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EX-15.2 - EXHIBIT 15.2 - AMERISERV FINANCIAL INC /PA/v408291_exh15x2.htm
EX-32.1 - EXHIBIT 32.1 - AMERISERV FINANCIAL INC /PA/v408291_exh32x1.htm
EX-32.2 - EXHIBIT 32.2 - AMERISERV FINANCIAL INC /PA/v408291_exh32x2.htm
EX-15.1 - EXHIBIT 15.1 - AMERISERV FINANCIAL INC /PA/v408291_exh15x1.htm
EX-31.1 - EXHIBIT 31.1 - AMERISERV FINANCIAL INC /PA/v408291_exh31x1.htm

 

 

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 March 31, 2015

 
o   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 May 1, 2015
Common Stock, par value $0.01   18,855,021
 

 


 
 

TABLE OF CONTENTS

AmeriServ Financial, Inc.
 
INDEX

 
  Page No.

PART I.

FINANCIAL INFORMATION:

        

Item 1.

Financial Statements

    1  
Consolidated Balance Sheets (Unaudited) — March 31, 2015 and
December 31, 2014
    1  
Consolidated Statements of Operations (Unaudited) — Three months ended March 31, 2015 and 2014     2  
Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended March 31, 2015 and 2014     4  
Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2015 and 2014     5  
Notes to Unaudited Consolidated Financial Statements     7  

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

    29  

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

    39  

Item 4.

Controls and Procedures

    39  

PART II.

OTHER INFORMATION

        

Item 1.

Legal Proceedings

    40  

Item 1A.

Risk Factors

    40  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    40  

Item 3.

Defaults Upon Senior Securities

    40  

Item 4.

Mine Safety Disclosures

    40  

Item 5.

Other Information

    40  

Item 6.

Exhibits

    40  

i


 
 

TABLE OF CONTENTS

Item 1. Financial Statements

AmeriServ Financial, Inc.

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

   
  March 31,
2015
  December 31,
2014
ASSETS
                 
Cash and due from depository institutions   $ 20,591     $ 23,780  
Interest bearing deposits     2,969       2,952  
Short-term investments in money market funds     7,158       6,140  
Total cash and cash equivalents     30,718       32,872  
Investment securities:
                 
Available for sale     122,533       127,110  
Held to maturity (fair value $20,013 on March 31, 2015 and $20,213 on December 31, 2014)     19,477       19,840  
Loans held for sale     3,575       5,051  
Loans     850,979       827,634  
Less: Unearned income     582       554  
Allowance for loan losses     9,689       9,623  
Net loans     840,708       817,457  
Premises and equipment, net     12,781       13,012  
Accrued interest income receivable     3,300       3,127  
Goodwill     11,944       11,944  
Bank owned life insurance     37,388       37,417  
Net deferred tax asset     8,938       9,548  
Federal Home Loan Bank stock     3,501       4,048  
Federal Reserve Bank stock     2,125       2,125  
Other assets     6,428       5,712  
TOTAL ASSETS   $ 1,103,416     $ 1,089,263  
LIABILITIES
                 
Non-interest bearing deposits   $ 171,074     $ 167,551  
Interest bearing deposits     721,602       702,330  
Total deposits     892,676       869,881  
Short-term borrowings     27,219       38,880  
Advances from Federal Home Loan Bank     44,000       42,000  
Guaranteed junior subordinated deferrable interest debentures     13,085       13,085  
Total borrowed funds     84,304       93,965  
Other liabilities     10,108       11,010  
TOTAL LIABILITIES     987,088       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 March 31, 2015 and December 31, 2014     21,000       21,000  
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,472,840 shares issued and 18,855,021 outstanding on March 31, 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 March 31, 2015 and December 31, 2014     (74,829 )      (74,829 ) 
Capital surplus     145,387       145,256  
Retained earnings     30,746       29,618  
Accumulated other comprehensive loss, net     (6,241 )      (6,902 ) 
TOTAL SHAREHOLDERS’ EQUITY     116,328       114,407  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 1,103,416     $ 1,089,263  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

   
  Three months ended
March 31,
     2015   2014
INTEREST INCOME
                 
Interest and fees on loans   $ 9,456     $ 9,032  
Interest bearing deposits     2       1  
Short-term investments in money market funds     2       2  
Investment securities:
                 
Available for sale     913       924  
Held to maturity     150       136  
Total Interest Income     10,523       10,095  
INTEREST EXPENSE
                 
Deposits     1,174       1,211  
Short-term borrowings     10       19  
Advances from Federal Home Loan Bank     125       60  
Guaranteed junior subordinated deferrable interest debentures     280       280  
Total Interest Expense     1,589       1,570  
NET INTEREST INCOME     8,934       8,525  
Provision for loan losses     250        
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     8,684       8,525  
NON-INTEREST INCOME
                 
Trust and investment advisory fees     2,056       2,032  
Service charges on deposit accounts     419       478  
Net gains on sale of loans     191       101  
Mortgage related fees     115       117  
Net realized gains on investment securities           57  
Bank owned life insurance     363       187  
Other income     568       560  
Total Non-Interest Income     3,712       3,532  
NON-INTEREST EXPENSE
                 
Salaries and employee benefits     6,073       6,314  
Net occupancy expense     841       839  
Equipment expense     466       470  
Professional fees     1,211       1,308  
Supplies, postage and freight     178       183  
Miscellaneous taxes and insurance     297       296  
Federal deposit insurance expense     167       160  
Other expense     1,177       1,168  
Total Non-Interest Expense     10,410       10,738  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

   
  Three months ended
March 31,
     2015   2014
PRETAX INCOME   $ 1,986     $ 1,319  
Provision for income tax expense     617       389  
NET INCOME     1,369       930  
Preferred stock dividends     53       53  
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS   $ 1,316     $ 877  
PER COMMON SHARE DATA:
                 
Basic:
                 
Net income   $ 0.07     $ 0.05  
Average number of shares outstanding     18,851       18,786  
Diluted:
                 
Net income   $ 0.07     $ 0.05  
Average number of shares outstanding     18,909       18,904  
Cash dividends declared   $ 0.01     $ 0.01  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

   
  Three Months Ended
March 31,
     2015   2014
COMPREHENSIVE INCOME
                 
Net income   $ 1,369     $ 930  
Other comprehensive income, before tax:
                 
Pension obligation change for defined benefit plan     655       392  
Income tax effect     (223 )      (133 ) 
Unrealized holding gains on available for sale securities arising during
period
    346       514  
Income tax effect     (117 )      (175 ) 
Reclassification adjustment for gains on available for sale securities included in net income           (57 ) 
Income tax effect           20  
Other comprehensive income     661       561  
Comprehensive income   $ 2,030     $ 1,491  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

   
  Three months ended
March 31,
     2015   2014
OPERATING ACTIVITIES
                 
Net income   $ 1,369     $ 930  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Provision for loan losses     250        
Depreciation expense     456       457  
Net amortization of investment securities     85       96  
Net realized gains on investment securities available for sale           (57 ) 
Net gains on loans held for sale     (191 )      (101 ) 
Amortization of deferred loan fees     (67 )      (75 ) 
Origination of mortgage loans held for sale     (11,764 )      (6,109 ) 
Sales of mortgage loans held for sale     13,431       6,804  
Increase in accrued interest income receivable     (173 )      (291 ) 
Decrease in accrued interest payable     (161 )      (186 ) 
Earnings on bank owned life insurance     (171 )      (187 ) 
Deferred income taxes     285       141  
Stock based compensation expense     132       32  
Other, net     (696 )      699  
Net cash provided by operating activities     2,785       2,153  
INVESTING ACTIVITIES
                 
Purchases of investment securities – available for sale           (2,520 ) 
Purchases of investment securities – held to maturity           (151 ) 
Proceeds from sales of investment securities – available for sale           2,753  
Proceeds from maturities of investment securities – available for sale     4,852       5,428  
Proceeds from maturities of investment securities – held to maturity     350       321  
Purchases of regulatory stock     (3,878 )      (1,830 ) 
Proceeds from redemption of regulatory stock     4,425       2,973  
Long-term loans originated     (68,544 )      (37,426 ) 
Principal collected on long-term loans     41,248       34,040  
Loans purchased or participated     (4,000 )       
Loans sold or participated     7,755        
Proceeds from sale of other real estate owned     53        
Proceeds from life insurance policy     200        
Purchases of premises and equipment     (220 )      (389 ) 
Net cash (used in) provided by investing activities     (17,759 )      3,199  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

   
  Three months ended
March 31,
     2015   2014
FINANCING ACTIVITIES
                 
Net increase in deposit balances   $ 22,722     $ 20,763  
Net decrease in other short-term borrowings     (11,661 )      (29,072 ) 
Principal borrowings on advances from Federal Home Loan Bank     2,000       3,000  
Common stock dividends     (188 )      (187 ) 
Preferred stock dividends     (53 )      (53 ) 
Net cash provided by (used in) financing activities     12,820       (5,549 ) 
NET DECREASE IN CASH AND CASH EQUIVALENTS     (2,154 )      (197 ) 
CASH AND CASH EQUIVALENTS AT JANUARY 1     32,872       30,066  
CASH AND CASH EQUIVALENTS AT MARCH 31   $ 30,718     $ 29,869  

 
 
See accompanying notes to unaudited consolidated financial statements.

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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 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 March 31, 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

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 198,888 common shares, at exercise prices ranging from $2.98 to $4.70, and 8,625 common shares, at exercise prices ranging from $4.60 to $5.75, were outstanding as of March 31, 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.

   
  Three months ended
March 31,
     2015   2014
     (In thousands, except
per share data)
Numerator:
                 
Net income   $ 1,369     $ 930  
Preferred stock dividends     53       53  
Net income available to common shareholders   $ 1,316     $ 877  

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TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Earnings Per Common Share  – (continued)

   
  Three months ended
March 31,
     2015   2014
     (In thousands, except
per share data)
Denominator:
                 
Weighted average common shares outstanding (basic)   $ 18,851     $ 18,786  
Effect of stock options     58       118  
Weighted average common shares outstanding (diluted)     18,909       18,904  
Earnings per common share:
                 
Basic   $ 0.07     $ 0.05  
Diluted     0.07       0.05  

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 $331,000 in income tax payments in the first three months of 2015 as compared to $254,000 for the first three months of 2014. The Company made total interest payments of $1,750,000 in the first three months of 2015 compared to $1,756,000 in the same 2014 period. The Company had $107,000 non-cash transfers to other real estate owned (OREO) in the first three months of 2015 compared to no 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):

       
  March 31, 2015
     Cost
Basis
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
US Agency   $ 5,932     $ 29     $ (13 )    $ 5,948  
US Agency mortgage-backed securities     97,964       3,385       (203 )      101,146  
Corporate bonds     15,497       79       (137 )      15,439  
Total   $ 119,393     $ 3,493     $ (353 )    $ 122,533  

Investment securities held to maturity (HTM):

       
  March 31, 2015
     Cost
Basis
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
US Agency mortgage-backed securities   $ 12,120     $ 449     $ (15 )    $ 12,554  
Taxable municipal     3,362       116             3,478  
Corporate bonds and other securities     3,995       4       (18 )      3,981  
Total   $ 19,477     $ 569     $ (33 )    $ 20,013  

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TABLE OF CONTENTS

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 March 31, 2015, 83.5% of the portfolio was rated “AAA” as compared to 84.1% at December 31, 2014. 4.0% of the portfolio was either rated below “A” or unrated at March 31, 2015. The Company has no exposure to subprime mortgage loans in the investment portfolio. At March 31, 2015, the Company’s consolidated investment securities portfolio had an effective duration of approximately 2.22 years.

The Company sold no AFS securities for the first three months of 2015. Total proceeds from the sale of AFS securities for the first three months of 2014 were $2.8 million resulting in $62,000 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 $106,810,000 at March 31, 2015 and $104,780,000 at December 31, 2014.

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

Total investment securities:

           
  March 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   $     $     $ 2,887     $ (13 )    $ 2,887     $ (13 ) 
US Agency mortgage-backed securities     2,347       (4 )      12,934       (214 )      15,281       (218 ) 
Corporate bonds and other securities     1,970       (27 )      9,870       (128 )      11,840       (155 ) 
Total   $ 4,317     $ (31 )    $ 25,691     $ (355 )    $ 30,008     $ (386 ) 

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TABLE OF CONTENTS

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 29 positions that are considered temporarily impaired at March 31, 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 March 31, 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:

       
  March 31, 2015
     Available for sale   Held to maturity
     Cost
Basis
  Fair
Value
  Cost
Basis
  Fair
Value
Within 1 year   $ 2,000     $ 2,013     $ 2,000     $ 1,995  
After 1 year but within 5 years     13,456       13,545       1,000       986  
After 5 years but within 10 years     18,833       19,198       3,794       3,866  
After 10 years but within 15 years     53,023       54,550       1,162       1,168  
Over 15 years     32,081       33,227       11,521       11,998  
Total   $ 119,393     $ 122,533     $ 19,477     $ 20,013  

7. Loans

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

   
  March 31,
2015
  December 31,
2014
Commercial   $ 151,293     $ 139,126  
Commercial loans secured by real estate     420,077       410,329  
Real estate-mortgage     259,884       258,616  
Consumer     19,143       19,009  
Loans, net of unearned income   $ 850,397     $ 827,080  

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. Loans  – (continued)

Loan balances at March 31, 2015 and December 31, 2014 are net of unearned income of $582,000 and $554,000, respectively. Real estate-construction loans comprised 3.2% and 3.5% of total loans, net of unearned income at March 31, 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 month periods ending March 31, 2015 and 2014 (in thousands).

         
  Three months ended March 31, 2015,
     Balance at
December 31,
2014
  Charge-Offs   Recoveries   Provision
(Credit)
  Balance at
March 31,
2015
Commercial   $ 3,262     $ (121 )    $ 6     $ 10     $ 3,157  
Commercial loans secured by real estate     3,902             42       143       4,087  
Real estate-mortgage     1,310       (103 )      30       67       1,304  
Consumer     190       (47 )      9       39       191  
Allocation for general risk     959                   (9 )      950  
Total   $ 9,623     $ (271 )    $ 87     $ 250     $ 9,689  

         
  Three months ended March 31, 2014,
     Balance at
December 31,
2013
  Charge-Offs   Recoveries   Provision
(Credit)
  Balance at
March 31,
2014
Commercial   $ 2,844     $ (72 )    $ 50     $ 243     $ 3,065  
Commercial loans secured by real estate     4,885       (66 )      153       (310 )      4,662  
Real estate-mortgage     1,260       (43 )      14       42       1,273  
Consumer     136       (36 )      5       34       139  
Allocation for general risk     979                   (9 )      970  
Total   $ 10,104     $ (217 )    $ 222     $     $ 10,109  

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 quarter of 2014, but the Company recorded a $250,000 provision in the first quarter 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 March 31, 2015
     Commercial   Commercial
Loans Secured
by Real Estate
  Real
Estate-
Mortgage
  Consumer   Allocation
for General
Risk
  Total
Loans:
                                                     
Individually evaluated for impairment   $ 204     $ 813     $     $              $ 1,017  
Collectively evaluated for impairment     151,089       419,264       259,884       19,143             849,380  
Total loans   $ 151,293     $ 420,077     $ 259,884     $ 19,143           $ 850,397  
Allowance for loan losses:
                                                     
Specific reserve allocation   $ 31     $ 471     $     $     $     $ 502  
General reserve allocation     3,126       3,616       1,304       191       950       9,187  
Total allowance for loan losses   $ 3,157     $ 4,087     $ 1,304     $ 191     $ 950     $ 9,689  

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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.

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8. Allowance for Loan Losses  – (continued)

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 passage of time;
the volatility of the local market;
the availability of financing;
natural disasters;
the inventory of competing properties;
new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank;
changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or
environmental contamination.

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).

         
  March 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   $ 204     $ 31     $     $ 204     $ 204  
Commercial loans secured by real estate     813       471             813       900  
Total impaired loans   $ 1,017     $ 502     $     $ 1,017     $ 1,104  

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8. Allowance for Loan Losses  – (continued)

         
  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  

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
March 31,
     2015   2014
Average loan balance:
                 
Commercial   $ 102     $  
Commercial loans secured by real estate     901       2,623  
Average investment in impaired loans   $ 1,003     $ 2,623  
Interest income recognized:
                 
Commercial   $ 1     $  
Commercial loans secured by real estate     6       1  
Interest income recognized on a cash basis on impaired loans   $ 7     $ 1  

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.

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8. Allowance for Loan Losses  – (continued)

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 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).

         
  March 31, 2015
     Pass   Special
Mention
  Substandard   Doubtful   Total
Commercial   $ 146,481     $ 678     $ 4,001     $ 133     $ 151,293  
Commercial loans secured by real estate     413,868       2,665       3,271       273       420,077  
Total   $ 560,349     $ 3,343     $ 7,272     $ 406     $ 571,370  

         
  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).

   
  March 31, 2015
     Performing   Non-Performing
Real estate-mortgage   $ 258,010     $ 1,874  
Consumer     19,143        
Total   $ 277,243     $ 1,874  

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

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8. Allowance for Loan Losses  – (continued)

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).

             
  March 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   $ 151,293     $     $     $     $     $ 151,293     $  
Commercial loans secured by real estate     419,483       358       236             594       420,077        
Real estate-mortgage     256,781       1,374       461       1,268       3,103       259,884           
Consumer     19,118       23       2             25       19,143        
Total   $ 846,675     $ 1,755     $ 699     $ 1,268     $ 3,722     $ 850,397     $  

             
  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

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8. Allowance for Loan Losses  – (continued)

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):

   
  March 31,
2015
  December 31,
2014
Non-accrual loans
                 
Commercial loans secured by real estate   $ 272     $ 778  
Real estate-mortgage     1,874       1,417  
Total     2,146       2,195  
Other real estate owned
                 
Commercial loans secured by real estate     384       384  
Real estate-mortgage     179       128  
Total     563       512  
TDR’s not in non-accrual     337       210  
Total non-performing assets including TDR   $ 3,046     $ 2,917  
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned     0.36 %      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
March 31,
     2015   2014
Interest income due in accordance with original terms   $ 24     $ 33  
Interest income recorded            
Net reduction in interest income   $ 24     $ 33  

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.

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

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

the borrower must be experiencing financial difficulties; and
the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would not otherwise be considered.

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

the borrower is currently in default on their loan(s);
the borrower has filed for bankruptcy;
the borrower has insufficient cash flows to service their loan(s); and
the borrower is unable to obtain refinancing from other sources at a market rate similar to rates available to a non-troubled debtor.

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

the borrower is granted an interest rate reduction to a level below market rates for debt with similar risk; or
the borrower is granted a material maturity date extension, or extension of the amortization plan to provide payment relief. For purposes of this policy, a material maturity date extension will generally include any maturity date extension, or the aggregate of multiple consecutive maturity date extensions, that exceed 120 days. A restructuring that results in an insignificant delay in payment, i.e. 120 days or less, is not necessarily a TDR. Insignificant payment delays occur when the amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value, and will result in an insignificant shortfall in the originally scheduled contractual amount due, and/or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the original maturity or the original amortization.

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 following table details the loans modified as TDRs during the three month period ended March 31, 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 March 31, 2014 (dollars in thousands).

     
Loans in non-accrual status   # of
Loans
  Current
Balance
  Concession Granted
Commercial loan secured by real estate     1     $ 265       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 $502,000 and $365,000 as of March 31, 2015 and 2014, respectively. All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed.

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

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 reporting periods preceding January 1, 2015 and January 1, 2014, respectively, and 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 March 31, 2015
Type   Maturing   Amount   Weighted Average Rate
Open Repo Plus     Overnight     $ 27,219       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       6,000       1.83  
Total advances           44,000       1.15  
Total FHLB borrowings         $ 71,219       0.84 % 

     
  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.

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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.

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. The dividend rate, as a percentage of the liquidation amount, may fluctuate while the Series E Preferred Stock is outstanding based upon changes in the level of “qualified small business lending” (“QSBL”) by the Bank from its average level of QSBL at each of the four quarter ends leading up to June 30, 2010 (the “Baseline”) as follows:

   
DIVIDEND PERIOD ANNUALIZED   ANNUALIZED
DIVIDEND RATE
BEGINNING   ENDING
August 11, 2011   December 31, 2011   5.0%
January 1, 2012   December 31, 2014   1.0% to 5.0%
January 1, 2014   February 7, 2016   1.0% to 7.0%(1)
February 8, 2016   Redemption   9.0%(2)

(1) Between January 1, 2014 and February 7, 2016, the Company’s dividend rate was fixed at 1% based upon the level of percentage change in QSBL between September 30, 2013 and the Baseline.
(2) Beginning on February 8, 2016, the dividend rate will be fixed at nine percent (9%) per annum.

As of September 30, 2013, the Company had increased its QSBL to a level that reduced the dividend rate to 1%. Accordingly, this 1% rate will continue through February 7, 2016.

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, if at all, the QSBL 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.

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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 months ended March 31, 2015 and 2014 (in thousands):

           
  Three months ended March 31, 2015   Three months ended March 31, 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 before reclassifications     229       432       661       339       256       595  
Amounts reclassified from accumulated other comprehensive loss                       (37 )      3       (34 ) 
Net current period other comprehensive income     229       432       661       302       259       561  
Ending balance   $ 2,072     $ (8,313 )    $ (6,241 )    $ 1,345     $ (6,659 )    $ (5,314 ) 

(1) Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three months ended March 31, 2015 and 2014 (in thousands):

     
  Amount reclassified from accumulated
other comprehensive loss(1)
  Affected line item in the
statement of operations
Details about accumulated other
comprehensive loss components
  For the
three months ended
March 31, 2015
  For the
three months ended
March 31, 2014
Unrealized gains and losses on sale of securities
                          
     $     $ (57 )      Net realized gains on investment securities  
             20       Provision for income tax expense  
     $     $ (37 )      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 income  
Total reclassifications for the period   $     $ (34 )      Net income  

(1) Amounts in parentheses indicate credits.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (see Note 16 for additional details).

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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 March 31, 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 March 31, 2015, the Company 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 Company 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 7.64% at March 31, 2015 (in thousands, except ratios).

           
  At March 31, 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   $ 131,581       14.68 %    $ 71,688       8.00 %    $ 89,609       10.00 % 
AmeriServ Financial Bank     105,692       11.92       70,925       8.00       88,657       10.00  
Common Equity Tier 1 Capital (To RWA)
                                                     
Consolidated     88,966       9.93       40,324       4.50       58,246       6.50  
AmeriServ Financial Bank     95,106       10.73       39,896       4.50       57,627       6.50  
Tier 1 Capital (To RWA)
                                                     
Consolidated     120,995       13.50       53,766       6.00       71,688       8.00  
AmeriServ Financial Bank     95,106       10.73       53,194       6.00       70,925       8.00  
Tier 1 Capital (To Average Assets) leverage Consolidated     120,995       11.24       43,072       4.00       53,839       5.00  
AmeriServ Financial Bank     95,106       9.06       41,988       4.00       52,485       5.00  

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13. Regulatory Capital  – (continued)

           
  At December 31, 2014
     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   $ 131,497       14.80 %    $ 71,066       8.00 %    $ 88,833       10.00 % 
AmeriServ Financial Bank     106,084       12.07       70,305       8.00       87,881       10.00  
Tier 1 Capital (To RWA)
                                                     
Consolidated     120,992       13.62       35,533       4.00       53,300       6.00  
AmeriServ Financial Bank     95,579       10.88       35,153       4.00       52,729       6.00  
Tier 1 Capital (To Average Assets)                                                      
Consolidated     120,992       11.34       42,662       4.00       53,327       5.00  
AmeriServ Financial Bank     95,579       9.19       41,608       4.00       52,010       5.00  

On July 2, 2013, the Board of Governors of the Federal Reserve System approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act, which will require institutions to, among other things, have more capital and a higher quality of capital by increasing the minimum regulatory capital ratios, and requiring capital buffers. The new rules became effective for the Company and the Bank on January 1, 2015, and have an implementation period that stretches to January 1, 2019. For a more detailed discussion see the Capital Resources section of the MD&A.

14. Segment Results

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

Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Commercial banking to businesses includes commercial loans, and CRE loans. The trust segment contains our wealth management businesses which include the Trust Company, West Chester Capital Advisors (WCCA), our registered investment advisory firm and financial services. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on guaranteed junior subordinated deferrable interest debentures, and centralized interest rate risk management. Inter-segment revenues were not material.

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14. Segment Results  – (continued)

The contribution of the major business segments to the Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

     
  Three months ended March 31, 2015   March 31, 2015
     Total
revenue
  Net income
(loss)
  Total
assets
Retail banking   $ 6,524     $ 659     $ 374,490  
Commercial banking     4,738       1,291       586,916  
Trust     2,167       380       5,125  
Investment/Parent     (783 )      (961 )      136,885  
Total   $ 12,646     $ 1,369     $ 1,103,416  

     
  Three months ended March 31, 2014   December 31, 2014
     Total
revenue
  Net income
(loss)
  Total
assets
Retail banking   $ 6,117     $ 348     $ 376,009  
Commercial banking     4,327       1,096       563,690  
Trust     2,114       308       5,015  
Investment/Parent     (501 )      (822 )      144,549  
Total   $ 12,057     $ 930     $ 1,089,263  

15. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $181.5 million and $188.0 million along with standby letters of credit of $7.8 million and $7.2 million as of March 31, 2015 and December 31, 2014, respectively. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operation or cash flows.

16. Pension Benefits

The Company has a noncontributory defined benefit pension plan covering certain employees who work at least 1,000 hours per year. The participants shall have a vested interest in their accrued benefit after five full years of service. The benefits of the plan are based upon the employee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. Plan assets are primarily debt securities (including US Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

   
  Three months ended
March 31,
     2015   2014
Components of net periodic benefit cost
                 
Service cost   $ 400     $ 430  
Interest cost     325       331  

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16. Pension Benefits  – (continued)

   
  Three months ended
March 31,
     2015   2014
Expected return on plan assets   $ (525 )    $ (498 ) 
Amortization of prior year service cost           (5 ) 
Recognized net actuarial loss     300       272  
Net periodic pension cost   $ 500     $ 530  

The Company implemented a soft freeze of its defined benefit pension plan to provide that non-union employees hired on or after January 1, 2013 and union employees hired on or after January 1, 2014 are not eligible to participate in the pension plan. Instead, such employees are eligible to participate in a qualified 401(k) plan. This change was made to help reduce pension costs in future periods.

17. Disclosures about Fair Value Measurements

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined within this hierarchy are as follows:

Level I:  Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:  Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III:  Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and Liability Measured on a Recurring Basis

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The following tables present the assets reported on the Consolidated Balance Sheets at their fair value as of March 31, 2015 and December 31, 2014, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Assets and liability measured at fair value on a recurring basis are summarized below (in thousands):

       
  Fair Value Measurements at March 31, 2015 Using
     Total   (Level 1)   (Level 2)   (Level 3)
US Agency securities   $ 5,948     $     $ 5,948     $  
US Agency mortgage-backed securities     101,146             101,146        
Corporate bonds     15,439             15,439        

       
  Fair Value Measurements at December 31, 2014 Using
     Total   (Level 1)   (Level 2)   (Level 3)
US Agency securities   $ 5,906     $     $ 5,906     $  
US Agency mortgage-backed securities     105,768             105,768        
Corporate bonds     15,436             15,436        

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17. Disclosures about Fair Value Measurements  – (continued)

Assets Measured on a Non-recurring Basis

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At March 31, 2015, impaired loans with a carrying value of $1.0 million were reduced by a specific valuation allowance totaling $502,000 resulting in a net fair value of $515,000. At December 31, 2014, impaired loans with a carrying value of $989,000 were reduced by a specific valuation allowance totaling $520,000 million resulting in a net fair value of $469,000.

Other real estate owned is measured at fair value based on appraisals, less cost to sell at the date of foreclosure. Valuations are periodically performed by management. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

Assets measured at fair value on a non-recurring basis are summarized below (in thousands, except range data):

       
  Fair Value Measurements at March 31, 2015 Using
     Total   (Level 1)   (Level 2)   (Level 3)
Impaired loans   $ 515     $     $     $ 515  
Other real estate owned     563                   563  

       
  Fair Value Measurements at December 31, 2014 Using
     Total   (Level 1)   (Level 2)   (Level 3)
Impaired loans   $ 469     $     $     $ 469  
Other real estate owned     512                   512  

       
March 31, 2015   Quantitative Information About Level 3 Fair Value Measurements
  Fair Value Estimate   Valuation Techniques   Unobservable Input   Range (Wgtd Ave)
Impaired loans   $515   Appraisal of collateral(1),(3)   Appraisal adjustments(2) Liquidation expenses   0% to 35% (30%)
1% to 15% (10%)
Other real estate owned   563   Appraisal of collateral(1),(3)   Appraisal adjustments(2) Liquidation expenses   0% to 48% (38%)
1% to 20% (10%)

       
December 31, 2014   Quantitative Information About Level 3 Fair Value Measurements
  Fair Value Estimate   Valuation Techniques   Unobservable Input   Range (Wgtd Ave)
Impaired loans   $469   Appraisal of collateral(1),(3)   Appraisal adjustments(2) Liquidation expenses   0% to 37% (30%)
1% to 15% (10%)
Other real estate owned   512   Appraisal of collateral(1),(3)   Appraisal adjustments(2) Liquidation expenses   47% to 83% (55%)
1% to 61% (9%)

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

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17. Disclosures about Fair Value Measurements  – (continued)

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded book balances at March 31, 2015 and December 31, 2014, were as follows (in thousands):

         
  March 31, 2015
     Carrying
Value
  Fair
Value
  (Level 1)   (Level 2)   (Level 3)
FINANCIAL ASSETS:
                                            
Cash and cash equivalents   $ 30,718     $ 30,718     $ 30,718     $     $  
Investment securities – AFS     122,533       122,533             122,533        
Investment securities – HTM     19,477       20,013             17,031       2,982  
Regulatory stock     5,626       5,626       5,626              
Loans held for sale     3,575       3,675       3,675              
Loans, net of allowance for loan loss and unearned income     840,708       845,904                   845,904  
Accrued interest income receivable     3,300       3,300       3,300              
Bank owned life insurance     37,388       37,388       37,388              
FINANCIAL LIABILITIES:
                                            
Deposits with no stated maturities   $ 587,825     $ 587,825     $ 587,825     $     $  
Deposits with stated maturities     304,851       307,634                   307,634