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, 20142015

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 Yesþ 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 Yesþ 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 Yeso 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 Yeso 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.þo

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 filero		Accelerated filero		Non-accelerated filero		Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ 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$62,809,831 as of June 30, 2014.2015.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 18,853,52118,870,811 shares outstanding as of January 30, 2015.29, 2016.

DOCUMENTS INCORPORATED BY REFERENCE.

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

 

		Page No.
PART I
Item 1. Business			1
Item 1A. Risk Factors			1211
Item 1B. Unresolved Staff Comments			1211
Item 2. Properties			1211
Item 3. Legal Proceedings			1211
Item 4. Mine Safety Disclosures			1211
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and     Issuer Purchases of Equity Securities			1312
Item 6. Selected Consolidated Financial Data			1413
Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and     Results of Operations			1514
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			3534
Item 8. Financial Statements and Supplementary Data			3635
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			9192
Item 11. Executive Compensation			9192
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related     Stockholder Matters			9293
Item 13. Certain Relationships and Related Transactions, and Director Independence			9293
Item 14. Principal Accountant Fees and Services			9293
PART IV
Item 15. Exhibits, Financial Statement Schedules			9394
Signatures			9596

i

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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, 2014:2015:

Headquarters		Johnstown, PA				Johnstown, PA
Total Assets		$	1,061,080			$	1,108,994
Total Investment Securities			132,780				129,902
Total Loans and Loans Held for Sale (net of unearned income)			832,131				883,987
Total Deposits			870,081				903,494
Total Net Income			3,799				5,938
Asset Leverage Ratio			9.19	%			8.97	%
Return on Average Assets			0.37				0.55
Return on Average Equity			3.70				5.80
Total Full-time Equivalent Employees			245				247

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.its 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,												AT DECEMBER 31,
		2014				2013				2012				2015				2014				2013
		(IN THOUSANDS)												(IN THOUSANDS)
U.S. Agency		$	5,931			$	6,926			$	5,848			$	2,900			$	5,931			$	6,926
Corporate bonds			15,497				11,992				7,992				18,541				15,497				11,992
U.S. Agency mortgage-backed securities			102,888				121,480				131,425				96,801				102,888				121,480
Total cost basis of investment securities available for sale		$	124,316			$	140,398			$	145,265			$	118,242			$	124,316			$	140,398
Total fair value of investment securities available for sale		$	127,110			$	141,978			$	151,538			$	119,467			$	127,110			$	141,978

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Investment securities held to maturity at:

		AT DECEMBER 31,												AT DECEMBER 31,
		2014				2013				2012				2015				2014				2013
		(IN THOUSANDS)												(IN THOUSANDS)
Taxable municipal		$	3,364			$	1,521			$	410			$	5,592			$	3,364			$	1,521
U.S. Agency mortgage-backed securities			12,481				12,671				9,318				10,827				12,481				12,671
Corporate bonds and other securities			3,995				3,995				3,995				5,000				3,995				3,995
Total cost basis of investment securities held to maturity		$	19,840			$	18,187			$	13,723			$	21,419			$	19,840			$	18,187
Total fair value of investment securities held to maturity		$	20,213			$	17,788			$	14,266			$	21,533			$	20,213			$	17,788

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Secondary Market Activities

The Residential Lendingresidential lending department of the CompanyBank 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.portfolio. New portfolio production is predominately adjustable rate mortgages.

Non-performing Assets

The following table presents information concerning non-performing assets:

		AT DECEMBER 31,																				AT DECEMBER 31,
		2014				2013				2012				2011				2010				2015				2014				2013				2012				2011
		(IN THOUSANDS, EXCEPT PERCENTAGES)																				(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
Commercial		$	—			$	—			$	—			$	—			$	3,679			$	4,260			$	—			$	—			$	—			$	—
Commercial loans secured by real estate			778				1,632				4,623				3,870				6,731				18				778				1,632				4,623				3,870
Real estate-mortgage			1,417				1,239				1,191				1,205				1,879				1,788				1,417				1,239				1,191				1,205
Total			2,195				2,871				5,814				5,075				12,289				6,066				2,195				2,871				5,814				5,075
Other real estate owned:
Commercial loans secured by real estate			384				344				1,101				20				436				—				384				344				1,101				20
Real estate-mortgage			128				673				127				104				302				75				128				673				127				104
Total			512				1,017				1,228				124				738				75				512				1,017				1,228				124
Total restructured loans not in non-accrual (TDR)			210				221				182				—				1,337				156				210				221				182				—
Total non-performing assets including TDR		$	2,917			$	4,109			$	7,224			$	5,199			$	14,364			$	6,297			$	2,917			$	4,109			$	7,224			$	5,199
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	%			0.71	%			0.35	%			0.52	%			1.00	%			0.78	%

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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 4448 professionals administers assets valued at approximately $1.8$2.0 billion that are not recognized on the Company’s balance sheet at December 31, 2014.2015. 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, 2014,2015, the Trust Company had total assets of $4.6$4.9 million and total stockholder’s equity of $4.2$4.6 million. In 2014,2015, the Trust Company contributed earnings to the corporationCompany as its gross revenue amounted to $7.9$8.5 million and the net income contribution was $1.2$1.3 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, 2014,2015, AmeriServ Life had total assets of $400,000.$389,000.

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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Showcase For Commerce. The city also hosts annual events such as the Flood City Music Festival and the Thunder in the overall job market is well short of anticipated improvement. This documents the fact that the local economy continuesValley Motorcycle Rally, which draw several thousand visitors. The Johnstown, PA MSA unemployment rate improved from a 6.9% average in 2014 to face a long hard climb back from the recession. The jobless rate6.5% average 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.2015.

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. “Happy Valley” is another often-used term to refer to the State College area, including the borough and the townships of College, Harris, Patton, and Ferguson. The unemployment rate for State College MSA averagedimproved from a 4.2% average in 2014 which representsto a 1.4% improvement over 20133.8% average in 2015 and remains the one of 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 Monroeville in Allegheny county, Altoona in Blair county, Pennsylvania, and Hagerstown in Washington county, Maryland. Maryland and Harrisonburg in Rockingham county, Virginia. Monroeville in Allegheny county, Pennsylvania is located 15 miles east of the city of Pittsburgh. While the city is historically known for its steel industry, today its economy is largely based on healthcare, education, technology and financial services. The city of Pittsburgh is home to many colleges, universities and research facilities, the most well-known of which are Carnegie Mellon University, Duquesne University and the University of Pittsburgh. Pittsburgh is rich in art and culture. Pittsburgh museums and cultural sites include the Andy Warhol Museum, the Carnegie Museum of Art, the Frick Art & Historical Center, and Pittsburgh Center for the Arts among numerous others. Pittsburgh is also the home of the Pirates, Steelers and Penguins. The unemployment rate for Pittsburgh MSA improved from a 5.6% average in 2014 to a 5.2% average in 2015.

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 5.6% average in 2014 to a 5.1% average in 2015.

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%6.0% average in 20132014 to a 6.5%5.5% average in 2014.2015.

AltoonaHarrisonburg is located on I-81, providing convenient access via interstate to Northern Virginia/Washington D.C., and Richmond, in addition to points north and south along I-81. The Shenandoah Valley Regional Airport provides the business center of Blair County, Pennsylvaniasame amenities as larger airports and is located 20 minutes from Harrisonburg via I-81. It has a diverse and vibrant economy, with a strong retail, governmentgood blend of business interests and manufacturing base. The top field of employment in Altoona and the metro areaopportunities. Rockingham county 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 listone of the top privately owned companies. In additionagricultural producers in Virginia. Harrisonburg is home to being located adjacentJames Madison University and Eastern Mennonite University. Continuing growth in education, health services and technology, plus a diverse mix of manufacturing, agriculture, retail, service and tourism helps Harrisonburg/Rockingham county prosper. The City of Harrisonburg Economic Development Department has established Harrisonburg Technology Park and the Harrison Downtown Technology Zone to I-99 and a major highway system, Altoona also has easy access to rail and air transportation.attract technology based firms. The Harrisonburg MSA unemployment rate in the Altoona MSA decreasedimproved from a 6.7% average in 2013 to a 5.2% average in 2014.2014 to a 4.6% average in 2015.

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EMPLOYEES

The Company employed 336341 people as of December 31, 20142015 in full- and part-time positions. Approximately 164162 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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As of December 31, 2014,2015, 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 (which includes the impact of the capital conservation buffer effective January 1, 2016) 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”). as follows:

		Minimum Capital
		Effective January 1,								Well Capitalized
		2015				2016
Common equity tier 1 capital ratio			4.5	%			5.125	%			6.5	%
Tier 1 capital ratio			6.0	%			6.625	%			8.0	%
Total capital ratio			8.0	%			8.625	%			10.0	%

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 effectiveconservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2015. The2016 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity tier 1 capital contribution buffer requirements phase inbegan on January 1, 2015 and will be phased-in over a three-year period beginning(beginning at 40% on January 1, 2016.2015, 60% on January 1, 2016 and an additional 20% per year thereafter). 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.

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.TABLE OF CONTENTS

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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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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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, 2015,29, 2016, the Company had 3,5453,416 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				PRICES								CASH DIVIDENDS DECLARED
		HIGH				LOW								HIGH				LOW
Year ended December 31, 2014:
Year ended December 31, 2015:
First Quarter		$	3.91			$	3.00			$	0.01			$	3.13			$	2.88			$	0.01
Second Quarter			3.88				3.40				0.01				3.44				3.00				0.01
Third Quarter			3.52				3.14				0.01				3.41				3.20				0.01
Fourth Quarter			3.31				3.02				0.01				3.39				3.16				0.01
Year ended December 31, 2013
Year ended December 31, 2014
First Quarter		$	3.23			$	2.90			$	0.00			$	3.91			$	3.00			$	0.01
Second Quarter			3.17				2.74				0.01				3.88				3.40				0.01
Third Quarter			3.29				2.97				0.01				3.52				3.14				0.01
Fourth Quarter			3.26				2.99				0.01				3.31				3.02				0.01

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

		AT OR FOR THE YEAR ENDED DECEMBER 31,																				AT OR FOR THE YEAR ENDED DECEMBER 31,
		2014				2013				2012				2011				2010				2015				2014				2013				2012				2011
		(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)																				(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			$	41,881			$	40,441			$	39,343			$	39,917			$	41,964
Total interest expense			6,397				6,482				7,714				9,681				12,489				6,520				6,397				6,482				7,714				9,681
Net interest income			34,044				32,861				32,203				32,283				32,342				35,361				34,044				32,861				32,203				32,283
Provision (credit) for loan losses			375				(1,100	)			(775	)			(3,575	)			5,250				1,250				375				(1,100	)			(775	)			(3,575	)
Net interest income after provision (credit) for loan losses			33,669				33,961				32,978				35,858				27,092				34,111				33,669				33,961				32,978				35,858
Total non-interest income			14,323				15,744				14,943				13,569				13,967				15,267				14,323				15,744				14,943				13,569
Total non-interest expense			43,371				42,223				40,641				40,037				39,697				41,038				43,371				42,223				40,641				40,037
Income before income taxes			4,621				7,482				7,280				9,390				1,362				8,340				4,621				7,482				7,280				9,390
Provision for income taxes			1,598				2,289				2,241				2,853				80				2,343				1,598				2,289				2,241				2,853
Net income		$	3,023			$	5,193			$	5,039			$	6,537			$	1,282			$	5,997			$	3,023			$	5,193			$	5,039			$	6,537
Net income available to common shareholders		$	2,813			$	4,984			$	4,211			$	5,152			$	121			$	5,787			$	2,813			$	4,984			$	4,211			$	5,152
PER COMMON SHARE DATA:
Basic earnings per share		$	0.15			$	0.26			$	0.21			$	0.24			$	0.01			$	0.31			$	0.15			$	0.26			$	0.21			$	0.24
Diluted earnings per share			0.15				0.26				0.21				0.24				0.01				0.31				0.15				0.26				0.21				0.24
Cash dividends declared			0.04				0.03				0.00				0.00				0.00				0.04				0.04				0.03				0.00				0.00
Book value at period end			4.97				4.91				4.67				4.37				4.07				5.19				4.97				4.91				4.67				4.37
BALANCE SHEET AND OTHER DATA:
Total assets		$	1,089,263			$	1,056,036			$	1,000,991			$	979,076			$	948,974			$	1,148,922			$	1,089,263			$	1,056,036			$	1,000,991			$	979,076
Loans and loans held for sale, net of unearned income			832,131				786,748				731,741				670,847				678,181				883,987				832,131				786,748				731,741				670,847
Allowance for loan losses			9,623				10,104				12,571				14,623				19,765				9,921				9,623				10,104				12,571				14,623
Investment securities available for sale			127,110				141,978				151,538				182,923				164,811				119,467				127,110				141,978				151,538				182,923
Investment securities held to maturity			19,840				18,187				13,723				12,280				7,824				21,419				19,840				18,187				13,723				12,280
Deposits			869,881				854,522				835,734				816,420				801,216				903,294				869,881				854,522				835,734				816,420
Total borrowed funds			93,965				79,640				41,745				34,850				27,385				117,483				93,965				79,640				41,745				34,850
Stockholders’ equity			114,407				113,307				110,468				112,352				107,058				118,973				114,407				113,307				110,468				112,352
Full-time equivalent employees			314				352				350				347				348				318				314				352				350				347
SELECTED FINANCIAL RATIOS:
Return on average assets			0.29	%			0.51	%			0.51	%			0.68	%			0.13	%			0.54	%			0.29	%			0.51	%			0.51	%			0.68	%
Return on average total equity			2.61				4.69				4.51				5.90				1.19				5.10				2.61				4.69				4.51				5.90
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				97.86				95.66				92.07				87.56				82.17
Ratio of average total equity to average assets			10.92				10.86				11.36				11.49				11.25				10.65				10.92				10.86				11.36				11.49
Common stock cash dividends as a percent of net income available to common shareholders			26.73				11.36				—				—				—				13.03				26.73				11.36				—				—
Interest rate spread			3.36				3.39				3.43				3.47				3.51				3.33				3.36				3.39				3.43				3.47
Net interest margin			3.52				3.56				3.65				3.72				3.79				3.49				3.52				3.56				3.65				3.72
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				1.13				1.16				1.29				1.74				2.20
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				0.71				0.35				0.52				1.00				0.78
Net charge-offs as a percentage of average loans			0.14				0.18				0.19				0.24				0.74				0.11				0.11				0.18				0.19				0.24
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits			3.30X				5.13X				3.80X				4.11X				1.49X				4.68X				3.30X				5.13X				3.80X				4.11X
Including interest on deposits			1.67				2.07				1.80				1.83				1.10				2.19				1.67				2.07				1.80				1.83
Cumulative one year interest rate sensitivity gap ratio, at period end			1.13				1.09				1.30				1.29				1.13				1.23				1.13				1.09				1.30				1.29

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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, 2015, 2014, 2013, AND 2012

20142015 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$1,374,000, or $0.04$0.07 per share, for the fourth quarter of 2014.2015. This was $0.05$625,000, or $0.03 per share, lesshigher 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,$5,997,000, or $0.15$0.31 per share, which represents a decline from $0.26an increase by $2,974,000, or $0.16 per share, in 2013.from 2014. The Company’s 2015 results illustrate the effectiveness from very specific profitability improvement actions executed to permit the Company to continue growing the business but to avoid expense increases so as to improve per share profitability.

We have previously emphasized the Company’s determination to become a significant competitor in every market where the company has a presence. Loans outstandingThe reports from the marketplace continue to be encouraging. Net loan growth year over year totaled almost $52 million while deposits increased inby $33 million as both of these activities set new year ending records for AmeriServ. These marketplace successes also found support from a more efficient company. Operating non-interest expense was $1.7 million, or 3.9%, lower than 2014. The now proven effectiveness of the 2014 by $45 million toprofitability efforts has resulted in a new company year-end record highenthusiasm among staff members for ways to trim expenses.

This is not to say that 2015 was without its challenges. The worldwide energy turmoil resulted in the bankruptcy of $832 million. Meanwhile deposits also closed 2014a Western Pennsylvania energy related company. However, the Company’s total loan portfolio still contains a lower level of troubled loans than the average level at the highest year-end totalCompany’s peer banks across the nation. The lending standards of the Company remain consistent with the goal of supporting qualified borrowers over the ups and downs of the business cycle.

The Federal Reserve’s interest rate policies that were adopted in 2008 have severely punished the thrifty, those living on recordpensions and community banks throughout the country. The squeeze on the banker’s net interest margin hurts the availability of $870 million. However, itcredit. It is a factunderstandable that such progress has been achieved at the priceFederal Reserve would respond to events like the freezing of increased expense levels. credit markets in 2008, but this seemed to encourage the Federal Reserve to seek to manage the entire economy permanently. Let us hope they can unwind their involvement without further disturbances in this very large and complex economy.

The Board and the management determined that 2014 would beteam of the year to take action on this increase in expenses. These actions have included:

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 maintaintime tested banking management practices. These include strong capital, deep liquidity and a conservative balance sheet. As we enterTo further these goals, in January 2016, the seventhCompany paid off the $21 million of US Treasury preferred shares related to the SBLF program using cash on hand and net proceeds from the private placement of $7.65 million in aggregate principal amount of 6.5% fixed rate subordinated notes. These SBLF funds were a way for the Treasury to encourage banks to lend to small businesses. It worked very well! The Company increased its roster of small business borrowers throughout its regions. However, the Treasury would have increased its dividend rate on the preferred shares from 1% per year of Washington’s Easy Money program, the Federal Reserve speaks of new directions. Therefore this would not seemto 9% per year in February 2016. The Company will continue to lend to small businesses and will continue to be the time for anythinga well-capitalized community bank, but the most basic banking and wealth management programs and careful watchingCompany will not experience this dividend rate increase for those shares are retired. This action was spelled out in detail in the Company’s press release from January 28, 2016.

Finally, a comment about the turmoil in financial markets. The domestic economy of the markets. AsU.S. has been dynamic and ever-changing throughout history. The question we are all forced to answer is how much risk to accept in our economic affairs. The events of 2015 would suggest that it is best to limit risk when contemplating a result of this situation,dynamic economy. This has been and will be our guiding principle as we will focuspursue our energies on successfully executing our business plansclimb to financial respectability in order to improve earnings per share2016 and the resulting return to the common shareholder in 2015.beyond.

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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,												YEAR ENDED DECEMBER 31,
		2014				2013				2012				2015				2014				2013
		(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)												(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Net income		$	3,023			$	5,193			$	5,039			$	5,997			$	3,023			$	5,193
Net income available to common shareholders			2,813				4,984				4,211				5,787				2,813				4,984
Diluted earnings per share			0.15				0.26				0.21				0.31				0.15				0.26
Return on average assets			0.29	%			0.51	%			0.51	%			0.54	%			0.29	%			0.51	%
Return on average equity			2.61				4.69				4.51				5.10				2.61				4.69

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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,												YEAR ENDED DECEMBER 31,
		2014				2013				2012				2015				2014				2013
		(IN THOUSANDS, EXCEPT RATIOS)												(IN THOUSANDS, EXCEPT RATIOS)
Interest income		$	40,441			$	39,343			$	39,917			$	41,881			$	40,441			$	39,343
Interest expense			6,397				6,482				7,714				6,520				6,397				6,482
Net interest income			34,044				32,861				32,203				35,361				34,044				32,861
Net interest margin			3.52	%			3.56	%			3.65	%			3.49	%			3.52	%			3.56	%

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The Company’s total interest expense for 2015 increased by $123,000, or 1.9%, when compared to 2014. This increase in interest expense was due to an increased level of average FHLB borrowed funds which more than offset a lower cost of funds as the cost of interest bearing liabilities declined by one basis point to 0.81%. Management’s strategy to carefully price 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. The overall cost of interest bearing deposits decreased by two basis points to 0.66% in spite of a $5.4 million increase in the total average volume. 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 $13 million while the average cost of these advances has increased by 20 basis points to 1.21%. Overall, total FHLB borrowings averaged $71 million or 6.4% of total assets during 2015.

2014 NET INTEREST INCOME PERFORMANCE OVERVIEW... The Company’s net interest income for the full year 2014 increased by $1,183,000,$1.2 million, 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$1.1 million 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'sCompany’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.

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.TABLE OF CONTENTS

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