UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended June 30, 2015

		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, PA		15907-0430
(Address of principal executive offices)		(Zip Code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

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

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company x

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

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

Class		Outstanding at August 3, 2015
Common Stock, par value $0.01		18,870,811

TABLE OF CONTENTS

AmeriServ Financial, Inc.
 
INDEX

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) — June 30, 2015 and December 31, 2014			1
Consolidated Statements of Operations (Unaudited) — Three and six months ended June 30, 2015 and 2014			2
Consolidated Statements of Comprehensive Income (Unaudited) — Three and six months ended June 30, 2015 and 2014			4
Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2015 and 2014			5
Notes to Unaudited Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosure About Market Risk			44
Item 4. Controls and Procedures			44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Mine Safety Disclosures			45
Item 5. Other Information			45
Item 6. Exhibits			45

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Item 1. Financial Statements

AmeriServ Financial, Inc.

CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
(Unaudited)

		June 30, 2015				December 31, 2014
ASSETS
Cash and due from depository institutions		$	16,748			$	23,780
Interest bearing deposits			2,957				2,952
Short-term investments in money market funds			6,886				6,140
Total cash and cash equivalents			26,591				32,872
Investment securities:
Available for sale			122,868				127,110
Held to maturity (fair value $19,776 on June 30, 2015 and $20,213 on December 31, 2014)			19,580				19,840
Loans held for sale			4,393				5,051
Loans			862,485				827,634
Less: Unearned income			635				554
Allowance for loan losses			9,717				9,623
Net loans			852,133				817,457
Premises and equipment, net			12,565				13,012
Accrued interest income receivable			3,310				3,127
Goodwill			11,944				11,944
Bank owned life insurance			37,558				37,417
Net deferred tax asset			8,969				9,548
Federal Home Loan Bank stock			5,180				4,048
Federal Reserve Bank stock			2,125				2,125
Other assets			5,718				5,712
TOTAL ASSETS		$	1,112,934			$	1,089,263
LIABILITIES
Non-interest bearing deposits		$	161,874			$	167,551
Interest bearing deposits			701,028				702,330
Total deposits			862,902				869,881
Short-term borrowings			63,430				38,880
Advances from Federal Home Loan Bank			46,000				42,000
Guaranteed junior subordinated deferrable interest debentures			13,085				13,085
Total borrowed funds			122,515				93,965
Other liabilities			10,212				11,010
TOTAL LIABILITIES			995,629				974,856
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; $1,000 per share liquidation preference; 2,000,000 shares authorized; 21,000 shares issued and outstanding on June 30, 2015 and December 31, 2014			21,000				21,000
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,479,630 shares issued and 18,861,811 outstanding on June 30, 2015; 26,402,707 shares issued and 18,784,888 outstanding on December 31, 2014			265				264
Treasury stock at cost, 7,617,819 shares on June 30, 2015 and December 31, 2014			(74,829	)			(74,829	)
Capital surplus			145,411				145,256
Retained earnings			31,926				29,618
Accumulated other comprehensive loss, net			(6,468	)			(6,902	)
TOTAL SHAREHOLDERS’ EQUITY			117,305				114,407
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,112,934			$	1,089,263

 
 
See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
INTEREST INCOME
Interest and fees on loans		$	9,480			$	8,939			$	18,936			$	17,971
Interest bearing deposits			5				1				7				2
Short-term investments in money market funds			1				2				3				4
Investment securities:
Available for sale			777				905				1,690				1,829
Held to maturity			146				136				296				272
Total Interest Income			10,409				9,983				20,932				20,078
INTEREST EXPENSE
Deposits			1,171				1,240				2,345				2,451
Short-term borrowings			23				5				33				24
Advances from Federal Home Loan Bank			135				74				260				134
Guaranteed junior subordinated deferrable interest debentures			280				280				560				560
Total Interest Expense			1,609				1,599				3,198				3,169
NET INTEREST INCOME			8,800				8,384				17,734				16,909
Provision for loan losses			200				—				450				—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,600				8,384				17,284				16,909
NON-INTEREST INCOME
Trust and investment advisory fees			2,135				1,948				4,191				3,980
Service charges on deposit accounts			429				501				848				979
Net gains on sale of loans			225				171				416				272
Mortgage related fees			109				160				224				277
Net realized gains on investment securities			28				120				28				177
Bank owned life insurance			171				184				534				371
Other income			595				554				1,163				1,114
Total Non-Interest Income			3,692				3,638				7,404				7,170
NON-INTEREST EXPENSE
Salaries and employee benefits			5,944				6,107				12,017				12,421
Net occupancy expense			718				717				1,559				1,556
Equipment expense			480				494				946				964
Professional fees			1,275				1,464				2,486				2,772
Supplies, postage and freight			175				187				353				370
Miscellaneous taxes and insurance			287				312				584				608
Federal deposit insurance expense			164				154				331				314
Other expense			1,196				1,185				2,373				2,353
Total Non-Interest Expense			10,239				10,620				20,649				21,358

 
 
See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS – (continued)
(In thousands, except per share data)
(Unaudited)

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
PRETAX INCOME			2,053				1,402				4,039				2,721
Provision for income tax expense			632				423				1,249				812
NET INCOME			1,421				979				2,790				1,909
Preferred stock dividends			52				52				105				105
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	1,369			$	927			$	2,685			$	1,804
PER COMMON SHARE DATA:
Basic:
Net income		$	0.07			$	0.05			$	0.14			$	0.10
Average number of shares outstanding			18,859				18,795				18,855				18,790
Diluted:
Net income		$	0.07			$	0.05			$	0.14			$	0.10
Average number of shares outstanding			18,941				18,936				18,923				18,920
Cash dividends declared		$	0.01			$	0.01			$	0.02			$	0.02

 
 
See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
COMPREHENSIVE INCOME
Net income		$	1,421			$	979			$	2,790			$	1,909
Other comprehensive income, before tax:
Pension obligation change for defined benefit plan			631				—				1,286				392
Income tax effect			(215	)			—				(438	)			(133	)
Unrealized holding (gains) losses on available for sale securities arising during period			(946	)			1,037				(600	)			1,551
Income tax effect			321				(353	)			204				(527	)
Reclassification adjustment for gains on available for sale securities included in net income			(28	)			(120	)			(28	)			(177	)
Income tax effect			10				41				10				60
Other comprehensive income (loss)			(227	)			605				434				1,166
Comprehensive income		$	1,194			$	1,584			$	3,224			$	3,075

 
 
See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Six months ended June 30,
		2015				2014
OPERATING ACTIVITIES
Net income		$	2,790			$	1,909
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			450				—
Depreciation expense			925				924
Net amortization of investment securities			181				186
Net realized gains on investment securities available for sale			(28	)			(177	)
Net gains on loans held for sale			(416	)			(272	)
Amortization of deferred loan fees			(133	)			(134	)
Origination of mortgage loans held for sale			(27,878	)			(18,393	)
Sales of mortgage loans held for sale			28,952				17,378
Increase in accrued interest income receivable			(183	)			(278	)
Decrease in accrued interest payable			(255	)			(306	)
Earnings on bank owned life insurance			(341	)			(371	)
Deferred income taxes			371				254
Stock based compensation expense			156				45
Other, net			443				1,336
Net cash provided by operating activities			5,034				2,101
INVESTING ACTIVITIES
Purchases of investment securities – available for sale			(7,410	)			(7,144	)
Purchases of investment securities – held to maturity			(1,545	)			(1,599	)
Proceeds from sales of investment securities – available for sale			519				5,242
Proceeds from maturities of investment securities – available for sale			10,380				10,763
Proceeds from maturities of investment securities – held to maturity			1,778				667
Purchases of regulatory stock			(9,464	)			(3,897	)
Proceeds from redemption of regulatory stock			8,332				4,056
Long-term loans originated			(118,956	)			(76,648	)
Principal collected on long-term loans			76,896				59,696
Loans purchased or participated			(5,120	)			(1,764	)
Loans sold or participated			12,055				2,250
Proceeds from sale of other real estate owned			478				434
Proceeds from life insurance policy			200				—
Purchases of premises and equipment			(473	)			(1,198	)
Net cash used in investing activities			(32,330	)			(9,142	)
FINANCING ACTIVITIES
Net (decrease) increase in deposit balances			(7,053	)			19,347
Net increase (decrease) in other short-term borrowings			24,550				(22,878	)
Principal borrowings on advances from Federal Home Loan Bank			4,000				9,000
Common stock dividends			(377	)			(376	)
Preferred stock dividends			(105	)			(105	)
Net cash provided by financing activities			21,015				4,988
NET DECREASE IN CASH AND CASH EQUIVALENTS			(6,281	)			(2,053	)
CASH AND CASH EQUIVALENTS AT JANUARY 1			32,872				30,066
CASH AND CASH EQUIVALENTS AT JUNE 30		$	26,591			$	28,013

 
 
See accompanying notes to unaudited consolidated financial statements.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 17 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $1.9 billion that are not reported on the Company’s balance sheet at June 30, 2015. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

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

2. Basis of Preparation

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

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

3. Recent Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

4. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. Options to purchase 179,304 common shares, at exercise prices ranging from $3.18 to $4.70, and 3,625 common shares, at exercise prices ranging from $4.60 to $5.22, were outstanding as of June 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Dividends on preferred shares are deducted from net income in the calculation of earnings per common share.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Earnings Per Common Share  – (continued)

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
		(In thousands, except per share data)
Numerator:
Net income		$	1,421			$	979			$	2,790			$	1,909
Preferred stock dividends			(52	)			(52	)			(105	)			(105	)
Net income available to common shareholders		$	1,369			$	927			$	2,685			$	1,804
Denominator:
Weighted average common shares outstanding (basic)			18,859				18,795				18,855				18,790
Effect of stock options			82				141				68				130
Weighted average common shares outstanding (diluted)			18,941				18,936				18,923				18,920
Earnings per common share:
Basic		$	0.07			$	0.05			$	0.14			$	0.10
Diluted			0.07				0.05				0.14				0.10

5. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits and short-term investments in money market funds. The Company made $878,000 in income tax payments in the first six months of 2015 as compared to $558,000 for the first six months of 2014. The Company made total interest payments of $3,453,000 in the first six months of 2015 compared to $3,475,000 in the same 2014 period. The Company had $132,000 non-cash transfers to other real estate owned (OREO) in the first six months of 2015 compared to $6,000 non-cash transfers in the same 2014 period.

6. Investment Securities

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

Investment securities available for sale (AFS):

		June 30, 2015
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	5,933			$	22			$	(19	)		$	5,936
US Agency mortgage-backed securities			97,265				2,708				(363	)			99,610
Corporate bonds			17,504				28				(210	)			17,322
Total		$	120,702			$	2,758			$	(592	)		$	122,868

Investment securities held to maturity (HTM):

		June 30, 2015
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	11,680			$	304			$	(73	)		$	11,911
Taxable municipal			3,905				70				(52	)			3,923
Corporate bonds and other securities			3,995				—				(53	)			3,942
Total		$	19,580			$	374			$	(178	)		$	19,776

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Investment securities available for sale (AFS):

		December 31, 2014
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	5,931			$	21			$	(46	)		$	5,906
US Agency mortgage-backed securities			102,888				3,197				(317	)			105,768
Corporate bonds			15,497				61				(122	)			15,436
Total		$	124,316			$	3,279			$	(485	)		$	127,110

Investment securities held to maturity (HTM):

		December 31, 2014
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	12,481			$	395			$	(50	)		$	12,826
Taxable municipal			3,364				74				(24	)			3,414
Corporate bonds and other securities			3,995				6				(28	)			3,973
Total		$	19,840			$	475			$	(102	)		$	20,213

Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of “A.” At June 30, 2015, 81.9% of the portfolio was rated “AAA” as compared to 84.1% at December 31, 2014. 3.9% of the portfolio was either rated below “A” or unrated at June 30, 2015. At June 30, 2015, the Company’s consolidated investment securities portfolio had an effective duration of approximately 2.80 years.

The Company sold a $519,000 AFS security for both the second quarter and first six months of 2015 resulting in a $28,000 gross investment security gain. Total proceeds from the sale of AFS securities for the second quarter of 2014 were $2.5 million resulting in $120,000 of gross investment security gains. Total proceeds from the sale of AFS securities for the first six months of 2014 were $5.2 million resulting in $182,000 of gross investment security gains and $5,000 of gross security losses.

The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits, and certain Federal Home Loan Bank borrowings was $98,457,000 at June 30, 2015 and $104,780,000 at December 31, 2014.

The following tables present information concerning investments with unrealized losses as of June 30, 2015 and December 31, 2014 (in thousands):

Total investment securities:

		June 30, 2015
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	—			$	—			$	2,881			$	(19	)		$	2,881			$	(19	)
Taxable municipal			2,644				(52	)			—				—				2,644				(52	)
US Agency mortgage-backed securities			16,974				(118	)			12,400				(318	)			29,374				(436	)
Corporate bonds and other securities			6,862				(133	)			8,867				(130	)			15,729				(263	)
Total		$	26,480			$	(303	)		$	24,148			$	(467	)		$	50,628			$	(770	)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Total investment securities:

		December 31, 2014
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	996			$	(4	)		$	2,858			$	(42	)		$	3,854			$	(46	)
US Agency mortgage-backed securities			2,826				(13	)			20,408				(354	)			23,234				(367	)
Taxable municipal			150				(1	)			988				(23	)			1,138				(24	)
Corporate bonds and other securities			2,960				(43	)			8,891				(107	)			11,851				(150	)
Total		$	6,932			$	(61	)		$	33,145			$	(526	)		$	40,077			$	(587	)

The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 51 positions that are considered temporarily impaired at June 30, 2015. 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.

Contractual maturities of securities at June 30, 2015 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Total investment securities:

		June 30, 2015
		Available for sale								Held to maturity
		Cost Basis				Fair Value				Cost Basis				Fair Value
Within 1 year		$	2,000			$	2,007			$	999			$	1,000
After 1 year but within 5 years			14,302				14,331				2,000				1,967
After 5 years but within 10 years			20,743				21,008				4,782				4,749
After 10 years but within 15 years			50,945				51,947				560				546
Over 15 years			32,712				33,575				11,239				11,514
Total		$	120,702			$	122,868			$	19,580			$	19,776

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. Loans

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

		June 30, 2015				December 31, 2014
Commercial		$	155,459			$	139,126
Commercial loans secured by real estate			427,174				410,329
Real estate-mortgage			259,144				258,616
Consumer			20,073				19,009
Loans, net of unearned income		$	861,850			$	827,080

Loan balances at June 30, 2015 and December 31, 2014 are net of unearned income of $635,000 and $554,000, respectively. Real estate-construction loans comprised 2.9% and 3.5% of total loans, net of unearned income at June 30, 2015 and December 31, 2014, respectively.

8. Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three and six month periods ending June 30, 2015 and 2014 (in thousands).

		Three months ended June 30, 2015,
		Balance at March 31, 2015				Charge-Offs				Recoveries				Provision (Credit)				Balance at June 30, 2015
Commercial		$	3,157			$	—			$	8			$	6			$	3,171
Commercial loans secured by real estate			4,087				(15	)			9				59				4,140
Real estate-mortgage			1,304				(188	)			25				180				1,321
Consumer			191				(16	)			5				21				201
Allocation for general risk			950				—				—				(66	)			884
Total		$	9,689			$	(219	)		$	47			$	200			$	9,717

		Three months ended June 30, 2014,
		Balance at March 31, 2014				Charge-Offs				Recoveries				Provision (Credit)				Balance at June 30, 2014
Commercial		$	3,065			$	—			$	55			$	134			$	3,254
Commercial loans secured by real estate			4,662				—				19				(206	)			4,475
Real estate-mortgage			1,273				(30	)			11				47				1,301
Consumer			139				(22	)			8				20				145
Allocation for general risk			970				—				—				5				975
Total		$	10,109			$	(52	)		$	93			$	—			$	10,150

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

		Six months ended June 30, 2015,
		Balance at December 31, 2014				Charge-Offs				Recoveries				Provision (Credit)				Balance at June 30, 2015
Commercial		$	3,262			$	(121	)		$	14			$	16			$	3,171
Commercial loans secured by real estate			3,902				(15	)			51				202				4,140
Real estate-mortgage			1,310				(291	)			55				247				1,321
Consumer			190				(63	)			14				60				201
Allocation for general risk			959				—				—				(75	)			884
Total		$	9,623			$	(490	)		$	134			$	450			$	9,717

		Six months ended June 30, 2014,
		Balance at December 31, 2013				Charge-Offs				Recoveries				Provision (Credit)				Balance at June 30, 2014
Commercial		$	2,844			$	(72	)		$	105			$	377			$	3,254
Commercial loans secured by real estate			4,885				(66	)			172				(516	)			4,475
Real estate-mortgage			1,260				(73	)			25				89				1,301
Consumer			136				(58	)			13				54				145
Allocation for general risk			979				—				—				(4	)			975
Total		$	10,104			$	(269	)		$	315			$	—			$	10,150

As a result of successful ongoing problem credit resolution efforts, the Company achieved further asset quality improvements in 2015 and 2014, specifically in the commercial loans secured by real estate category. There was no provision for loan losses in the first six months of 2014, but the Company recorded a $450,000 provision in the first six months of 2015 which was needed to support loan growth.

The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).

		At June 30, 2015
		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Loans:
Individually evaluated for impairment		$	406			$	776			$	—			$	—							$	1,182
Collectively evaluated for impairment			155,053				426,398				259,144				20,073								860,668
Total loans		$	155,459			$	427,174			$	259,144			$	20,073							$	861,850
Allowance for loan losses:
Specific reserve allocation		$	102			$	512			$	—			$	—			$	—			$	614
General reserve allocation			3,069				3,628				1,321				201				884				9,103
Total allowance for loan losses		$	3,171			$	4,140			$	1,321			$	201			$	884			$	9,717

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

		At December 31, 2014
		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Loans:
Individually evaluated for impairment		$	—			$	989			$	—			$	—							$	989
Collectively evaluated for impairment			139,126				409,340				258,616				19,009								826,091
Total loans		$	139,126			$	410,329			$	258,616			$	19,009							$	827,080
Allowance for loan losses:
Specific reserve allocation		$	—			$	520			$	—			$	—			$	—			$	520
General reserve allocation			3,262				3,382				1,310				190				959				9,103
Total allowance for loan losses		$	3,262			$	3,902			$	1,310			$	190			$	959			$	9,623

The segments of the Company’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The loan segments used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio and therefore, no further disaggregation into classes is necessary. The overall risk profile for the commercial loan segment is impacted by non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, as a meaningful but declining portion of the commercial portfolio is centered in these types of accounts. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans secured by residential real estate. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates for possible impairment any individual loan in the commercial or commercial real estate segment with a loan balance in excess of $100,000 that is in nonaccrual status or classified as a Troubled Debt Restructure (TDR). Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a TDR.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs for collateral dependent loans. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Assigned Risk Department to support the value of the property.

When reviewing an appraisal associated with an existing collateral real estate dependent transaction, the Bank’s internal Assigned Risk Department must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:

The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Assigned Risk Department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Bank’s Assigned Risk Department personnel rests with the Assigned Risk Department and not the originating account officer.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).

		June 30, 2015
		Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance
Commercial		$	406			$	102			$	—			$	406			$	406
Commercial loans secured by real estate			756				512				20				776				885
Total impaired loans		$	1,162			$	614			$	20			$	1,182			$	1,291

		December 31, 2014
		Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance
Commercial loans secured by real estate		$	989			$	520			$	—			$	989			$	1,069
Total impaired loans		$	989			$	520			$	—			$	989			$	1,069

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
Average loan balance:
Commercial		$	220			$	—			$	110			$	—
Commercial loans secured by real estate			1,509				2,296				1,891				2,678
Average investment in impaired loans		$	1,729			$	2,296			$	2,001			$	2,678
Interest income recognized:
Commercial		$	10			$	—			$	11			$	—
Commercial loans secured by real estate			5				1				11				2
Interest income recognized on a cash basis on impaired loans		$	15			$	1			$	22			$	2

Management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass-6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, 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. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board’s Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2015 required review of a minimum range of 50% to 55% of the commercial loan portfolio.

In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $1,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Company’s Loan Loss Reserve Committee on a quarterly basis. Additionally, the Asset Quality Task Force, which is a group comprised of senior level personnel, meets monthly to monitor the status of problem loans.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

The following table presents the classes of the commercial and commercial real estate loan portfolios summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands).

		June 30, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	150,704			$	758			$	3,866			$	131			$	155,459
Commercial loans secured by real estate			421,117				2,627				3,175				255				427,174
Total		$	571,821			$	3,385			$	7,041			$	386			$	582,633

		December 31, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	132,665			$	161			$	6,164			$	136			$	139,126
Commercial loans secured by real estate			406,195				620				3,238				276				410,329
Total		$	538,860			$	781			$	9,402			$	412			$	549,455

It is generally the policy of the bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is the policy of the bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolios (in thousands).

		June 30, 2015
		Performing				Non-Performing
Real estate-mortgage		$	257,497			$	1,647
Consumer			20,073				—
Total		$	277,570			$	1,647

		December 31, 2014
		Performing				Non-Performing
Real estate-mortgage		$	257,199			$	1,417
Consumer			19,009				—
Total		$	276,208			$	1,417

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).

		June 30, 2015
		Current				30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days Past Due				Total Past Due				Total Loans				90 Days Past Due and Still Accruing
Commercial		$	153,174			$	—			$	2,285			$	—			$	2,285			$	155,459			$	—
Commercial loans secured by real estate			426,939				—				—				235				235				427,174				—
Real estate-mortgage			255,924				1,634				637				949				3,220				259,144				—
Consumer			20,009				55				9				—				64				20,073				—
Total		$	856,046			$	1,689			$	2,931			$	1,184			$	5,804			$	861,850			$	—

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

		December 31, 2014
		Current				30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days Past Due				Total Past Due				Total Loans				90 Days Past Due and Still Accruing
Commercial		$	139,126			$	—			$	—			$	—			$	—			$	139,126			$	—
Commercial loans secured by real estate			410,049				280				—				—				280				410,329				—
Real estate-mortgage			255,021				2,196				332				1,067				3,595				258,616				—
Consumer			18,927				74				8				—				82				19,009				—
Total		$	823,123			$	2,550			$	340			$	1,067			$	3,957			$	827,080			$	—

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are complemented by consideration of other qualitative factors.

Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.

The Company uses a comprehensive methodology and procedural discipline to maintain an ALL 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, non-performing and TDR loans, 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 Company’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.

“Pass” rated credits are segregated from “Criticized” and “Classified” credits for the application of qualitative factors.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. Non-performing Assets Including Troubled Debt Restructurings (TDR)

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

		June 30, 2015				December 31, 2014
Non-accrual loans
Commercial		$	209			$	—
Commercial loans secured by real estate			255				778
Real estate-mortgage			1,647				1,417
Total			2,111				2,195
Other real estate owned
Commercial loans secured by real estate			—				384
Real estate-mortgage			126				128
Total			126				512
TDR’s not in non-accrual			328				210
Total non-performing assets including TDR		$	2,565			$	2,917
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.30	%			0.35	%

The Company had no loans past due 90 days or more for the periods presented which were accruing interest.

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 (in thousands).

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
Interest income due in accordance with original terms		$	24			$	34			$	48			$	67
Interest income recorded			—				—				—				—
Net reduction in interest income		$	24			$	34			$	48			$	67

Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Bank’s objective in offering a TDR is to increase the probability of repayment of the borrower’s loan.

To be considered a TDR, both of the following criteria must be met:

Factors that indicate a borrower is experiencing financial difficulties include, but are not limited to:

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9. Non-performing Assets Including Troubled Debt Restructurings (TDR)  – (continued)

Factors that indicate that a concession has been granted include, but are not limited to:

The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the modification. No single factor is determinative of whether a restructuring is a TDR. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean that the borrower is experiencing financial difficulty. Accordingly, determination of whether a modification is a TDR involves a large degree of judgment.

The Company had no loans modified as TDRs during the second quarter of 2015.

The following table details the loans modified as TDRs during the six month period ended June 30, 2015 (dollars in thousands).

Loans in accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan

1

$

204

Extension of maturity date

The following table details the loans modified as TDRs during the three month period ended June 30, 2014 (dollars in thousands).

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan secured by real estate

1

$

141

Extension of maturity date

The following table details the loans modified as TDRs during the six month period ended June 30, 2014 (dollars in thousands).

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan secured by real estate

1

$

253

Extension of maturity date

In all instances where loans have been modified in troubled debt restructurings the pre- and post-modified balances are the same. The specific ALL reserve for loans modified as TDR’s was $542,000 and $365,000 as of June 30, 2015 and 2014, respectively. All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed.

Once a loan is classified as a TDR, this classification will remain until documented improvement in the financial position of the borrower supports confidence that all principal and interest will be paid according to terms. Additionally, the customer must have re-established a track record of timely payments according to the restructured contract terms for a minimum of six consecutive months prior to consideration for removing the

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9. Non-performing Assets Including Troubled Debt Restructurings (TDR)  – (continued)

loan from non-accrual TDR status. However, a loan will continue to be on non-accrual status until, consistent with our policy, the borrower has made a minimum of an additional six consecutive monthly payments in accordance with the terms of the loan.

The Company had no loans that were classified as TDR’s or were subsequently modified during each 12-month period prior to the current reporting periods, which begin January 1, 2015 and 2014 (six month periods) and April 1, 2015 and 2014 (three month periods), respectively, and that subsequently defaulted during these reporting periods.

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.

10. Federal Home Loan Bank Borrowings

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

		At June 30, 2015
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	63,430				0.33	%
Advances			2015				4,000				0.52
			2016				12,000				0.81
			2017				12,000				1.06
			2018				10,000				1.51
			2019 and over				8,000				1.76
Total advances							46,000				1.17
Total FHLB borrowings						$	109,430				0.68	%

		At December 31, 2014
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	38,880				0.27	%
Advances			2015				4,000				0.52
			2016				12,000				0.81
			2017				12,000				1.06
			2018				10,000				1.51
			2019 and over				4,000				1.88
Total advances							42,000				1.12
Total FHLB borrowings						$	80,880				0.71	%

The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance. All FHLB stock along with an interest in certain residential mortgage and CRE loans with an aggregate statutory value equal to the amount of the advances are pledged as collateral to the FHLB of Pittsburgh to support these borrowings.

11. Preferred Stock

On August 11, 2011, pursuant to the Small Business Lending Fund (SBLF), the Company issued and sold to the US Treasury 21,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E Preferred Stock) for the aggregate proceeds of $21 million. The SBLF is a voluntary program sponsored by the US Treasury that encourages small business lending by providing capital to qualified community banks at favorable rates. The Company used the proceeds from the Series E Preferred Stock issued to the US Treasury to repurchase all 21,000 shares of its outstanding preferred shares previously issued to the US Treasury under the TARP Capital Purchase Program.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11. Preferred Stock  – (continued)

The Series E Preferred Stock has an aggregate liquidation preference of approximately $21 million and qualifies as Tier 1 Capital for regulatory purposes. The terms of the Series E Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. Since January 1, 2014, the dividend rate of the Series E Preferred Stock has been fixed at 1% per annum until February 7, 2016. Beginning on February 8, 2016, the dividend rate will be fixed at 9% per annum.

As long as shares of Series E Preferred Stock remain outstanding, we may not pay dividends to our common shareholders (nor may we repurchase or redeem any shares of our common stock) during any quarter in which we fail to declare and pay dividends on the Series E Preferred Stock and for the next three quarters following such failure. In addition, under the terms of the Series E Preferred Stock, we may only declare and pay dividends on our common stock (or repurchase shares of our common stock), if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least ninety percent (90%) of Tier 1 capital as of June 30, 2011, excluding any charge-offs and redemptions of the Series E Preferred Stock (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning January 1, 2014, based upon the extent by which the Qualified Small Business Lending by the Bank at September 30, 2013 has increased over the Baseline.

We may redeem the Series E Preferred Stock at any time at our option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, subject to the approval of our federal banking regulator.

12. Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three and six months ended June 30, 2015 and 2014 (in thousands):

		Three months ended June 30, 2015												Three months ended June 30, 2014
		Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)				Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)
Beginning balance		$	2,072			$	(8,313	)		$	(6,241	)		$	1,345			$	(6,659	)		$	(5,314	)
Other comprehensive income (loss) before reclassifications			(625	)			416				(209	)			684				—				684
Amounts reclassified from accumulated other comprehensive loss			(18	)			—				(18	)			(79	)			—				(79	)
Net current period other comprehensive income (loss)			(643	)			416				(227	)			605				—				605
Ending balance		$	1,429			$	(7,897	)		$	(6,468	)		$	1,950			$	(6,659	)		$	(4,709	)

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

		Six months ended June 30, 2015												Six months ended June 30, 2014
		Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)				Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)
Beginning balance		$	1,843			$	(8,745	)		$	(6,902	)		$	1,043			$	(6,918	)		$	(5,875	)
Other comprehensive income (loss) before reclassifications			(396	)			848				452				1,024				256				1,280
Amounts reclassified from accumulated other comprehensive loss			(18	)			—				(18	)			(117	)			3				(114	)
Net current period other comprehensive income (loss)			(414	)			848				434				907				259				1,166
Ending balance		$	1,429			$	(7,897	)		$	(6,468	)		$	1,950			$	(6,659	)		$	(4,709	)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three and six months ended June 30, 2015 and 2014 (in thousands):

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the three months ended June 30, 2015				For the three months ended June 30, 2014				Affected line item in the statement of operations
Unrealized gains and losses on sale of securities
		$	(28	)		$	(120	)			Net realized gains on investment securities
			10				41				Provision for income tax expense
		$	(18	)		$	(79	)			Net of tax
Total reclassifications for the period		$	(18	)		$	(79	)			Net income

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the six months ended June 30, 2015				For the six months ended June 30, 2014				Affected line item in the statement of operations
Unrealized gains and losses on sale of securities
		$	(28	)		$	(177	)			Net realized gains on investment securities
			10				60				Provision for income tax expense
		$	(18	)		$	(117	)			Net of tax
Amortization of defined benefit items(2)
Amortization of prior year service cost		$	—			$	5				Salaries and employee benefits
			—				(2	)			Provision for income tax expense
		$	—			$	3				Net of tax
Total reclassifications for the period		$	(18	)		$	(114	)			Net income

13. Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. For June 30, 2015, the final Basel III rules require the Company to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulations) to risk-weighted assets (RWA) (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules. As of June 30, 2015, the Bank was categorized as “Well Capitalized” under the regulatory framework for prompt corrective action promulgated by the Federal Reserve. The Company believes that no conditions or events have occurred that would change this conclusion as of such date. To be categorized as Well Capitalized, the Bank must maintain minimum Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital, and Tier 1 leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.66% at June 30, 2015 (in thousands, except ratios).

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. Regulatory Capital  – (continued)

		At June 30, 2015
		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital (To RWA) Consolidated		$	132,879				14.63	%		$	72,653				8.00	%		$	90,817				10.00	%
AmeriServ Financial Bank			106,168				11.81				71,907				8.00				89,884				10.00
Common Equity Tier 1 Capital (To RWA) Consolidated			90,191				9.93				40,867				4.50				59,031				6.50
AmeriServ Financial Bank			95,541				10.63				40,448				4.50				58,425				6.50
Tier 1 Capital (To RWA) Consolidated			122,252				13.46				54,490				6.00				72,653				8.00
AmeriServ Financial Bank			95,541				10.63				53,930				6.00				71,907				8.00
Tier 1 Capital (To Average Assets) leverage Consolidated			122,252				11.23				43,543				4.00				54,428				5.00
AmeriServ Financial Bank			95,541				9.01				42,425				4.00				53,032				5.00