods indicated, (1) the gross interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period, (2) the amount of interest income actually recorded on such loans, and (3) the net reduction in interest income attributable to such loans.


	YEAR ENDED DECEMBER 31,
	2009			2008		2007			2006			2005
	(IN THOUSANDS)
Interest income due in accordance with original terms	$	553		$	198	$	215		$	214		$	213
Interest income recorded		(75	)		—		(24	)		(55	)		(12	)

Net reduction in interest income	$	478		$	198	$	191		$	159		$	201

DEPOSITS

The following table sets forth the average balance of the Company’s deposits and average rates paid thereon for the past three calendar years:


	AT DECEMBER 31,
	2009				2008				2007
	(IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
Non-interest bearing	$	114,473	—	%	$	110,601	—	%	$	105,306	—	%
Interest bearing		62,494	0.41			64,683	1.01			67,132	1.76
Savings		72,350	0.73			70,255	0.76			71,922	0.76
Money market		169,823	1.44			107,843	2.24			158,947	3.80
Other time		343,841	2.88			341,185	3.54			346,134	4.34

Total deposits	$	762,981	2.02		$	694,567	2.69		$	749,441	3.54

Interest expense on deposits consisted of the following:


	YEAR ENDED DECEMBER 31,
	2009		2008		2007
	(IN THOUSANDS)
Interest bearing demand	$	256	$	653	$	1,184
Savings		530		535		549
Money market		2,437		2,417		6,040
Certificates of deposit in denominations of $100,000 or more		1,186		1,744		1,774
Other time		8,700		10,331		13,264

Total interest expense	$	13,109	$	15,680	$	22,811

Additionally, the following table provides more detailed maturity information regarding certificates of deposit issued in denominations of $100,000 or more as of December 31, 2009:

MATURING IN:


	(IN THOUSANDS)
Three months or less	$	13,140
Over three through six months		17,667
Over six through twelve months		5,192
Over twelve months		9,170

Total	$	45,169

FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS

The outstanding balances and related information for federal funds purchased and other short-term borrowings are summarized as follows:


	AT DECEMBER 31, 2009
	FEDERAL FUNDS PURCHASED			OTHER SHORT-TERM BORROWINGS
	(IN THOUSANDS, EXCEPT RATES)
Balance	$	—		$	25,775
Maximum indebtedness at any month end		5,968			54,649
Average balance during year		1,358			19,670
Average rate paid for the year		0.50	%		0.67	%
Interest rate on year end balance		—			0.62


	AT DECEMBER 31, 2008
	FEDERAL FUNDS PURCHASED			OTHER SHORT-TERM BORROWINGS
	(IN THOUSANDS, EXCEPT RATES)
Balance	$	—		$	119,920
Maximum indebtedness at any month end		5,685			138,855
Average balance during year		20			71,617
Average rate paid for the year		3.16	%		1.96	%
Interest rate on year end balance		—			0.60


	AT DECEMBER 31, 2007
	FEDERAL FUNDS PURCHASED			OTHER SHORT-TERM BORROWINGS
	(IN THOUSANDS, EXCEPT RATES)
Balance	$	—		$	72,210
Maximum indebtedness at any month end		3,430			74,095
Average balance during year		99			19,745
Average rate paid for the year		5.18	%		4.89	%
Interest rate on year end balance		—			3.88

Average amounts outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances.

These borrowing transactions can range from overnight to one year in maturity. The average maturity was two days at the end of 2009, 2008, and 2007.

ITEM 1A.

RISK FACTORS

Not applicable.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

The Company has no unresolved staff comments from the SEC for the reporting periods presented.

ITEM 2.

PROPERTIES

The principal offices of the Company and the Bank occupy the five-story AmeriServ Financial building at the corner of Main and Franklin Streets in Johnstown plus twelve floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 13 other locations which are owned. Eight additional locations are leased with terms expiring from February 16, 2010 to March 31, 2018.

ITEM 3.

LEGAL PROCEEDINGS

The Company is subject to a number of asserted and unasserted potential legal claims encountered in the normal course of business. In the opinion of both management and legal counsel, there is no present basis to conclude that the resolution of these claims will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted by the Company to its shareholders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

As of January 29, 2010, the Company had 4,138 shareholders of its common stock. AmeriServ Financial, Inc.’s common stock is traded on the NASDAQ Global Market System under the symbol “ASRV.” The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:


	PRICES				CASH DIVIDENDS DECLARED
	HIGH		LOW		CASH DIVIDENDS DECLARED
Year ended December 31, 2009:
First Quarter	$	1.99	$	1.43	$	0.00
Second Quarter		1.88		1.56		0.00
Third Quarter		2.09		1.54		0.00
Fourth Quarter		1.97		1.46		0.00
Year ended December 31, 2008:
First Quarter	$	3.30	$	2.21	$	0.00
Second Quarter		3.08		2.60		0.00
Third Quarter		2.98		2.37		0.00
Fourth Quarter		2.85		1.59		0.025

See Capital Resources section of the MD&A for dividend restriction information. Information required by this section is presented in the “Capital Equity Compensation Plan Information Table” section of the Proxy Statement for the Annual Meeting of Shareholders.

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA


	AT OR FOR THE YEAR ENDED DECEMBER 31,
	2009			2008		2007		2006			2005
	(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income	$	47,455		$	47,819	$	49,379	$	46,565		$	45,865
Total interest expense		15,021			18,702		25,156		22,087			21,753

Net interest income		32,434			29,117		24,223		24,478			24,112
Provision for loan losses		15,150			2,925		300		(125	)		(175	)

Net interest income after provision for loan losses		17,284			26,192		23,923		24,603			24,287
Total non-interest income		13,928			16,424		14,707		12,841			10,209
Total non-interest expense		39,157			35,637		34,672		34,692			49,420

Income (loss) from continuing operations before income taxes		(7,945	)		6,979		3,958		2,752			(14,924	)
Provision (benefit) for income taxes		(3,050	)		1,470		924		420			(5,902	)

Income (loss) from continuing operations		(4,895	)		5,509		3,034		2,332			(9,022	)
Loss from discontinued operations, net of income taxes*		—			—		—		—			(119	)

Net income (loss)	$	(4,895	)	$	5,509	$	3,034	$	2,332		$	(9,141	)

PER COMMON SHARE DATA FROM CONTINUING OPERATIONS:
Basic earnings (loss) per share	$	(0.28	)	$	0.25	$	0.14	$	0.11		$	(0.44	)
Diluted earnings (loss) per share		(0.28	)		0.25		0.14		0.11			(0.44	)
PER COMMON SHARE DATA FROM DISCONTINUED OPERATIONS*:
Basic loss per share	$	—		$	—	$	—	$	—		$	(0.01	)
Diluted loss per share		—			—		—		—			(0.01	)
PER COMMON SHARE DATA:
Basic earnings (loss) per share	$	(0.28	)	$	0.25	$	0.14	$	0.11		$	(0.45	)
Diluted earnings (loss) per share		(0.28	)		0.25		0.14		0.11			(0.45	)
Cash dividends declared		0.00			0.025		0.00		0.00			0.00
Book value at period end		4.09			4.39		4.07		3.82			3.82
BALANCE SHEET AND OTHER DATA:
Total assets	$	970,026		$	966,929	$	904,878	$	895,992		$	880,176
Loans and loans held for sale, net of unearned income		722,904			707,108		636,155		589,435			550,602
Allowance for loan losses		19,685			8,910		7,252		8,092			9,143
Investment securities available for sale		131,272			126,781		140,582		172,223			201,569
Investment securities held to maturity		11,611			15,894		18,533		20,657			30,355
Deposits		786,011			694,956		710,439		741,755			712,665
Total borrowings		64,664			146,863		95,200		63,122			77,256
Stockholders’ equity		107,254			113,252		90,294		84,684			84,474
Full-time equivalent employees		345			353		351		369			378

*	The Company sold its remaining mortgage servicing rights of Standard Mortgage Corporation, its former mortgage servicing subsidiary, in December 2004 and incurred discontinued operations activity of this non-core business in 2005.


	AT OR FOR THE YEAR ENDED DECEMBER 31,
	2009		2008		2007		2006		2005
SELECTED FINANCIAL RATIOS:
Return on average total equity	(4.33	)%	5.93	%	3.51	%	2.74	%	(10.77	)%
Return on average assets	(0.51	)	0.62		0.34		0.27		(0.95	)
Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end	91.97		101.75		89.54		79.46		77.26
Ratio of average total equity to average assets	11.72		10.40		9.79		9.73		8.80
Common stock cash dividends as a percent of net income available to common shareholders	—		9.92		—		—		—
Interest rate spread	3.37		3.21		2.54		2.67		2.39
Net interest margin	3.72		3.64		3.06		3.12		2.76
Allowance for loan losses as a percentage of loans and loans held for sale, net of unearned income, at period end	2.72		1.26		1.14		1.37		1.66
Non-performing assets as a percentage of loans, loans held for sale and other real estate owned, at period end	2.53		0.65		0.83		0.39		0.78
Net charge-offs as a percentage of average loans and loans held for sale	0.60		0.20		0.19		0.16		0.11
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits	(1.12	)X	3.17	X	2.60	X	1.93	X	(1.35	)X
Including interest on deposits	0.53		1.37		1.16		1.12		0.05
Cumulative one year interest rate sensitivity gap ratio, at period end	1.08		1.10		0.90		0.85		0.89

(1)

The ratio of earnings to fixed charges and preferred dividends is computed by dividing the sum of income before taxes, fixed charges, and preferred dividends by the sum of fixed charges and preferred dividends. Fixed charges represent interest expense and are shown as both excluding and including interest on deposits.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The following discussion and analysis of financial condition and results of operations of AmeriServ Financial, Inc. (AmeriServ) should be read in conjunction with the consolidated financial statements of AmeriServ Financial, Inc. including the related notes thereto, included elsewhere herein.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007

2009 SUMMARY OVERVIEW:

On January 26, 2010, AmeriServ announced a net loss for the fourth quarter of 2009 of $1.7 million or $0.09 per share. This quarterly loss increased the net loss for 2009 to $4.9 million or $0.28 per share compared to net income of $5.5 million or $0.25 per share reported for 2008. It is our job to provide an analysis of the 2009 challenges and our responses to those challenges. But first a few comments on the economy and the steps that AmeriServ has been taking to position the Company to be a healthy survivor of this economic downturn.

Many people are aware of the increases in unemployment and the difficulties being experienced by small and medium sized businesses around the nation as well as in this region. The banking industry has presented a rather confused story of late. As the quarter progressed, the media noted that the Wall Street banks were emphasizing their trading activities, instead of traditional banking in order to rebuild their revenues. Their trading profits, along with a series of shareholder diluting capital infusions, permitted them to repay their TARP injections from the U.S. Treasury so that they could continue to practice their much criticized executive compensation programs. However, at the same time, the banking supervisors continued to classify more community banks as troubled and continued to close banks in the fourth quarter. It was probably inevitable that the brush fire that began on Wall Street in securitized subprime residential mortgages would grow and eventually impact Main Street where community banks live. Faced with this spreading recession, community banks have necessarily focused on their fundamental safety and soundness.

So it has been here at AmeriServ. Even though this Western Pennsylvania region had not been a participant in the so called economic “bubble,” the resulting recession has also spread to this region. So as to increase the level of vigilance, in September, the AmeriServ Board of Directors and management established an asset quality task force and charged it with the responsibility to examine and critique the entire loan portfolio. The task force was instructed to recommend setting aside the appropriate level of allowance for loan losses for any loan weakened by the recession. This review has been completed, but the task force will remain active in 2010 for we do not believe that the economy has yet entered a period of sustained recovery. Guided by the task force recommendations, AmeriServ added $3.8 million in the fourth quarter to the allowance for loan losses insuring that this represents over 100% coverage of the total of non-performing loans. This concentrated focus on asset quality actually resulted in a reduction of $5.4 million in the total of non-performing assets when compared with September 30, 2009. We believe that this coldly realistic policy will provide the necessary level of reserves for these times and reduce the likelihood of unpleasant surprises.

It is also common knowledge that the wealth management business has been through something of a firestorm as a consequence of the recession. Therefore, AmeriServ has also taken specific actions to strengthen our trust and wealth management subsidiaries. Beginning in October 2009, a nationally known consulting firm has been performing a comprehensive study of the Trust Company from top to bottom. This study is focused on strategic issues, but also on the day-to-day operating and compliance issues. The Boards and management received this study just recently and are now building a timeline during which to implement the recommendations. The year 2010 is a year for the Trust Company to re-invent itself so that it can be an active participant in its various markets. A part of that re-invention is a search for a successor to the retiring Trust Company CEO.

You should also know that the fourth quarter has not been just studying things and fixing things. AmeriServ has been quite active in the business of banking. During the fourth quarter, the Company:

•

originated $55 million of new loans, including $23 million of residential mortgages in this region,

•

increased its core deposit base by $6.8 million, further maintaining its position as the market leader in deposits in its primary market,

•

concluded a new 4 year collective bargaining agreement with its unionized work force, ensuring a united staff focused on customer service for years to come,

•

received the necessary approvals to begin construction of our third full service retail banking branch in State College, PA,

•

began an effort to emphasize the marketing and sales of business services, to improve our visibility in the business community, and

•

completed a seamless transition between our retiring President and Chief Executive Officer, Allan R. Dennison, and his successor, Glenn L. Wilson.

Just another word about these difficult times for community banks. It has been the keystone of the AmeriServ Turnaround strategy to maintain a conservative balance sheet and to deal with problem situations swiftly and completely. This has meant emphasizing our core deposit strength, limiting the geographical radius of our lending activities and emphasizing the growth of Trust business revenue and profitability. We try to always keep three goals in mind:

•

Maintain an Allowance for Loan Losses equal to at least 100% of Non-Performing Loans. We ended 2009 with a coverage of 115%

•

Surpass all required regulatory Capital Ratios and report these to shareholders publicly each quarter. AmeriServ also met this goal as of year-end 2009

•

Ensure strong liquidity. While there is no commonly accepted liquidity measure in our industry, our Board Investment/ALCO Committee examines this calculation regularly and, as of year-end 2009, AmeriServ reported strong liquidity.

We hope that this recession will pass soon so that we can get back to growing the franchise. But as long as the troubles continue we will continue to concentrate on the safety and soundness of this institution and position AmeriServ to be one of the strong survivors.

PERFORMANCE OVERVIEW... The following table summarizes some of the Company’s key profitability performance indicators for each of the past three years.


	YEAR ENDED DECEMBER 31,
	2009			2008			2007
	(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Net income (loss)	$	(4,895	)	$	5,509		$	3,034
Diluted earnings (loss) per share		(0.28	)		0.25			0.14
Return on average assets		(0.51	)%		0.62	%		0.34	%
Return on average equity		(4.33	)		5.93			3.51

The Company reported a net loss of $4.9 million or $0.28 loss per diluted common share for 2009. This represents a decrease of $10.4 million from the 2008 net income of $5.5 million or $0.25 per diluted common share. Diluted earnings per share declined more significantly than net income due to the preferred dividend requirement on the CPP preferred stock purchased by the U.S. Treasury under its TARP program in 2009, which amounted to $1.0 million and reduced the amount of net income available to common shareholders. An increased provision for loan losses, reduced non-interest income, and higher non-interest expenses were the main factors causing the decrease in net income in 2009. These negative items more than offset good growth in net interest income that resulted from solid loan and deposit growth within our retail Bank and effective balance sheet management in a declining interest rate environment.

The Company reported net income of $5.5 million or $0.25 per diluted share for 2008. This represented an increase of $2.5 million or 82% over 2007 net income of $3.0 million or $0.14 per diluted share. The Company’s return on assets improved to 0.62% in 2008 compared to 0.34% in 2007. Conservative balance sheet positioning allowed AmeriServ to report improved financial performance during a historic period of turmoil and crisis within the financial markets. The growth in earnings in 2008 was driven by increased net interest income and higher non-interest revenue, which more than offset an increased provision for loan losses and higher non-interest expenses.

NET INTEREST INCOME AND MARGIN... The Company’s net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company’s earnings; it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. The following table summarizes the Company’s net interest income performance for each of the past three years:


	YEAR ENDED DECEMBER 31,
	2009			2008			2007
	(IN THOUSANDS, EXCEPT RATIOS)
Interest income	$	47,455		$	47,819		$	49,379
Interest expense		15,021			18,702			25,156

Net interest income		32,434			29,117			24,223
Net interest margin		3.72	%		3.64	%		3.06	%

2009 NET INTEREST PERFORMANCE OVERVIEW… The Company’s net interest income in 2009 increased by $3.3 million, or 11.4%, from 2008 and the net interest margin rose by 8 basis points to 3.72% over the same comparative period. The increased net interest income and margin resulted from a combination of good balance sheet growth and the pricing benefits achieved from a steeper yield curve in 2009. Specifically, total loans averaged $725 million in 2009, an increase of $83 million or 13.0% over 2008. This growth caused overall loan interest revenue to increase in 2009 despite the lower interest rate environment. The Company’s strong liquidity position has been supported by total deposits that averaged $763 million in 2009, an increase of $68 million or 9.8% over 2008. The Company believes that uncertainties in the financial markets and the economy have contributed to growth in money market accounts, certificates of deposit, and demand deposits as consumers have looked for safety in well capitalized community banks like AmeriServ Financial Bank. Additionally, the Company also benefited from a favorable $3.7 million decline in interest expense caused by the more rapid downward repricing of both deposits and Federal Home Loan Bank borrowings due to the market decline in short-term interest rates.

COMPONENT CHANGES IN NET INTEREST INCOME: 2009 VERSUS 2008… Regarding the separate components of net interest income, the Company’s total interest income in 2009 decreased by $364,000 when compared to 2008. This decrease was due to a 52 basis point decline in the earning asset yield to 5.44%, that was partially mitigated by a $79 million increase in average earning assets due to the previously mentioned strong loan growth. Within the earning asset base, the yield on the total loan portfolio decreased by 65 basis points to 5.72% and reflects the lower interest rate environment in 2009 as the Federal Reserve has reduced the federal

funds rate by approximately 200 basis points in response to the financial market crisis that hit in last year’s third quarter. The total investment securities yield decreased by 5 basis points to 4.08% while the yield on short-term money market funds dropped by 161 basis points to 0.35%. Both of these yield drops also reflect the lower interest rate environment in 2009.

The $79 million, or 9.9%, increase in the volume of average earning assets was due to an $83 million, or 13.0%, increase in average loans, partially offset by a $7 million, or 4.9%, decrease in average investment securities. This loan growth was driven by increased commercial real estate loans as a result of successful new business development efforts, particularly in the suburban Pittsburgh market. The Company found increased commercial lending opportunities in the Pittsburgh market in the second half of 2008 and first half of 2009 due to the retrenchment of several larger competitors as a result of the turmoil in the financial markets. This loan growth caused the Company’s loan to deposit ratio to average 95.1% in 2009 compared to 92.4% in 2008. The decline in investment securities was caused by the call of certain agency securities and ongoing cash flow from mortgage-backed securities. The Company has elected to utilize this cash from lower yielding investment securities to fund higher yielding loans in an effort to improve the Company’s earning asset yield and net interest margin. The Company, however, does not expect the investment securities portfolio to shrink any further in 2010 in order to maintain sufficient security balances for pledging purposes.

The Company’s total interest expense for 2009 decreased by $3.7 million, or 19.7%, when compared to 2008. This decrease in interest expense was due to a lower cost of funds as the cost of both deposits and borrowings repriced downward with the reductions in short-term interest rates. Specifically, the cost of interest bearing deposits declined by 67 basis points to 2.02%, while the cost of all FHLB borrowings dropped by 106 basis points to 1.22%. This decrease in funding costs more than offset the additional interest expense associated with a $46 million increase in the volume of interest bearing liabilities due to the previously mentioned deposit growth. Additionally, the Company’s funding mix also benefited from a $3.9 million increase in non-interest bearing demand deposits. Overall, in 2009 the Company had the discipline to further reduce its reliance on borrowings as a funding source as wholesale borrowings averaged only 6.7% of total assets. The Company also does not use brokered certificates of deposit as a funding source.

2008 NET INTEREST PERFORMANCE OVERVIEW… The Company’s net interest income in 2008 increased by $4.9 million, or 20.2%, from the prior year and the net interest margin was up by 58 basis points over the same comparative period. The Company’s balance sheet positioning allowed it to benefit from the significant Federal Reserve reductions in short-term interest rates and the return to a more traditional positively sloped yield curve. As a result of these changes, the Company’s interest expense on deposits and borrowings declined at a faster rate than the interest income on loans and investments. Additionally, an improved earning asset mix with fewer investment securities and more loans outstanding also contributed to the increased net interest income and margin in 2008. Total loans increased by $71 million or 11.1% with $43 million of the growth occurring during the fourth quarter of 2008 as we were able to extend credit to quality borrowers within the communities in which we operate.

COMPONENT CHANGES IN NET INTEREST INCOME: 2008 VERSUS 2007… Regarding the separate components of net interest income, the Company’s total interest income for 2008 decreased by $1.6 million when compared to 2007. This decrease was due to a 27 basis point decrease in the earning asset yield to 5.96%. Within the earning asset base, the yield on the total loan portfolio decreased by 45 basis points to 6.37% and reflects the lower interest rate environment in 2008 as the Federal Reserve reduced the federal funds rate by 400 basis points during 2008. The total investment securities yield, however, increased by five basis points to 4.13%. The Company took advantage of the positively sloped yield curve in the second quarter of 2008 to position the investment portfolio for better future earnings by selling some of the lower yielding securities in the portfolio at a loss and replacing them with higher yielding securities with a modestly longer duration.

The $8.8 million increase in the volume of average earning assets was due to a $34.3 million, or 5.6%, increase in average loans partially offset by a $21.6 million, or 12.3%, decrease in average investment securities. The loan growth was driven by increased commercial real estate loans as a result of successful new business

development efforts particularly in the suburban Pittsburgh market. The Company has found increased commercial lending opportunities in the Pittsburgh market in 2008 due to the retrenchment of several larger competitors as a result of the turmoil in the financial markets. The decline in investment securities was caused by the call of certain agency securities and ongoing cash flow from mortgage-backed securities. The Company has elected to utilize this cash from lower yielding securities to fund higher yielding loans in an effort to improve the Company’s earning asset yield.

The Company’s total interest expense for 2008 decreased by $6.5 million, or 25.7%, when compared to 2007. This decrease in interest expense was due to a lower cost of funds. The total cost of funds for 2008 declined by 94 basis points to 2.75% and was driven down by lower short-term interest rates and a more favorable funding mix in 2008. Specifically, the costs of interest bearing deposits decreased by 85 basis points to 2.69% while the cost of short-term borrowings dropped by 293 basis points to 1.96%. Total average interest bearing deposits decreased by $60.2 million or 9.3% due almost entirely to a decline in Trust Company specialty deposits as wholesale borrowings provided the Company with a lower cost funding source than these deposits for the majority of 2008. Wholesale borrowings averaged 9.3% of total assets in 2008. Additionally, the Company’s funding mix also benefited from a $5.3 million increase in non-interest bearing demand deposits and an increase in retail money market deposits as customers had opted for short-term liquidity during this period of volatility and decline in the equity markets.

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) interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables loan balances include non-accrual loans, and interest income recorded on non-accrual loans on a cash basis, which is deemed to be immaterial, is included in interest income. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of approximately 34% is used to compute tax-equivalent yields.


	YEAR ENDED DECEMBER 31,
	2009								2008								2007
	AVERAGE BALANCE			INTEREST INCOME/ EXPENSE			YIELD/ RATE		AVERAGE BALANCE			INTEREST INCOME/ EXPENSE			YIELD/ RATE		AVERAGE BALANCE			INTEREST INCOME/ EXPENSE			YIELD/ RATE
	(IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning assets:
Loans, net of unearned income	$	725,241		$	41,488		5.72	%	$	641,766		$	41,100		6.37	%	$	607,507		$	41,654		6.82	%
Deposits with banks		1,782			4		0.23			583			13		2.23			500			20		4.00
Federal funds sold		490			1		0.11			114			4		3.54			2,278			121		5.26
Short-term investment in money market funds		9,022			30		0.35			7,136			140		1.96			8,857			203		2.29
Investment securities:
Available for sale		131,804			5,340		4.05			136,344			5,770		4.03			155,003			6,433		3.96
Held to maturity		14,346			630		4.36			17,292			875		5.06			20,257			1,039		5.04

Total investment securities		146,150			5,970		4.08			153,636			6,645		4.13			175,260			7,472		4.08

TOTAL INTEREST EARNING ASSETS/ INTEREST INCOME		882,685			47,493		5.44			803,235			47,902		5.96			794,402			49,470		6.23

Non-interest earning assets:
Cash and due from banks		14,498								16,786								17,750
Premises and equipment		9,213								9,333								8,623
Other assets		72,574								72,249								70,369
Allowance for loan losses		(13,382	)							(7,837	)							(7,755	)

TOTAL ASSETS	$	965,588							$	893,766							$	883,389

Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand	$	62,494		$	256		0.41	%	$	64,683		$	654		1.01	%	$	67,132		$	1,184		1.76	%
Savings		72,350			530		0.73			70,255			535		0.76			71,922			549		0.76
Money market		169,823			2,437		1.44			107,843			2,417		2.24			158,947			6,040		3.80
Other time		343,841			9,886		2.88			341,185			12,074		3.54			346,134			15,038		4.34

Total interest bearing deposits		648,508			13,109		2.02			583,966			15,680		2.69			644,135			22,811		3.54

Federal funds purchased and other short-term borrowings		21,028			140		0.67			71,636			1,403		1.96			19,844			972		4.89
Advances from Federal Home Loan Bank		43,934			652		1.48			11,725			499		4.26			4,852			253		5.22
Guaranteed junior subordinated deferrable interest debentures		13,085			1,120		8.57			13,085			1,120		8.57			13,085			1,120		8.57

TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE		726,555			15,021		2.07			680,412			18,702		2.75			681,916			25,156		3.69

Non-interest bearing liabilities:
Demand deposits		114,473								110,601								105,306
Other liabilities		11,428								9,816								9,703
Stockholders’ equity		113,132								92,937								86,464

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	965,588							$	893,766							$	883,389

Interest rate spread							3.37								3.21								2.54
Net interest income/net interest margin					32,472		3.72	%					29,200		3.64	%					24,314		3.06	%
Tax-equivalent adjustment					(38	)							(83	)							(91	)

Net interest income				$	32,434							$	29,117							$	24,223

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.


	2009 vs. 2008									2008 vs. 2007
	INCREASE (DECREASE) DUE TO CHANGE IN:									INCREASE (DECREASE) DUE TO CHANGE IN:
	AVERAGE VOLUME			RATE			TOTAL			AVERAGE VOLUME			RATE			TOTAL
	(IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned income	$	1,146		$	(758	)	$	388		$	3,258		$	(3,812	)	$	(554	)
Deposits with banks		15			(24	)		(9	)		4			(11	)		(7	)
Federal funds sold		9			(12	)		(3	)		(87	)		(30	)		(117	)
Short-term investments in money market funds		(78	)		(32	)		(110	)		(36	)		(27	)		(63	)
Investment securities:
Available for sale		(156	)		(274	)		(430	)		(777	)		114			(663	)
Held to maturity		(265	)		20			(245	)		(169	)		5			(164	)

Total investment securities		(421	)		(254	)		(675	)		(946	)		119			(827	)

Total interest income		671			(1,080	)		(409	)		2,193			(3,761	)		(1,568	)

INTEREST PAID ON:
Interest bearing demand deposits		(410	)		12			(398	)		(42	)		(489	)		(531	)
Savings deposits		(5	)		—			(5	)		(14	)		—			(14	)
Money market		526			(506	)		20			(1,591	)		(2,032	)		(3,623	)
Other time deposits		(2,158	)		(30	)		(2,188	)		(213	)		(2,751	)		(2,964	)
Federal funds purchased and other short-term borrowings		(1,916	)		653			(1,263	)		561			(129	)		432
Advances from Federal Home Loan Bank		1,046			(893	)		153			283			(37	)		246

Total interest expense		(2,917	)		(764	)		(3,681	)		(1,016	)		(5,438	)		(6,454	)

Change in net interest income	$	3,588		$	(316	)	$	3,272		$	3,209		$	1,677		$	4,886

LOAN QUALITY… AmeriServ Financial’s written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. 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 loan relationships with aggregate balances in excess of $250,000 within a 12-month period. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business loans $250,000 or less, 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 following table sets forth information concerning AmeriServ’s loan delinquency and other non-performing assets.


	AT DECEMBER 31,
	2009			2008			2007
	(IN THOUSANDS, EXCEPT PERCENTAGES)
Total loan past due 30 to 89 days	$	11,408		$	4,396		$	3,559
Total non-accrual loans		17,116			3,377			5,238
Total non-performing assets(1)		18,337			4,572			5,280
Loan delinquency as a percentage of total loans and loans held for sale, net of unearned income		1.58	%		0.62	%		0.56	%
Non-accrual loans as a percentage of total loans and loans held for sale, net of unearned income		2.37			0.48			0.82
Non-performing assets as a percentage of total loans and loans held for sale, net of unearned income, and other real estate owned		2.53			0.65			0.83
Non-performing assets as a percentage of total assets		1.89			0.47			0.58
Total classified loans (loans rated substandard or doubtful)	$	48,689		$	13,235		$	10,839

(1)	Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as to interest and principal payments and (iii) other real estate owned.

As a result of the recessionary economy, non-performing assets and delinquency levels have trended upward over the past year, specifically, non-performing assets have increased by $13.8 million and now total $18.3 million or 2.53% of total loans. Three credits were primarily responsible for the increased level of non-performing assets: First, in response to the Shared National Credit Examination, the Company transferred a $9.6 million commercial loan relationship to a borrower in the restaurant industry to non-accrual status. The Company restructured this loan at its maturity by entering into a forbearance agreement with the borrower to make reduced payments over a six-month period in an effort to give the borrower greater flexibility to restructure its operations to improve its cash flows during this difficult economic period. The Company has never had any payment delinquency with this borrower. Recently, the borrower has resumed making normal principal and interest payments in accordance with the terms of the forbearance agreement. A $3.4 million specific reserve has been established against this credit. Second, a $3.0 million loan to a borrower in the heavy construction equipment rental business was transferred to non-accrual status. This borrower was experiencing cash flow difficulties that caused payment delinquency. A $1.1 million specific reserve has been established against this credit. Third, a $2.3 million land development loan related to a lake property in Western Pennsylvania. Interest on the loan since origination had been paid through an interest reserve funded via proceeds from the loan. Development of the land has not proceeded according to schedule and the Company elected to transfer this commercial loan into non-accrual status during the fourth quarter. A $461,000 reserve has been established against this credit.

The remainder of the total $35 million increase in classified loans was caused by the downgrade of the rating classification of numerous commercial loans that are experiencing operating weakness in the recessionary economy but are still performing. These downgrades reflected the receipt of the most current financial data we could obtain from our commercial borrowers to determine what impact the recessionary economy had on their financial performance. Included in this amount was another $5 million credit to a large national industrial company that was downgraded to substandard in the third quarter of 2009, as a result of the Shared National Credit Examination. We continue to closely monitor the portfolio given the recessionary economy and the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As of December 31, 2009, the 25 largest credits represented 31.1% of total loans outstanding. Additionally, the Company had no performing loans that were considered restructured for the periods presented.

ALLOWANCE AND PROVISION FOR LOAN LOSSES... As described in more detail in the Critical Accounting Policies and Estimates section of this MD&A, the Company uses a comprehensive methodology and procedural discipline to maintain an allowance for loan losses to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: 1) an allowance established on specifically identified problem loans, 2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors which include delinquency and non-performing loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and 3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Bank’s loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company’s management to establish allocations which accommodate each of the listed risk factors. The following table sets forth changes in the allowance for loan losses and certain ratios for the periods ended.


	YEAR ENDED DECEMBER 31,
	2009			2008			2007			2006			2005
	(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year	$	8,910		$	7,252		$	8,092		$	9,143		$	9,893
Charge-offs:
Commercial		(3,810	)		(405	)		(934	)		(769	)		(214	)
Commercial loans secured by real estate		(840	)		(811	)		(12	)		(2	)		(113	)
Real estate-mortgage		(128	)		(132	)		(79	)		(76	)		(145	)
Consumer		(352	)		(365	)		(307	)		(397	)		(403	)

Total charge-offs		(5,130	)		(1,713	)		(1,332	)		(1,244	)		(875	)

Recoveries:
Commercial		601			299			40			115			77
Commercial loans secured by real estate		14			39			38			41			15
Real estate-mortgage		27			26			12			19			52
Consumer		113			82			102			143			156

Total recoveries		755			446			192			318			300

Net charge-offs		(4,375	)		(1,267	)		(1,140	)		(926	)		(575	)
Provision for loan losses		15,150			2,925			300			(125	)		(175	)

Balance at end of year	$	19,685		$	8,910		$	7,252		$	8,092		$	9,143

Loans and loans held for sale, net of unearned income:
Average for the year	$	725,241		$	644,896		$	610,685		$	567,435		$	528,545
At December 31		722,904			707,108			636,155			589,435			550,602
As a percent of average loans and loans held for sale:
Net charge-offs		0.60	%		0.20	%		0.19	%		0.16	%		0.11	%
Provision for loan losses		2.09			0.45			0.05			(0.02	)		(0.03	)
Allowance as a percent of each of the following:
Total loans and loans held for sale, net of unearned income		2.72			1.26			1.14			1.37			1.66
Total delinquent loans (past due 30 to 89 days)		172.55			202.68			203.77			270.54			209.65
Total non-accrual loans		115.01			263.84			138.45			353.98			220.37
Total non-performing assets		107.35			194.88			137.35			353.05			211.89
Allowance as a multiple of net charge-offs		4.50	x		7.03	x		6.36	x		8.74	x		15.90	x

The Company appropriately strengthened its allowance for loan losses in 2009 in response to deterioration in asset quality. As previously discussed, this deterioration in asset quality in 2009 was evidenced by higher levels of non-performing loans and classified loans than in 2008 and reflects the results of a comprehensive review of loans in the commercial loan and commercial real estate portfolio in the second half of 2009. Overall, the Company recorded a $15.2 million provision for loan losses in 2009, compared to a $2.9 million provision for 2008, or an increase of $12.2 million. Actual credit losses realized through charge-off, however, are running well below the provision level, but are higher than the prior year. For 2009, net charge-offs amounted to $4.4 million or 0.60% of total loans, compared to net charge-offs of $1.3 million or 0.20% of total loans for 2008. Of the 2009 net charge-offs, $3.3 million was realized in the fourth quarter and reflected the resolution of one of the Company’s larger non-performing loans. In summary, the allowance for loan losses provided 115% coverage of non-performing loans and was 2.72% of total loans at December 31, 2009, compared to 264% of non-performing loans and 1.26% of total loans at December 31, 2008.

The Company recorded a $2.9 million loan loss provision for 2008 compared to a $300,000 loan loss provision for 2007. The higher loan provision in 2008 was caused by the Company’s decision to strengthen its allowance for loan losses due to the downgrade of the rating classification of several specific performing commercial loans, uncertainties in the local and national economies and strong growth in total loans in 2008. Overall net charge-offs have trended upward over the past several years. Specifically, for 2008, net charge-offs amounted to $1.3 million or 0.20% of total loans compared to net charge-offs of $1.1 million or 0.19% of total loans for 2007.

The following schedule sets forth the allocation of the allowance for loan losses among various loan categories. This allocation is determined by using the consistent quarterly procedural discipline that was previously discussed. The entire allowance for loan losses is available to absorb future loan losses in any loan category.


	AT DECEMBER 31,
	2009				2008				2007				2006				2005
	AMOUNT		PERCENT OF LOANS IN EACH CATEGORY TO LOANS		AMOUNT		PERCENT OF LOANS IN EACH CATEGORY TO LOANS		AMOUNT		PERCENT OF LOANS IN EACH CATEGORY TO LOANS		AMOUNT		PERCENT OF LOANS IN EACH CATEGORY TO LOANS		AMOUNT		PERCENT OF LOANS IN EACH CATEGORY TO LOANS
	(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial	$	4,756	13.3	%	$	2,841	15.6	%	$	2,074	18.7	%	$	2,361	15.6	%	$	3,312	14.6	%
Commercial loans secured by real estate		12,692	54.9			4,467	50.0			3,632	44.8			3,546	45.8			3,644	45.3
Real estate-mortgage		314	29.2			325	31.1			316	33.9			424	35.6			381	36.5
Consumer		905	2.6			925	3.3			835	2.6			1,000	3.0			1,022	3.6
Allocation to general risk		1,018	—			352	—			395	—			761	—			784	—

Total	$	19,685	100.0	%	$	8,910	100.0	%	$	7,252	100.0	%	$	8,092	100.0	%	$	9,143	100.0	%

Even though residential real estate-mortgage loans comprise 29.2% of the Company’s total loan portfolio, only $314,000 or 1.6% 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.

Based on the Company’s allowance for loan loss methodology and the related assessment of the inherent risk factors contained within the Company’s loan portfolio, we believe that the allowance for loan losses was adequate at December 31, 2009 to cover losses within the Company’s loan portfolio.

NON-INTEREST INCOME... Non-interest income for 2009 totalled $13.9 million; a decrease of $2.5 million, or 15.2%, from 2008. Factors contributing to this reduced level of non-interest income in 2009 included:

•

a $1.5 million decrease in revenue from bank owned life insurance (BOLI) due to fewer death claim payments in 2009.

•

a $1.2 million, or 16.2%, decline in trust and investment advisory fees due to reductions in the market value of assets managed due to lower equity and real estate values in 2009.

•

a $174,000, or 36.5%, increase in gains realized on residential mortgage loan sales into the secondary market in 2009. As a result of increased mortgage purchase and refinance activity in the Company’s primary market, there were $66 million of residential mortgage loans sold into the secondary market in 2009 compared to $37 million in 2008. Overall, the Company sold approximately 70% of its new residential mortgage loan production into the secondary market in 2009 in an effort to limit longer term interest rate risk.

•

the Company took advantage of market opportunities and generated $164,000 of gains on the sale of investment securities in 2009 compared to a $95,000 loss on a portfolio repositioning strategy executed in 2008.

Non-interest income for 2008 totaled $16.4 million; an increase of $1.7 million, or 11.7%, from 2007. Factors contributing to this increased level of non-interest income in 2008 included:

•

a $1.4 million increase in revenue from bank owned life insurance due to increased payments of death claims in 2008.

•

a $170,000 increase in gains on loans held for sale due to increased residential mortgage loan sales into the secondary market in 2008. There were $37.5 million of residential mortgage loans sold into the secondary market in 2008 compared to $26.7 million in 2007.

•

a $490,000, or 19.0%, increase in deposit service charges due to increased overdraft fees and greater service charge revenue that resulted from a realignment of the Bank’s checking accounts to include more fee based products.

•

a $195,000 decrease in investment advisory fees as a result of a drop in assets under management due to the declines experienced in the equity markets in 2008.

NON-INTEREST EXPENSE... Non-interest expense for 2009 totalled $39.2 million; a $3.5 million, or 9.9%, increase from 2008. Factors contributing to the higher non-interest expense in 2009 included:

•

a $1.6 million increase in FDIC deposit insurance expense due to the recognition of a $435,000 expense for a special five basis point assessment mandated for all banks and higher recurring insurance premiums due to the need to strengthen the deposit insurance fund.

•

a $1.3 million, or 6.8%, increase in salaries and employee benefits expense due to higher sales related incentive compensation, normal merit increases, severance costs and greater pension expense.

•

Other expense increased by $1.1 million primarily due to credit related costs. Specifically, other real estate owned expense increased by $715,000 due to the write-down and operating costs associated with an increased number of other real-estate owned properties while the Company also had to fund its reserve for unfunded commitments by an additional $118,000 in 2009.

•

a $450,000 increase in professional fees due to higher legal costs, recruitment fees, and greater consulting costs associated with a comprehensive review of the Trust Company in the fourth quarter of 2009.

•

a $757,000 decrease in core deposit amortization as a branch core deposit intangible was fully amortized by the end of the first quarter of 2009.

Non-interest expense for 2008 totaled $35.6 million; a $965,000 or 2.8% increase from 2007. Factors contributing to the higher non-interest expense in 2008 included:

•

a $887,000 increase in other expense was largely caused by the non-recurrence of a favorable $400,000 recovery related to previous mortgage servicing operation that was realized in 2007 and greater marketing, other real estate owned, and telephone expenses in 2008. The higher other real estate expense was due to the Company taking possession of a commercial apartment building in the first half of 2008.

•

a $385,000 increase in professional fees due to higher legal costs related to the Trust Company matters, and higher consulting and other professional fees related to productivity studies in 2008.

•

a $122,000 decrease in salaries and employee benefits due primarily to lower medical insurance premiums in 2008 as a result of a switch in carriers.

•

a $368,000 decrease in equipment expense resulting from the benefits achieved on the migration to a new core data processing operating system and mainframe processor.

•

a $91,000 penalty realized on the prepayment of $6 million of Federal Home Loan Bank debt. This charge resulted from the Company’s decision to retire some higher cost advances and replace them with lower cost current market rate borrowings in order to reduce ongoing interest expense.

INCOME TAX EXPENSE... As a result of the pre-tax loss incurred in 2009, the Company recorded an income tax benefit of $3.1 million or 38.4% compared to income tax expense of $1.5 million or an effective tax rate of 21.1% in 2008. The income tax expense recorded in 2007 was $924,000 or an effective tax rate of 23.3%. The Company was able to record a lower effective tax rate in all periods due to tax-free revenue from BOLI. BOLI is the Company’s largest source of tax-free income. The Company’s deferred tax asset was $15.9 million at December 31, 2009 and relates primarily to net operating loss carryforwards and the allowance for loan losses.

SEGMENT RESULTS... Retail banking’s net income contribution was $948,000 in 2009 compared to $2.7 million in 2008 and $2.0 million in 2007. The lower 2009 net income performance is reflective of increases in FDIC insurance premiums, generally higher other non-interest expenses and reduced non-interest income from BOLI. These negative items more than offset increased net interest income resulting from the growth in deposits achieved in 2009 and improved revenue from residential mortgage loan sales into the secondary market. The 2008 net income is better than 2007 due to the positive impact of increased non-interest revenue in line items such as deposit service charges, bank owned life insurance, and gain on residential mortgage loan sales. Retail banking also benefited from reduced non-interest expenses due to lower salaries/benefits costs and reduced occupancy costs as a result of the consolidation and closing of two offices in our branch network.

The commercial lending segment reported a net loss of $6.4 million in 2009 compared to net income of $2.3 million in 2008 and $3.2 million in 2007. The loss in 2009 was caused by an increased provision for loan losses due to the previously discussed strengthening of the allowance for loan losses as a result of the deterioration in asset quality experienced in 2009. The loan loss provision allocated to this segment was $12.3 million greater in 2009. Non-interest expenses also increased in 2009 due to higher other real-estate owned expenses and other loan work out related costs. These negative items more than offset an increased level of net interest income due to the solid commercial loan growth achieved over the past year. The reduced net income contribution in 2008 was caused by an increased provision for loan losses due to the previously discussed strengthening of the allowance for loan losses and higher non-interest expenses. These factors more than offset an increased level of net interest income that resulted from the strong growth in commercial real-estate loans achieved in 2008. Overall, assets within the commercial lending segment increased by $30 million or 6.5% during 2009 after achieving growth of 16.9% in 2008.

The trust segment’s net income contribution was $148,000 in 2009 compared to $1.3 million in 2008 and $1.8 million in 2007. The major reason for the decrease between years was due to less wealth management revenue as a result of fewer assets under management due to the declines experienced in the equity and real estate markets during the past year. Specifically, the most significant decline has been in the value of real-estate assets in the BUILD Fund (a fund that invests union pension dollars in construction projects that utilize union labor) where the market value of assets has declined from $151 million at December 31, 2008 to $33 million at December 31, 2009. The BUILD Fund is in liquidation status. This segment has also experienced an increase in non-interest expenses due to increased personnel costs and higher professional fees due in part to consulting costs associated with a comprehensive review of the Trust Company in the fourth quarter of 2009. The decline in net income contribution in 2008 when compared to 2007 was also caused by less investment advisory and trust revenue as a result of fewer assets under management due to the declines experienced in the equity markets in 2008. Another factor causing the drop between years was increased non-interest expenses due in part to higher legal and professional costs incurred in conjunction with the movement of the union collective Investment BUILD Fund into liquidation status. The Company expects this fund to be liquidated over a 3 to 5 year period given the current real estate market conditions. Overall, the fair market value of trust assets totaled $1.36 billion at December 31, 2009, a decrease of $196 million, or 12.6%, from the December 31, 2008 total of $1.55 billion.

The investment/parent segment reported net income of $379,000 in 2009 compared to net losses of $783,000 in 2008 and $3.9 million in 2007. The Company’s balance sheet positioning allowed it to benefit from the significant Federal Reserve reductions in short-term interest rates and the return to a more traditional positively sloped yield curve, which has caused net interest income in this segment to increase meaningfully over each of the past two years. Also, the Company realized $164,000 of investment security gains in 2009 compared to losses of $95,000 realized in 2008.

For greater discussion on the future strategic direction of the Company’s key business segments, see Forward Looking Statements in this MD&A.

BALANCE SHEET... The Company’s total consolidated assets were $970 million at December 31, 2009 which was comparable with the $967 million level at December 31, 2008. The Company’s loans and loan held for sale totaled $723 million at December 31, 2009, an increase of $15.8 million or 2.2% from year-end 2008 due to commercial loan growth. The Company’s commercial loan pipelines are currently weak so we expect that it will be difficult to grow the loan portfolio during the first half of 2010. Investment securities and short-term money market investments declined by $12 million in 2009 due to principal repayments in the mortgage backed securities portfolio and $5 million of investment security sales in 2009. The Company has elected to utilize this excess cash to fund loan growth. Other assets increased by $4 million due to the industry mandated prepayment of three years worth of FDIC deposit insurance in the fourth quarter of 2009.

The Company’s deposits totaled $786 million at December 31, 2009, which was $91 million or 13.1% higher than December 31, 2008, due to an increase in money market deposits, certificates of deposit, and demand deposits. We believe that uncertainties in the financial markets and the economy have contributed to growth in our deposits as consumers have looked for safety in well capitalized community banks like AmeriServ Financial Bank. As a result of this deposit growth, we were able to reduce FHLB borrowings by $82 million during 2009. Total FHLB borrowings now represent 5.3% of total assets compared to 13.8% at December 31, 2008. The Company’s total shareholders’ equity has decreased by $6 million since year-end 2008 due to the net loss reported for 2009 and the dividend paid on the CPP preferred stock. The Company continues to be considered well capitalized for regulatory purposes with an asset leverage ratio at December 31, 2009 of 11.06%. At December 31, 2009, the Company’s book value per common share was $4.09, its tangible book value per common share was $3.47, and its tangible common equity to tangible assets ratio was 7.71%.

LIQUIDITY... The Bank’s liquidity position has been strong during the last several years. Our core retail deposit base has remained stable throughout the early part of this period and has recently shown nice growth, which has been adequate to fund the Bank’s operations. Cash flow from maturities, prepayments and amortization of securities was used to fund the strong net loan growth that the Company has achieved over the

past several years. We plan to operate our loan to deposit ratio in a range of 90% to 95%. At December 31, 2009, the Bank’s loan to deposit ratio was 92.0%. Additionally, we do not plan to shrink the investment securities portfolio any further in 2010 in order to maintain sufficient security balances for pledging purposes.

Liquidity can also be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents decreased by $8.8 million from December 31, 2008, to December 31, 2009, due to $16.5 million of cash used in investing activities. This was partially offset by $6.5 million of cash provided by financing activities and $1.2 million of cash provided by operating activities. Within investing activities, cash advanced for new loan fundings and purchases totalled $157.9 million and was $16.4 million higher than the $141.5 million of cash received from loan principal payments and sales. Within financing activities, deposits increased by $89.6 million, which was used to help pay down short-term borrowings by $94.1 million.

The Parent Company had a total of $20 million of cash, short-term investments, and securities at December 31, 2009, which was down $3.2 million from the year-end 2008 total. We have elected to retain $15 million of the total $21 million in funds received from the preferred stock issued to the U.S. Treasury in connection with our participation in TARP’s Capital Purchase Program (CPP) at the Parent Company to provide us with greater liquidity and financial flexibility. ($6 million of the CPP funds were downstreamed to our subsidiary Bank over the past 13 months.) Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the Parent. At December 31, 2009, however, the subsidiary Bank did not have any cash available for immediate dividends to the Parent under the applicable regulatory formulas because of the loss it incurred in 2009.

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investment securities, time deposits with banks, federal funds sold, and short-term investments in money market funds, these assets totaled $33 million at December 31, 2009 and $42 million at December 31, 2008. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.

Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the Federal Home Loan Bank systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary Bank is a member of the Federal Home Loan Bank, which provides the opportunity to obtain short- to longer-term advances based upon the Bank’s investment in assets secured by one- to four-family residential real estate. At December 31, 2009, the Bank had immediately available $142 million of overnight borrowing availability at the FHLB, $24 million of short-term borrowing availability at the Federal Reserve Bank and $23 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

CAPITAL RESOURCES... The Company meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The asset leverage ratio was 11.06%, the Tier 1 capital ratio was 14.06%, and the risk based capital ratio was 15.33% at December 31, 2009. Each of these ratios did decline from the prior year-end due primarily to the net loss the Company incurred in 2009. Note that the impact of other comprehensive loss is excluded from the regulatory capital ratios. At December 31, 2009, accumulated other comprehensive loss amounted to $4.4 million. The Company’s tangible equity to assets ratio was 9.85% and its tangible common equity to assets ratio was 7.71% at December 31, 2009. We anticipate that our strong capital ratios may increase in 2010 due to the retention of all earnings, which will be partially offset by preferred dividend requirements and limited balance sheet growth.

Our decision to accept the $21 million CPP preferred stock investment in December 2008 did strengthen our capital ratios. However as a result of this decision, for a period of three years we are no longer permitted to

repurchase stock or declare and pay common dividends without the consent of the U.S. Treasury. The Company currently does not expect to repay any portion of the CPP preferred stock investment in 2010 given the uncertainties in the economic environment.

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 forecasts earnings under a variety of scenarios that incorporate changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling incorporates assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities; 2) market value of portfolio equity sensitivity analysis, and 3) static GAP analysis, which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. The overall interest rate risk position and strategies are reviewed by senior management and the Company’s Board of Directors on an ongoing basis.

The following table presents a summary of the Company’s static GAP positions at December 31, 2009:

INTEREST SENSITIVITY PERIOD

3 MONTHS
OR LESS

OVER
3 MONTHS
THROUGH
6 MONTHS

OVER
6 MONTHS
THROUGH
1 YEAR

OVER
1 YEAR

TOTAL

(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)

RATE SENSITIVE ASSETS:

Loans and loans held for sale

239,602

50,171

78,452

334,994

703,219

Investment securities

19,807

8,304

17,067

97,705

142,883

Short-term assets

5,473

—

5,473

Regulatory stock

7,614

—

2,125

9,739

Bank owned life insurance

—

33,690

—

33,690

Total rate sensitive assets

272,496

58,475

129,209

434,824

895,004

RATE SENSITIVE LIABILITIES:

Deposits:

Non-interest bearing deposits

—

118,232

NOW

5,064

—

56,228

61,292

Money market

159,723

—

21,416

181,139

Other savings

18,139

—

54,418

72,557

Certificates of deposit of $100,000 or more

13,290

17,667

5,192

9,020

45,169

Other time deposits

72,383

33,252

54,471

147,516

307,622

Total deposits

268,599

50,919

59,663

406,830

786,011

Borrowings

39,788

8,027

16,837

64,664

Total rate sensitive liabilities

308,387

50,931

67,690

423,667

850,675

INTEREST SENSITIVITY GAP:

Interval

(35,891

)

7,544

61,519

11,157

—

Cumulative

(35,891

)

(28,347

)

33,172

44,329

Period GAP ratio

0.88

1.15

1.91

1.03

Cumulative GAP ratio

0.88

0.92

1.08

1.05

Ratio of cumulative GAP to total assets

(3.70

(2.92

3.42

4.57

When December 31, 2009, is compared to December 31, 2008, there has been little change in the Company’s modestly positive cumulative GAP ratio through one year. While the Company does have a negative GAP position through six months, the absolute low level of rates makes this table more difficult to analyze since there is little room for certain liabilities to reprice downward further.

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 200 basis points. 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 changes of 100 and 200 basis points. Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low level of interest rates. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.


INTEREST RATE SCENARIO	VARIABILITY OF NET INTEREST INCOME		CHANGE IN MARKET VALUE OF PORTFOLIO EQUITY
200 bp increase	4.6	%	4.1	%
100 bp increase	4.0		4.6
100 bp decrease	(8.5	)	(13.8	)

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

Within the investment portfolio at December 31, 2009, 92% of the portfolio is classified as available for sale and 8% as held to maturity. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity to fund loan growth if needed. The mark to market of the available for sale securities does inject more volatility in the book value of equity, but has no impact on regulatory capital. There are 19 securities that are temporarily impaired at December 31, 2009. The Company reviews its securities quarterly and has asserted that at December 31, 2009, the impaired value of securities represents temporary declines due to movements in interest rates and the Company does have the ability and intent to hold those securities to maturity or to allow a market recovery. Furthermore, it is the Company’s intent to manage its long-term interest rate risk by continuing to sell newly originated fixed-rate 30-year mortgage loans into the secondary market. The Company also periodically sells 15-year fixed rate mortgage loans into the secondary market as well. For the year 2009, 70% of all residential mortgage loan production was sold into the secondary market.

The amount of loans outstanding by category as of December 31, 2009, which are due in (i) one year or less, (ii) more than one year through five years, and (iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.

ONE
YEAR OR
LESS

MORE
THAN ONE
YEAR
THROUGH
FIVE YEARS

OVER FIVE
YEARS

TOTAL
LOANS

(IN THOUSANDS, EXCEPT RATIOS)

Commercial

31,426

46,702

18,030

96,158

Commercial loans secured by real estate

39,588

182,102

175,097

396,787

Real estate-mortgage

51,615

76,500

82,896

211,011

Consumer

4,782

6,738

8,099

19,619

Total

127,411

312,042

284,122

723,575

Loans with fixed-rate

72,454

169,050

116,659

358,163

Loans with floating-rate

54,957

142,992

167,463

365,412

Total

127,411

312,042

284,122

723,575

Percent composition of maturity

17.6

43.1

39.3

100.0

Fixed-rate loans as a percentage of total loans

49.5

Floating-rate loans as a percentage of total loans

50.5

The loan maturity information is based upon original loan terms and is not adjusted for principal paydowns and rollovers. In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.

CONTRACTUAL OBLIGATIONS... The following table presents, as of December 31, 2009, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

PAYMENTS DUE IN

NOTE
REFERENCE

ONE YEAR
OR LESS

ONE TO THREE
YEARS

THREE TO FIVE
YEARS

OVER FIVE
YEARS

TOTAL

(IN THOUSANDS)

Deposits without a stated maturity

433,220

—

433,220

Certificates of deposit*

201,888

122,144

21,361

31,809

377,202

Borrowed funds*

48,463

3,317

177

695

52,652

Guaranteed junior subordinated deferrable interest debentures*

—

31,052

Pension obligation

1,500

—

1,500

Lease commitments

753

1,103

670

2,816

5,342

*	Includes interest based upon interest rates in effect at December 31, 2009. Future changes in market interest rates could materially affect contractual amounts to be paid.

OFF BALANCE SHEET ARRANGEMENTS... The Bank incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same

credit and collateral policies in making commitments and conditional obligations as for all other lending. The Company had various outstanding commitments to extend credit approximating $99,275,000 and standby letters of credit of $11,695,000 as of December 31, 2009. The Company can also use 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. As of December 31, 2009, the Company had $18 million in interest rate swaps outstanding.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES... The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses, goodwill and core deposit intangibles, income taxes, and investment securities 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

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

Commercial and commercial mortgage loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan loss. Approximately $17.4 million, or 89%, of the total allowance for loan losses at December 31, 2009 has been allotted to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods.

ACCOUNT — Goodwill and core deposit intangibles

BALANCE SHEET REFERENCE — Goodwill and core deposit intangibles

INCOME STATEMENT REFERENCE — Goodwill impairment and amortization of core deposit intangibles

DESCRIPTION

The Company considers our accounting policies related to goodwill and core deposit intangibles to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired

in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

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

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

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

Core deposit intangibles that have a finite life are amortized over their useful life. As of December 31, 2009, all core deposit intangibles for the Company had been fully amortized.

As of December 31, 2009, goodwill was not considered impaired; however, deteriorating economic conditions could result in impairment, which could adversely affect earnings in future periods.

ACCOUNT — Income Taxes

BALANCE SHEET REFERENCE — Deferred Tax Asset and Current Taxes Payable

INCOME STATEMENT REFERENCE — Provision for Income Taxes

DESCRIPTION

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

In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are

permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of December 31, 2009, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed.

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

ACCOUNT — Investment Securities

BALANCE SHEET REFERENCE — Investment Securities

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

DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At December 31, 2009, all of the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies, the U.S. Treasury or government sponsored agencies. The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

FORWARD LOOKING STATEMENTS...

THE STRATEGIC FOCUS:

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

•

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

•

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

•

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

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

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

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

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, and liquidity risk. The Company controls and monitors these risks with policies, procedures, and various levels of managerial and Board oversight. The Company’s objective is to optimize profitability while managing and controlling risk within Board approved policy limits.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and hedges. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk.

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors, debtholders and to fund operating expenses. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk.

For information regarding the market risk of the Company’s financial instruments, see Interest Rate Sensitivity in the MD&A. The Company’s principal market risk exposure is to interest rates.

ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMERISERV FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS


	AT DECEMBER 31,
	2009			2008
	(IN THOUSANDS)
ASSETS
Cash and due from depository institutions	$	20,835		$	17,945
Interest bearing deposits		1,707			1,601
Short-term investments in money market funds		3,766			15,578

Cash and cash equivalents		26,308			35,124

Investment securities:
Available for sale		131,272			126,781
Held to maturity (market value $11,996 at December 31, 2009 and $16,323 at December 31, 2008)		11,611			15,894
Loans held for sale		3,790			1,000
Loans		719,785			706,799
Less: Unearned income		671			691
Allowance for loan losses		19,685			8,910

Net loans		699,429			697,198

Premises and equipment, net		9,229			9,521
Accrued income receivable		3,589			3,735
Goodwill		12,950			13,497
Core deposit intangibles		—			108
Bank owned life insurance		33,690			32,929
Net deferred tax asset		15,925			12,651
Regulatory stock		9,739			9,739
Prepaid federal deposit insurance		4,538			—
Other assets		7,956			8,752

TOTAL ASSETS	$	970,026		$	966,929

LIABILITIES
Non-interest bearing deposits	$	118,232		$	116,372
Interest bearing deposits		667,779			578,584

Total deposits		786,011			694,956

Short-term borrowings		25,775			119,920
Advances from Federal Home Loan Bank		25,804			13,858
Guaranteed junior subordinated deferrable interest debentures		13,085			13,085

Total borrowed funds		64,664			146,863

Other liabilities		12,097			11,858

TOTAL LIABILITIES		862,772			853,677

STOCKHOLDERS’ EQUITY
Preferred stock, no par value; $1,000 per share liquidation preference; 2,000,000 shares authorized; there were 21,000 shares issued and outstanding on December 31, 2009 and 2008		20,558			20,447
Common stock, par value $0.01 per share; 30,000,000 shares authorized: 26,410,528 shares issued and 21,221,909 shares outstanding on December 31, 2009; par value $2.50 per share; 26,317,450 shares issued and 21,128,831 shares outstanding on December 31, 2008		264			65,794
Treasury stock at cost, 5,188,619 shares on December 31, 2009 and 2008		(68,659	)		(68,659	)
Capital surplus		144,873			79,353
Retained earnings		14,591			20,533
Accumulated other comprehensive loss, net		(4,373	)		(4,216	)

TOTAL STOCKHOLDERS’ EQUITY		107,254			113,252

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	970,026		$	966,929

See accompanying notes to consolidated financial statements.

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	YEAR ENDED DECEMBER 31,
	2009			2008			2007
	(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans:
Taxable	$	41,359		$	40,817		$	41,345
Tax exempt		91			200			218
Deposits with banks		4			13			20
Short-term investments in money market funds		30			140			203
Federal funds sold		1			4			121
Investment securities:
Available for sale		5,340			5,770			6,433
Held to maturity		630			875			1,039

Total Interest Income		47,455			47,819			49,379

INTEREST EXPENSE
Deposits		13,109			15,680			22,811
Federal funds purchased		7			1			—
Short-term borrowings		133			1,402			972
Advances from Federal Home Loan Bank		652			499			253
Guaranteed junior subordinated deferrable interest debentures		1,120			1,120			1,120

Total Interest Expense		15,021			18,702			25,156

Net Interest Income		32,434			29,117			24,223
Provision for loan losses		15,150			2,925			300

Net Interest Income after Provision for Loan Losses		17,284			26,192			23,923

NON-INTEREST INCOME
Trust fees		5,648			6,731			6,753
Net gains on loans held for sale		651			477			307
Net realized gains (losses) on investment securities		164			(95	)		—
Service charges on deposit accounts		2,769			3,069			2,579
Investment advisory fees		648			779			974
Bank owned life insurance		1,208			2,695			1,268
Other income		2,840			2,768			2,826

Total Non-Interest Income		13,928			16,424			14,707

NON-INTEREST EXPENSE
Salaries and employee benefits		20,526			19,217			19,339
Net occupancy expense		2,632			2,561			2,494
Equipment expense		1,692			1,677			2,045
Professional fees		4,032			3,582			3,197
Supplies, postage, and freight		1,117			1,252			1,211
Miscellaneous taxes and insurance		1,374			1,395			1,436
Federal deposit insurance expense		1,670			113			88
Amortization of core deposit intangibles		108			865			865
Federal Home Loan Bank prepayment penalties		—			91			—
Other expense		6,006			4,884			3,997

Total Non-Interest Expense		39,157			35,637			34,672

PRETAX INCOME (LOSS)		(7,945	)		6,979			3,958
Provision for income taxes (benefit)		(3,050	)		1,470			924

NET INCOME (LOSS)		(4,895	)		5,509			3,034
Preferred stock dividends		1,047			35			—

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(5,942	)	$	5,474		$	3,034

(continued on next page)

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)


	YEAR ENDED DECEMBER 31,
	2009			2008		2007
	(IN THOUSANDS, EXCEPT PER SHARE DATA)
PER COMMON SHARE DATA:
Basic:
Net income (loss)	$	(0.28	)	$	0.25	$	0.14
Average number of shares outstanding		21,172			21,833		22,171
Diluted:
Net income (loss)	$	(0.28	)	$	0.25	$	0.14
Average number of shares outstanding		21,174			21,975		22,173
Cash dividends declared	$	0.00		$	0.025	$	0.00

See accompanying notes to consolidated financial statements.

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	YEAR ENDED DECEMBER 31,
	2009			2008			2007
	(IN THOUSANDS)
COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(4,895	)	$	5,509		$	3,034
Other comprehensive income (loss), before tax:
Pension obligation change for defined benefit plan		(1,093	)		(3,745	)		21
Income tax effect		372			1,273			(7	)
Unrealized holding gains on available for sale securities arising during period		1,018			3,345			3,683
Income tax effect		(346	)		(1,180	)		(1,252	)
Reclassification adjustment for (gains) losses on available for sale securities included in net income (loss)		(164	)		95			—
Income tax effect		56			(32	)		—

Other comprehensive income (loss)		(157	)		(244	)		2,445

Comprehensive income (loss)	$	(5,052	)	$	5,265		$	5,479

See accompanying notes to consolidated financial statements.

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


	YEAR ENDED DECEMBER 31,
	2009			2008			2007
	(IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of period	$	20,447		$	—		$	—
New shares issued		—			20,447			—
Accretion of preferred stock discount		111			—			—

Balance at end of period		20,558			20,447			—

COMMON STOCK
Balance at beginning of period		65,794			65,700			65,618
New shares issued (43,078 shares)		51			94			82
Change in par value (from $2.50 per share to $0.01 per share)		(65,582	)		—			—
Restricted stock (50,000 shares)		1			—			—

Balance at end of period		264			65,794			65,700

TREASURY STOCK
Balance at beginning of period		(68,659	)		(65,824	)		(65,824	)
Treasury stock, purchased at cost (1,097,700 shares)		—			(2,835	)		—

Balance at end of period		(68,659	)		(68,659	)		(65,824	)

CAPITAL SURPLUS
Balance at beginning of period		79,353			78,788			78,739
New common shares issued (43,078 shares)		22			5			37
Stock option expense		11			7			12
Common stock warrant issued (1,312,500 shares)		—			553			—
Change in par value (from $2.50 per share to $0.01 per share)		65,582			—			—
Accretion of preferred stock discount		(111	)		—			—
Restricted stock (50,000 shares)		16			—			—

Balance at end of period		144,873			79,353			78,788

RETAINED EARNINGS
Balance at beginning of period		20,533			15,602			12,568
Net income (loss)		(4,895	)		5,509			3,034
Cash dividend declared on preferred stock		(1,047	)		(35	)		—
Cash dividend declared on common stock of $0.025 per share		—			(543	)		—

Balance at end of period		14,591			20,533			15,602

ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period		(4,216	)		(3,972	)		(6,417	)
Other comprehensive income (loss)		(157	)		(244	)		2,445

Balance at end of period		(4,373	)		(4,216	)		(3,972	)

TOTAL STOCKHOLDERS’ EQUITY	$	107,254		$	113,252		$	90,294

See accompanying notes to consolidated financial statements.

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	YEAR ENDED DECEMBER 31
	2009			2008			2007
	(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)	$	(4,895	)	$	5,509		$	3,034
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		15,150			2,925			300
Depreciation and amortization expense		1,586			1,533			1,505
Amortization expense of core deposit intangibles		108			865			865
Net amortization of investment securities		231			193			387
Net realized (gains) losses on investment securities — available for sale		(164	)		95			—
Net realized gains on loans held for sale		(651	)		(477	)		(307	)
Amortization of deferred loan fees		(456	)		(466	)		(518	)
Origination of mortgage loans held for sale		(67,775	)		(36,923	)		(26,720	)
Sales of mortgage loans held for sale		65,636			37,460			26,325
Decrease in accrued interest receivable		146			297			133
Increase (decrease) in accrued interest payable		74			(899	)		530
Earnings on bank-owned life insurance		(1,021	)		(1,038	)		(1,268	)
Deferred income taxes		(3,274	)		1,099			2,087
Net increase in other assets		(4,586	)		(3,313	)		(36	)
Net increase in other liabilities		1,085			1,048			3,000

Net cash provided by operating activities		1,194			7,908			9,317

INVESTING ACTIVITIES
Purchase of investment securities — available for sale		(55,171	)		(68,610	)		(6,768	)
Purchase of investment securities — held to maturity		—			(4,464	)		—
Purchase of regulatory stock		—			(8,268	)		(5,824	)
Proceeds from maturities of investment securities — available for sale		46,778			59,299			41,988
Proceeds from maturities of investment securities — held to maturity		4,225			7,052			2,054
Proceeds from sales of investment securities — available for sale		4,746			25,941			—
Proceeds from redemption of regulatory stock		—			5,733			3,975
Long-term loans originated		(132,551	)		(152,535	)		(180,558	)
Principal collected on long-term loans		128,554			133,043			163,819
Loans purchased or participated		(25,343	)		(56,182	)		(33,762	)
Loans sold or participated		12,950			3,950			4,500
Net decrease (increase) in other short-term loans		116			90			(332	)
Purchases of premises and equipment		(1,294	)		(2,604	)		(1,667	)
Proceeds from sale of premises and equipment		—			—			522
Proceeds from insurance policies		452			2,635			—
Acquisition of West Chester Capital Advisors		—			—			2,200

Net cash used in investing activities		(16,538	)		(54,920	)		(9,853	)

FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts		89,606			(16,526	)		(31,316	)
Net increase (decrease) in other short-term borrowings		(94,145	)		47,710			23,119
Principal borrowings on advances from Federal Home Loan Bank		350,000			11,000			9,004
Principal repayments on advances from Federal Home Loan Bank		(338,055	)		(7,047	)		(45	)
Common stock dividend paid		—			(543	)		—
Preferred stock dividend paid		(951	)		—			—
Proceeds from dividend reinvestment and stock purchase plan and stock options exercised		73			106			131
Purchases of treasury stock		—			(2,835	)		—
Preferred stock issuance		—			21,000			—

Net cash provided by financing activities		6,528			52,865			893

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(8,816	)		5,853			357
CASH AND CASH EQUIVALENTS AT JANUARY 1		35,124			29,271			28,914

CASH AND CASH EQUIVALENTS AT DECEMBER 31	$	26,308		$	35,124	<