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



 

FORM 10-Q



 

 
x   Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the period ended March 31, 2013

 
o   Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from            to            

Commission File Number     0-11204



 

AmeriServ Financial, Inc.

(Exact name of registrant as specified in its charter)



 

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

 
Main & Franklin Streets,
P.O. Box 430, Johnstown, PA
  15907-0430
(Address of principal executive offices)   (Zip Code)

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



 

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 
Class   Outstanding at May 1, 2013
Common Stock, par value $0.01   19,168,188
 

 


 
 

TABLE OF CONTENTS

AmeriServ Financial, Inc.

INDEX

 
  Page No.
PART I. FINANCIAL INFORMATION:
        
Item 1. Financial Statements
        
Consolidated Balance Sheets (Unaudited) — March 31, 2013 and December 31, 2012     1  
Consolidated Statements of Operations (Unaudited) — Three months ended March 31, 2013
and 2012
    2  
Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended
March 31, 2013 and 2012
    3  
Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2013
and 2012
    4  
Notes to Unaudited Consolidated Financial Statements     5  
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
    29  
Item 3. Quantitative and Qualitative Disclosure About Market Risk     40  
Item 4. Controls and Procedures     40  
PART II. OTHER INFORMATION
        
Item 1. Legal Proceedings     40  
Item 1A. Risk Factors     40  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     40  
Item 3. Defaults Upon Senior Securities     40  
Item 4. Mine Safety Disclosures     40  
Item 5. Other Information     40  
Item 6. Exhibits     41  

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TABLE OF CONTENTS

Item 1. Financial Statements

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

   
  March 31, 2013   December 31, 2012
ASSETS
                 
Cash and due from depository institutions   $ 15,561     $ 17,808  
Interest bearing deposits     17,406       1,730  
Short-term investments in money market funds     6,589       7,282  
Total cash and cash equivalents     39,556       26,820  
Investment securities:
                 
Available for sale     146,489       151,538  
Held to maturity (fair value $16,847 on March 31, 2013 and $14,266 on December 31, 2012)     16,377       13,723  
Loans held for sale     3,941       10,576  
Loans     714,513       721,802  
Less: Unearned income     602       637  
 Allowance for loan losses     10,960       12,571  
Net loans     702,951       708,594  
Premises and equipment, net     12,558       11,798  
Accrued interest income receivable     3,305       2,960  
Goodwill     12,613       12,613  
Bank owned life insurance     36,415       36,214  
Net deferred tax asset     11,089       11,467  
Federal Home Loan Bank stock     3,565       4,179  
Federal Reserve Bank stock     2,125       2,125  
Prepaid federal deposit insurance     1,324       1,444  
Other assets     7,410       6,940  
TOTAL ASSETS   $ 999,718     $ 1,000,991  
LIABILITIES
                 
Non-interest bearing deposits   $ 165,028     $ 156,223  
Interest bearing deposits     682,161       679,511  
Total deposits     847,189       835,734  
Short-term borrowings           15,660  
Advances from Federal Home Loan Bank     16,000       13,000  
Guaranteed junior subordinated deferrable interest debentures     13,085       13,085  
Total borrowed funds     29,085       41,745  
Other liabilities     11,999       13,044  
TOTAL LIABILITIES     888,273       890,523  
SHAREHOLDERS' EQUITY
                 
Preferred stock, no par value; $1,000 per share liquidation preference; 2,000,000 shares authorized; 21,000 shares issued and outstanding on March 31, 2013 and December 31, 2012     21,000       21,000  
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,402,007 shares issued and 19,168,188 outstanding on March 31, 2013; 26,398,540 shares issued and 19,164,721 outstanding on December 31, 2012     264       264  
Treasury stock at cost, 7,233,819 shares on March 31, 2013 and
December 31, 2012
    (73,658 )      (73,658 ) 
Capital surplus     145,119       145,102  
Retained earnings     24,143       23,139  
Accumulated other comprehensive loss, net     (5,423 )      (5,379 ) 
TOTAL SHAREHOLDERS' EQUITY     111,445       110,468  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 999,718     $ 1,000,991  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

   
  Three months ended
March 31,
     2013   2012
INTEREST INCOME
                 
Interest and fees on loans   $ 8,628     $ 8,729  
Interest bearing deposits     1       1  
Short-term investments in money market funds     2       3  
Investment securities:
                 
Available for sale     956       1,279  
Held to maturity     115       112  
Total Interest Income     9,702       10,124  
INTEREST EXPENSE
                 
Deposits     1,350       1,762  
Short-term borrowings     5       4  
Advances from Federal Home Loan Bank     25       20  
Guaranteed junior subordinated deferrable interest debentures     280       280  
Total Interest Expense     1,660       2,066  
NET INTEREST INCOME     8,042       8,058  
Provision (credit) for loan losses     (250 )      (625 ) 
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES     8,292       8,683  
NON-INTEREST INCOME
                 
Trust fees     1,667       1,697  
Investment advisory fees     214       193  
Net realized gains on investment securities     71        
Net gains on sale of loans     386       276  
Service charges on deposit accounts     511       535  
Bank owned life insurance     201       215  
Other income     766       758  
Total Non-Interest Income     3,816       3,674  
NON-INTEREST EXPENSE
                 
Salaries and employee benefits     6,331       5,986  
Net occupancy expense     773       729  
Equipment expense     455       451  
Professional fees     1,035       923  
Supplies, postage and freight     211       233  
Miscellaneous taxes and insurance     376       355  
Federal deposit insurance expense     134       129  
Other expense     1,307       1,308  
Total Non-Interest Expense     10,622       10,114  
PRETAX INCOME     1,486       2,243  
Provision for income tax expense     430       678  
NET INCOME     1,056       1,565  
Preferred stock dividends     52       263  
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS   $ 1,004     $ 1,302  
PER COMMON SHARE DATA:
                 
Basic:
                 
Net income   $ 0.05     $ 0.06  
Average number of shares outstanding     19,168       20,679  
Diluted:
                 
Net income   $ 0.05     $ 0.06  
Average number of shares outstanding     19,257       20,722  
Cash dividends declared   $ 0.00     $ 0.00  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

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

   
  Three Months Ended
March 31,
     2013   2012
COMPREHENSIVE INCOME
                 
Net income   $ 1,056     $ 1,565  
Other comprehensive loss, before tax:
                 
Pension obligation change for defined benefit plan     489       (400 ) 
Income tax effect     (166 )      136  
Unrealized holding losses on available for sale securities arising during period     (484 )      (62 ) 
Income tax effect     164       20  
Reclassification adjustment for gains on available for sale securities included in net income     (71 )       
Income tax effect     24        
Other comprehensive loss     (44 )      (306 ) 
Comprehensive income   $ 1,012     $ 1,259  

 
 
See accompanying notes to unaudited consolidated financial statements.

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

   
  Three months ended
March 31,
     2013   2012
OPERATING ACTIVITIES
                 
Net income   $ 1,056     $ 1,565  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Provision (credit) for loan losses     (250 )      (625 ) 
Depreciation expense     386       375  
Net amortization of investment securities     226       262  
Net realized gains on investment securities available for sale     (71 )       
Net gains on loans held for sale     (386 )      (276 ) 
Amortization of deferred loan fees     (82 )      (45 ) 
Origination of mortgage loans held for sale     (16,288 )      (17,168 ) 
Sales of mortgage loans held for sale     23,309       21,601  
Decrease (increase) in accrued interest income receivable     (345 )      70  
Decrease in accrued interest payable     (338 )      (325 ) 
Earnings on bank owned life insurance     (201 )      (215 ) 
Deferred income taxes     401       521  
Stock based compensation expense     17       6  
Decrease in prepaid Federal Deposit Insurance     120       100  
Other, net     (736 )      (1,350 ) 
Net cash provided by operating activities     6,818       4,496  
INVESTING ACTIVITIES
                 
Purchases of investment securities – available for sale     (10,170 )      (11,517 ) 
Purchases of investment securities – held to maturity     (3,423 )       
Proceeds from sales of investment securities – available for sale     1,218        
Proceeds from maturities of investment securities – available for sale     13,305       15,852  
Proceeds from maturities of investment securities – held to maturity     755       453  
Proceeds from redemption of regulatory stock     614       294  
Long-term loans originated     (34,833 )      (37,246 ) 
Principal collected on long-term loans     42,737       36,401  
Loans purchased or participated     (3,000 )      (4,000 ) 
Loans sold or participated     1,000        
Proceeds from sale of other real estate owned     113        
Purchases of premises and equipment     (1,146 )      (521 ) 
Net cash provided by (used in) investing activities     7,170       (284 ) 
FINANCING ACTIVITIES
                 
Net increase in deposit balances     11,460       3,730  
Net decrease in other short-term borrowings     (15,660 )      (14,375 ) 
Principal borrowings on advances from Federal Home Loan Bank     9,000        
Principal repayments on advances from Federal Home Loan Bank     (6,000 )      (1,000 ) 
Purchases of treasury stock           (1,085 ) 
Preferred stock dividends     (52 )      (263 ) 
Net cash used in financing activities     (1,252 )      (12,993 ) 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     12,736       (8,781 ) 
CASH AND CASH EQUIVALENTS AT JANUARY 1     26,820       34,783  
CASH AND CASH EQUIVALENTS AT MARCH 31   $ 39,556     $ 26,002  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 18 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $1.6 billion that are not reported on the Company’s balance sheet at March 31, 2013. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

In addition, the Parent Company is an administrative group that provides support in such areas as audit, finance, investments, loan review, general services, and marketing. Significant intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements.

2. Basis of Preparation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.

For further information, refer to the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

3. Accounting Policies

In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-02, Intangibles — Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption permitted). This ASU did not have a significant impact on the Company’s financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. The Company’s disclosures reflecting the impact on its financial statements are presented in Note 12.

4. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock

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TABLE OF CONTENTS

AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Earnings Per Common Share  – (continued)

equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. Options and warrants to purchase 103,570 common shares, at exercise prices ranging from $3.23 to $5.75, and 261,583 common shares, at exercise prices ranging from $2.57 to $6.10, were outstanding as of March 31, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. Dividends on preferred shares are deducted from net income in the calculation of earnings per common share.

   
  Three months ended March 31,
     2013   2012
     (In thousands, except per share data)
Numerator:
                 
Net income   $ 1,056     $ 1,565  
Preferred stock dividends     52       263  
Net income available to common shareholders   $ 1,004     $ 1,302  
Denominator:
                 
Weighted average common shares outstanding (basic)     19,168       20,679  
Effect of stock options     89       43  
Weighted average common shares outstanding (diluted)     19,257       20,722  
Earnings per common share:
                 
Basic   $ 0.05     $ 0.06  
Diluted     0.05       0.06  

5. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits, federal funds sold and short-term investments in money market funds. The Company made $27,000 in income tax payments in the first three months of 2013 as compared to $23,000 for the first three months of 2012. The Company made total interest payments of $1,998,000 in the first three months of 2013 compared to $2,391,000 in the same 2012 period. The Company had non-cash transfers to other real estate owned (OREO) in the amounts of $71,000 and $35,000 in the first three months of 2013 and 2012, respectively.

6. Investment Securities

The cost basis and fair values of investment securities are summarized as follows (in thousands):

Investment securities available for sale (AFS):

       
  March 31, 2013
     Cost
Basis
  Gross Unrealized Gains   Gross Unrealized Losses   Fair
Value
US Agency   $ 6,850     $ 61     $ (8 )    $ 6,903  
US Agency mortgage-backed securities     124,928       5,703       (18 )      130,613  
Corporate bonds     8,993       52       (72 )      8,973  
Total   $ 140,771     $ 5,816     $ (98 )    $ 146,489  

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TABLE OF CONTENTS

AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Investment securities held to maturity (HTM):

       
  March 31, 2013
     Cost
Basis
  Gross Unrealized Gains   Gross Unrealized Losses   Fair
Value
US Agency mortgage-backed securities   $ 11,370     $ 498     $ (24 )    $ 11,844  
Taxable municipal     1,012       5             1,017  
Corporate bonds and other securities     3,995             (9 )      3,986  
Total   $ 16,377     $ 503     $ (33 )    $ 16,847  

Investment securities available for sale (AFS):

       
  December 31, 2012
     Cost
Basis
  Gross Unrealized Gains   Gross Unrealized Losses   Fair
Value
US Agency   $ 5,848     $ 70     $ (7 )    $ 5,911  
US Agency mortgage-backed securities     131,425       6,320       (10 )      137,735  
Corporate bonds     7,992       3       (103 )      7,892  
Total   $ 145,265     $ 6,393     $ (120 )    $ 151,538  

Investment securities held to maturity (HTM):

       
  December 31, 2012
     Cost
Basis
  Gross Unrealized Gains   Gross Unrealized Losses   Fair
Value
US Agency mortgage-backed securities   $ 9,318     $ 578     $     $ 9,896  
Taxable municipal     410       6             416  
Corporate bonds and other securities     3,995       14       (55 )      3,954  
Total   $ 13,723     $ 598     $ (55 )    $ 14,266  

Maintaining investment quality is a primary objective of the Company's investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody's Investor's Service or Standard & Poor's rating of “A.” At March 31, 2013, 91.1% of the portfolio was rated “AAA” as compared to 92.2% at December 31, 2012. 1.3% of the portfolio was either rated below “A” or unrated at March 31, 2013. The Company has no exposure to subprime mortgage loans in the investment portfolio. At March 31, 2013, the Company’s consolidated investment securities portfolio had a modified duration of approximately 2.15 years. Total proceeds from the sale of AFS securities were $1.2 million for the first three months of 2013. The Company had $71,000 of gross investment security gains in the first quarter of 2013. There were no sales of AFS securities in the first quarter of 2012.

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 $89,123,000 at March 31, 2013 and $94,206,000 at December 31, 2012.

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

The following tables present information concerning investments with unrealized losses as of March 31, 2013 and December 31, 2012 (in thousands):

Investment securities available for sale:

           
  March 31, 2013
     Less than 12 months   12 months or longer   Total
     Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses
US Agency   $ 992     $ (8 )    $     $     $ 992     $ (8 ) 
US Agency mortgage-backed securities     7,254       (18 )                  7,254       (18 ) 
Corporate bonds     4,941       (52 )      980       (20 )      5,921       (72 ) 
Total   $ 13,187     $ (78 )    $ 980     $ (20 )    $ 14,167     $ (98 ) 

Investment securities held to maturity:

           
  March 31, 2013
     Less than 12 months   12 months or longer   Total
     Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses
US Agency mortgage-backed securities   $ 2,789     $ (24 )    $     $     $ 2,789     $ (24 ) 
Corporate bonds and other securities     1,987       (8 )      1,999       (1 )      3,986       (9 ) 
Total   $ 4,776     $ (32 )    $ 1,999     $ (1 )    $ 6,775     $ (33 ) 

Investment securities available for sale:

           
  December 31, 2012
     Less than 12 months   12 months or longer   Total
     Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses
US Agency   $ 993     $ (7 )    $     $     $ 993     $ (7 ) 
US Agency mortgage-backed securities     1,140       (8 )      349       (2 )      1,489       (10 ) 
Corporate bonds     6,898       (103 )                  6,898       (103 ) 
Total   $ 9,031     $ (118 )    $ 349     $ (2 )    $ 9,380     $ (120 ) 

Investment securities held to maturity:

           
  December 31, 2012
     Less than 12 months   12 months or longer   Total
     Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses
Corporate bonds and other securities   $ 965     $ (35 )    $ 1,981     $ (20 )    $ 2,946     $ (55 ) 
Total   $ 965     $ (35 )    $ 1,981     $ (20 )    $ 2,946     $ (55 ) 

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 18 positions that are considered temporarily impaired at March 31, 2013.

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

Contractual maturities of securities at March 31, 2013 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Investment securities available for sale:

       
  March 31, 2013
Cost Basis   US Agency   US Agency Mortgage-Backed Securities   Corporate Bonds   Total Investment Securities
Available For Sale
After 1 year but within 5 years   $ 5,850     $     $ 7,993     $ 13,843  
After 5 years but within 10 years     1,000       13,661       1,000       15,661  
After 10 years but within 15 years           56,008             56,008  
Over 15 years           55,259             55,259  
Total   $ 6,850     $ 124,928     $ 8,993     $ 140,771  

       
  March 31, 2013
Fair Value   US Agency   US Agency Mortgage-Backed Securities   Corporate Bonds   Total Investment Securities Available For Sale
After 1 year but within 5 years   $ 5,911     $     $ 7,970     $ 13,881  
After 5 years but within 10 years     992       14,424       1,003       16,419  
After 10 years but within 15 years           58,367             58,367  
Over 15 years           57,822             57,822  
Total   $ 6,903     $ 130,613     $ 8,973     $ 146,489  

Investment securities held to maturity:

     
  March 31, 2013
Cost Basis   US Agency Mortgage-Backed Securities   Corporate
Bonds and
Other Securities
  Total Investment Securities Held
To Maturity
Within 1 year   $     $ 2,000     $ 2,000  
After 1 year but within 5 years           1,000       1,000  
After 5 years but within 10 years     761             761  
After 10 years but within 15 years           1,012       1,012  
Over 15 years     10,609       995       11,604  
Total   $ 11,370     $ 5,007     $ 16,377  

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

     
  March 31, 2013
Fair Value   US Agency Mortgage-Backed Securities   Corporate Bonds and Other Securities   Total Investment Securities Held
To Maturity
Within 1 year   $     $ 1,999     $ 1,999  
After 1 year but within 5 years           995       995  
After 5 years but within 10 years     751             751  
After 10 years but within 15 years           1,017       1,017  
Over 15 years     11,093       992       12,085  
Total   $ 11,844     $ 5,003     $ 16,847  

7. Loans

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

   
  March 31, 2013   December 31, 2012
Commercial   $ 98,966     $ 102,822  
Commercial loans secured by real estate     376,161       383,339  
Real estate – mortgage     221,716       217,584  
Consumer     17,068       17,420  
Loans, net of unearned income   $ 713,911     $ 721,165  

Loan balances at March 31, 2013 and December 31, 2012 are net of unearned income of $602,000 and $637,000, respectively. Real estate-construction loans comprised 2.5%, and 2.0% of total loans, net of unearned income, at March 31, 2013 and December 31, 2012, respectively. The Company has no exposure to subprime mortgage loans in the loan portfolio.

8. Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three month periods ending March 31, 2013 and 2012 (in thousands).

         
  Balance at December 31, 2012   Charge-Offs   Recoveries   Provision (Credit)   Balance at March 31, 2013
Commercial   $ 2,596     $     $ 11     $ 60     $ 2,667  
Commercial loans secured by real estate     7,796       (1,480 )      108       (435 )      5,989  
Real estate – mortgage     1,269       (29 )      55       (28 )      1,267  
Consumer     150       (38 )      12       23       147  
Allocation for general risk     760                   130       890  
Total   $ 12,571     $ (1,547 )    $ 186     $ (250 )    $ 10,960  

         
  Balance at December 31, 2011   Charge-Offs   Recoveries   Provision (Credit)   Balance at March 31, 2012
Commercial   $ 2,365     $ (99 )    $ 22     $ 195     $ 2,483  
Commercial loans secured by real estate     9,400       (141 )      30       (734 )      8,555  
Real estate – mortgage     1,270       (40 )      24       (4 )      1,250  
Consumer     174       (27 )      11       8       166  
Allocation for general risk     1,414                   (90 )      1,324  
Total   $ 14,623     $ (307 )    $ 87     $ (625 )    $ 13,778  

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

As a result of successful ongoing problem credit resolution efforts, the Company achieved further asset quality improvements in the first quarter of 2013. 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 higher charge-off in the commercial loans secured by real estate relate primarily to one loan for which a specific reserve had been previously established. The largest portion of the credit provision occurred in commercial loans secured by real-estate as this is the category that experienced the most meaningful improvement in asset quality.

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

         
  At March 31, 2013
     Commercial   Commercial Loans Secured by Real Estate   Real Estate -
Mortgage
  Consumer   Total
Individually evaluated for impairment   $     $ 2,327     $     $ 12     $ 2,339  
Collectively evaluated for impairment     98,966       373,834       221,716       17,056       711,572  
Total loans   $ 98,966     $ 376,161     $ 221,716     $ 17,068     $ 713,911  

           
  At March 31, 2013
     Commercial   Commercial Loans Secured by Real Estate   Real Estate - Mortgage   Consumer   Allocation for General Risk   Total
Specific reserve allocation   $     $ 477     $     $     $     $ 477  
General reserve allocation     2,667       5,512       1,267       147       890       10,483  
Total allowance for loan losses   $ 2,667     $ 5,989     $ 1,267     $ 147     $ 890     $ 10,960  

         
  At December 31, 2012
     Commercial   Commercial Loans Secured by Real Estate   Real Estate -
Mortgage
  Consumer   Total
Individually evaluated for impairment   $     $ 4,793     $     $ 13     $ 4,806  
Collectively evaluated for impairment     102,822       378,546       217,584       17,407       716,359  
Total loans   $ 102,822     $ 383,339     $ 217,584     $ 17,420     $ 721,165  

           
  At December 31, 2012
     Commercial   Commercial Loans Secured by Real Estate   Real Estate -
Mortgage
  Consumer   Allocation for General Risk   Total
Specific reserve allocation   $     $ 1,586     $     $     $     $ 1,586  
General reserve allocation     2,596       6,210       1,269       150       760       10,985  
Total allowance for loan losses   $ 2,596     $ 7,796     $ 1,269     $ 150     $ 760     $ 12,571  

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 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. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

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.

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

         
  March 31, 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
Commercial loans secured by real estate   $ 1,773     $ 477     $ 554     $ 2,327     $ 2,392  
Consumer                 12       12       12  
Total impaired loans   $ 1,773     $ 477     $ 566     $ 2,339     $ 2,404  

         
  December 31, 2012
     Impaired Loans with
Specific Allowance
  Impaired Loans with no Specific Allowance   Total Impaired Loans
     Recorded Investment   Related Allowance   Recorded Investment   Recorded Investment   Unpaid Principal Balance
Commercial loans secured by real estate   $ 4,239     $ 1,586     $ 554     $ 4,793     $ 4,850  
Consumer                 13       13       13  
Total impaired loans   $ 4,239     $ 1,586     $ 567     $ 4,806     $ 4,863  

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

   
  Three months ended
March 31,
     2013   2012
Average loan balance:
                 
Commercial   $     $ 26  
Commercial loans secured by real estate     3,572       3,732  
Consumer     12        
Average investment in impaired loans   $ 3,584     $ 3,758  
Interest income recognized:
                 
Commercial   $     $  
Commercial loans secured by real estate            
Consumer            
Interest income recognized on a cash basis on impaired loans   $     $  

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass 6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board 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 2013 requires review of a minimum 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.

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

         
  March 31, 2013
     Pass   Special Mention   Substandard   Doubtful   Total
Commercial   $ 92,320     $ 3,667     $ 2,979     $     $ 98,966  
Commercial loans secured by real estate     341,549       23,829       10,295       488       376,161  
Total   $ 433,869     $ 27,496     $ 13,274     $ 488     $ 475,127  

         
  December 31, 2012
     Pass   Special Mention   Substandard   Doubtful   Total
Commercial   $ 99,886     $ 28     $ 2,908     $     $ 102,822  
Commercial loans secured by real estate     343,885       20,836       17,010       1,608       383,339  
Total   $ 443,771     $ 20,864     $ 19,918     $ 1,608     $ 486,161  

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolios (in thousands).

   
  March 31, 2013
     Performing   Non-Performing
Real estate – mortgage   $ 220,872     $ 844  
Consumer     17,056       12  
Total   $ 237,928     $ 856  

   
  December 31, 2012
     Performing   Non-Performing
Real estate – mortgage   $ 216,393     $ 1,191  
Consumer     17,407       13  
Total   $ 233,800     $ 1,204  

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).

             
  March 31, 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
Commercial   $ 98,961     $ 5     $     $     $ 5     $ 98,966     $  
Commercial loans secured by real estate     374,354       743             1,064       1,807       376,161        
Real estate – mortgage     218,447       1,649       994       626       3,269       221,716        
Consumer     17,022       18       28             46       17,068        
Total   $ 708,784     $ 2,415     $ 1,022     $ 1,690     $ 5,127     $ 713,911     $  

             
  December 31, 2012
     Current   30 – 59 Days Past Due   60 – 89 Days Past Due   90 Days Past Due   Total Past Due   Total Loans   90 Days Past Due and Still Accruing
Commercial   $ 102,775     $     $ 47     $     $ 47     $ 102,822     $  
Commercial loans secured by real estate     379,834             2,545       960       3,505       383,339        
Real estate – mortgage     213,300       3,240       303       741       4,284       217,584        
Consumer     17,371       16       33             49       17,420        
Total   $ 713,280     $ 3,256     $ 2,928     $ 1,701     $ 7,885     $ 721,165     $  

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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. 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, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.

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

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

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

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

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

   
  March 31, 2013   December 31, 2012
Non-accrual loans
                 
Commercial   $     $  
Commercial loans secured by real estate     2,158       4,623  
Real estate – mortgage     844       1,191  
Total     3,002       5,814  
Other real estate owned
                 
Commercial     25        
Commercial loans secured by real estate     1,101       1,101  
Real estate – mortgage     79       127  
Total     1,205       1,228  
TDR’s not in non-accrual     180       182  
Total non-performing assets including TDR   $ 4,387     $ 7,224  
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned     0.61 %      1.00 % 

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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 troubled debt restructure 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.

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.

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table details the loans modified as TDRs during the three month period ended March 31, 2013 (dollars in thousands).

     
Loans in accrual status   # of Loans   Current Balance   Concession Granted
Commercial loan secured by real estate     2     $ 168       Extension of maturity date  
Consumer     1       12       Extension of maturity date  

     
Loans in non-accrual status   # of Loans   Current Balance   Concession Granted
Commercial loan secured by real estate     2     $ 1,314       Extension of maturity date  

The following table details the loans modified as TDRs during the three month period ended March 31, 2012 (dollars in thousands).

     
Loans in accrual status   # of Loans   Current Balance   Concession Granted
Commercial loan secured by real estate     2     $ 140       Extension of maturity date  

     
Loans in non-accrual status   # of Loans   Current Balance   Concession Granted
Commercial loan secured by real estate     4     $ 2,527       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.

The following table presents the recorded investment in loans that were classified as TDR’s or were subsequently modified during each 12-month period prior to the reporting periods preceding January 1, 2013 and January 1, 2012, respectively, in the table below and subsequently defaulted during these reporting periods (in thousands).

   
  Three months ended
March 31,
     2013   2012
Recorded investment of defaults
                 
Commercial loan secured by real estate   $ 1,320     $ 32  
Total   $ 1,320     $ 32  

All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed. All TDR’s 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. Other real estate owned is recorded at fair value minus estimated costs to sell.

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

   
  Three months ended
March 31,
     2013   2012
Interest income due in accordance with original terms   $ 63     $ 84  
Interest income recorded            
Net reduction in interest income   $ 63     $ 84  

10. Federal Home Loan Bank Borrowings

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

     
  At March 31, 2013
Type   Maturing   Amount   Weighted Average Rate
Open Repo Plus     Overnight     $       % 
Advances     2015       4,000       0.52  
       2016       6,000       0.71  
       2017       5,000       0.91  
       2018       1,000       1.13  
Total advances           16,000       0.75  
Total FHLB borrowings         $ 16,000       0.75 % 

     
  At December 31, 2012
Type   Maturing   Amount   Weighted Average Rate
Open Repo Plus     Overnight     $ 15,660       0.25 % 
Advances     2015       4,000       0.52  
       2016       5,000       0.74  
       2017       4,000       0.92  
Total advances           13,000       0.73  
Total FHLB borrowings         $ 28,660       0.47 % 

The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance.

11. 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 had been initially set at 5% per annum and may be decreased to as low as 1% per annum if growth thresholds were met for qualified outstanding small business loans. The Company used the proceeds from the Series E Preferred Stock issued to the

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11. Preferred Stock  – (continued)

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 dividend rate will be fixed at a rate in such range 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.

In addition to the applicable dividend rates described above, beginning on January 1, 2014 and on all dividend payment dates thereafter ending on April 1, 2016, if we fail to increase our level of QSBL compared to the Baseline, we will be required to pay a quarterly lending incentive fee of 0.5% of the liquidation value. As of March 31, 2013, the Company had increased its QSBL to a level that reduced the dividend rate to 1%. This 1% rate will continue at least through the third quarter of 2013.

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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2013 (in thousands):

     
  Net Unrealized Gains and Losses on Investment Securities AFS(1)   Defined Benefit Pension Items(1)   Total
Balance at January 1, 2013   $ 4,141     $ (9,520 )    $ (5,379 ) 
Other comprehensive income (loss) before reclassifications     (320 )      103       (217 ) 
Amounts reclassified from accumulated other comprehensive loss     (47 )      220       173  
Net current period other comprehensive loss     (367 )      323       (44 ) 
Balance at March 31, 2013   $ 3,774     $ (9,197 )    $ (5,423 ) 

(1) Amounts in parentheses indicate debits.

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three months ended March 31, 2013 (in thousands):

   
Details about accumulated other
comprehensive loss components
  Amount
reclassified from
accumulated other
comprehensive loss(1)
  Affected line item in the
statement of operations
Unrealized gains and losses on sale of securities
                 
     $ (71 )      Net realized gains on investment securities AFS  
       (71 )      Total before tax  
       24       Provision for income tax expense  
     $ (47 )      Net of tax  
Amortization of defined benefit items(2)
                 
Estimated net loss   $ 341       Salaries and employee benefits  
Prior service cost     (5 )      Salaries and employee benefits  
Transition asset     (2 )      Salaries and employee benefits  
       334       Total before tax  
       (114 )      Provision for income tax expense  
     $ 220       Net of tax  
Total reclassifications for the period   $ 173       Net of tax  

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

13. Regulatory Capital

The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. Regulatory Capital  – (continued)

amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of March 31, 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 1 risk-based, and Tier 1 leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.88% at March 31, 2013 (in thousands, except ratios).

           
  At March 31, 2013
     Actual   For Capital
Adequacy Purposes
  To Be Well
Capitalized Under Prompt Corrective Action Provisions
     Amount   Ratio   Amount   Ratio   Amount   Ratio
Total Capital (To Risk Weighted Assets) Consolidated   $ 123,873       16.11 %    $ 61,510       8.00 %    $ 76,887       10.00 % 
AmeriServ Financial Bank     101,589       13.34       60,924       8.00       76,155       10.00  
Tier 1 Capital (To Risk Weighted Assets) Consolidated     114,237       14.86       30,755       4.00       46,132       6.00  
AmeriServ Financial Bank     92,044       12.09       30,462       4.00       45,693       6.00  
Tier 1 Capital (To Average Assets) Consolidated     114,237       11.58       39,475       4.00       49,343       5.00  
AmeriServ Financial Bank     92,044       9.55       38,557       4.00       48,197       5.00  

           
  At December 31, 2012
     Actual   For Capital
Adequacy Purposes
  To Be Well
Capitalized Under Prompt Corrective Action Provisions
     Amount   Ratio   Amount   Ratio   Amount   Ratio
Total Capital (To Risk Weighted Assets) Consolidated   $ 122,583       15.92 %    $ 61,588       8.00 %    $ 76,985       10.00 % 
AmeriServ Financial Bank     101,786       13.34       61,060       8.00       76,325       10.00  
Tier 1 Capital (To Risk Weighted Assets) Consolidated     112,916       14.67       30,794       4.00       46,191       6.00  
AmeriServ Financial Bank     92,200       12.08       30,530       4.00       45,795       6.00  
Tier 1 Capital (To Average Assets) Consolidated     112,916       11.44       39,474       4.00       49,343       5.00  
AmeriServ Financial Bank     92,200       9.55       38,616       4.00       48,269       5.00  

14. Segment Results

The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. The Company’s major business units include retail banking, commercial lending, 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

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. Segment Results  – (continued)

match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.

Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Commercial banking to businesses includes commercial loans, and commercial real-estate loans. The trust segment contains our wealth management businesses which include the Trust Company, West Chester Capital Advisors, 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 for the three months ended March 31, 2013 and 2012 were as follows (in thousands):

     
  Three months ended
March 31, 2013
  March 31, 2013
     Total
revenue
  Net income (loss)   Total
assets
Retail banking   $ 6,749     $ 823     $ 345,853  
Commercial banking     3,887       1,045       488,817  
Trust     1,985       176       4,336  
Investment/Parent     (763 )      (988 )      160,712  
Total   $ 11,858     $ 1,056     $ 999,718  

     
  Three months ended
March 31, 2012
  March 31, 2012
     Total revenue   Net income (loss)   Total
assets
Retail banking   $ 6,703     $ 841     $ 325,790  
Commercial banking     3,594       1,246       447,279  
Trust     1,977       252       4,243  
Investment/Parent     (542 )      (774 )      190,089  
Total   $ 11,732     $ 1,565     $ 967,401  

15. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $141.6 million and standby letters of credit of $11.5 million as of March 31, 2013. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15. Commitments and Contingent Liabilities  – (continued)

claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operation or cash flows.

16. Pension Benefits

The Company has a noncontributory defined benefit pension plan covering certain employees who work at least 1,000 hours per year. Effective January 1, 2013, the Company amended the defined benefit pension plan to provide that employees hired on or after that date are not eligible to participate. Instead such employees are eligible to participate in a qualified 401(k) retirement plan. The participants shall have a vested interest in their accrued benefit after five full years of service. The benefits of the plan are based upon the employee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. Plan assets are primarily debt securities (including US Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three months ended March 31, 2013 and 2012 were as follows (in thousands):

   
  Three months ended March 31,
     2013   2012
Components of net periodic benefit cost
                 
Service cost   $ 453     $ 373  
Interest cost     291       299  
Expected return on plan assets     (440 )      (406 ) 
Amortization of prior year service cost     (5 )      (5 ) 
Amortization of transition asset     (2 )      (4 ) 
Recognized net actuarial loss     341       262  
Net periodic pension cost   $ 638     $ 519  

The higher pension expense in 2013 reflects the negative impact that the low interest rate environment is having on the discount rate used to calculate the plan liabilities. This increasing pension cost was a key factor causing the Company to implement a soft freeze of its defined benefit pension plan to provide that non-union employees hired on or after January 1, 2013 are not eligible to participate. Instead, such employees are eligible to participate in a qualified 401(k) plan.

17. Disclosures About Fair Value Measurements

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

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

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

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. Disclosures About Fair Value Measurements  – (continued)

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

The fair value of the swap asset and liability is based on an external derivative valuation model using data inputs as of the valuation date and classified Level 2.

The following tables present the assets reported on the consolidated balance sheets at their fair value as of March 31, 2013 and December 31, 2012, 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 March 31, 2013 Using
     Total   (Level 1)   (Level 2)   (Level 3)
US Agency securities   $ 6,903     $     $ 6,903     $  
US Agency mortgage-backed securities     130,613             130,613        
Corporate bonds     8,973             8,973        
Fair value of swap asset     108             108        
Fair value of swap liability     108             108        

       
  Fair Value Measurements at December 31, 2012 Using
     Total   (Level 1)   (Level 2)   (Level 3)
US Agency securities   $ 5,911     $     $ 5,911     $  
US Agency mortgage-backed securities     137,735             137,735        
Corporate bonds     7,892             7,892        
Fair value of swap asset     164             164        
Fair value of swap liability     164             164        

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At March 31, 2013, impaired loans with a carrying value of $2.3 million were reduced by a specific valuation allowance totaling $477,000 resulting in a net fair value of $1.9 million. At December 31, 2012, impaired loans with a carrying value of $4.8 million were reduced by a specific valuation allowance totaling $1.6 million resulting in a net fair value of $3.2 million.

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

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AmeriServ Financial, Inc.
  
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. 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 March 31, 2013 Using
     Total   (Level 1)   (Level 2)   (Level 3)
Impaired loans   $ 1,862     $     $     $ 1,862  
Other real estate owned     1,205                   1,205  

       
  Fair Value Measurements at December 31, 2012 Using
     Total   (Level 1)   (Level 2)   (Level 3)
Impaired loans   $ 3,220     $     $     $ 3,220  
Other real estate owned     1,228                   1,228  

       
  Quantitative Information About Level 3 Fair Value Measurements
March 31, 2013   Fair Value Estimate   Valuation Techniques   Unobservable Input   Range
Impaired loans   $ 1,862       Appraisal of
collateral(1)
      Appraisal adjustments(2)
Liquidation expenses(2)
      1% to 35%
1% to 15%
 
Other real estate owned     1,205       Appraisal of
collateral(1),(3)
      Appraisal adjustments(2