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 September 30, 2016

		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 November 1, 2016
Common Stock, par value $0.01		18,903,472

TABLE OF CONTENTS

AmeriServ Financial, Inc.
 
INDEX

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) — September 30, 2016 and December 31, 2015			1
Consolidated Statements of Operations (Unaudited) — Three and nine months ended September 30, 2016 and 2015			2
Consolidated Statements of Comprehensive Income (Unaudited) — Three and nine months ended September 30, 2016 and 2015			3
Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2016 and 2015			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosure About Market Risk			45
Item 4. Controls and Procedures			45
PART II. OTHER INFORMATION			46
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Mine Safety Disclosures			46
Item 5. Other Information			46
Item 6. Exhibits			46

TABLE OF CONTENTS

Item 1. Financial Statements

AmeriServ Financial, Inc.
 
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
(Unaudited)

		September 30, 2016				December 31, 2015
ASSETS
Cash and due from depository institutions		$	22,241			$	23,443
Interest bearing deposits			2,781				6,960
Short-term investments in money market funds			5,498				18,107
Total cash and cash equivalents			30,520				48,510
Investment securities:
Available for sale			117,789				119,467
Held to maturity (fair value $28,577 on September 30, 2016 and $21,533 on December 31, 2015)			27,820				21,419
Loans held for sale			8,777				3,003
Loans			888,013				881,541
Less: Unearned income			489				557
Allowance for loan losses			9,726				9,921
Net loans			877,798				871,063
Premises and equipment, net			11,823				12,108
Accrued interest income receivable			3,007				3,057
Goodwill			11,944				11,944
Bank owned life insurance			37,733				37,228
Net deferred tax asset			8,623				8,993
Federal Home Loan Bank stock			3,355				4,628
Federal Reserve Bank stock			2,125				2,125
Other assets			4,341				4,952
TOTAL ASSETS		$	1,145,655			$	1,148,497
LIABILITIES
Non-interest bearing deposits		$	178,664			$	188,947
Interest bearing deposits			784,072				714,347
Total deposits			962,736				903,294
Short-term borrowings			7,901				48,748
Advances from Federal Home Loan Bank			49,042				48,000
Guaranteed junior subordinated deferrable interest debentures, net			12,904				12,892
Subordinated debt, net			7,435				7,418
Total borrowed funds			77,282				117,058
Other liabilities			5,593				9,172
TOTAL LIABILITIES			1,045,611				1,029,524
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 December 31, 2015			—				21,000
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,521,291 shares issued and 18,903,472 outstanding on September 30, 2016; 26,488,630 shares issued and 18,870,811 outstanding on December 31, 2015			265				265
Treasury stock at cost, 7,617,819 shares on September 30, 2016 and December 31, 2015			(74,829	)			(74,829	)
Capital surplus			145,530				145,441
Retained earnings			35,135				34,651
Accumulated other comprehensive loss, net			(6,057	)			(7,555	)
TOTAL SHAREHOLDERS’ EQUITY			100,044				118,973
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,145,655			$	1,148,497

 
 
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 September 30,								Nine months ended September 30,
		2016				2015				2016				2015
INTEREST INCOME
Interest and fees on loans		$	9,462			$	9,718			$	28,336			$	28,654
Interest bearing deposits			2				1				11				4
Short-term investments in money market funds			31				3				54				10
Investment securities:
Available for sale			779				790				2,324				2,480
Held to maturity			202				155				562				451
Total Interest Income			10,476				10,667				31,287				31,599
INTEREST EXPENSE
Deposits			1,391				1,174				3,975				3,519
Short-term borrowings			2				37				49				70
Advances from Federal Home Loan Bank			166				141				484				401
Guaranteed junior subordinated deferrable interest debentures			280				280				840				840
Subordinated debt			131				—				389				—
Total Interest Expense			1,970				1,632				5,737				4,830
NET INTEREST INCOME			8,506				9,035				25,550				26,769
Provision for loan losses			300				300				3,650				750
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,206				8,735				21,900				26,019
NON-INTEREST INCOME
Trust and investment advisory fees			2,035				2,085				6,234				6,276
Service charges on deposit accounts			433				441				1,252				1,289
Net gains on sale of loans			260				178				552				594
Mortgage related fees			132				87				293				311
Net realized gains (losses) on investment securities			60				(36	)			177				(8	)
Bank owned life insurance			169				684				505				1,218
Other income			572				576				1,827				1,739
Total Non-Interest Income			3,661				4,015				10,840				11,419
NON-INTEREST EXPENSE
Salaries and employee benefits			5,901				6,079				17,935				18,096
Net occupancy expense			656				692				2,083				2,251
Equipment expense			419				409				1,264				1,355
Professional fees			1,330				1,206				3,987				3,692
Supplies, postage and freight			181				181				530				534
Miscellaneous taxes and insurance			287				288				866				872
Federal deposit insurance expense			189				174				556				505
Other expense			1,393				1,190				3,885				3,563
Total Non-Interest Expense			10,356				10,219				31,106				30,868
PRETAX INCOME			1,511				2,531				1,634				6,570
Provision for income tax expense			446				698				474				1,947
NET INCOME			1,065				1,833				1,160				4,623
Preferred stock dividends			—				52				15				157
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	1,065			$	1,781			$	1,145			$	4,466
PER COMMON SHARE DATA:
Basic:
Net income		$	0.06			$	0.09			$	0.06			$	0.24
Average number of shares outstanding			18,899				18,869				18,893				18,860
Diluted:
Net income		$	0.06			$	0.09			$	0.06			$	0.24
Average number of shares outstanding			18,957				18,951				18,947				18,928
Cash dividends declared		$	0.015			$	0.010			$	0.035			$	0.030

 
 
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 September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
COMPREHENSIVE INCOME
Net income		$	1,065			$	1,833			$	1,160			$	4,623
Other comprehensive income, before tax:
Pension obligation change for defined benefit plan			263				315				1,030				1,601
Income tax effect			(89	)			(107	)			(349	)			(545	)
Unrealized holding gains (losses) on available for sale securities arising during period			(191	)			387				1,417				(211	)
Income tax effect			65				(131	)			(483	)			72
Reclassification adjustment for (gains) losses on available for sale securities included in net income			(60	)			36				(177	)			8
Income tax effect			20				(12	)			60				(3	)
Other comprehensive income			8				488				1,498				922
Comprehensive income		$	1,073			$	2,321			$	2,658			$	5,545

 
 
See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine months ended September 30,
		2016				2015
OPERATING ACTIVITIES
Net income		$	1,160			$	4,623
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses			3,650				750
Depreciation expense			1,306				1,346
Net amortization of investment securities			342				254
Net realized (gains) losses on investment securities available for sale			(177	)			8
Net gains on loans held for sale			(552	)			(594	)
Amortization of deferred loan fees			(174	)			(202	)
Origination of mortgage loans held for sale			(42,549	)			(39,214	)
Sales of mortgage loans held for sale			37,327				41,946
Decrease (increase) in accrued interest income receivable			50				(188	)
Decrease in accrued interest payable			(18	)			(105	)
Earnings on bank owned life insurance			(505	)			(514	)
Deferred income taxes			(280	)			805
Amortization of deferred issuance costs			29				—
Stock based compensation expense			89				179
Other, net			(2,000	)			(2,536	)
Net cash (used in) provided by operating activities			(2,302	)			6,558
INVESTING ACTIVITIES
Purchases of investment securities – available for sale			(24,896	)			(9,408	)
Purchases of investment securities – held to maturity			(8,633	)			(4,795	)
Proceeds from sales of investment securities – available for sale			8,966				2,379
Proceeds from maturities of investment securities – available for sale			18,750				19,063
Proceeds from maturities of investment securities – held to maturity			2,166				4,233
Purchases of regulatory stock			(8,833	)			(14,111	)
Proceeds from redemption of regulatory stock			10,106				13,498
Long-term loans originated			(145,189	)			(185,864	)
Principal collected on long-term loans			120,875				140,143
Loans purchased or participated			(4,948	)			(11,519	)
Loans sold or participated			18,900				18,443
Proceeds from sale of other real estate owned			99				478
Proceeds from life insurance policy			—				1,140
Purchases of premises and equipment			(1,012	)			(691	)
Net cash used in investing activities			(13,649	)			(27,011	)
FINANCING ACTIVITIES
Net increase (decrease) in deposit balances			59,442				(56	)
Net (decrease) increase in other short-term borrowings			(40,847	)			14,108
Principal borrowings on advances from Federal Home Loan Bank			7,042				9,000
Principal repayments on advances from Federal Home Loan Bank			(6,000	)			(3,000	)
Preferred stock redemption			(21,000	)			—
Common stock dividends			(661	)			(566	)
Preferred stock dividends			(15	)			(157	)
Net cash (used in) provided by financing activities			(2,039	)			19,329
NET DECREASE IN CASH AND CASH EQUIVALENTS			(17,990	)			(1,124	)
CASH AND CASH EQUIVALENTS AT JANUARY 1			48,510				32,872
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30		$	30,520			$	31,748

 
 
See accompanying notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

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 16 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.0 billion that are not reported on the Company’s consolidated balance sheet at September 30, 2016. 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, 2015.

3. Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In June 2016, the four federal financial institution regulatory agencies issued a joint statement regarding ASU 2016-13 providing their initial supervisory views regarding the standard’s implementation, including as it relates to measurement methods, use of vendors, portfolio segmentation, data collection, processes and controls over allowance methodology, and potential impact on capital. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

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NOTES TO UNAUDITED CONSOLIDATED 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 excluded for earnings per share purposes. Options to purchase 147,968 common shares, at exercise prices ranging from $3.18 to $4.60, were outstanding as of September 30, 2016, but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Options to purchase 74,304 common shares, at exercise prices ranging from $3.20 to $4.70, were outstanding as of September 30, 2015, but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Dividends on preferred shares are deducted from net income in the calculation of earnings per common share.

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
		(In thousands, except per share data)
Numerator:
Net income		$	1,065			$	1,833			$	1,160			$	4,623
Preferred stock dividends			—				(52	)			(15	)			(157	)
Net income available to common shareholders		$	1,065			$	1,781			$	1,145			$	4,466
Denominator:
Weighted average common shares outstanding (basic)			18,899				18,869				18,893				18,860
Effect of stock options			58				82				54				68
Weighted average common shares outstanding (diluted)			18,957				18,951				18,947				18,928
Earnings per common share:
Basic		$	0.06			$	0.09			$	0.06			$	0.24
Diluted			0.06				0.09				0.06				0.24

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 $390,000 in income tax payments in the first nine months of 2016 and $1.1 million in the same 2015 period. The Company made total interest payments of $5,755,000 in the first nine months of 2016 compared to $4,935,000 in the same 2015 period. The Company had $151,000 non-cash transfers to other real estate owned (OREO) in the first nine months of 2016 compared to $165,000 non-cash transfers in the same 2015 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):

		September 30, 2016
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	900			$	—			$	—			$	900
US Agency mortgage-backed securities			83,911				2,308				(34	)			86,185
Taxable municipal			827				—				(1	)			826
Corporate bonds			29,686				458				(266	)			29,878
Total		$	115,324			$	2,766			$	(301	)		$	117,789

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Investment securities held to maturity (HTM):

		September 30, 2016
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	11,725			$	494			$	—			$	12,219
Taxable municipal			10,047				257				(12	)			10,292
Corporate bonds and other securities			6,048				54				(36	)			6,066
Total		$	27,820			$	805			$	(48	)		$	28,577

Investment securities available for sale (AFS):

		December 31, 2015
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	2,900			$	—			$	(19	)		$	2,881
US Agency mortgage-backed securities			96,801				1,975				(442	)			98,334
Corporate bonds			18,541				18				(307	)			18,252
Total		$	118,242			$	1,993			$	(768	)		$	119,467

Investment securities held to maturity (HTM):

		December 31, 2015
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	10,827			$	247			$	(53	)		$	11,021
Taxable municipal			5,592				67				(65	)			5,594
Corporate bonds and other securities			5,000				3				(85	)			4,918
Total		$	21,419			$	317			$	(203	)		$	21,533

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 September 30, 2016, 67.4% of the portfolio was rated “AAA” as compared to 79.1% at December 31, 2015. Approximately 8.2% of the portfolio was either rated below “A” or unrated at September 30, 2016 as compared to 5.7% at December 31, 2015.

The Company sold $1.5 million AFS securities in the third quarter of 2016 resulting in $60,000 of gross investment security gains and sold $9.0 million AFS securities in the first nine months of 2016 resulting in $183,000 of gross investment security gains and $6,000 of gross investment security losses. The Company sold a $1.9 million AFS security in the third quarter of 2015 resulting in $36,000 of gross investment security losses and $2.4 million of AFS securities for the first nine months of 2015 resulting in a $28,000 gross investment security gains and $36,000 of gross investment 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 $97,182,000 at September 30, 2016 and $87,096,000 at December 31, 2015.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

The following tables present information concerning investments with unrealized losses as of September 30, 2016 and December 31, 2015 (in thousands):

Total investment securities:

		September 30, 2016
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	400			$	—			$	—			$	—			$	400			$	—
US Agency mortgage-backed securities			3,082				(12	)			1,074				(22	)			4,156				(34	)
Taxable municipal			2,268				(13	)			—				—				2,268				(13	)
Corporate bonds and other securities			6,499				(90	)			7,786				(212	)			14,285				(302	)
Total		$	12,249			$	(115	)		$	8,860			$	(234	)		$	21,109			$	(349	)

Total investment securities:

		December 31, 2015
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	1,486			$	(14	)		$	395			$	(5	)		$	1,881			$	(19	)
US Agency mortgage-backed securities			33,359				(245	)			9,088				(250	)			42,447				(495	)
Taxable municipal			3,617				(65	)			—				—				3,617				(65	)
Corporate bonds and other securities			8,884				(160	)			7,766				(232	)			16,650				(392	)
Total		$	47,346			$	(484	)		$	17,249			$	(487	)		$	64,595			$	(971	)

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 24 positions that are considered temporarily impaired at September 30, 2016. 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 September 30, 2016 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. The duration of the total investment securities portfolio at September 30, 2016 is 29.4 months and is lower than the duration at December 31, 2015 which was 34.2 months. The duration remains within our internal established guideline range of 24 to 42 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Total investment securities:

		September 30, 2016
		Available for sale								Held to maturity
		Cost Basis				Fair Value				Cost Basis				Fair Value
Within 1 year		$	3,999			$	3,986			$	—			$	—
After 1 year but within 5 years			7,778				7,824				3,400				3,378
After 5 years but within 10 years			35,835				36,809				9,387				9,639
After 10 years but within 15 years			34,267				35,141				5,739				5,848
Over 15 years			33,445				34,029				9,294				9,712
Total		$	115,324			$	117,789			$	27,820			$	28,577

7. Loans

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

		September 30, 2016				December 31, 2015
Commercial		$	181,251			$	181,066
Commercial loans secured by real estate			437,911				421,637
Real estate – mortgage			248,544				257,937
Consumer			19,818				20,344
Loans, net of unearned income		$	887,524			$	880,984

Loan balances at September 30, 2016 and December 31, 2015 are net of unearned income of $489,000 and $557,000, respectively. Real estate-construction loans comprised 4.0% and 3.0% of total loans, net of unearned income at September 30, 2016 and December 31, 2015, 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 nine month periods ending September 30, 2016 and 2015 (in thousands).

		Three months ended September 30, 2016
		Balance at June 30, 2016				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2016
Commercial		$	4,322			$	(295	)		$	115			$	92			$	4,234
Commercial loans secured by real estate			3,274				(13	)			2				85				3,348
Real estate – mortgage			1,075				(104	)			24				77				1,072
Consumer			135				(57	)			8				53				139
Allocation for general risk			940				—				—				(7	)			933
Total		$	9,746			$	(469	)		$	149			$	300			$	9,726

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

		Three months ended September 30, 2015
		Balance at June 30, 2015				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2015
Commercial		$	3,171			$	(35	)		$	21			$	(47	)		$	3,110
Commercial loans secured by real estate			4,140				(235	)			3				113				4,021
Real estate – mortgage			1,321				(85	)			98				58				1,392
Consumer			201				(18	)			6				88				277
Allocation for general risk			884				—				—				88				972
Total		$	9,717			$	(373	)		$	128			$	300			$	9,772

		Nine months ended September 30, 2016
		Balance at December 31, 2015				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2016
Commercial		$	4,244			$	(3,648	)		$	126			$	3,512			$	4,234
Commercial loans secured by real estate			3,449				(13	)			38				(126	)			3,348
Real estate – mortgage			1,173				(150	)			86				(37	)			1,072
Consumer			151				(302	)			18				272				139
Allocation for general risk			904				—				—				29				933
Total		$	9,921			$	(4,113	)		$	268			$	3,650			$	9,726

		Nine months ended September 30, 2015
		Balance at December 31, 2014				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2015
Commercial		$	3,262			$	(156	)		$	35			$	(31	)		$	3,110
Commercial loans secured by real estate			3,902				(250	)			54				315				4,021
Real estate – mortgage			1,310				(376	)			153				305				1,392
Consumer			190				(81	)			20				148				277
Allocation for general risk			959				—				—				13				972
Total		$	9,623			$	(863	)		$	262			$	750			$	9,772

The substantially higher than typical provision in the first nine months 2016 for the commercial portfolio was necessary to resolve the Company’s only meaningful direct loan exposure to the energy industry. These loans are related to a single borrower in the fracking industry who had filed for bankruptcy protection in the fourth quarter of 2015. With the bankruptcy changing from Chapter 11 (reorganization) to Chapter 7 (liquidation) late in the first quarter of 2016, the Company concluded that its previously established reserves on these non-accrual loans were not sufficient to cover the discounted collateral values that will result from the liquidation process. As a result of this action, the Company also experienced heightened net loan charge-offs.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

		At September 30, 2016
		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Loans:
Individually evaluated for impairment		$	656			$	224			$	—			$	—							$	880
Collectively evaluated for impairment			180,595				437,687				248,544				19,818								886,644
Total loans		$	181,251			$	437,911			$	248,544			$	19,818							$	887,524
Allowance for loan losses:
Specific reserve allocation		$	507			$	33			$	—			$	—			$	—			$	540
General reserve allocation			3,727				3,315				1,072				139				933				9,186
Total allowance for loan losses		$	4,234			$	3,348			$	1,072			$	139			$	933			$	9,726

		At December 31, 2015
		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Loans:
Individually evaluated for impairment		$	4,416			$	86			$	—			$	—							$	4,502
Collectively evaluated for impairment			176,650				421,551				257,937				20,344								876,482
Total loans		$	181,066			$	421,637			$	257,937			$	20,344							$	880,984
Allowance for loan losses:
Specific reserve allocation		$	1,387			$	—			$	—			$	—			$	—			$	1,387
General reserve allocation			2,857				3,449				1,173				151				904				8,534
Total allowance for loan losses		$	4,244			$	3,449			$	1,173			$	151			$	904			$	9,921

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 commercial real estate (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

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8. Allowance for Loan Losses  – (continued)

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 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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).

		September 30, 2016
		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		$	507			$	507			$	149			$	656			$	656
Commercial loans secured by real estate			165				33				59				224				646
Total impaired loans		$	672			$	540			$	208			$	880			$	1,302

		December 31, 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		$	4,416			$	1,387			$	—			$	4,416			$	4,421
Commercial loans secured by real estate			—				—				86				86				522
Total impaired loans		$	4,416			$	1,387			$	86			$	4,502			$	4,943

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 September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Average loan balance:
Commercial		$	821			$	347			$	992			$	189
Commercial loans secured by real estate			283				966				449				1,583
Consumer			—				35				—				23
Average investment in impaired loans		$	1,104			$	1,348			$	1,441			$	1,795
Interest income recognized:
Commercial		$	1			$	7			$	9			$	17
Commercial loans secured by real estate			—				5				8				15
Consumer			—				—				—				1
Interest income recognized on a cash basis on impaired loans		$	1			$	12			$	17			$	33

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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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 2016 requires 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.

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).

		September 30, 2016
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	178,536			$	90			$	2,118			$	507			$	181,251
Commercial loans secured by real estate			428,613				7,593				1,689				16				437,911
Total		$	607,149			$	7,683			$	3,807			$	523			$	619,162

		December 31, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	174,616			$	1,811			$	3,318			$	1,321			$	181,066
Commercial loans secured by real estate			416,331				3,100				2,188				18				421,637
Total		$	590,947			$	4,911			$	5,506			$	1,339			$	602,703

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).

		September 30, 2016
		Performing				Non-Performing
Real estate – mortgage		$	247,628			$	916
Consumer			19,818				—
Total		$	267,446			$	916

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

		December 31, 2015
		Performing				Non-Performing
Real estate – mortgage		$	256,149			$	1,788
Consumer			20,344				—
Total		$	276,493			$	1,788

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).

		September 30, 2016
		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		$	180,774			$	328			$	—			$	149			$	477			$	181,251			$	—
Commercial loans secured by real estate			437,789				122				—				—				122				437,911				—
Real estate – mortgage			245,023				2,243				554				724				3,521				248,544				—
Consumer			19,742				66				10				—				76				19,818				—
Total		$	883,328			$	2,759			$	564			$	873			$	4,196			$	887,524			$	—

		December 31, 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		$	176,216			$	489			$	4,361			$	—			$	4,850			$	181,066			$	—
Commercial loans secured by real estate			421,247				208				182				—				390				421,637				—
Real estate – mortgage			254,288				2,658				442				549				3,649				257,937				—
Consumer			20,115				67				162				—				229				20,344				—
Total		$	871,866			$	3,422			$	5,147			$	549			$	9,118			$	880,984			$	—

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,

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8. Allowance for Loan Losses  – (continued)

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.

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

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

		September 30, 2016				December 31, 2015
Non-accrual loans
Commercial		$	656			$	4,260
Commercial loans secured by real estate			181				18
Real estate – mortgage			916				1,788
Total			1,753				6,066
Other real estate owned
Commercial			18				—
Commercial loans secured by real estate			100				—
Real estate – mortgage			36				75
Total			154				75
TDR’s not in non-accrual			—				156
Total non-performing assets including TDR		$	1,907			$	6,297
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.21	%			0.71	%

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 September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Interest income due in accordance with original terms		$	20			$	25			$	99			$	73
Interest income recorded			—				—				—				—
Net reduction in interest income		$	20			$	25			$	99			$	73

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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:

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 three month period ending September 30, 2016.

The following table details the loans modified as TDRs during the nine month period ended September 30, 2016 (dollars in thousands).

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan

2

$

507

Extension of maturity date

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

Loans in accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan

1

$

162

Extension of maturity date

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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 $507,000 and $524,000 as of September 30, 2016 and 2015, 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 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, 2016 and 2015 (nine month periods) and July 1, 2016 and 2015 (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.

Foreclosed assets acquired in settlement of loans carried at fair value less estimated costs to sell are included in the other assets on the Consolidated Balance Sheet. As of September 30, 2016 and December 31, 2015, a total of $154,000 and $75,000, respectively of residential real estate foreclosed assets were included in other assets. As of September 30, 2016, the Company had initiated formal foreclosure procedures on $111,000 of consumer residential mortgages.

10. Federal Home Loan Bank Borrowings

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

		At September 30, 2016
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	7,901				0.58	%
Advances			2016				6,000				0.84
			2017				12,000				1.06
			2018				12,000				1.48
			2019				11,000				1.48
			2020 and over				8,042				1.47
Total advances							49,042				1.32
Total FHLB borrowings						$	56,943				1.21	%

		At December 31, 2015
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	48,748				0.43	%
Advances			2016				12,000				0.81
			2017				12,000				1.06
			2018				12,000				1.48
			2019				7,000				1.73
			2020 and over				5,000				1.69
Total advances							48,000				1.27
Total FHLB borrowings						$	96,748				0.85	%

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Federal Home Loan Bank Borrowings  – (continued)

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 was a voluntary program sponsored by the US Treasury that encouraged 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 Capital Purchase Program.

On January 27, 2016, the Company redeemed the Series E Preferred Stock, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, after receiving approval from its federal banking regulator and the US Treasury.

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 nine months ended September 30, 2016 and 2015 (in thousands):

		Three months ended September 30, 2016												Three months ended September 30, 2015
		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		$	1,791			$	(7,856	)		$	(6,065	)		$	1,429			$	(7,897	)		$	(6,468	)
Other comprehensive income (loss) before reclassifications			(126	)			174				48				256				208				464
Amounts reclassified from accumulated other comprehensive loss			(40	)			—				(40	)			24				—				24
Net current period other comprehensive income (loss)			(166	)			174				8				280				208				488
Ending balance		$	1,625			$	(7,682	)		$	(6,057	)		$	1,709			$	(7,689	)		$	(5,980	)

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

		Nine months ended September 30, 2016												Nine months ended September 30, 2015
		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		$	808			$	(8,363	)		$	(7,555	)		$	1,843			$	(8,745	)		$	(6,902	)
Other comprehensive income (loss) before reclassifications			934				681				1,615				(139	)			1,056				917
Amounts reclassified from accumulated other comprehensive loss			(117	)			—				(117	)			5				—				5
Net current period other comprehensive income (loss)			817				681				1,498				(134	)			1,056				922
Ending balance		$	1,625			$	(7,682	)		$	(6,057	)		$	1,709			$	(7,689	)		$	(5,980	)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015 (in thousands):

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the three months ended September 30, 2016				For the three months ended September 30, 2015				Affected line item in the consolidated statement of operations
Realized (gains) and losses on sale of securities
		$	(60	)		$	36				Net realized (gains) losses on investment securities
			20				(12	)			Provision for income tax expense
		$	(40	)		$	24				Net of tax
Total reclassifications for the period		$	(40	)		$	24				Net income

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the nine months ended September 30, 2016				For the nine months ended September 30, 2015				Affected line item in the consolidated statement of operations
Realized (gains) and losses on sale of securities
		$	(177	)		$	8				Net realized (gains) losses on investment securities
			60				(3	)			Provision for income tax expense
		$	(117	)		$	5				Net of tax
Total reclassifications for the period		$	(117	)		$	5				Net income

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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. For a more detailed discussion see the Capital Resources section of the MD&A.

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, Tier 1 capital to average assets, and 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. As of September 30, 2016, 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 7.77% at September 30, 2016 (in thousands, except ratios).

		At September 30, 2016
		Company								Bank								Minimum Required For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Regulations*
		Amount				Ratio				Amount				Ratio				Ratio				Ratio
		(In Thousands, Except Ratios)
Total Capital (To Risk Weighted Assets)		$	124,055				13.17	%		$	106,942				11.43	%			8.63	%			10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)			94,157				10.00				96,315				10.29				5.13				6.50
Tier 1 Capital (To Risk Weighted Assets)			105,993				11.25				93,315				10.29				6.63				8.00
Tier 1 Capital (To Average Assets)			105,993				9.29				96,315				8.58				4.00				5.00