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 endedSeptember 30, 2015March 31, 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 Number0-11204

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. Yesx Noo

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). Yesx Noo

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 filero Accelerated filero Non-accelerated filero Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).Yeso Nox

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 NovemberMay 2, 20152016
Common Stock, par value $0.01 18,870,81118,896,876
 

 


 
 

TABLE OF CONTENTS

AmeriServ Financial, Inc.
 
INDEX

 
 Page No.

PART I.

FINANCIAL INFORMATION:

     

Item 1.

Financial Statements

     
Consolidated Balance Sheets (Unaudited) — September 30, 2015March 31, 2016 and December 31, 20142015  1 
Consolidated Statements of Operations (Unaudited) — Three and nine months ended September 30,
March 31, 2016 and 2015 and 2014
  2 
Consolidated Statements of Comprehensive Income (Unaudited) — Three and nine months ended September 30,March 31, 2016 and 2015 and 2014  3 
Consolidated Statements of Cash Flows (Unaudited) — NineThree months ended September 30,
March 31, 2016 and 2015 and 2014
  4 
Notes to Unaudited Consolidated Financial Statements  5 

Item 2.

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

  2927 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

  4338 

Item 4.

Controls and Procedures

  4338 

PART II.

OTHER INFORMATION

     

Item 1.

Legal Proceedings

  4439 

Item 1A.

Risk Factors

  4439 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  4439 

Item 3.

Defaults Upon Senior Securities

  4439 

Item 4.

Mine Safety Disclosures

  4439 

Item 5.

Other Information

  4439 

Item 6.

Exhibits

  4439 

i


 
 

TABLE OF CONTENTS

Item 1. Financial Statements

AmeriServ Financial, Inc.

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

    
 September 30, 2015 December 31, 2014 March 31,
2016
 December 31,
2015
ASSETS
                    
Cash and due from depository institutions $16,782  $23,780  $18,067  $23,443 
Interest bearing deposits  2,966   2,952   2,796   6,960 
Short-term investments in money market funds  12,000   6,140   2,760   18,107 
Total cash and cash equivalents  31,748   32,872   23,623   48,510 
Investment securities:
                    
Available for sale  114,652   127,110   115,742   119,467 
Held to maturity (fair value $20,771 on September 30, 2015 and $20,213 on December 31, 2014)  20,361   19,840 
Held to maturity (fair value $23,800 on March 31, 2016 and $21,533 on December 31, 2015)  23,258   21,419 
Loans held for sale  2,913   5,051   2,438   3,003 
Loans  865,890   827,634   880,496   881,541 
Less: Unearned income  590   554   524   557 
Allowance for loan losses  9,772   9,623   9,520   9,921 
Net loans  855,528   817,457   870,452   871,063 
Premises and equipment, net  12,362   13,012   11,899   12,108 
Accrued interest income receivable  3,315   3,127   3,295   3,057 
Goodwill  11,944   11,944   11,944   11,944 
Bank owned life insurance  37,266   37,417   37,396   37,228 
Net deferred tax asset  8,284   9,548   9,560   8,993 
Federal Home Loan Bank stock  4,661   4,048   4,647   4,628 
Federal Reserve Bank stock  2,125   2,125   2,125   2,125 
Other assets  5,684   5,712   5,322   4,952 
TOTAL ASSETS $1,110,843  $1,089,263  $1,121,701  $1,148,497 
LIABILITIES
                    
Non-interest bearing deposits $158,374  $167,551  $180,348  $188,947 
Interest bearing deposits  711,525   702,330   726,425   714,347 
Total deposits  869,899   869,881   906,773   903,294 
Short-term borrowings  52,988   38,880   39,952   48,748 
Advances from Federal Home Loan Bank  48,000   42,000   49,000   48,000 
Guaranteed junior subordinated deferrable interest debentures  13,085   13,085 
Guaranteed junior subordinated deferrable interest debentures, net  12,896   12,892 
Subordinated debt, net  7,424   7,418 
Total borrowed funds  114,073   93,965   109,272   117,058 
Other liabilities  7,463   11,010   8,067   9,172 
TOTAL LIABILITIES  991,435   974,856   1,024,112   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 September 30, 2015 and December 31, 2014  21,000   21,000 
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,488,630 shares issued and 18,870,811 outstanding on September 30, 2015; 26,402,707 shares issued and 18,784,888 outstanding on December 31, 2014  265   264 
Treasury stock at cost, 7,617,819 shares on September 30, 2015 and December 31, 2014  (74,829  (74,829
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; 26,512,380 shares issued and 18,894,561 outstanding on March 31, 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 March 31, 2016 and
December 31, 2015
  (74,829  (74,829
Capital surplus  145,434   145,256   145,496   145,441 
Retained earnings  33,518   29,618   33,181   34,651 
Accumulated other comprehensive loss, net  (5,980  (6,902  (6,524  (7,555
TOTAL SHAREHOLDERS' EQUITY  119,408   114,407 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,110,843  $1,089,263 
TOTAL SHAREHOLDERS’ EQUITY  97,589   118,973 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,121,701  $1,148,497 

 
 
See accompanying notes to unaudited consolidated financial statements.


 

TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

      
 Three months ended
September 30,
 Nine months ended
September 30,
 Three months ended March 31,
 2015 2014 2015 2014 2016 2015
INTEREST INCOME
                              
Interest and fees on loans $9,718  $9,019  $28,654  $26,990  $9,465  $9,456 
Interest bearing deposits  1   2   4   6   7   2 
Short-term investments in money market funds  3   1   10   3   10   2 
Investment securities:
                              
Available for sale  790   859   2,480   2,688   767   913 
Held to maturity  155   138   451   410   173   150 
Total Interest Income  10,667   10,019   31,599   30,097   10,422   10,523 
INTEREST EXPENSE
                              
Deposits  1,174   1,237   3,519   3,688   1,254   1,174 
Short-term borrowings  37   10   70   34   42   10 
Advances from Federal Home Loan Bank  141   89   401   223   159   125 
Guaranteed junior subordinated deferrable interest debentures  280   280   840   840   280   280 
Subordinated debt  129    
Total Interest Expense  1,632   1,616   4,830   4,785   1,864   1,589 
NET INTEREST INCOME  9,035   8,403   26,769   25,312   8,558   8,934 
Provision for loan losses  300      750      3,100   250 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  8,735   8,403   26,019   25,312   5,458   8,684 
NON-INTEREST INCOME
                              
Trust and investment advisory fees  2,085   1,807   6,276   5,787   2,075   2,056 
Service charges on deposit accounts  441   507   1,289   1,486   415   419 
Net gains on sale of loans  178   275   594   547   107   191 
Mortgage related fees  87   190   311   467   63   115 
Net realized gains (losses) on investment securities  (36     (8  177 
Net realized gains on investment securities  57    
Bank owned life insurance  684   188   1,218   559   167   363 
Other income  576   626   1,739   1,740   553   568 
Total Non-Interest Income  4,015   3,593   11,419   10,763   3,437   3,712 
NON-INTEREST EXPENSE
                              
Salaries and employee benefits  6,079   6,139   18,096   18,560   6,166   6,073 
Net occupancy expense  692   709   2,251   2,265   737   841 
Equipment expense  409   468   1,355   1,432   436   466 
Professional fees  1,206   1,360   3,692   4,132   1,465   1,211 
Supplies, postage and freight  181   196   534   566   195   178 
Miscellaneous taxes and insurance  288   276   872   884   291   297 
Federal deposit insurance expense  174   159   505   473   179   167 
Goodwill impairment charge     669      669 
Other expense  1,190   1,267   3,563   3,620   1,242   1,177 
Total Non-Interest Expense  10,219   11,243   30,868   32,601   10,711   10,410 
PRETAX INCOME  2,531   753   6,570   3,474 
Provision for income tax expense  698   388   1,947   1,200 
NET INCOME  1,833   365   4,623   2,274 
PRETAX INCOME (LOSS)  (1,816  1,986 
Provision (benefit) for income tax expense  (549  617 
NET INCOME (LOSS)  (1,267  1,369 
Preferred stock dividends  52   53   157   158   15   53 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $1,781  $312  $4,466  $2,116 
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(1,282 $1,316 
PER COMMON SHARE DATA:
                              
Basic:
                              
Net income $0.09  $0.02  $0.24  $0.11 
Net income (loss) $(0.07 $0.07 
Average number of shares outstanding  18,869   18,795   18,860   18,792   18,884   18,851 
Diluted:
                              
Net income $0.09  $0.02  $0.24  $0.11 
Net income (loss) $(0.07 $0.07 
Average number of shares outstanding  18,951   18,908   18,928   18,916   18,884   18,909 
Cash dividends declared $0.01  $0.01  $0.03  $0.03  $0.01  $0.01 

 
 
See accompanying notes to unaudited consolidated financial statements.


 

TABLE OF CONTENTS

AmeriServ Financial, Inc.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

      
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 Three Months Ended
March 31,
 2015 2014 2015 2014 2016 2015
COMPREHENSIVE INCOME
                    
Net income $1,833  $365  $4,623  $2,274 
COMPREHENSIVE INCOME (LOSS)
          
Net income (loss) $(1,267 $1,369 
Other comprehensive income, before tax:
                              
Pension obligation change for defined benefit plan  315   799   1,601   1,191   504   655 
Income tax effect  (107  (272  (545  (405  (171  (223
Unrealized holding (gains) losses on available for sale securities arising during period  387   (701  (211  850 
Unrealized holding losses on available for sale securities arising during period  1,115   346 
Income tax effect  (131  238   72   (289  (379  (117
Reclassification adjustment for losses (gains) on available for sale securities included in net income  36      8   (177
Reclassification adjustment for gains on available for sale securities included in net income  (57   
Income tax effect  (12     (3  60   19    
Other comprehensive income  488   64   922   1,230   1,031   661 
Comprehensive income $2,321  $429  $5,545  $3,504 
Comprehensive income (loss) $(236 $2,030 

 
 
See accompanying notes to unaudited consolidated financial statements.


 

TABLE OF CONTENTS

AmeriServ Financial, Inc.

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

    
 Nine months ended
September 30,
 Three months ended
March 31,
 2015 2014 2016 2015
OPERATING ACTIVITIES
                    
Net income $4,623  $2,274  $(1,267 $1,369 
Adjustments to reconcile net income to net cash provided by operating activities:
          
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
          
Provision for loan losses  750      3,100   250 
Depreciation expense  1,346   1,359   445   456 
Net amortization of investment securities  254   283   87   85 
Net realized losses (gains) on investment securities available for sale  8   (177
Net realized gains on investment securities available for sale  (57   
Net gains on loans held for sale  (594  (547  (107  (191
Amortization of deferred loan fees  (202  (198  (74  (67
Origination of mortgage loans held for sale  (39,214  (36,105  (7,226  (11,764
Sales of mortgage loans held for sale  41,946   36,090   7,898   13,431 
Increase in accrued interest income receivable  (188  (372  (238  (173
Decrease in accrued interest payable  (105  (173  (167  (161
Earnings on bank owned life insurance  (514  (559  (167  (171
Deferred income taxes  805   139   (976  285 
Amortization of deferred issuance costs  10    
Stock based compensation expense  179   56   55   132 
Goodwill impairment charge     669 
Other, net  (2,536  (679  (912  (696
Net cash provided by operating activities  6,558   2,060   404   2,785 
INVESTING ACTIVITIES
                    
Purchases of investment securities – available for sale  (9,408  (10,215  (6,128   
Purchases of investment securities – held to maturity  (4,795  (2,442  (2,107   
Proceeds from sales of investment securities – available for sale  2,379   5,242   4,248    
Proceeds from maturities of investment securities – available for sale  19,063   16,581   6,649   4,852 
Proceeds from maturities of investment securities – held to maturity  4,233   1,095   253   350 
Purchases of regulatory stock  (14,111  (6,679  (4,929  (3,878
Proceeds from redemption of regulatory stock  13,498   6,329   4,910   4,425 
Long-term loans originated  (185,864  (126,805  (52,432  (68,544
Principal collected on long-term loans  140,143   91,886   48,974   41,248 
Loans purchased or participated  (11,519  (4,247  (3,995  (4,000
Loans sold or participated  18,443   7,810   5,000   7,755 
Proceeds from sale of other real estate owned  478   454   13   53 
Proceeds from life insurance policy  1,140         200 
Purchases of premises and equipment  (691  (1,643  (227  (220
Net cash used in investing activities  (27,011  (22,634  229   (17,759
FINANCING ACTIVITIES
                    
Net (decrease) increase in deposit balances  (56  17,828 
Net increase (decrease) in other short-term borrowings  14,108   (15,117
Net increase in deposit balances  3,479   22,722 
Net decrease in other short-term borrowings  (8,796  (11,661
Principal borrowings on advances from Federal Home Loan Bank  9,000   12,000   2,000   2,000 
Principal repayments on advances from Federal Home Loan Bank  (3,000     (1,000   
Preferred stock redemption  (21,000   
Common stock dividends  (566  (563  (188  (188
Preferred stock dividends  (157  (158  (15  (53
Net cash provided by financing activities  19,329   13,990   (25,520  12,820 
NET DECREASE IN CASH AND CASH EQUIVALENTS  (1,124  (6,584  (24,887  (2,154
CASH AND CASH EQUIVALENTS AT JANUARY 1  32,872   30,066   48,510   32,872 
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $31,748  $23,482 
CASH AND CASH EQUIVALENTS AT MARCH 31 $23,623  $30,718 

 
 
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 1716 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $1.9$2.0 billion that are not reported on the Company’s balance sheet at September 30, 2015.March 31, 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'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.

3. Recent Accounting Pronouncements

In April 2015,January 2016, the FASB issued ASU 2015-03,2016-01,InterestFinancial Instruments — ImputationOverall (Subtopic 825-10): Recognition and Measurement of Interest (Subtopic 835-30)Financial Assets and Financial Liabilities, as part. 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 its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.financial instruments. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and2017, including interim periods within those fiscal years. For all otherAll entities that are not public business entities may adopt the amendments in this Update are effective for financial statements issued forearlier as of the fiscal years beginning after December 15, 2015, and2017, including interim periods within those fiscal years beginning after December 15, 2016. An entity should applyyears. The Company is currently evaluating the new guidance on a retrospective basis, whereinimpact the balance sheetadoption of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected tostandard will have a significant impact on the Company’s financial statements.position or results of operations.

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 retiredexcluded for earnings per share purposes. Due to the net loss as of March 31, 2016, all options to purchase common shares were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Options to purchase 74,304198,888 common shares, at exercise prices ranging from $3.20$2.98 to $4.70, and 3,625 common shares, at exercise prices ranging from $4.60 to $5.22, were outstanding as of September 30,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.


 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Earnings Per Common Share  – (continued)

      
 Three months ended
September 30,
 Nine months ended
September 30,
 Three months ended
March 31,
 2015 2014 2015 2014 2016 2015
 (In thousands, except per share data) (In thousands, except
per share data)
Numerator:
                              
Net income $1,833  $365  $4,623  $2,274 
Net income (loss) $(1,267 $1,369 
Preferred stock dividends  (52  (53  (157  (158  15   53 
Net income available to common shareholders $1,781  $312  $4,466  $2,116 
Net income (loss) available to common shareholders $(1,282 $1,316 
Denominator:
                              
Weighted average common shares outstanding (basic)  18,869   18,795   18,860   18,792   18,884   18,851 
Effect of stock options  82   113   68   124      58 
Weighted average common shares outstanding (diluted)  18,951   18,908   18,928   18,916   18,884   18,909 
Earnings per common share:
                    
Earnings (loss) per common share:
          
Basic $0.09  $0.02  $0.24  $0.11  $(0.07 $0.07 
Diluted  0.09   0.02   0.24   0.11   (0.07  0.07 

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.funds. The Company made $1.1 million$438,500 in income tax payments in both the first ninethree months of 2016 and $331,000 in the same 2015 and 2014.period. The Company made total interest payments of $4,935,000$2,031,000 in the first ninethree months of 20152016 compared to $4,958,000$1,750,000 in the same 20142015 period. The Company had $165,000$38,000 non-cash transfers to other real estate owned (OREO) in the first ninethree months of 20152016 compared to $455,000$107,000 non-cash transfers in the same 20142015 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, 2015 March 31, 2016
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
US Agency $2,900  $1  $(1 $2,900  $1,900  $2  $(1 $1,901 
US Agency mortgage-backed securities  91,656   2,830   (144  94,342   92,053   2,514   (59  94,508 
Corporate bonds  17,505   71   (166  17,410   19,506   101   (274  19,333 
Total $112,061  $2,902  $(311 $114,652  $113,459  $2,617  $(334 $115,742 

Investment securities held to maturity (HTM):

        
 September 30, 2015 March 31, 2016
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
US Agency mortgage-backed securities $11,208  $374  $(4 $11,578  $12,672  $408  $  $13,080 
Taxable municipal  4,153   93   (12  4,234   5,586   175   (2  5,759 
Corporate bonds and other securities  5,000   17   (58  4,959   5,000   27   (66  4,961 
Total $20,361  $484  $(74 $20,771  $23,258  $610  $(68 $23,800 

 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Investment securities available for sale (AFS):

        
 December 31, 2014 December 31, 2015
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
US Agency $5,931  $21  $(46 $5,906  $2,900  $  $(19 $2,881 
US Agency mortgage-backed securities  102,888   3,197   (317  105,768 
US Agency mortgage – backed securities  96,801   1,975   (442  98,334 
Corporate bonds  15,497   61   (122  15,436   18,541   18   (307  18,252 
Total $124,316  $3,279  $(485 $127,110  $118,242  $1,993  $(768 $119,467 

Investment securities held to maturity (HTM):

        
 December 31, 2014 December 31, 2015
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 Cost
Basis
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
US Agency mortgage-backed securities $12,481  $395  $(50 $12,826  $10,827  $247  $(53 $11,021 
Taxable municipal  3,364   74   (24  3,414   5,592   67   (65  5,594 
Corporate bonds and other securities  3,995   6   (28  3,973   5,000   3   (85  4,918 
Total $19,840  $475  $(102 $20,213  $21,419  $317  $(203 $21,533 

Maintaining investment quality is a primary objective of the Company'sCompany’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody's Investor'sMoody’s Investor’s Service or Standard & Poor'sPoor’s rating of “A.” At September 30, 2015, 79.9%March 31, 2016, 78.0% of the portfolio was rated “AAA” as compared to 84.1%79.1% at December 31, 2014. 5.7%2015. Approximately 5.8% of the portfolio was either rated below “A” or unrated at September 30,March 31, 2016 as compared to 5.7% at December 31, 2015. At September 30, 2015, the Company’s consolidated investment securities portfolio had an effective duration of approximately 2.66 years.

The Company sold a $1.9$4.2 million AFS security for 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 $36,000 of gross investment security losses and $28,000 of gross investment security gains. There were no sales of AFS securities in the thirdfirst quarter of 2014. Total proceeds from the sale of AFS securities for the first nine months of 2014 were $5.2 million2016 resulting in $182,000$63,000 of gross investment security gains and $5,000$6,000 of gross investment security losses. The Company had no investment security sales for the first three months of 2015.

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 $103,478,000$99,376,000 at September 30, 2015March 31, 2016 and $104,780,000$87,096,000 at December 31, 2014.2015.

The following tables present information concerning investments with unrealized losses as of September 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):

Total investment securities:

            
 September 30, 2015 March 31, 2016
 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Total
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
US Agency $  $  $399  $(1 $399  $(1 $  $  $399  $(1 $399  $(1
Taxable municipal  1,379   (12        1,379   (12  832   (2        832   (2
US Agency mortgage-backed securities  4,321   (15  9,554   (133  13,875   (148  1,795   (13  7,166   (46  8,961   (59
Corporate bonds and other securities  5,904   (96  6,870   (128  12,774   (224  6,869   (130  6,789   (210  13,658   (340
Total $11,604  $(123 $16,823  $(262 $28,427  $(385 $9,496  $(145 $14,354  $(257 $23,850  $(402

 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Total investment securities:

            
 December 31, 2014 December 31, 2015
 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Total
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
US Agency $996  $(4 $2,858  $(42 $3,854  $(46 $1,486  $(14 $395  $(5 $1,881  $(19
US Agency mortgage-backed securities  2,826   (13  20,408   (354  23,234   (367  33,359   (245  9,088   (250  42,447   (495
Taxable municipal  150   (1  988   (23  1,138   (24  3,617   (65        3,617   (65
Corporate bonds and other securities  2,960   (43  8,891   (107  11,851   (150  8,884   (160  7,766   (232  16,650   (392
Total $6,932  $(61 $33,145  $(526 $40,077  $(587 $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 2924 positions that are considered temporarily impaired at September 30, 2015.March 31, 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, 2015March 31, 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 March 31, 2016 is 29.8 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.

Total investment securities:

        
 September 30, 2015 March 31, 2016
 Available for sale Held to maturity Available for sale Held to maturity
 Cost
Basis
 Fair
Value
 Cost
Basis
 Fair
Value
 Cost
Basis
 Fair
Value
 Cost
Basis
 Fair
Value
Within 1 year $1,000  $998  $1,000  $997  $1,999  $1,987  $1,000  $997 
After 1 year but within 5 years  12,266   12,335   2,000   1,945   9,453   9,471   2,000   1,957 
After 5 years but within 10 years  21,133   21,524   6,767   6,851   31,662   32,454   7,600   7,763 
After 10 years but within 15 years  46,838   48,068   1,397   1,389   35,830   36,652   2,110   2,124 
Over 15 years  30,824   31,727   9,197   9,589   34,515   35,178   10,548   10,959 
Total $112,061  $114,652  $20,361  $20,771  $113,459  $115,742  $23,258  $23,800 

 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. Loans

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

    
 September 30, 2015 December 31, 2014 March 31,
2016
 December 31,
2015
Commercial $169,472  $139,126  $181,515  $181,066 
Commercial loans secured by real estate  418,168   410,329   425,265   421,637 
Real estate – mortgage  257,530   258,616   253,565   257,937 
Consumer  20,130   19,009   19,627   20,344 
Loans, net of unearned income $865,300  $827,080  $879,972  $880,984 

Loan balances at September 30, 2015March 31, 2016 and December 31, 20142015 are net of unearned income of $590,000$524,000 and $554,000,$557,000, respectively. Real estate-construction loans comprised 3.4%2.4% and 3.5%3.0% of total loans, net of unearned income at September 30, 2015March 31, 2016 and December 31, 2014,2015, 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,March 31, 2016 and 2015 and 2014 (in thousands).

          
 Three months ended September 30, 2015, Three months ended March 31, 2016
 Balance at
June 30,
2015
 Charge-Offs Recoveries Provision
(Credit)
 Balance at
September 30,
2015
 Balance at
December 31,
2015
 Charge-Offs Recoveries Provision
(Credit)
 Balance at
March 31,
2016
Commercial $3,171  $(35 $21  $(47 $3,110  $4,244  $(3,339 $7  $2,655  $3,567 
Commercial loans secured by real estate  4,140   (235  3   113   4,021   3,449      28   229   3,706 
Real estate – mortgage  1,321   (85  98   58   1,392   1,173   (38  42   (20  1,157 
Consumer  201   (18  6   88   277   151   (205  4   195   145 
Allocation for general risk  884         88   972   904         41   945 
Total $9,717  $(373 $128  $300  $9,772  $9,921  $(3,582 $81  $3,100  $9,520 

          
 Three months ended September 30, 2014, Three months ended March 31, 2015
 Balance at
June 30,
2014
 Charge-Offs Recoveries Provision
(Credit)
 Balance at
September 30,
2014
 Balance at
December 31,
2014
 Charge-Offs Recoveries Provision
(Credit)
 Balance at
March 31,
2015
Commercial $3,254  $  $6  $35  $3,295  $3,262  $(121 $6  $10  $3,157 
Commercial loans secured by real estate  4,475   (506  24   (78  3,915   3,902      42   143   4,087 
Real estate – mortgage  1,301   (103  29   115   1,342   1,310   (103  30   67   1,304 
Consumer  145   (24  6   24   151   190   (47  9   39   191 
Allocation for general risk  975         (96  879   959         (9  950 
Total $10,150  $(633 $65  $  $9,582  $9,623  $(271 $87  $250  $9,689 

The substantially higher than typical provision in the first quarter of 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 recently 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.


 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

     
 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 

     
 Nine months ended September 30, 2014,
   Balance at
December 31,
2013
 Charge-Offs Recoveries Provision
(Credit)
 Balance at
September 30,
2014
Commercial $2,844  $(72 $111  $412  $3,295 
Commercial loans secured by real estate  4,885   (572  196   (594  3,915 
Real estate – mortgage  1,260   (176  54   204   1,342 
Consumer  136   (82  19   78   151 
Allocation for general risk  979         (100  879 
Total $10,104  $(902 $380  $  $9,582 

As a result of successful ongoing problem credit resolution efforts, including a reduction in classified loans, the Company achieved further asset quality improvements in 2015 and 2014, specifically in the commercial and commercial loans secured by real estate portfolios. There was no provision for loan losses in the first nine months of 2014, but the Company recorded a $750,000 provision in the first nine months of 2015 which was needed to support loan growth.

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

            
 At September 30, 2015 At March 31, 2016
 Commercial Commercial
Loans Secured
by Real Estate
 Real
Estate–
Mortgage
 Consumer Allocation
for General
Risk
 Total Commercial Commercial
Loans Secured
by Real Estate
 Real
Estate-
Mortgage
 Consumer Allocation
for General
Risk
 Total
Loans:
                                                            
Individually evaluated for impairment $473  $422  $  $70       $965  $1,053  $363  $  $       $1,416 
Collectively evaluated for impairment  168,999   417,746   257,530   20,060      864,335   180,462   424,902   253,565   19,627      878,556 
Total loans $169,472  $418,168  $257,530  $20,130     $865,300  $181,515  $425,265  $253,565  $19,627     $879,972 
Allowance for loan losses:
                                                            
Specific reserve allocation $195  $259  $  $70  $  $524  $573  $61  $  $  $  $634 
General reserve allocation  2,915   3,762   1,392   207   972   9,248   2,994   3,645   1,157   145   945   8,886 
Total allowance for loan losses $3,110  $4,021  $1,392  $277  $972  $9,772  $3,567  $3,706  $1,157  $145  $945  $9,520 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

            
 At December 31, 2014 At December 31, 2015
 Commercial Commercial
Loans Secured
by Real Estate
 Real
Estate–
Mortgage
 Consumer Allocation
for General
Risk
 Total Commercial Commercial
Loans Secured
by Real Estate
 Real
Estate-
Mortgage
 Consumer Allocation
for General
Risk
 Total
Loans:
                                                            
Individually evaluated for impairment $  $989  $  $       $989  $4,416  $86  $ ��$       $4,502 
Collectively evaluated for impairment  139,126   409,340   258,616   19,009      826,091   176,650   421,551   257,937   20,344      876,482 
Total loans $139,126  $410,329  $258,616  $19,009     $827,080  $181,066  $421,637  $257,937  $20,344     $880,984 
Allowance for loan losses:
                                                            
Specific reserve allocation $  $520  $  $  $  $520  $1,387  $  $  $  $  $1,387 
General reserve allocation  3,262   3,382   1,310   190   959   9,103   2,857   3,449   1,173   151   904   8,534 
Total allowance for loan losses $3,262  $3,902  $1,310  $190  $959  $9,623  $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 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


TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a TDR.

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

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


TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

the 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.


TABLE OF CONTENTS

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, 2015 March 31, 2016
 Impaired Loans with
Specific Allowance
 Impaired
Loans with
no Specific Allowance
 Total Impaired Loans 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 Recorded
Investment
 Related
Allowance
 Recorded
Investment
 Recorded
Investment
 Unpaid
Principal
Balance
Commercial $473  $195  $  $473  $476  $806  $573  $247  $1,053  $1,061 
Commercial loans secured by real estate  378   259   44   422   507   302   61   61   363   786 
Consumer  70   70      70   70 
Total impaired loans $921  $524  $44  $965  $1,053  $1,108  $634  $308  $1,416  $1,847 

          
 December 31, 2014 December 31, 2015
 Impaired Loans with
Specific Allowance
 Impaired
Loans with
no Specific
Allowance
 Total Impaired Loans 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 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 $989  $520  $  $989  $1,069         86   86   522 
Total impaired loans $989  $520  $  $989  $1,069  $4,416  $1,387  $86  $4,502  $4,943 

TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

      
 Three months ended September 30, Nine months ended September 30, Three months ended
March 31,
 2015 2014 2015 2014 2016 2015
Average loan balance:
                              
Commercial $347  $  $189  $  $1,162  $102 
Commercial loans secured by real estate  966   1,897   1,583   2,012   615   901 
Consumer  35      23    
Average investment in impaired loans $1,348  $1,897  $1,795  $2,012  $1,777  $1,003 
Interest income recognized:
                              
Commercial $7  $  $17  $  $3  $1 
Commercial loans secured by real estate  5   4   15   6      6 
Consumer        1    
Interest income recognized on a cash basis on
impaired loans
 $12  $4  $33  $6  $3  $7 

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


TABLE OF CONTENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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 required2016 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.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

          
 September 30, 2015 March 31, 2016
 Pass Special
Mention
 Substandard Doubtful Total Pass Special
Mention
 Substandard Doubtful Total
Commercial $166,822  $744  $1,778  $128  $169,472  $178,520  $793  $1,955  $247  $181,515 
Commercial loans secured by real estate  412,270   2,942   2,937   19   418,168   415,949   7,764   1,533   19   425,265 
Total $579,092  $3,686  $4,715  $147  $587,640  $594,469  $8,557  $3,488  $266  $606,780 

          
 December 31, 2014 December 31, 2015
 Pass Special
Mention
 Substandard Doubtful Total Pass Special
Mention
 Substandard Doubtful Total
Commercial $132,665  $161  $6,164  $136  $139,126  $174,616  $1,811  $3,318  $1,321  $181,066 
Commercial loans secured by real estate  406,195   620   3,238   276   410,329   416,331   3,100   2,188   18   421,637 
Total $538,860  $781  $9,402  $412  $549,455  $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, 2015 March 31, 2016
 Performing Non-Performing Performing Non-Performing
Real estate – mortgage $255,901  $1,629 
Real estate-mortgage $252,478  $1,087 
Consumer  20,060   70   19,627    
Total $275,961  $1,699  $272,105  $1,087 

    
 December 31, 2014 December 31, 2015
 Performing Non-Performing Performing Non-Performing
Real estate – mortgage $257,199  $1,417 
Real estate-mortgage $256,149  $1,788 
Consumer  19,009      20,344    
Total $276,208  $1,417  $276,493  $1,788 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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).

              
 September 30, 2015 March 31, 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
 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 $168,872  $600  $  $  $600  $169,472  $  $180,598  $427  $243  $247  $917  $181,515  $ 
Commercial loans secured by real estate  418,168               418,168      420,538   4,727         4,727   425,265    
Real estate – mortgage  254,125   1,887   801   717   3,405   257,530      249,427   3,005   456   677   4,138   253,565    
Consumer  19,607   446   77      523   20,130      19,541   84   2      86   19,627    
Total $860,772  $2,933  $878  $717  $4,528  $865,300  $  $870,104  $8,243  $701  $924  $9,868  $879,972  $ 

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8. Allowance for Loan Losses  – (continued)

              
 December 31, 2014 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
 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  $  $176,216  $489  $4,361  $  $4,850  $181,066  $ 
Commercial loans secured by real estate  410,049   280         280   410,329      421,247   208   182      390   421,637    
Real estate – mortgage  255,021   2,196   332   1,067   3,595   258,616      254,288   2,658   442   549   3,649   257,937    
Consumer  18,927   74   8      82   19,009      20,115   67   162      229   20,344    
Total $823,123  $2,550  $340  $1,067  $3,957  $827,080  $  $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, 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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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

    
 September 30, 2015 December 31, 2014 March 31,
2016
 December 31,
2015
Non-accrual loans
                    
Commercial $162  $  $910  $4,260 
Commercial loans secured by real estate  19   778   194   18 
Real estate – mortgage  1,629   1,417   1,087   1,788 
Total  1,810   2,195   2,191   6,066 
Other real estate owned
                    
Commercial loans secured by real estate     384 
Commercial  570    
Real estate – mortgage  172   128   102   75 
Consumer  1    
Total  172   512   673   75 
TDR’s not in non-accrual  312   210   143   156 
Total non-performing assets including TDR $2,294  $2,917  $3,007  $6,297 
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned  0.27  0.35  0.34  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,
 Three months ended
March 31,
 2015 2014 2015 2014 2016 2015
Interest income due in accordance with original terms $25  $39  $73  $106  $59  $24 
Interest income recorded                  
Net reduction in interest income $25  $39  $73  $106  $59  $24 

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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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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;

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

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 Company had no loans modified as TDRs during the three month period ended March 31, 2016.

The following table details the loans modified as TDRs during the three month period ended September 30,March 31, 2015 (dollars in thousands).

   
Loans in accrual status # of
Loans
 Current
Balance
 Concession Granted
Commercial loan  1  $162   Extension of maturity date 

The Company had no loans modified as TDRs during the third quarter of 2014.

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

   
Loans in accrual status # of
Loans
 Current
Balance
 Concession Granted
Commercial loan  2  $366   Extension of maturity date 

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

   
Loans in non-accrual status # of
Loans
 Current
Balance
 Concession Granted
Commercial loan secured by real estate  1  $138   Extension of maturity date 
   
Loans in accrual status # of
Loans
 Current
Balance
 Concession Granted
Commercial loan  1  $204   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 $524,000$24,000 and $503,000$502,000 as of September 30,March 31, 2016 and 2015, and 2014, respectively. All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed.

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


 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above.

10. Federal Home Loan Bank Borrowings

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

      
 At September 30, 2015 At March 31, 2016
Type Maturing Amount Weighted
Average Rate
 Maturing Amount Weighted
Average Rate
Open Repo Plus  Overnight  $52,988   0.34  Overnight  $39,952   0.57
Advances  2015   1,000   0.50   2016   11,000   0.83 
  2016   12,000   0.81   2017   12,000   1.06 
  2017   12,000   1.06   2018   12,000   1.48 
  2018   12,000   1.48   2019   8,000   1.67 
  2019 and over   11,000   1.72   2020 and over   6,000   1.68 
Total advances     48,000   1.24      49,000   1.29 
Total FHLB borrowings    $100,988   0.77    $88,952   0.97

      
 At December 31, 2014 At December 31, 2015
Type Maturing Amount Weighted
Average Rate
 Maturing Amount Weighted
Average Rate
Open Repo Plus  Overnight  $38,880   0.27  Overnight  $48,748   0.43
Advances  2015   4,000   0.52   2016   12,000   0.81 
  2016   12,000   0.81   2017   12,000   1.06 
  2017   12,000   1.06   2018   12,000   1.48 
  2018   10,000   1.51   2019   7,000   1.73 
  2019 and over   4,000   1.88   2020 and over   5,000   1.69 
Total advances     42,000   1.12      48,000   1.27 
Total FHLB borrowings    $80,880   0.71    $96,748   0.85

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 iswas a voluntary program sponsored by the US Treasury that encouragesencouraged 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.


 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11. Preferred Stock  – (continued)

The Series E Preferred Stock has an aggregate liquidation preference of approximately $21 million and qualifies as Tier 1 Capital for regulatory purposes. The terms ofOn January 27, 2016, we redeemed the Series E Preferred Stock, provide for the payment of non-cumulative dividends on a quarterly basis. Since January 1, 2014, the dividend rate of the Series E Preferred Stock has been fixed at 1% per annum until February 7, 2016. Beginning on February 8, 2016, the dividend rate will be fixed at 9% per annum.

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

We may redeem the Series E Preferred Stock at any time at our option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, subject to theafter receiving approval offrom our federal banking regulator.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,March 31, 2016 and 2015 and 2014 (in thousands):

      
 Three months ended September 30, 2015 Three months ended September 30, 2014
   Net Unrealized
Gains and (Losses)
on Investment
Securities AFS(1)
 Defined
Benefit
Pension
Items(1)
 Total(1) Net Unrealized
Gains and (Losses)
on Investment
Securities AFS(1)
 Defined
Benefit
Pension
Items(1)
 Total(1)
Beginning balance $1,429  $(7,897 $(6,468 $1,950  $(6,659 $(4,709
Other comprehensive income (loss) before reclassifications  256   208   464   (463     (463
Amounts reclassified from accumulated other comprehensive loss  24      24      527   527 
Net current period other comprehensive income (loss)  280   208   488   (463  527   64 
Ending balance $1,709  $(7,689 $(5,980 $1,487  $(6,132 $(4,645

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

            
 Nine months ended September 30, 2015 Nine months ended September 30, 2014 Three months ended March 31, 2016 Three months ended March 31, 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) 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 $808  $(8,363 $(7,555 $1,843  $(8,745 $(6,902
Other comprehensive income (loss) before reclassifications  (139  1,056   917   561   259   820 
Other comprehensive income before reclassifications  736   333   1,069   229   432   661 
Amounts reclassified from accumulated other comprehensive loss  5      5   (117  527   410   (38     (38         
Net current period other comprehensive income (loss)  (134  1,056   922   444   786   1,230 
Net current period other comprehensive income  698   333   1,031   229   432   661 
Ending balance $1,709  $(7,689 $(5,980 $1,487  $(6,132 $(4,645 $1,506  $(8,030 $(6,524 $2,072  $(8,313 $(6,241

(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 and nine months ended September 30,March 31, 2016 and 2015 and 2014 (in thousands):

      
 Amount reclassified from accumulated other comprehensive loss(1) 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
September 30,
2015
 For the three
months ended
September 30,
2014
 Affected line item in the
statement of operations
 For the three
months ended
March 31,
2016
 Affected line item in the
statement of operations
Unrealized gains and losses on sale of securities
                         
 $36  $   Net realized (gains) losses on
investment securities
  $(57 $   Net realized (gains) losses on
investment securities
 
  (12     Provision for income tax expense   19      Provision for income tax expense 
 $24  $   Net of tax  $(38 $   Net of tax 
Total reclassifications for the period $24  $   Net income  $(38 $   Net income 

(1)Amounts in parentheses indicate credits.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

   
 Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components For the nine
months ended
September 30,
2015
 For the nine
months ended
September 30,
2014
 Affected line item in the
statement of operations
Unrealized gains and losses on sale of securities
               
   $8  $(177  Net realized (gains) losses on
investment securities
 
    (3  60   Provision for income tax expense 
   $5  $(117  Net of tax 
Amortization of defined benefit items(2)
               
Amortization of prior year service cost $  $5   Salaries and employee benefits 
       (2  Provision for income tax expense 
   $  $3   Net of tax 
Total reclassifications for the period $5  $(114  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).

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'sCompany’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company'sCompany’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'sCompany’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 September 30, 2015, the final Basel III rules require the Company to maintain minimum amountsassets, 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 September 30, 2015,March 31, 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 7.87%7.72% at September 30, 2015March 31, 2016 (in thousands, except ratios).

      
 At March 31, 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) $120,661   13.11 $105,065   11.49  8.63  10.00
Tier 1 Common Equity (To Risk Weighted Assets)  91,487   9.94   94,690   10.36   5.13   6.50 
Tier 1 Capital (To Risk Weighted Assets)  102,862   11.18   94,690   10.36   6.63   8.00 
Tier 1 Capital (To Average Assets)  102,862   9.28   94,690   8.73   4.00   5.00 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13.Regulatory Capital – (continued)

      
 At September 30, 2015
   Actual For Capital
Adequacy Purposes
 To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
   Amount Ratio Amount Ratio Amount Ratio
Total Capital (To RWA)
                              
Consolidated $134,591   14.77 $72,904   8.00 $91,130   10.00
AmeriServ Financial Bank  106,582   11.81   72,178   8.00   90,223   10.00 
Common Equity Tier 1 Capital (To RWA)
                              
Consolidated  91,825   10.08   41,009   4.50   59,235   6.50 
AmeriServ Financial Bank  95,906   10.63   40,600   4.50   58,645   6.50 
Tier 1 Capital (To RWA)
                              
Consolidated  123,915   13.60   54,678   6.00   72,904   8.00 
AmeriServ Financial Bank  95,906   10.63   54,134   6.00   72,178   8.00 
Tier 1 Capital (To Average Assets) leverage
                              
Consolidated  123,915   11.40   43,473   4.00   54,342   5.00 
AmeriServ Financial Bank  95,906   9.06   42,327   4.00   52,909   5.00 
      
 At December 31, 2015
   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) $144,096   15.55 $106,890   11.67  8.00  10.00
Tier 1 Common Equity (To Risk Weighted Assets)  93,202   10.06   96,092   10.49   4.50   6.50 
Tier 1 Capital (To Risk Weighted Assets)  125,648   13.56   96,092   10.49   6.00   8.00 
Tier 1 Capital (To Average Assets)  125,648   11.41   96,092   8.97   4.00   5.00 

      
 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 
*Applies to the Bank only.

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.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. Segment Results  – (continued)

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 and 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


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14. Segment Results  – (continued)

expense on guaranteed junior subordinated deferrable interest debentures, and centralized interest rate risk management. Inter-segment revenues were not material.

The contribution of the major business segments to the Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 were as follows (in thousands):

        
 Three months ended
September 30, 2015
 Nine months ended
September 30, 2015
 September 30,
2015
 Three months ended
March 31, 2016
 March 31,
2016
 Total
revenue
 Net income
(loss)
 Total
revenue
 Net income
(loss)
 Total
assets
 Total
revenue
 Net income
(loss)
 Total
assets
Retail banking $6,501  $723  $19,564  $2,125  $376,034  $6,297  $583  $355,224 
Commercial banking  4,945   1,553   14,318   4,178   599,796   4,635   (835  627,477 
Trust  2,177   391   6,574   1,167   5,260   2,177   145   5,367 
Investment/Parent  (573  (834  (2,268  (2,847  129,753   (1,114  (1,160  133,633 
Total $13,050  $1,833  $38,188  $4,623  $1,110,843  $11,995  $(1,267 $1,121,701 

        
 Three months ended
September 30, 2014
 Nine months ended
September 30, 2014
 December 31, 2014 Three months ended
March 31, 2015
 December 31,
2015
 Total
revenue
 Net income
(loss)
 Total
revenue
 Net income
(loss)
 Total
assets
 Total
revenue
 Net income
(loss)
 Total
assets
Retail banking $6,651  $706  $19,238  $1,671  $376,009  $6,524  $659  $415,008 
Commercial banking  4,279   1,141   12,691   3,267   563,690   4,738   1,291   589,840 
Trust  1,907   (432  6,062   232   5,015   2,167   380   5,263 
Investment/Parent  (841  (1,050  (1,916  (2,896  144,549   (783  (961  138,386 
Total $11,996  $365  $36,075  $2,274  $1,089,263  $12,646  $1,369  $1,148,497 

15. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $193.6$171.1 million and $188.0$170.5 million along with standby letters of credit of $7.6$9.0 million and $7.2$7.5 million as of September 30, 2015March 31, 2016 and December 31, 2014,2015, 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.


 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 and nine months ended September 30,March 31, 2016 and 2015 and 2014 were as follows (in thousands):

      
 Three months ended
September 30,
 Nine months ended
September 30,
 Three months ended
March 31,
 2015 2014 2015 2014 2016 2015
Components of net periodic benefit cost
                              
Service cost $400  $430  $1,200  $1,290  $368  $400 
Interest cost  325   331   975   993   344   325 
Expected return on plan assets  (525  (498  (1,575  (1,494  (563  (525
Amortization of prior year service cost     (5     (15
Recognized net actuarial loss  300   272   900   816   314   300 
Net periodic pension cost $500  $530  $1,500  $1,590  $463  $500 

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.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. Disclosures about Fair Value Measurements  – (continued)

The following tables present the assets reported on the Consolidated Balance Sheets at their fair value as of September 30, 2015March 31, 2016 and December 31, 2014,2015, 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.


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17. Disclosures about Fair Value Measurements  – (continued)

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

        
 Fair Value Measurements at September 30, 2015 Using Fair Value Measurements at March 31, 2016 Using
 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)
US Agency securities $2,900  $  $2,900  $  $1,901  $  $1,901  $ 
US Agency mortgage-backed securities  94,342      94,342      94,508      94,508    
Corporate bonds  17,410      17,410      19,333      19,333    

        
 Fair Value Measurements at December 31, 2014 Using Fair Value Measurements at December 31, 2015 Using
 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)
US Agency securities $5,906  $  $5,906  $  $2,881  $  $2,881  $ 
US Agency mortgage-backed securities  105,768      105,768      98,334      98,334    
Corporate bonds  15,436      15,436      18,252      18,252    

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 September 30, 2015,March 31, 2016, impaired loans with a carrying value of $965,000$1,416,000 were reduced by a specific valuation allowance totaling $524,000$634,000 resulting in a net fair value of $441,000.$782,000. At December 31, 2014,2015, 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 September 30, 2015 Using Fair Value Measurements at March 31, 2016 Using
 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)
Impaired loans $441  $  $  $441  $782  $  $  $782 
Other real estate owned  172         172   673         673 

        
 Fair Value Measurements at December 31, 2014 Using Fair Value Measurements at December 31, 2015 Using
 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)
Impaired loans $469  $  $  $469  $3,115  $  $  $3,115 
Other real estate owned  512         512   75         75 

March 31, 2016Quantitative Information About Level 3 Fair Value Measurements
Fair Value EstimateValuation TechniquesUnobservable InputRange (Wgtd Ave)
Impaired loans$782Appraisal of collateral(1),(3)Appraisal adjustments(2)
15% to 20% (18%)
Other real estate owned 673Appraisal of collateral(1),(3)Appraisal adjustments(2) Liquidation expenses29% to 81% (47%)
9% to 55% (16%)

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. Disclosures about Fair Value Measurements  – (continued)

    
September 30,December 31, 2015 Quantitative Information About Level 3 Fair Value Measurements
 Fair Value Estimate Valuation Techniques Unobservable Input Range (Wgtd Ave)
Impaired loans $4413,115Appraisal of collateral(1),(3)Appraisal adjustments(2)
15% to 20% (17%)
Other real estate owned    75 Appraisal of collateral(1),(3) Appraisal adjustments(2)
Liquidation expenses
 0%23% to 35% (30%49% (35%)
1%10% to 15% (10%)
Other real estate owned172Appraisal of collateral(1),(3)Appraisal adjustments(2)
Liquidation expenses
0% to 48% (38%)
1% to 20% (10%)

December 31, 2014Quantitative Information About Level 3 Fair Value Measurements
Fair Value EstimateValuation TechniquesUnobservable InputRange (Wgtd Ave)
Impaired loans$469Appraisal of collateral(1),(3)Appraisal adjustments(2)
Liquidation expenses
0% to 37% (30%)
1% to 15% (10%)
Other real estate owned512Appraisal of collateral(1),(3)Appraisal adjustments(2)
Liquidation expenses
47% to 83% (55%)
1% to 61% (9%59% (25%)

(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.

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 September 30, 2015March 31, 2016 and December 31, 2014,2015, were as follows (in thousands):

          
 September 30, 2015 March 31, 2016
 Carrying Value Fair Value (Level 1) (Level 2) (Level 3) Carrying
Value
 Fair Value (Level 1) (Level 2) (Level 3)
FINANCIAL ASSETS:
                                                  
Cash and cash equivalents $31,748  $31,748  $31,748  $  $  $23,623  $23,623  $23,623  $  $ 
Investment securities – AFS  114,652   114,652      114,652      115,742   115,742      115,742    
Investment securities – HTM  20,361   20,771      17,829   2,942   23,258   23,800      20,846   2,954 
Regulatory stock  6,786   6,786   6,786         6,772   6,772   6,772       
Loans held for sale  2,913   2,983   2,983         2,438   2,489   2,489       
Loans, net of allowance for loan loss and unearned income  855,528   857,049         857,049   870,452   873,976         873,976 
Accrued interest income receivable  3,315   3,315   3,315         3,295   3,295   3,295       
Bank owned life insurance  37,266   37,266   37,266         37,396   37,396   37,396       
FINANCIAL LIABILITIES:
                                                  
Deposits with no stated maturities $591,286  $591,286  $591,286  $  $  $633,714  $633,714  $633,714  $  $ 
Deposits with stated maturities  278,613   281,283         281,283   273,059   275,261         275,261 
Short-term borrowings  52,988   52,988   52,988         39,952   39,952   39,952       
All other borrowings  61,085   65,142         65,142   69,320   74,278         74,278 
Accrued interest payable  1,601   1,601   1,601         1,484   1,484   1,484       

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. Disclosures about Fair Value Measurements  – (continued)

          
 December 31, 2014 December 31, 2015
 Carrying Value Fair Value (Level 1) (Level 2) (Level 3) Carrying
Value
 Fair Value (Level 1) (Level 2) (Level 3)
FINANCIAL ASSETS:
                                                  
Cash and cash equivalents $32,872  $32,872  $32,872  $  $  $48,510  $48,510  $48,510  $  $ 
Investment securities – AFS  127,110   127,110      127,110      119,467   119,467      119,467    
Investment securities – HTM  19,840   20,213      17,241   2,972   21,419   21,533      18,608   2,925 
Regulatory stock  6,173   6,173   6,173         6,753   6,753   6,753       
Loans held for sale  5,051   5,127   5,127         3,003   3,041   3,041       
Loans, net of allowance for loan loss and unearned income  817,457   819,935         819,935   871,063   869,591         869,591 
Accrued interest income receivable  3,127   3,127   3,127         3,057   3,057   3,057       
Bank owned life insurance  37,417   37,417   37,417         37,228   37,228   37,228       
FINANCIAL LIABILITIES:
                                                  
Deposits with no stated maturities $568,625  $568,625  $568,625  $  $  $633,751  $633,751  $633,751  $  $ 
Deposits with stated maturities  301,256   304,744         304,744   269,543   271,909         271,909 
Short-term borrowings  38,880   38,880   38,880         48,748   48,748   48,748       
All other borrowings  55,085   59,256         59,256   68,310   71,816         71,816 
Accrued interest payable  1,706   1,706   1,706         1,651   1,651   1,651       

The fair value of cash and cash equivalents, regulatory stock, accrued interest income receivable, short-term borrowings, and accrued interest payable are equal to the current carrying value.

The fair value of investment securities is equal to the available quoted market price for similar securities. 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 Level 3 securities are valued by discounted cash flows using the US Treasury rate for the remaining term of the securities.

Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment with an investor. All loans in the held for sale account conform to Fannie Mae underwriting guidelines, with the specific intent of the loan being purchased by an investor at the predetermined rate structure. Loans in the held for sale account have specific delivery dates that must be executed to protect the pricing commitment (typically a 30, 45, or 60 day lock period).

The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.

The fair value of bank owned life insurance is based upon the cash surrender value of the underlying policies and matches the book value.

Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

The fair value of all other borrowings is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.


 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. Disclosures about Fair Value Measurements  – (continued)

Commitments to extend credit and standby letters of credit are financial instruments generally not subject to sale, and fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 15.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.

18.Accounting Changes

On January 1, 2016, the Company adopted ASU 2015-03,Interest — Imputation of Interest (Subtopic 835-30), which changed the presentation of debt issuance costs. Whereas in prior periods debt issuance cost related to a recognized debt liability was presented on the balance sheet as an asset of the Company, the amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new method of accounting for debt issuance cost was adopted in accordance with the Update and comparative financial statements of prior years have been adjusted to apply the new method retrospectively. The guaranteed junior subordinated deferrable interest debentures and subordinated debt financial statement line items for the periods ended March 31, 2016 and December 31, 2015 were affected by this change in accounting principle.


 

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

.....2015 THIRD.....2016 FIRST QUARTER SUMMARY OVERVIEW.....AmeriServ Financial, Inc. reported thirda first quarter 2016 loss available to common shareholders of $1,282,000, or ($0.07) per diluted common share, due primarily to an increased provision for loan losses. This net loss is consistent with the information previously disclosed in a Form 8-K filed on March 31, 2016. In the first quarter of 2015, net income available to common shareholders of $1,781,000,totaled $1,316,000 or $0.09$0.07 per diluted common share. This represented a significant increase

The net loss reported in earnings per share from the thirdfirst quarter of 2014 where2016 was caused by an increased provision for loan losses that was needed to resolve our only meaningful direct loan exposure to the energy industry. In spite of this troubled loan, the Company’s overall loan portfolio quality continues to be strong. The other item significantly impacting our financial performance in the first quarter of 2016 was operating expenses increasing at our Trust Company primarily due to additional one-time legal and accounting costs. Several meaningful positive accomplishments occurred during the quarter and included the pay-off of $21 million of SBLF preferred stock, continued year over year growth in both loans and deposits to record levels, and the identification of further non-interest expense savings which will benefit earnings in future quarters. It is fully expected that the negative items responsible for the loss are behind us and the Company should return to more typical profitability levels in the second quarter.

During the first quarter of 2016, it was appropriate for the AmeriServ Board of Directors and the AmeriServ management team to exercise the high degree of discipline that this risk versus reward banking business demands at times. The announcement of the first quarter financial results contained the details concerning a net income available to common shareholders totaled $312,000,loss of $1,267,000 or $0.02a negative $0.07 per diluted common share. The third quarter 2014need for discipline concerned two specific issues that we have now put behind us.

Typically, in recent history, the performance was negatively impacted byof AmeriServ Trust and Financial Services Company has been highlighted, noting the continuing growth in assets under management and assets under administration. This growth has triggered a $669,000 goodwill impairment charge. Forsteady increase in the nine month period ended September 30, 2015, the Company reported net income available to common shareholderscontribution of $4,466,000, or $0.24 per diluted share. This also represented a 118% increase in earnings per share from the first nine months of 2014 where net income available to common shareholders totaled $2,116,000, or $0.11 per diluted common share. Our improved financial performance of 2015 resulted from a disciplined focus on successfully executing our business plan to increase profitability and improve the earnings power of AmeriServ Financial, Inc. We were able to increase revenue and reduce non-interest expense to help achieve meaningful growth in earnings per share. Non-interest income was positively impacted by increased revenue from bank owned life insurance. Additionally, we have shown sustained earnings improvement in 2015 while maintaining excellent asset quality and a strong capital position.

Some of the more significant trends include the following:

The third quarter of 2015 marks the tenth consecutive quarter in which the Company has set a new high in loans outstanding. The net loan growth during these ten consecutive quarters now exceeds $150 million.
During these same ten consecutive quarters, the total of non-performing assets has fallen by $2,093,000 or 47.7%. This is evidence that AmeriServ continues to maintain the appropriate level of credit standards for a community bank.
Management’s drive for efficiency resulted in operating expenses in the third quarter of 2015 totaling $355,000 less than in the third quarter of 2014. This has been a company wide effort and the result has exceeded our expectations.
A common measure in the community banking industry is the ratio of non-interest expenses to total revenue. In the third quarter of 2015, this ratio was below 80% at AmeriServ for the first full quarter since 2008.
Last year, we reported that 2014 was a record year for the Trust Company. However, after nine monthsthis steady growth had placed unavoidable stress on the infrastructure of the Company. Therefore, the management team began to search for solutions. The result was a decision to install a new state of the art software complex provided by one of the largest software companies in the financial industry. Suffice it to say that certain operational flaws appeared during the installation and conversion. Consequently, we reached out to other independent advisors to analyze the specific errors. That process is now over and we are now nearly finished with implementing the recommended solutions. We believe the system is now functioning as expected but it is a fact that the analysis phase and the corrective action phase did elevate the cost of the Trust Company. Fortunately, the issues were in what some of us still refer to as the “back room” operation areas. Actually, during the corrective actions the Trust Company continued to grow and we believe that the Trust Company will resume the growth pattern of the last five years. It was necessary to solve the shortfalls promptly and we did.

Concurrently in the Bank, we have been working with a local group who has been active in the new shale technology. The collapse in oil prices, which we have seen in the last year or years, has hurt many of these relatively new companies. It is our job to work with local companies for they provide precious jobs in the region. However, oil is an international commodity and this group will not survive. Therefore, with regret, we charged off their loan and this company will cease to exist. Fortunately over 99% of our borrowers continue to pay on schedule and our list of troubled loans remains much better than most banks our size. We must be disciplined to maintain this record and so we took this difficult but necessary action.

Once again, let us emphasize that it is important to deal with problems. We have dealt with these two problems and now we will resume our emphasis on growth with earnings.

During the first quarter of 2015, this samewe restructured our executive team. The results of these changes were quite positive but we continue to search for an improved level of performance every year. Therefore, during the first quarter of 2016 we placed James Huerth in the role of President and CEO of the Trust Company and added the title of Bank President and CEO to Jeffrey Stopko. Actually, this is 27.3% better thanmerely a return to the 2014 nine-month level of net income.

It is quite positive to be able to list these kinds of results. Progress requires hard work and painstaking execution. This Board and this management team are very aware of this fact and appreciate the contribution of every AmeriServ banker to these results.

The leadership team of AmeriServ has always worked closely with the regulatory authorities in the Department of Banking and Securities in Harrisburg, Pennsylvania and in the Federal Reserve Bank of Philadelphia. We understand their responsibility to maintain a healthy banking industry. However, we also offer our own thoughts and ideas to our regulators so that we remain a part of the dialogue between banker and regulator in a positive atmosphere that is both practical and rewarding.

The Rust Belt economy continues to struggle but that is not a new discovery. The difficult days at AmeriServ are not so long ago and we have learned how to monitor risk throughout this Company. The inclusion of a Chief Risk Officer in our Executive Management Team is giving us all a more precise view of the risks that do exist at AmeriServ. Our business like most businesses is moving faster and our protection is care and thoughtfulness in the monitoring of every known risk.structure


 

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we operated under from 2004 to 2015. It does enable us to benefit from bringing Mr. Huerth’s boundless energies into the rapidly growing Trust Company and asks Mr. Stopko to find ways to improve the profitability of the bank.

In the midst of all this, the staff set a new record in loans outstanding and a new record in deposits. We all hear so much about the underperforming economy and the need to fix things. Our conclusion has been quite different from what we read and hear. Our solution is to rely on working harder. We do note that AmeriServ’s tangible book value has been increasing at almost a 5% per year compound annual growth rate over the past 5 years. That growth rate puts us in the middle of our peer bank roster.

THREE MONTHS ENDED SEPTEMBER 30, 2015MARCH 31, 2016 VS. THREE MONTHS ENDED SEPTEMBER 30, 2014MARCH 31, 2015

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

  
 Three months ended
September 30, 2015
 Three months ended
September 30, 2014
Net income $1,833  $365 
Net income available to common shareholders  1,781   312 
Diluted earnings per share  0.09   0.02 
Return on average assets (annualized)  0.66  0.14
Return on average equity (annualized)  6.15  1.25
  
 Three months ended
March 31, 2016
 Three months ended
March 31, 2015
Net income (loss) $(1,267 $1,369 
Net income (loss) available to common shareholders  (1,282  1,316 
Diluted earnings (loss) per share  (0.07  0.07 
Return on average assets (annualized)  (0.45)%   0.51
Return on average equity (annualized)  (4.86)%   4.80

The Company continued its positive earnings momentum in the thirdreported a first quarter of 2015 by reporting2016 net incomeloss available to common shareholders of $1,781,000,$1,282,000, or $0.09($0.07) per diluted common share. This represented a significant increase in earnings per share, fromdue primarily to an increased provision for loan losses. In the thirdfirst quarter of 2014 where2015, net income available to common shareholders totaled $312,000,$1,316,000, or $0.02$0.07 per diluted common share. SolidThe negative impact of net interest margin compression more than offset continued solid loan and deposit growth in our community banking business contributed to an increase of $632,000, or 7.5%,and resulted in net interest income. Non-interest expense inincome decreasing by $376,000. Additionally, the third quarter of 2015 declined by $1.0 million, or 9.1%, as we are realizing the savings from several profitability improvement initiatives that were implemented in late 2014. The third quarter 2014Company’s earning’s performance was also negatively impacted bydue to a $669,000 goodwill impairment charge. A lower level of professional fees also contributed to the favorable comparison.non-interest income by $275,000 and a higher level of non-interest expense by $301,000.

.....NET INTEREST INCOME AND MARGIN.....The Company'sCompany’s net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities. Net interest income is a primary source of the Company'sCompany’s earnings, and it is affected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities. The following table compares the Company'sCompany’s net interest income performance for the thirdfirst quarter of 20152016 to the thirdfirst quarter of 20142015 (in thousands, except percentages):

        
 Three months ended
September 30, 2015
 Three months ended
September 30, 2014
 $
Change
 %
Change
 Three months ended
March 31, 2016
 Three months ended
March 31, 2015
 $
Change
 %
Change
Interest income $10,667  $10,019  $648   6.5 $10,422  $10,523  $(101  (1.0)% 
Interest expense  1,632   1,616   16   1.0   1,864   1,589   275   17.3 
Net interest income $9,035  $8,403  $632   7.5  $8,558  $8,934  $(376  (4.2
Net interest margin  3.52  3.42  0.10   N/M   3.30  3.57  (0.27  N/M 

N/M — not meaningful

The Company’s net interest income in the thirdfirst quarter of 2015 increased2016 decreased by $632,000,$376,000, or 7.5%4.2%, fromwhen compared to the prior year’s third quarter. The Company’s has been able to increase its net interest income through a combinationfirst quarter of earning asset growth and improved net interest margin performance.2015. The Company’s net interest margin of 3.52%3.30% for the thirdfirst quarter of 20152016 was 1027 basis points betterlower than the net interest margin of 3.42%3.57% for the thirdfirst quarter 2015 and was consistent with the 3.30% margin reported for the more recent fourth quarter 2015 performance. The reduction in net interest income is a direct result of 2014.net interest margin compression along with the interest expense associated with the Company’s late fourth quarter 2015 issuance of subordinated debt. The prolonged low interest rate environment that exists in the economy, along with intense market competition for loans are the primary causes of this net interest margin compression and more than offset the Company continuing to grow earning assets and control its cost of funds through disciplined deposit pricing. Specifically, the earning asset growth has occurred in the loan portfolio as total loans averaged $859$881 million in the thirdfirst quarter of 20152016 which is $50$39.5 million, or 6.2%4.7%, higher than the $809$842 million average for the thirdfirst quarter of 2014.2015. This loan growth


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reflects the successful results of the Company’s sales callingbusiness development efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans particularly through its loan production offices. Despite this meaningful loan growth experienced between years, loan interest income increased modestly by $9,000, or 0.1%. Interest income on investments in 2015 has2016 also benefittedreturned to a more normal level after the Company benefited from greater prepayment fees on early loan payoffs and an increaseda special dividend from the FHLB of Pittsburgh.Pittsburgh in 2015. Overall, total interest income has increaseddecreased by $648,000,$101,000, or 6.5%1.0%, in the third quarter of 2015.between years.

Total interest expense has been well controlled in 2015 as itfor the first quarter of 2016 increased by only $16,000$275,000, or 17.3%, due to a higher level of both borrowings and deposit interest expense. The Company experienced a $195,000 increase in the thirdinterest cost for borrowings in the first quarter of 2015 as compared2016 with $129,000 of this increase attributable to the same periodCompany’s recent subordinated debt issuance. Specifically, the Company issued $7.65 million of subordinated debt which has a 6.50% fixed interest rate in 2014late December 2015. The proceeds from the subordinated debt issuance, along with other cash on hand, was used to redeem all $21 million of our outstanding SBLF preferred stock on January 27, 2016. The remainder of the increase in interest expense was due to tight control of ourthe December increase in the fed funds rate which had an immediate impact on the cost of funds through disciplined deposit pricing. Even with this reductionovernight borrowed funds. The average volume of overnight borrowings increased by $16 million in deposit costs, the first quarter of 2016. The Company continues to have a strong loyalalso experienced growth in deposits which we believe reflects the loyalty of our core deposit base and success in cross-sellingongoing efforts to cross sell new loan customers into deposit products. Specifically, total deposits were relatively stable and averaged $875a record level of $910 million for the thirdfirst quarter of 20152016 which is only


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$2.1$13.4 million, or 0.2%1.5%, lowerhigher than the $877$897 million average for the same period in 2014. This slight decrease in total deposits occurred primarily in a few rate sensitive accounts and is indicativefirst quarter of the competitive pressures that all community banks must deal with to retain customer accounts in this low interest rate environment. Alternatively, the2015. The Company is pleased that within the mix of total deposits, a meaningful portion of this deposit growth occurred in non-interest bearing demand deposit accounts. The decreasedDeposit interest expense forin 2016 increased by $80,000, or 6.8%, due to the higher balance of deposits has been offset by a $79,000 increase inalong with certain money market accounts repricing upward after the Federal Reserve fed funds interest cost for borrowings as the Company has utilized more FHLB term advances to extend borrowings and provide protection against rising interest rates.rate increase.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended September 30,March 31, 2016 and March 31, 2015 and September 30, 2014 setting forth (i) average assets, liabilities, and stockholders'stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) the Company’s interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables, loan balances do include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Additionally, a tax rate of 34% is used to compute tax-equivalent yields.

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

      
 2015 2014
   Average
Balance
 Interest
Income/
Expense
 Yield/Rate Average
Balance
 Interest
Income/
Expense
 Yield/Rate
Interest earning assets:
                              
Loans and loans held for sale, net of unearned income $858,752  $9,727   4.46 $808,731  $9,025   4.40
Interest bearing deposits  1,235   1   0.39   1,449   2   0.66 
Short-term investment in money market funds  9,496   3   0.11   7,207 �� 1   0.03 
Investment securities – AFS  124,294   790   2.54   136,172   859   2.53 
Investment securities – HTM  20,664   155   3.00   19,644   138   2.81 
Total investment securities  144,958   945   2.61   155,816   997   2.56 
Total interest earning assets/interest income  1,014,441   10,676   4.16   973,203   10,025   4.08 
Non-interest earning assets:
                              
Cash and due from banks  16,362             16,027           
Premises and equipment  12,508             13,477           
Other assets  69,021             69,528           
Allowance for loan losses  (9,837        (10,040      
TOTAL ASSETS $1,102,495        $1,062,195       
Interest bearing liabilities:
                              
Interest bearing deposits:
                              
Interest bearing demand $101,494  $55   0.21 $104,197  $52   0.20
Savings  95,968   40   0.17   89,522   36   0.16 
Money markets  235,578   194   0.33   228,353   196   0.34 
Time deposits  277,680   885   1.26   299,730   953   1.26 
Total interest bearing deposits  710,720   1,174   0.66   721,802   1,237   0.69 
Short-term borrowings  40,427   37   0.36   12,933   10   0.27 
Advances from Federal Home Loan Bank  46,386   141   1.20   34,729   89   0.97 
Guaranteed junior subordinated deferrable interest debentures  13,085   280   8.57   13,085   280   8.57 
Total interest bearing liabilities/interest expense  810,618   1,632   0.80   782,549   1,616   0.82 

 

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Three months ended March 31(In thousands, except percentages)

            
 2015 2014 2016 2015
 Average
Balance
 Interest
Income/
Expense
 Yield/Rate Average
Balance
 Interest
Income/
Expense
 Yield/Rate Average
Balance
 Interest
Income/
Expense
 Yield/Rate Average
Balance
 Interest
Income/
Expense
 Yield/Rate
Interest earning assets:
                              
Loans and loans held for sale, net of unearned income $881,063  $9,473   4.27 $841,612  $9,461   4.50
Interest bearing deposits  3,484   7   0.78   2,017   2   0.40 
Short-term investment in money market funds  7,955   10   0.51   11,296   2   0.07 
Investment securities – AFS  120,213   767   2.56   127,386   913   2.88 
Investment securities – HTM  21,948   173   3.15   20,266   150   2.97 
Total investment securities  142,161   940   2.65   147,652   1,063   2.89 
Total interest earning assets/interest income  1,034,663   10,430   4.03   1,002,577   10,528   4.22 
Non-interest earning assets:
                              
Cash and due from banks  18,739             17,293           
Premises and equipment  12,090             12,953           
Other assets  67,751             70,301           
Allowance for loan losses  (9,886        (9,673      
TOTAL ASSETS $1,123,357        $1,093,451       
Interest bearing liabilities:
                              
Interest bearing deposits:
                              
Interest bearing demand $101,293  $69   0.27 $92,926  $44   0.19
Savings  95,303   39   0.16   92,490   37   0.16 
Money markets  264,433   278   0.42   232,542   180   0.31 
Time deposits  267,805   868   1.29   306,050   913   1.21 
Total interest bearing deposits  728,834   1,254   0.69   724,008   1,174   0.66 
Short-term borrowings  29,449   42   0.57   13,484   10   0.31 
Advances from Federal Home Loan Bank  49,135   159   1.30   43,581   125   1.16 
Guaranteed junior subordinated deferrable interest debentures  13,085   280   8.57   13,085   280   8.57 
Subordinated debt  7,650   129   6.73          
Total interest bearing liabilities/interest expense  828,153   1,864   0.90   794,158   1,589   0.81 
Non-interest bearing liabilities:
                                                            
Demand deposits  164,092             155,157             181,096             172,559           
Other liabilities  9,531             8,143             9,370             11,052           
Shareholders' equity  118,254         116,346       
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,102,495        $1,062,195       
Shareholders’ equity  104,738         115,682       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,123,357        $1,093,451       
Interest rate spread            3.36             3.26             3.13             3.41 
Net interest income/Net interest
margin
       9,044   3.52       8,409   3.42       8,566   3.30       8,939   3.57
Tax-equivalent adjustment     (9        (6        (8        (5   
Net Interest Income    $9,035        $8,403        $8,558        $8,934    

.....PROVISION....PROVISION FOR LOAN LOSSES.....The Company recorded a $300,000$3.1 million provision for loan losses in the thirdfirst quarter of 20152016 compared to noa $250,000 provision for loan losses in the thirdfirst quarter of 2014. This2015, or an increase of $2.85 million between periods. The substantially higher than typical provision in the thirdfirst quarter of 20152016 was needednecessary to supportresolve the continuing growthCompany’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 loan portfolio andbankruptcy recently changing from Chapter 11 (reorganization) to Chapter 7 (liquidation) late in the first quarter of 2016, the Company concluded that its previously established


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reserves on these non-accrual loans were not sufficient to cover net loan charge-offs. Thethe 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 of $245,000,$3.4 million, or 0.11%1.60% of total loans, in the thirdfirst quarter of 20152016 compared to net loan charge-offs of $568,000,$184,000, or 0.28%0.09% of total loans, in the thirdfirst quarter of 2014. At September 30, 2015,2015. Overall, the Company continued to maintain good asset quality as its non-performing assets totaled $2.3$3.0 million, or only 0.27%0.34% of total loans and is $1.6 million lower thanat March 31, 2016. In summary, the September 30, 2014 level. When determining the provisionallowance for loan losses the Company considersprovided a numberstrong 408% coverage of factors, somenon-performing loans, and 1.08% of which include periodic credit reviews,total loans, at March 31, 2016, compared to 159% coverage of non-performing assets, loan delinquencyloans, and charge-off trends, concentrations1.13% of credit, loan volume trends and broader local and national economic trends.total loans, at December 31, 2015.

.....NON-INTEREST INCOME.....Non-interest income for the thirdfirst quarter of 20152016 totaled $4.0$3.4 million and increased $422,000,decreased $275,000, or 11.7%7.4%, from the thirdfirst quarter 20142015 performance. Factors contributing to this higherlower level of non-interest income for the quarter included:

*a $496,000 increase$196,000 decrease in revenue from bank owned life insurance due toafter the receipt of twoCompany received a death claimsclaim in the quarter;2015 and no such claim occurred in 2016;
*an $84,000, or 44.0%, decrease in net gains realized on residential mortgage loan sales and a $278,000, or 15.4%, increase in trust and investment advisory fees due to increased assets under management which reflects successful new business development activities as well as effective management of existing customer accounts in this volatile market environment;
*a $103,000, or 54.2%,$52,000 decrease in mortgage related fees and a $97,000 decrease in net gains on sale of loans due to reduced volume of refinance activity in 2015;
*and a $66,000 decrease in deposit service charges due to fewer overdraft fees during the quarter;new mortgage loan originations in 2016; and
*a $36,000 loss$57,000 gain realized on the sale of investment securities in the thirdfirst quarter of 2015;2016. The Company had no sales of investment securitiesdid not execute any sale transactions in the thirdfirst quarter of 2014.2015.

.....NON-INTEREST EXPENSE.....Non-interest expense for the thirdfirst quarter of 20152016 totaled $10.2$10.7 million and decreasedincreased by $1.0 million,$301,000, or 9.1%2.9%, from the prior year’s thirdfirst quarter. Factors contributing to the lowerhigher non-interest expense in the quarter included:

*an increase in professional fees that was almost entirely attributable to $288,000 of non-recurring costs for legal and accounting services that were necessary to resolve a $669,000 decrease in goodwill impairment charges astrust operations trading error. Costs related to this trust issue were also the Company recognized this charge in the third quarter of 2014, with no such charge taken in 2015;primary reason that other expenses increased by $76,000 between years;
*a $154,000 decrease$93,000, or 1.5%, increase in professional feessalaries and employee benefits due to lower legal fees, consulting feesincreased health care costs and recruitmentseverance costs related to the consolidation of branches in the third quarter of 2015;State College market; and
*a $60,000, or 1.0%,$104,000 decrease in salaries and employee benefits due to 23 fewer full time equivalent employees as certain employees who elected to participate in an early retirement program in late 2014 were not replaced in order to achieve efficiencies identified as part ofoccupancy expenses along with a profitability improvement program.

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NINE MONTHS ENDED SEPTEMBER 30, 2015 VS. NINE MONTHS ENDED SEPTEMBER 30, 2014

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

  
 Nine months ended
September 30, 2015
 Nine months ended
September 30, 2014
Net income $4,623  $2,274 
Net income available to common shareholders  4,466   2,116 
Diluted earnings per share  0.24   0.11 
Return on average assets (annualized)  0.56  0.29
Return on average equity (annualized)  5.29  2.64

The Company reported net income available to common shareholders of $4,466,000, or $0.24 per diluted share in the first nine months of 2015. This represented a 118% increase in earnings per share from the first nine months of 2014 where net income available to common shareholders totaled $2,116,000, or $0.11 per diluted common share. Solid loan growth as well as cost of funds control through disciplined deposit pricing in our community banking business contributed to an increase of $1.5 million, or 5.8%, in net interest income. Non-interest income increased due largely to greater revenue from our trust and wealth management business and bank owned life insurance income. Non-interest expense in the first nine months of 2015 declined by $1.7 million, or 5.3%, due to savings from several profitability improvement initiatives that were implemented in late 2014 and a lower level of professional fees.

.....NET INTEREST INCOME AND MARGIN..... The following table compares the Company's net interest income performance for the first nine months of 2015 to the first nine months of 2014 (in thousands, except percentages):

    
 Nine months ended
September 30, 2015
 Nine months ended
September 30, 2014
 $
Change
 %
Change
Interest income $31,599  $30,097  $1,502   5.0
Interest expense  4,830   4,785   45   0.9 
Net interest income $26,769  $25,312  $1,457   5.8 
Net interest margin  3.52  3.48  0.04   N/M 

N/M — not meaningful

The Company’s net interest income for the first nine months of 2015 increased by $1,457,000, or 5.8%, when compared to the first nine months of 2014. The Company’s has been able to increase its net interest income through a combination of earning asset growth and improved net interest margin performance. The Company’s net interest margin of 3.52% for the first nine months of 2015 was four basis points better than the net interest margin of 3.48% for the first nine months of 2014. Specifically, the earning asset growth has occurred in the loan portfolio as total loans averaged $853 million in the first nine months of 2015 which is $55 million, or 7.0%, higher than the $797 million average for the first nine months of 2014. This loan growth reflects the successful results of the Company’s sales calling efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans particularly through its loan production offices in stronger growth markets of Pittsburgh and Altoona in Pennsylvania, and Hagerstown, Maryland. Interest income in 2015 has also benefitted from greater prepayment fees on early loan payoffs and an increased dividend from the FHLB of Pittsburgh. Overall, total interest income has increased by $1.5 million, or 5.0%, in the first nine months of 2015.

Total interest expense has been well controlled in 2015 as it increased by only $45,000, or 0.9% in the first nine months of 2015 as compared to the same period in 2014 due to tight control of our cost of funds through disciplined deposit pricing. Total deposit interest expense decreased by $169,000, or 4.6%, in the first nine months of 2015 from the same timeframe in 2014. Even with this reduction in deposit costs, the Company continues to have a strong loyal core deposit base and success in cross-selling new loan customers into deposit products. Specifically, total deposits averaged $887 million for the first nine months of 2015 which is $17 million, or 2.0%, higher than the $870 million average for the same period in 2014. The


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Company is pleased that a meaningful portion of this deposit growth occurred in non-interest bearing demand deposit accounts. This decreased interest expense for deposits has been offset by a $214,000 increase in the interest cost for borrowings as the Company has utilized more FHLB term advances to extend borrowings and provide protection against rising interest rates.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the nine month periods ended September 30, 2015 and September 30, 2014. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 31.

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

      
 2015 2014
   Average Balance Interest Income/ Expense Yield/Rate Average Balance Interest Income/ Expense Yield/Rate
Interest earning assets:
                              
Loans and loans held for sale, net of unearned income $852,553  $28,674   4.45 $797,090  $27,008   4.49
Interest bearing deposits  1,235   4   0.40   2,635   6   0.21 
Short-term investment in money market funds  10,228   10   0.14   6,904   3   0.06 
Investment securities – AFS  125,967   2,480   2.63   139,548   2,688   2.57 
Investment securities – HTM  20,381   451   2.95   19,103   410   2.86 
Total investment securities  146,348   2,931   2.67   158,651   3,098   2.60 
Total interest earning assets/interest income  1,010,364   31,619   4.16   965,280   30,115   4.15 
Non-interest earning assets:
                              
Cash and due from banks  17,241             15,755           
Premises and equipment  12,729             13,273           
Other assets  69,732             69,635           
Allowance for loan losses  (9,751        (10,101      
TOTAL ASSETS $1,100,315        $1,053,842       
Interest bearing liabilities:
                              
Interest bearing deposits:
                              
Interest bearing demand $98,668  $151   0.20 $95,688  $140   0.20
Savings  95,050   117   0.16   89,647   107   0.16 
Money markets  233,311   556   0.32   228,898   584   0.34 
Time deposits  291,668   2,695   1.24   301,959   2,857   1.27 
Total interest bearing deposits  718,697   3,519   0.65   716,192   3,688   0.69 
Short-term borrowings  27,228   70   0.34   16,606   34   0.26 
Advances from Federal Home Loan Bank  45,300   401   1.18   30,605   223   0.97 
Guaranteed junior subordinated deferrable interest debentures  13,085   840   8.57   13,085   840   8.57 
Total interest bearing liabilities/interest expense  804,310   4,830   0.80   776,488   4,785   0.82 
Non-interest bearing liabilities:
                              
Demand deposits  168,634             153,648           
Other liabilities  10,442             8,395           
Shareholders' equity  116,929         115,311       
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,100,315        $1,053,842       
Interest rate spread            3.36             3.33 
Net interest income/Net interest
margin
       26,789   3.52       25,330   3.48
Tax-equivalent adjustment     (20        (18   
Net Interest Income    $26,769        $25,312    

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.....PROVISION FOR LOAN LOSSES.....The Company recorded a $750,000 provision for loan losses compared to no provision for loan losses in the first nine months of 2014. The provision recorded in 2015 was needed to support the continuing growth of the loan portfolio and cover net loan charge-offs. The Company experienced net loan charge-offs $601,000, or 0.09%, of total loans in 2015 compared to net loan charge-offs of $522,000 or 0.09% of total loans in 2014. Overall, the Company continued to maintain outstanding asset quality during the first nine months of 2015. At September 30, 2015, non-performing assets totaled $2.3 million, or only 0.27% of total loans, and is $1.6 million lower than the September 30, 2014 level. In summary, the allowance for loan losses provided a strong 461% coverage of non-performing loans, and 1.13% of total loans, at September 30, 2015, compared to 400% coverage of non-performing loans, and 1.16% of total loans, at December 31, 2014.

.....NON-INTEREST INCOME.....Non-interest income for the first nine months of 2015 totaled $11.4 million and increased $656,000, or 6.1%, from the first nine months 2014 performance. Factors contributing to this higher level of non-interest income for the period included:

*a $659,000 increase in revenue from bank owned life insurance due to the receipt of a total of three death claims in the first nine months of 2015;
*a $489,000, or 8.4%, increase in trust and investment advisory fees due to increased assets under management which reflects successful new business development activities as well as effective management of existing customer accounts in this volatile market environment;
*a $197,000 decrease in deposit service charges due to fewer overdraft fees and account analysis fees during the first nine months of 2015 as customers have modified their behavior by holding greater deposit balances;
*a net $185,000$30,000 reduction in investment security transactions asequipment expenses which is reflective of the Company recognized a modest lossCompany’s ongoing focus on the sale of lower yielding securities in the third quarter of 2015 compared to gains realized on the sale of rapidly pre-paying mortgage backed securities in 2014; andreducing non-interest expenses.
*a $156,000, or 33.4%, decrease in mortgage related fees due to reduced volume of refinance activity in 2015.

.....NON-INTEREST EXPENSE.....Non-interest expense for the first nine months of 2015 totaled $30.9 million and decreased by $1.7 million, or 5.3%, from the prior year’s first nine months. Factors contributing to the lower non-interest expense in 2015 included:

*a $669,000 decrease in goodwill impairment charges as we recognized this charge in 2014 with no such charge taken in 2015;
*a $464,000, or 2.5%, decrease in salaries and employee benefits due to 23 fewer full time equivalent employees as certain employees who elected to participate in an early retirement program in late 2014 were not replaced in order to achieve efficiencies identified as part of a profitability improvement program; and
*a $440,000 decrease in professional fees due to lower legal fees, director’s fees and recruitment costs in the first nine months of 2015.

The remainder of the key non-interest expense categories were relatively consistent between years reflecting the Company’s focus on reducing and controlling costs.

.....INCOME TAX EXPENSE.....TheDue to the pre-tax loss, the Company recorded an income tax expensebenefit of $1,947,000,$549,000, or an effective tax rate of 29.6%30.2%, in the first nine monthsquarter of 2015 compared2016. This compares to the income tax expense of $1,200,000,$617,000, or an effective tax rate of 34.5%31.1%, for the first nine monthsquarter of 2014. The higher income tax expense is due to the Company’s increased earnings in the first nine months of 2015 as the Company’s effective tax rate is lower than 2014 due to an increase in tax free revenue from bank owned life insurance. The higher effective tax rate in 2014 was also due to the non-deductibility of the goodwill impairment charge for tax purposes.


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.....SEGMENT RESULTS.....Retail banking’s net income contribution was $723,000$583,000 in the thirdfirst quarter and $2.1 million for the first nine months of 2015 which was updown by $17,000 and $454,000$76,000 from the net income contribution for the same 2014 periods, respectively.2015 period. These increasesdecrease in earnings in 2015 were2016 was due to the higherlower level of BOLI income, which more than offset a lower level of deposit service charges, residential mortgage related fee income and the higherresidential mortgage loan loss provision. In addition,sale gains. Partially offsetting these lower levels of non-interest income was this segments’ net interest income benefitedbenefitting from higher consumer loandeposit balances and reduced non-interest expenses particularly personneloccupancy and equipment costs.

The commercial banking segment reported a net income contributionsloss of $1.6 million$835,000 in the thirdfirst quarter and $4.2 million for the first nine months of 2015 which was $412,000 and $911,000 better$2.1 million lower than the 2014 results2015 result for the same periods, respectively. This improved net income contributionperiod. The loss was due to the higher loan loss provision that was required to resolve the troubled energy sector loan. Also, net interest income decreased modestly as a resultthe negative impact of net interest margin compression more than offset the previously discussed strong growth in commercial and commercial real estate loans over the past year as well asyear. Additionally, total non-interest income decreased to the higher receiptlower level of loan prepayment feeBOLI income on early loan payoffs. This growth in net interest income more than offset an increased loan loss provision. Additionally,while total non-interest expense was also lowerhigher due to cost savings achieved from the profitability improvement program implemented last year.increased employee expense.


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The trust segment reported net income of $391,000$145,000 in the thirdfirst quarter and $1.2 million for the first nine months of 2015 which was $823,000 and $935,000 better$235,000 lower than the 2014 results2015 result for the same periods, respectively.period. The goodwill impairment chargelower level of $669,000net income is primarily due to the Trust Company operations trading error that occurred during a technology upgrade and resulted in $366,000 of additional expenses. Slightly offsetting this was recordedTrust and investment advisory fees increasing modestly since the first quarter of last year as successful business development efforts more than offset fee pressure from reduced asset market values that was caused by a declining equity market which occurred early in 2014 at WCCA is included in this segment and was the largest cause of the variance. Both2016. Also, trust fee income and financial services income at West Chester Capital improved due to increased assets under management which reflects successful new business development activities, as well as market forces and effective management of customer accounts.

The investment/parent segment reported net loss of $834,000$1.2 million in the thirdfirst quarter of 2016 which was $199,000 greater than the 2015 result for the same period. The increase between years is reflective of an increase in total interest expense due to the additional cost associated with the subordinated debt issuance that occurred in late 2015 and $2.8 millionis included in the investment/parent segment’s results for the first nine months of 2015 which was an improvement of $216,000 and $49,000 from the 2014 results for the same periods, respectively. The improvement between years reflects the benefit of receipt of a death claim benefit on a former chairman. However, overalltime. Finally, this segment has felt the most earnings pressure from the continued low interest rate environment.

.....BALANCE SHEET.....The Company'sCompany’s total consolidated assets were $1.111$1.122 billion at September 30, 2015,March 31, 2016, which grewdeclined by $21.6$26.8 million, or 2.0%2.3%, from the December 31, 20142015 asset level. The growthreduction in assets was primarily due to a $38.2the repayment of the $21 million or 4.6%, increase in net loans during the first nine months of 2015. This loan increaseSBLF preferred stock. The redemption was partially offset by an $11.9 million decrease in investment securities as the Company utilized cash flowfunded from the issuance of $7.65 million of subordinated debt and $13.4 million of cash and securities portfolio to help fundon hand at the loan growth.Parent Company.

Total deposits remained unchanged increasingincreased by a modest $18,000$3.5 million, or 0.39% in the first ninethree months of 2015.2016. Total FHLB borrowings have increaseddecreased by $20.1$7.8 million since year-end 2014.2015. The FHLB term advances with maturities between three and five years grew by $6$1 million and now total $48$49 million as the Company has utilized these advances to help manage interest rate risk and favorably position our balance sheet in a rising rate environment. The Company’s total shareholders’ equity increaseddecreased by $5.0$21.4 million over the first ninethree months of 20152016 due to the Company’s redemption of the preferred stock on January 27, 2016 and the net retention of earnings after dividend payments and a reductionloss recognized in accumulated other comprehensive loss.the first quarter. The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of 14.77%13.11%, and a common equity tier 1 capital ratio of 10.08%9.94% at September 30, 2015.March 31, 2016. (See the discussion of the new Basel III capital requirements under the “Capital Resources” section.) The Company’s book value per common share was $5.21,$5.16, its tangible book value per common share was $4.58,$4.53, and its tangible common equity to tangible assets ratio was 7.87%7.72% at September 30, 2015.


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.....LOAN QUALITY.....The following table sets forth information concerning the Company’s loan delinquency, non-performing assets, and classified assets (in thousands, except percentages):

      
 September 30,
2015
 December 31,
2014
 September 30,
2014
 March 31,
2016
 December 31,
2015
 March 31,
2015
Total accruing loan delinquency (past due 30 to 89 days) $3,428  $2,643  $2,256  $8,315  $4,396  $1,901 
Total non-accrual loans  1,810   2,195   3,001   2,191   6,066   2,146 
Total non-performing assets including TDR*  2,294   2,917   3,898   3,007   6,297   3,046 
Accruing loan delinquency, as a percentage of total loans, net of unearned income  0.40  0.32  0.28  0.94  0.50  0.22
Non-accrual loans, as a percentage of total loans, net of unearned income  0.21   0.27   0.37   0.25   0.69   0.25 
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned  0.27   0.35   0.48   0.34   0.71   0.36 
Non-performing assets as a percentage of total assets  0.21   0.27   0.36   0.27   0.55   0.28 
As a percent of average loans, net of unearned income:
                              
Annualized net charge-offs  0.09   0.11   0.09   1.60   0.11   0.09 
Annualized provision for loan losses  0.12   0.05      1.42   0.15   0.12 
Total classified loans (loans rated substandard or doubtful) $6,088  $11,229  $12,053  $4,671  $8,566  $9,143 

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

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The Company continued to maintain strong asset quality in the first ninethree months of 20152016 as evidenced by low levels of non-accrual loans, non-performing assets, classified loans, and loan delinquency levels that continue to be well below 1% of total loans. We continue to closely monitor the loan portfolio given the slow recovery in the economy and the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As of September 30, 2015,March 31, 2016, the 25 largest credits represented 25.3%25.5% of total loans outstanding.

.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth the allowance for loan losses and certain ratios for the periods ended (in thousands, except percentages):

      
 September 30,
2015
 December 31,
2014
 September 30,
2014
 March 31,
2016
 December 31,
2015
 March 31,
2015
Allowance for loan losses $9,772  $9,623  $9,582  $9,520  $9,921  $9,689 
Allowance for loan losses as a percentage of each of the following total loans, net of unearned income  1.13  1.16  1.18  1.08  1.13  1.14
total accruing delinquent loans (past due 30 to 89 days)  285.06   364.09   424.73   114.49   225.68   509.68 
total non-accrual loans  539.89   438.21   298.13   434.50   163.55   451.49 
total non-performing assets  425.98   329.89   245.82   316.59   157.55   318.09 

The Company recorded a $300,000$3.1 million provision for loan losslosses in the first quarter of 2016 compared to a $250,000 provision for loan losses in the first quarter of 2015 or an increase of $2.85 million between periods. The substantially higher than typical provision in the thirdfirst quarter and $750,000 inof 2016 was necessary to resolve the first nine months of 2015 and had recorded noCompany’s only meaningful direct loan loss provision forexposure to the allowance for loan losses from earnings during the same periods in 2014. The provision recorded in 2015 was needed to support the continuing growth of the loan portfolio and cover net loan charge-offs. As a result, the balance in the allowance for loan losses has increased modestly in the first nine months of 2015 while the Company has been able to still maintain strong coverage of non-accrual loans and non-performing assets as indicated in the above table.energy industry.

.....LIQUIDITY.....The Company’s liquidity position has been strong during the last several years. Our core retail deposit base has grown over the past five years and has been more than adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities was also used to help fund


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loan growth over the past few years. We strive to operate our loan to deposit ratio in a range of 85% to 100%. For the first ninethree months of 2015,2016, the Company’s loan to deposit ratio has averaged 96.1%96.8%. We are optimistic that we can increase the loan to deposit ratio in the future given current commercial loan pipelines, continued growth of our loan production offices and our focus on small business lending.

Liquidity can be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents decreased by $1.1$24.9 million from December 31, 20142015 to September 30, 2015,March 31, 2016, due to $27.0$25.5 million of cash used in investingfinancing activities. This more than offset the $6.6 million$404,000 of cash provided by operating activities and $19.3 million$229,000 of cash provided by financinginvesting activities. Within investing activities, cash provided from investment security maturities was $23.3$6.9 million. Cash advanced for new loan fundings and purchases (excluding residential mortgages sold in the secondary market) totaled $197.4$56.4 million and was $38.8$2.5 million higher than the $158.6$53.9 million of cash received from loan principal payments and participations. Within financing activities, deposits declinedincreased by $56,000$3.5 million of cash. Total borrowings increaseddecreased as advances of short-term borrowings and purchases of FHLB term advances grewdeclined by $20.1$7.8 million. The company also used $21.0 million to redeem the preferred stock issued to the US Treasury under the SBLF program. At September 30, 2015,March 31, 2016, the Company had immediately available $348$366 million of overnight borrowing capacity at the FHLB and $39 million of unsecured federal funds lines with correspondent banks.

The holding company had $20.7$9.2 million of cash, short-term investments, and investment securities at September 30, 2015.March 31, 2016. Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the holding company. At September 30, 2015,March 31, 2016, our subsidiary Bank had $3.6$1.7 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that limits dividend payments from the Trust Company to 75% of annual net income. Based upon this internal limit, the Trust Company had $195,000 of cash available for immediate dividends to the holding company. Overall, we believe that the holding company has strong liquidity to meet its trust preferred and subordinated debt service requirements, its current preferred stock dividends, and its current common stock dividends, all of which should approximate $2.1$2.4 million over the next twelve months. The most recent $0.01 dividend was announced on October 20, 2015April 25, 2016 payable on November 16,May 23, 2015 to shareholders of record on November 2, 2015.May 9, 2016.


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.....CAPITAL RESOURCES.....The Bank meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The Company’s common equity tier 1 ratio was 10.08%9.94%, the tier 1 capital ratio was 13.60%11.18%, and the total capital ratio was 14.77%13.11% at September 30, 2015.March 31, 2016. The Company’s tier 1 leverage was 11.40%9.28% at September 30, 2015.March 31, 2016. We anticipate that we will maintain our strong capital ratios throughout the remainder of 2015.2016. We expect that capital generated from earnings will be utilized to pay the SBLF preferred dividend, common stock cash dividend and will also support anticipated balance sheet growth. Additionally, we planWe will consider more active capital return to retain excess cash to position the Company to redeem all or a portion of the SBLF Preferred Stock when the rate increases from 1% to 9%our shareholders in the first quartersecond half of 2016. We will also be pursuing a subordinated debt offering in2016 pending the fourth quarter of 2015 in orderCompany’s return to provide funds to assist with the SBLF Preferred Stock redemption. Our common dividend payout ratio for the first nine months of 2015 was 12.5%.more typical profitability levels.

On January 1, 2015, U.S. federal banking agencies implemented the new Basel III capital standards, which, similar to the previous standards, establish the minimum capital levels to be considered well-capitalized and revise the prompt corrective action requirements under banking regulations. The revisions from the previous standards include a revised definition of capital, the introduction of a minimum Common Equity Tier 1 capital ratio and changed risk weightings for certain assets. The implementation of the new rules will be phased in over a four year period ending January 1, 2019 with minimum capital requirements becoming increasingly more strict each year of the transition. The new minimum capital requirements for each ratio, both, initially on January 1, 2015 and at the end of the transition on January 1, 2019, are as follows: A common equity tier 1 capital ratio of 4.5% initially and 7.0% at January 1, 2019; a tier 1 capital ratio of 6.0% and 8.50%; a total capital ratio of 8.0% and 10.50%; and a tier 1 leverage ratio of 5.00% and 5.00%. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer above its minimum risk-based capital requirements, which increases over the transition period, from 0.625% of total risk weighted assets in 2016 to 2.5% in 2019. The Company continues to be committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a return to our shareholders.


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.....INTEREST RATE SENSITIVITY.....The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points. Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low level of interest rates. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.

    
Interest Rate Scenario Variability of
Net Interest Income
 Change in
Market Value of
Portfolio Equity
 Variability of
Net Interest Income
 Change in
Market Value of
Portfolio Equity
200bp increase  1.0  7.8  3.1  24.4
100bp increase  0.5   5.2   1.9   15.0 
100bp decrease  (3.2  (13.5  (3.7  (18.7

The Company believes that its overall interest rate risk position is well controlled. The variability of net interest income is modestly positive in the upward rate shocks due to the Company’s short duration investment securities portfolio, the scheduled repricing of loans tied to LIBOR or prime, and the extension of a portion of borrowed funds. Also, the Company expects that it will not have to reprice its core deposit accounts up as quickly when interest rates rise. The variability of net interest income is negative in the 100 basis point downward rate scenario as the Company has more exposure to assets repricing downward to a greater extent than liabilities due to the absolute low level of interest rates with the fed funds rate currently at approximately 0.25%. The market value of portfolio equity increases in the upward rate shocks due to the improved value of the Company’s core deposit base. Negative variability of market value of portfolio equity occurs in the downward rate shock due to a reduced value for core deposits.


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.....OFF BALANCE SHEET ARRANGEMENTS.....The Company incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company had various outstanding commitments to extend credit approximating $193.6$171.1 million and standby letters of credit of $7.6$9.0 million as of September 30, 2015.March 31, 2016. 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 Company uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

.....CRITICAL ACCOUNTING POLICIES AND ESTIMATES.....The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses, goodwill, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company’s financial position or results of operation.

ACCOUNT — Allowance for Loan Losses
BALANCE SHEET REFERENCE — Allowance for loan losses
INCOME STATEMENT REFERENCE — Provision for loan losses
DESCRIPTION

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


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All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management’s judgment concerning those trends.

Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan loss. Approximately $7.1$7.3 million, or 73%76%, of the total allowance for loan losses at September 30, 2015March 31, 2016 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, levels of non-performing and TDR loans, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for loan losses may be required that would adversely impact earnings in future periods.

ACCOUNT — Goodwill
BALANCE SHEET REFERENCE — Goodwill
INCOME STATEMENT REFERENCE — Goodwill impairment
DESCRIPTION

The Company considers our accounting policies related to goodwill to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third party sources, when available. When third party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective


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and are susceptible to significant changes. The Company routinely utilizes the services of an independent third party that is regarded within the banking industry as an expert in valuing core deposits to monitor the ongoing value and changes in the Company’s core deposit base. These core deposit valuation updates are based upon specific data provided from statistical analysis of the Company’s own deposit behavior to estimate the duration of these non-maturity deposits combined with market interest rates and other economic factors.

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

Goodwill which has an indefinite useful life is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value.

In 2014, the CEO of WCCA voluntarily left the employment of the company on January 31, 2014. This caused AmeriServ Financial Inc. and WCCA to initiate legal action against the former CEO in February 2014. This litigation involved alleged violations of the non-solicitation, non-competition, and other provisions included in the former CEO’s employment agreement, as well as other statutory and common law claims. The former CEO’s departure and the litigation caused disruption within the WCCA customer base during 2014. After an initial period where WCCA experienced client attrition, the customer base stabilized. Management believes that these clients will continue to use WCCA for investment management services in the future since


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this stabilization has been demonstrated for more than one year. The departure of the former CEO and the subsequent loss of a meaningful number of clients caused a reduction in the earnings capacity of WCCA. This was considered a triggering event which suggested from a qualitative standpoint that the fair value of WCCA and its goodwill was below its carrying amount. This necessitated that management perform the impairment test in accordance with ASC 350. The results of the test resulted in WCCA recording a goodwill impairment loss of $669,000 in the third quarter of 2014 to write the carrying amount of the goodwill down to the estimated fair value. The Company recorded no such charge in 2015.

ACCOUNT — Income Taxes
BALANCE SHEET REFERENCE — Net deferred tax asset
INCOME STATEMENT REFERENCE — Provision for income tax expense
DESCRIPTION

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

In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of September 30, 2015,March 31, 2016, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed.

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

ACCOUNT — Investment Securities
BALANCE SHEET REFERENCE — Investment securities
INCOME STATEMENT REFERENCE — Net realized gains (losses) on investment securities
DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment


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such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At September 30, 2015,March 31, 2016, the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies or government sponsored agencies and certain high quality corporate securities. The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.


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.....FORWARD LOOKING STATEMENT.....

THE STRATEGIC FOCUS:

The challenge for the future is to improve earnings performance to peer levels through a disciplined focus on community banking and improving the profitability of our Trust Company. In accordance with our strategic plan, the Company will maintain its focus as a community bank delivering banking and trust services to the best of our ability and focus on further growing revenues by leveraging our strong capital base and infrastructure. This Company will not succumb to the lure of quick fixes and fancy financial gimmicks. It is our plan to continue to build the Company into a potent banking force in this region and in this industry. Our focus encompasses the following:

Customer Service — It is the existing and prospective customer that the Company must satisfy. This means good products and fair prices. But it also means quick response time and professional competence. It means speedy problem resolution and a minimizing of bureaucratic frustrations. The Company is training and motivating its staff to meet these standards while providing customers with more banking options that involve leading technologies such as computers, smartphones, and tablets to conduct business.
Revenue Growth — It is necessary for the Company to focus on growing revenues. This means loan growth, deposit growth and fee growth. It also means close coordination between all customer service areas so as many revenue producing products as possible can be presented to existing and prospective customers. The Company’s Strategic Plan contains action plans in each of these areas particularly on increasing loans through several loan production offices. There will be a particular focus on small business commercial lending. An examination of the peer bank database provides ample proof that a well-executed community banking business model can generate a reliable and rewarding revenue stream.
Expense Rationalization — The Company remains focused on trying to reduce and rationalize expenses. This has not been a program of broad based cuts, but has been targeted so the Company stays strong but spends less. It is critical to be certain that future expenditures are directed to areas that are playing a positive role in the drive to improve revenues. The Company engaged a consulting firmCompany’s also recently completed two additional initiatives that specializes in the areas of expense rationalization and profit improvement for community banks in 2014. This firm completed a thorough analysis of our business operations and practices. As a result of this project, the firm provided the Company with recommendations towill further reduce non-interest expenses and improve the Company’s future profitability. Many of their recommendations have been evaluatedSpecifically, the Company has closed its Southern Atherton branch office in the State College market and already implemented with further study being doneconsolidated the retail customer accounts from this branch into its nearby and newer branch office located on other recommendations scheduled throughout 2015.North Atherton Street. The Company has already recognized expenseremains committed to the State College market and this change will allow for a more efficient operation that will allow us to better compete in this demographically attractive but highly competitive banking market. Additionally, the Company also recently realigned its executive leadership team by eliminating one senior position in its executive office. We anticipate that the combined annual cost savings in excess of $1 million through the first nine months of 2015, which more than offsets the cost of this project.from these two profitability improvement initiatives will approximate $750,000.

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This Form 10-Q contains various forward-looking statements and includes assumptions concerning the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results, and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan” or similar expressions. These forward-looking statements are based upon current expectations, are subject to risk and uncertainties and are applicable only as of the dates of such statements. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Form 10-Q. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.


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

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

Item 3.....QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.....The Company manages market risk, which for the Company is primarily interest rate risk, through its asset liability management process and committee, see further discussion in Interest Rate Sensitivity section of the M.D. & A.

Item 4.....CONTROLS AND PROCEDURES.....(a) Evaluation of Disclosure Controls and Procedures. The Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015,March 31, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2015,March 31, 2016, are effective.

(b) Changes in Internal Controls. There have been no changes in AmeriServ Financial Inc.’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


 

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Part II Other Information

Item 1. Legal Proceedings

There are no material proceedings to which the Company or any of our subsidiaries are a party or by which, to the Company’s’ knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending or threatened against the Company or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.

Item 1A. Risk Factors

Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

 
 3.1 Amended and Restated Articles of Incorporation as amended through August 11, 2011 (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8 (File No. 333-176869) filed on September 16, 2011).
 3.2 Bylaws, as amended and restated on December 30, 2014 (Incorporated by reference to Exhibit 3.2 to the Current report on Form 8-K filed on January 2, 2015).
15.1 Report of S.R. Snodgrass, P.C. regarding unaudited interim financial statement information.
15.2 Awareness Letter of S.R. Snodgrass, P.C.
31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101 The following information from AMERISERV FINANCIAL, INC.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015,March 31, 2016, formatted in XBRL (eTensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (iv) Notes to the Unaudited Consolidated Financial Statements.

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 AmeriServ Financial, Inc.
Registrant
Date: NovemberMay 6, 20152016 /s/ Jeffrey A. Stopko

Jeffrey A. Stopko
President and Chief Executive Officer
Date: NovemberMay 6, 20152016 /s/ Michael D. Lynch

Michael D. Lynch
Senior Vice President and Chief Financial Officer

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