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



 

FORM 10-K



 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

OR

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

FOR THE TRANSITION PERIOD FROM          TO         

COMMISSION FILE NUMBER 0-11204



 

AMERISERV FINANCIAL, INC.

(Exact name of registrant as specified in its charter)



 

 
PENNSYLVANIA   25-1424278
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 
MAIN & FRANKLIN STREETS,
P.O. BOX 430, JOHNSTOWN,
PENNSYLVANIA
  15907-0430
(Address of principal executive offices)   (Zip Code)

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



 

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

 
Title Of Each Class   Name Of Each Exchange On Which Registered
Common Stock, Par Value $0.01 Per Share   The NASDAQ Stock Market LLC
8.45% Beneficial Unsecured Securities, Series A
(AmeriServ Financial Capital Trust I)
   
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None



 

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

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

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

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

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

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

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was $58,827,999 as of June 30, 2014.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 18,853,521 shares outstanding as of January 30, 2015.

DOCUMENTS INCORPORATED BY REFERENCE.

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

 

 


 
 

TABLE OF CONTENTS

FORM 10-K INDEX

 
  Page No.
PART I
        

Item 1.

Business

    1  

Item 1A.

Risk Factors

    12  

Item 1B.

Unresolved Staff Comments

    12  

Item 2.

Properties

    12  

Item 3.

Legal Proceedings

    12  

Item 4.

Mine Safety Disclosures

    12  

PART II


        

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and     Issuer Purchases of Equity Securities

    13  

Item 6.

Selected Consolidated Financial Data

    14  

Item 7.

Management’s Discussion and Analysis of Consolidated Financial Condition and     Results of Operations

    15  

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

    35  

Item 8.

Financial Statements and Supplementary Data

    36  

Item 9.

Changes in and Disagreements With Accountants On Accounting and Financial     Disclosure

    91  

Item 9A.

Controls and Procedures

    91  

Item 9B.

Other Information

    91  

PART III


        

Item 10.

Directors, Executive Officers, and Corporate Governance

    91  

Item 11.

Executive Compensation

    91  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related     Stockholder Matters

    92  

Item 13.

Certain Relationships and Related Transactions, and Director Independence

    92  

Item 14.

Principal Accountant Fees and Services

    92  
PART IV
        

Item 15.

Exhibits, Financial Statement Schedules

    93  
Signatures     95  

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PART I

ITEM 1. BUSINESS
GENERAL

AmeriServ Financial, Inc. (the Company) is a bank holding company organized under the Pennsylvania Business Corporation Law. The Company became a holding company upon acquiring all of the outstanding shares of AmeriServ Financial Bank (the Bank) in January 1983. The Company’s other wholly owned subsidiaries include AmeriServ Trust and Financial Services Company (the Trust Company), formed in October 1992, and AmeriServ Life Insurance Company (AmeriServ Life), formed in October 1987. When used in this report, “the Company” may refer to AmeriServ Financial, Inc. individually or AmeriServ Financial, Inc. and its direct and indirect subsidiaries.

The Company’s principal activities consist of owning and operating its three wholly owned subsidiary entities. At December 31, 2014, the Company had, on a consolidated basis, total assets, deposits, and shareholders’ equity of $1.089 billion, $870 million, and $114 million, respectively. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, accounting and taxes, loan review, auditing, investment accounting, marketing and risk management.

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

AMERISERV FINANCIAL BANKING SUBSIDIARY
AMERISERV FINANCIAL BANK

The Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended (the Banking Code.) Through 17 locations in Allegheny, Cambria, Centre, Somerset, and Westmoreland counties, Pennsylvania, the Bank conducts a general banking business. It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, checking accounts, money market accounts, secured and unsecured consumer loans, mortgage loans, safe deposit boxes, holiday club accounts, money orders, and traveler’s checks; and (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as commercial real estate mortgage loans (CRE), short and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services. The Bank also operates 19 automated bank teller machines (ATMs) through its 24-hour banking network that is linked with NYCE, a regional ATM network, and CIRRUS, a national ATM network. West Chester Capital Advisors (WCCA), a SEC registered investment advisor, is also a subsidiary of the Bank. The Company also operates loan production offices (LPOs) in Monroeville and Altoona in Pennsylvania and Hagerstown in Maryland.

We believe that the Bank’s deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. The Bank’s business is not seasonal, nor does it have any risks attendant to foreign sources. A significant majority of the Bank’s customer base is located within a 150 mile radius of Johnstown, Pennsylvania, the Bank’s headquarters.

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The Bank is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the PDB. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios of the Bank at December 31, 2014:

 
Headquarters   Johnstown, PA
Total Assets   $ 1,061,080  
Total Investment Securities     132,780  
Total Loans and Loans Held for Sale (net of unearned income)     832,131  
Total Deposits     870,081  
Total Net Income     3,799  
Asset Leverage Ratio     9.19 % 
Return on Average Assets     0.37  
Return on Average Equity     3.70  
Total Full-time Equivalent Employees     245  
RISK MANAGEMENT OVERVIEW:

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, which includes credit, interest rate and market, liquidity, operational, legal/compliance, strategic/reputational and security risk. The Company controls and monitors these risks with policies, procedures, and various levels of oversight from the Company’s Board of Directors (the Board) and management. The Company has both a Management Enterprise Risk Committee and a Board Enterprise Risk Committee to help manage and monitor the Company’s risk position.

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

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

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

Commercial Loans

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

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Commercial Loans Secured by Real Estate

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

Residential Real Estate — Mortgages

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

Consumer Loans

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

INVESTMENTS

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

The investment portfolio is primarily made up of AAA rated agency mortgage-backed securities and short maturity agency securities. Beginning in 2012, the Company began to add high quality corporate securities and select taxable municipal securities to the portfolio. Management strives to maintain a relatively short duration in the portfolio. All holdings must meet standards documented in the AmeriServ Financial Investment Policy.

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

Investment securities available for sale at:

     
  AT DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
U.S. Agency   $ 5,931     $ 6,926     $ 5,848  
Corporate bonds     15,497       11,992       7,992  
U.S. Agency mortgage-backed securities     102,888       121,480       131,425  
Total cost basis of investment securities available for sale   $ 124,316     $ 140,398     $ 145,265  
Total fair value of investment securities available for sale   $ 127,110     $ 141,978     $ 151,538  

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Investment securities held to maturity at:

     
  AT DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
Taxable municipal   $ 3,364     $ 1,521     $ 410  
U.S. Agency mortgage-backed securities     12,481       12,671       9,318  
Corporate bonds and other securities     3,995       3,995       3,995  
Total cost basis of investment securities held to maturity   $ 19,840     $ 18,187     $ 13,723  
Total fair value of investment securities held to maturity   $ 20,213     $ 17,788     $ 14,266  
DEPOSITS AND OTHER SOURCES OF FUNDS
Deposits

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

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

           
  AT DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
                                                     
Non-interest bearing   $ 155,365       —%     $ 158,169       %    $ 147,887       % 
Interest bearing     97,641       0.20       75,126       0.18       60,810       0.19  
Savings     89,554       0.16       87,819       0.16       85,112       0.21  
Money market     228,150       0.33       212,735       0.35       211,744       0.42  
Other time     300,915       1.26       312,741       1.33       327,557       1.62  
Total deposits   $ 871,625       0.68 %    $ 846,590       0.75 %    $ 833,110       0.95 % 
Loans

The loan portfolio of the Company consisted of the following:

         
  AT DECEMBER 31,
     2014   2013   2012   2011   2010
     (IN THOUSANDS)
Commercial   $ 139,158     $ 120,120     $ 102,864     $ 83,124     $ 78,322  
Commercial loans secured by real estate(1)     410,851       412,254       383,934       350,224       370,375  
Real estate-mortgage(1)     258,616       235,689       217,584       212,669       203,323  
Consumer     19,009       15,864       17,420       18,172       19,233  
Total loans     827,634       783,927       721,802       664,189       671,253  
Less: Unearned income     554       581       637       452       477  
Total loans, net of unearned income   $ 827,080     $ 783,346     $ 721,165     $ 663,737     $ 670,776  

(1) For each of the periods presented beginning with December 31, 2014, real estate-construction loans constituted 3.5%, 3.0%, 2.0%, 1.9% and 3.9% of the Company’s total loans, net of unearned income, respectively.

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Secondary Market Activities

The Residential Lending department of the Company continues to originate one-to-four family mortgage loans for customers, the majority of which are sold to outside investors in the secondary market and some of which are retained for the Bank’s portfolio. Mortgages sold on the secondary market are sold to investors on a “flow” basis; mortgages are priced and delivered on a “best efforts” pricing basis, with servicing released to the investor. Fannie Mae/Freddie Mac guidelines are used in underwriting all mortgages with the exception of a limited amount of CRA loans. Mortgages with longer terms, such as 20-year, 30-year, FHA, and VA loans, are usually sold. The remaining production of the department includes construction, adjustable rate mortgages, quality non-salable loans, and bi-weekly mortgages. These loans are usually kept in the Bank’s portfolios. New portfolio production is predominately adjustable rate mortgages.

Non-performing Assets

The following table presents information concerning non-performing assets:

         
  AT DECEMBER 31,
     2014   2013   2012   2011   2010
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
                                            
Commercial   $     $     $     $     $ 3,679  
Commercial loans secured by real estate     778       1,632       4,623       3,870       6,731  
Real estate-mortgage     1,417       1,239       1,191       1,205       1,879  
Total     2,195       2,871       5,814       5,075       12,289  
Other real estate owned:
                                            
Commercial loans secured by real estate     384       344       1,101       20       436  
Real estate-mortgage     128       673       127       104       302  
Total     512       1,017       1,228       124       738  
Total restructured loans not in
non-accrual (TDR)
    210       221       182             1,337  
Total non-performing assets including TDR   $ 2,917     $ 4,109     $ 7,224     $ 5,199     $ 14,364  
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned     0.35 %      0.52 %      1.00 %      0.78 %      2.14 % 

The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above. Other real estate owned (OREO) is measured at fair value based on appraisals, less cost to sell at the date of foreclosure. The Company had no loans past due 90 days or more, still accruing, for the periods presented.

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

         
  YEAR ENDED DECEMBER 31,
     2014   2013   2012   2011   2010
     (IN THOUSANDS)
Interest income due in accordance with original terms   $ 136     $ 178     $ 231     $ 376     $ 1,086  
Interest income recorded                       (167 )      (458 ) 
Net reduction in interest income   $ 136     $ 178     $ 231     $ 209     $ 628  

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AMERISERV FINANCIAL NON-BANKING SUBSIDIARIES
AMERISERV TRUST AND FINANCIAL SERVICES COMPANY

AmeriServ Trust and Financial Services Company is a trust company organized under Pennsylvania law in October 1992. Its staff of approximately 44 professionals administers assets valued at approximately $1.8 billion that are not recognized on the Company’s balance sheet at December 31, 2014. The Trust Company focuses on wealth management. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. This segment also includes financial services which include the sale of mutual funds, annuities, and insurance products. The wealth management business also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. The BUILD fund is in the process of liquidation. At December 31, 2014, the Trust Company had total assets of $4.6 million and total stockholder’s equity of $4.2 million. In 2014, the Trust Company contributed earnings to the corporation as its gross revenue amounted to $7.9 million and the net income contribution was $1.2 million. The Trust Company is subject to regulation and supervision by the Federal Reserve Bank of Philadelphia and the PDB.

AMERISERV LIFE

AmeriServ Life is a captive insurance company organized under the laws of the State of Arizona. AmeriServ Life engages in underwriting as reinsurer of credit life and disability insurance within the Company’s market area. Operations of AmeriServ Life are conducted in each office of the Company’s banking subsidiary. AmeriServ Life is subject to supervision and regulation by the Arizona Department of Insurance, the Pennsylvania Insurance Department, and the Board of Governors of the Federal Reserve System (the Federal Reserve). At December 31, 2014, AmeriServ Life had total assets of $400,000.

MONETARY POLICIES

Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve are: open market operations in U.S. Government securities, changes in the federal funds rate and discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Federal Reserve have had, and will continue to have, a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

COMPETITION

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

MARKET AREA & ECONOMY

In January 2015, the Federal Open Market Committee (the Committee) characterized economic activity as “expanding at a solid pace.” There has been continued improvement in labor market conditions as the Federal Reserve noted strong job gains and a lower unemployment rate. Underutilization of labor resources continues to diminish. Household spending is rising moderately as recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the

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housing sector remains slow. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and two percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

The outlook for 2015 is that the economy should grow with GDP predicted to be slightly above 3.0%. Consumers will drive economic growth with the availability of more jobs and low energy prices, which puts more money into their pockets for spending on other goods and services. According to Kiplinger’s, spending in the fourth quarter of 2014 grew at the fastest pace in more than eight years and, with the unemployment rate dropping, consumer confidence is at a seven year high. Increased consumer spending should result in businesses investing in new production capacity. Housing is in a recovery mode with builders expected to increase the pace of new home construction in 2015. Conversely, the strong dollar and sluggish global economic expansion will hinder sales abroad while some U.S. manufacturers will also lose sales as U.S. consumers will opt for cheaper imported products, especially autos and other durable goods.

The job market should continue to be strong in 2015 and keep incomes and consumption fueling healthy economic growth. The unemployment rate is projected to decline further in 2015 to about 5.3%. A strong job market is likely to entice more people back into the labor force which will slow the pace of the falling unemployment rate.

The expectation for business spending is to match the 5% gain obtained in 2014. The dollar’s soaring value and the steep decline in oil prices makes it hard to sell capital goods overseas because they cost more for foreigners to buy. At the same time, demand for energy related equipment at home is declining. Business sentiment, however, is strong, particularly among smaller companies. The housing market is expected to experience more expansion in 2015, with income and employment rising, demand for housing should increase.

The economy in Cambria and Somerset counties, Pennsylvania at the end of 2014 produced seasonally adjusted unemployment rates of 5.9% and 5.8%, respectively, as compared to national and state rates of 5.6% and 4.8%. Johnstown, Pennsylvania, where the Company is headquartered, continues to have a cost of living that is lower than the national average. On an annual average basis, the 2014 job level for the Johnstown Metropolitan Statistical Area of 58,100 increased by a very modest 100 over the previous year. Annual growth

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in the overall job market is well short of anticipated improvement. This documents the fact that the local economy continues to face a long hard climb back from the recession. The jobless rate in Johnstown MSA averaged 5.2% in 2014. Unemployment in the Johnstown labor market area has recently experienced substantial declines in comparison to previous periods. However this is a function of the declining number of labor force participants who have dropped out of the labor force.

Economic conditions are stronger in the State College market and have demonstrated the same improvement experienced in the national economy. The community is a college town, dominated economically and demographically by the presence of the University Park campus of the Pennsylvania State University. The unemployment rate for State College MSA averaged 4.2% in 2014, which represents a 1.4% improvement over 2013 and remains the lowest of all regions in the Commonwealth. Seasonally adjusted average total nonfarm jobs for the MSA increased by 800 since 2013. A large percentage of the population in State College falls into the 18 to 34 year old age group, while potential customers in the Cambria/Somerset markets tend to be over 50 years of age.

The Company also has loan production offices in Altoona in Blair county, Pennsylvania, and Hagerstown in Washington county, Maryland. Hagerstown and Washington county, Maryland offers a rare combination of business advantages providing a major crossroads location that is convenient to the entire East Coast at the intersection of I-81 and I-70. It has a workforce of over 400,000 with strengths in manufacturing and technology. It also offers an affordable cost of doing business and living within an hour of the Washington, D.C./Baltimore regions. There are also plenty of facilities and land slated for industrial/commercial development. Hagerstown has become a choice location for manufacturers, financial services, and distribution companies. The Hagerstown, MD-Martinsburg, WV MSA unemployment rate improved from a 7.1% average in 2013 to a 6.5% average in 2014.

Altoona is the business center of Blair County, Pennsylvania with a strong retail, government and manufacturing base. The top field of employment in Altoona and the metro area is healthcare. Its location along I-99 draws from a large trade area over a wide geographic area that extends to State College and Johnstown. It serves as the headquarters for Sheetz Corporation which ranks on Forbes list of the top privately owned companies. In addition to being located adjacent to I-99 and a major highway system, Altoona also has easy access to rail and air transportation. The unemployment rate in the Altoona MSA decreased from a 6.7% average in 2013 to a 5.2% average in 2014.

EMPLOYEES

The Company employed 336 people as of December 31, 2014 in full- and part-time positions. Approximately 164 non-supervisory employees of the Company are represented by the United Steelworkers, AFL-CIO-CLC, Local Union 2635-06. The Company is under a four year labor contract with the United Steelworkers Local that will expire on October 15, 2017. The contract calls for annual wage increases of 3.0%. Additionally, effective January 1, 2014, the Company implemented a soft freeze of its defined benefit pension plan for union employees. A soft freeze means that all existing union employees as of December 31, 2013 currently participating will remain in the defined benefit pension plan but any new union employees hired after January 1, 2014 will no longer be part of the defined benefit plan but instead will be offered retirement benefits under an enhanced 401(k) program. The Company has not experienced a work stoppage since 1979. The Company is one of an estimated ten union-represented banks nationwide.

INDUSTRY REGULATION

The banking and trust industry, and the operation of bank holding companies, is highly regulated by federal and state law, and by numerous regulations adopted by the federal banking agencies and state banking agencies. Bank regulation affects all aspects of conducting business as a bank, including such major items as minimum capital requirements, limits on types and amounts of investments, loans and other assets, as well as borrowings and other liabilities, and numerous restrictions or requirements on the loan terms and other products made available to customers, particularly consumers. Federal deposit insurance from the Federal Deposit Insurance Corporation (the FDIC) is required for all banks in the United States, and maintaining FDIC insurance requires observation of the various rules of the FDIC, as well as payment of deposit premiums. New branches, or acquisitions or mergers, are required to be pre-approved by the responsible agency, which in the case of the Company and the Bank is the Federal Reserve and the PDB. The Bank

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provides detailed financial information to its regulators, including a quarterly call report that is filed pursuant to detailed prescribed instructions to ensure that all U.S. banks report the same way. The U.S. banking laws and regulations are frequently updated and amended, especially in response to crises in the financial industry, such as the global financial crisis of 2008, which resulted in the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 (the Dodd-Frank Act), a statute affecting many facets of the financial industry.

While it is impractical to discuss all laws and regulations that regularly affect the business of the Company and its subsidiaries, set forth below is an overview of some of the major provisions and statutes that apply.

CAPITAL REQUIREMENTS

One of the most significant regulatory requirements for banking institutions is minimal capital, imposed as a ratio of capital to assets. The Federal Deposit Insurance Act, as amended (the FDIA), identifies five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. It requires U.S. federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. The FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Unless a bank is well capitalized, it is subject to restrictions on its ability to utilize brokered deposits and on other aspects of its operations. Generally, a bank is prohibited from paying any dividend or making any capital distribution or paying any management fee to its holding company if the bank would thereafter be undercapitalized.

As of December 31, 2014, the Company believes that its bank subsidiary was well capitalized, based on the prompt corrective action guidelines described above. As discussed below, however, the capital requirements for all banks are being increased under the Dodd-Frank Act. Specifically, on July 2, 2013, the Federal Reserve 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. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). 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 comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016. The Company is continuing to review the impact of these new rules and currently expects that its capital position will be more than adequate to meet the revised regulatory capital requirements.

DIVIDEND RESTRICTIONS

The primary source of cash to pay dividends, if any, to the Company’s shareholders and to meet the Company’s obligations is dividends paid to the Company by the Bank and the Trust Company. Dividend payments by the Bank to the Company are subject to the laws of the Commonwealth of Pennsylvania, the Banking Code, the FDIA and the regulation of the PDB and of the Federal Reserve. Under the Banking Act and the FDIA, a bank may not pay any dividends if, after paying such dividends, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in unsafe or unsound banking practices. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

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It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available from the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividend that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. A bank holding company may not pay dividends when it is insolvent.

The terms of our Company’s Senior Non-Cumulative Perpetual Preferred Stock (the SBLF Preferred Stock) impose limits on the ability of the Company to pay dividends and repurchase shares of common stock. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

Under the terms of the SBLF Preferred Stock, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital as of June 30, 2011, excluding any subsequent net charge-offs and any redemption of shares of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”). Beginning on the first day of the eleventh dividend period ending on June 20, 2014, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in qualified small business lending from the baseline level through the ninth dividend period ending on September 30, 2013.

The Company resumed paying quarterly cash dividends to common shareholders in 2013. For more information regarding quarterly cash dividends, see Part II, Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities below.

SARBANES-OXLEY ACT OF 2002

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

PRIVACY PROVISIONS

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

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USA PATRIOT ACT

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

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

On July 21, 2010, the President signed into law the Dodd-Frank Act. This law significantly changed the previous bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations. The due date for many of such regulations is still in the future; consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for years.

Many provisions of the Dodd-Frank Act are already in effect. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to prior law could have an adverse impact on the Company’s interest expense.

The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.

Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, will be permitted to include trust preferred securities that were issued before May 19, 2010, such as the Company’s 8.45% Trust Preferred Securities, as Tier 1 capital; however, trust preferred securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) after May 19, 2010, will no longer count as Tier 1 capital. Such trust preferred securities still will be entitled to be treated as Tier 2 capital.

The Dodd-Frank Act also required publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the CFPB), a new independent regulatory agency with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Company will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations and gives state attorney generals the ability to enforce federal consumer protection laws.

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It is difficult to predict at this time what the total impact the Dodd-Frank Act will have on community banks as it continues to be subject to intensive rulemaking and public comment, which has not yet been completed with respect to the application of certain key aspects of the Dodd-Frank Act. However, it is expected that, at a minimum, it will continue to increase our capital requirements, our operating and compliance costs, and could increase our interest expense.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. These filings are available to the public on the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our Internet address is http://www.ameriserv.com. We make available free of charge on http://www. ameriserv.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS

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

ITEM 2. PROPERTIES

The principal offices of the Company and the Bank occupy the five-story AmeriServ Financial building at the corner of Main and Franklin Streets in Johnstown plus twelve floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 13 other locations which are owned. Eight additional locations are leased with terms expiring from January 1, 2015 to August 31, 2030.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

As of January 30, 2015, the Company had 3,545 shareholders of record for its common stock. The Company’s common stock is traded on the NASDAQ Global Market System under the symbol “ASRV.” The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:

     
  PRICES   CASH
DIVIDENDS
DECLARED
     HIGH   LOW
Year ended December 31, 2014:
                          
First Quarter   $ 3.91     $ 3.00     $ 0.01  
Second Quarter     3.88       3.40       0.01  
Third Quarter     3.52       3.14       0.01  
Fourth Quarter     3.31       3.02       0.01  
Year ended December 31, 2013
                          
First Quarter   $ 3.23     $ 2.90     $ 0.00  
Second Quarter     3.17       2.74       0.01  
Third Quarter     3.29       2.97       0.01  
Fourth Quarter     3.26       2.99       0.01  

The declaration of cash dividends on the Company's common stock is at the discretion of the Board, and any decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition, regulatory capital levels, applicable covenants under any credit agreements and other contractual restrictions, Pennsylvania law, federal and Pennsylvania bank regulatory law, and other factors deemed relevant. Additionally, the Company’s previously announced common stock repurchase programs have been completed.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

         
         
  AT OR FOR THE YEAR ENDED DECEMBER 31,
     2014   2013   2012   2011   2010
     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
                                            
Total interest income   $ 40,441     $ 39,343     $ 39,917     $ 41,964     $ 44,831  
Total interest expense     6,397       6,482       7,714       9,681       12,489  
Net interest income     34,044       32,861       32,203       32,283       32,342  
Provision (credit) for loan losses     375       (1,100 )      (775 )      (3,575 )      5,250  
Net interest income after provision (credit) for loan losses     33,669       33,961       32,978       35,858       27,092  
Total non-interest income     14,323       15,744       14,943       13,569       13,967  
Total non-interest expense     43,371       42,223       40,641       40,037       39,697  
Income before income taxes     4,621       7,482       7,280       9,390       1,362  
Provision for income taxes     1,598       2,289       2,241       2,853       80  
Net income   $ 3,023     $ 5,193     $ 5,039     $ 6,537     $ 1,282  
Net income available to common shareholders   $ 2,813     $ 4,984     $ 4,211     $ 5,152     $ 121  
PER COMMON SHARE DATA:
                                            
Basic earnings per share   $ 0.15     $ 0.26     $ 0.21     $ 0.24     $ 0.01  
Diluted earnings per share     0.15       0.26       0.21       0.24       0.01  
Cash dividends declared     0.04       0.03       0.00       0.00       0.00  
Book value at period end     4.97       4.91       4.67       4.37       4.07  
BALANCE SHEET AND OTHER DATA:
                                            
Total assets   $ 1,089,263     $ 1,056,036     $ 1,000,991     $ 979,076     $ 948,974  
Loans and loans held for sale, net of unearned income     832,131       786,748       731,741       670,847       678,181  
Allowance for loan losses     9,623       10,104       12,571       14,623       19,765  
Investment securities available for sale     127,110       141,978       151,538       182,923       164,811  
Investment securities held to maturity     19,840       18,187       13,723       12,280       7,824  
Deposits     869,881       854,522       835,734       816,420       801,216  
Total borrowed funds     93,965       79,640       41,745       34,850       27,385  
Stockholders’ equity     114,407       113,307       110,468       112,352       107,058  
Full-time equivalent employees     314       352       350       347       348  
SELECTED FINANCIAL RATIOS:
                                            
Return on average assets     0.29 %      0.51 %      0.51 %      0.68 %      0.13 % 
Return on average total equity     2.61       4.69       4.51       5.90       1.19  
Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end     95.66       92.07       87.56       82.17       84.64  
Ratio of average total equity to average assets     10.92       10.86       11.36       11.49       11.25  
Common stock cash dividends as a percent of net income available to common shareholders     26.73       11.36                    
Interest rate spread     3.36       3.39       3.43       3.47       3.51  
Net interest margin     3.52       3.56       3.65       3.72       3.79  
Allowance for loan losses as a percentage of loans, net of unearned income, at period end     1.16       1.29       1.74       2.20       2.95  
Non-performing assets as a percentage of loans and other real estate owned, at period end     0.35       0.52       1.00       0.78       2.14  
Net charge-offs as a percentage of average loans     0.14       0.18       0.19       0.24       0.74  
Ratio of earnings to fixed charges and preferred dividends:(1)
                                            
Excluding interest on deposits     3.30X       5.13X       3.80X       4.11X       1.49X  
Including interest on deposits     1.67       2.07       1.80       1.83       1.10  
Cumulative one year interest rate sensitivity gap ratio, at period end     1.13       1.09       1.30       1.29       1.13  

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

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012

2014 SUMMARY OVERVIEW:

On January 20, 2015, the Company reported its financial performance for the fourth quarter of 2014 and consequently for the full year of 2014. Net income available to shareholders was $749,000 or $0.04 per share for the fourth quarter of 2014. This was $0.05 per share less than the fourth quarter of 2013, but $0.02 per share more than the third quarter of 2014. Net income for the full year was $3,023,000, or $0.15 per share, which represents a decline from $0.26 per share in 2013.

We have previously emphasized the Company’s determination to become a significant competitor in every market where the company has a presence. Loans outstanding increased in 2014 by $45 million to a new company year-end record high of $832 million. Meanwhile deposits also closed 2014 at the highest year-end total on record of $870 million. However, it is a fact that such progress has been achieved at the price of increased expense levels. The Board and management determined that 2014 would be the year to take action on this increase in expenses. These actions have included:

A soft freeze on the defined benefit pension plan and a gradual change to a defined contribution plan, such as a qualified 401(k) plan.
A prominent bank-consulting firm was retained to conduct a company-wide profitability improvement program. This program has already provided more than $1 million in annual expense reduction.
Then, in the fourth quarter the Company offered a voluntary early retirement program to a number of our most loyal, long-term staff. The expenses of this program are part of the 2014 financials but the significant reductions will be evident in 2015 and beyond.

The goal of these actions is to permit the Company to continue growing the business but to avoid expense increases so as to increase earnings per share and shareholder return.

Finally in 2014, the Company put behind us a costly litigation process that was previously disclosed in our regulatory filings earlier this year. This litigation concerned our registered investment advisory subsidiary, WCCA, and resulted in a $669,000 impairment charge related to Goodwill on the balance sheet.

We believe the sum of these can result in 2014 being a foundation year for the next decade. The Company has strong capital, a substantial and growing tangible book value, along with the previously mentioned success in the market place. It is also gratifying to tell you that the Trust Company has now completed four consecutive years of double digit net income increases.

We should mention that early 2015 did bring a new challenge; Glenn L. Wilson voluntarily resigned on January 9, 2015 to join a small bank close to his long-term home in Maryland. Glenn served as President and Chief Executive Officer since November 1, 2009. Jeffrey A. Stopko, our former Chief Financial Officer, is now leading an Interim Management Team.

It is enough to say that we expect another bumpy year in the U.S. and regional economies. Just when the Marcellus Shale began to promise job gains for Pennsylvania, the global price of oil has experienced a sudden and dramatic decline. Our answer to these larger issues of the national and global economy remains the same. The Company will maintain strong capital, deep liquidity and a conservative balance sheet. As we enter the seventh year of Washington’s Easy Money program, the Federal Reserve speaks of new directions. Therefore this would not seem to be the time for anything but the most basic banking and wealth management programs and careful watching of the markets. As a result of this situation, we will focus our energies on successfully executing our business plans in order to improve earnings per share and the resulting return to the common shareholder in 2015.

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

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
Net income   $ 3,023     $ 5,193     $ 5,039  
Net income available to common shareholders     2,813       4,984       4,211  
Diluted earnings per share     0.15       0.26       0.21  
Return on average assets     0.29 %      0.51 %      0.51 % 
Return on average equity     2.61       4.69       4.51  

The Company reported net income available to common shareholders of $2.8 million or $0.15 per diluted common share for 2014. This represented a 42.3% decrease in earnings per share from 2013 where net income available to common shareholders totaled $5.0 million or $0.26 per diluted share. Factors contributing to this reduction in earnings were a $1.5 million unfavorable swing in the provision for loan losses, a $1.4 million reduction in non-interest revenue, and a $1.1 million increase in non-interest expense. The non-interest expense increase included a $669,000 goodwill impairment charge and a $376,000 fourth quarter pension charge related to 25 employees who elected to participate in an early retirement incentive program. These negative items were partially offset by a $1.2 million increase in net interest income due to continued growth of our loan portfolio while maintaining excellent asset quality.

The Company reported net income available to common shareholders of $5.0 million or $0.26 per diluted common share for 2013. This represented a 23.8% increase in earnings per share from 2012 where net income available to common shareholders totalled $4.2 million or $0.21 per diluted share. Growth in total revenue, improved asset quality, and effective capital management caused the increase in earnings per share in 2013. Specifically, a $658,000 increase in net interest income resulted from continued strong growth of our loan portfolio, as total loans grew by $55 million, or 7.5%. Material loan growth occurred in loan categories that qualify for the SBLF through the Company’s loan production offices. As a result of this growth in SBLF qualified loans, the Company locked in the lowest preferred dividend rate available under the program of 1% until the first quarter of 2016. This lower rate saved the Company $619,000 in preferred stock dividend payments in 2013 and was a key factor contributing to the earnings per share growth. Additionally, the calculation of earnings per share benefitted from a 713,000 or 3.6% reduction in average shares outstanding due to the success of the Company’s common stock repurchase program that was completed in the second quarter of 2013. There was also $325,000 more earnings benefit from negative loan loss provisions in 2013 due to the Company’s improved asset quality. These positive items were partially offset by a $1.6 million or 3.9% increase in non-interest expense and slightly higher income tax expense.

The Company reported net income available to common shareholders of $4.2 million or $0.21 per diluted common share for 2012. This represented a 12.5% decline in earnings per share from 2011 where net income available to common shareholders totalled $5.2 million or $0.24 per diluted share. The largest factor causing the reduction in net income available to common shareholders was the provision for loan losses. The Company recorded a negative provision of $775,000 but this was at a lesser level than the $3,575,000 negative provision for 2011. Non-interest income increased by $1.4 million or 10.1% largely due to increased revenue from residential mortgage banking activities and the Trust Company’s wealth management businesses. Continued focus on expense control helped contain the increase in non-interest expense to $604,000 or 1.5%.

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

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT RATIOS)
Interest income   $ 40,441     $ 39,343     $ 39,917  
Interest expense     6,397       6,482       7,714  
Net interest income     34,044       32,861       32,203  
Net interest margin     3.52 %      3.56 %      3.65 % 

2014 NET INTEREST PERFORMANCE OVERVIEW... The Company’s net interest income for the full year 2014 increased by $1,183,000, or 3.6%, when compared to the full year 2013. The Company’s net interest margin of 3.52% for the full year 2014 was four basis points lower than the net interest margin of 3.56% for the full year 2013. The Company has been able to mitigate this net interest margin pressure and to increase net interest income by both growing its earning assets and reducing its cost of funds. Specifically, the earning asset growth has occurred in the loan portfolio as total loans averaged a record $805 million for the full year 2014 which is $58 million, or 7.8%, higher than the $746 million average for the 2013 year. This loan growth reflects the successful results of the Company’s more intensive sales calling efforts, with an emphasis on generating commercial loans and owner occupied CRE loans, which qualify as SBLF loans. Interest income in 2014 has also benefitted from reduced premium amortization on mortgage backed securities due to slower mortgage prepayment speeds. Overall, total interest income has increased by $1,098,000 in 2014. Additionally, the increase in loans caused the Company’s loan to deposit ratio to average 92.3% in 2014 compared to 88.2% in 2013.

Total interest expense for the 2014 year declined by $85,000 from the full year 2013 due to the Company’s proactive efforts to reduce deposit costs. Even with this reduction in deposit costs, the Company still experienced growth in deposits which reflects the loyalty of our core deposit base and ongoing efforts to cross sell new loan customers into deposit products. Specifically, total deposits averaged a record level of $872 million for the full year 2014 which is $25 million, or 3.0%, higher than the $847 million average for the full year 2013. This decreased interest expense for deposits has been partially offset by a $190,000 increase in the interest cost for borrowings as the Company has utilized more Federal Home Loan Bank (FHLB) term advances to extend borrowings and provide protection against rising interest rates.

Overall, the Company expects that it will need to continue to grow earning assets to achieve net interest income growth in 2015 as little net interest margin improvement is expected given the ongoing challenges of the exceptionally low interest rate environment. Solid commercial loan pipelines suggest that the Company should be able to again grow the loan portfolio in 2015 although we expect pricing pressures on new commercial loans to continue to be intense.

COMPONENT CHANGES IN NET INTEREST INCOME: 2014 VERSUS 2013... Regarding the separate components of net interest income, the Company's total interest income in 2014 increased by $1.1 million when compared to 2013. This increase was due to a $44.1 million increase in average earning assets due to an increase in average loans partially offset by a nine basis point decline in the earning asset yield from 4.27% to 4.18%. Within the earning asset base, the yield on the total loan portfolio decreased by 19 basis points from 4.71% to 4.52% as new loans typically have yields that are below the rate on the maturing instruments that they are replacing. However, the yield on total investment securities increased by 10 basis points from 2.50% to 2.60% due primarily to a reduction in premium amortization on mortgage backed securities due to a slowdown in mortgage prepayment speeds in 2014. Investment securities interest revenue declined by $122,000 in 2014 due to an $11 million decrease in the average investment securities portfolio as the Company has utilized cash flow from securities to help fund the previously mentioned loan growth.

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The Company's total interest expense for 2014 decreased by $85,000, or 1.3%, when compared to 2013. This decrease in interest expense was due to a lower cost of funds as the cost of interest bearing liabilities declined by six basis points to 0.82%. Management’s decision to further reduce interest rates paid on all deposit categories has not had a negative impact on deposit growth and reflects the loyalty of the bank’s core deposit base. This decrease in funding costs occurred in spite of a $43.4 million increase in the volume of average interest bearing liabilities. The Company has utilized term advances from the FHLB, with maturities ranging between three and five years, to help fund its earning asset growth and manage interest rate risk. The average balance of FHLB term advances has increased by $15 million while the average cost of these advances has increased by only 17 basis points to 1.01%. Overall, total FHLB borrowings averaged $52 million or 4.9% of total assets during 2014.

2013 NET INTEREST PERFORMANCE OVERVIEW... The Company’s net interest income in 2013 increased by 658,000, or 2.0%, when compared to 2012. The Company’s 2013 net interest margin of 3.56% was nine basis points lower than the net interest margin of 3.65% for 2012. The lower net interest margin demonstrates the impact of the Federal Reserve low interest rate policies which have pressured interest revenue. The Company has been able to overcome this net interest margin pressure and increase net interest income by reducing its cost of funds and growing its earning assets, particularly loans. Specifically, these efforts resulted in total loans averaging $746 million in 2013, which was $58 million or 8.4% higher than the $689 million average for 2012. This loan growth reflects the successful results of the Company’s more intensive sales calling efforts with an emphasis on generating commercial loans and owner occupied CRE loans which qualify as SBLF loans, particularly through its loan production offices. Overall, the increase in loans caused the Company’s loan to deposit ratio to average 88.2% in 2013 compared to 82.7% in 2012.

Total interest expense for 2013 declined by $1.2 million from 2012 due to the Company’s proactive efforts to reduce deposit costs. Even with this reduction in deposit costs, the Company still experienced growth in deposits which reflects the loyalty of its core deposit base and its ongoing efforts to cross sell new loan customers into deposit products. Specifically, total deposits averaged $847 million in 2013, which is $14 million or 1.6% higher than the $833 million average in 2012.

COMPONENT CHANGES IN NET INTEREST INCOME: 2013 VERSUS 2012... Regarding the separate components of net interest income, the Company's total interest income in 2013 decreased by $574,000 when compared to 2012. This decrease was due to a 25 basis point decline in the earning asset yield from 4.52% to 4.27%, partially offset by additional interest income from a $38.3 million increase in average earning assets due to an increase in average loans. Within the earning asset base, the yield on the total loan portfolio decreased by 35 basis points from 5.06% to 4.71%, while the yield on total investment securities dropped by 22 basis points from 2.72% to 2.50%. This earning asset yield drop reflects the fact that new investment securities and loans typically have yields that are below the rate on the maturing instruments that they are replacing. Investment securities interest revenue also declined by $865,000 in 2013 due to an $18 million decrease in the average investment securities portfolio as the Company has utilized cash flow from securities to help fund the previously mentioned loan growth.

The Company's total interest expense for 2013 decreased by $1.2 million, or 16.0%, when compared to 2012. This decrease in interest expense was due to a lower cost of funds as the cost of interest bearing liabilities declined by 21 basis points to 0.88%. Management’s decision to further reduce interest rates paid on all deposit categories has not had a negative impact on deposit growth and reflects the loyalty of the bank’s core deposit base. This decrease in funding costs occurred in spite of a $28.3 million increase in the volume of interest bearing liabilities. The Company has utilized term advances from the FHLB, with maturities ranging between three and five years, to help fund its earning asset growth and manage interest rate risk over the past year. The average balance of FHLB term advances has increased by $13 million while the average cost of these advances declined by 60 basis points to 0.84%. Overall, total FHLB borrowings averaged $36 million or 3.5% of total assets during 2013.

The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) interest rate spread (the difference between the average

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

                 
                 
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     AVERAGE BALANCE   INTEREST
INCOME/
EXPENSE
  YIELD/
RATE
  AVERAGE
BALANCE
  INTEREST
INCOME/
EXPENSE
  YIELD/
RATE
  AVERAGE
BALANCE
  INTEREST
INCOME/
EXPENSE
  YIELD/
RATE
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning assets:
                                                                                
Loans, net of unearned
income
  $ 804,721     $ 36,366       4.52 %    $ 746,490     $ 35,145       4.71 %    $ 688,736     $ 34,842       5.06 % 
Deposits with banks     7,227       5       0.07       8,027       6       0.08       9,634       10       0.18  
Federal funds sold                       79             0.05                    
Short-term investment in money market funds     1,243       7       0.49       3,260       8       0.24       2,889       18       0.61  
Investment securities:
                                                                                
Available for sale     137,839       3,528       2.56       150,621       3,701       2.46       172,947       4,634       2.68  
Held to maturity     19,399       559       2.88       17,900       508       2.84       13,828       440       3.18  
Total investment securities     157,238       4,087       2.60       168,521       4,209       2.50       186,775       5,074       2.72  
TOTAL INTEREST EARNING ASSETS/INTEREST INCOME     970,429       40,465       4.18       926,377       39,368       4.27       888,034       39,944       4.52  
Non-interest earning assets:
                                                                                
Cash and due from banks     16,919                         16,795                         17,136                    
Premises and equipment     13,282                         12,839                         11,055                    
Other assets     69,423                         75,360                         81,796                    
Allowance for loan losses     (9,951 )                  (11,434 )                  (13,500 )             
TOTAL ASSETS   $ 1,060,102                 $ 1,019,937                 $ 984,521              
Interest bearing liabilities:
                                                                                
Interest bearing deposits:
                                                                                
Interest bearing demand   $ 97,641     $ 191       0.20 %    $ 75,126     $ 138       0.18 %    $ 60,810     $ 116       0.19 % 
Savings     89,554       144       0.16       87,819       139       0.16       85,112       181       0.21  
Money market     228,150       761       0.33       212,735       736       0.35       211,744       895       0.42  
Other time     300,915       3,793       1.26       312,741       4,151       1.33       327,557       5,310       1.62  
Total interest bearing deposits     716,260       4,889       0.68       688,421       5,164       0.75       685,223       6,502       0.95  
Federal funds purchased and other short-term borrowings     18,783       55       0.29       17,973       46       0.26       5,342       11       0.21  
Advances from Federal Home Loan Bank     32,885       333       1.01       18,170       152       0.84       5,661       81       1.44  
Guaranteed junior subordinated deferrable interest debentures     13,085       1,120       8.57       13,085       1,120       8.57       13,085       1,120       8.57  
TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE     781,013       6,397       0.82       737,649       6,482       0.88       709,311       7,714       1.09  
Non-interest bearing liabilities:
                                                                                
Demand deposits     155,365                         158,169                         147,887                    
Other liabilities     7,969                         13,378                         15,517                    
Stockholders’ equity     115,755                   110,741                   111,806              
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 1,060,102                 $ 1,019,937                 $ 984,521              
Interest rate spread                       3.36                         3.39                         3.43  
Net interest income/net interest margin              34,068       3.52 %               32,886       3.56 %               32,230       3.65 % 
Tax-equivalent adjustment           (24 )                  (25 )                  (27 )       
Net interest income         $ 34,044                 $ 32,861                 $ 32,203        

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

           
  2014 vs. 2013   2013 vs. 2012
     INCREASE (DECREASE)
DUE TO CHANGE IN:
  INCREASE (DECREASE)
DUE TO CHANGE IN:
     AVERAGE VOLUME   RATE   TOTAL   AVERAGE
VOLUME
  RATE   TOTAL
     (IN THOUSANDS)
INTEREST EARNED ON:
                                                     
Loans, net of unearned income   $ 3,853     $ (2,632 )    $ 1,221     $ 1,730     $ (1,427 )    $ 303  
Deposits with banks           (1 )      (1 )      (1 )      (3 )      (4 ) 
Short-term investments in money market funds     (1 )            (1 )      3       (13 )      (10 ) 
Investment securities:
                                                     
Available for sale     (332 )      159       (173 )      (570 )      (363 )      (933 ) 
Held to maturity     44       7       51       107       (39 )      68  
Total investment securities     (288 )      166       (122 )      (463 )      (402 )      (865 ) 
Total interest income     3,564       (2,467 )      1,097       1,269       (1,845 )      (576 ) 
INTEREST PAID ON:
                                                     
Interest bearing demand deposits     39       14       53       28       (6 )      22  
Savings deposits     5             5       6       (48 )      (42 ) 
Money market     118       (93 )      25       5       (164 )      (159 ) 
Other time deposits     (150 )      (208 )      (358 )      (234 )      (925 )      (1,159 ) 
Federal funds purchased and other short-term borrowings     3       6       9       36       (1 )      35  
Advances from Federal Home Loan Bank     145       36       181       87       (16 )      71  
Total interest expense     160       (245 )      (85 )      (72 )      (1,160 )      (1,232 ) 
Change in net interest income   $ 3,404     $ (2,222 )    $ 1,182     $ 1,341     $ (685 )    $ 656  

LOAN QUALITY... The Company’s written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. The Company’s policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business relationships with aggregate balances of $250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment. The following table sets forth information concerning the Company’s loan delinquency and other non-performing assets.

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  AT DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Total accruing loans past due 30 to 89 days   $ 2,643     $ 3,264     $ 3,456  
Total non-accrual loans     2,196       2,871       5,814  
Total non-performing assets including TDRs(1)     2,917       4,109       7,224  
Loan delinquency as a percentage of total loans, net of unearned income     0.32 %      0.42 %      0.48 % 
Non-accrual loans as a percentage of total loans, net of unearned income     0.27       0.37       0.81  
Non-performing assets as a percentage of total loans, net of unearned income, and other real estate owned     0.35       0.52       1.00  
Non-performing assets as a percentage of total assets     0.27       0.39       0.72  
Total classified loans (loans rated substandard or doubtful)   $ 11,229     $ 11,779     $ 22,717  

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

As a result of successful ongoing problem credit resolution efforts, the Company realized further asset quality improvements in 2014. Each of the metrics in the above table demonstrated improvement in 2014 as particularly evidenced by reduced levels of non-accrual loans, non-performing assets, classified loans and low loan delinquency levels that continue to be well below 1% of total loans. We continue to closely monitor the loan portfolio given the uneven recovery in the economy and the number of relatively large-sized commercial and CRE loans within the portfolio. As of December 31, 2014, the 25 largest credits represented 26.6% of total loans outstanding.

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ALLOWANCE AND PROVISION FOR LOAN LOSSES... As described in more detail in the Critical Accounting Policies and Estimates section of this MD&A, the Company uses a comprehensive methodology and procedural discipline to maintain an 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 following table sets forth changes in the ALL and certain ratios for the periods ended.

         
  YEAR ENDED DECEMBER 31,
     2014   2013   2012   2011   2010
     (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year   $ 10,104     $ 12,571     $ 14,623     $ 19,765     $ 19,685  
Charge-offs:
                                            
Commercial     (172 )      (50 )      (345 )      (953 )      (835 ) 
Commercial loans secured by real estate     (708 )      (1,777 )      (796 )      (1,700 )      (4,221 ) 
Real estate-mortgage     (322 )      (139 )      (420 )      (85 )      (293 ) 
Consumer     (121 )      (154 )      (200 )      (203 )      (282 ) 
Total charge-offs     (1,323 )      (2,120 )      (1,761 )      (2,941 )      (5,631 ) 
Recoveries:
                                            
Commercial     141       80       138       831       226  
Commercial loans secured by real
estate
    231       481       245       331       48  
Real estate-mortgage     71       122       54       53       42  
Consumer     24       70       47       159       145  
Total recoveries     467       753       484       1,374       461  
Net charge-offs     (856 )      (1,367 )      (1,277 )      (1,567 )      (5,170 ) 
Provision (credit) for loan losses     375       (1,100 )      (775 )      (3,575 )      5,250  
Balance at end of year   $ 9,623     $ 10,104     $ 12,571     $ 14,623     $ 19,765  
Loans and loans held for sale, net of unearned income:
                                            
Average for the year   $ 804,721     $ 746,490     $ 688,736     $ 662,746     $ 701,502  
At December 31     832,131       786,748       731,741       670,847       678,181  
As a percent of average loans:
                                            
Net charge-offs     0.11 %      0.18 %      0.19 %      0.24 %      0.74 % 
Provision (credit) for loan losses     0.05       (0.15 )      (0.11 )      (0.54 )      0.75  
Allowance as a percent of each of the following:
                                            
Total loans, net of unearned income     1.16       1.29       1.74       2.20       2.95  
Total accruing delinquent loans (past due 30 to 89 days)     364.09       309.56       363.74       440.58       708.17  
Total non-accrual loans     438.21       351.93       216.22       288.14       160.83  
Total non-performing assets     329.89       245.90       174.02       281.27       137.60  
Allowance as a multiple of net charge-offs     11.24x       7.39x       9.84x       9.33x       3.82x  

For 2014, the Company recorded a $375,000 provision for loan losses compared to a $1.1 million negative provision for the 2013 year. This represents an unfavorable swing of $1.5 million between years and is a significant factor contributing to the lower earnings in 2014. The positive provision in 2014 was needed to partially cover net loan charge-offs and support the continuing growth of the loan portfolio. In 2014 actual credit losses realized through net charge-offs totaled $856,000, or 0.11% of average total loans, which represents a decrease from the 2013 year when net charge-offs totaled $1.4 million, or 0.18% of average total loans. Overall, for the 2014 year, the Company continued to maintain outstanding asset quality. At December 31, 2014, non-performing assets totaled $2.9 million, or only 0.35% of total loans, which represents

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the first time that our non-performing assets have been under $3 million since 2007. In summary, the ALL provided a strong 400% coverage of non-performing loans, and 1.16% of total loans, at December 31, 2014, compared to 327% coverage of non-performing loans, and 1.29% of total loans, at December 31, 2013. The Company presently expects that it will have greater positive loan loss provisions in 2015 to support the expected growth of the loan portfolio.

The Company recorded for the 2013 year a negative loan loss provision of $1.1 million compared to a $775,000 negative provision for the 2012 year. There was $325,000 more earnings benefit from negative loan loss provisions in 2013. The 2013 negative provision primarily resulted from the release of reserves due to the fourth quarter pay-off of a large classified loan and a continued reduction in the level of criticized loans and non-performing assets. At December 31, 2013, non-performing assets totaled $4.1 million or 0.52% of total loans which is $3.1 million lower than they were at the end of 2012. Net loan charge-offs for 2013 totaled $1.4 million or 0.18% of average total loans which is comparable with 2012 when net charge-offs totaled $1.3 million or 0.19% of average total loans.

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

                   
                   
AT DECEMBER 31,
     2014   2013   2012   2011   2010
     AMOUNT   PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL LOANS
  AMOUNT   PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL
LOANS
  AMOUNT   PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL
LOANS
  AMOUNT   PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL
LOANS
  AMOUNT   PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL
LOANS
  (IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial   $ 3,262       16.8 %    $ 2,844       15.3 %    $ 2,596       14.3 %    $ 2,365       12.5 %    $ 3,851       11.5 % 
Commercial loans secured by real estate     3,902       49.6       4,885       52.6       7,796       53.2       9,400       52.8       12,717       54.6  
Real estate-mortgage     1,310       31.3       1,260       30.1       1,269       30.2       1,270       32.0       1,117       31.1  
Consumer     190       2.3       136       2.0       150       2.3       174       2.7       206       2.8  
Allocation to general risk     959             979             760             1,414             1,874        
Total   $ 9,623       100.0 %    $ 10,104       100.0 %    $ 12,571       100.0 %    $ 14,623       100.0 %    $ 19,765       100.0 % 

Even though residential real estate-mortgage loans comprise 31.3% of the Company’s total loan portfolio, only $1.3 million or 13.6% of the total ALL is allocated against this loan category. The residential real estate-mortgage loan allocation is based upon the Company’s three-year historical average of actual loan charge-offs experienced in that category and other qualitative factors. The disproportionately higher allocations for commercial loans and commercial loans secured by real estate reflect the increased credit risk associated with this type of lending, the Company’s historical loss experience in these categories, and other qualitative factors. The large decline in the part of the allowance allocated to commercial loans secured by real estate reflects the continued asset quality improvements in this sector.

Based on the Company’s ALL methodology and the related assessment of the inherent risk factors contained within the Company’s loan portfolio, we believe that the ALL is adequate at December 31, 2014 to cover losses within the Company’s loan portfolio.

NON-INTEREST INCOME... Non-interest income for 2014 totalled $14.3 million, a decrease of $1.4 million, or 9.0%, from 2013. Factors contributing to this lower level of non-interest income in 2014 included:

Reduced revenue from residential mortgage banking activities was caused by both lower refinance activity due to higher mortgage rates and reduced purchase activity in 2014. As a result, gains realized on residential mortgage loan sales into the secondary market declined by $341,000 or 31.3% and mortgage related fees dropped by $183,000 due largely to lower mortgage origination and underwriting fees.

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a $216,000, or 9.9% decrease in service charges on deposit accounts due to fewer overdraft charges and account analysis fees as customers have generally maintained higher balances in their checking accounts in 2014.
a $250,000, or 25.1%, decrease in Bank Owned Life Insurance (BOLI) revenue due largely to the receipt of a death claim payment in 2013.
a $357,000 decrease in other income due to a $226,000 reduction in financial services commission revenue and a net unfavorable swing of $140,000 on OREO property transactions.

Non-interest income for 2013 totalled $15.7 million, an increase of $801,000, or 5.4%, from 2012. Factors contributing to this higher level of non-interest income in 2013 included:

a $544,000, or 7.5%, increase in trust and investment advisory fees due to increased assets under management which reflects both successful new business development efforts and market appreciation of existing assets given the strong equity market performance in 2013.
a $204,000 investment security gain realized on the sale of certain rapidly prepaying mortgage backed securities in 2013. There was only $12,000 of investment security gains realized in 2012.
a $135,000, or 15.6%, increase in BOLI due to the receipt of a death claim payment in 2013.
a $43,000, or 3.8%, decrease in gains realized on residential mortgage loan sales into the secondary market due to a reduced level of mortgage loan production and refinance activity in the second half of 2013.

NON-INTEREST EXPENSE... Non-interest expense for 2014 totalled $43.4 million, a $1.1 million, or 2.7%, increase from 2013. Factors contributing to the higher non-interest expense in 2014 included:

professional fees increased by $1.1 million in 2014 due to higher legal costs related to litigation against the former CEO of WCCA, the consulting costs associated with our profitability improvement project and new recurring costs related to outsourcing our computer operations and statement processing to a third party vendor. The overall cost savings benefit from outsourcing these services is captured in lower personnel costs in these departments and reduced software expense, which is a key factor contributing to the decline in other expenses of $199,000 in 2014.
the recognition of a $669,000 goodwill impairment charge during the third quarter of 2014. The voluntary departure of WCCA’s former CEO, and the related litigation against him for violations of his employment agreement, caused disruption within the WCCA customer base during 2014. This disruption ultimately led to the loss of certain clients and a reduction in the projected earnings capacity of WCCA which caused the Company to incur the goodwill impairment charge.
a $293,000 decrease in miscellaneous taxes and insurance due to reduced Pennsylvania bank shares tax expense resulting from a change in the calculation methodology that took effect January 1, 2014.
a $155,000, or 0.6%, decrease in salaries and employee benefits expense due to lower salaries and incentive compensation in 2014. This reduction occurred even with a $376,000 pension charge in the fourth quarter of 2014 related to 25 employees who elected to participate in an early retirement incentive program. Since the majority of these retired employees will not be replaced, the Company expects to achieve meaningful salary and benefits expense savings in 2015.

Non-interest expense for 2013 totalled $42.2 million, a $1.6 million, or 3.9%, increase from 2012. Factors contributing to the higher non-interest expense in 2013 included:

a $691,000, or 2.8%, increase in salaries and employee benefits expense due to higher salaries expense and pension expense in 2013.
a $457,000 increase in professional fees due largely to higher legal costs, recruitment fees, and increases in several other professional fee categories which included the cost for outsourcing the computer operations function for part of the year.
a $170,000 increase in FDIC insurance expense due largely to the Bank’s increased asset size.

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INCOME TAX EXPENSE... The Company recorded income tax expense of $1.6 million or an effective tax rate of 34.6% for 2014 compared to income tax expense of $2.3 million or an effective tax rate of 30.6% for 2013. The higher effective tax rate in 2014 was primarily due to the non-deductibility of the goodwill impairment charge for tax purposes. The income tax expense recorded in 2012 was $2.2 million or an effective tax rate of 30.8% which was comparable with 2013. BOLI is the Company’s largest source of tax-free earnings. The Company’s deferred tax asset was $9.6 million at December 31, 2014 and relates primarily to net operating loss carryforwards and the ALL.

SEGMENT RESULTS... Retail banking’s net income contribution was $2.2 million in 2014 compared to $2.8 million in 2013 and $3.2 million in 2012. This decline in earnings in 2014 was due primarily to lower non-interest income resulting from the previously discussed decrease in residential mortgage banking related revenues, lower deposit service charges and reduced revenue from BOLI in 2014. Net interest income was also down modestly in this segment reflecting the ongoing net interest margin pressure from the continued low interest rate environment which causes the funding benefit for deposits provided by this segment to be lower. These negative items were partially offset by reduced non-interest expense due largely to lower personnel costs. The reduced earnings in 2013 was due largely to lower net interest income resulting from the previously discussed net interest margin pressure, modestly lower non-interest income and higher non-interest expense. The decline in non-interest income reflects decreased residential mortgage banking related revenues resulting from the reduced mortgage production in the second half of the year. The increase in non-interest expense was largely due to a $170,000 increase in FDIC deposit insurance expense in 2013.

The commercial banking segment reported net income of $4.2 million in 2014 compared to net income of $5.0 million in 2013 and $4.7 million in 2012. The reduced net income contribution was due to a net unfavorable swing of $1.3 million in the provision for loan losses from a negative provision of $1.0 million in 2013 to a positive provision of $318,000 in 2014. Non-interest expense also increased in this segment due higher salaries and employee benefit costs as we have increased staffing levels within this segment to generate and support the solid commercial loan growth that we have achieved. These negative items were partially offset by higher net interest income as a result of the previously discussed strong growth in commercial and CRE loans over the past year. Continued improvements in asset quality resulted in a negative provision for loan losses in 2013. Overall, there has been $393,000 additional earnings benefit from negative loan loss provisions in this segment in 2013. This segment also benefitted from a $1.2 million increase in net interest income due to growth in commercial loans in 2013. These positive items were partially offset by a $1.2 million increase in non-interest expense due to higher personnel costs, the costs associated with all three new loan production offices being operational for the entire year and a $238,000 increase in the reserve for unfunded commitments due to increased loan approval activity.

The trust segment’s net income contribution was $564,000 in 2014 compared to $1.2 million in 2013 and $945,000 in 2012. The 2014 year was negatively impacted by the previously discussed $669,000 goodwill impairment charge at WCCA due to the loss of certain clients and a reduction in the projected earnings capacity of WCCA. Non-interest revenue for this segment was also negatively impacted by client attrition at WCCA and lower financial services revenue due to fewer production personnel in 2014. However, non-interest expense in this segment (excluding the goodwill impairment charge) was also down due to reduced personnel cost at WCCA which has helped mitigate a significant portion of the revenue decline. The higher net income contribution in 2013 was due to $607,000 more revenue from increased assets under management which reflects both successful new business development efforts and market appreciation of existing assets given the strong equity market performance in 2013. This more than offset higher non-interest expense from increased personnel costs and professional fees. Overall, the fair market value of trust assets under administration totaled $1.784 billion at December 31, 2014, an increase of $115.6 million, or 6.9%, from the December 31, 2013 total of $1.669 billion.

The investment/parent segment reported a net loss of $3.9 million in 2014 which was comparable with the net loss of $3.8 million in 2013 and $3.7 million in 2012. Overall this segment has felt the most earnings pressure from the continued low interest rate environment and declining investment security balances which have been utilized to help fund loan growth. Additionally, all of the interest expense is allocated to this

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segment. The Company did generate investment security gains of $177,000 in 2014 and $204,000 in 2013 from the sale of certain rapidly prepaying mortgage backed securities which had a favorable impact on earnings in this segment.

For greater discussion on the future strategic direction of the Company’s key business segments, see “Management’s Discussion and Analysis — Forward Looking Statements.”

BALANCE SHEET... The Company's total consolidated assets of $1.089 billion at December 31, 2014 grew by $33 million or 3.2% from the $1.056 billion level at December 31, 2013. This asset growth was due primarily to a $43.7 million or 5.6% increase in total loans in 2014. This loan growth reflects the successful results of the Company’s more intensive sales calling efforts with an emphasis on generating commercial loans and owner occupied CRE loans particularly through its loan production offices. This loan increase was partially offset by a $13.2 million decrease in investment securities as the Company utilized this item to help fund the loan growth.

The Company also funded the previously mentioned asset growth with a combination of both increased deposits ($15 million) and FHLB advances ($17 million). The FHLB term advances, with maturities between 3 and 5 years, now total $42 million as the Company has utilized these advances to help manage interest rate risk in a rising rate environment. Other liabilities increased by $2.4 million due to an increase in the Company’s pension liability. Total stockholders’ equity increased by $1.1 million since year-end 2013 mainly due to increased retained earnings as the Company’s net income available to common shareholders more than exceeded funds used for common stock cash dividend payments. The Company continues to be considered well capitalized for regulatory purposes with a risk based capital ratio of 14.80% and an asset leverage ratio of 11.34% at December 31, 2014. The Company’s book value per common share was $4.97, its tangible book value per common share was $4.33 and its tangible common equity to tangible assets ratio was 7.56% at December 31, 2014.

LIQUIDITY... The Company’s liquidity position has been strong during the last several years. Our core retail deposit base has grown over the past three years and has been adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities was also used to help fund loan growth over the past two years. We strive to operate our loan to deposit ratio in a range of 85% to 100%. At December 31, 2014, the Company’s loan to deposit ratio was 95.7%. We are optimistic that we can further increase the loan to deposit ratio in 2015 given current commercial loan pipelines, the continued development of our three existing loan production offices, and the opening of a new loan production office in Harrisonburg Virginia in 2015.

Liquidity can also be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents increased by $2.8 million from December 31, 2013, to December 31, 2014, due to $28.7 million of cash provided by financing activities and $5.0 of cash provided by operating activities. This was partially offset by $30.9 million of cash used in investing activities. Within investing activities, cash advanced for new loan fundings and purchases totalled $182.7 million and was $41.4 million higher than the $141.3 million of cash received from loan principal payments and sales. Within financing activities, deposits increased by $15.4 million, which was used to help fund the overall loan growth experienced in 2014. Total FHLB borrowings increased as advances, both short-term and long term, exceeded pay downs by $14 million and was also utilized to fund earning asset growth.

The holding company had a total of $17.6 million of cash, short-term investments, and investment securities at December 31, 2014. Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the holding company. At December 31, 2014, our subsidiary Bank had $514,000 of cash available for immediate dividends to the holding company under applicable regulatory formulas. As such, the holding company has strong liquidity to meet its trust preferred debt service requirements, its SBLF preferred stock dividends, and its common stock dividends, which in total should approximate $2 million over the next twelve months.

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by

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short-term investment securities, time deposits with banks, federal funds sold, and short-term investments in money market funds. These assets totaled $33 million and $30 million at December 31, 2014 and 2013, respectively. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.

Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the FHLB systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary bank is a member of the FHLB, which provides the opportunity to obtain short- to longer-term advances based upon the Company’s investment in assets secured by one- to four-family residential real estate. At December 31, 2014, the Company had $347 million of overnight borrowing availability at the FHLB, $40 million of short-term borrowing availability at the Federal Reserve Bank and $39 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

CAPITAL RESOURCES... The Company meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The asset leverage ratio was 11.34% and the risk based capital ratio was 14.80% at December 31, 2014. We anticipate that we will maintain our strong capital ratios throughout 2015. 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. Our common dividend payout ratio for the full year 2014 was 26.7%. Even after satisfying these obligations, we believe that we will still be able to build the holding company’s cash position in 2015 which currently stands at $17.6 million. We are presently planning to utilize a meaningful part of this cash to redeem a portion of the SBLF preferred stock in the first quarter of 2016 when the interest rate is scheduled to increase from 1% to 9%.

On July 2, 2013, the Federal Reserve 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. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). 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 comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements are effective for the Company and the Bank on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

The July 2013 final rules include three significant changes from the proposals initially made by federal banking regulators in September 2012: (i) the final rules do not change the current risk weighting for residential mortgage exposures; (ii) the final rules permit institutions, other than certain large institutions, to elect to continue to treat certain components of accumulated other comprehensive income as permitted under the current general risk-based capital rules, and not reflect unrealized gains and losses on available-for-sale securities in common equity tier 1 calculations; and (iii) the final rules permit institutions with less than $15.0 billion in assets to grandfather certain non-qualifying capital instruments (including trust preferred securities) issued prior to May 19, 2009 into tier 1 capital.

The Company is continuing to review the impact of these new rules and currently expects that its capital position will be more than adequate to meet the revised regulatory capital requirements.

INTEREST RATE SENSITIVITY... Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company’s net interest income, net income and capital. The management and measurement of interest rate risk at the Company is performed by using the following tools: 1) simulation modeling, which analyzes the impact of interest rate changes on net interest

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

The following table presents a summary of the Company’s static GAP positions at December 31, 2014:

         
INTEREST SENSITIVITY PERIOD   3 MONTHS
OR LESS
  OVER
3 MONTHS
THROUGH
6 MONTHS
  OVER
6 MONTHS
THROUGH
1 YEAR
  OVER
1 YEAR
  TOTAL
     (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
RATE SENSITIVE ASSETS:
                                            
Loans and loans held for sale   $ 226,727     $ 56,024     $ 90,390     $ 458,990     $ 832,131  
Investment securities     25,969       7,658       15,389       97,934       146,950  
Short-term assets     9,092                         9,092  
Regulatory stock     4,048                   2,125       6,173  
Bank owned life insurance                 37,417             37,417  
Total rate sensitive assets   $ 265,836     $ 63,682     $ 143,196     $ 559,049     $ 1,031,763  
RATE SENSITIVE LIABILITIES:
                                            
Deposits:
                                            
Non-interest bearing deposits   $     $     $     $ 167,551     $ 167,551  
NOW                       89,676       89,676  
Money market     179,827                   41,551       221,378  
Other savings     22,504                   67,516       90,020  
Certificates of deposit of $100,000 or more     4,483       23,171       13,927       8,948       50,529  
Other time deposits     68,273       31,312       30,505       120,637       250,727  
Total deposits     275,087       54,483       44,432       495,879       869,881  
Borrowings     38,880             4,000       51,085       93,965  
Total rate sensitive liabilities   $ 313,967     $ 54,483     $ 48,432     $ 546,964     $ 963,846  
INTEREST SENSITIVITY GAP:
                                            
Interval     (48,131 )      9,199       94,764       12,085        
Cumulative   $ (48,131 )    $ (38,932 )    $ 55,832     $ 67,917     $ 67,917  
Period GAP ratio     0.85X       1.17X       2.96X       1.02X           
Cumulative GAP ratio     0.85       0.89       1.13       1.07           
Ratio of cumulative GAP to total assets     (4.42 )%      (3.57 )%      5.13 %      6.24 %          

When December 31, 2014 is compared to December 31, 2013, the Company’s cumulative GAP ratio through one year indicates that the Company’s balance sheet is still asset sensitive with some improvement noted between years. We continue to see loan customer preference for fixed rate loans given the overall low level of interest rates. Also, we have extended some term advances with the FHLB to help manage our interest rate risk position. Overall, the absolute low level of short interest rates makes this table more difficult to analyze since there is little room for certain deposit liabilities to reprice downward further.

Management places primary emphasis on simulation modeling to manage and measure interest rate risk. The Company’s asset/liability management policy seeks to limit net interest income variability over the first twelve months of the forecast period to +/-7.5%, which include interest rate movements of 200 basis points. Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet

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exposure to changes in interest rates. The Company monitors the trends in market value of portfolio equity sensitivity analysis on a quarterly basis.

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

   
INTEREST RATE SCENARIO   VARIABILITY
OF NET
INTEREST
INCOME
  CHANGE IN
MARKET
VALUE OF
PORTFOLIO
EQUITY
200 bp increase     0.8 %      9.2 % 
100 bp increase     0.6       6.3  
100 bp decrease     (3.8 )      (14.4 ) 

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 and scheduled repricing of loans tied to LIBOR or prime. 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 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.

Within the investment portfolio at December 31, 2014, 86% of the portfolio is classified as available for sale and 14% as held to maturity. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity if needed. The mark to market of the available for sale securities does inject more volatility in the book value of equity, but has no impact on regulatory capital. There are 38 securities that are temporarily impaired at December 31, 2014. The Company reviews its securities quarterly and has asserted that at December 31, 2014, the impaired value of securities represents temporary declines due to movements in interest rates and the Company does have the ability and intent to hold those securities to maturity or to allow a market recovery. Furthermore, it is the Company’s intent to manage its long-term interest rate risk by continuing to sell newly originated fixed-rate 30-year mortgage loans into the secondary market (excluding construction and any jumbo loans). The Company also sells 15-year fixed-rate mortgage loans into the secondary market as well, depending on market conditions. For the year 2014, 59% of all residential mortgage loan production was sold into the secondary market.

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The amount of loans outstanding by category as of December 31, 2014, which are due in (i) one year or less, (ii) more than one year through five years, and (iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.

       
  ONE YEAR
OR LESS
  MORE THAN
ONE YEAR
THROUGH
FIVE YEARS
  OVER FIVE
YEARS
  TOTAL
LOANS
     (IN THOUSANDS, EXCEPT RATIOS)
Commercial   $ 41,663     $ 42,388     $ 55,075     $ 139,126  
Commercial loans secured by real estate     46,254       145,941       218,134       410,329  
Real estate-mortgage     46,570       85,850       131,247       263,667  
Consumer     6,272       8,654       4,083       19,009  
Total   $ 140,759     $ 282,833     $ 408,539     $ 832,131  
Loans with fixed-rate   $ 82,788     $ 149,392     $ 227,768     $ 459,948  
Loans with floating-rate     57,971       133,441       180,771       372,183  
Total   $ 140,759     $ 282,833     $ 408,539     $ 832,131  
Percent composition of maturity     16.9 %      34.0 %      49.1 %      100.0 % 
Fixed-rate loans as a percentage of total loans                                55.3 % 
Floating-rate loans as a percentage of total loans                                44.7 % 

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

CONTRACTUAL OBLIGATIONS... The following table presents, as of December 31, 2014, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

           
  PAYMENTS DUE IN
     NOTE
REFERENCE
  ONE
YEAR OR
LESS
  ONE TO
THREE
YEARS
  THREE TO
FIVE
YEARS
  OVER FIVE
YEARS
  TOTAL
     (IN THOUSANDS)
Deposits without a stated maturity     8     $ 568,625     $     $     $     $ 568,625  
Certificates of deposit*     8       173,817       55,644       41,247       40,645       311,353  
Borrowed funds*     10       43,176       24,727       14,707             82,610  
Guaranteed junior subordinated deferrable interest debentures*     10                         25,524       25,524  
Pension obligation     14       2,500                         2,500  
Lease commitments     15       711       1,011       439       1,561       3,722  

* Includes interest based upon interest rates in effect at December 31, 2014. Future changes in market interest rates could materially affect contractual amounts to be paid.

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’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. The Company had various outstanding commitments to extend credit

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approximating $188.0 million and standby letters of credit of $7.2 million as of December 31, 2014. The Company can also use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company had no interest rate contracts outstanding as of December 31, 2014.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES... The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry. Accounting and reporting policies for the ALL, 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 (credit) 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. 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 CRE loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the ALL. Approximately $7.2 million, or 74%, of the total ALL at December 31, 2014 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 Troubled Debt Restructured (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 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

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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.

The Company recorded a $669,000 impairment charge as a result of a goodwill impairment analysis performed in the third quarter of 2014. A qualitative assessment of WCCA indicated that it was more likely than not that the carrying value of WCCA exceeded it fair value. As such, the Company then performed the necessary two-step impairment test. In Step 1, we determined the carrying value of WCCA, including the goodwill, and compared it to the estimated fair value of WCCA. The results of Step 1 indicated that the carrying value of the goodwill exceeded the fair value so it was necessary to move to Step 2 where we measured the amount of the impairment loss. After performing Step 2, we determined that the implied value of the goodwill was less than its carrying costs which caused us to record an impairment charge of $669,000 in the third quarter of 2014. Overall, the voluntary departure of WCCA’s former CEO and the related litigation against him for violations of his employment agreement, caused disruption within the WCCA customer base during 2014. This disruption ultimately led to the loss of certain clients and a reduction in the projected earnings capacity of WCCA. These were the key facts and circumstances that led to the goodwill impairment charge in the third quarter of 2014. The Company utilized a discounted cash flow model along with a valuation technique based upon a multiple of revenues to estimate the fair value of WCCA.

ACCOUNT — Income Taxes

BALANCE SHEET REFERENCE — Net deferred tax asset

INCOME STATEMENT REFERENCE — Provision for income taxes

DESCRIPTION

The provision for income taxes is the sum of income taxes both currently payable and deferred. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the basis of 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 December 31, 2014, 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.

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

ACCOUNT — Investment Securities

BALANCE SHEET REFERENCE — Investment securities

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

DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At December 31, 2014, 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.

FORWARD LOOKING STATEMENTS...

THE STRATEGIC FOCUS:

The challenge for the future is to improve earnings performance to peer levels through a disciplined focus on community banking and improving the profitability of our 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.

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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. Additionally, the Company incurred approximately $150,000 of expenses related to a profitability improvement project in 2015. The Company engaged a consulting firm that specializes in the areas of expense rationalization and profit improvement for community banks. This firm completed a thorough analysis of our business operations and practices during the third quarter. As a result of this project, the firm provided the Company with recommendations to reduce expenses and improve future profitability. Many of their recommendations have been evaluated and already implemented with further study being done on other recommendations scheduled for 2015. The Company expects that its payback on this project will be significant and presently believes that a minimum of $1 million of annual savings from this project will be realized in 2015.

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

Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of the 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) 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and hedges. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk. For information regarding the effect of changing interest rates on the Company’s net interest income and market value of its investment portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity.”

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors, debtholders and to fund operating expenses. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity.”

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

For information regarding the market risk of the Company’s financial instruments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity.” The Company’s principal market risk exposure is to interest rates.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMERISERV FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
                 
Cash and due from depository institutions   $ 23,780     $ 20,288  
Interest bearing deposits     2,952       2,967  
Short-term investments in money market funds     6,140       6,811  
Cash and cash equivalents     32,872       30,066  
Investment securities:
                 
Available for sale     127,110       141,978  
Held to maturity (fair value $20,213 at December 31, 2014 and $17,788 at December 31, 2013)     19,840       18,187  
Loans held for sale     5,051       3,402  
Loans     827,634       783,927  
Less: Unearned income     554       581  
Allowance for loan losses     9,623       10,104  
Net loans     817,457       773,242  
Premises and equipment, net     13,012       13,119  
Accrued interest income receivable     3,127       2,908  
Goodwill     11,944       12,613  
Bank owned life insurance     37,417       36,669  
Net deferred tax asset     9,548       9,572  
Federal Home Loan Bank stock     4,048       4,677  
Federal Reserve Bank stock     2,125       2,125  
Other assets     5,712       7,478  
TOTAL ASSETS   $ 1,089,263     $ 1,056,036  
LIABILITIES
                 
Non-interest bearing deposits   $ 167,551     $ 154,002  
Interest bearing deposits     702,330       700,520  
Total deposits     869,881       854,522  
Short-term borrowings     38,880       41,555  
Advances from Federal Home Loan Bank     42,000       25,000  
Guaranteed junior subordinated deferrable interest debentures     13,085       13,085  
Total borrowed funds     93,965       79,640  
Other liabilities     11,010       8,567  
TOTAL LIABILITIES     974,856       942,729  
STOCKHOLDERS’ EQUITY                  
Preferred stock, no par value; $1,000 per share liquidation preference; 2,000,000 shares authorized; there were 21,000 shares issued and outstanding on December 31, 2014 and 2013     21,000       21,000  
Common stock, par value $0.01 per share; 30,000,000 shares authorized: 26,412,007 shares issued and 18,794,888 shares outstanding on December 31, 2014; 26,402,007 shares issued and 18,784,188 shares outstanding on December 31, 2013     264       264  
Treasury stock at cost, 7,617,819 shares on December 31, 2014 and 2013     (74,829 )      (74,829 ) 
Capital surplus     145,256       145,190  
Retained earnings     29,618       27,557  
Accumulated other comprehensive loss, net     (6,902 )      (5,875 ) 
TOTAL STOCKHOLDERS’ EQUITY     114,407       113,307  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 1,089,263     $ 1,056,036  

 
 
See accompanying notes to consolidated financial statements.

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AMERISERV FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT
PER SHARE DATA)
INTEREST INCOME
                          
Interest and fees on loans:
                          
Taxable   $ 36,285     $ 35,063     $ 34,752  
Tax exempt     57       57       63  
Interest bearing deposits     5       6       10  
Short-term investments in money market funds     7       8       18  
Investment securities:
                          
Available for sale     3,528       3,701       4,634  
Held to maturity     559       508       440  
Total Interest Income     40,441       39,343       39,917  
INTEREST EXPENSE
                          
Deposits     4,889       5,164       6,502  
Short-term borrowings     55       46       11  
Advances from Federal Home Loan Bank     333       152       81  
Guaranteed junior subordinated deferrable interest debentures     1,120       1,120       1,120  
Total Interest Expense     6,397       6,482       7,714  
Net Interest Income     34,044       32,861       32,203  
Provision (credit) for loan losses     375       (1,100 )      (775 ) 
Net Interest Income after Provision (credit) for Loan Losses     33,669       33,961       32,978  
NON-INTEREST INCOME
                          
Trust and investment advisory fees     7,765       7,812       7,268  
Service charges on deposit accounts     1,957       2,173       2,195  
Net gains on loans held for sale     748       1,089       1,132  
Mortgage related fees     590       773       902  
Net realized gains on investment securities     177       204       12  
Bank owned life insurance     748       998       863  
Other income     2,338       2,695       2,571  
Total Non-Interest Income     14,323       15,744       14,943  
NON-INTEREST EXPENSE
                          
Salaries and employee benefits     24,960       25,115       24,424  
Net occupancy expense     2,964       2,937       2,800  
Equipment expense     1,892       1,851       1,764  
Professional fees     5,409       4,327       3,870  
Supplies, postage, and freight     761       810       830  
Miscellaneous taxes and insurance     1,174       1,467       1,439  
Federal deposit insurance expense     636       611       441  
Goodwill impairment charge     669              
Other expense     4,906       5,105       5,073  
Total Non-Interest Expense     43,371       42,223       40,641  

 
 
See accompanying notes to consolidated financial statements.

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AMERISERV FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS – (continued)

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT
PER SHARE DATA)
PRETAX INCOME     4,621       7,482       7,280  
Provision for income taxes     1,598       2,289       2,241  
NET INCOME     3,023       5,193       5,039  
Preferred stock dividends     210       209       828  
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS   $ 2,813     $ 4,984     $ 4,211  
PER COMMON SHARE DATA:
                          
Basic:
                          
Net income   $ 0.15     $ 0.26     $ 0.21  
Average number of shares outstanding     18,793       18,942       19,685  
Diluted:
                       
Net income   $ 0.15     $ 0.26     $ 0.21  
Average number of shares outstanding     18,908       19,034       19,747  
Cash dividends declared   $ 0.04     $ 0.03     $ 0.00  

 
 
See accompanying notes to consolidated financial statements.

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AMERISERV FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
COMPREHENSIVE INCOME
                          
Net income   $ 3,023     $ 5,193     $ 5,039  
Other comprehensive loss, before tax:
                          
Pension obligation change for defined benefit plan     (2,770 )      3,942       (2,127 ) 
Income tax effect     943       (1,340 )      724  
Unrealized holding gains (losses) on available for sale securities arising during period     1,391       (4,489 )      (466 ) 
Income tax effect     (474 )      1,526       158  
Reclassification adjustment for net realized gains on available for sale securities included in net income     (177 )      (204 )      (12 ) 
Income tax effect     60       69       4  
Other comprehensive loss     (1,027 )      (496 )      (1,719 ) 
Comprehensive income   $ 1,996     $ 4,697     $ 3,320  

 
 
See accompanying notes to consolidated financial statements.

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AMERISERV FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
PREFERRED STOCK
                          
Balance at beginning of period   $ 21,000     $ 21,000     $ 21,000  
Balance at end of period     21,000       21,000       21,000  
COMMON STOCK
                          
Balance at beginning of period     264       264       264  
Balance at end of period     264       264       264  
TREASURY STOCK
                          
Balance at beginning of period     (74,829 )      (73,658 )      (69,241 ) 
Treasury stock, purchased at cost (384,000 and 1,757,800 shares in 2013 and 2012, respectively)           (1,171 )      (4,417 ) 
Balance at end of period     (74,829 )      (74,829 )      (73,658 ) 
CAPITAL SURPLUS
                          
Balance at beginning of period     145,190       145,102       145,061  
New common shares issued for exercise of stock options     24       6       3  
Stock option expense     42       82       38  
Balance at end of period     145,256       145,190       145,102  
RETAINED EARNINGS
                          
Balance at beginning of period     27,557       23,139       18,928  
Net income     3,023       5,193       5,039  
Cash dividend declared on common stock     (752 )      (566 )       
Cash dividend declared on preferred stock     (210 )      (209 )      (828 ) 
Balance at end of period     29,618       27,557       23,139  
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
                          
Balance at beginning of period     (5,875 )      (5,379 )      (3,660 ) 
Other comprehensive loss     (1,027 )      (496 )      (1,719 ) 
Balance at end of period     (6,902 )      (5,875 )      (5,379 ) 
TOTAL STOCKHOLDERS’ EQUITY   $ 114,407     $ 113,307     $ 110,468  

 
 
See accompanying notes to consolidated financial statements.

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AMERISERV FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
OPERATING ACTIVITIES
                          
Net income   $ 3,023     $ 5,193     $ 5,039  
Adjustments to reconcile net income to net cash provided by operating activities:
                          
Provision (credit) for loan losses     375       (1,100 )      (775 ) 
Depreciation and amortization expense     1,836       1,683       1,523  
Net amortization of investment securities     385       755       1,124  
Net realized gains on investment securities – available for sale     (177 )      (204 )      (12 ) 
Net gains on loans held for sale     (748 )      (1,089 )      (1,132 ) 
Amortization of deferred loan fees     (262 )      (304 )      (240 ) 
Origination of mortgage loans held for sale     (51,481 )      (60,826 )      (76,688 ) 
Sales of mortgage loans held for sale     50,580       69,089       74,354  
Decrease (increase) in accrued interest receivable     (219 )      52       256  
Decrease in accrued interest payable     (78 )      (299 )      (440 ) 
Earnings on bank-owned life insurance     (748 )      (811 )      (863 ) 
Deferred income taxes     562       2,150       2,101  
Stock compensation expense     66       88       41  
Goodwill impairment charge     669              
Decrease in prepaid Federal Deposit Insurance           1,444       370  
Other, net     1,179       (967 )      (1,446 ) 
Net cash provided by operating activities     4,962       14,854       3,212  
INVESTING ACTIVITIES
                          
Purchase of investment securities – available for sale     (12,218 )      (50,125 )      (34,199 ) 
Purchase of investment securities – held to maturity     (3,093 )      (8,942 )      (4,987 ) 
Proceeds from maturities of investment securities – available for sale     22,900       43,307       59,800  
Proceeds from maturities of investment securities – held to maturity     1,390       4,425       3,518  
Proceeds from sales of investment securities – available for sale     5,242       11,185       4,221  
Purchase of regulatory stock     (9,817 )      (5,865 )       
Proceeds from redemption of regulatory stock     10,446       5,367       1,712  
Long-term loans originated     (177,351 )      (205,549 )      (232,685 ) 
Principal collected on long-term loans     130,476       146,720       182,245  
Participations purchased     (5,347 )      (12,990 )      (17,492 ) 
Participations sold     10,810       8,500       8,500  
Net increase in other short-term loans     (3,558 )      (679 )      (300 ) 
Purchases of premises and equipment     (1,720 )      (3,004 )      (2,647 ) 
Proceeds from sale of other real estate owned     946       993       160  
Proceeds from life insurance policies           356        
Net cash used in investing activities     (30,894 )      (66,301 )      (32,154 ) 
FINANCING ACTIVITIES
                          
Net increase in deposit balances     15,375       18,744       19,329  
Net (decrease) increase in other short-term borrowings     (2,675 )      25,895       (105 ) 
Principal borrowings on advances from Federal Home Loan Bank     17,000       18,000       21,000  
Principal repayments on advances from Federal Home Loan Bank           (6,000 )      (14,000 ) 
Preferred stock dividend paid     (210 )      (209 )      (828 ) 
Common stock dividend paid     (752 )      (566 )       
Purchase of treasury stock           (1,171 )      (4,417 ) 
Net cash provided by financing activities     28,738       54,693       20,979  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     2,806       3,246       (7,963 ) 
CASH AND CASH EQUIVALENTS AT JANUARY 1     30,066       26,820       34,783  
CASH AND CASH EQUIVALENTS AT DECEMBER 31   $ 32,872     $ 30,066     $ 26,820  

 
 
See accompanying notes to consolidated financial statements.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND NATURE OF OPERATIONS:

AmeriServ Financial, Inc. (the Company) is a bank holding company, headquartered in Johnstown, Pennsylvania. Through its banking subsidiary the Company operates 17 banking locations in five southwestern Pennsylvania counties. These branches provide a full range of consumer, mortgage, and commercial financial products. The AmeriServ Trust and Financial Services Company (Trust Company) offers a complete range of trust and financial services and administers assets valued at approximately $1.8 billion that are not recognized on the Company’s Consolidated Balance Sheet at December 31, 2014.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of AmeriServ Financial, Inc. and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), Trust Company, and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a state-chartered full service bank with 17 locations in Pennsylvania. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

Intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles, or GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from these estimates and the differences may be material to the Consolidated Financial Statements. The Company’s most significant estimates relate to the allowance for loan losses, goodwill, income taxes, investment securities, pension, and the fair value of financial instruments.

INVESTMENT SECURITIES:

Securities are classified at the time of purchase as investment securities held to maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company’s books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management’s intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate appreciation/depreciation excluded from income and credited/charged to accumulated other comprehensive income/loss within stockholders’ equity on a net of tax basis. Any securities classified as trading assets are reported at fair value with unrealized aggregate appreciation/depreciation included in income on a net of tax basis. The Company does not engage in trading activity.

Realized gains or losses on securities sold are computed upon the adjusted cost of the specific securities sold. Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. 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

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

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.

FEDERAL HOME LOAN BANK STOCK:

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time any such situation has persisted (b) Commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) The impact of legislative and regulatory changes on the customer base of FHLB and (d) The liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.

LOANS:

Interest income is recognized using the level yield method related to principal amounts outstanding. The Company discontinues the accrual of interest income when loans become 90 days past due in either principal or interest. In addition, if circumstances warrant, the accrual of interest may be discontinued prior to 90 days. Payments received on non-accrual loans are credited to principal until full recovery of principal has been recognized; or the loan has been returned to accrual status. The only exception to this policy is for residential mortgage loans wherein interest income is recognized on a cash basis as payments are received. A non-accrual commercial loan is placed on accrual status after becoming current and remaining current for twelve consecutive payments. Residential mortgage loans are placed on accrual status upon becoming current.

LOAN FEES:

Loan origination and commitment fees, net of associated direct costs, are deferred and amortized into interest and fees on loans over the loan or commitment period. Fee amortization is determined by the effective interest method.

LOANS HELD FOR SALE:

Certain newly originated fixed-rate residential mortgage loans are classified as held for sale, because it is management’s intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or market value.

TRANSFERS OF FINANCIAL ASSETS:

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

PREMISES AND EQUIPMENT:

Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation is charged to operations over the estimated useful lives of the premises and equipment using the straight-line method with a half-year convention. Useful lives of up to 30 years for buildings and up to 10 years for equipment are utilized. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives of the improvements, whichever is shorter. Maintenance, repairs, and minor alterations are charged to current operations as expenditures are incurred.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFF PROCEDURES:

As a financial institution, which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline to perform an analysis which is updated on a quarterly basis at the Bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes:

 —  Review of all criticized, classified and impaired loans with aggregate balances over $250,000 to determine if any specific reserve allocations are required on an individual loan basis. The specific reserve allocations established for these criticized, classified and impaired loans are based on careful analysis of the loan’s performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. All loans classified as doubtful or worse are specifically reserved. For impaired loans the measurement of impairment may be based upon: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate; 2) the observable market price of the impaired loan; or 3) the fair value of the collateral of a collateral dependent loan.
 —  The application of formula driven reserve allocations for all commercial and commercial real-estate loans by using a three-year migration analysis of net losses incurred within each risk grade for the entire commercial loan portfolio. The difference between estimated and actual losses is reconciled through the nature of the migration analysis.
 —  The application of formula driven reserve allocations to consumer and residential mortgage loans which are based upon historical net charge-off experience for those loan types. The residential mortgage loan and consumer loan allocations are based upon the Company’s three-year historical average of actual loan net charge-offs experienced in each of those categories.
 —  The application of formula driven reserve allocations to all outstanding loans is based upon review of historical losses and qualitative factors, which include but are not limited to, economic trends, delinquencies, levels of non-accrual 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.
 —  Management recognizes that there may be events or economic factors that have occurred affecting specific borrowers or segments of borrowers that may not yet be fully reflected in the information that the Company uses for arriving at reserves for a specific loan or portfolio segment. Therefore, the Company believes that there is estimation risk associated with the use of specific and formula driven allowances.

After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve.

When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses.

The Company’s policy is to individually review, as circumstances warrant, its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. The Company defines classified loans as those loans rated substandard or doubtful. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

collectively for impairment. These separate pools are for small business relationships with aggregate balances of $250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and evaluated for specific impairment if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment.

ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT:

The allowance for unfunded loan commitments and letters of credit is maintained at a level believed by management to be sufficient to absorb estimated losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers and the terms and expiration dates of the unfunded credit facilities. Net adjustments to the allowance for unfunded loan commitments and letters of credit are provided for in the unfunded commitment reserve expense line item within other expense in the Consolidated Statements of Operations and a separate reserve is recorded within the other liabilities section of the Consolidated Balance Sheets.

TRUST FEES:

Trust fees are recorded on the cash basis which approximates the accrual basis for such income.

BANK-OWNED LIFE INSURANCE:

The Company has purchased life insurance policies on certain employees. These policies are recorded on the Consolidated Balance Sheets at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in bank owned life insurance within non-interest income.

INTANGIBLE ASSETS:
Goodwill

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. The Company accounts for goodwill using a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company performs an impairment analysis of goodwill at least annually.

EARNINGS PER COMMON SHARE:

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. Options to purchase 3,625, 103,570, and 49,842 shares of common stock were outstanding during 2014, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive. Exercise prices of anti-dilutive options to purchase common stock outstanding were $4.60 – $5.22, $3.05 – $5.75, and $2.80 – $5.75 during 2014, 2013 and 2012, respectively. Dividends on preferred shares are deducted from net income in the calculation of earnings per common share.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

     
     YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
                          
Net income   $ 3,023     $ 5,193     $ 5,039  
Preferred stock dividends     210       209       828  
Net income available to common shareholders   $ 2,813     $ 4,984     $ 4,211  
Denominator:
                          
Weighted average common shares outstanding (basic)     18,793       18,942       19,685  
Effect of stock options     115       92       62  
Weighted average common shares outstanding (diluted)     18,908       19,034       19,747  
Earnings per common share:
                          
Basic   $ 0.15     $ 0.26     $ 0.21  
Diluted     0.15       0.26       0.21  
STOCK-BASED COMPENSATION:

The Company uses the modified prospective method for accounting of stock-based compensation. The Company recognized $42,000, $82,000 and $38,000 of pretax compensation expense for the years 2014, 2013 and 2012. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. See Note 18 for details on the assumptions used.

ACCUMULATED OTHER COMPREHENSIVE LOSS:

The Company presents the components of other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income. These components are comprised of the change in the defined benefit pension obligation and the unrealized holding gains (losses) on available for sale securities, net of any reclassification adjustments for realized gains and losses.

CONSOLIDATED STATEMENT OF CASH FLOWS:

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest bearing deposits, and short-term investments in money market funds. The Company made $1,063,000 in income tax payments in 2014; $137,000 in 2013; and $142,000 in 2012. The Company had non-cash transfers to other real estate owned (OREO) in the amounts of $660,000 in 2014; $766,000 in 2013; and $1,266,000 in 2012. The Company made total interest payments of $6,475,000 in 2014; $6,781,000 in 2013; and $8,154,000 in 2012.

INCOME TAXES:

Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the corresponding asset or liability from period to period. Deferred tax assets are reduced, if necessary, by the amounts of such benefits that are not expected to be realized based upon available evidence.

INTEREST RATE CONTRACTS:

The Company recognizes all derivatives as either assets or liabilities on the Consolidated Balance Sheets and measures those instruments at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and hedged item related to the hedged risk are recognized in earnings. Changes in fair value of derivatives designated and accounted as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” net of deferred taxes and are subsequently

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

The Company periodically enters into derivative instruments to meet the financing, interest rate and equity risk management needs of its customers. Upon entering into these instruments to meet customer needs, the Company enters into offsetting positions to minimize interest rate and equity risk to the Company. These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings. These instruments and their offsetting positions are recorded in other assets and other liabilities on the Consolidated Balance Sheets.

PENSION:

Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Our pension benefits are described further in Note 12 of the Notes to Consolidated Financial Statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

We group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level I — Valuation is based upon quoted prices for identical instruments traded in active markets.

Level II — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level III — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in generally accepted accounting principles.

Fair value measurements for most of our assets are obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid, and other market information. Subsequently, all of our financial instruments use either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. In certain cases, however, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. When market data is not available, we use valuation techniques requiring

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

more management judgment to estimate the appropriate fair value measurement. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations.

RECENT ACCOUNTING STANDARDS:

In January 2014, the FASB issued ASU 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This ASU is not expected to have a significant impact on the Company’s financial statements.

2.  CASH AND DUE FROM DEPOSITORY INSTITUTIONS

Included in “Cash and due from depository institutions” are required federal reserves of $2,000 and $61,000 at December 31, 2014 and 2013, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of vault cash and a depository amount held with the Federal Reserve Bank.

3.  INVESTMENT SECURITIES

The cost basis and fair values of investment securities are summarized as follows:

Investment securities available for sale:

       
  AT DECEMBER 31, 2014
     COST
BASIS
  GROSS
UNREALIZED
GAINS
  GROSS
UNREALIZED
LOSSES
  FAIR
VALUE
     (IN THOUSANDS)
U.S. Agency   $ 5,931     $ 21     $ (46 )    $ 5,906  
Corporate bonds     15,497       61       (122 )      15,436  
U.S. Agency mortgage-backed securities     102,888       3,197       (317 )      105,768  
Total   $ 124,316     $ 3,279     $ (485 )    $ 127,110  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  INVESTMENT SECURITIES  – (continued)

Investment securities held to maturity:

       
  AT DECEMBER 31, 2014
     COST
BASIS
  GROSS
UNREALIZED
GAINS
  GROSS
UNREALIZED
LOSSES
  FAIR
VALUE
     (IN THOUSANDS)
U.S. Agency mortgage-backed securities   $ 12,481     $ 395     $ (50 )    $ 12,826  
Taxable municipal     3,364       74       (24 )      3,414  
Corporate bonds and other securities     3,995       6       (28 )      3,973  
Total   $ 19,840     $ 475     $ (102 )    $ 20,213  

Investment securities available for sale:

       
  AT DECEMBER 31, 2013
     COST
BASIS
  GROSS
UNREALIZED
GAINS
  GROSS
UNREALIZED
LOSSES
  FAIR
VALUE
     (IN THOUSANDS)
U.S. Agency   $ 6,926     $ 35     $ (126 )    $ 6,835  
Corporate bonds     11,992       21       (252 )      11,761  
U.S. Agency mortgage-backed securities     121,480       3,129       (1,227 )      123,382  
Total   $ 140,398     $ 3,185     $ (1,605 )    $ 141,978  

Investment securities held to maturity:

       
  AT DECEMBER 31, 2013
     COST
BASIS
  GROSS
UNREALIZED
GAINS
  GROSS
UNREALIZED
LOSSES
  FAIR
VALUE
     (IN THOUSANDS)
U.S. Agency mortgage-backed securities   $ 12,671     $ 289     $ (477 )    $ 12,483  
Taxable municipal     1,521             (120 )      1,401  
Corporate bonds and other securities     3,995             (91 )      3,904  
Total   $ 18,187     $ 289     $ (688 )    $ 17,788  

Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investors Service or Standard & Poor’s rating of A. At December 31, 2014, 84.1% of the portfolio was rated AAA as compared to 89.0% at December 31, 2013. 3.8% of the portfolio was rated below A or unrated on December 31, 2014. The Company and its subsidiaries, collectively, did not hold securities of any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10% of shareholders’ equity at December 31, 2014.

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 $104,780,000 at December 31, 2014 and $110,780,000 at December 31, 2013.

The Company realized $182,000 of gross investment security gains and $5,000 of gross investment security losses in 2014 and $289,000 of gross investment security gains and $85,000 of investment security losses in 2013, and $12,000 of gross investment gains and no investment security losses in 2012. On a net basis, the realized gain for 2014 was $117,000 after factoring in tax expense of $60,000 and the realized gain for 2013 was $135,000 after factoring in tax expense of $69,000, and the realized gain for 2012 was $8,000

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  INVESTMENT SECURITIES  – (continued)

after factoring in tax expense of $4,000. Proceeds from sales of investment securities available for sale were $5.2 million for 2014, $11.2 million for 2013, and $4.2 million during 2012.

The following table sets forth the contractual maturity distribution of the investment securities, cost basis and fair market values, and the weighted average yield for each type and range of maturity as of December 31, 2014. Yields are not presented on a tax-equivalent basis, but are based upon the cost basis and are weighted for the scheduled maturity. The Company’s consolidated investment securities portfolio had an effective duration of approximately 2.95 years. The weighted average expected maturity for available for sale securities at December 31, 2014 for U.S. Agency, U.S. Agency Mortgage-Backed and Corporate Bond securities was 2.95, 4.25 and 4.85 years, respectively. The weighted average expected maturity for held to maturity securities at December 31, 2014 for U.S. Agency Mortgage-Backed and Corporate Bonds/Taxable Municipals and other securities were 6.37 and 5.78 years.

Investment securities available for sale:

               
  AT DECEMBER 31, 2014
     U.S.
AGENCY
  U.S. AGENCY
MORTGAGE-
BACKED SECURITIES
  CORPORATE
BONDS
  TOTAL
INVESTMENT
SECURITIES
AVAILABLE
FOR SALE
     (IN THOUSANDS, EXCEPT YIELDS)
COST BASIS
                                                                       
Within 1 year   $ 1,000       2.00 %    $       —%     $       —%     $ 1,000       2.00 % 
After 1 year but within 5 years     4,931       1.38       1,696       4.46       7,999       1.75       14,626       1.96  
After 5 years but within 10 years                 10,340       2.74       7,498       2.05       17,838       2.46  
After 10 years but within 15 years                 56,783       2.66                   56,783       2.66  
Over 15 years                 34,069       2.56                   34,069       2.56  
Total   $ 5,931       1.48     $ 102,888       2.66     $ 15,497       1.90     $ 124,316       2.52  
FAIR VALUE
                                                                       
Within 1 year   $ 1,013              $              $              $ 1,013           
After 1 year but within 5 years     4,893                1,791                7,991                14,675           
After 5 years but within 10 years                    10,671                7,445                18,116           
After 10 years but within15 years                    58,141                               58,141           
Over 15 years                 35,165                         35,165        
Total   $ 5,906           $ 105,768           $ 15,436           $ 127,110  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  INVESTMENT SECURITIES  – (continued)

Investment securities held to maturity:

           
  AT DECEMBER 31, 2014
     U.S. AGENCY
MORTGAGE-
BACKED
SECURITIES
  CORPORATE
BONDS
AND
OTHER
  TOTAL
INVESTMENT
SECURITIES
HELD TO
MATURITY
     (IN THOUSANDS, EXCEPT YIELDS)
COST BASIS
                                                     
Within 1 year   $       —%     $ 2,000       1.35 %    $ 2,000       1.35 % 
After 1 year but within 5 years                 1,000       1.67       1,000       1.67  
After 5 years but within 10 years     2,959       2.40       851       3.63       3,810       2.67  
After 10 years but within15 years                 1,162       3.27       1,162       3.27  
Over 15 years     9,522       3.45       2,346       4.49       11,868       3.66  
Total   $ 12,481       3.20     $ 7,359       2.96     $ 19,840       3.11  
FAIR VALUE
                                                     
Within 1 year   $              $ 1,991              $ 1,991           
After 1 year but within 5 years                    981                981           
After 5 years but within 10 years     2,931                868                3,799           
After 10 years but within15 years                    1,140                1,140           
Over 15 years     9,895             2,407             12,302        
Total   $ 12,826           $ 7,387           $ 20,213        

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

           
  LESS THAN 12 MONTHS   12 MONTHS OR LONGER   TOTAL
Total investment securities:   FAIR
VALUE
  UNREALIZED
LOSSES
  FAIR
VALUE
  UNREALIZED
LOSSES
  FAIR
VALUE
  UNREALIZED
LOSSES
U.S. Agency   $ 996     $ (4 )    $ 2,858     $ (42 )    $ 3,854     $ (46)  
U.S. Agency mortgage-backed securities     2,826       (13 )      20,408       (354 )      23,234       (367 ) 
Taxable municipal     150       (1 )      988       (23 )      1,138       (24 ) 
Corporate bonds and other securities     2,960       (43 )      8,891       (107 )      11,851       (150 ) 
Total   $ 6,932     $ (61)     $ 33,145     $ (526 )    $ 40,077     $ (587)  

The following tables present information concerning investments with unrealized losses as of December 31, 2013 (in thousands):

           
  LESS THAN 12 MONTHS   12 MONTHS OR LONGER   TOTAL
Total investment securities:   FAIR
VALUE
  UNREALIZED
LOSSES
  FAIR
VALUE
  UNREALIZED
LOSSES
  FAIR
VALUE
  UNREALIZED
LOSSES
U.S. Agency   $ 3,812     $ (64 )    $ 938     $ (62 )    $ 4,750     $ (126 ) 
U.S. Agency mortgage-backed securities     52,163       (1,701 )      669       (3 )      52,832       (1,704 ) 
Taxable municipal     891       (120 )                  891       (120 ) 
Corporate bonds and other securities     9,687       (300 )      2,957       (43 )      12,644       (343 ) 
Total   $ 66,553     $ (2,185 )    $ 4,564     $ (108 )    $ 71,117     $ (2,293 ) 

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  INVESTMENT SECURITIES  – (continued)

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 38 positions that are considered temporarily impaired at December 31, 2014. 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 or mature.

4.  LOANS

The loan portfolio of the Company consisted of the following:

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
Commercial   $ 139,126     $ 120,102  
Commercial loans secured by real estate     410,329       411,691  
Real estate-mortgage     258,616       235,689  
Consumer     19,009       15,864  
Loans, net of unearned income   $ 827,080     $ 783,346  

Loan balances at December 31, 2014 and 2013 are net of unearned income of $554,000 and $581,000, respectively. Real estate construction loans comprised 3.5% and 3.0% of total loans net of unearned income at December 31, 2014 and 2013, respectively. The Company has no exposure to subprime mortgage loans in either the loan or investment portfolios. The Company has no direct loan exposure to foreign countries. Additionally, the Company has no significant industry lending concentrations. As of December 31, 2014 and 2013, loans to customers engaged in similar activities and having similar economic characteristics, as defined by standard industrial classifications, did not exceed 10% of total loans. Additionally, the majority of the Company’s lending occurs within a 250 mile radius of the Johnstown market.

In the ordinary course of business, the subsidiaries have transactions, including loans, with their officers, directors, and their affiliated companies. In management’s opinion, these transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than the normal credit risk. These loans totaled $847,000 and $853,000 at December 31, 2014 and 2013, respectively.

5.  ALLOWANCE FOR LOAN LOSSES

The following table summarizes the rollforward of the allowance for loan losses by portfolio segment (in thousands).

         
  BALANCE AT
DECEMBER 31,
2013
  CHARGE-
OFFS
  RECOVERIES   PROVISION
(CREDIT)
  BALANCE AT
DECEMBER 31,
2014
Commercial   $ 2,844     $ (172 )    $ 141     $ 449     $ 3,262  
Commercial loans secured by real estate     4,885       (708 )      231       (506     3,902  
Real estate-mortgage     1,260       (322 )      71       301       1,310  
Consumer     136       (121 )      24       151       190  
Allocation for general risk     979                   (20 )      959  
Total   $ 10,104     $ (1,323 )    $ 467     $ 375     $ 9,623  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

         
  BALANCE AT
DECEMBER 31,
2012
  CHARGE-
OFFS
  RECOVERIES   PROVISION
(CREDIT)
  BALANCE AT
DECEMBER 31,
2013
Commercial   $ 2,596     $ (50 )    $ 80     $ 218     $ 2,844  
Commercial loans secured by real estate     7,796       (1,777 )      481       (1,615 )      4,885  
Real estate-mortgage     1,269       (139 )      122       8       1,260  
Consumer     150       (154 )      70       70       136  
Allocation for general risk     760                   219       979  
Total   $ 12,571     $ (2,120 )    $ 753     $ (1,100 )    $ 10,104  

         
  BALANCE AT
DECEMBER 31,
2011
  CHARGE-
OFFS
  RECOVERIES   PROVISION
(CREDIT)
  BALANCE AT
DECEMBER 31,
2012
Commercial   $ 2,365     $ (345 )    $ 138     $ 438     $ 2,596  
Commercial loans secured by real estate     9,400       (796 )      245       (1,053 )      7,796  
Real estate-mortgage     1,270       (420 )      54       365       1,269  
Consumer     174       (200 )      47       129       150  
Allocation for general risk     1,414                   (654 )      760  
Total   $ 14,623     $ (1,761 )    $ 484     $ (775 )    $ 12,571  

As a result of successful ongoing problem credit resolution efforts, the Company achieved further asset quality improvements in 2014. These improvements are evidenced by reduced levels of non-accrual loans, non-performing assets, classified assets and low loan delinquency levels that continue to be well below 1% of total loans. The positive provision for loan losses in commercial and real-estate mortgage loans was needed to support the loan growth experienced in these categories during 2014.

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

         
  AT DECEMBER 31, 2014
     (IN THOUSANDS)
Loans:
  COMMERCIAL   COMMERCIAL
LOANS
SECURED BY
REAL ESTATE
  REAL
ESTATE-
MORTGAGE
  CONSUMER   TOTAL
Individually evaluated for impairment   $     $ 989     $     $     $ 989  
Collectively evaluated for impairment     139,126       409,340       258,616       19,009       826,091  
Total loans   $ 139,126     $ 410,329     $ 258,616     $ 19,009     $ 827,080  

           
  AT DECEMBER 31, 2014
     (IN THOUSANDS)
Allowance for loan losses:   COMMERCIAL   COMMERCIAL
LOANS SECURED BY
REAL ESTATE
  REAL
ESTATE-
MORTGAGE
  CONSUMER   ALLOCATION
FOR GENERAL
RISK
  TOTAL
Specific reserve
allocation
  $     $ 520     $     $     $     $ 520  
General reserve
allocation
    3,262       3,382       1,310       190       959       9,103  
Total allowance for loan losses   $ 3,262     $ 3,902     $ 1,310     $ 190     $ 959     $ 9,623  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

         
  AT DECEMBER 31, 2013
     (IN THOUSANDS)
Loans:   COMMERCIAL   COMMERCIAL LOANS
SECURED BY
REAL ESTATE
  REAL
ESTATE- MORTGAGE
  CONSUMER   TOTAL
Individually evaluated for impairment   $     $ 3,005     $     $ 61     $ 3,066  
Collectively evaluated for impairment     120,102       408,686       235,689       15,803       780,280  
Total loans   $ 120,102     $ 411,691     $ 235,689     $ 15,864     $ 783,346  

           
  AT DECEMBER 31, 2013
     (IN THOUSANDS)
Allowance for loan losses:   COMMERCIAL   COMMERCIAL
LOANS
SECURED BY
REAL ESTATE
  REAL
ESTATE- MORTGAGE
  CONSUMER   ALLOCATION FOR GENERAL RISK   TOTAL
Specific reserve
allocation
  $     $ 812     $     $ 1     $     $ 813  
General reserve
allocation
    2,844       4,073       1,260       135       979       9,291  
Total allowance for loan losses   $ 2,844     $ 4,885     $ 1,260     $ 136     $ 979     $ 10,104  

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

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

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs for collateral dependent loans. The method is selected on a loan-by-loan basis,

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Assigned Risk Department to support the value of the property.

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

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

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

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

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

         
  DECEMBER 31, 2014
     IMPAIRED LOANS WITH
SPECIFIC ALLOWANCE
  IMPAIRED
LOANS WITH
NO SPECIFIC
ALLOWANCE
  TOTAL IMPAIRED LOANS
     RECORDED
INVESTMENT
  RELATED
ALLOWANCE
  RECORDED
INVESTMENT
  RECORDED
INVESTMENT
  UNPAID
PRINCIPAL
BALANCE
     (IN THOUSANDS)
Commercial loans secured by real estate   $ 989     $ 520     $     $ 989     $ 1,069  
Total impaired loans   $ 989     $ 520     $     $ 989     $ 1,069  

         
  DECEMBER 31, 2013
     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
     (IN THOUSANDS)
Commercial loans secured by real estate   $ 3,005     $ 812     $     $ 3,005     $ 3,118  
Consumer     61       1             61       61  
Total impaired loans   $ 3,066     $ 813     $     $ 3,066     $ 3,179  

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

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
Average impaired balance:
                          
Commercial   $     $ 13     $ 13  
Commercial loans secured by real estate     1,756       2,459       3,754  
Consumer           37       3  
Average investment in impaired loans   $ 1,756     $ 2,509     $ 3,770  
Interest income recognized:
                          
Commercial   $     $     $  
Commercial loans secured by real estate     12       11        
Consumer           3        
Interest income recognized on a cash basis on impaired loans   $ 12     $ 14     $  

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

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board’s Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2014 required review of a minimum range of 50% to 55% of the commercial loan portfolio.

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

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system.

         
  DECEMBER 31, 2014
     PASS   SPECIAL
MENTION
  SUBSTANDARD   DOUBTFUL   TOTAL
     (IN THOUSANDS)
Commercial   $ 132,665     $ 161     $ 6,164     $ 136     $ 139,126  
Commercial loans secured by real estate     406,195       620       3,238       276       410,329  
Total   $ 538,860     $ 781     $ 9,402     $ 412     $ 549,455  

         
  DECEMBER 31, 2013
     PASS   SPECIAL
MENTION
  SUBSTANDARD   DOUBTFUL   TOTAL
     (IN THOUSANDS)
Commercial   $ 108,623     $ 8,880     $ 2,599     $     $ 120,102  
Commercial loans secured by real estate     396,788       6,961       7,482       460       411,691  
Total   $ 505,411     $ 15,841     $ 10,081     $ 460     $ 531,793  

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).

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

   
  DECEMBER 31, 2014
     PERFORMING   NON-
PERFORMING
     (IN THOUSANDS)
Real estate-mortgage   $ 257,199     $ 1,417  
Consumer     19,009        
Total   $ 276,208     $ 1,417  

   
  December 31, 2013
     PERFORMING   NON-
PERFORMING
     (IN THOUSANDS)
Real estate-mortgage   $ 234,450     $ 1,239  
Consumer     15,803       61  
Total   $ 250,253     $ 1,300  

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.

             
  DECEMBER 31, 2014
     CURRENT   30 – 59
DAYS PAST
DUE
  60 – 89
DAYS PAST
DUE
  90 DAYS
PAST DUE
  TOTAL
PAST DUE
  TOTAL
LOANS
  90 DAYS
PAST DUE
AND STILL
ACCRUING
     (IN THOUSANDS)
Commercial   $ 139,126     $     $     $     $     $ 139,126     $  
Commercial loans secured by real estate     410,049       280                   280       410,329        
Real estate-mortgage     255,021       2,196       332       1,067       3,595       258,616        
Consumer     18,927       74       8             82       19,009        
Total   $ 823,123     $ 2,550     $ 340     $ 1,067     $ 3,957     $ 827,080     $  

             
  DECEMBER 31, 2013
     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
     (IN THOUSANDS)
Commercial   $ 120,102     $     $     $     $     $ 120,102     $  
Commercial loans secured by real estate     410,619       457             615       1,072       411,691        
Real estate-mortgage     231,740       2,232       670       1,047       3,949       235,689        
Consumer     15,804       33       27             60       15,864        
Total   $ 778,265     $ 2,722     $ 697     $ 1,662     $ 5,081     $ 783,346     $  

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.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  ALLOWANCE FOR LOAN LOSSES  – (continued)

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 and residential mortgage 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 and residential mortgage portfolios are based on a three year historical average of actual loss experience.

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

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

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

6.  NON-PERFORMING ASSETS INCLUDING TROUBLED DEBT
RESTRUCTURINGS

Non-performing assets are comprised of (i) loans which are on a non-accrual basis, (ii) loans which are contractually past due 90 days or more as to interest or principal payments, (iii) performing loans classified as TDR and (iv) OREO (real estate acquired through foreclosure, in-substance foreclosures and repossessed assets).

The following tables present information concerning non-performing assets including TDR:

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
                 
Commercial loans secured by real estate   $ 778     $ 1,632  
Real estate-mortgage     1,417       1,239  
Total     2,195       2,871  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  NON-PERFORMING ASSETS INCLUDING TROUBLED DEBT
RESTRUCTURINGS  – (continued)

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Other real estate owned:
                 
Commercial loans secured by real estate     384       344  
Real estate-mortgage     128       673  
Total     512       1,017  
Total restructured loans not in non-accrual (TDR)     210       221  
Total non-performing assets including TDR   $ 2,917     $ 4,109  
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned     0.35 %      0.52 % 

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

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

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

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

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

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

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

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

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  NON-PERFORMING ASSETS INCLUDING TROUBLED DEBT
RESTRUCTURINGS  – (continued)

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.

Any loan modification where the borrower’s aggregate exposure is at least $250,000 and where the loan currently maintains a criticized or classified risk rating, i.e. Special Mention, Substandard or Doubtful, or where the loan will be assigned a criticized or classified rating after the modification is evaluated to determine the need for TDR classification. The specific ALL reserve for loans modified as TDR’s was $520,000 and $344,000 as of December 31, 2014 and 2013, respectively.

The following table details the TDRs at December 31, 2014 (dollars in thousands).

     
Loans in non-accrual status   # of Loans   Current
Balance
  Concession Granted
Commercial loan secured by real estate     2     $ 210       Extension of maturity date  

     
Loans in accrual status   # of Loans   Current
Balance
  Concession Granted
Commercial loan secured by real estate     2     $ 742       Extension of maturity date  

The following table details the TDRs at December 31, 2013 (dollars in thousands).

     
Loans in non-accrual status   # of Loans   Current
Balance
  Concession Granted
Commercial loan secured by real estate     2     $ 1,250       Extension of maturity date  

     
Loans in accrual status   # of Loans   Current
Balance
  Concession Granted
Commercial loan secured by real estate     2     $ 161       Extension of maturity date  
Consumer     2       61       Extension of maturity date  

The following table details the TDRs at December 31, 2012 (dollars in thousands).

     
Loans in non-accrual status   # of Loans   Current
Balance
  Concession Granted
Commercial loan secured by real estate     4     $ 3,772       Extension of maturity date  

     
Loans in accrual status   # of Loans   Current
Balance
  Concession Granted
Commercial loan secured by real estate     2     $ 169       Extension of maturity date  
Consumer     1       13       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.

Once a loan is classified as a TDR, this classification will remain until documented improvement in the financial position of the borrower supports confidence that all principal and interest will be paid according to terms. Additionally, the customer must have re-established a track record of timely payments according to the restructured contract terms for a minimum of six consecutive months prior to consideration for removing the loan from non-accrual TDR status. However, a loan will continue to be on non-accrual status until, consistent with our policy, the borrower has made a minimum of six consecutive payments in accordance with the terms of the loan.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  NON-PERFORMING ASSETS INCLUDING TROUBLED DEBT
RESTRUCTURINGS  – (continued)

The following table presents the recorded investment in loans that were modified as TDR’s in the previous 12 months and defaulted during these reporting periods (in thousands).

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
Recorded investment of defaults
                          
Commercial loan secured by real estate   $     $ 1,480     $ 595  
Total   $     $ 1,480     $ 595  

All TDRs are individually evaluated for impairment and a related allowance is recorded, as needed. All TDRs which defaulted in the above table had a related allowance adequate to reserve for anticipated losses.

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. OREO is recorded at the lower of 1) fair value minus estimated costs to sell, or 2) carrying cost.

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

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
Interest income due in accordance with original terms   $ 136     $ 178     $ 231  
Interest income recorded                  
Net reduction in interest income   $ 136     $ 178     $ 231  

7.  PREMISES AND EQUIPMENT

An analysis of premises and equipment follows:

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
Land   $ 1,198     $ 1,208  
Premises     24,175       25,752  
Furniture and equipment     8,337       8,912  
Leasehold improvements     689       803  
Total at cost     34,399       36,675  
Less: Accumulated depreciation and amortization     21,387       23,556  
Net book value   $ 13,012     $ 13,119  

The Company recorded depreciation expense of $1.8 million and $1.7 million for the years 2014 and 2013, respectively.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.  DEPOSITS

The following table sets forth the balance of the Company’s deposits:

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
Demand:
                 
Non-interest bearing   $ 167,551     $ 154,002  
Interest bearing     89,676       84,926  
Savings     90,020       87,655  
Money market     221,378       219,801  
Certificates of deposit in denominations of $100,000 or more     50,529       47,287  
Other time     250,727       260,851  
Total deposits   $ 869,881     $ 854,522  

Interest expense on deposits consisted of the following:

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
Interest bearing demand   $ 191     $ 138     $ 116  
Savings     144       139       181  
Money market     761       736       895  
Certificates of deposit in denominations of $100,000
or more
    268       289       435  
Other time     3,525       3,862       4,875  
Total interest expense   $ 4,889     $ 5,164     $ 6,502  

The following table sets forth the balance of other time deposits and certificates of deposit of $100,000 or more as of December 31, 2014 maturing in the periods presented:

   
YEAR:   OTHER
TIME
DEPOSITS
  CERTIFICATES
OF DEPOSIT
OF $100,000
OR MORE
     (IN THOUSANDS)
2015   $ 130,090     $ 41,582  
2016     30,472       8,230  
2017     14,515       417  
2018     26,424       200  
2019     12,193        
2020 and after     37,033       100  
Total   $ 250,727     $ 50,529  

The maturities on certificates of deposit greater than $100,000 or more as of December 31, 2014, are as follows:

 
MATURING IN:   (IN THOUSANDS)
Three months or less   $ 4,483  
Over three through six months     23,171  
Over six through twelve months     13,928  
Over twelve months     8,947  
Total   $ 50,529  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.  DEPOSITS  – (continued)

The aggregate amount of time deposit accounts (including certificates of deposit) that meet or exceed the FDIC insurance limit at December 31, 2014 and 2013 are $65.2 million and $61.0 million, respectively.

9.  SHORT-TERM BORROWINGS

Short-term borrowings, which consist of federal funds purchased and other short-term borrowings are summarized as follows:

   
  AT DECEMBER 31, 2014
     FEDERAL
FUNDS
PURCHASED
  SHORT-TERM
BORROWINGS
     (IN THOUSANDS, EXCEPT RATES)
Balance   $     $ 38,880  
Maximum indebtedness at any month end           47,762  
Average balance during year           18,783  
Average rate paid for the year           0.29 % 
Interest rate on year-end balance           0.27  

   
  AT DECEMBER 31, 2013
     FEDERAL
FUNDS
PURCHASED
  SHORT-TERM
BORROWINGS
     (IN THOUSANDS, EXCEPT RATES)
Balance   $     $ 41,555  
Maximum indebtedness at any month end           41,555  
Average balance during year     959       16,482  
Average rate paid for the year     0.34 %      0.26 % 
Interest rate on year-end balance           0.25  

   
  AT DECEMBER 31, 2012
     FEDERAL
FUNDS
PURCHASED
  OTHER
SHORT-TERM
BORROWINGS
     (IN THOUSANDS, EXCEPT RATES)
Balance   $     $ 15,660  
Maximum indebtedness at any month end           19,755  
Average balance during year     117       5,225  
Average rate paid for the year     0.34 %      0.20 % 
Interest rate on year-end balance           0.25  

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

These borrowing transactions can range from overnight to one year in maturity. The average maturity was one day at the end of 2014, 2013 and 2012.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  ADVANCES FROM FEDERAL HOME LOAN BANK AND GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

Advances from the FHLB consist of the following:

   
  AT DECEMBER 31, 2014
MATURING   WEIGHTED
AVERAGE
YIELD
  BALANCE
     (IN THOUSANDS, EXCEPT RATES)
2015     0.52       4,000  
2016     0.81       12,000  
2017     1.06       12,000  
2018     1.51       10,000  
2019     1.88       4,000  
Total advances from FHLB     1.12     $ 42,000  

   
  AT DECEMBER 31, 2013
MATURING   WEIGHTED
AVERAGE
YIELD
  BALANCE
     (IN THOUSANDS, EXCEPT RATES)
2015     0.52       4,000  
2016     0.81       12,000  
2017     1.07       7,000  
2018     1.47       2,000  
Total advances from FHLB     0.89     $ 25,000  

The Company’s subsidiary Bank is a member of the FHLB which provides this subsidiary with the opportunity to obtain short to longer-term advances based upon the Company’s investment in assets secured by one- to four-family residential real estate and certain types of CRE. The rate on open repo plus advances, which are typically overnight borrowings, can change daily, while the rate on the advances is 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. At December 31, 2014, the Company had immediately available $347 million of overnight borrowing capability at the FHLB and $39 million of unsecured federal funds lines with correspondent banks.

Guaranteed Junior Subordinated Deferrable Interest Debentures:

On April 28, 1998, the Company completed a $34.5 million public offering of 8.45% Trust Preferred Securities, which represent undivided beneficial interests in the assets of a Delaware business trust, AmeriServ Financial Capital Trust I. The Trust Preferred Securities will mature on June 30, 2028, and are callable at par at the option of the Company after June 30, 2003. Proceeds of the issue were invested by AmeriServ Financial Capital Trust I in Junior Subordinated Debentures issued by the Company. Unamortized deferred issuance costs associated with the Trust Preferred Securities amounted to $209,000 as of December 31, 2014 and are included in other assets on the Consolidated Balance Sheets, and are being amortized on a straight-line basis over the term of the issue. The Trust Preferred securities are listed on NASDAQ under the symbol ASRVP. The Company used $22.5 million of proceeds from a private placement of common stock to redeem Trust Preferred Securities in 2005 and 2004. The balance as of December 31, 2014 and 2013 was $13.1 million.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS

The following disclosures establish a hierarchal 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.

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 U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value as of December 31, 2014 and 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Assets and Liability Measured on a Recurring Basis

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

       
  FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2014 USING
     TOTAL   (LEVEL 1)   (LEVEL 2)   (LEVEL 3)
Assets:
                                   
U.S. Agency securities   $ 5,906     $     $ 5,906     $  
U.S. Agency mortgage-backed securities     105,768             105,768        
Corporate bonds     15,436             15,436        

       
  FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2013 USING
     TOTAL   (LEVEL 1)   (LEVEL 2)   (LEVEL 3)
Assets:
                                   
U.S. Agency securities   $ 6,835     $     $ 6,835     $  
U.S. Agency mortgage-backed securities     123,382             123,382        
Corporate bonds     11,761             11,761        

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS  – (continued)

Assets Measured on a Non-recurring Basis

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

       
  FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2014 USING
     TOTAL   (LEVEL 1)   (LEVEL 2)   (LEVEL 3)
Assets:
                                   
Impaired loans   $ 469     $     $     $ 469  
Other real estate owned     512                   512  

       
  FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2013 USING
     TOTAL   (LEVEL 1)   (LEVEL 2)   (LEVEL 3)
Assets:
                                   
Impaired loans   $ 2,253     $     $     $ 2,253  
Other real estate owned     1,017                   1,017  

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. 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 December 31, 2014, impaired loans with a carrying value of $989,000 were reduced by specific valuation allowance totaling $520,000 resulting in a net fair value of $469,000. At December 31, 2013, impaired loans with a carrying value of $3.1 million were reduced by specific valuation allowance totaling $813,000 resulting in a net fair value of $2.3 million.

OREO is measured at fair value based on appraisals, less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

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

       
  Quantitative Information About Level 3 Fair Value Measurements
December 31, 2013   Fair Value   Valuation Techniques   Unobservable Input   Range (Wgtd Ave)
Impaired loans   $ 2,253       Appraisal of collateral(1)
      Appraisal adjustments(2)
      0% to 37%(30%)
 
                         Liquidation expenses(2)
      1% to 15%(10%)
 
Other real estate owned     1,017       Appraisal of collateral(1),(3)
      Appraisal adjustments(2)
      31% to 48%(38%)
 
                         Liquidation expenses(2)
      1% to 20%(10%)  

(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 and estimated liquidation expenses.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  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 uses 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 and cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded carrying values. The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded carrying values at December 31, 2014 and 2013, were as follows:

         
  AT DECEMBER 31, 2014
     Carrying
Value
  Fair
Value
  (Level 1)   (Level 2)   (Level 3)
     (IN THOUSANDS)
FINANCIAL ASSETS:
                                            
Cash and cash equivalents   $ 32,872     $ 32,872     $ 32,872     $     $  
Investment securities – AFS     127,110       127,110             127,110        
Investment securities – HTM     19,840       20,213             17,241       2,972  
Regulatory stock     6,173       6,173       6,173              
Loans held for sale     5,051       5,127       5,127              
Loans, net of allowance for loan loss and unearned income     817,457       819,935                   819,935  
Accrued interest income receivable     3,127       3,127       3,127              
Bank owned life insurance     37,417       37,417       37,417              
FINANCIAL LIABILITIES:
                                            
Deposits with no stated maturities   $ 568,625     $ 568,625     $ 568,625     $     $  
Deposits with stated maturities     301,256       304,744                   304,744  
Short-term borrowings     38,880       38,880       38,880              
All other borrowings     55,085       59,256                   59,256  
Accrued interest payable     1,706       1,706       1,706              

         
  At December 31, 2013
     Carrying
Value
  Fair
Value
  (Level 1)   (Level 2)   (Level 3)
     (IN THOUSANDS)
FINANCIAL ASSETS:
                                            
Cash and cash equivalents   $ 30,066     $ 30,066     $ 30,066     $     $  
Investment securities – AFS     141,978       141,978             141,978        
Investment securities – HTM     18,187       17,788             14,822       2,966  
Regulatory stock     6,802       6,802       6,802              
Loans held for sale     3,402       3,453       3,453              
Loans, net of allowance for loan loss and unearned income     773,242       771,460                   771,460  
Accrued interest income receivable     2,908       2,908       2,908              
Bank owned life insurance     36,669       36,669       36,669              

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS  – (continued)

         
  At December 31, 2013
     Carrying
Value
  Fair
Value
  (Level 1)   (Level 2)   (Level 3)
     (IN THOUSANDS)
FINANCIAL LIABILITIES:
                                            
Deposits with no stated maturities   $ 546,384     $ 546,384     $ 546,384     $     $  
Deposits with stated maturities     308,138       313,272                   313,272  
Short-term borrowings     41,555       41,555       41,555              
All other borrowings     38,085       40,598                   40,598  
Accrued interest payable     1,784       1,784       1,784              

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.

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, are not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 16.

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.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  INCOME TAXES

The expense for income taxes is summarized below:

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
Current   $ 1,036     $ 139     $ 140  
Deferred     562       2,150       2,101  
Income tax expense   $ 1,598     $ 2,289     $ 2,241  

The reconciliation between the federal statutory tax rate and the Company’s effective consolidated income tax rate is as follows:

           
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     AMOUNT   RATE   AMOUNT   RATE   AMOUNT   RATE
     (IN THOUSANDS, EXCEPT PERCENTAGES)
Income tax expense based on federal statutory rate   $ 1,571       34.0 %    $ 2,544       34.0 %    $ 2,475       34.0 % 
Tax exempt income     (274 )      (5.9 )      (359 )      (4.8 )      (315 )      (4.3 ) 
Other     301       6.5       104       1.4       81       1.1  
Total expense for income taxes   $ 1,598       34.6 %    $ 2,289       30.6 %    $ 2,241       30.8 % 

The following table highlights the major components comprising the deferred tax assets and liabilities for each of the periods presented:

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
DEFERRED TAX ASSETS:
                 
Allowance for loan losses   $ 3,272     $ 3,437  
Unfunded commitment reserve     300       264  
Premises and equipment     1,433       1,832  
Accrued pension obligation     2,358       1,462  
Net operating loss carryforwards     242       1,307  
Alternative minimum tax credits     2,820       1,749  
Other     349       393  
Total tax assets     10,774       10,444  
DEFERRED TAX LIABILITIES:
                 
Investment accretion     (25 )      (18 ) 
Unrealized investment security gains     (950 )      (545 ) 
Other     (251 )      (309 ) 
Total tax liabilities     (1,226 )      (872 ) 
Net deferred tax asset   $ 9,548     $ 9,572  

At December 31, 2014 and 2013, the Company had no valuation allowance established against its deferred tax assets as we believe the Company will generate sufficient future taxable income to fully utilize all net operating loss carryforwards and alternative minimum tax (AMT) credits.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  INCOME TAXES  – (continued)

The change in net deferred tax assets and liabilities consist of the following:

   
  YEAR ENDED DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
Unrealized gains recognized in comprehensive income   $ (404 )    $ 1,595  
Pension obligation of the defined benefit plan not yet recognized in income     942       (1,340 ) 
Deferred provision for income taxes     (562 )      (2,150 ) 
Net decrease   $ (24 )    $ (1,895 ) 

The Company has AMT credit carryforwards of approximately $2.8 million at December 31, 2014. These credits have an indefinite carryforward period. The Company also has a $713,000 net operating loss carryforward that will begin to expire in the year 2025.

The Company utilizes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company has no tax liability for uncertain tax positions. The Company’s federal and state income tax returns for taxable years through 2010 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

14.  EMPLOYEE BENEFIT PLANS

PENSION PLANS:

The Company has a noncontributory defined benefit pension plan covering all 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. Effective January 1, 2013, the Company implemented a soft freeze of its defined benefit pension plan for non-union employees. A soft freeze means that all existing employees as of December 31, 2012 will remain in the defined benefit pension plan but any new non-union employees hired after January 1, 2013 will no longer be part of the defined benefit plan but instead will be offered retirement benefits under an enhanced 401K program. The Company implemented a similar soft freeze of its defined benefit pension plan for union employees effective January 1, 2014. The Company executed these changes to help reduce its pension costs in future years. Plan assets are primarily debt securities (including U.S. Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of the Company’s common stock valued at $651,000 and is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The following actuarial tables are based upon data provided by an independent third party as of December 31, 2014.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  EMPLOYEE BENEFIT PLANS  – (continued)

PENSION BENEFITS:

   
  YEAR ENDED DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
                 
Benefit obligation at beginning of year   $ 30,249     $ 29,844  
Service cost     1,601       1,703  
Interest cost     1,368       1,189  
Actuarial (gain) loss     3,406       (757 ) 
Curtailments     328        
Special/contractual termination benefits     376        
Benefits paid     (3,627 )      (1,730 ) 
Benefit obligation at end of year     33,701       30,249  
CHANGE IN PLAN ASSETS:
                 
Fair value of plan assets at beginning of year     26,288       21,368  
Actual return on plan assets     2,056       3,850  
Employer contributions     2,650       2,800  
Benefits paid     (3,627 )      (1,730 ) 
Fair value of plan assets at end of year     27,367       26,288  
Funded status of the plan – under funded   $ (6,334 )    $ (3,961 ) 

   
  YEAR ENDED DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
AMOUNTS NOT YET RECOGNIZED AS A COMPONENT OF NET PERIODIC PENSION COST:
                 
Amounts recognized in accumulated other comprehensive loss consists of:
                 
Prior service cost   $     $ (19 ) 
Net actuarial loss     12,596       10,107  
Total   $ 12,596     $ 10,088  

   
  YEAR ENDED DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
ACCUMULATED BENEFIT OBLIGATION:
                 
Accumulated benefit obligation   $ 30,914     $ 27,566  

The weighted-average assumptions used to determine benefit obligations at December 31, 2014 and 2013 were as follows:

   
  YEAR ENDED DECEMBER 31,
     2014   2013
WEIGHTED AVERAGE ASSUMPTIONS:
                 
Discount rate     4.00 %      4.50 % 
Salary scale     2.50       2.50  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  EMPLOYEE BENEFIT PLANS  – (continued)

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST:
                          
Service cost   $ 1,601     $ 1,703     $ 1,593  
Interest cost     1,368       1,189       1,234  
Expected return on plan assets     (1,991 )      (1,775 )      (1,656 ) 
Amortization of prior year service cost     (19 )      (19 )      (19 ) 
Amortization of transition asset           (8 )      (17 ) 
Special termination benefit liability     376              
Recognized net actuarial loss     1,181       1,375       1,094  
Net periodic pension cost   $ 2,516     $ 2,465     $ 2,229  

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
OTHER CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OTHER COMPREHENSIVE LOSS
                          
Net (gain) loss   $ 3,669     $ (2,832 )    $ 2,376  
Recognized loss     (1,181 )      (1,375 )      (1,094 ) 
Recognized prior service cost     19       19       19  
Recognized net initial asset           8       17  
Total recognized in other comprehensive loss before tax effect   $ 2,507     $ (4,180 )    $ 1,318  
Total recognized in net benefit cost and other comprehensive loss before tax effect   $ 5,023     $ (1,715 )    $ 3,547  

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year is $1,261,000.

The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2014, 2013 and 2012 were as follows:

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
WEIGHTED AVERAGE ASSUMPTIONS:
                          
Discount rate     4.50 %      4.00 %      4.75 % 
Expected return on plan assets     8.00       8.00       8.00  
Rate of compensation increase     2.50       2.50       2.50  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  EMPLOYEE BENEFIT PLANS  – (continued)

The Company has assumed an 8% long-term expected return on plan assets. This assumption was based upon the plan’s historical investment performance over a longer-term period of 15 years combined with the plan’s investment objective of balanced growth and income. Additionally, this assumption also incorporates a targeted range for equity securities of approximately 60% of plan assets.

PLAN ASSETS:

The plan’s measurement date is December 31, 2014. This plan’s asset allocations at December 31, 2014 and 2013, by asset category are as follows:

   
  2014   2013
ASSET CATEGORY:
                 
Cash and cash equivalents     2 %      % 
Domestic equities     10       10  
Mutual funds/ETFs     80       79  
International equities     3       6  
Corporate bonds     5       5  
Total     100 %      100 % 

The major categories of assets in the Company’s Pension Plan as of year end are presented in the following table. Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value.

   
  YEAR ENDED DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
Level 1:
                 
Cash and cash equivalents   $ 639     $  
Domestic equities     2,753       2,741  
International equities     851       1,478  
Mutual funds/ETFs     21,782       20,744  
Level 2:
                 
Corporate bonds     1,342       1,325  
Total fair value of plan assets   $ 27,367     $ 26,288  

Cash and cash equivalents may include uninvested cash balances along with money market mutual funds, treasury bills, or other assets normally categorized as cash equivalents. Domestic equities may include common or preferred stocks, covered options, rights or warrants, or American Depository Receipts which are traded on any U.S. equity market. Mutual funds/ETFs may include any equity, fixed income, balanced, international, or global mutual fund or exchange traded fund including any propriety fund managed by the Trust Company. Agencies may include any U.S. government agency security or asset-backed security. Collective investment funds may include equity, fixed income, or balanced collective investment funds managed by the Trust Company. Corporate bonds may include any corporate bond or note.

The investment strategy objective for the pension plan is a balance of growth and income. This objective seeks to develop a portfolio for acceptable levels of current income together with the opportunity for capital appreciation. The balanced growth and income objective reflects a relatively equal balance between equity and fixed income investments such as debt securities. The allocation between equity and fixed income assets may vary by a moderate degree but the plan typically targets a range of equity investments between 50% and 60% of the plan assets. This means that fixed income and cash investments typically approximate 40% to 50% of the plan assets. The plan is also able to invest in ASRV common stock up to a maximum level of 10% of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  EMPLOYEE BENEFIT PLANS  – (continued)

market value of the plan assets (at December 31, 2014, 2.4% of the plan assets were invested in ASRV common stock). This asset mix is intended to ensure that there is a steady stream of cash from maturing investments to fund benefit payments.

CASH FLOWS:

The Company presently expects that the contribution to be made to the Plan in 2015 will be approximately $2.5 million.

ESTIMATED FUTURE BENEFIT PAYMENTS:

The following benefit payments, which reflect future service, as appropriate, are expected to be paid.

 
YEAR:   ESTIMATED FUTURE BENEFIT PAYMENTS
     (IN THOUSANDS)
2015   $ 1,939  
2016     2,472  
2017     2,752  
2018     2,434  
2019     2,573  
Years 2020 – 2024     16,419  
401(k) PLAN:

The Company maintains a qualified 401(k) plan that allows for participation by Company employees. Under the plan, employees may elect to make voluntary, pretax contributions to their accounts which the Company will match one half on the first 2% of contribution up to a maximum of 1%. The Company also contributes 4% of salaries for union members who are in the plan. Effective January 1, 2013, any new non-union employees receive a 4% non-elective contribution and these employees may elect to make voluntary, pretax contributions to their accounts which the Company will match one half on the first 6% of contribution up to a maximum of 3%. Effective January 1, 2014, any new union employees receive a 4% non-elective contribution and these employees may elect to make voluntary, pretax contributions to their accounts which the Company will match dollar for dollar up to a maximum of 4%. Contributions by the Company charged to operations were $387,000 and $327,000 for the years ended December 31, 2014 and 2013, respectively. The fair value of plan assets includes $1.1 million pertaining to the value of the Company’s common stock and Trust Preferred securities that are held by the plan at December 31, 2014.

Except for the above benefit plans, the Company has no significant additional exposure for any other post-retirement or post-employment benefits.

15.  LEASE COMMITMENTS

The Company’s obligation for future minimum lease payments on operating leases at December 31, 2014, is as follows:

 
YEAR:   FUTURE MINIMUM LEASE PAYMENTS
     (IN THOUSANDS)
2015   $ 711  
2016     585  
2017     426  
2018     280  
2019     159  
2020 and thereafter     1,561  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  LEASE COMMITMENTS  – (continued)

In addition to the amounts set forth above, certain of the leases require payments by the Company for taxes, insurance, and maintenance. Rent expense included in total non-interest expense amounted to $732,000, $764,000 and $785,000, in 2014, 2013, and 2012, respectively.

16.  COMMITMENTS AND CONTINGENT LIABILITIES

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. Commitments to extend credit are obligations to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral which secures these types of commitments is the same as for other types of secured lending such as accounts receivable, inventory, and fixed assets.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financings, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Letters of credit are issued both on an unsecured and secured basis. Collateral securing these types of transactions is similar to collateral securing the Company’s commercial loans.

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. At December 31, 2014, the Company had various outstanding commitments to extend credit approximating $188.0 million and standby letters of credit of $7.2 million, compared to commitments to extend credit of $146.0 million and standby letters of credit of $13.2 million at December 31, 2013. Standby letters of credit had terms ranging from 1 to 2 years with annual extension options available. Standby letters of credit of approximately $3.3 million were secured as of December 31, 2014 and approximately $3.9 million at December 31, 2013. The carrying amount of the liability for AmeriServ obligations related to unfunded commitments and standby letters of credit was $882,000 at December 31, 2014 and $776,000 at December 31, 2013.

Pursuant to its bylaws, the Company provides indemnification to its directors and officers against certain liabilities incurred as a result of their service on behalf of the Company. In connection with this indemnification obligation, the Company can advance on behalf of covered individuals costs incurred in defending against certain claims. 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 CONSOLIDATED FINANCIAL STATEMENTS

17.  PREFERRED STOCK

SBLF:

On August 11, 2011, pursuant to the Small Business Lending Fund (SBLF), the Company issued and sold to the US Treasury 21,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E Preferred Stock) for the aggregate proceeds of $21 million. The SBLF is a voluntary program sponsored by the US Treasury that encourages small business lending by providing capital to qualified community banks at favorable rates. The initial interest rate on the Series E Preferred Stock has been initially set at 5% per annum and may be decreased to as low as 1% per annum if growth thresholds are met for qualified outstanding small business loans. The Company used the proceeds from the Series E Preferred Stock issued to the US Treasury to repurchase all 21,000 shares of its outstanding preferred shares previously issued to the US Treasury under the TARP Capital Purchase Program.

The Series E Preferred Stock has an aggregate liquidation preference of approximately $21 million and qualifies as Tier 1 Capital for regulatory purposes. The terms of the Series E Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The dividend rate, as a percentage of the liquidation amount, may fluctuate while the Series E Preferred Stock is outstanding based upon changes in the level of “qualified small business lending” (“QSBL”) by the Bank from its average level of QSBL at each of the four quarter ends leading up to June 30, 2010 (the “Baseline”) as follows:

   
DIVIDEND PERIOD ANNUALIZED   ANNUALIZED DIVIDEND RATE
BEGINNING   ENDING
August 11, 2011   December 31, 2011   5.0%
January 1, 2012   December 31, 2013   1.0% to 5.0%
January 1, 2014   February 7, 2016   1.0% to 7.0%(1)
February 8, 2016   Redemption   9.0%(2)

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.  STOCK COMPENSATION PLANS

The Company uses the modified prospective method for accounting for stock-based compensation and recognized $42,000 of pretax compensation expense for the year 2014, $82,000 in 2013 and $38,000 in 2012.

During 2011, the Company’s Board adopted, and its shareholders approved, the AmeriServ Financial, Inc. 2011 Stock Incentive Plan (the Plan) authorizing the grant of options or restricted stock covering 800,000 shares of common stock. This Plan replaced the expired 2001 Stock Option Plan. Under the Plan, options or restricted stock can be granted (the Grant Date) to directors, officers, and employees that provide services to the Company and its affiliates, as selected by the compensation committee of the Board. The option price at which a granted stock option may be exercised was not less than 100% of the fair market value per share of common stock on the Grant Date. The maximum term of any option granted under the Plan cannot exceed 10 years. Generally, options vest over a three year period and become exercisable in equal installments over the vesting period. At times, options with a one year vesting period may also be issued.

A summary of the status of the Company’s Stock Incentive Plan at December 31, 2014, 2013, and 2012, and changes during the years then ended is presented in the table and narrative following:

           
  YEAR ENDED DECEMBER 31
     2014   2013   2012
     SHARES   WEIGHTED AVERAGE EXERCISE PRICE   SHARES   WEIGHTED AVERAGE EXERCISE PRICE   SHARES   WEIGHTED AVERAGE EXERCISE PRICE
Outstanding at beginning of year     487,349     $ 2.55       398,371     $ 2.43       313,612     $ 3.02  
Granted     115,000       3.18       102,445       3.19       164,241       2.73  
Exercised     (10,700 )      2.25       (3,467 )      1.81       (1,500 )      1.70  
Forfeited     (31,740 )      3.08       (10,000 )      4.25       (77,982 )      5.47  
Outstanding at end of year     559,909       2.66       487,349       2.55       398,371       2.43  
Exercisable at end of year     330,822       2.36       257,253       2.25       167,624       2.29  
Weighted average fair value of options granted in current year            $ 0.85              $ 0.83              $ 0.80  

A total of 330,822 of the 559,909 options outstanding at December 31, 2014, are exercisable and have exercise prices between $1.53 and $5.22, with a weighted average exercise price of $2.36 and a weighted average remaining contractual life of 6.10 years. All of these options are exercisable. The remaining 229,087 options that are not yet exercisable have exercise prices between $2.57 and $3.23, with a weighted average exercise price of $3.09 and a weighted average remaining contractual life of 8.63 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2014, 2013, and 2012.

     
  YEAR ENDED DECEMBER 31
BLACK-SCHOLES ASSUMPTION RANGES   2014   2013   2012
Risk-free interest rate     2.43 – 2.74%       1.82 – 2.03%         1.66 – 2.28%    
Expected lives in years     10       10       10  
Expected volatility     28 – 29%       30 – 32%         33 – 36%    
Expected dividend rate     1.25 – 1.30%         1.30%               0%              

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.  ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the periods ending December 31, 2014 and 2013 (in thousands):

           
  YEAR ENDING DECEMBER 31, 2014   YEAR ENDING DECEMBER 31, 2013
     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   $ 1,043     $ (6,918 )    $ (5,875 )    $ 4,141     $ (9,520 )    $ (5,379 ) 
Other comprehensive income (loss) before reclassifications     917       (2,354 )      (1,437 )      (2,963 )      2,161       (802 ) 
Amounts reclassified from accumulated other comprehensive loss     (117 )      527       410       (135 )      441       306  
Net current period other comprehensive income (loss)     800       (1,827 )      (1,027 )      (3,098 )      2,602       (496 ) 
Ending balance   $ 1,843     $ (8,745 )    $ (6,902 )    $ 1,043     $ (6,918 )    $ (5,875 ) 

(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 periods ending December 31, 2014 and 2013 (in thousands):

     
  Amount reclassified from
accumulated other comprehensive
loss(1)
 
Details about accumulated other
comprehensive loss components
  YEAR ENDING DECEMBER 31, 2014   YEAR ENDING DECEMBER 31, 2013   Affected line item in the
statement of operations
Unrealized gains and losses on
sale of securities
                          
     $ (177 )    $ (204 )      Net realized gains on investment securities  
       60       69       Provision for income taxes  
     $ (117 )    $ (135 )      Net of tax  
Amortization of defined benefit items(2)
                          
Recognized net actuarial loss   $ 813     $ 683       Salaries and employee benefits  
Prior service cost     (14 )      (10 )      Salaries and employee benefits  
Transition asset           (4 )      Salaries and employee benefits  
       799       669       Pretax income  
       (272 )      (228 )      Provision for income taxes  
     $ 527     $ 441       Net income  
Total reclassifications for the period   $ 410     $ 306       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 14 for additional details).

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.  INTANGIBLE ASSETS

The Company’s Consolidated Balance Sheets show both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill). Goodwill has an indefinite life and is not amortized. Instead such intangible is evaluated for impairment at the reporting unit level at least annually. Any resulting impairment would be reflected as a non-interest expense. Of the Company’s goodwill of $11.9 million, $9.5 million is allocated to the retail banking segment and $2.4 million relates to the WCCA acquisition which is included in the trust segment. In the third quarter of 2014, the Company performed a goodwill impairment test and determined that the fair value of WCCA was less than its carrying value and, accordingly, recorded an impairment charge of $669,000. The goodwill impairment charge was the result of a reduction in earnings power caused by the departure of WCCA’s former CEO and subsequent loss of a meaningful number of clients. A reconciliation of the Company’s goodwill follows (in thousands):

   
  2014   2013
Balance at January 1   $ 12,613     $ 12,613  
Goodwill impairment charge     (669 )       
Balance at December 31   $ 11,944     $ 12,613  

21.  DERIVATIVE HEDGING INSTRUMENTS

The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company can use derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates.

The following table summarizes the interest rate swap transactions that impacted the Company’s 2013 performance:

             
START DATE   MATURITY DATE   HEDGE TYPE   NOTIONAL AMOUNT   RATE RECEIVED   RATE PAID   REPRICING FREQUENCY   INCREASE (DECREASE) IN INTEREST EXPENSE
12/12/08     09/24/13       FAIR VALUE     $ 9,000,000       5.25 %      2.73 %      MONTHLY     $ 165,488  
12/12/08     09/24/13       FAIR VALUE       9,000,000       2.73       5.25       MONTHLY       (165,488 ) 
                                         $  

The Company monitors and controls all derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions. All hedge transactions must be approved in advance by the Investment Asset/Liability Committee (ALCO) of the Board.

22.  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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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22.  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, WCCA, our registered investment advisory firm and financial services. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on guaranteed junior subordinated deferrable interest debentures, and centralized interest rate risk management. Inter-segment revenues were not material.

The contribution of the major business segments to the Consolidated Results of Operations were as follows:

         
  YEAR ENDED DECEMBER 31, 2014
     RETAIL BANKING   COMMERCIAL BANKING   TRUST   INVESTMENT/ PARENT   TOTAL
     (IN THOUSANDS)
Net interest income   $ 20,141     $ 16,777     $ 47     $ (2,921 )    $ 34,044  
Provision for loan loss     57       318                   375  
Non-interest income     5,633       381       8,118       191       14,323  
Non-interest expense     22,531       10,868       6,967       3,005       43,371  
Income (loss) before income taxes     3,186       5,972       1,198       (5,735 )      4,621  
Income tax expense (benefit)     958       1,819       634       (1,813 )      1,598  
Net income (loss)   $ 2,228     $ 4,153     $ 564     $ (3,922 )    $ 3,023  
Total assets   $ 376,009     $ 563,690     $ 5,015     $ 144,549     $ 1,089,263  

         
  YEAR ENDED DECEMBER 31, 2013
     RETAIL BANKING   COMMERCIAL BANKING   TRUST   INVESTMENT/ PARENT   TOTAL
     (IN THOUSANDS)
Net interest income   $ 20,223     $ 15,687     $ 35     $ (3,084 )    $ 32,861  
Credit provision for loan loss     (92 )      (1,008 )                  (1,100 ) 
Non-interest income     6,512       642       8,391       199       15,744  
Non-interest expense     22,870       10,148       6,605       2,600       42,223  
Income (loss) before income taxes     3,957       7,189       1,821       (5,485 )      7,482  
Income tax expense (benefit)     1,165       2,166       619       (1,661 )      2,289  
Net income (loss)   $ 2,792     $ 5,023     $ 1,202     $ (3,824 )    $ 5,193  
Total assets   $ 347,823     $ 545,556     $ 4,722     $ 157,935     $ 1,056,036  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22.  SEGMENT RESULTS  – (continued)

         
  YEAR ENDED DECEMBER 31, 2012
     RETAIL BANKING   COMMERCIAL BANKING   TRUST   INVESTMENT/ PARENT   TOTAL
     (IN THOUSANDS)
Net interest income   $ 20,585     $ 14,499     $ 35     $ (2,916 )    $ 32,203  
Credit provision for loan loss     (160 )      (615 )                  (775 ) 
Non-interest income     6,565       585       7,784       9       14,943  
Non-interest expense     22,802       8,970       6,387       2,482       40,641  
Income (loss) before income taxes     4,508       6,729       1,432       (5,389 )      7,280  
Income tax expense (benefit)     1,358       2,044       487       (1,648 )      2,241  
Net income (loss)   $ 3,150     $ 4,685     $ 945     $ (3,741 )    $ 5,039  
Total assets   $ 336,241     $ 497,331     $ 4,429     $ 162,990     $ 1,000,991  

23.  REGULATORY CAPITAL

The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s 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 I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 2014 and 2013, the Federal Reserve categorized the Company as Well Capitalized under the regulatory framework for prompt corrective action. The Company believes that no conditions or events have occurred that would change this conclusion. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.56% and 7.64% for 2014 and 2013, respectively.

           
  AS OF DECEMBER 31, 2014
     ACTUAL   FOR CAPITAL ADEQUACY PURPOSES   TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS
     AMOUNT   RATIO   AMOUNT   RATIO   AMOUNT   RATIO
     (IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets) 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 Risk Weighted Assets) 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  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23.  REGULATORY CAPITAL  – (continued)

           
  AS OF DECEMBER 31, 2013
     ACTUAL   FOR CAPITAL ADEQUACY PURPOSES   TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS
     AMOUNT   RATIO   AMOUNT   RATIO   AMOUNT   RATIO
     (IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets) Consolidated   $ 128,469       15.28 %    $ 67,247       8.00 %    $ 84,059       10.00 % 
AmeriServ Financial Bank     103,009       12.39       66,506       8.00       83,132       10.00  
Tier 1 Capital (To Risk Weighted Assets) Consolidated     117,957       14.03       33,624       4.00       50,435       6.00  
AmeriServ Financial Bank     92,611       11.14       33,253       4.00       49,879       6.00  
Tier 1 Capital (To Average Assets) Consolidated     117,957       11.45       41,204       4.00       51,505       5.00  
AmeriServ Financial Bank     92,611       9.23       40,124       4.00       50,155       5.00  

On July 2, 2013, the Federal Reserve 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 become effective for the Company on January 1, 2015, with an implementation period that stretches to 2019. For a more detailed discussion see the Capital Resources section of the MD&A.

24.  PARENT COMPANY FINANCIAL INFORMATION

The parent company functions primarily as a coordinating and servicing unit for all subsidiary entities. Provided services include general management, accounting and taxes, loan review, internal auditing, investment advisory, marketing, insurance risk management, general corporate services, and financial and strategic planning. The following financial information relates only to the parent company operations:

             BALANCE SHEETS

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
ASSETS
                 
Cash   $ 100     $ 100  
Short-term investments in money market funds     5,784       6,561  
Investment securities available for sale     11,714       11,909  
Equity investment in banking subsidiary     100,473       99,250  
Equity investment in non-banking subsidiaries     5,685       5,321  
Guaranteed junior subordinated deferrable interest debenture issuance costs     209       224  
Other assets     4,698       4,352  
TOTAL ASSETS   $ 128,663     $ 127,717  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

24.  PARENT COMPANY FINANCIAL INFORMATION  – (continued)

   
  AT DECEMBER 31,
     2014   2013
     (IN THOUSANDS)
LIABILITIES
                 
Guaranteed junior subordinated deferrable interest debentures   $ 13,085     $ 13,085  
Other liabilities     1,171       1,325  
TOTAL LIABILITIES     14,256       14,410  
STOCKHOLDERS’ EQUITY
                 
Total stockholders’ equity     114,407       113,307  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 128,663     $ 127,717  

             STATEMENTS OF OPERATIONS

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
INCOME
                          
Inter-entity management and other fees   $ 2,432     $ 2,355     $ 2,355  
Dividends from banking subsidiary     1,500       5,500       8,000  
Dividends from non-banking subsidiaries     870       675       710  
Interest and dividend income     262       243       306  
TOTAL INCOME     5,064       8,773       11,371  
EXPENSE
                          
Interest expense     1,121       1,121       1,121  
Salaries and employee benefits     2,576       2,502       2,368  
Other expense     1,996       1,608       1,582  
TOTAL EXPENSE     5,693       5,231       5,071  
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES     (629 )      3,542       6,300  
Benefit for income taxes     1,020       895       819  
Equity in undistributed earnings of subsidiaries     2,632       756       (2,080 ) 
NET INCOME   $ 3,023     $ 5,193     $ 5,039  
COMPREHENSIVE INCOME   $ 1,996     $ 4,697     $ 3,320  

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

24.  PARENT COMPANY FINANCIAL INFORMATION  – (continued)

STATEMENTS OF CASH FLOWS

     
  YEAR ENDED DECEMBER 31,
     2014   2013   2012
     (IN THOUSANDS)
OPERATING ACTIVITIES
                          
Net income   $ 3,023     $ 5,193     $ 5,039  
Adjustment to reconcile net income to net cash (used in) provided by operating activities:
                          
Equity in undistributed earnings of subsidiaries     (2,632 )      (756 )      2,080  
Stock compensation expense     42       82       38  
Other – net     (505 )      (718 )      (989 ) 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES     (72 )      3,801       6,168  
INVESTING ACTIVITIES
                          
Purchase of investment securities – available for sale     (2,027 )      (3,885 )      (2,077 ) 
Proceeds from maturity of investment securities – available for sale     2,284       2,506       2,809  
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES
    257       (1,379 )      732  
FINANCING ACTIVITIES
                          
Purchase of treasury stock           (1,171 )      (4,417 ) 
Preferred stock dividends paid     (210 )      (209 )      (828 ) 
Common stock dividends paid     (752 )      (566 )       
NET CASH USED IN FINANCING ACTIVITIES     (962 )      (1,946 )      (5,245 ) 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     (777 )      476       1,655  
CASH AND CASH EQUIVALENTS AT JANUARY 1     6,661       6,185       4,530  
CASH AND CASH EQUIVALENTS AT DECEMBER 31   $ 5,884     $ 6,661     $ 6,185  

The ability of the subsidiary Bank to upstream cash to the parent company is restricted by regulations. Federal law prevents the parent company from borrowing from its subsidiary Bank unless the loans are secured by specified assets. Further, such secured loans are limited in amount to ten percent of the subsidiary Bank’s capital and surplus. In addition, the Bank is subject to legal limitations on the amount of dividends that can be paid to its shareholder. The dividend limitation generally restricts dividend payments to a bank’s retained net income for the current and preceding two calendar years. Cash may also be upstreamed to the parent company by the subsidiaries as an inter-entity management fee. The subsidiary Bank had a combined $105,400,000 of restricted surplus and retained earnings at December 31, 2014.

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AMERISERV FINANCIAL, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

25.  SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (unaudited)

The following table sets forth certain unaudited quarterly consolidated financial data regarding the Company:

       
  2014 QUARTER ENDED
     DEC. 31   SEPT. 30   JUNE 30   MARCH 31
     (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income   $ 10,344     $ 10,019     $ 9,983     $ 10,095  
Interest expense     1,612       1,616       1,599       1,570  
Net interest income     8,732       8,403       8,384       8,525  
Provision for loan losses     375                    
Net interest income after provision for loan
losses
    8,357       8,403       8,384       8,525  
Non-interest income     3,560       3,593       3,638       3,532  
Non-interest expense     10,770       11,243       10,620       10,738  
Income before income taxes     1,147       753       1,402       1,319  
Provision for income taxes     398       388       423       389  
Net income   $ 749     $ 365     $ 979     $ 930  
Basic earnings per common share   $ 0.04     $ 0.02     $ 0.05     $ 0.05  
Diluted earnings per common share     0.04       0.02       0.05       0.05  
Cash dividends declared per common share     0.01       0.01       0.01       0.01  

       
  2013 QUARTER ENDED
     DEC. 31   SEPT. 30   JUNE 30   MARCH 31
     (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income   $ 10,203     $ 9,811     $ 9,627     $ 9,702  
Interest expense     1,605       1,611       1,606       1,660  
Net interest income     8,598       8,200       8,021       8,042  
Provision (credit) for loan losses     (1,000 )            150       (250 ) 
Net interest income after provision (credit) for loan losses     9,598       8,200       7,871       8,292  
Non-interest income     3,867       3,986       4,075       3,816  
Non-interest expense     10,746       10,413       10,442       10,622  
Income before income taxes     2,719       1,773       1,504       1,486  
Provision for income taxes     878       547       434       430  
Net income   $ 1,841     $ 1,226     $ 1,070     $ 1,056  
Basic earnings per common share   $ 0.10     $ 0.06     $ 0.05     $ 0.05  
Diluted earnings per common share     0.09       0.06       0.05       0.05  
Cash dividends declared per common share     0.01       0.01       0.01       0.00  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
AmeriServ Financial, Inc.

We have audited the accompanying consolidated balance sheets of AmeriServ Financial, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These consolidated financial statements are the responsibility of AmeriServ Financial, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AmeriServ Financial, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AmeriServ Financial, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 6, 2015 expressed an unqualified opinion on the effectiveness of AmeriServ Financial, Inc. and subsidiaries internal control over financial reporting.

/s/ S.R. Snodgrass, P.C.
Wexford, Pennsylvania
March 6, 2015

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Shareholders
AmeriServ Financial, Inc.

We have audited AmeriServ Financial, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. AmeriServ Financial, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, AmeriServ Financial, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AmeriServ Financial, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated March 6, 2015 expressed an unqualified opinion.

/s/ S.R. Snodgrass, P.C.
Wexford, Pennsylvania
March 6, 2015

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REPORT ON MANAGEMENT’S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING

We, as management of AmeriServ Financial, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Company’s system of internal control over financial reporting as of December 31, 2014, in relation to criteria for effective internal control over financial reporting as described in “2013 Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2014, its system of internal control over financial reporting is effective and meets the criteria of the “2013 Internal Control — Integrated Framework”. S.R. Snodgrass, P.C., independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.

Management is responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the Federal Reserve as safety and soundness laws and regulations.

Management has assessed compliance by the Company with the designated laws and regulations relating to safety and soundness. Based on the assessment, management believes that the Company complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2014.

 
/s/ JEFFREY A. STOPKO

Jeffrey A. Stopko
Interim President &
Chief Executive Officer
  /s/ MICHAEL D. LYNCH

Michael D. Lynch
Senior Vice President &
Interim Chief Financial Officer

Johnstown, PA
March 6, 2015

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STATEMENT OF MANAGEMENT RESPONSIBILITY

February 19, 2015
 
To the Stockholders and
Board of Directors of
AmeriServ Financial, Inc.

Management of AmeriServ Financial, Inc. and its subsidiaries have prepared the consolidated financial statements and other information in the Annual Report and Form 10-K in accordance with United States generally accepted accounting principles and are responsible for its accuracy.

In meeting its responsibility, management relies on internal accounting and related control systems, which include selection and training of qualified personnel, establishment and communication of accounting and administrative policies and procedures, appropriate segregation of responsibilities, and programs of internal audit. These systems are designed to provide reasonable assurance that financial records are reliable for preparing financial statements and maintaining accountability for assets and that assets are safeguarded against unauthorized use or disposition. Such assurance cannot be absolute because of inherent limitations in any internal control system.

Management also recognizes its responsibility to foster a climate in which Company affairs are conducted with the highest ethical standards. The Company’s Code of Conduct, furnished to each employee and director, addresses the importance of open internal communications, potential conflicts of interest, compliance with applicable laws, including those related to financial disclosure, the confidentiality of proprietary information, and other items. There is an ongoing program to assess compliance with these policies.

The Audit Committee of the Company’s Board of Directors consists solely of independent directors. The Audit Committee meets periodically with management and the independent auditors to discuss audit, financial reporting, and related matters. S.R. Snodgrass P.C. and the Company’s internal auditors have direct access to the Audit Committee.

 
/s/ JEFFREY A. STOPKO

Jeffrey A. Stopko
Interim President &
Chief Executive Officer
  /s/ MICHAEL D. LYNCH

Michael D. Lynch
Senior Vice President &
Interim Chief Financial Officer

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  As of December 31, 2014, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Interim Chief Executive Officer and Interim Chief Financial Officer, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that evaluation, the Company’s management, including the Interim Chief Executive Officer and Interim Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed by the Company in its reports filed and submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports filed under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management Report on Internal Control over Financial Reporting.  The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Management’s assessment of internal control over financial reporting for the fiscal year ended December 31, 2014 is included in Item 8.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this section relating to Directors of the Registrant is presented in the “Election of ASRV Directors” section of the Proxy Statement for the Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this section is presented in the “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” the “Compensation Committee Report,” and “Compensation Paid to Executive Officers” sections of the Proxy Statement for the Annual Meeting of Shareholders.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table summarizes the number of shares remaining for issuance under the Company’s outstanding stock incentive plans as of December 31, 2014.

     
Equity Compensation Plan Information
Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
  Weighted-average exercise price of outstanding options, warrants and rights
(b)
  Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders     559,909     $ 2.66       397,518  
Equity compensation plans not approved by security holders     0       0       0  
Total     559,909     $ 2.66       397,518  

Information required by this section is presented in the “Principal Owners” and “Security Ownership of Management” sections of the Proxy Statement for the Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this section is presented in the “Director Independence and Transactions with Related Parties” section of the Proxy Statement for the Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this section is presented in the “Independent Registered Accounting Firm” section of the Proxy Statement for the Annual Meeting of Shareholders.

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PART IV

ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

CONSOLIDATED FINANCIAL STATEMENTS FILED:

The consolidated financial statements listed below are from this 2014 Form 10-K and Part II — Item 8. Page references are to this Form 10-K.

CONSOLIDATED FINANCIAL STATEMENTS:

 
AmeriServ Financial, Inc. and Subsidiaries
   

 
Consolidated Balance Sheets     36  
Consolidated Statements of Operations     37  
Consolidated Statements of Comprehensive Income     39  
Consolidated Statements of Changes in Stockholders’ Equity     40  
Consolidated Statements of Cash Flows     41  
Notes to Consolidated Financial Statements     42  
Report of Independent Registered Public Accounting Firm     87  
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting     88  
Report of Management’s Assessment of Internal Control Over Financial Reporting     89  
Statement of Management Responsibility     90  

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:

These schedules are not required or are not applicable under SEC accounting regulations and therefore have been omitted.

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EXHIBITS:

The exhibits listed below are filed herewith or to other filings.

   
EXHIBIT NUMBER   DESCRIPTION   PRIOR FILING OR EXHIBIT
PAGE NUMBER HEREIN
 3.1   Amended and Restated Articles of Incorporation as amended through August 11, 2011.   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 17, 2009.   Exhibit 3.2 to Form 8-K filed on January 2, 2015
10.1   Securities Purchase Agreement, dated August 11, 2011, between AmeriServ Financial, Inc. and the Secretary of the Treasury, with respect to the issuance and sale of the SBLF Preferred Stock.   Exhibit 10.1 to Form 8-K filed on August 12, 2011
10.2   Agreement, dated July 22, 2009, between AmeriServ Financial, Inc. and Glenn L. Wilson.   Exhibit 10.1 to Form 8-K filed July 28, 2009
10.5   Agreement, dated May 24, 2002, between AmeriServ Financial, Inc. and Jeffrey A. Stopko.   Exhibit 10.1 to the Quarterly Report on Form 10-Q filed for the period ended June 30, 2002
10.6   AmeriServ Financial, Inc. 2011 Stock Incentive Plan   Appendix A to the Definitive Proxy Statement, filed under Schedule 14A, filed on March 21, 2011
10.7   AmeriServ Financial, Inc. Deferred Compensation Plan   Exhibit 10.1 to Form 8-K filed October 21, 2014
21.1   Subsidiaries of the Registrant.   Attached
23.1   Consent of Independent Registered Public Accounting Firm   Attached
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.   Attached
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.   Attached
32.1   Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.   Attached
32.2   Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.   Attached
101   The following information from AMERISERV FINANCIAL, INC.’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eTensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to the Consolidated Financial Statements.   Attached

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AmeriServ Financial, Inc.
(Registrant)

By: /s/ Jeffrey A. Stopko

Jeffrey A. Stopko
Interim President & CEO

Date: February 19, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 19, 2015:

     
/s/ Craig G. Ford

Craig G. Ford
  Chairman
Director
         
/s/ Jeffrey A. Stopko

Jeffrey A. Stopko
  Interim President & CEO   /s/ Michael D. Lynch

Michael D. Lynch
  Interim CFO
& SVP
/s/ J. Michael Adams, Jr.

J. Michael Adams, Jr.
  Director   /s/ Margaret A. O’Malley

Margaret A. O’Malley
  Director
/s/ Allan R. Dennison

Allan R. Dennison
  Director   /s/ Mark E. Pasquerilla

Mark E. Pasquerilla
  Director
/s/ Daniel R. DeVos

Daniel R. DeVos
  Director   /s/ Sara A. Sargent

Sara A. Sargent
  Director
/s/ Bruce E. Duke, III

Bruce E. Duke, III
  Director   /s/ Thomas C. Slater

Thomas C. Slater
  Director
/s/ James M. Edwards, Sr.

James M. Edwards, Sr.
  Director   /s/ Robert L. Wise

Robert L. Wise
  Director
/s/ Kim W. Kunkle

Kim W. Kunkle
  Director          

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AMERISERV FINANCIAL, INC.

AMERISERV FINANCIAL
BANK OFFICE LOCATIONS

* Main Office Downtown
216 Franklin Street
PO Box 520
Johnstown, PA 15907-0520
1-800-837-BANK (2265)
* Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1211
* University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3218
* Eighth Ward Office
1059 Franklin Street
Johnstown, PA 15905-4303
* Carrolltown Office
101 South Main Street
Carrolltown, PA 15722-0507
* Northern Cambria Office
4206 Crawford Avenue
Suite 1 Northern Cambria,
PA 15714-1342
* Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-1864
* Nanty Glo Office
1383 Shoemaker Street
Nanty Glo, PA 15943-1254

Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911

 

 
 

* Seward Office
1 Roadway Plaza
6858 Route 711 Suite One
Seward, PA 15954-3130
* Windber Office
1501 Somerset Avenue
Windber, PA 15963-1745
* Central City Office
104 Sunshine Avenue
Central City, PA 15926-1129
* Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
* Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
* South Atherton Office
734 South Atherton Street
State College, PA 16801-4628
* Pittsburgh Office
United Steelworkers Bldg
60 Boulevard of the Allies
Suite 100
Pittsburgh, PA 15222-1232
* North Atherton Office
1857 N. Atherton Street
State College, PA 16803-1521
* = 24-Hour ATM Banking
Available
 

REMOTE ATM
BANKING LOCATIONS

* East Hills Drive-up,
1213 Scalp Avenue,
Johnstown
* Main Office, 216 Franklin
Street, Johnstown
The Galleria, Johnstown

AMERISERV LOAN
PRODUCTION LOCATIONS

Main Office Downtown
216 Franklin Street
PO Box 520
Johnstown, PA 15907-0520

Altoona Office
3415 Pleasant Valley Boulevard
Pleasant Valley Shopping Center
Altoona, PA 16602-4321

Hagerstown Office
1829 Howell Road
Suite 3
Hagerstown, MD 21740-6606

Pittsburgh Loan Center
300 Penn Center Boulevard
Suite 402
Pittsburgh, PA 15235-5507

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SHAREHOLDER INFORMATION

SECURITIES MARKETS

AmeriServ Financial, Inc. Common Stock is publicly traded and quoted on the NASDAQ National Market System. The common stock is traded under the symbol of “ASRV.” The listed market makers for the stock are:

 
Sandler O’Neill & Partners, L.P.
1251 Avenue of the Americas
6th Floor
New York, NY 10020
Telephone: (800) 635-6860
  Keefe Bruyette & Woods, Inc.
787 Seventh Avenue
Equitable Bldg — 4th Floor
New York, NY 10019
Telephone: (800) 966-1559
Stifel Nicolaus
1407 Eisenhower Boulevard
Johnstown, PA 15904
Telephone: (814) 269-9211
  Knight Capital Group, Inc.
545 Washington Boulevard
Jersey City, NJ 07310
Telephone: (800) 544-7508

CORPORATE OFFICES

The corporate offices of AmeriServ Financial, Inc. are located at 216 Franklin Street, Johnstown, PA 15901. Mailing address:

P.O. Box 430
Johnstown, PA 15907-0430
(814) 533-5300

AGENTS

The transfer agent and registrar for AmeriServ Financial, Inc.’s common stock is:

Computershare Investor Services
P O Box 43078
Providence, RI 02940-3078
Shareholder Inquiries: 1-800-730-4001
Internet Address: http://www.Computershare.com

INFORMATION

Analysts, investors, shareholders, and others seeking financial data about AmeriServ Financial, Inc. or any of its subsidiaries’ annual and quarterly reports, proxy statements, 10-K, 10-Q, 8-K, and call reports — are asked to contact Jeffrey A. Stopko, Interim President & Chief Executive Officer at (814) 533-5310 or by e-mail at JStopko@AmeriServ.com. The Company also maintains a website (www.AmeriServ.com) that makes available, free of charge, such reports and proxy statements and other current financial information, such as press releases and SEC documents, as well as the corporate governance documents under the Investor Relations tab on the Company’s website. Information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K.

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