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

 

FORM 10-Q

 

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

For the period ended March 31, 2017

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

For the transition period from            to          

Commission File Number 0-11204

AmeriServ Financial, Inc.

(Exact name of registrant as specified in its charter)

 

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

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

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

 

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

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

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

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

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

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

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

Class		Outstanding at May 1, 2017
Common Stock, par value $0.01		18,668,784

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AmeriServ Financial, Inc.
 
INDEX

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) — March 31, 2017 and December 31, 2016			1
Consolidated Statements of Operations (Unaudited) — Three months ended March 31, 2017 and 2016			2
Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended March 31, 2017 and 2016			3
Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2017 and 2016			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosure About Market Risk			41
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Mine Safety Disclosures			42
Item 5. Other Information			42
Item 6. Exhibits			42

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Item 1. Financial Statements

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

		March 31, 2017				December 31, 2016
ASSETS
Cash and due from depository institutions		$	22,696			$	25,107
Interest bearing deposits			2,748				3,066
Short-term investments in money market funds			5,572				5,900
Total cash and cash equivalents			31,016				34,073
Investment securities:
Available for sale			129,044				127,077
Held to maturity (fair value $36,594 on March 31, 2017 and $30,420 on December 31, 2016)			36,737				30,665
Loans held for sale			2,613				3,094
Loans			897,296				884,240
Less: Unearned income			453				476
Allowance for loan losses			10,080				9,932
Net loans			886,763				873,832
Premises and equipment, net			11,968				11,694
Accrued interest income receivable			3,200				3,116
Goodwill			11,944				11,944
Bank owned life insurance			38,044				37,903
Net deferred tax asset			9,998				10,655
Federal Home Loan Bank stock			4,284				3,359
Federal Reserve Bank stock			2,125				2,125
Other assets			4,391				4,243
TOTAL ASSETS		$	1,172,127			$	1,153,780
LIABILITIES
Non-interest bearing deposits		$	182,528			$	188,808
Interest bearing deposits			782,248				778,978
Total deposits			964,776				967,786
Short-term borrowings			33,676				12,754
Advances from Federal Home Loan Bank			46,042				45,542
Guaranteed junior subordinated deferrable interest debentures, net			12,912				12,908
Subordinated debt, net			7,447				7,441
Total borrowed funds			100,077				78,645
Other liabilities			11,670				11,954
TOTAL LIABILITIES			1,076,523				1,058,385
SHAREHOLDERS’ EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,536,139 shares issued and 18,666,520 outstanding on March 31, 2017; 26,521,291 shares issued and 18,903,472 outstanding on December 31, 2016			265				265
Treasury stock at cost, 7,869,619 shares on March 31, 2017 and 7,617,819 on December 31, 2016			(75,821	)			(74,829	)
Capital surplus			145,577				145,535
Retained earnings			37,066				36,001
Accumulated other comprehensive loss, net			(11,483	)			(11,577	)
TOTAL SHAREHOLDERS’ EQUITY			95,604				95,395
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,172,127			$	1,153,780

 
 
See accompanying notes to unaudited consolidated financial statements.

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

		Three months ended March 31,
		2017				2016
INTEREST INCOME
Interest and fees on loans		$	9,556			$	9,465
Interest bearing deposits			2				7
Short-term investments in money market funds			24				10
Investment securities:
Available for sale			901				767
Held to maturity			265				173
Total Interest Income			10,748				10,422
INTEREST EXPENSE
Deposits			1,436				1,254
Short-term borrowings			19				42
Advances from Federal Home Loan Bank			162				159
Guaranteed junior subordinated deferrable interest debentures			280				280
Subordinated debt			130				129
Total Interest Expense			2,027				1,864
NET INTEREST INCOME			8,721				8,558
Provision for loan losses			225				3,100
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,496				5,458
NON-INTEREST INCOME
Trust and investment advisory fees			2,166				2,075
Service charges on deposit accounts			374				415
Net gains on sale of loans			114				107
Mortgage related fees			75				63
Net realized gains on investment securities			27				57
Bank owned life insurance			141				167
Other income			665				553
Total Non-Interest Income			3,562				3,437
NON-INTEREST EXPENSE
Salaries and employee benefits			6,010				6,166
Net occupancy expense			674				737
Equipment expense			419				436
Professional fees			1,200				1,465
Supplies, postage and freight			194				195
Miscellaneous taxes and insurance			294				291
Federal deposit insurance expense			160				179
Other expense			1,134				1,242
Total Non-Interest Expense			10,085				10,711
PRETAX INCOME (LOSS)			1,973				(1,816	)
Provision (benefit) for income tax expense			625				(549	)
NET INCOME (LOSS)			1,348				(1,267	)
Preferred stock dividends			—				15
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	1,348			$	(1,282	)
PER COMMON SHARE DATA:
Basic:
Net income (loss)		$	0.07			$	(0.07	)
Average number of shares outstanding			18,814				18,884
Diluted:
Net income (loss)		$	0.07			$	(0.07	)
Average number of shares outstanding			18,922				18,884
Cash dividends declared		$	0.015			$	0.010

 
 
See accompanying notes to unaudited consolidated financial statements.

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

		Three Months Ended March 31,
		2017				2016
COMPREHENSIVE INCOME (LOSS)
Net income (loss)		$	1,348			$	(1,267	)
Other comprehensive income, before tax:
Pension obligation change for defined benefit plan			77				504
Income tax effect			(27	)			(171	)
Unrealized holding gains on available for sale securities arising during period			92				1,115
Income tax effect			(30	)			(379	)
Reclassification adjustment for gains on available for sale securities included in net income			(27	)			(57	)
Income tax effect			9				19
Other comprehensive income			94				1,031
Comprehensive income (loss)		$	1,442			$	(236	)

 
 
See accompanying notes to unaudited consolidated financial statements.

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

		Three months ended March 31,
		2017				2016
OPERATING ACTIVITIES
Net income (loss)		$	1,348			$	(1,267	)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses			225				3,100
Depreciation expense			428				445
Net amortization of investment securities			126				87
Net realized gains on investment securities available for sale			(27	)			(57	)
Net gains on loans held for sale			(114	)			(107	)
Amortization of deferred loan fees			(51	)			(74	)
Origination of mortgage loans held for sale			(7,583	)			(7,226	)
Sales of mortgage loans held for sale			8,178				7,898
Increase in accrued interest income receivable			(84	)			(238	)
Decrease in accrued interest payable			(139	)			(167	)
Earnings on bank owned life insurance			(141	)			(167	)
Deferred income taxes			623				(976	)
Amortization of deferred issuance costs			10				10
Stock based compensation expense			42				55
Other, net			(233	)			(912	)
Net cash provided by operating activities			2,608				404
INVESTING ACTIVITIES
Purchases of investment securities – available for sale			(14,195	)			(6,128	)
Purchases of investment securities – held to maturity			(6,476	)			(2,107	)
Proceeds from sales of investment securities – available for sale			5,653				4,248
Proceeds from maturities of investment securities – available for sale			6,570				6,649
Proceeds from maturities of investment securities – held to maturity			375				253
Purchases of regulatory stock			(4,531	)			(4,929	)
Proceeds from redemption of regulatory stock			3,606				4,910
Long-term loans originated			(50,495	)			(52,432	)
Principal collected on long-term loans			37,520				48,974
Loans purchased or participated			(150	)			(3,995	)
Loans sold or participated			—				5,000
Proceeds from sale of other real estate owned			23				13
Purchases of premises and equipment			(702	)			(227	)
Net cash (used in) provided by investing activities			(22,802	)			229
FINANCING ACTIVITIES
Net (decrease) increase in deposit balances			(3,010	)			3,479
Net increase (decrease) in other short-term borrowings			20,922				(8,796	)
Principal borrowings on advances from Federal Home Loan Bank			3,500				2,000
Principal repayments on advances from Federal Home Loan Bank			(3,000	)			(1,000	)
Preferred stock redemption			—				(21,000	)
Purchase of treasury stock			(992	)			—
Common stock dividends			(283	)			(188	)
Preferred stock dividends			—				(15	)
Net cash provided by (used in) financing activities			17,137				(25,520	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(3,057	)			(24,887	)
CASH AND CASH EQUIVALENTS AT JANUARY 1			34,073				48,510
CASH AND CASH EQUIVALENTS AT MARCH 31		$	31,016			$	23,623

 
 
See accompanying notes to unaudited consolidated financial statements.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 16 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.0 billion that are not reported on the Company’s consolidated balance sheet at March 31, 2017. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

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

2. Basis of Preparation

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

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

3. Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical measures it may elect at adoption, but does not anticipate the amendment will have a significant impact to the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the Company expects to recognize a right of use asset and a lease liability for its operating leases commitments. The Company also anticipates additional disclosures to be provided at adoption.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Recent Accounting Pronouncements  – (continued)

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a heading instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact that the Update will have on our consolidated financial statements. The overall impact of the amendment will be affected by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.

In January 2017, the FASB issued ASU No. 2017-03 “Accounting Changes and Error Corrections (Topic 250) and Investments — Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of “SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). This announcement applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU 2016-03, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments. The Company has enhanced its disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on its accounting and disclosures in this footnote.

4. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are excluded for earnings per share purposes. The Company had no options to purchase common shares excluded from the computation of diluted earnings per common share, since all option exercise prices were below the average closing price for the first quarter of 2017. Due to the net loss as of March 31, 2016, all options to purchase common shares were not included in

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Earnings Per Common Share  – (continued)

the computation of diluted earnings per common share because to do so would be antidilutive. Dividends on preferred shares are deducted from net income in the calculation of earnings per common share.

		Three months ended March 31,
		2017				2016
		(In thousands, except per share data)
Numerator:
Net income		$	1,348			$	(1,267	)
Preferred stock dividends			—				(15	)
Net income available to common shareholders		$	1,348			$	(1,282	)
Denominator:
Weighted average common shares outstanding (basic)			18,814				18,884
Effect of stock options			108				—
Weighted average common shares outstanding (diluted)			18,922				18,884
Earnings per common share:
Basic		$	0.07			$	(0.07	)
Diluted			0.07				(0.07	)

5. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits and short-term investments in money market funds. The Company made $3,000 in income tax payments in the first three months of 2017 and $438,500 in the same 2016 period. The Company made total interest payments of $2,166,000 in the first three months of 2017 compared to $2,031,000 in the same 2016 period. The Company had $20,000 non-cash transfers to other real estate owned (OREO) in the first three months of 2017 compared to $38,000 non-cash transfers in the same 2016 period.

6. Investment Securities

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

Investment securities available for sale (AFS):

		March 31, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	1,397			$	—			$	(6	)		$	1,391
US Agency mortgage-backed securities			88,508				1,023				(641	)			88,890
Taxable municipal			5,450				13				(176	)			5,287
Corporate bonds			33,881				196				(601	)			33,476
Total		$	129,236			$	1,232			$	(1,424	)		$	129,044

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Investment securities held to maturity (HTM):

		March 31, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	10,784			$	186			$	(67	)		$	10,903
Taxable municipal			19,907				144				(341	)			19,710
Corporate bonds and other securities			6,046				17				(82	)			5,981
Total		$	36,737			$	347			$	(490	)		$	36,594

Investment securities available for sale (AFS):

		December 31, 2016
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	400			$	—			$	(2	)		$	398
US Agency mortgage-backed securities			88,738				1,132				(686	)			89,184
Taxable municipal			3,793				3				(174	)			3,622
Corporate bonds			34,403				194				(724	)			33,873
Total		$	127,334			$	1,329			$	(1,586	)		$	127,077

Investment securities held to maturity (HTM):

		December 31, 2016
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	11,177			$	180			$	(79	)		$	11,278
Taxable municipal			13,441				70				(348	)			13,163
Corporate bonds and other securities			6,047				15				(83	)			5,979
Total		$	30,665			$	265			$	(510	)		$	30,420

Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of “A.” At March 31, 2017, 61.3% of the portfolio was rated “AAA” as compared to 79.1% at December 31, 2016. Approximately 10.7% of the portfolio was either rated below “A” or unrated at March 31, 2017 as compared to 5.7% at December 31, 2016.

The Company sold $5.7 million AFS securities in the first quarter of 2017 resulting in $27,000 of gross investment security gains and sold $4.2 million AFS securities in the first three months of 2016 resulting in $63,000 of gross investment security gains and $6,000 of gross investment security losses.

The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits, and certain Federal Home Loan Bank borrowings was $111,529,000 at March 31, 2017 and $104,953,000 at December 31, 2016.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

The following tables present information concerning investments with unrealized losses as of March 31, 2017 and December 31, 2016 (in thousands):

Total investment securities:

		March 31, 2017
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	1,391			$	(6	)		$	—			$	—			$	1,391			$	(6	)
US Agency mortgage-backed securities			52,169				(645	)			1,478				(63	)			53,647				(708	)
Taxable municipal			14,830				(517	)			—				—				14,830				(517	)
Corporate bonds and other securities			17,979				(450	)			7,766				(233	)			25,745				(683	)
Total		$	86,369			$	(1,618	)		$	9,244			$	(296	)		$	95,613			$	(1,914	)

Total investment securities:

		December 31, 2016
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	398			$	(2	)		$	—			$	—			$	398			$	(2	)
US Agency mortgage-backed securities			49,918				(703	)			1,576				(62	)			51,494				(765	)
Taxable municipal			13,301				(522	)			—				—				13,301				(522	)
Corporate bonds and other securities			20,380				(570	)			6,762				(237	)			27,142				(807	)
Total		$	83,997			$	(1,797	)		$	8,338			$	(299	)		$	92,335			$	(2,096	)

The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 111 positions that are considered temporarily impaired at March 31, 2017. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

Contractual maturities of securities at March 31, 2017 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The duration of the total investment securities portfolio at March 31, 2017 is 45.2 months and is higher than the duration at December 31, 2016 which was 41.2 months. The duration remains within our internal established guideline range of 24 to 60 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Total investment securities:

		March 31, 2017
		Available for sale								Held to maturity
		Cost Basis				Fair Value				Cost Basis				Fair Value
Within 1 year		$	3,000			$	2,993			$	—			$	—
After 1 year but within 5 years			8,881				8,843				3,400				3,349
After 5 years but within 10 years			44,213				44,313				12,105				12,069
After 10 years but within 15 years			32,673				32,399				13,578				13,431
Over 15 years			40,469				40,496				7,654				7,745
Total		$	129,236			$	129,044			$	36,737			$	36,594

7. Loans

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

		March 31, 2017				December 31, 2016
Commercial		$	169,348			$	171,529
Commercial loans secured by real estate			461,017				446,598
Real estate – mortgage			246,907				245,765
Consumer			19,571				19,872
Loans, net of unearned income		$	896,843			$	883,764

Loan balances at March 31, 2017 and December 31, 2016 are net of unearned income of $453,000 and $476,000, respectively. Real estate-construction loans comprised 4.0% and 4.7% of total loans, net of unearned income at March 31, 2017 and December 31, 2016, respectively.

8. Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three month periods ending March 31, 2017 and 2016 (in thousands).

		Three months ended March 31, 2017
		Balance at December 31, 2016				Charge-Offs				Recoveries				Provision (Credit)				Balance at March 31, 2017
Commercial		$	4,041			$	—			$	7			$	(24	)		$	4,024
Commercial loans secured by real estate			3,584				(14	)			2				175				3,747
Real estate – mortgage			1,169				(94	)			66				26				1,167
Consumer			151				(63	)			19				42				149
Allocation for general risk			987				—				—				6				993
Total		$	9,932			$	(171	)		$	94			$	225			$	10,080

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

		Three months ended March 31, 2016
		Balance at December 31, 2015				Charge-Offs				Recoveries				Provision (Credit)				Balance at March 31, 2016
Commercial		$	4,244			$	(3,339	)		$	7			$	2,655			$	3,567
Commercial loans secured by real estate			3,449				—				28				229				3,706
Real estate – mortgage			1,173				(38	)			42				(20	)			1,157
Consumer			151				(205	)			4				195				145
Allocation for general risk			904				—				—				41				945
Total		$	9,921			$	(3,582	)		$	81			$	3,100			$	9,520

The provision expense, charge-offs and recoveries were at more typical levels in the first quarter of 2017. The substantially higher than typical provision and net loan charge-offs in the first three months 2016 for the commercial portfolio was 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. With the bankruptcy changing from Chapter 11 (reorganization) to Chapter 7 (liquidation) late in the first quarter of 2016, 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.

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

		At March 31, 2017
		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Loans:
Individually evaluated for impairment		$	484			$	173			$	—			$	—							$	657
Collectively evaluated for impairment			168,864				460,844				246,907				19,571								896,186
Total loans		$	169,348			$	461,017			$	246,907			$	19,571							$	896,843
Allowance for loan losses:
Specific reserve allocation		$	484			$	23			$	—			$	—			$	—			$	507
General reserve allocation			3,540				3,724				1,167				149				993				9,573
Total allowance for loan losses		$	4,024			$	3,747			$	1,167			$	149			$	993			$	10,080

		At December 31, 2016
		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Loans:
Individually evaluated for impairment		$	496			$	178			$	—			$	—							$	674
Collectively evaluated for impairment			171,033				446,420				245,765				19,872								883,090
Total loans		$	171,529			$	446,598			$	245,765			$	19,872							$	883,764
Allowance for loan losses:
Specific reserve allocation		$	496			$	31			$	—			$	—			$	—			$	527
General reserve allocation			3,545				3,553				1,169				151				987				9,405
Total allowance for loan losses		$	4,041			$	3,584			$	1,169			$	151			$	987			$	9,932

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

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

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

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

		March 31, 2017
		Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance
Commercial		$	484			$	484			$	—			$	484			$	511
Commercial loans secured by real estate			157				23				16				173				207
Total impaired loans		$	641			$	507			$	16			$	657			$	718

		December 31, 2016
		Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance
Commercial		$	496			$	496			$	—			$	496			$	517
Commercial loans secured by real estate			162				31				16				178				209
Total impaired loans		$	658			$	527			$	16			$	674			$	726

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

		Three months ended March 31,
		2017				2016
Average loan balance:
Commercial		$	331			$	1,162
Commercial loans secured by real estate			335				615
Average investment in impaired loans		$	666			$	1,777
Interest income recognized:
Commercial		$	6			$	3
Commercial loans secured by real estate			2				—
Interest income recognized on a cash basis on impaired loans		$	8			$	3

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board’s Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2017 requires review of a minimum range of 50% to 55% of the commercial loan portfolio.

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

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

		March 31, 2017
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	166,609			$	1,083			$	1,172			$	484			$	169,348
Commercial loans secured by real estate			447,160				12,441				1,400				16				461,017
Total		$	613,769			$	13,524			$	2,572			$	500			$	630,365

		December 31, 2016
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	168,116			$	1,087			$	1,830			$	496			$	171,529
Commercial loans secured by real estate			436,318				7,497				2,767				16				446,598
Total		$	604,434			$	8,584			$	4,597			$	512			$	618,127

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

		March 31, 2017
		Performing				Non-Performing
Real estate – mortgage		$	246,101			$	806
Consumer			19,571				—
Total		$	265,672			$	806

		December 31, 2016
		Performing				Non-Performing
Real estate – mortgage		$	244,836			$	929
Consumer			19,872				—
Total		$	264,708			$	929

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

		March 31, 2017
		Current				30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days Past Due				Total Past Due				Total Loans				90 Days Past Due and Still Accruing
Commercial		$	169,208			$	140			$	—			$	—			$	140			$	169,348			$	—
Commercial loans secured by real estate			456,482				4,535				—				—				4,535				461,017				—
Real estate – mortgage			243,120				2,784				595				408				3,787				246,907				—
Consumer			19,485				64				22				—				86				19,571				—
Total		$	888,295			$	7,523			$	617			$	408			$	8,548			$	896,843			$	—

		December 31, 2016
		Current				30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days Past Due				Total Past Due				Total Loans				90 Days Past Due and Still Accruing
Commercial		$	171,292			$	237			$	—			$	—			$	237			$	171,529			$	—
Commercial loans secured by real estate			446,477				121				—				—				121				446,598				—
Real estate – mortgage			241,802				2,856				610				497				3,963				245,765				—
Consumer			19,795				50				27				—				77				19,872				—
Total		$	879,366			$	3,264			$	637			$	497			$	4,398			$	883,764			$	—

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

An allowance for loan losses (“ALL”) is maintained to support loan growth and cover charge-offs from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are complemented by consideration of other qualitative factors.

Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.

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

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

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

		March 31, 2017				December 31, 2016
Non-accrual loans
Commercial		$	484			$	496
Commercial loans secured by real estate			173				178
Real estate – mortgage			806				929
Total			1,463				1,603
Other real estate owned
Real estate – mortgage			25				21
Total			25				21
TDR’s not in non-accrual			—				—
Total non-performing assets including TDR		$	1,488			$	1,624
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.17	%			0.18	%

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

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

		Three months ended March 31,
		2017				2016
Interest income due in accordance with original terms		$	16			$	59
Interest income recorded			—				—
Net reduction in interest income		$	16			$	59

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

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

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the modification. No single factor is determinative of whether a restructuring is a TDR. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean that the borrower is experiencing financial difficulty. Accordingly, determination of whether a modification is a TDR involves a large degree of judgment.

The Company had no loans modified as TDRs during the three month period ending March 31, 2017 and 2016.

In all instances where loans have been modified in troubled debt restructurings the pre- and post-modified balances are the same. The specific ALL reserve for loans modified as TDR’s was $507,000 and $24,000 as of March 31, 2017 and 2016, respectively. All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed.

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

The Company had no loans that were classified as TDR’s or were subsequently modified during each 12-month period prior to the current reporting periods, which begin January 1, 2016 and 2015 respectively, and that subsequently defaulted during these reporting periods.

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.

Foreclosed assets acquired in settlement of loans carried at fair value less estimated costs to sell are included in the other assets on the Consolidated Balance Sheet. As of March 31, 2017 and December 31, 2016, a total of $25,000 and $21,000, respectively of residential real estate foreclosed assets were included in other assets. As of March 31, 2017, the Company had initiated formal foreclosure procedures on $321,000 of consumer residential mortgages.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Federal Home Loan Bank Borrowings

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

		At March 31, 2017
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	33,676				0.95	%
Advances			2017				9,000				1.11
			2018				12,000				1.48
			2019				12,500				1.51
			2020				11,542				1.60
			2021 and over				1,000				1.60
Total advances							46,042				1.41
Total FHLB borrowings						$	79,718				1.22	%

		At December 31, 2016
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	12,754				0.74	%
Advances			2017				12,000				1.06
			2018				12,000				1.48
			2019				12,500				1.51
			2020				8,042				1.59
			2021 and over				1,000				1.60
Total advances							45,542				1.37
Total FHLB borrowings						$	58,296				1.23	%

The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance. All FHLB stock along with an interest in certain residential mortgage and CRE loans with an aggregate statutory value equal to the amount of the advances are pledged as collateral to the FHLB of Pittsburgh to support these borrowings.

11. Preferred Stock

On August 11, 2011, pursuant to the Small Business Lending Fund (SBLF), the Company issued and sold to the US Treasury 21,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E Preferred Stock) for the aggregate proceeds of $21 million. The SBLF was a voluntary program sponsored by the US Treasury that encouraged small business lending by providing capital to qualified community banks at favorable rates. The Company used the proceeds from the Series E Preferred Stock issued to the US Treasury to repurchase all 21,000 shares of its outstanding preferred shares previously issued to the US Treasury under the Capital Purchase Program.

On January 27, 2016, the Company redeemed the Series E Preferred Stock, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, after receiving approval from its federal banking regulator and the US Treasury.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2017 and 2016 (in thousands):

		Three months ended March 31, 2017												Three months ended March 31, 2016
		Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)				Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)
Beginning balance		$	(171	)		$	(11,406	)		$	(11,577	)		$	808			$	(8,363	)		$	(7,555	)
Other comprehensive income (loss) before reclassifications			62				(210	)			(148	)			736				333				1,069
Amounts reclassified from accumulated other comprehensive loss			(18	)			260				242				(38	)			—				(38	)
Net current period other comprehensive income			44				50				94				698				333				1,031
Ending balance		$	(127	)		$	(11,356	)		$	(11,483	)		$	1,506			$	(8,030	)		$	(6,524	)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016 (in thousands):

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the three months ended March 31, 2017				For the three months ended March 31, 2016				Affected line item in the consolidated statement of operations
Realized (gains) and losses on sale of securities
		$	(27	)		$	(57	)			Net realized gains on investment securities
			9				19				Provision for income tax expense
		$	(18	)		$	(38	)			Net of tax
Amortization of defined benefit items Recognized net actuarial loss		$	395			$	—				Salaries and employee benefits
			(135	)			—				Provision for income taxes
		$	260			$	—				Net of tax
Total reclassifications for the period		$	242			$	(38	)			Net income

13. Regulatory Capital

The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory

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13. Regulatory Capital  – (continued)

and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. For a more detailed discussion see the Capital Resources section of the MD&A.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier I capital (as defined in the regulations) to risk-weighted assets (RWA) (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of March 31, 2017, the Bank was categorized as “Well Capitalized” under the regulatory framework for prompt corrective action promulgated by the Federal Reserve. The Company believes that no conditions or events have occurred that would change this conclusion as of such date. To be categorized as Well Capitalized, the Bank must maintain minimum Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital, and Tier 1 leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.21% at March 31, 2017 (in thousands, except ratios).

		AT MARCH 31, 2017
		COMPANY								BANK								MINIMUM REQUIRED FOR CAPITAL ADEQUACY PURPOSES				TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION REGULATIONS*
		AMOUNT				RATIO				AMOUNT				RATIO				RATIO				RATIO
		(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)		$	125,331				13.03	%		$	108,243				11.32	%			8.00	%			10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)			95,143				9.89				97,346				10.18				4.50				6.50
Tier 1 Capital (To Risk Weighted Assets)			106,987				11.13				97,346				10.18				6.00				8.00
Tier 1 Capital (To Average Assets)			106,987				9.33				97,346				8.63				4.00				5.00

		AT DECEMBER 31, 2016
		COMPANY								BANK								MINIMUM REQUIRED FOR CAPITAL ADEQUACY PURPOSES				TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION REGULATIONS*
		AMOUNT				RATIO				AMOUNT				RATIO				RATIO				RATIO
		(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)		$	125,131				13.15	%		$	107,618				11.35	%			8.00	%			10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)			95,028				9.99				96,796				10.21				4.50				6.50
Tier 1 Capital (To Risk Weighted Assets)			106,868				11.23				96,796				10.21				6.00				8.00
Tier 1 Capital (To Average Assets)			106,868				9.35				96,796				8.61				4.00				5.00

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. DERIVATIVE HEDGING INSTRUMENTS

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

To accommodate a customer need and support the Company’s asset/liability positioning, we entered into an interest rate swap with the customer and Pittsburgh National Bank (PNC) in the first quarter of 2017. This arrangement involves the exchange of interest payments based on the notional amounts. The Company entered into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company entered into an offsetting fixed rate swap with PNC. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay PNC the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. This transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations. The Company received a $58,000 fee on the transaction.

The following table summarizes the interest rate swap transactions that impacted the Company’s first quarter 2017 performance.

START DATE		MATURITY DATE				HEDGE TYPE				NOTIONAL AMOUNT				RATE RECEIVED				RATE PAID				REPRICING FREQUENCY				INCREASE (DECREASE) IN INTEREST EXPENSE
01/12/17			01/12/27				FAIR VALUE			$	5,000,000				4.50	%			3.10	%			MONTHLY			$	15,367
01/12/17			01/12/27				FAIR VALUE				5,000,000				3.10				4.50				MONTHLY				(15,367	)
																										$	—

The Company monitors and controls all derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions. All hedge transactions must be approved in advance by the Investment Asset/Liability Committee (ALCO) of the Board of Directors. The Company had no caps or floors outstanding at March 31, 2017.

15. Segment Results

The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. The Company’s major business units include retail banking, commercial banking, trust, and investment/parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.

Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and local business commercial loans. Commercial banking to businesses includes commercial loans, and CRE loans. The trust segment contains our wealth management businesses which include the Trust Company and West Chester Capital Advisors (WCCA), our registered investment advisory firm and financial services. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15. Segment Results  – (continued)

services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on corporate debt, and centralized interest rate risk management. Inter-segment revenues were not material.

The contribution of the major business segments to the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 were as follows (in thousands):

		Three months ended March 31, 2017
		Total revenue				Net income (loss)
Retail banking		$	6,243			$	617
Commercial banking			4,725				1,472
Trust			2,326				367
Investment/Parent			(1,011	)			(1,108	)
Total		$	12,283			$	1,348

		Three months ended March 31, 2016
		Total revenue				Net income (loss)
Retail banking		$	6,297			$	583
Commercial banking			4,635				(835	)
Trust			2,177				145
Investment/Parent			(1,114	)			(1,160	)
Total		$	11,995			$	(1,267	)

16. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $159.8 million and $160.5 million along with standby letters of credit of $8.4 million and $8.5 million as of March 31, 2017 and December 31, 2016, respectively. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operation or cash flows.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17. Pension Benefits

The Company has a noncontributory defined benefit pension plan covering certain employees who work at least 1,000 hours per year. The participants shall have a vested interest in their accrued benefit after five full years of service. The benefits of the plan are based upon the employee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. Plan assets are primarily debt securities (including US Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three months ended March 31, 2017 and 2016 were as follows (in thousands):

		Three months ended March 31,
		2017				2016
Components of net periodic benefit cost
Service cost		$	390			$	368
Interest cost			326				344
Expected return on plan assets			(631	)			(563	)
Recognized net actuarial loss			367				314
Net periodic pension cost		$	452			$	463

The Company implemented a soft freeze of its defined benefit pension plan to provide that non-union employees hired on or after January 1, 2013 and union employees hired on or after January 1, 2014 are not eligible to participate in the pension plan. Instead, such employees are eligible to participate in a qualified 401(k) plan. This change was made to help reduce pension costs in future periods.

18. Disclosures about Fair Value Measurements

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

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

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

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

Assets and Liability Measured on a Recurring Basis

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

The following tables present the assets reported on the Consolidated Balance Sheets at their fair value as of March 31, 2017 and December 31, 2016, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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18. Disclosures about Fair Value Measurements  – (continued)

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

		Fair Value Measurements at March 31, 2017 Using
		Total				(Level 1)				(Level 2)				(Level 3)
US Agency securities		$	1,391			$	—			$	1,391			$	—
US Agency mortgage-backed securities			88,890				—				88,890				—
Taxable municipal			5,287				—				5,287				—
Corporate bonds			33,476				—				33,476				—
Fair value swap asset			5				—				—				5

		Fair Value Measurements at December 31, 2016 Using
		Total				(Level 1)				(Level 2)				(Level 3)
US Agency securities		$	398			$	—			$	398			$	—
Taxable municipal			3,622				—				3,622				—
Corporate bonds			33,873				—				33,873				—
US Agency mortgage-backed securities			89,184				—				89,184				—

Assets Measured on a Non-recurring Basis

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At March 31, 2017, impaired loans with a carrying value of $657,000 were reduced by a specific valuation allowance totaling $507,000 resulting in a net fair value of $150,000. At December 31, 2016, impaired loans with a carrying value of $674,000 were reduced by a specific valuation allowance totaling $527,000 resulting in a net fair value of $147,000.

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

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

		Fair Value Measurements at March 31, 2017 Using
		Total				(Level 1)				(Level 2)				(Level 3)
Impaired loans		$	150			$	—			$	—			$	150
Other real estate owned			25				—				—				25

		Fair Value Measurements at December 31, 2016 Using
		Total				(Level 1)				(Level 2)				(Level 3)
Impaired loans		$	147			$	—			$	—			$	147
Other real estate owned			21				—				—				21

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18. Disclosures about Fair Value Measurements  – (continued)

March 31, 2017		Quantitative Information About Level 3 Fair Value Measurements
		Fair Value Estimate		Valuation Techniques		Unobservable Input		Range (Wgtd Ave)
Impaired loans		$150		Appraisal of collateral(1),(3)		Appraisal adjustments(2)		40% to 77% (42%)
Other real estate owned		25		Appraisal of collateral(1),(3)		Appraisal adjustments(2) Liquidation expenses		0% to 43% (17%) 2% to 206% (108%)

December 31, 2016		Quantitative Information About Level 3 Fair Value Measurements
		Fair Value Estimate		Valuation Techniques		Unobservable Input		Range (Wgtd Ave)
Impaired loans		$147		Appraisal of collateral(1),(3)		Appraisal adjustments(2)		40% to 99% (45%)
Other real estate owned		21		Appraisal of collateral(1),(3)		Appraisal adjustments(2) Liquidation expenses		20% to 77% (42%) 3% to 199% (37%)

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded book balances at March 31, 2017 and December 31, 2016, were as follows (in thousands):

		March 31, 2017
		Carrying Value				Fair Value				(Level 1)				(Level 2)				(Level 3)
FINANCIAL ASSETS:
Cash and cash equivalents		$	31,016			$	31,016			$	31,016			$	—			$	—
Investment securities – AFS			129,044				129,044				—				129,044				—
Investment securities – HTM			36,737				36,594				—				33,648				2,946
Regulatory stock			6,409				6,409				6,409				—				—
Loans held for sale			2,613				2,660				2,660				—				—
Loans, net of allowance for loan loss and unearned income			886,763				882,004				—				—				882,004
Accrued interest income receivable			3,200				3,200				3,200				—				—
Bank owned life insurance			38,044				38,044				38,044				—				—
Fair value swap asset			5				5				—				—				5
FINANCIAL LIABILITIES:
Deposits with no stated maturities		$	709,932			$	709,932			$	709,932			$	—			$	—
Deposits with stated maturities			254,844				255,220				—				—				255,220
Short-term borrowings			33,676				33,676				33,676				—				—
All other borrowings			66,401				69,833				—				—				69,833
Accrued interest payable			1,501				1,501				1,501				—				—
Fair value swap liability			5				5				—				—				5