10-K 1 tv485302_10k.htm 10-K

  

  

 

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



 

FORM 10-K



 

 
(MARK ONE)
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

OR

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

FOR THE TRANSITION PERIOD FROM            TO           

COMMISSION FILE NUMBER 0-11204



 

AMERISERV FINANCIAL, INC.

(Exact name of registrant as specified in its charter)



 

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

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

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



 

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

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

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



 

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE.

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

 

 


 
 

TABLE OF CONTENTS

FORM 10-K INDEX

 
  Page No.
PART I
        

Item 1.

Business

    1  

Item 1A.

Risk Factors

    11  

Item 1B.

Unresolved Staff Comments

    11  

Item 2.

Properties

    11  

Item 3.

Legal Proceedings

    11  

Item 4.

Mine Safety Disclosures

    11  
PART II
        

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    12  

Item 6.

Selected Consolidated Financial Data

    13  

Item 7.

Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

    14  

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

    34  

Item 8.

Financial Statements and Supplementary Data

    36  

Item 9.

Changes in and Disagreements With Accountants On Accounting and Financial Disclosure

    93  

Item 9A.

Controls and Procedures

    93  

Item 9B.

Other Information

    93  
PART III
        

Item 10.

Directors, Executive Officers, and Corporate Governance

    94  

Item 11.

Executive Compensation

    94  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    95  

Item 13.

Certain Relationships and Related Transactions, and Director Independence

    95  

Item 14.

Principal Accountant Fees and Services

    95  
PART IV
        

Item 15.

Exhibits, Financial Statement Schedules

    96  
Signatures     98  

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PART I

ITEM 1. BUSINESS
GENERAL

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

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

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

AMERISERV FINANCIAL BANKING SUBSIDIARY
AMERISERV FINANCIAL BANK

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

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

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

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

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

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

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

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

Commercial Loans

This category includes credit extensions to commercial and industrial borrowers. Business assets, including accounts receivable, inventory and/or equipment, typically secure these credits. In appropriate instances, extensions of credit in this category are subject to collateral advance formulas. Balance sheet strength and profitability are considered when analyzing these credits, with special attention given to historical, current and prospective sources of cash flow, and the ability of the customer to sustain cash flow at acceptable levels. The Bank’s policy permits flexibility in determining acceptable debt service coverage ratios. Personal guarantees are frequently required; however, as the financial strength of the borrower increases, the Bank’s ability to obtain personal guarantees decreases. In addition to economic risk, this category is impacted by the strength of the borrower’s management, industry risk and portfolio concentration risk each of which are also monitored and considered during the underwriting process.

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Commercial Loans Secured by Real Estate

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

Residential Real Estate — Mortgages

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

Consumer Loans

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

INVESTMENTS

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

The investment portfolio is primarily made up of AAA rated agency mortgage-backed securities, short maturity agency securities, high quality corporate securities and select taxable municipal securities. Management strives to maintain a portfolio duration that is less than 60 months. All holdings must meet standards documented in its investment policy.

Investment securities classified as held to maturity are carried at amortized cost while investment securities classified as available for sale are reported at fair market value. The following table sets forth the cost basis and fair value of the Company’s investment portfolio as of the periods indicated:

Investment securities available for sale at:

     
  AT DECEMBER 31,
     2017   2016   2015
     (IN THOUSANDS)
U.S. Agency   $ 6,612     $ 400     $ 2,900  
Taxable municipal     7,198       3,793        
Corporate bonds     35,886       34,403       18,541  
U.S. Agency mortgage-backed securities     79,854       88,738       96,801  
Total cost basis of investment securities available for sale   $ 129,550     $ 127,334     $ 118,242  
Total fair value of investment securities available for sale   $ 129,138     $ 127,077     $ 119,467  

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Investment securities held to maturity at:

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

DEPOSITS

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

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

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

The loan portfolio of the Company consisted of the following:

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

(1) For each of the periods presented beginning with December 31, 2017, real estate-construction loans constituted 4.1%, 4.7%, 3.0%, 3.5% and 3.0% of the Company’s total loans, net of unearned income, respectively.

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Secondary Market Activities

The residential lending department of the Bank continues to originate one-to-four family mortgage loans for customers, the majority of which are sold to outside investors in the secondary market and some of which are retained for the Bank’s portfolio. Mortgages sold on the secondary market are sold to investors on a “flow” basis; mortgages are priced and delivered on a “best efforts” pricing basis, with servicing released to the investor. Fannie Mae/Freddie Mac guidelines are used in underwriting all mortgages with the exception of a limited amount of CRA loans. Mortgages with longer terms, such as 20-year, 30-year, FHA, and VA loans, are usually sold. The remaining production of the department includes construction, adjustable rate mortgages, quality non-salable loans, and bi-weekly mortgages. These loans are usually kept in the Bank’s portfolio. New portfolio production is predominately adjustable rate mortgages.

Non-performing Assets

The following table presents information concerning non-performing assets:

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

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

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

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

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AMERISERV FINANCIAL NON-BANKING SUBSIDIARIES
AMERISERV TRUST AND FINANCIAL SERVICES COMPANY

AmeriServ Trust and Financial Services Company is a trust company organized under Pennsylvania law in October 1992. Its staff of approximately 45 professionals administers assets valued at approximately $2.2 billion that are not recognized on the Company’s balance sheet at December 31, 2017. The Trust Company focuses on wealth management. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. This segment also includes financial services, which include the sale of mutual funds, annuities, and insurance products. The wealth management business also includes the union collective investment funds, namely the ERECT and BUILD funds which are designed to use union pension dollars in construction projects that utilize union labor. The BUILD fund continues in the process of liquidation. At December 31, 2017, the Trust Company had total assets of $5.1 million and total stockholder’s equity of $5.1 million. In 2017, the Trust Company contributed earnings to the Company as its gross revenue amounted to $8.8 million and the net income contribution was $1.1 million. The Trust Company is subject to regulation and supervision by the Federal Reserve Bank of Philadelphia and the PDB.

AMERISERV LIFE

AmeriServ Life is a captive insurance company organized under the laws of the State of Arizona. AmeriServ Life engages in underwriting as reinsurer of credit life and disability insurance within the Company’s market area. Operations of AmeriServ Life are conducted in each office of the Company’s banking subsidiary. AmeriServ Life is subject to supervision and regulation by the Arizona Department of Insurance, the Pennsylvania Insurance Department, and the Board of Governors of the Federal Reserve System (the Federal Reserve). At December 31, 2017, AmeriServ Life had total assets of $284,000.

MONETARY POLICIES

Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve are: open market operations in U.S. Government securities, changes in the federal funds rate and discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Federal Reserve have had, and will continue to have, a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

COMPETITION

Our subsidiaries face strong competition from other commercial banks, savings banks, credit unions, savings and loan associations, and other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions which are substantially larger and have greater financial resources than the Bank and the Trust Company. As the financial services industry continues to consolidate, the scope of potential competition affecting our subsidiaries will also increase. Brokerage houses, consumer finance companies, insurance companies, and pension trusts are important competitors for various types of financial services. In addition, personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals.

MARKET AREA & ECONOMY

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

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

Economic conditions are stronger in the State College market and have demonstrated the same improvement experienced in the national economy. The community is a college town, dominated economically and demographically by the presence of the University Park campus of the Pennsylvania State University. “Happy Valley” is another often-used term to refer to the State College area, including the borough and the townships of College, Harris, Patton, and Ferguson. The unemployment rate for State College MSA decreased from a 4.1% average in 2016 to a 3.7% average in 2017 and remains the one of the lowest of all regions in the Commonwealth. A large percentage of the population in State College falls into the 18 to 34 year old age group, while potential customers in the Cambria/Somerset markets tend to be over 50 years of age.

The Company also has loan production offices in Monroeville in Allegheny County, Altoona in Blair County, Pennsylvania, and Hagerstown in Washington County, Maryland. Monroeville in Allegheny County, Pennsylvania is located 15 miles east of the city of Pittsburgh. While the city is historically known for its steel industry, today its economy is largely based on healthcare, education, technology and financial services. The city of Pittsburgh is home to many colleges, universities and research facilities, the most well-known of which are Carnegie Mellon University, Duquesne University and the University of Pittsburgh. Pittsburgh is rich in art and culture. Pittsburgh museums and cultural sites include the Andy Warhol Museum, the Carnegie Museum of Art, the Frick Art & Historical Center, and Pittsburgh Center for the Arts among numerous others. Pittsburgh is also the home of the Pirates, Steelers and Penguins. The unemployment rate for Pittsburgh MSA decreased from a 5.7% average in 2016 to a 5.0% average in 2017.

Altoona is the business center of Blair County, Pennsylvania with a strong retail, government and manufacturing base. The top field of employment in Altoona and the metro area is healthcare. Its location along I-99 draws from a large trade area over a wide geographic area that extends to State College and Johnstown. It serves as the headquarters for Sheetz Corporation, which ranks on Forbes list of the top privately owned companies. In addition to being located adjacent to I-99 and a major highway system, Altoona also has easy access to rail and air transportation. The unemployment rate in the Altoona MSA decreased from a 5.3% average in 2016 to a 4.8% average in 2017.

Hagerstown in Washington County, Maryland offers a rare combination of business advantages providing a major crossroads location that is convenient to the entire East Coast at the intersection of I-81 and I-70. It has a workforce of over 400,000 with strengths in manufacturing and technology. It also offers an affordable cost of doing business and living within an hour of the Washington, D.C./Baltimore regions. There are also plenty of facilities and land slated for industrial/commercial development. Hagerstown has become a choice location for manufacturers, financial services, and distribution companies. The Hagerstown, MD-Martinsburg, WV MSA unemployment rate improved from a 4.6% average in 2016 to a 3.7% average in 2017.

EMPLOYEES

The Company employed 321 people as of December 31, 2017 in full- and part-time positions. Approximately 155 non-supervisory employees of the Company are represented by the United Steelworkers, AFL-CIO-CLC, Local Union 2635-06. The Company is under a four year labor contract with the United Steelworkers Local that will expire on October 15, 2021. The contract calls for annual wage increases of 3.0%. Additionally, effective January 1, 2014, the Company implemented a soft freeze of its defined benefit pension plan for union employees. A soft freeze means that all existing union employees as of December 31, 2013 currently participating will remain in the defined benefit pension plan but any new union employees hired after January 1, 2014 will no longer be part of the defined benefit plan but instead will be offered retirement benefits under an enhanced 401(k) program. The Company has not experienced a work stoppage since 1979. The Company is one of an estimated ten union-represented banks nationwide.

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INDUSTRY REGULATION

The banking and trust industry, and the operation of bank holding companies, is highly regulated by federal and state law, and by numerous regulations adopted by the federal banking agencies and state banking agencies. Bank regulation affects all aspects of conducting business as a bank, including such major items as minimum capital requirements, limits on types and amounts of investments, loans and other assets, as well as borrowings and other liabilities, and numerous restrictions or requirements on the loan terms and other products made available to customers, particularly consumers. Federal deposit insurance from the Federal Deposit Insurance Corporation (the FDIC) is required for all banks in the United States, and maintaining FDIC insurance requires observation of the various rules of the FDIC, as well as payment of deposit premiums. New branches, or acquisitions or mergers, are required to be pre-approved by the responsible agency, which in the case of the Company and the Bank is the Federal Reserve and the PDB. The Bank provides detailed financial information to its regulators, including a quarterly call report that is filed pursuant to detailed prescribed instructions to ensure that all U.S. banks report the same way. The U.S. banking laws and regulations are frequently updated and amended, especially in response to crises in the financial industry, such as the global financial crisis of 2008, which resulted in the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 (the Dodd-Frank Act), a statute affecting many facets of the financial industry.

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

CAPITAL REQUIREMENTS

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

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

     
  Minimum Capital   Well Capitalized
     Effective January 1,
     2016   2017
Common equity tier 1 capital ratio     5.125 %      5.75 %      6.5 % 
Tier 1 capital ratio     6.625 %      7.25 %      8.0 % 
Total capital ratio     8.625 %      9.25 %      10.0 % 

Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer above its minimum risk-based capital requirements, which increases over the transition

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

DIVIDEND RESTRICTIONS

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

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

For more information regarding quarterly cash dividends, see Part II, Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities below.

SARBANES-OXLEY ACT OF 2002

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

PRIVACY PROVISIONS

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

USA PATRIOT ACT

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

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

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

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

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

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

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the CFPB), a new independent regulatory agency with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Company will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations and gives state attorney generals the ability to enforce federal consumer protection laws.

AVAILABLE INFORMATION

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

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

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ITEM 1A. RISK FACTORS

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS

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

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

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PART II

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

COMMON STOCK

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

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

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

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

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

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

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

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

(1) The ratio of earnings to fixed charges and preferred dividends is computed by dividing the sum of income before taxes, fixed charges, and preferred dividends by the sum of fixed charges and preferred dividends. Fixed charges represent interest expense and are shown as both excluding and including interest on deposits.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company including the related notes thereto, included elsewhere herein.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015

2017 SUMMARY OVERVIEW:

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

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

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

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

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

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

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

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PERFORMANCE OVERVIEW... The following table summarizes some of the Company’s key profitability performance indicators for each of the past three years.

     
  YEAR ENDED DECEMBER 31,
     2017   2016   2015
     (IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
Net income   $ 3,293     $ 2,310     $ 5,997  
Net income available to common shareholders     3,293       2,295       5,787  
Diluted earnings per share     0.18       0.12       0.31  
Return on average assets     0.28 %      0.20 %      0.54 % 
Return on average equity     3.42       2.30       5.10  

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

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

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

NET INTEREST INCOME AND MARGIN... The Company’s net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company’s earnings; it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. The following table summarizes the Company’s net interest income performance for each of the past three years:

     
  YEAR ENDED DECEMBER 31,
     2017   2016   2015
     (IN THOUSANDS, EXCEPT RATIOS)
Interest income   $ 44,356     $ 41,869     $ 41,881  
Interest expense     8,795       7,735       6,520  
Net interest income     35,561       34,134       35,361  
Net interest margin     3.32 %      3.26 %      3.49 % 

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

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

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

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

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

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

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

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

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

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

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

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

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The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of approximately 34% is used to compute tax-equivalent yields.

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

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

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

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

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

(1) Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as to interest and principal payments, (iii) performing loans classified as troubled debt restructuring and (iv) other real estate owned.

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

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

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

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

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

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

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

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

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

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

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

a $258,000, or 10.2%, increase in other income as the Company benefited from additional revenue resulting from a more aggressive business development strategy within its Financial Services Division. Also, fee revenue from Trust and investment advisory fees increased by a $129,000, or 1.6% as the Company benefited from increasing market values for assets under management in 2017. Wealth management continues to be an important strategic focus as it contributed over 29% of the Company’s total revenue in 2017.

a $62,000 increase in Bank Owned Life Insurance (BOLI) revenue after the Company received one death claim in 2017.

a $287,000, or 22.9%, decrease in mortgage loan sale gains and mortgage related fees due to reduced refinance activity and a lower level of new mortgage loan originations when compared to 2016.

a $93,000, or 5.6%, decrease in service charges on deposit accounts due to fewer overdraft charges.

a $62,000 decrease in revenue from investment security sale transactions due to the increase in national interest rates which resulted in the market value of existing securities in the Company’s portfolio decreasing since last year.

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:

a $942,000 decrease in BOLI revenue after the Company received four death claims in 2015 and there were no such claims in 2016.

a $201,000, or 8.6%, increase in other income as the Company benefited from additional revenue resulting from a more aggressive business development strategy within its Financial Services Division.

a $106,000 increase in revenue from investment security sale transactions as the Company recognized a higher level of gains on the sale of rapidly prepaying, low balance mortgage backed securities.

a $93,000, or 8.0%, increase in mortgage loan sale gains and mortgage related fees due to increased refinance activity and a comparable level of new mortgage loan originations when compared to 2015.

a $76,000, or 4.3%, decrease in service charges on deposit accounts due to fewer overdraft charges and account analysis fees as customers have generally maintained higher balances in their checking accounts in 2016.

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

other expenses were down $413,000, or 7.8%, while professional fees declined by $222,000, or 4.2%, due to lower legal fees and litigation costs and the non-recurrence of costs related to resolving a trust operations trading error in 2016.

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occupancy expenses were lower by $182,000, or 6.5%, and equipment costs declined by $103, 000, or 6.1%, as a result of the management’s continued efforts to control costs. Specifically, a branch consolidation and closure of an unprofitable loan production office were the primary reasons for these expenses decreasing between years.

Total salaries and benefits increased by $93,000, or 0.4%. The increase between years was limited by our ongoing cost control focus despite additional investment in talent, particularly in our wealth management division.

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:

other expenses were up $544,000, or 11.5% and professional fees increased by $277,000, or 5.5% for the year as a result of non-recurring costs for legal and accounting services that were necessary to address a trust operations trading error.

occupancy and equipment related expenses are lower by $244,000, or 5.2%, as a result of management’s continued efforts to improve efficiencies and control costs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 1.25% to 1.50%. 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, 2017, 78% of the portfolio is classified as available for sale and 22% 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 133 securities that are temporarily impaired at December 31, 2017. The Company reviews its securities quarterly and has asserted that at December 31, 2017, 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 2017, 82% of all residential mortgage loan production was sold into the secondary market.

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The amount of loans outstanding by category as of December 31, 2017, 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   $ 51,136     $ 70,481     $ 37,575     $ 159,192  
Commercial loans secured by real estate     62,886       135,410       265,484       463,780  
Real estate-mortgage     22,921       58,389       169,093       250,403  
Consumer     7,103       5,095       7,185       19,383  
Total   $ 144,046     $ 269,375     $ 479,337     $ 892,758  
Loans with fixed-rate   $ 49,404     $ 132,852     $ 244,437     $ 426,693  
Loans with floating-rate     94,642       136,523       234,900       466,065  
Total   $ 144,046     $ 269,375     $ 479,337     $ 892,758  
Percent composition of maturity     16.1 %      30.2 %      53.7 %      100.0 % 
Fixed-rate loans as a percentage of total
loans
                               47.8 % 
Floating-rate loans as a percentage of total loans                                52.2 % 

The loan maturity information is based upon original loan terms and is not adjusted for principal paydowns and rollovers. In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.

CONTRACTUAL OBLIGATIONS... The following table presents, as of December 31, 2017, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

           
  PAYMENTS DUE IN
     NOTE
REFERENCE
  ONE YEAR
OR LESS
  ONE TO
THREE
YEARS
  THREE TO
FIVE
YEARS
  OVER
FIVE
YEARS
  TOTAL
     (IN THOUSANDS)
Deposits without a stated maturity     8     $ 688,648     $     $     $     $ 688,648  
Certificates of deposit*     8       128,307       95,520       30,205       13,109       267,141  
Borrowed funds*     10       62,019       30,667       5,438             98,124  
Guaranteed junior subordinated deferrable interest debentures*     10       1,015       2,030       2,030       17,784       22,859  
Subordinated debt*     10       497       994       994       9,142       11,627  
Pension obligation     14