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, 2016

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 “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was $57,068,566 as of June 30, 2016.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 18,903,472 shares outstanding as of January 31, 2017.

DOCUMENTS INCORPORATED BY REFERENCE.

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

FORM 10-K INDEX

		Page No.
PART I
Item 1. Business			2
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			12
Item 2. Properties			12
Item 3. Legal Proceedings			12
Item 4. Mine Safety Disclosures			12
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer     Purchases of Equity Securities			13
Item 6. Selected Consolidated Financial Data			14
Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and     Results of Operations			15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			36
Item 8. Financial Statements and Supplementary Data			37
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial     Disclosure			92
Item 9A. Controls and Procedures			92
Item 9B. Other Information			92
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			93
Item 11. Executive Compensation			93
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related     Stockholder Matters			94
Item 13. Certain Relationships and Related Transactions, and Director Independence			94
Item 14. Principal Accountant Fees and Services			94
PART IV
Item 15. Exhibits, Financial Statement Schedules			95
Signatures			97

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, 2016, the Company had, on a consolidated basis, total assets, deposits, and shareholders’ equity of $1.154 billion, $968 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 16 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 18 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.

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, 2016:

Headquarters		Johnstown, PA
Total Assets		$	1,134,827
Total Investment Securities			149,178
Total Loans and Loans Held for Sale (net of unearned income)			886,858
Total Deposits			967,986
Total Net Income			3,379
Asset Leverage Ratio			8.61	%
Return on Average Assets			0.30
Return on Average Equity			3.32
Total Full-time Equivalent Employees			235

RISK MANAGEMENT OVERVIEW:

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

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

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

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

Commercial Loans

This category includes credit extensions to commercial and industrial borrowers. Business assets, including accounts receivable, inventory and/or equipment, typically secure these credits. In appropriate instances, extensions of credit in this category are subject to collateral advance formulas. Balance sheet strength and profitability are considered when analyzing these credits, with special attention given to historical, current and prospective sources of cash flow, and the ability of the customer to sustain cash flow at acceptable levels. The Bank’s policy permits flexibility in determining acceptable debt service coverage ratios. 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.

Commercial Loans Secured by Real Estate

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

Residential Real Estate — Mortgages

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

Consumer Loans

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

INVESTMENTS

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

The investment portfolio is primarily made up of AAA rated agency mortgage-backed securities and short maturity agency securities. Beginning in 2012, the Company began to add high quality corporate securities and select taxable municipal securities to the portfolio. Management strives to maintain a relatively short duration in the portfolio. All holdings must meet standards documented in 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,
		2016				2015				2014
		(IN THOUSANDS)
U.S. Agency		$	400			$	2,900			$	5,931
Taxable municipal			3,793				—				—
Corporate bonds			34,403				18,541				15,497
U.S. Agency mortgage-backed securities			88,738				96,801				102,888
Total cost basis of investment securities available for sale		$	127,334			$	118,242			$	124,316
Total fair value of investment securities available for sale		$	127,077			$	119,467			$	127,110

Investment securities held to maturity at:

		AT DECEMBER 31,
		2016				2015				2014
		(IN THOUSANDS)
Taxable municipal		$	13,441			$	5,592			$	3,364
U.S. Agency mortgage-backed securities			11,177				10,827				12,481
Corporate bonds and other securities			6,047				5,000				3,995
Total cost basis of investment securities held to maturity		$	30,665			$	21,419			$	19,840
Total fair value of investment securities held to maturity		$	30,420			$	21,533			$	20,213

DEPOSITS AND OTHER SOURCES OF FUNDS

Deposits

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

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

		AT DECEMBER 31,
		2016								2015								2014
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Demand:
Non-interest bearing		$	182,732				—%			$	171,175				—	%		$	155,365				—	%
Interest bearing			108,350				0.29				97,201				0.21				97,641				0.20
Savings			95,986				0.17				94,425				0.17				89,554				0.16
Money market			277,967				0.43				242,298				0.34				228,150				0.33
Other time			290,612				1.28				287,783				1.24				300,915				1.26
Total deposits		$	955,647				0.70	%		$	892,882				0.66	%		$	871,625				0.68	%

Loans

The loan portfolio of the Company consisted of the following:

		AT DECEMBER 31,
		2016				2015				2014				2013				2012
		(IN THOUSANDS)
Commercial		$	171,563			$	181,115			$	139,158			$	120,120			$	102,864
Commercial loans secured by real estate(1)			447,040				422,145				410,851				412,254				383,934
Real estate-mortgage(1)			245,765				257,937				258,616				235,689				217,584
Consumer			19,872				20,344				19,009				15,864				17,420
Total loans			884,240				881,541				827,634				783,927				721,802
Less: Unearned income			476				557				554				581				637
Total loans, net of unearned income		$	883,764			$	880,984			$	827,080			$	783,346			$	721,165

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,
		2016				2015				2014				2013				2012
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
Commercial		$	496			$	4,260			$	—			$	—			$	—
Commercial loans secured by real estate			178				18				778				1,632				4,623
Real estate-mortgage			929				1,788				1,417				1,239				1,191
Total			1,603				6,066				2,195				2,871				5,814
Other real estate owned:
Commercial loans secured by real estate			—				—				384				344				1,101
Real estate-mortgage			21				75				128				673				127
Total			21				75				512				1,017				1,228
Total restructured loans not in non-accrual (TDR)			—				156				210				221				182
Total non-performing assets including TDR		$	1,624			$	6,297			$	2,917			$	4,109			$	7,224
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.18	%			0.71	%			0.35	%			0.52	%			1.00	%

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,
		2016				2015				2014				2013				2012
		(IN THOUSANDS)
Interest income due in accordance with original terms		$	118			$	94			$	136			$	178			$	231
Interest income recorded			—				—				—				—				—
Net reduction in interest income		$	118			$	94			$	136			$	178			$	231

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 46 professionals administers assets valued at approximately $2.0 billion that are not recognized on the Company’s balance sheet at December 31, 2016. 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, 2016, the Trust Company had total assets of $4.8 million and total stockholder’s equity of $4.8 million. In 2016, the Trust Company contributed earnings to the Company as its gross revenue amounted to $8.0 million and the net income contribution was $905,000. 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, 2016, AmeriServ Life had total assets of $384,000.

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

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 increased from a 6.5% average in 2015 to a 6.8% average in 2016. The Johnstown, PA MSA continues to have the highest jobless rate 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 increased from a 3.8% average in 2015 to a 4.1% average in 2016 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 increased from a 5.2% average in 2015 to a 5.7% average in 2016.

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 increased from a 5.1% average in 2015 to a 5.3% average in 2016.

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 5.5% average in 2015 to a 4.6% average in 2016.

EMPLOYEES

The Company employed 326 people as of December 31, 2016 in full- and part-time positions. Approximately 159 non-supervisory employees of the Company are represented by the United Steelworkers, AFL-CIO-CLC, Local Union 2635-06. The Company is under a four year labor contract with the United Steelworkers Local that will expire on October 15, 2017. The contract calls for annual wage increases of 3.0%. Additionally, effective January 1, 2014, the Company implemented a soft freeze of its defined benefit pension plan for union employees. A soft freeze means that all existing union employees as of December 31, 2013 currently participating will remain in the defined benefit pension plan but any new union employees hired after January 1, 2014 will no longer be part of the defined benefit plan but instead will be offered retirement benefits under an enhanced 401(k) program. The Company has not experienced a work stoppage since 1979. The Company is one of an estimated ten union-represented banks nationwide.

INDUSTRY REGULATION

The banking and trust industry, and the operation of bank holding companies, is highly regulated by federal and state law, and by numerous regulations adopted by the federal banking agencies and state banking agencies. Bank regulation affects all aspects of conducting business as a bank, including such major items as minimum capital requirements, limits on types and amounts of investments, loans and other assets, as well as borrowings and other liabilities, and numerous restrictions or requirements on the loan terms and other products made available to customers, particularly consumers. Federal deposit insurance from the Federal Deposit Insurance Corporation (the FDIC) is required for all banks in the United States, and maintaining FDIC insurance requires observation of the various rules of the FDIC, as well as payment of deposit premiums. New branches, or acquisitions or mergers, are required to be pre-approved by the responsible agency, which in the case of the Company and the Bank is the Federal Reserve and the PDB. The Bank 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, 2016, the Company believes that its bank subsidiary was well capitalized, based on the prompt corrective action guidelines described above. As discussed below, however, the capital requirements for all banks are being increased under the Dodd-Frank Act. Specifically, on July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new capital to risk-adjusted assets requirements (which includes the impact of the capital conservation buffer effective January 1, 2016) are as follows:

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

Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital

requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2016 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity tier 1 capital 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). The Company is continuing to review the impact of these new rules and currently expects that its capital position will be more than adequate to meet the revised regulatory capital requirements.

DIVIDEND RESTRICTIONS

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

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

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

SARBANES-OXLEY ACT OF 2002

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

PRIVACY PROVISIONS

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

USA PATRIOT ACT

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

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

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

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.

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. Seven additional locations are leased with terms expiring from January 1, 2017 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.

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, 2017, the Company had 3,327 shareholders of record for its common stock. The Company’s common stock is traded on the NASDAQ Global Market System under the symbol “ASRV.” The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:

		PRICES								CASH DIVIDENDS DECLARED
		HIGH				LOW
Year ended December 31, 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
Year ended December 31, 2015
First Quarter		$	3.13			$	2.88			$	0.01
Second Quarter			3.44				3.00				0.01
Third Quarter			3.41				3.20				0.01
Fourth Quarter			3.39				3.16				0.01

The declaration of cash dividends on the Company’s common stock is at the discretion of the Board, and any decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition, regulatory capital levels, applicable covenants under any credit agreements and other contractual restrictions, Pennsylvania law, federal and Pennsylvania bank regulatory law, and other factors deemed relevant. Additionally, the Company’s announced a new common stock repurchase program which calls for the buyback of up to 5%, or approximately 945,000 shares, of its common stock during the next 18 months.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

		AT OR FOR THE YEAR ENDED DECEMBER 31,
		2016				2015				2014				2013				2012
		(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income		$	41,869			$	41,881			$	40,441			$	39,343			$	39,917
Total interest expense			7,735				6,520				6,397				6,482				7,714
Net interest income			34,134				35,361				34,044				32,861				32,203
Provision (credit) for loan losses			3,950				1,250				375				(1,100	)			(775	)
Net interest income after provision (credit) for loan losses			30,184				34,111				33,669				33,961				32,978
Total non-interest income			14,638				15,267				14,323				15,744				14,943
Total non-interest expense			41,615				41,038				43,371				42,223				40,641
Income before income taxes			3,207				8,340				4,621				7,482				7,280
Provision for income taxes			897				2,343				1,598				2,289				2,241
Net income		$	2,310			$	5,997			$	3,023			$	5,193			$	5,039
Net income available to common shareholders		$	2,295			$	5,787			$	2,813			$	4,984			$	4,211
PER COMMON SHARE DATA:
Basic earnings per share		$	0.12			$	0.31			$	0.15			$	0.26			$	0.21
Diluted earnings per share			0.12				0.31				0.15				0.26				0.21
Cash dividends declared			0.05				0.04				0.04				0.03				0.00
Book value at period end			5.05				5.19				4.97				4.91				4.67
BALANCE SHEET AND OTHER DATA:
Total assets		$	1,153,780			$	1,148,497			$	1,089,263			$	1,056,036			$	1,000,991
Loans and loans held for sale, net of unearned income			886,858				883,987				832,131				786,748				731,741
Allowance for loan losses			9,932				9,921				9,623				10,104				12,571
Investment securities available for sale			127,077				119,467				127,110				141,978				151,538
Investment securities held to maturity			30,665				21,419				19,840				18,187				13,723
Deposits			967,786				903,294				869,881				854,522				835,734
Total borrowed funds			78,645				117,058				93,965				79,640				41,745
Stockholders’ equity			95,395				118,973				114,407				113,307				110,468
Full-time equivalent employees			305				318				314				352				350
SELECTED FINANCIAL RATIOS:
Return on average assets			0.20	%			0.54	%			0.29	%			0.51	%			0.51	%
Return on average total equity			2.30				5.10				2.61				4.69				4.51
Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end			91.64				97.86				95.66				92.07				87.56
Ratio of average total equity to average assets			8.79				10.65				10.92				10.86				11.36
Common stock cash dividends as a percent of net income available to common shareholders			41.18				13.03				26.73				11.36				—
Interest rate spread			3.08				3.33				3.36				3.39				3.43
Net interest margin			3.26				3.49				3.52				3.56				3.65
Allowance for loan losses as a percentage of loans, net of unearned income, at period end			1.12				1.13				1.16				1.29				1.74
Non-performing assets as a percentage of loans and other real estate owned, at period end			0.18				0.71				0.35				0.52				1.00
Net charge-offs as a percentage of average loans			0.44				0.11				0.11				0.18				0.19
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits			2.26X				4.68X				3.30X				5.13X				3.80X
Including interest on deposits			1.40				2.19				1.67				2.07				1.80
Cumulative one year interest rate sensitivity gap ratio, at period end			1.44				1.23				1.13				1.09				1.30

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, 2016, 2015, AND 2014

2016 SUMMARY OVERVIEW:

AmeriServ closed 2016 with its third consecutive profitable quarter while it continued to recover from the net loss of the first quarter. The Company reported net income for the fourth quarter of $1,150,000 or $0.06 earnings per share. When consolidated with the previous quarters of 2016, net income for the year was $2,310,000 or $0.12 per share. The fourth quarter was $85,000 above the third quarter of 2016, but $224,000 below the fourth quarter of 2015. These results reflect the continuing impact of the net loss recorded in the first quarter. We continue to take full responsibility for putting the expenses related to the Trust Company trading error, and our only loan to the energy industry, behind us immediately. AmeriServ’s quick return to profitability tells us that these were self-contained events and therefore do not indicate any continuing risk to the Company.

We believe the marketplace agrees, net loans have begun to increase again and deposits closed the quarter at an all-time high and very near the $1 billion mark. However, even more encouraging was that the total revenue of the Trust Company was at an all-time high in the fourth quarter of 2016. It is also important to note that as 2016 ended, the level of non-performing assets was at the lowest level ever reported. We believe that our present balance sheet is well positioned for the higher level of interest rates which have developed since the November election. It is a fact that it was necessary to take corrective actions and such actions take time and money. Therefore, the fourth quarter level of operating expenses were $339,000 higher than the same period in 2015. As those expenses disappear, our focus on increasing revenues should show a very positive trend line.

Looking to that speedy return to profitability, AmeriServ requested and received from the regulators their non-objection to implement a common stock repurchase program. This program could reduce the outstanding shares by almost one million, thus increasing the value of any continuing shares. This action following so soon after the cash dividend increase, announced in August, indicates our commitment to improving the return to our shareholders.

You may also recall that the Pennsylvania State Education Association has named AmeriServ as its preferred residential mortgage and consumer lender. Their 190,000 members can accomplish an entire residential mortgage transaction through a dedicated and centralized application center at AmeriServ. Since this program is functioning so well with Pennsylvania’s schoolteachers, we are approaching other similar associations in the Keystone State. This effort combines our new proven procedures with our traditional personal service.

As you know this management team began its tour of duty in March of 2015. In the fourth quarter of 2016 they completed a three-year Strategic Plan to take AmeriServ to 2020. We believe that AmeriServ is an exceptionally clean franchise, a community bank with assets approaching one and one-quarter billion dollars, with a freestanding trust and wealth management subsidiary. The goal of this Board and this Management team is to build this franchise in both profitability and asset size. This new Strategic Plan is the road map that will be used in this effort. We intend to maintain our tradition of personal service while incorporating the best in new technology. The University Heights and State College locations are being updated for a better customer experience. These community bank offices will be equipped to accommodate the growing cohort of millennials, while maintaining the time-tested personal service our senior citizens expect and value. It is indeed an exciting time to be a community bank whose mission is to provide “Banking for Life”.

A comment about the national and regional scene is warranted. The contentious national election is now behind us, but the road ahead is unclear. The Federal Reserve policies in recent years have not created a positive economic environment for community banks. The interest rate policies have lessened the support costs of the enormous national debt, but have created tremendous burdens for pensions, for savers and for

community banks. It is good that the existing Federal Reserve policies are beginning to be discussed, but thus far, there has been little tangible action to alleviate these difficult conditions. We decided some time ago on our preferred course of action. It is simply to maintain a conservative balance sheet with strong capital and deep liquidity. Also, we will strive for better than industry measures in our loan and securities portfolios. We think these guidelines, and the counter cyclical nature of our Trust Company, adds up to a strong Company in a struggling economy. There will be no “bet the bank” strategies at AmeriServ and we will remain poised for signs of an upturn in 2017.

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,
		2016				2015				2014
		(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Net income		$	2,310			$	5,997			$	3,023
Net income available to common shareholders			2,295				5,787				2,813
Diluted earnings per share			0.12				0.31				0.15
Return on average assets			0.20	%			0.54	%			0.29	%
Return on average equity			2.30				5.10				2.61

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.

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

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,
		2016				2015				2014
		(IN THOUSANDS, EXCEPT RATIOS)
Interest income		$	41,869			$	41,881			$	40,441
Interest expense			7,735				6,520				6,397
Net interest income			34,134				35,361				34,044
Net interest margin			3.26	%			3.49	%			3.52	%

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% which indicates that the Company has ample room to further grow its loan portfolio in 2017.

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 decrease was due to 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. 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. The growth is also a reflection of the loyalty and stability of our core deposit base. 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%.

Overall, the Company expects that it will need to continue to grow the earning assets to achieve net interest income growth in 2017 as net interest margin compression is expected to slow or bottom. Solid commercial pipelines suggest that the Company should be able to grow the loan portfolio in 2017 although we expect the pricing pressures on new commercial loans to continue to be intense.

2015 NET INTEREST PERFORMANCE OVERVIEW... The Company’s net interest income increased by $1.3 million, or 3.9%, for the full year of 2015 when compared to the full year 2014 as net interest margin compression was more than fully mitigated by earning asset growth, a greater level of prepayment fees on early loan payoffs and an increased dividend from the FHLB of Pittsburgh. The Company’s net interest margin of 3.49% for the full year 2015 was three basis points lower than the net interest margin of 3.52% for the full year 2014. The earning asset growth occurred in the loan portfolio as total loans averaged $857 million for the full year of 2015 which is $52 million, or 6.5%, higher than the $805 million average for the full year of 2014. This loan growth reflects the successful results of the Company’s sales calling efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans particularly through its loan production offices in the stronger growth markets of Pittsburgh and Altoona in Pennsylvania, Hagerstown, Maryland. Overall, total interest income increased by $1.4 million, or 3.6%, for the full year 2015.

Total interest expense was well controlled in 2015 as it increased by $123,000, or 1.9%, for the full year of 2015 due to tight control of our cost of funds through disciplined deposit pricing. Total deposit interest expense decreased by $137,000, or 2.8%, in 2015 when compared to 2014. Even with this reduction in deposit costs, the Company continues to have a strong loyal core deposit base and success in cross-selling new loan customers into deposit products. Specifically, total deposits averaged $893 million for full year of 2015 which is $21 million, or 2.4%, higher than the $872 million average in 2014. The Company is pleased that a meaningful portion of this deposit growth occurred in non-interest bearing demand deposit accounts. This decreased interest expense for deposits has been more than offset by a $260,000 increase in the interest cost for borrowings as the Company has utilized more FHLB term advances to extend borrowings and provide protection against rising interest rates.

COMPONENT CHANGES IN NET INTEREST INCOME: 2015 VERSUS 2014... Regarding the separate components of net interest income, the Company’s total interest income in 2015 increased by $1.4 million, or 3.6%, when compared to 2014. This increase was due to a $44.4 million increase in average earning assets due to an increase in average loans, partially offset by a four basis point decline in the earning asset yield from 4.18% to 4.14%. Within the earning asset base, the yield on the total loan portfolio decreased by eight basis points from 4.52% to 4.44% as a greater level of prepayment fees on early loan payoffs was more than offset by the impact from new loans having yields that are below the rate on the maturing instruments that they are replacing. However, the yield on total investment securities increased by seven basis points from 2.60% to 2.67% due to an increased dividend from the FHLB of Pittsburgh and a reduction in premium amortization on mortgage backed securities which resulted from a slowdown in mortgage prepayment speeds in 2015. Investment securities interest revenue declined by $223,000 in 2015 due to a $12 million decrease in the average investment securities portfolio as the Company has utilized cash flow from securities to help fund the previously mentioned loan growth.

The Company’s total interest expense for 2015 increased by $123,000, or 1.9%, when compared to 2014. This increase in interest expense was due to an increased level of average FHLB borrowed funds which more than offset a lower cost of funds as the cost of interest bearing liabilities declined by one basis point to 0.81%. Management’s strategy to carefully price interest rates paid on all deposit categories has not had a negative impact on deposit growth and reflects the loyalty of the bank’s core deposit base. The overall cost of interest bearing deposits decreased by two basis points to 0.66% in spite of a $5.4 million increase in the total average volume. The Company 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 increased by $13 million while the average cost of these advances increased by 20 basis points to 1.21%. Overall, total FHLB borrowings averaged $71 million or 6.4% of total assets during 2015.

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,
		2016												2015												2014
		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		$	887,679			$	37,891				4.27	%		$	857,015			$	38,024				4.44	%		$	804,721			$	36,366				4.52	%
Deposits with banks			1,668				13				0.70				2,198				8				0.34				7,227				5				0.07
Short-term investment in money market funds			15,156				84				0.56				10,700				14				0.14				1,243				7				0.49
Investment securities:
Available for sale			121,630				3,132				2.58				124,383				3,250				2.61				137,839				3,528				2.56
Held to maturity			25,649				779				3.04				20,576				614				2.98				19,399				559				2.88
Total investment securities			147,279				3,911				2.66				144,959				3,864				2.67				157,238				4,087				2.60
TOTAL INTEREST EARNING ASSETS/INTEREST INCOME			1,051,782				41,899				3.99				1,014,872				41,910				4.14				970,429				40,465				4.18
Non-interest earning assets:
Cash and due from banks			20,626												17,312												16,919
Premises and equipment			11,930												12,617												13,282
Other assets			68,046												69,201												69,423
Allowance for loan losses			(9,790	)											(9,766	)											(9,951	)
TOTAL ASSETS		$	1,142,594											$	1,104,236											$	1,060,102
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand		$	108,350			$	317				0.29	%		$	97,201			$	199				0.21	%		$	97,641			$	191				0.20	%
Savings			95,986				159				0.17				94,425				156				0.17				89,554				144				0.16
Money market			277,967				1,198				0.43				242,298				817				0.34				228,150				761				0.33
Other time			290,612				3,726				1.28				287,783				3,580				1.24				300,915				3,793				1.26
Total interest bearing deposits			772,915				5,400				0.70				721,707				4,752				0.66				716,260				4,889				0.68
Federal funds purchased and other short-term borrowings			9,030				52				0.57				24,582				86				0.35				18,783				55				0.29
Advances from Federal Home Loan Bank			48,720				644				1.32				46,166				558				1.21				32,885				333				1.01
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				519				6.79				62				4				6.72				—				—				—
TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE			851,400				7,735				0.91				805,602				6,520				0.81				781,013				6,397				0.82
Non-interest bearing liabilities:
Demand deposits			182,732												171,175												155,365
Other liabilities			8,074												9,871												7,969
Stockholders’ equity			100,388												117,588												115,755
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,142,594											$	1,104,236											$	1,060,102
Interest rate spread											3.08												3.33												3.36
Net interest income/net interest margin							34,164				3.26	%							35,390				3.49	%							34,068				3.52	%
Tax-equivalent adjustment							(30	)											(29	)											(24	)
Net interest income						$	34,134											$	35,361											$	34,044

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.

		2016 vs. 2015												2015 vs. 2014
		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		$	247			$	(380)			$	(133)			$	1,398			$	260			$	1,658
Deposits with banks			(1	)			6				5				16				(13	)			3
Short-term investments in money market funds			7				63				70				42				(35	)			7
Investment securities:
Available for sale			(78	)			(40	)			(118	)			(276	)			(2	)			(278	)
Held to maturity			153				12				165				53				2				55
Total investment securities			75				(28	)			47				(223	)			—				(223	)
Total interest income			328				(339	)			(11	)			1,233				212				1,445
INTEREST PAID ON:
Interest bearing demand deposits			27				91				118				9				(1	)			8
Savings deposits			3				—				3				17				(5	)			12
Money market			136				245				381				70				(14	)			56
Other time deposits			34				112				146				(226	)			13				(213	)
Federal funds purchased and other short-term borrowings			(64	)			30				(34	)			28				3				31
Advances from Federal Home Loan Bank			33				53				86				200				25				225
Subordinated debt			515				—				515				4				—				4
Total interest expense			684				531				1,215				102				21				123
Change in net interest income		$	(356)			$	(870)			$	(1,226)			$	1,131			$	191			$	1,322

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,
		2016				2015				2014
		(IN THOUSANDS, EXCEPT PERCENTAGES)
Total accruing loans past due 30 to 89 days		$	3,278			$	4,396			$	2,643
Total non-accrual loans			1,603				6,066				2,195
Total non-performing assets including TDRs(1)			1,624				6,297				2,917
Loan delinquency as a percentage of total loans, net of unearned income			0.37	%			0.50	%			0.32	%
Non-accrual loans as a percentage of total loans, net of unearned income			0.18				0.69				0.27
Non-performing assets as a percentage of total loans, net of unearned income, and other real estate owned			0.18				0.71				0.35
Non-performing assets as a percentage of total assets			0.14				0.55				0.27
Total classified loans (loans rated substandard or doubtful)		$	6,039			$	8,566			$	11,229

The Company continues to maintain excellent asset quality. Non-performing assets declined by $4.7 million since the prior year-end with the early in the year resolution of the Company’s largest energy sector loan and now total $1.6 million, one of the lowest levels reported by the Company. 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 well below 1% of total loans. We continue to closely monitor the loan portfolio given the uneven recovery in the economy and the number of relatively large-sized commercial and CRE loans within the portfolio. As of December 31, 2016, the 25 largest credits represented 26.8% of total loans outstanding.

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,
		2016				2015				2014				2013				2012
		(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year		$	9,921			$	9,623			$	10,104			$	12,571			$	14,623
Charge-offs:
Commercial			(3,648	)			(170	)			(172	)			(50	)			(345	)
Commercial loans secured by real estate			(13	)			(250	)			(708	)			(1,777	)			(796	)
Real estate-mortgage			(291	)			(753	)			(322	)			(139	)			(420	)
Consumer			(344	)			(188	)			(121	)			(154	)			(200	)
Total charge-offs			(4,296	)			(1,361	)			(1,323	)			(2,120	)			(1,761	)
Recoveries:
Commercial			140				101				141				80				138
Commercial loans secured by real estate			40				111				231				481				245
Real estate-mortgage			147				171				71				122				54
Consumer			30				26				24				70				47
Total recoveries			357				409				467				753				484
Net charge-offs			(3,939	)			(952	)			(856	)			(1,367	)			(1,277	)
Provision (credit) for loan losses			3,950				1,250				375				(1,100	)			(775	)
Balance at end of year		$	9,932			$	9,921			$	9,623			$	10,104			$	12,571
Loans and loans held for sale, net of unearned income:
Average for the year		$	887,679			$	857,015			$	804,721			$	746,490			$	688,736
At December 31			886,858				880,984				827,080				786,748				731,741
As a percent of average loans:
Net charge-offs			0.44	%			0.11	%			0.11	%			0.18	%			0.19	%
Provision (credit) for loan losses			0.44				0.15				0.05				(0.15	)			(0.11	)
Allowance as a percent of each of the following:
Total loans, net of unearned income			1.12				1.13				1.16				1.29				1.74
Total accruing delinquent loans (past due 30 to 89 days)			302.99				225.68				364.09				309.56				363.74
Total non-accrual loans			619.59				163.55				438.21				351.93				216.22
Total non-performing assets			611.58				157.55				329.89				245.90				174.02
Allowance as a multiple of net charge-offs			2.52x				10.42x				11.24x				7.39x				9.84x

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 Company presently expects that it will have a more typical loan loss provision in 2017. The expected lower provision will be necessary to cover loan charge-offs and support the anticipated growth in the loan portfolio.

For 2015, the Company recorded a $1,250,000 provision for loan losses which represented an increase of $875,000 when compared to the 2014 full year provision of $375,000. The higher provision that was needed this year was largely due to the transfer into non-accrual status of a $4.1 million loan to a customer in the fracking industry that filed for bankruptcy protection in the fourth quarter. The higher provision recorded in 2015 was also needed to support the continuing growth of the loan portfolio and cover net loan charge-offs. For the full year, there were net loan charge-offs of $952,000, or 0.11% of total loans, in 2015 compared to net loan charge-offs of $856,000, or 0.11% of total loans, in 2014. Overall, even with the fourth quarter increase in non-performing assets, the Company continued to maintain strong asset quality in 2015. At December 31, 2015, non-performing assets totaled $6.3 million, or 0.71% of total loans. When determining the provision for loan losses, the Company considers a number of factors, some of which include periodic credit reviews, non-performing assets, loan delinquency and charge-off trends, concentrations of credit, loan volume trends and broader local and national economic trends. In summary, the allowance for loan losses provided 158% coverage of non-performing loans, and 1.13% of total loans, at December 31, 2015, compared to 400% coverage of non-performing loans, and 1.16% of total loans, at December 31, 2014.

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,
		2016								2015								2014								2013								2012
		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		$	4,041				19.3	%		$	4,244				20.6	%		$	3,262				16.8	%		$	2,844				15.3	%		$	2,596				14.3	%
Commercial loans secured by real estate			3,584				50.4				3,449				47.9				3,902				49.6				4,885				52.6				7,796				53.2
Real estate-mortgage			1,169				28.1				1,173				29.3				1,310				31.3				1,260				30.1				1,269				30.2
Consumer			151				2.2				151				2.2				190				2.3				136				2.0				150				2.3
Allocation to general risk			987				—				904				—				959				—				979				—				760				—
Total		$	9,932				100.0	%		$	9,921				100.0	%		$	9,623				100.0	%		$	10,104				100.0	%		$	12,571				100.0	%

Even though residential real estate-mortgage loans comprise 28.1% of the Company’s total loan portfolio, only $1.2 million or 11.8% 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 large decline in the part of the allowance allocated to commercial loans secured by real estate reflects the continued asset quality improvements in this sector.

Based on the Company’s ALL methodology and the related assessment of the inherent risk factors contained within the Company’s loan portfolio, we believe that the ALL is adequate at December 31, 2016 to cover losses within the Company’s loan portfolio.

NON-INTEREST INCOME... 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 income for 2015 totalled $15.3 million, an increase of $944,000, or 6.6%, from 2014. Factors contributing to this higher level of non-interest income in 2015 included:

NON-INTEREST EXPENSE... 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:

Non-interest expense for 2015 totalled $41.0 million, which represents a $2.3 million, or 5.4%, decrease from 2014. Factors contributing to the lower non-interest expense in 2015 included:

INCOME TAX EXPENSE... The Company recorded income tax expense of $897,000, or an effective tax rate of 28.0%, in 2016 compared to the income tax expense of $2.3 million, or an effective tax rate of 28.1%, for 2015. The lower income tax expense and effective tax rate are due to the first quarter 2016 loss recognized by the Company. The Company’s deferred tax asset was $10.7 million at December 31, 2016 and relates primarily to AMT carryforwards and the ALL.

SEGMENT RESULTS... Retail banking’s net income contribution was $3.0 million in 2016 and was comparable to the $3.0 million contribution in 2015 and $2.2 million in 2014. Net interest income was positively impacted by an increased funding benefit from the significant growth in deposits provided by this segment, which more than fully mitigated the ongoing net interest margin pressure from the continued low interest rate environment. The Retail segment also benefitted from increased efficiencies resulting in a lower overall level of non-interest expense. These positive items more than offset a lower level of non-interest income primarily resulting from decreased revenue from BOLI and reduced deposit service charges.

The commercial banking segment reported net income of $3.3 million in 2016 compared to net income of $5.4 million in 2015 and $4.2 million in 2014. The net income contribution for 2016 decreased as a result of the increased provision for loan losses due to the first quarter charge-off of the energy sector credit. Overhead expense was higher primarily due to increased incentive compensation and non-interest income was negatively impacted by the lower level of BOLI income. These unfavorable items more than offset strong growth in the commercial and commercial real estate loan portfolios which resulted in a higher level of net interest income.

The trust segment’s net income contribution was $1.1 million in 2016 compared to $1.3 million in 2015 and $564,000 in 2014. The reduced net income contribution for 2016 was reflective of the non-recurring additional costs for legal and accounting services recognized in 2016 to address a trust operations trading error and resulted in higher professional fees and other expenses. These additional costs along with a lower level of Trust fee income more than offset successful new business development activities as well as effective management of existing customer accounts in this volatile market environment. Overall, the fair market value of trust assets under administration totaled $1.993 billion at December 31, 2016, an increase of $18 million, or 0.9%, from the December 31, 2015 total of $1.975 billion.

The investment/parent segment reported a net loss of $5.2 million in 2016, which was higher than the net loss of $3.8 million in 2015 and $3.9 million in 2014. Overall this segment has felt the most earnings pressure from the continued low interest rate environment. The lower level of BOLI income recognized by the Company in 2016 also significantly impacted this segment. Additionally, both the interest expense of the trust preferred securities and subordinated debt interest expense are allocated to this segment. Note that the first full year of interest expense associated with the subordinated debt occurred in 2016. The Company did generate investment security gains of $177,000 in 2016 and $71,000 in 2015 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 21.

BALANCE SHEET... The Company’s total consolidated assets of $1.154 billion at December 31, 2016 grew by $5.3 million or 0.5% from the $1.148 billion level at December 31, 2015. This asset growth was due primarily to a $16.9 million or 12.0% increase in total investment securities in 2016. This investment securities increase was partially offset by a $16.1 million decrease in short term investments and cash used to redeem the SBLF preferred stock. Loan growth during this period was $2.9 million or 0.3%, which is lower than the 2015 level due to lower levels of production in the months leading up to the presidential election that was caused by uncertainty in the market. However, loan production in the first six months of 2016 and after the election was at more typical levels 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 also funded the previously mentioned asset growth by increasing deposits ($64 million), partially offset by a reduction in FHLB borrowings ($38 million). The FHLB term advances, with maturities between 3 and 5 years, now total $46 million as the Company has utilized these advances to help mitigate interest rate risk. Other liabilities increased by $2.8 million due to an increase in the Company’s pension liability. Total stockholders’ equity decreased by $23.6 million since year-end 2015 mainly due to the redemption of $21 million of preferred stock from the US Treasury under the SBLF program. The Company continues to be considered well capitalized for regulatory purposes with a risk based capital ratio of 13.15% and an asset leverage ratio of 9.35% at December 31, 2016. The Company’s book value per common share was $5.05, its tangible book value per common share was $4.41 and its tangible common equity to tangible assets ratio was 7.31% at December 31, 2016.

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, 2016, the Company’s loan to deposit ratio was 91.6%. Given current commercial loan pipelines and the continued development of our four 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 Statement of Cash Flows. Cash and cash equivalents decreased by $14.4 million from December 31, 2015, to December 31, 2016, due to $25.2 million of cash used in investing activities. This was partially offset by $6.7 million of cash provided by operating activities and $4.1 million provided by financing activities. Within investing activities, cash advanced for new loan fundings and purchases totalled $214.2 million and was $5.8 million higher than the $208.4 million of cash received from loan principal payments and sales. Within financing activities, deposits increased by $64.5 million, which was used to help fund the overall loan growth experienced in 2016. Total FHLB borrowings decreased as advances, both short-term and long term, were reduced by $38.5 million. Early in 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 $11.5 million of cash, short-term investments, and investment securities at December 31, 2016. Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the holding company. At December 31, 2016, our subsidiary Bank had $3.5 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 $4.9 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 $38 million and $45 million at December 31, 2016 and 2015, 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, 2016, the Company had $402 million of overnight borrowing availability at the FHLB, $29 million of short-term borrowing availability at the Federal Reserve Bank and $39 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

CAPITAL RESOURCES... The Company meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The asset leverage ratio was 9.35% and the risk based capital ratio was 13.15% at December 31, 2016. We anticipate that we will maintain our strong capital ratios throughout 2017. Capital generated from earnings will be utilized to pay the common stock cash dividend, support the stock repurchase program and will also support anticipated balance sheet growth. Our common dividend payout ratio for the full year 2016 was 41.2%. Late in 2015, the Company issued $7.65 million of subordinated debt which qualifies as Tier 2 capital for regulatory capital calculation purposes. In the first quarter of 2016, we used the net proceeds from the subordinated debt issuance along with a meaningful portion of holding company cash to redeem the SBLF preferred stock prior to the interest rate on the SBLF increasing from 1% to 9%. In the third quarter of 2016, the Company increased its common stock dividend by $0.005 to $0.015 per common share. Total Parent Company cash was $11.5 million at December 31, 2016.

The Company’s Board of Directors approved a new common stock repurchase program which calls for AmeriServ Financial, Inc. to buy back up to 5% or approximately 945,000 shares of its outstanding common stock during the next 18 months. 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. As of December 31, 2016, the Company had approximately 18.9 million shares of its common stock outstanding.

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% 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, 2016:

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		$	270,021			$	67,271			$	97,093			$	452,473			$	886,858
Investment securities			35,008				4,920				9,791				108,023				157,742
Short-term assets			8,966				—				—				—				8,966
Regulatory stock			3,359				—				—				2,125				5,484
Bank owned life insurance			—				—				37,903				—				37,903
Total rate sensitive assets		$	317,354			$	72,191			$	144,787			$	562,621			$	1,096,953
RATE SENSITIVE LIABILITIES:
Deposits:
Non-interest bearing deposits		$	—			$	—			$	—			$	188,808			$	188,808
NOW			4,576				—				—				159,225				163,801
Money market			207,625				—				—				51,353				258,978
Other savings			24,119				—				—				72,356				96,475
Certificates of deposit of $100,000 or more			5,800				8,753				6,835				6,039				27,427
Other time deposits			46,281				23,435				18,858				143,723				232,297
Total deposits			288,401				32,188				25,693				621,504				967,786
Borrowings			15,754				2,000				7,000				53,891				78,645
Total rate sensitive liabilities		$	304,155			$	34,188			$	32,693			$	675,395			$	1,046,431
INTEREST SENSITIVITY GAP:
Interval			13,199				38,003				112,094				(112,774	)			—
Cumulative		$	13,199			$	51,202			$	163,296			$	50,522			$	50,522
Period GAP ratio			1.04X				2.11X				4.43X				0.83X
Cumulative GAP ratio			1.04				1.15				1.44				1.05
Ratio of cumulative GAP to total assets			1.14	%			4.44	%			14.15	%			4.38	%

When December 31, 2016 is compared to December 31, 2015, the Company’s cumulative GAP ratio through one year indicates that the Company’s balance sheet is still asset sensitive with some improvement noted between years. We continue to see loan customer preference for fixed rate loans given the overall low level of interest rates. Also, we have extended some term advances with the FHLB to help manage our interest rate risk position. Overall, the absolute low level of short interest rates makes this table more difficult to analyze since there is little room for certain deposit liabilities to reprice downward further.

Management places primary emphasis on simulation modeling to manage and measure interest rate risk. The Company’s asset/liability management policy seeks to limit net interest income variability over the first twelve months of the forecast period to +/-7.5%, which include interest rate movements of 200 basis points. Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet 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			3.6	%			20.5	%
100 bp increase			2.1				11.9
100 bp decrease			(3.0	)			(16.8	)

The Company believes that its overall interest rate risk position is well controlled. The variability of net interest income is positive in the upward rate shocks due to the Company’s short duration investment securities portfolio and scheduled repricing of loans tied to LIBOR or prime. Also, the Company expects that it will not have to reprice its core deposit accounts up as quickly when interest rates rise. The variability of net interest income is negative in the 100 basis point downward rate scenario as the Company has more exposure to assets repricing downward to a greater extent than liabilities due to the absolute low level of interest rates with the fed funds rate currently at a targeted range of 0.50% to 0.75%. The market value of portfolio equity increases in the upward rate shocks due to the improved value of the Company’s core deposit base. Negative variability of market value of portfolio equity occurs in the downward rate shock due to a reduced value for core deposits.

Within the investment portfolio at December 31, 2016, 81% of the portfolio is classified as available for sale and 19% as held to maturity. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity if needed. The mark to market of the available for sale securities does inject more volatility in the book value of equity, but has no impact on regulatory capital. There are 101 securities that are temporarily impaired at December 31, 2016. The Company reviews its securities quarterly and has asserted that at December 31, 2016, the impaired value of securities represents temporary declines due to movements in interest rates and the Company does have the ability and intent to hold those securities to maturity or to allow a market recovery. Furthermore, it is the Company’s intent to manage its long-term interest rate risk by continuing to sell newly originated fixed-rate 30-year mortgage loans into the secondary market (excluding construction and any jumbo loans). The Company also sells 15-year fixed-rate mortgage loans into the secondary market as well, depending on market conditions. For the year 2016, 83% of all residential mortgage loan production was sold into the secondary market.

The amount of loans outstanding by category as of December 31, 2016, which are due in (i) one year or less, (ii) more than one year through five years, and (iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.

		ONE YEAR OR LESS				MORE THAN ONE YEAR THROUGH FIVE YEARS				OVER FIVE YEARS				TOTAL LOANS
		(IN THOUSANDS, EXCEPT RATIOS)
Commercial		$	50,851			$	75,587			$	45,091			$	171,529
Commercial loans secured by real estate			49,262				132,941				264,395				446,598
Real estate-mortgage			23,051				58,722				167,086				248,859
Consumer			7,546				4,385				7,941				19,872
Total		$	130,710			$	271,635			$	484,513			$	886,858
Loans with fixed-rate		$	41,707			$	123,926			$	258,286			$	423,919
Loans with floating-rate			89,003				147,709				226,227				462,939
Total		$	130,710			$	271,635			$	484,513			$	886,858
Percent composition of maturity			14.7	%			30.6	%			54.6	%			100.0	%
Fixed-rate loans as a percentage of total loans															47.8	%
Floating-rate loans as a percentage of total loans															52.2	%