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, 2017

OR

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

FOR THE TRANSITION PERIOD FROM            TO           

COMMISSION FILE NUMBER 0-11204

 

AMERISERV FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

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

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

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

 

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

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

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

 

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was $69,492,588 as of June 30, 2017.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 18,128,247 shares outstanding as of January 31, 2018.

DOCUMENTS INCORPORATED BY REFERENCE.

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

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FORM 10-K INDEX

		Page No.
PART I
Item 1. Business			1
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			11
Item 2. Properties			11
Item 3. Legal Proceedings			11
Item 4. Mine Safety Disclosures			11
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			12
Item 6. Selected Consolidated Financial Data			13
Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations			14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			34
Item 8. Financial Statements and Supplementary Data			36
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure			93
Item 9A. Controls and Procedures			93
Item 9B. Other Information			93
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			94
Item 11. Executive Compensation			94
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			95
Item 13. Certain Relationships and Related Transactions, and Director Independence			95
Item 14. Principal Accountant Fees and Services			95
PART IV
Item 15. Exhibits, Financial Statement Schedules			96
Signatures			98

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PART I

ITEM 1. BUSINESS

GENERAL

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

The Company’s principal activities consist of owning and operating its three wholly owned subsidiary entities. At December 31, 2017, the Company had, on a consolidated basis, total assets, deposits, and shareholders’ equity of $1.168 billion, $948 million, and $95 million, respectively. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, accounting and taxes, loan review, auditing, investment accounting, marketing and risk management.

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

AMERISERV FINANCIAL BANKING SUBSIDIARY

AMERISERV FINANCIAL BANK

The Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended (the Banking Code). Through 15 locations in Allegheny, Cambria, Centre, Somerset, and Westmoreland counties, Pennsylvania, the Bank conducts a general banking business. It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, checking accounts, money market accounts, secured and unsecured consumer loans, mortgage loans, safe deposit boxes, holiday club accounts, money orders, and traveler’s checks; and (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as commercial real estate mortgage loans (CRE), short and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services. The Bank also operates 16 automated bank teller machines (ATMs) through its 24-hour banking network that is linked with NYCE, a regional ATM network, and CIRRUS, a national ATM network. West Chester Capital Advisors (WCCA), a SEC registered investment advisor, is also a subsidiary of the Bank. The Company also operates loan production offices (LPOs) in Monroeville and Altoona in Pennsylvania, and in Hagerstown, Maryland.

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

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The Bank is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the PDB. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios of the Bank at December 31, 2017:

Headquarters		Johnstown, PA
Total Assets		$	1,151,205
Total Investment Securities			159,956
Total Loans and Loans Held for Sale (net of unearned income)			892,758
Total Deposits			948,145
Total Net Income			4,337
Asset Leverage Ratio			8.75	%
Return on Average Assets			0.38
Return on Average Equity			4.37
Total Full-time Equivalent Employees			232

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 with Board of Director representation 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. 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 strategic focus of the investment securities portfolio is managed for liquidity and earnings in a prudent 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, short maturity agency securities, high quality corporate securities and select taxable municipal securities. Management strives to maintain a portfolio duration that is less than 60 months. All holdings must meet standards documented in 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,
		2017				2016				2015
		(IN THOUSANDS)
U.S. Agency		$	6,612			$	400			$	2,900
Taxable municipal			7,198				3,793				—
Corporate bonds			35,886				34,403				18,541
U.S. Agency mortgage-backed securities			79,854				88,738				96,801
Total cost basis of investment securities available for sale		$	129,550			$	127,334			$	118,242
Total fair value of investment securities available for sale		$	129,138			$	127,077			$	119,467

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Investment securities held to maturity at:

		AT DECEMBER 31,
		2017				2016				2015
		(IN THOUSANDS)
Taxable municipal		$	22,970			$	13,441			$	5,592
U.S. Agency mortgage-backed securities			9,740				11,177				10,827
Corporate bonds and other securities			6,042				6,047				5,000
Total cost basis of investment securities held to maturity		$	38,752			$	30,665			$	21,419
Total fair value of investment securities held to maturity		$	38,811			$	30,420			$	21,533

DEPOSITS

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

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

		AT DECEMBER 31,
		2017								2016								2015
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
Non-interest bearing		$	182,301				—%			$	182,732				—	%		$	171,175				—	%
Interest bearing			129,589				0.49				108,350				0.29				97,201				0.21
Savings			97,405				0.17				95,986				0.17				94,425				0.17
Money market			275,636				0.52				277,967				0.43				242,298				0.34
Other time			291,475				1.38				290,612				1.28				287,783				1.24
Total deposits		$	976,406				0.79	%		$	955,647				0.70	%		$	892,882				0.66	%

LOANS

The loan portfolio of the Company consisted of the following:

		AT DECEMBER 31,
		2017				2016				2015				2014				2013
		(IN THOUSANDS)
Commercial		$	159,218			$	171,563			$	181,115			$	139,158			$	120,120
Commercial loans secured by real estate(1)			464,153				447,040				422,145				410,851				412,254
Real estate-mortgage(1)			247,278				245,765				257,937				258,616				235,689
Consumer			19,383				19,872				20,344				19,009				15,864
Total loans			890,032				884,240				881,541				827,634				783,927
Less: Unearned income			399				476				557				554				581
Total loans, net of unearned income		$	889,633			$	883,764			$	880,984			$	827,080			$	783,346

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Secondary Market Activities

The residential lending department of the Bank 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 portfolio. New portfolio production is predominately adjustable rate mortgages.

Non-performing Assets

The following table presents information concerning non-performing assets:

		AT DECEMBER 31,
		2017				2016				2015				2014				2013
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
Commercial		$	353			$	496			$	4,260			$	—			$	—
Commercial loans secured by real estate			1,406				178				18				778				1,632
Real estate-mortgage			1,257				929				1,788				1,417				1,239
Total			3,016				1,603				6,066				2,195				2,871
Other real estate owned:
Commercial loans secured by real estate			—				—				—				384				344
Real estate-mortgage			18				21				75				128				673
Total			18				21				75				512				1,017
Total restructured loans not in non-accrual (TDR)			—				—				156				210				221
Total non-performing assets including TDR		$	3,034			$	1,624			$	6,297			$	2,917			$	4,109
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.34	%			0.18	%			0.71	%			0.35	%			0.52	%

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

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

		YEAR ENDED DECEMBER 31,
		2017				2016				2015				2014				2013
		(IN THOUSANDS)
Interest income due in accordance with original terms		$	103			$	118			$	94			$	136			$	178
Interest income recorded			(75	)			—				—				—				—
Net reduction in interest income		$	28			$	118			$	94			$	136			$	178

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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 45 professionals administers assets valued at approximately $2.2 billion that are not recognized on the Company’s balance sheet at December 31, 2017. 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 continues in the process of liquidation. At December 31, 2017, the Trust Company had total assets of $5.1 million and total stockholder’s equity of $5.1 million. In 2017, the Trust Company contributed earnings to the Company as its gross revenue amounted to $8.8 million and the net income contribution was $1.1 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, 2017, AmeriServ Life had total assets of $284,000.

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

Johnstown, Pennsylvania, where the Company is headquartered, continues to have a cost of living that is lower than the national average. Johnstown is home to The University of Pittsburgh at Johnstown, Pennsylvania Highlands Community College and Conemaugh Health System. The high-tech defense industry is now the main non-health care staple of the Johnstown economy, with the region fulfilling many Federal government contracts, punctuated by one of the premier defense trade shows in the U.S., the annual Showcase

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For Commerce. The city also hosts annual events such as the Flood City Music Festival and the Thunder in the Valley Motorcycle Rally, which draw several thousand visitors. The Johnstown, PA MSA unemployment rate decreased from a 6.8% average in 2016 to a 6.0% average in 2017. The Johnstown, PA MSA continues to have one of the highest jobless rates among the 18 metropolitan statistical areas across the state. This coupled with a declining population trend creates a challenge moving forward.

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 decreased from a 4.1% average in 2016 to a 3.7% average in 2017 and remains the one of the lowest of all regions in the Commonwealth. 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. 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 decreased from a 5.7% average in 2016 to a 5.0% average in 2017.

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 5.3% average in 2016 to a 4.8% average in 2017.

Hagerstown in 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 4.6% average in 2016 to a 3.7% average in 2017.

EMPLOYEES

The Company employed 321 people as of December 31, 2017 in full- and part-time positions. Approximately 155 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, 2021. 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.

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

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

CAPITAL REQUIREMENTS

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

As of December 31, 2017, the Company believes that its bank subsidiary was well capitalized, based on the prompt corrective action guidelines described above. On January 1, 2015, U.S. federal banking agencies implemented the new Basel III capital standards, which establish the minimum capital levels to be considered well-capitalized and revise the prompt corrective action requirements under banking regulations. The revisions from the previous standards include a revised definition of capital, the introduction of a minimum common equity tier 1 capital ratio and changed risk weightings for certain assets. The implementation of the new rules will be phased in over a four year period ending January 1, 2019 with minimum capital requirements becoming increasingly more strict each year of the transition. The new minimum capital to risk-adjusted assets requirements (which includes the impact of the capital conservation buffer applicable to each year) are as follows:

		Minimum Capital								Well Capitalized
		Effective January 1,
		2016				2017
Common equity tier 1 capital ratio			5.125	%			5.75	%			6.5	%
Tier 1 capital ratio			6.625	%			7.25	%			8.0	%
Total capital ratio			8.625	%			9.25	%			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 above its minimum risk-based capital requirements, which increases over the transition

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period, from 0.625% of total risk weighted assets in 2016 to 2.50% in 2019. Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and will be phased-in over a three-year period (beginning at 40% on January 1, 2015, 60% on January 1, 2016 and an additional 20% per year thereafter).

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.

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

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. The Company maintains 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.

USA PATRIOT ACT

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect,

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prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the Company.

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

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

A provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.

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

The Dodd-Frank Act 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.

AVAILABLE INFORMATION

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

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

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ITEM 1A. RISK FACTORS

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS

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

ITEM 2. PROPERTIES

The principal offices of the Company and the Bank occupy the five-story AmeriServ Financial building at the corner of Main and Franklin Streets in Johnstown plus twelve floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 13 other locations which are owned. Six additional locations are leased with terms expiring from January 1, 2018 to July 31, 2030.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

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PART II

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

COMMON STOCK

As of January 31, 2018, the Company had 2,983 shareholders of record for its common stock. The Company’s common stock is traded on The NASDAQ Stock Market under the symbol “ASRV.” The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:

		PRICES								CASH DIVIDENDS DECLARED
		HIGH				LOW
Year ended December 31, 2017:
First Quarter		$	4.00			$	3.60			$	0.015
Second Quarter			4.20				3.70				0.015
Third Quarter			4.05				3.80				0.015
Fourth Quarter			4.35				3.85				0.015
Year ended December 31, 2016
First Quarter		$	3.36			$	2.96			$	0.01
Second Quarter			3.27				2.95				0.01
Third Quarter			3.34				3.02				0.015
Fourth Quarter			3.80				3.15				0.015

The declaration of cash dividends on the Company’s common stock is at the discretion of the Board, and any decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition, regulatory capital levels, applicable covenants under any credit agreements and other contractual restrictions, Pennsylvania law, federal and Pennsylvania bank regulatory law, and other factors deemed relevant. Additionally, on January 24, 2017, the Company’s Board of Directors approved a common stock repurchase program that called for AmeriServ Financial, Inc. to buy back up to 5% or approximately 945,000 shares of its outstanding common stock over an 18 month time period beginning on the day of announcement.

Following are the Company’s monthly common stock purchases during the fourth quarter of 2017. All shares are repurchased under Board of Directors authorization.

Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of publicly announced plan				Maximum number of shares that may yet be purchased under the plan
October 1 – 31, 2017			19,900			$	4.12				19,900				238,740
November 1 – 30, 2017			61,194				4.17				61,194				177,546
December 1 – 31, 2017			71,883				4.31				71,883				105,663
Total			152,977			$	4.23				152,977

In first nine months of 2017, the Company was able to repurchase 686,360 shares at an average price of $4.02. Through December 31, 2017, the Board of Director approved repurchase plan had a total of 839,337 shares repurchased at an average price of $4.06. This represents approximately 89% of the authorized repurchase plan.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

		AT OR FOR THE YEAR ENDED DECEMBER 31,
		2017				2016				2015				2014				2013
		(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income		$	44,356			$	41,869			$	41,881			$	40,441			$	39,343
Total interest expense			8,795				7,735				6,520				6,397				6,482
Net interest income			35,561				34,134				35,361				34,044				32,861
Provision (credit) for loan losses			800				3,950				1,250				375				(1,100	)
Net interest income after provision (credit) for loan losses			34,761				30,184				34,111				33,669				33,961
Total non-interest income			14,645				14,638				15,267				14,323				15,744
Total non-interest expense			40,766				41,615				41,038				43,371				42,223
Income before income taxes			8,640				3,207				8,340				4,621				7,482
Provision for income taxes			5,347				897				2,343				1,598				2,289
Net income		$	3,293			$	2,310			$	5,997			$	3,023			$	5,193
Net income available to common shareholders		$	3,293			$	2,295			$	5,787			$	2,813			$	4,984
PER COMMON SHARE DATA:
Basic earnings per share		$	0.18			$	0.12			$	0.31			$	0.15			$	0.26
Diluted earnings per share			0.18				0.12				0.31				0.15				0.26
Cash dividends declared			0.06				0.05				0.04				0.04				0.03
Book value at period end			5.25				5.05				5.19				4.97				4.91
BALANCE SHEET AND OTHER DATA:
Total assets		$	1,167,655			$	1,153,780			$	1,148,497			$	1,089,263			$	1,056,036
Loans and loans held for sale, net of unearned income			892,758				886,858				883,987				832,131				786,748
Allowance for loan losses			10,214				9,932				9,921				9,623				10,104
Investment securities available for sale			129,138				127,077				119,467				127,110				141,978
Investment securities held to maturity			38,752				30,665				21,419				19,840				18,187
Deposits			947,945				967,786				903,294				869,881				854,522
Total borrowed funds			115,701				78,645				117,058				93,965				79,640
Stockholders’ equity			95,102				95,395				118,973				114,407				113,307
Full-time equivalent employees			302				305				318				314				352
SELECTED FINANCIAL RATIOS:
Return on average assets			0.28	%			0.20	%			0.54	%			0.29	%			0.51	%
Return on average total equity			3.42				2.30				5.10				2.61				4.69
Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end			94.18				91.64				97.86				95.66				92.07
Ratio of average total equity to average assets			8.24				8.79				10.65				10.92				10.86
Common stock cash dividends as a percent of net income available to common shareholders			33.80				41.18				13.03				26.73				11.36
Interest rate spread			3.14				3.08				3.33				3.36				3.39
Net interest margin			3.32				3.26				3.49				3.52				3.56
Allowance for loan losses as a percentage of loans, net of unearned income, at period end			1.15				1.12				1.13				1.16				1.29
Non-performing assets as a percentage of loans and other real estate owned, at period end			0.34				0.18				0.71				0.35				0.52
Net charge-offs as a percentage of average loans			0.06				0.44				0.11				0.11				0.18
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits			4.22X				2.26X				4.68X				3.30X				5.13X
Including interest on deposits			1.97				1.40				2.19				1.67				2.07
Cumulative one year interest rate sensitivity gap ratio, at period end			1.22				1.44				1.23				1.13				1.09

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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, 2017, 2016, AND 2015

2017 SUMMARY OVERVIEW:

The new Tax Cut and Jobs Act became law on December 21, 2017. Subsequently, AmeriServ and most other banks in the nation were caught up in the technical accounting issues the legislation created. We recalculated our Federal tax position for 2017 as of December 31, 2017. The result was a one-time $2.6 million charge against 2017 earnings. This action was taken as of December 21, 2017 and reported in an 8-K filing on January 11, 2018. With those issues completed, we begin this year with a new statutory tax rate of 21%, replacing the previous rate of 34%. We believe that this will be an opportunity for the Company.

This new tax code arrived at a favorable time for AmeriServ. Our goal for 2017 was to re-establish the financial performance level that we reported in mid-2015. The result of this strong emphasis was that AmeriServ ended 2017 with the highest level of average loans for a full year on record. AmeriServ also ended 2017 with the highest level of average deposits on record, the highest level of total revenue on record and a reduced level of operating expenses. It is possible that had it not been necessary to recalculate the tax accounting process and accept a one-time charge against earnings, that 2017 may have been the best year since the restructure of the franchise in 2000.

That one-time charge resulted in AmeriServ announcing on January 23, 2018 net income for 2017 of $3,293,000 or $0.18 per common share. This was a 43% improvement in net income and a 50% improvement in earnings per share over 2016 which reported net income of $2,295,000 or $0.12 per share. Parenthetically, it is a fact that if the Tax Cut and Jobs Act had never occurred and the Company would not have been required to recognize an additional income tax charge of $2,624,000, AmeriServ would have reported net income of $5,917,000 or $0.32 per share for 2017. This was our year-long goal for 2017.

AmeriServ is growing stronger year over year, but challenges remain. AmeriServ has become a very active lender to small and mid-size businesses. AmeriServ finished 2017 for the fourth consecutive year with a record of lending over 90% of deposits into our regional markets. This means we are always seeking fresh deposits because it is our responsibility to provide affordable loans to the local and regional businesses and consumers who are the backbone of our local economies.

AmeriServ also has been a company with a higher level of overhead than most community banks our size. We are working to improve this through technical advances which allow for higher productivity. A relationship has been established with a company who is the largest provider of banking software in the U.S. The goal is to continue to improve productivity and to consequently further reduce expenses.

It is important to note that AmeriServ is now fully focused on executing the 2017 – 2019 Strategic Plan. Perhaps the biggest challenge in that plan is to improve shareholder return. It was especially gratifying to meet and exceed the shareholder return target established in the strategic plan. That target is to return up to 75% of earnings to shareholders annually, subject to maintaining sufficient capital to support balance sheet growth. Using the adjusted net income figure prior to the one-time charge required under the Tax Cut and Jobs Act, the total capital return in 2017 was 76.4%. This was composed of quarterly cash dividend payments totaling $1,113,000. Also, a stock repurchase program returned $3,405,000 to shareholders. Upon completion of these entries, AmeriServ still met and exceeded the capital requirements established by the regulators enabling AmeriServ to operate successfully and to respond to expansion opportunities.

As has been our aim, we are setting forth in 2018 with all of the issues contained in the Tax Cut and Jobs Act as we know them today behind us. It is our job to use the new lower tax rate to build an even stronger and more profitable company. We will not chase the latest “fad.” Instead, we will continue to build strength in our balance sheet and then leverage that strength for the benefit of our customers and our shareholders. We think these are exciting times to be community bankers.

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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,
		2017				2016				2015
		(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Net income		$	3,293			$	2,310			$	5,997
Net income available to common shareholders			3,293				2,295				5,787
Diluted earnings per share			0.18				0.12				0.31
Return on average assets			0.28	%			0.20	%			0.54	%
Return on average equity			3.42				2.30				5.10

The Company reported net income available to common shareholders of $3,293,000, or $0.18 per diluted common share. This represents an improvement of $998,000 from the full year of 2016 where net income available to common shareholders totaled $2,295,000, or $0.12 per diluted common share. In the fourth quarter of 2017, the enactment into law of “H.R.1.”, known as the “Tax Cuts and Jobs Act”, necessitated the revaluation of the Company’s deferred tax asset because of the new lower corporate tax rate. This revaluation required that the Company recognize additional income tax expense of $2.6 million, which is consistent with the information previously disclosed in an 8-K filed on January 11, 2018. The additional income tax expense negatively impacted diluted earnings per share by $0.14 for both the fourth quarter and full year of 2017.

The Company reported net income available to common shareholders of $2.3 million, or $0.12 per diluted common share, for 2016. This represented a 61% decrease in earnings per share from 2015 where net income available to common shareholders totaled $5.8 million, or $0.31 per diluted share. This reduction reflects, 1.) a substantially higher than typical provision for loan losses and net loan charge offs that were recorded in the first quarter of 2016 to resolve the Company’s only meaningful direct loan exposure to the energy industry, 2.) a reduced level of net interest income that results from net interest margin compression, which is prevalent in the banking industry, as well as a lower level of loan prepayment fee income and additional interest expense related to the issuance of subordinated debt, and 3.) operating expenses increasing by $577,000, or 1.4% due to non-recurring costs for legal and accounting services that were necessary to address a trust operations trading error.

The Company reported net income available to common shareholders of $5.8 million, or $0.31 per diluted common share, for 2015. This represented a 107% increase in earnings per share from 2014 where net income available to common shareholders totalled $2.8 million, or $0.15 per diluted share. Factors causing this increase in earnings were solid loan and deposit growth in our community banking business which contributed to an increase of $1.3 million, or 3.9%, in net interest income while increasing revenue from our trust and wealth management business contributed to 6.6% growth in non-interest income in 2015. Additionally, operating expenses declined by $2.3 million, or 5.4%, as we improved the ongoing efficiency of the Company by successfully executing several profitability improvement initiatives.

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,
		2017				2016				2015
		(IN THOUSANDS, EXCEPT RATIOS)
Interest income		$	44,356			$	41,869			$	41,881
Interest expense			8,795				7,735				6,520
Net interest income			35,561				34,134				35,361
Net interest margin			3.32	%			3.26	%			3.49	%

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2017 NET INTEREST PERFORMANCE OVERVIEW... The Company’s net interest income for the full year of 2017 increased by $1.4 million, or 4.2%, when compared to the full year of 2016. The Company’s net interest margin was 3.32% for the full year of 2017 representing a six basis point improvement from the full year of 2016. The 2017 increase in net interest income is a result of a higher level of total earning assets and favorable balance sheet positioning which contributed to the improved net interest margin performance. The Company continues to grow earning assets while also limiting increases in its cost of funds through disciplined deposit pricing. Specifically, the earning asset growth occurred in both the loan and investment securities portfolios. Investment securities averaged $173 million for the full year of 2017 which is $25.3 million, or 17.2%, higher than the full year 2016 average. Total loans averaged $894 million for the full year 2017 which is $6.2 million, or 0.7%, higher than the 2016 full year average.

The Company experienced growth in average deposits which we believe reflects the loyalty of our core deposit base that provides a strong foundation upon which this growth builds. Specifically, total deposits averaged $976 million in 2017 which is $20.8 million, or 2.2%, higher than the $956 million average for the full year of 2016 The deposit growth occurred in interest bearing deposits while the total non-interest bearing demand deposit account balances remained relatively stable between years. As a result of this strong deposit growth, the Company’s loan to deposit ratio ended the year at 91.5% which indicates that the Company has ample capacity to further grow its loan portfolio in 2018.

Total interest expense increased by $1,060,000, or 13.7%, for the full year of 2017 when compared to 2016, due to higher levels of both deposit and borrowing interest expense. Deposit interest expense in 2017 increased by $855,000, or 15.8%, due to the higher balance of deposits along with certain indexed money market accounts repricing upward after the Federal Reserve interest rate increases. The Company experienced a $205,000 increase in the interest cost for borrowings in 2017 primarily due to the immediate impact that the increases in the Federal Funds Rate had on the cost of overnight borrowed funds as well as matured FHLB term advances that were replaced with advances at higher rates. For the full year of 2017, total average FHLB borrowed funds of $62.6 million, increased by $4.9 million, or 8.4%.

COMPONENT CHANGES IN NET INTEREST INCOME: 2017 VERSUS 2016... Regarding the separate components of net interest income, the Company’s total interest income in 2017 increased by $2.5 million when compared to 2016. Total average earnings assets in 2017 grew by $23.7 million due to increases in both average loans and average securities, which was complemented by a 15 basis point increase in the earning asset yield from 3.99% to 4.14%. Within the earning asset base, investment securities interest revenue increased by $1.1 million or 27.8% in 2017 due to a $25.3 million increase in the average investment securities portfolio. The yield on total investment securities increased by 24 basis points from 2.66% to 2.90%. The growth in the investment securities portfolio is the result of management electing to diversify the mix of the investment securities portfolio through purchases of high quality corporate and taxable municipal securities. This revised strategy for securities purchases was facilitated by the increase in national interest rates that resulted in improved opportunities to purchase additional securities and grow the portfolio. Total loan interest income increased by $1.4 million as the yield on the total loan portfolio increased by 12 basis points from 4.27% to 4.39%. Even though loan production slowed somewhat during the fourth quarter because of the uncertainty that existed in the market from potential borrowers due to the timing that corporate tax reform would be enacted, the loan portfolio still demonstrated an increase. This increase was the result of the successful results of the Company’s business development efforts, with an emphasis on generating all types of commercial business loans particularly through its loan production offices. Loan interest income increased by $1,356,000, or 3.6%, for the full year of 2017 when compared to last year. The higher loan interest income also results from new loans originating at higher yields due to the higher interest rates and also reflects the upward repricing of certain loans tied to LIBOR or the prime rate as both of these indices have moved up with the Federal Reserve’s decision to increase the target federal funds interest rate by 25 basis points three times in 2017.

The Company’s total interest expense increased by $1,060,000, or 13.7%, in 2017 when compared to 2016, due to higher levels of both deposit and borrowing interest expense. The Company experienced growth in average deposits which we believe reflects the loyalty of our core deposit base that provides a strong foundation upon which this growth builds. Management’s ability to acquire new core deposit funding from outside of our traditional market areas as well as our ongoing efforts to offer new loan customers deposit

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products were the primary reasons for this growth. Specifically, total interest bearing deposits averaged $794 million in 2017 which is $21.2 million, or 2.7%, higher than the $773 million average for the full year of 2016. Deposit interest expense in 2017 increased by $855,000, or 15.8%, due to the higher balance of interest bearing deposits along with certain indexed money market accounts repricing upward after the Federal Reserve interest rate increases. The cost of interest bearing deposits increased by nine basis points in 2017 to 0.79% due to the impact of increasing national interest rates. Management continues to carefully price interest rates paid on all deposit categories. The Company experienced a $205,000 increase in the interest cost for borrowings in 2017 due to the immediate impact that the increases in the Federal Funds Rate had on the cost of overnight borrowed funds, FHLB term advances and a higher level of total borrowed funds. Total overnight borrowings increased by $7.9 million while their cost increased by 64 basis points to 1.21%. The Company also continued to utilize term advances from the FHLB, with maturities ranging between three and five years, to help fund earning asset growth and manage interest rate risk. The average balance of FHLB term advances decreased by $3.1 million while the average cost of these advances increased by 20 basis points to 1.52% as matured term advances were replaced by advances with higher interest rates. Total FHLB borrowed funds, including overnight borrowed funds, averaged $62.6 million or 5.4% of total average assets and increased by $4.9 million, or 8.4%. Overall, total interest bearing funding costs increased by nine basis points to 1.00%.

Overall, the Company expects that continued growth of earning assets as well as an increasing net interest margin will result in net interest income growth in 2018. The net interest margin stabilized in 2017 after a period of compression and also demonstrated improvement in the second half of the year. It is expected that this moderate pace of improvement in the net interest margin should continue in 2018. Solid commercial pipelines suggest that the Company should be able to grow the loan portfolio in 2018 although we expect the pricing pressures on new commercial loans to continue to be intense.

2016 NET INTEREST PERFORMANCE OVERVIEW... The Company’s net interest income for the full year of 2016 decreased by $1,227,000, or 3.5%, when compared to the full year of 2015. The Company’s net interest margin of 3.26% for the full year of 2016 was 23 basis points lower than the net interest margin of 3.49% for the full year of 2015. The 2016 reduction in net interest income has been significantly impacted by the following three factors: 1.) net interest margin compression that results from the prolonged low interest rate environment that exists in the economy and is pressuring community bank net interest margins, 2.) additional interest expense that was associated with the Company’s late fourth quarter 2015 issuance of subordinated debt, and 3.) a significantly lower level of loan prepayment fee income, which decreased by approximately $300,000 for full year of 2016. These factors more than offset the Company’s continued growth in earning assets and control of its cost of funds through disciplined deposit pricing. Specifically, the earning asset growth occurred in the loan portfolio as total loans averaged $888 million for the full year of 2016, which is $31 million, or 3.6%, higher than the $857 million average for the full year of 2015. This loan growth reflects the successful results of the Company’s business development efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans particularly through its loan production offices. However, loan interest income is $134,000, or 0.4%, lower for the full year of 2016 when compared to the full year of 2015 due primarily to the previously mentioned decline in loan prepayment fees between years. Interest income on short-term investments and investment securities grew by $122,000 or 3.1% for the full year as the Company benefited from a higher balance of investment securities in 2016. Overall, total interest income decreased by $12,000, or 0.03%, in 2016.

The Company experienced significant growth in deposits between years which is a reflection of the loyalty and stability of our core deposit base that provides a strong foundation upon which this growth builds. Management’s ability to acquire new core deposit funding from outside of our traditional market areas as well as our ongoing efforts to offer new loan customers deposit products were the primary reasons for this growth. Specifically, total deposits averaged $956 million for the full year of 2016 which is $63 million, or 7.0%, higher than the $893 million average for the full year of 2015. The Company is also pleased that a meaningful portion of this deposit growth occurred in non-interest bearing demand deposit accounts. Deposit interest expense for the full year of 2016 increased by $648,000, or 13.6%, due to the higher balance of deposits along with certain money market accounts repricing upward after Federal Reserve fed funds interest rate increases. As a result of this strong deposit growth, the Company’s loan to deposit ratio ended the year at 91.6%.

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Total interest expense increased for the full year of 2016 by $1,215,000, or 18.6%, as compared to 2015 due to higher levels of both borrowings and deposit interest expense. The Company experienced a $567,000 increase in the interest cost for borrowings in 2016, with $515,000 of this increase attributable to the Company’s subordinated debt issuance which occurred late in December of 2015. Specifically, the Company issued $7.65 million of subordinated debt which has a 6.50% fixed interest rate. The proceeds from the subordinated debt issuance, along with other cash on hand, was used to redeem all $21 million of our outstanding SBLF preferred stock on January 27, 2016. The remainder of the increase in borrowings interest expense was due to a greater utilization of FHLB term advances to extend borrowings for interest rate risk management purposes.

COMPONENT CHANGES IN NET INTEREST INCOME: 2016 VERSUS 2015... Regarding the separate components of net interest income, the Company’s total interest income in 2016 decreased by $12,000 when compared to 2015. This is evidenced by a $36.9 million increase in average earning assets due to increases in both average loans and average securities, which was more than offset by a 15 basis point decline in the earning asset yield from 4.14% to 3.99%. Within the earning asset base, total loan interest income decreased by $134,000 as the yield on the total loan portfolio decreased by 17 basis points from 4.44% to 4.27%. The greater level of total average loans in 2016 was more than offset by the impact of new loans having yields that are below the rate on the maturing instruments that they are replacing. Also negatively impacting loan interest income in 2016 was the reduced level of loan prepayment fee income. Investment securities interest revenue increased by $47,000 in 2016 due to a $2.3 million increase in the average investment securities portfolio. However, the yield on total investment securities decreased by one basis points from 2.67% to 2.66% due to net interest margin compression as well as an increase in premium amortization on mortgage backed securities, which resulted from an increase in mortgage prepayment speeds in 2016.

The Company’s total interest expense for 2016 increased by $1.2 million, or 18.6%, when compared to 2015. Total interest bearing deposits increased by $51.2 million or 7.1% due to management’s ability to acquire new core deposit funding from outside our traditional market areas as well as our ongoing efforts to offer new loan customers deposit products. Total interest bearing deposit interest expense increased by $648,000 in 2016 due to the higher volume of interest bearing deposits and an increase of four basis points in the cost of interest bearing deposits to 0.70%. Management continues to carefully price interest rates paid on all deposit categories. The Company experienced a $567,000 increase in the interest cost for borrowings in 2016, with $515,000 of this increase attributable to the Company’s subordinated debt issuance which occurred late in December of 2015. The increase in borrowings interest expense is also reflective of a greater usage total average FHLB term advances. 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 $2.6 million while the average cost of these advances has increased by 11 basis point to 1.32%. Total FHLB borrowings, including overnight borrowed funds, averaged $57.8 million or 5.1% of total assets during 2016. Overall, total interest bearing funding costs increased by 10 basis points to 0.91%.

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

		YEAR ENDED DECEMBER 31,
		2017												2016												2015
		AVERAGE BALANCE				INTEREST INCOME/ EXPENSE				YIELD/ RATE				AVERAGE BALANCE				INTEREST INCOME/ EXPENSE				YIELD/ RATE				AVERAGE BALANCE				INTEREST INCOME/ EXPENSE				YIELD/ RATE
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning assets:
Loans, net of unearned income		$	893,849			$	39,257				4.39	%		$	887,679			$	37,891				4.27	%		$	857,015			$	38,024				4.44	%
Deposits with banks			1,028				11				1.11				1,668				13				0.70				2,198				8				0.34
Short-term investment in money market funds			7,996				130				1.63				15,156				84				0.56				10,700				14				0.14
Investment securities:
Available for sale			135,131				3,800				2.81				121,630				3,132				2.58				124,383				3,250				2.61
Held to maturity			37,484				1,198				3.20				25,649				779				3.04				20,576				614				2.98
Total investment securities			172,615				4,998				2.90				147,279				3,911				2.66				144,959				3,864				2.67
TOTAL INTEREST EARNING ASSETS/INTEREST INCOME			1,075,488				44,396				4.14				1,051,782				41,899				3.99				1,014,872				41,910				4.14
Non-interest earning assets:
Cash and due from banks			22,393												20,626												17,312
Premises and equipment			12,273												11,930												12,617
Other assets			67,169												68,046												69,201
Allowance for loan losses			(10,241	)											(9,790	)											(9,766	)
TOTAL ASSETS		$	1,167,082											$	1,142,594											$	1,104,236
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand		$	129,589			$	638				0.49	%		$	108,350			$	317				0.29	%		$	97,201			$	199				0.21	%
Savings			97,405				162				0.17				95,986				159				0.17				94,425				156				0.17
Money market			275,636				1,446				0.52				277,967				1,198				0.43				242,298				817				0.34
Other time			291,475				4,009				1.38				290,612				3,726				1.28				287,783				3,580				1.24
Total interest bearing deposits			794,105				6,255				0.79				772,915				5,400				0.70				721,707				4,752				0.66
Federal funds purchased and other short-term borrowings			16,972				206				1.21				9,030				52				0.57				24,582				86				0.35
Advances from Federal Home Loan Bank			45,657				694				1.52				48,720				644				1.32				46,166				558				1.21
Guaranteed junior subordinated deferrable interest debentures			13,085				1,120				8.57				13,085				1,120				8.57				13,085				1,120				8.57
Subordinated debt			7,650				520				6.80				7,650				519				6.79				62				4				6.72
TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE			877,469				8,795				1.00				851,400				7,735				0.91				805,602				6,520				0.81
Non-interest bearing liabilities:
Demand deposits			182,301												182,732												171,175
Other liabilities			11,119												8,074												9,871
Stockholders’ equity			96,193												100,388												117,588
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,167,082											$	1,142,594											$	1,104,236
Interest rate spread											3.14												3.08												3.33
Net interest income/net interest margin							35,601				3.32	%							34,164				3.26	%							35,390				3.49	%
Tax-equivalent adjustment							(40	)											(30	)											(29	)
Net interest income						$	35,561											$	34,134											$	35,361

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

		2017 vs. 2016												2016 vs. 2015
		INCREASE (DECREASE) DUE TO CHANGE IN:												INCREASE (DECREASE) DUE TO CHANGE IN:
		AVERAGE VOLUME				RATE				TOTAL				AVERAGE VOLUME				RATE				TOTAL
		(IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned income		$	271			$	1,095			$	1,366			$	247			$	(380	)		$	(133	)
Deposits with banks			(6	)			4				(2	)			(1	)			6				5
Short-term investments in money market funds			(15	)			61				46				7				63				70
Investment securities:
Available for sale			370				298				668				(78	)			(40	)			(118	)
Held to maturity			376				43				419				153				12				165
Total investment securities			746				341				1,087				75				(28	)			47
Total interest income			996				1,501				2,497				328				(339	)			(11	)
INTEREST PAID ON:
Interest bearing demand deposits			71				250				321				27				91				118
Savings deposits			3				—				3				3				—				3
Money market			(10	)			258				248				136				245				381
Other time deposits			10				273				283				34				112				146
Federal funds purchased and other short-term borrowings			68				86				154				(64	)			30				(34	)
Advances from Federal Home Loan Bank			(35	)			85				50				33				53				86
Subordinated debt			—				1				1				515				—				515
Total interest expense			107				953				1,060				684				531				1,215
Change in net interest income		$	889			$	548			$	1,437			$	(356	)		$	(870	)		$	(1,226	)

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

		AT DECEMBER 31,
		2017				2016				2015
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Total accruing loans past due 30 to 89 days		$	8,178			$	3,278			$	4,396
Total non-accrual loans			3,016				1,603				6,066
Total non-performing assets including TDRs(1)			3,034				1,624				6,297
Loan delinquency as a percentage of total loans, net of unearned income			0.92	%			0.37	%			0.50	%
Non-accrual loans as a percentage of total loans, net of unearned income			0.34				0.18				0.69
Non-performing assets as a percentage of total loans, net of unearned income, and other real estate owned			0.34				0.18				0.71
Non-performing assets as a percentage of total assets			0.26				0.14				0.55
Total classified loans (loans rated substandard or doubtful)		$	5,433			$	6,039			$	8,566

The Company continues to maintain excellent asset quality. Non-performing assets increased by $1.4 million since the prior year-end and now total $3.0 million. The continued successful ongoing problem credit resolution efforts of the Company is demonstrated in the table above as levels of non-accrual loans, non-performing assets, classified loans and low loan delinquency levels are below 1% of total loans. We continue to closely monitor the loan portfolio given the uneven recovery in the economy and the number of relatively large-sized commercial and CRE loans within the portfolio. As of December 31, 2017, the 25 largest credits represented 26.4% of total loans outstanding.

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ALLOWANCE AND PROVISION FOR LOAN LOSSES... As described in more detail in the Critical Accounting Policies and Estimates section of this MD&A, the Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The following table sets forth changes in the ALL and certain ratios for the periods ended.

		YEAR ENDED DECEMBER 31,
		2017				2016				2015				2014				2013
		(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year		$	9,932			$	9,921			$	9,623			$	10,104			$	12,571
Charge-offs:
Commercial			(278	)			(3,648	)			(170	)			(172	)			(50	)
Commercial loans secured by real estate			(165	)			(13	)			(250	)			(708	)			(1,777	)
Real estate-mortgage			(313	)			(291	)			(753	)			(322	)			(139	)
Consumer			(172	)			(344	)			(188	)			(121	)			(154	)
Total charge-offs			(928	)			(4,296	)			(1,361	)			(1,323	)			(2,120	)
Recoveries:
Commercial			27				140				101				141				80
Commercial loans secured by real estate			14				40				111				231				481
Real estate-mortgage			250				147				171				71				122
Consumer			119				30				26				24				70
Total recoveries			410				357				409				467				753
Net charge-offs			(518	)			(3,939	)			(952	)			(856	)			(1,367	)
Provision (credit) for loan losses			800				3,950				1,250				375				(1,100	)
Balance at end of year		$	10,214			$	9,932			$	9,921			$	9,623			$	10,104
Loans and loans held for sale, net of unearned income:
Average for the year		$	893,849			$	887,679			$	857,015			$	804,721			$	746,490
At December 31			892,758				886,858				880,984				827,080				786,748
As a percent of average loans:
Net charge-offs			0.06	%			0.44	%			0.11	%			0.11	%			0.18	%
Provision (credit) for loan losses			0.09				0.44				0.15				0.05				(0.15	)
Allowance as a percent of each of the following:
Total loans, net of unearned income			1.15				1.12				1.13				1.16				1.29
Total accruing delinquent loans (past due 30 to 89 days)			124.90				302.99				225.68				364.09				309.56
Total non-accrual loans			338.66				619.59				163.55				438.21				351.93
Total non-performing assets			336.65				611.58				157.55				329.89				245.90
Allowance as a multiple of net charge-offs			19.72x				2.52x				10.42x				11.24x				7.39x

For 2017, the Company recorded an $800,000 provision for loan losses compared to a $3,950,000 provision for loan losses in 2016 or a decrease of $3.2 million between years. Both, the loan loss provision and net charge-offs were at more typical levels this year than the substantially higher levels that were necessary early last year to resolve a troubled loan exposure to the energy industry. The provision recorded in 2017 supported commercial loan growth and more than covered the low level of net loan charge-offs in 2017 resulting in the allowance for loan losses growing between years. The Company experienced net loan

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charge-offs of $518,000, or 0.06% of total loans in 2017 compared to net loan charge-offs of $3.9 million, or 0.44%, of total loans in 2016. Overall, the Company continued to maintain strong asset quality as its nonperforming assets totaled $3.0 million, or 0.34%, of total loans, at December 31, 2017. In summary, the allowance for loan losses provided 337% coverage of non-performing loans, and 1.15% of total loans, at December 31, 2017, compared to 612% coverage of non-performing loans, and 1.12% of total loans, at December 31, 2016. The Company presently expects that it will have a typical loan loss provision in 2018. The expected provision will be necessary to cover loan charge-offs and support the anticipated growth in the loan portfolio.

For 2016, the Company recorded a $3,950,000 provision for loan losses compared to a $1,250,000 provision for loan losses for the full year of 2015 or an increase of $2.7 million between years. A substantially higher than typical provision and net loan charge-offs were recorded in the first quarter of 2016 and were necessary to resolve the Company’s only meaningful direct loan exposure to the energy industry. These loans were related to a single borrower in the fracking industry who had filed for bankruptcy protection in the fourth quarter of 2015. The bankruptcy changed from Chapter 11 (reorganization) to Chapter 7 (liquidation), and the Company concluded that its previously established reserves on these non-accrual loans were not sufficient to cover the discounted collateral values that resulted from the liquidation process. As a result of this action, the Company also experienced heightened net loan charge-offs of $3.9 million, or 0.44%, of total loans in 2016, compared to net loan charge-offs of $952,000, or 0.11% of total loans, in 2015. Overall, the Company continued to maintain excellent asset quality. At December 31, 2016, non-performing assets totaled $1.6 million, or only 0.18% of total loans, which is down by $4.7 million from the prior year-end and is one of the lowest levels ever reported by the Company. In summary, the allowance for loan losses provided a strong 612% coverage of non-performing loans, and 1.12% of total loans, at December 31, 2016, compared to 158% coverage of non-performing loans, and 1.13% of total loans, at December 31, 2015.

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

										AT DECEMBER 31,
		2017								2016								2015								2014								2013
		AMOUNT				PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS				AMOUNT				PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS				AMOUNT				PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS				AMOUNT				PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS				AMOUNT				PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS
						(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial		$	4,299				17.8	%		$	4,041				19.3	%		$	4,244				20.6	%		$	3,262				16.8	%		$	2,844				15.3	%
Commercial loans secured by real estate			3,666				52.0				3,584				50.4				3,449				47.9				3,902				49.6				4,885				52.6
Real estate-mortgage			1,102				28.0				1,169				28.1				1,173				29.3				1,310				31.3				1,260				30.1
Consumer			128				2.2				151				2.2				151				2.2				190				2.3				136				2.0
Allocation to general risk			1,019				—				987				—				904				—				959				—				979				—
Total		$	10,214				100.0	%		$	9,932				100.0	%		$	9,921				100.0	%		$	9,623				100.0	%		$	10,104				100.0	%

Even though residential real estate-mortgage loans comprise 28.0% of the Company’s total loan portfolio, only $1.1 million or 10.8% of the total ALL is allocated against this loan category. The residential real estate-mortgage loan allocation is based upon the Company’s three-year historical average of actual loan charge-offs experienced in that category and other qualitative factors. The disproportionately higher allocations for commercial loans and commercial loans secured by real estate reflect the increased credit risk associated with this type of lending, the Company’s historical loss experience in these categories, and other qualitative factors. The stability in the part of the allowance allocated to each loan category reflects the continued strong asset quality of each sector.

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Based on the Company’s ALL methodology and the related assessment of the inherent risk factors contained within the Company’s loan portfolio, we believe that the ALL is adequate at December 31, 2017 to cover losses within the Company’s loan portfolio.

NON-INTEREST INCOME... Non-interest income for 2017 totalled $14.6 million, an increase of $7,000, or 0.1%, from 2016. Factors contributing to this higher level of non-interest income in 2017 included:

Non-interest income for 2016 totalled $14.6 million, a decrease of $629,000, or 4.1%, from 2015. Factors contributing to this lower level of non-interest income in 2016 included:

NON-INTEREST EXPENSE... Non-interest expense for 2017 totalled $40.8 million, which represents an $849,000, or 2.0%, decrease from 2016. Factors contributing to the lower non-interest expense in 2017 included:

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Non-interest expense for 2016 totalled $41.6 million, which represents a $577,000, or 1.4%, increase from 2015. Factors contributing to the higher non-interest expense in 2016 included:

INCOME TAX EXPENSE... The Company recorded an income tax expense of $5.3 million, or an effective tax rate of 61.9%, in 2017. The higher income tax expense is due to the enactment into law of “H.R.1.”, known as the “Tax Cuts and Jobs Act”, which necessitated the revaluation of the Company’s deferred tax asset because of the new lower corporate tax rate. The revaluation required that the Company recognize additional income tax expense of $2.6 million which was recorded in December of 2017. Without this charge, the Company’s effective tax rate would have approximated 31.5% in 2017. In 2016, income tax expense totalled $897,000, or an effective tax rate of 28.0%. Beginning in 2018, we expect a reduction in the Company’s effective tax rate to approximately 20% which we believe will provide a meaningful boost to future earnings. The Company’s deferred tax asset was $6.0 million at December 31, 2017 and relates primarily to AMT carryforwards and the ALL.

SEGMENT RESULTS... Retail banking’s net income contribution was $2.7 million in 2017 and decreased from the $3.0 million contribution in 2016 and $3.0 million in 2015. The decrease in 2017 reflects a higher volume of fixed rate residential mortgage loans being sold in the secondary market resulting in a lower volume held on our balance sheet. Interest expense is also higher between years due to higher deposit totals and certain indexed money market accounts repriced upward with the increases in the fed funds rate. Favorably impacting the retail segment’s income was a lower level of non-interest expense due to the Company’s focus on reducing and controlling costs which resulted in lower employee and occupancy expenses due to a branch consolidation. Finally, FDIC insurance expense and miscellaneous expenses are lower in 2017.

The commercial banking segment reported net income of $5.8 million in 2017 compared to net income of $3.3 million in 2016 and $5.4 million in 2015. The net income contribution for 2017 increased due to the lower provision for loan losses. The higher loan loss provision in 2016 was necessary to resolve the troubled energy sector loan that had a significant negative impact to reported net income in 2016. Also, a decrease in classified assets and the level of delinquency during the year contributed to the lower provision expense. Growth in commercial real estate loans over the past year also contributed to the higher level of net income. In addition to the growth experienced in the CRE portfolio the commercial banking segment also benefitted from a lower level of non-interest expense due to the closure of a loan production office and additional operation efficiencies.

The trust segment’s net income contribution was $1.4 million in 2017 compared to $1.1 million in 2016 and $1.3 million in 2015. The increase to total income occurred as expenses returned to a more normal level after additional costs were necessary in 2016 to address a trust operations trading error. Also, the higher level of net income results from continued effective management of existing customer accounts as asset market values have improved. Finally, income from the Financial Services business unit increased as wealth management continues to be an important strategic focus of the Company. Additionally, and slightly offsetting the favorable items mentioned above was additional investment in talent, which contributed to higher salaries

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and benefits expense. Overall, the fair market value of trust assets under administration totaled $2.186 billion at December 31, 2017, an increase of $193 million, or 9.7%, from the December 31, 2016 total of $1.993 billion.

The investment/parent segment reported a net loss of $6.7 million in 2017, which was higher than the net loss of $5.2 million in 2016 and $3.8 million in 2015. The increased loss between years is solely reflective of the higher income tax expense that resulted from the additional income tax charge of $2.6 million recorded in December of 2017 and is related to corporate income tax reform. This additional tax expense more than offset the favourable impact of the higher level of investment securities on the Company’s balance sheet in 2017 that resulted from the Company’s strategic decision to purchase more high quality corporate and taxable municipal securities. This segment continues to feel the most earnings pressure from the continued low interest rate environment. The Company did generate investment security gains of $115,000 in 2017 and $177,000 in 2016 from the sale of certain low balance, rapidly prepaying mortgage backed securities which had a favorable impact on earnings in this segment.

For greater discussion on the future strategic direction of the Company’s key business segments, see “Management’s Discussion and Analysis — Forward Looking Statements.” For a more detailed analysis of the segment results, see Footnote 22.

BALANCE SHEET... The Company’s total consolidated assets of $1.168 billion at December 31, 2017 grew by $13.9 million or 1.2% from the $1.154 billion level at December 31, 2016. This asset growth was due primarily to a $10.1 million or 6.4% increase in total investment securities in 2017. The growth in the investment securities portfolio is the result of management electing to diversify the mix of the investment securities portfolio through purchases of high quality corporate and taxable municipal securities. This revised strategy for securities purchases was facilitated by the increase in national interest rates that resulted in improved opportunities to purchase additional securities and grow the portfolio. This investment securities increase was partially offset by a $1.0 million decrease in short term investments. Total loan growth of $5.9 million or 0.7% between years was lower than what is typically experienced as loan production slowed in the second half of the year because of the uncertainty in the market from potential regarding the timing that corporate tax reform would be enacted. The loan growth that did occur was due to continued successful results of the Company’s intensive sales calling efforts with an emphasis on generating commercial loans and owner occupied CRE loans particularly through its loan production offices.

The Company’s deposits at period end declined by $19.8 million and was offset by an increase in FHLB borrowings ($37 million). The increase in FHLB borrowings occurred in overnight borrowed funds. The FHLB term advances, with maturities between 3 and 5 years, remained relatively stable at $46 million as the Company has utilized these advances to help mitigate interest rate risk. Other liabilities decreased by $3.0 million due to a decrease in the Company’s pension liability. Total stockholders’ equity decreased by $293,000 since year-end 2016 due to the impact of the Company returning more capital to its shareholders through the common stock repurchase program. This along with the negative impact that the additional income tax charge had on total equity more than offset retained earnings growth. The Company continues to be considered well capitalized for regulatory purposes with a risk based capital ratio of 13.21% and an asset leverage ratio of 9.32% at December 31, 2017. The Company’s book value per common share was $5.25, its tangible book value per common share was $4.59 and its tangible common equity to tangible assets ratio was 7.20% at December 31, 2017.

LIQUIDITY... The Company’s liquidity position has been strong during the last several years. Our core retail deposit base has grown over the past four years and has been adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities was also used to help fund loan growth. We strive to operate our loan to deposit ratio in a range of 85% to 100%. At December 31, 2017, the Company’s loan to deposit ratio was 91.5%. Given current commercial loan pipelines and the continued development of our three existing loan production offices, we are optimistic that we can grow our loan to deposit ratio and remain within our guideline parameters.

Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents increased by $115,000 from December 31, 2016, to December 31, 2017, due to $12.7 million of cash provided by financing activities and $7.7 million of cash provided by operating activities. This was offset

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by $20.2 million of cash used in investing activities. Within investing activities, cash advanced for new loan fundings and purchases totalled $166.4 million and was $6.3 million higher than the $160.1 million of cash received from loan principal payments and sales. Within financing activities, deposits decreased by $19.8 million. Total FHLB borrowings increased as advances, both short-term and long term, were increased by $37.0 million. Early in the first quarter of 2016, the Company redeemed the $21 million preferred stock issued to the US Treasury under the SBLF program.

The holding company had a total of $9.9 million of cash, short-term investments, and investment securities at December 31, 2017. Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the holding company. At December 31, 2017, our subsidiary Bank had $2.7 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. As such, the holding company has strong liquidity to meet its trust preferred debt service requirements, its subordinated debt interest payments, its common stock dividends, and support its common stock repurchase program, which in total should approximate $3.3 million over the next twelve months.

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investment securities, time deposits with banks, federal funds sold, and short-term investments in money market funds. These assets totaled $42 million and $38 million at December 31, 2017 and 2016, respectively. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.

Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the FHLB systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary bank is a member of the FHLB, which provides the opportunity to obtain short- to longer-term advances based upon the Company’s investment in assets secured by one- to four-family residential real estate. At December 31, 2017, the Company had $371 million of overnight borrowing availability at the FHLB, $34 million of short-term borrowing availability at the Federal Reserve Bank and $35 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

CAPITAL RESOURCES... The Company meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The asset leverage ratio was 9.32% and the risk based capital ratio was 13.21% at December 31, 2017. We anticipate that we will maintain our strong capital ratios throughout 2018. On January 24, 2017, the Company’s Board of Directors approved a common stock repurchase program that called for AmeriServ Financial, Inc. to buy back up to 5% or approximately 945,000 shares of its outstanding common stock over an 18 month time period beginning on the day of announcement. The shares may be purchased from time to time in open market, privately negotiated, or block transactions. This common stock repurchase program does not obligate the Company to acquire any specific number of shares and may be modified, suspended or discontinued at any time. During 2017, the Company returned $3.4 million of capital to its shareholders through the repurchase of 839,337 shares of its common stock in 2017. This represents approximately 89% of the authorized common stock repurchase program. Capital generated from earnings will be utilized to pay the common stock cash dividend, support the stock repurchase program and will also support controlled balance sheet growth. Our common dividend payout ratio for the full year 2017 was 33.7%. Total Parent Company cash was $9.9 million at December 31, 2017.

On January 1, 2015, U.S. federal banking agencies implemented the new Basel III capital standards, which establish the minimum capital levels to be considered well-capitalized and revise the prompt corrective action requirements under banking regulations. The revisions from the previous standards include a revised definition of capital, the introduction of a minimum Common Equity Tier 1 capital ratio and changed risk weightings for certain assets. The implementation of the new rules will be phased in over a four year period ending January 1, 2019 with minimum capital requirements becoming increasingly more strict each year of the transition. The new minimum capital requirements for each ratio, both, initially on January 1, 2015 and at the end of the transition on January 1, 2019, are as follows: A common equity tier 1 capital ratio of 4.5%

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initially and 7.0% at January 1, 2019; a tier 1 capital ratio of 6.0% and 8.50%; a total capital ratio of 8.0% and 10.50%; and a tier 1 leverage ratio of 5.00% and 5.00%. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer above its minimum risk-based capital requirements, which increases over the transition period, from 0.625% of total risk weighted assets in 2016 to 2.5% in 2019. The Company continues to be committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a return to our shareholders.

The Company’s capital position will be more than adequate to meet the revised regulatory capital requirements.

INTEREST RATE SENSITIVITY... Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company’s net interest income, net income and capital. The management and measurement of interest rate risk at the Company is performed by using the following tools: 1) simulation modeling, which analyzes the impact of interest rate changes on net interest income, net income and capital levels over specific future time periods. The simulation modeling forecasts earnings under a variety of scenarios that incorporate changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling incorporates assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities; 2) market value of portfolio equity sensitivity analysis, and 3) static GAP analysis, which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. The overall interest rate risk position and strategies are reviewed by senior management and the Company’s Board on an ongoing basis.

The following table presents a summary of the Company’s static GAP positions at December 31, 2017:

INTEREST SENSITIVITY PERIOD		3 MONTHS OR LESS				OVER 3 MONTHS THROUGH 6 MONTHS				OVER 6 MONTHS THROUGH 1 YEAR				OVER 1 YEAR				TOTAL
		(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
RATE SENSITIVE ASSETS:
Loans and loans held for sale		$	272,879			$	55,391			$	113,203			$	451,285			$	892,758
Investment securities			33,294				6,179				11,496				116,921				167,890
Short-term assets			7,954				—				—				—				7,954
Regulatory stock			4,675				—				—				2,125				6,800
Bank owned life insurance			—				—				37,860				—				37,860
Total rate sensitive assets		$	318,802			$	61,570			$	162,559			$	570,331			$	1,113,262
RATE SENSITIVE LIABILITIES:
Deposits:
Non-interest bearing deposits		$	—			$	—			$	—			$	183,603			$	183,603
NOW			4,620				—				33,042				132,681				170,343
Money market			193,829				—				—				44,290				238,119
Other savings			24,146				—				—				72,437				96,583
Certificates of deposit of $100,000 or more			6,649				9,511				8,034				6,103				30,297
Other time deposits			52,633				21,761				28,135				126,471				229,000
Total deposits			281,877				31,272				69,211				565,585				947,945
Borrowings			51,084				4,000				6,000				54,617				115,701
Total rate sensitive liabilities		$	332,961			$	35,272			$	75,211			$	620,202			$	1,063,646
INTEREST SENSITIVITY GAP:
Interval			(14,159	)			26,298				87,348				(49,871	)			—
Cumulative		$	(14,159)			$	12,139			$	99,487			$	49,616			$	49,616
Period GAP ratio			0.96X				1.75X				2.16X				0.82X
Cumulative GAP ratio			0.96				1.03				1.22				1.05
Ratio of cumulative GAP to total assets			(1.21	)%			1.04	%			8.52	%			4.25	%

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When December 31, 2017 is compared to December 31, 2016, the Company’s cumulative GAP ratio through one year indicates that the Company’s balance sheet is still asset sensitive with some improvement noted between years. We continue to see loan customer preference for fixed rate loans given the overall low level of interest rates. Also, we have extended some term advances with the FHLB to help manage our interest rate risk position. Overall, the low level of short interest rates makes this table more difficult to analyze since there is little room for certain deposit liabilities to reprice downward further.

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

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

INTEREST RATE SCENARIO		VARIABILITY OF NET INTEREST INCOME				CHANGE IN MARKET VALUE OF PORTFOLIO EQUITY
200 bp increase			1.4	%			18.7	%
100 bp increase			1.0				11.0
100 bp decrease			(1.1	)			(16.5	)