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, 20152017

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

Large accelerated filero		Accelerated filero		Non-accelerated filero		Smaller reporting companyþ
Emerging growth companyo

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 Yesþ 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 $62,809,831$69,492,588 as of June 30, 2015.2017.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 18,870,81118,128,247 shares outstanding as of January 29, 2016.31, 2018.

DOCUMENTS INCORPORATED BY REFERENCE.

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

 

		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			3536
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure			9193
Item 9A. Controls and Procedures			9193
Item 9B. Other Information			9193
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			9294
Item 11. Executive Compensation			9294
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			9395
Item 13. Certain Relationships and Related Transactions, and Director Independence			9395
Item 14. Principal Accountant Fees and Services			9395
PART IV
Item 15. Exhibits, Financial Statement Schedules			9496
Signatures			9698

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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, 2015:2017:

Headquarters		Johnstown, PA				Johnstown, PA
Total Assets		$	1,108,994			$	1,151,205
Total Investment Securities			129,902				159,956
Total Loans and Loans Held for Sale (net of unearned income)			883,987				892,758
Total Deposits			903,494				948,145
Total Net Income			5,938				4,337
Asset Leverage Ratio			8.97	%			8.75	%
Return on Average Assets			0.55				0.38
Return on Average Equity			5.80				4.37
Total Full-time Equivalent Employees			247				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, with a minimum level of 1.1 to 1x desired.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 of the Company and its subsidiaries is managed primarily to provide amplefor liquidity to fund, for example, loan growth and secondarily for 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, and short maturity agency securities. Beginning in 2012, the Company began to addsecurities, high quality corporate securities and select taxable municipal securities to the portfolio.securities. Management strives to maintain a relatively shortportfolio duration in the portfolio.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,												AT DECEMBER 31,
		2015				2014				2013				2017				2016				2015
		(IN THOUSANDS)												(IN THOUSANDS)
U.S. Agency		$	2,900			$	5,931			$	6,926			$	6,612			$	400			$	2,900
Taxable municipal															7,198				3,793				—
Corporate bonds			18,541				15,497				11,992				35,886				34,403				18,541
U.S. Agency mortgage-backed securities			96,801				102,888				121,480				79,854				88,738				96,801
Total cost basis of investment securities available for sale		$	118,242			$	124,316			$	140,398			$	129,550			$	127,334			$	118,242
Total fair value of investment securities available for sale		$	119,467			$	127,110			$	141,978			$	129,138			$	127,077			$	119,467

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Investment securities held to maturity at:

		AT DECEMBER 31,												AT DECEMBER 31,
		2015				2014				2013				2017				2016				2015
		(IN THOUSANDS)												(IN THOUSANDS)
Taxable municipal		$	5,592			$	3,364			$	1,521			$	22,970			$	13,441			$	5,592
U.S. Agency mortgage-backed securities			10,827				12,481				12,671				9,740				11,177				10,827
Corporate bonds and other securities			5,000				3,995				3,995				6,042				6,047				5,000
Total cost basis of investment securities held to maturity		$	21,419			$	19,840			$	18,187			$	38,752			$	30,665			$	21,419
Total fair value of investment securities held to maturity		$	21,533			$	20,213			$	17,788			$	38,811			$	30,420			$	21,533

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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,																				AT DECEMBER 31,
		2015				2014				2013				2012				2011				2017				2016				2015				2014				2013
		(IN THOUSANDS, EXCEPT PERCENTAGES)																				(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
Commercial		$	4,260			$	—			$	—			$	—			$	—			$	353			$	496			$	4,260			$	—			$	—
Commercial loans secured by real estate			18				778				1,632				4,623				3,870				1,406				178				18				778				1,632
Real estate-mortgage			1,788				1,417				1,239				1,191				1,205				1,257				929				1,788				1,417				1,239
Total			6,066				2,195				2,871				5,814				5,075				3,016				1,603				6,066				2,195				2,871
Other real estate owned:
Commercial loans secured by real estate			—				384				344				1,101				20				—				—				—				384				344
Real estate-mortgage			75				128				673				127				104				18				21				75				128				673
Total			75				512				1,017				1,228				124				18				21				75				512				1,017
Total restructured loans not in non-accrual (TDR)			156				210				221				182				—				—				—				156				210				221
Total non-performing assets including TDR		$	6,297			$	2,917			$	4,109			$	7,224			$	5,199			$	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			0.71	%			0.35	%			0.52	%			1.00	%			0.78	%			0.34	%			0.18	%			0.71	%			0.35	%			0.52	%

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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 4845 professionals administers assets valued at approximately $2.0$2.2 billion that are not recognized on the Company’s balance sheet at December 31, 2015.2017. 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 iscontinues in the process of liquidation. At December 31, 2015,2017, the Trust Company had total assets of $4.9$5.1 million and total stockholder’s equity of $4.6$5.1 million. In 2015,2017, the Trust Company contributed earnings to the Company as its gross revenue amounted to $8.5$8.8 million and the net income contribution was $1.3$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, 2015,2017, AmeriServ Life had total assets of $389,000.$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 Cambria-Rowe Business College.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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Showcase For Commerce. The city also hosts annual events such as the Flood City Music Festival and the Thunder in the Valley Motorcycle Rally, which draw several thousand visitors. The Johnstown, PA MSA unemployment rate improveddecreased from a 6.9%6.8% average in 20142016 to a 6.5%6.0% average in 2015.2017. 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 improveddecreased from a 4.2%4.1% average in 20142016 to a 3.8%3.7% average in 20152017 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,County, Altoona in Blair county,County, Pennsylvania, and Hagerstown in Washington county, Maryland and Harrisonburg in Rockingham county, Virginia.County, Maryland. Monroeville in Allegheny county,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 improveddecreased from a 5.6%5.7% average in 20142016 to a 5.2%5.0% average in 2015.2017.

Altoona is the business center of Blair county,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 5.6%5.3% average in 20142016 to a 5.1%4.8% average in 2015.2017.

Hagerstown andin Washington county,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 6.0% average in 2014 to a 5.5% average in 2015.

Harrisonburg is located on I-81, providing convenient access via interstate to Northern Virginia/Washington D.C., and Richmond, in addition to points north and south along I-81. The Shenandoah Valley Regional Airport provides the same amenities as larger airports and is located 20 minutes from Harrisonburg via I-81. It has a diverse and vibrant economy, with a good blend of business interests and employment opportunities. Rockingham county is one of the top agricultural producers in Virginia. Harrisonburg is home to James Madison University and Eastern Mennonite University. Continuing growth in education, health services and technology, plus a diverse mix of manufacturing, agriculture, retail, service and tourism helps Harrisonburg/Rockingham county prosper. The City of Harrisonburg Economic Development Department has established Harrisonburg Technology Park and the Harrison Downtown Technology Zone to attract technology based firms. The Harrisonburg MSA unemployment rate improved from a 5.2% average in 2014 to a 4.6% average in 2015.

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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.

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period, from 0.625% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity tier 1 capital, began on January 1,risk weighted assets in 2016 at the 0.625% level and will be phasedto 2.50% in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019).2019. Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and will be phased-in over a three-year period (beginning at 40% on January 1, 2015, 60% on January 1, 2016 and an additional 20% per year thereafter). The Company is continuing to review the impact of these new rules and currently expects that its capital position will be more than adequate to meet the revised regulatory capital requirements.

DIVIDEND RESTRICTIONS

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

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

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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

On July 21, 2010, the PresidentThe Dodd-Frank Act was signed into law the Dodd-Frank Act.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

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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. NineSix additional locations are leased with terms expiring from January 1, 20162018 to AugustJuly 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 29, 2016,31, 2018, the Company had 3,4162,983 shareholders of record for its common stock. The Company’s common stock is traded on theThe NASDAQ GlobalStock Market System under the symbol “ASRV.” The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:

		PRICES								CASH DIVIDENDS DECLARED				PRICES								CASH DIVIDENDS DECLARED
		HIGH				LOW								HIGH				LOW
Year ended December 31, 2015:
Year ended December 31, 2017:
First Quarter		$	3.13			$	2.88			$	0.01			$	4.00			$	3.60			$	0.015
Second Quarter			3.44				3.00				0.01				4.20				3.70				0.015
Third Quarter			3.41				3.20				0.01				4.05				3.80				0.015
Fourth Quarter			3.39				3.16				0.01				4.35				3.85				0.015
Year ended December 31, 2014
Year ended December 31, 2016
First Quarter		$	3.91			$	3.00			$	0.01			$	3.36			$	2.96			$	0.01
Second Quarter			3.88				3.40				0.01				3.27				2.95				0.01
Third Quarter			3.52				3.14				0.01				3.34				3.02				0.015
Fourth Quarter			3.31				3.02				0.01				3.80				3.15				0.015

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

		AT OR FOR THE YEAR ENDED DECEMBER 31,																				AT OR FOR THE YEAR ENDED DECEMBER 31,
		2015				2014				2013				2012				2011				2017				2016				2015				2014				2013
		(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)																				(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income		$	41,881			$	40,441			$	39,343			$	39,917			$	41,964			$	44,356			$	41,869			$	41,881			$	40,441			$	39,343
Total interest expense			6,520				6,397				6,482				7,714				9,681				8,795				7,735				6,520				6,397				6,482
Net interest income			35,361				34,044				32,861				32,203				32,283				35,561				34,134				35,361				34,044				32,861
Provision (credit) for loan losses			1,250				375				(1,100	)			(775	)			(3,575	)			800				3,950				1,250				375				(1,100	)
Net interest income after provision (credit) for loan losses			34,111				33,669				33,961				32,978				35,858				34,761				30,184				34,111				33,669				33,961
Total non-interest income			15,267				14,323				15,744				14,943				13,569				14,645				14,638				15,267				14,323				15,744
Total non-interest expense			41,038				43,371				42,223				40,641				40,037				40,766				41,615				41,038				43,371				42,223
Income before income taxes			8,340				4,621				7,482				7,280				9,390				8,640				3,207				8,340				4,621				7,482
Provision for income taxes			2,343				1,598				2,289				2,241				2,853				5,347				897				2,343				1,598				2,289
Net income		$	5,997			$	3,023			$	5,193			$	5,039			$	6,537			$	3,293			$	2,310			$	5,997			$	3,023			$	5,193
Net income available to common shareholders		$	5,787			$	2,813			$	4,984			$	4,211			$	5,152			$	3,293			$	2,295			$	5,787			$	2,813			$	4,984
PER COMMON SHARE DATA:
Basic earnings per share		$	0.31			$	0.15			$	0.26			$	0.21			$	0.24			$	0.18			$	0.12			$	0.31			$	0.15			$	0.26
Diluted earnings per share			0.31				0.15				0.26				0.21				0.24				0.18				0.12				0.31				0.15				0.26
Cash dividends declared			0.04				0.04				0.03				0.00				0.00				0.06				0.05				0.04				0.04				0.03
Book value at period end			5.19				4.97				4.91				4.67				4.37				5.25				5.05				5.19				4.97				4.91
BALANCE SHEET AND OTHER DATA:
Total assets		$	1,148,922			$	1,089,263			$	1,056,036			$	1,000,991			$	979,076			$	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			883,987				832,131				786,748				731,741				670,847				892,758				886,858				883,987				832,131				786,748
Allowance for loan losses			9,921				9,623				10,104				12,571				14,623				10,214				9,932				9,921				9,623				10,104
Investment securities available for sale			119,467				127,110				141,978				151,538				182,923				129,138				127,077				119,467				127,110				141,978
Investment securities held to maturity			21,419				19,840				18,187				13,723				12,280				38,752				30,665				21,419				19,840				18,187
Deposits			903,294				869,881				854,522				835,734				816,420				947,945				967,786				903,294				869,881				854,522
Total borrowed funds			117,483				93,965				79,640				41,745				34,850				115,701				78,645				117,058				93,965				79,640
Stockholders’ equity			118,973				114,407				113,307				110,468				112,352				95,102				95,395				118,973				114,407				113,307
Full-time equivalent employees			318				314				352				350				347				302				305				318				314				352
SELECTED FINANCIAL RATIOS:
Return on average assets			0.54	%			0.29	%			0.51	%			0.51	%			0.68	%			0.28	%			0.20	%			0.54	%			0.29	%			0.51	%
Return on average total equity			5.10				2.61				4.69				4.51				5.90				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			97.86				95.66				92.07				87.56				82.17				94.18				91.64				97.86				95.66				92.07
Ratio of average total equity to average assets			10.65				10.92				10.86				11.36				11.49				8.24				8.79				10.65				10.92				10.86
Common stock cash dividends as a percent of net income available to common shareholders			13.03				26.73				11.36				—				—				33.80				41.18				13.03				26.73				11.36
Interest rate spread			3.33				3.36				3.39				3.43				3.47				3.14				3.08				3.33				3.36				3.39
Net interest margin			3.49				3.52				3.56				3.65				3.72				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			1.13				1.16				1.29				1.74				2.20				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			0.71				0.35				0.52				1.00				0.78				0.34				0.18				0.71				0.35				0.52
Net charge-offs as a percentage of average loans			0.11				0.11				0.18				0.19				0.24				0.06				0.44				0.11				0.11				0.18
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits			4.68X				3.30X				5.13X				3.80X				4.11X				4.22X				2.26X				4.68X				3.30X				5.13X
Including interest on deposits			2.19				1.67				2.07				1.80				1.83				1.97				1.40				2.19				1.67				2.07
Cumulative one year interest rate sensitivity gap ratio, at period end			1.23				1.13				1.09				1.30				1.29				1.22				1.44				1.23				1.13				1.09

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

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014,2017, 2016, AND 2013

2015

20152017 SUMMARY OVERVIEW:

NetThe 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 $1,374,000,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 $0.07$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 the fourth quarter of 2015.2017. This was $625,000, or $0.03 per share, higher than the fourth quarter of 2014. Net incomeour year-long goal for the full year was $5,997,000, or $0.31 per share, which represents an increase by $2,974,000, or $0.16 per share, from 2014. The Company’s 2015 results illustrate the effectiveness from very specific profitability improvement actions executed to permit the Company to continue2017.

AmeriServ is growing the business but to avoid expense increases so as to improve per share profitability.

We have previously emphasized the Company’s determination to become a significant competitor in every market where the company has a presence. The reports from the marketplace continue to be encouraging. Net loan growthstronger year over year, totaled almost $52 million whilebut 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 increased by $33 million as bothinto 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 activities set new year ending records for AmeriServ. These marketplace successes also found support from a more efficient company. Operating non-interest expense was $1.7 million, or 3.9%, lower than 2014. The now proven effectivenessentries, 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 2014 profitability efforts has resulted in a new enthusiasm among staff members for ways to trim expenses.

This is not to say that 2015 was without its challenges. The worldwide energy turmoil resultedissues contained in the bankruptcy of a Western Pennsylvania energy related company. However, the Company’s total loan portfolio still contains a lower level of troubled loans than the average level at the Company’s peer banks across the nation. The lending standards of the Company remain consistent with the goal of supporting qualified borrowers over the upsTax Cut and downs of the business cycle.

The Federal Reserve’s interest rate policies that were adopted in 2008 have severely punished the thrifty, those living on pensions and community banks throughout the country. The squeeze on the banker’s net interest margin hurts the availability of credit.Jobs Act as we know them today behind us. It is understandable thatour job to use the Federal Reserve would respondnew lower tax rate to events likebuild an even stronger and more profitable company. We will not chase the freezing of credit markets in 2008, but this seemed to encourage the Federal Reserve to seek to manage the entire economy permanently. Let us hope they can unwind their involvement without further disturbances in this very large and complex economy.

The Board and the management team of the Company remain committed to a continuation of time tested banking management practices. These include strong capital, deep liquidity and a conservative balance sheet. To further these goals, in January 2016, the Company paid off the $21 million of US Treasury preferred shares related to the SBLF program using cash on hand and net proceeds from the private placement of $7.65 million in aggregate principal amount of 6.5% fixed rate subordinated notes. These SBLF funds were a way for the Treasury to encourage banks to lend to small businesses. It worked very well! The Company increased its roster of small business borrowers throughout its regions. However, the Treasury would have increased its dividend rate on the preferred shares from 1% per year to 9% per year in February 2016. The Companylatest “fad.” Instead, we will continue to lend to small businessesbuild strength in our balance sheet and will continuethen leverage that strength for the benefit of our customers and our shareholders. We think these are exciting times to be a well-capitalized community bank, but the Company will not experience this dividend rate increase for those shares are retired. This action was spelled out in detail in the Company’s press release from January 28, 2016.

Finally, a comment about the turmoil in financial markets. The domestic economy of the U.S. has been dynamic and ever-changing throughout history. The question we are all forced to answer is how much risk to accept in our economic affairs. The events of 2015 would suggest that it is best to limit risk when contemplating a dynamic economy. This has been and will be our guiding principle as we pursue our climb to financial respectability in 2016 and beyond.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,												YEAR ENDED DECEMBER 31,
		2015				2014				2013				2017				2016				2015
		(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)												(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Net income		$	5,997			$	3,023			$	5,193			$	3,293			$	2,310			$	5,997
Net income available to common shareholders			5,787				2,813				4,984				3,293				2,295				5,787
Diluted earnings per share			0.31				0.15				0.26				0.18				0.12				0.31
Return on average assets			0.54	%			0.29	%			0.51	%			0.28	%			0.20	%			0.54	%
Return on average equity			5.10				2.61				4.69				3.42				2.30				5.10

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20152017 NET INTEREST PERFORMANCE OVERVIEW... The Company’s net interest income for the full year of 2017 increased by $1.3$1.4 million, or 3.9%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 20152017 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 2014 asof 2015. The Company’s net interest margin compressionof 3.26% for the full year of 2016 was more23 basis points lower than fully mitigated by earning asset growth, a greater level of prepayment fees on early loan payoffs and an increased dividend from the FHLB of Pittsburgh. The Company’s net interest margin of 3.49% for the full year 2015 wasof 2015. The 2016 reduction in net interest income has been significantly impacted by the following three basis points lower than thefactors: 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 3.52%subordinated debt, and 3.) a significantly lower level of loan prepayment fee income, which decreased by approximately $300,000 for the full year 2014. Theof 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 $857$888 million for the full year of 20152016, which is $52$31 million, or 6.5%3.6%, higher than the $805$857 million average for the full year of 2014.2015. This loan growth reflects the successful results of the Company’s sales callingbusiness development efforts, with an emphasis on generating commercial loans and owner occupied commercial real estate loans particularly through its loan production offices in the stronger growth markets of Pittsburgh and Altoona in Pennsylvania, Hagerstown, Maryland and Harrisonburg, Virginia. Overall, totaloffices. However, loan interest income increased by $1.4 million,is $134,000, or 3.6%0.4%, lower for the full year 2015.

Total interest expense has been well controlled in 2015 as it increased by $123,000, or 1.9%, forof 2016 when compared to the full year of 2015 due primarily to tight controlthe 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 cost of funds through disciplined deposit pricing. Total deposit interest expense decreased by $137,000, or 2.8%, in 2015 when compared to last year. Even with this reduction in deposit costs, the Company continues to have a strong loyal core deposit base and success in cross-sellingthat 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 into deposit products.products were the primary reasons for this growth. Specifically, total deposits averaged $893$956 million for the full year of 20152016 which is $21$63 million, or 2.4%7.0%, higher than the $872$893 million average in 2014.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. This decreasedDeposit interest expense for the full year of 2016 increased by $648,000, or 13.6%, due to the higher balance of deposits has been more than offsetalong 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 $260,000$567,000 increase in the interest cost for borrowings asin 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 utilized morea 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 and provide protection against rising interest rates.

Overall, the Company expects that it will need to continue to grow earning assets to achieve net interest income growth in 2016 as net interest margin compression is expected to continue given the ongoing challenges of the exceptionally lowfor interest rate environment. Solid commercial loan pipelines suggest that the Company should be able to again grow the loan portfolio in 2016 although we expect pricing pressures on new commercial loans to continue to be intense.risk management purposes.

COMPONENT CHANGES IN NET INTEREST INCOME: 20152016 VERSUS 2014...2015... Regarding the separate components of net interest income, the Company’s total interest income in 2015 increased2016 decreased by $1.4 million, or 3.6%,$12,000 when compared to 2014.2015. This increase was due tois evidenced by a $44.4$36.9 million increase in average earning assets due to an increaseincreases in both average loans partiallyand average securities, which was more than offset by a four15 basis point decline in the earning asset yield from 4.18%4.14% to 4.14%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 eight17 basis points from 4.52%4.44% to 4.44% as a4.27%. The greater level of prepayment fees on early loan payoffstotal average loans in 2016 was more than offset by the impact fromof 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 increaseddecreased by sevenone basis points from 2.60%2.67% to 2.67%2.66% due to net interest margin compression as well as an increased dividend from the FHLB of Pittsburgh and a reductionincrease in premium amortization on mortgage backed securities, which resulted from a slowdownan increase in mortgage prepayment speeds in 2015. Investment securities interest revenue declined by $223,000 in 2015 due to a $12 million decrease in the average investment securities portfolio as the Company has utilized cash flow from securities to help fund the previously mentioned loan growth.

TABLE OF CONTENTS

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,																																				YEAR ENDED DECEMBER 31,
		2015												2014												2013												2017												2016												2015
		AVERAGE BALANCE				INTEREST INCOME/ EXPENSE				YIELD/ RATE				AVERAGE BALANCE				INTEREST INCOME/ EXPENSE				YIELD/ RATE				AVERAGE BALANCE				INTEREST INCOME/ EXPENSE				YIELD/ RATE				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)																																				(IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning assets:
Loans, net of unearned income		$	857,015			$	38,024				4.44	%		$	804,721			$	36,366				4.52	%		$	746,490			$	35,145				4.71	%		$	893,849			$	39,257				4.39	%		$	887,679			$	37,891				4.27	%		$	857,015			$	38,024				4.44	%
Deposits with banks			2,198				8				0.34				7,227				5				0.07				8,027				6				0.08				1,028				11				1.11				1,668				13				0.70				2,198				8				0.34
Federal funds sold			—				—				—				—				—				—				79				—				0.05
Short-term investment in money market funds			10,700				14				0.14				1,243				7				0.49				3,260				8				0.24				7,996				130				1.63				15,156				84				0.56				10,700				14				0.14
Investment securities:
Available for sale			124,383				3,250				2.61				137,839				3,528				2.56				150,621				3,701				2.46				135,131				3,800				2.81				121,630				3,132				2.58				124,383				3,250				2.61
Held to maturity			20,576				614				2.98				19,399				559				2.88				17,900				508				2.84				37,484				1,198				3.20				25,649				779				3.04				20,576				614				2.98
Total investment securities			144,959				3,864				2.67				157,238				4,087				2.60				168,521				4,209				2.50				172,615				4,998				2.90				147,279				3,911				2.66				144,959				3,864				2.67
TOTAL INTEREST EARNING ASSETS/INTEREST INCOME			1,014,872				41,910				4.14				970,429				40,465				4.18				926,377				39,368				4.27				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			17,312												16,919												16,795												22,393												20,626												17,312
Premises and equipment			12,617												13,282												12,839												12,273												11,930												12,617
Other assets			69,201												69,423												75,360												67,169												68,046												69,201
Allowance for loan losses			(9,766	)											(9,951	)											(11,434	)											(10,241	)											(9,790	)											(9,766	)
TOTAL ASSETS		$	1,104,236											$	1,060,102											$	1,019,937											$	1,167,082											$	1,142,594											$	1,104,236
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand		$	97,201			$	199				0.21	%		$	97,641			$	191				0.20	%		$	75,126			$	138				0.18	%		$	129,589			$	638				0.49	%		$	108,350			$	317				0.29	%		$	97,201			$	199				0.21	%
Savings			94,425				156				0.17				89,554				144				0.16				87,819				139				0.16				97,405				162				0.17				95,986				159				0.17				94,425				156				0.17
Money market			242,298				817				0.34				228,150				761				0.33				212,735				736				0.35				275,636				1,446				0.52				277,967				1,198				0.43				242,298				817				0.34
Other time			287,783				3,580				1.24				300,915				3,793				1.26				312,741				4,151				1.33				291,475				4,009				1.38				290,612				3,726				1.28				287,783				3,580				1.24
Total interest bearing deposits			721,707				4,752				0.66				716,260				4,889				0.68				688,421				5,164				0.75				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			24,582				86				0.35				18,783				55				0.29				17,973				46				0.26				16,972				206				1.21				9,030				52				0.57				24,582				86				0.35
Advances from Federal Home Loan Bank			46,166				558				1.21				32,885				333				1.01				18,170				152				0.84				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				13,085				1,120				8.57				13,085				1,120				8.57				13,085				1,120				8.57
Subordinated debt			62				4				6.72				—				—				—				—				—				—				7,650				520				6.80				7,650				519				6.79				62				4				6.72
TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE			805,602				6,520				0.81				781,013				6,397				0.82				737,649				6,482				0.88				877,469				8,795				1.00				851,400				7,735				0.91				805,602				6,520				0.81
Non-interest bearing liabilities:
Demand deposits			171,175												155,365												158,169												182,301												182,732												171,175
Other liabilities			9,871												7,969												13,378												11,119												8,074												9,871
Stockholders’ equity			117,588												115,755												110,741												96,193												100,388												117,588
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,104,236											$	1,060,102											$	1,019,937											$	1,167,082											$	1,142,594											$	1,104,236
Interest rate spread											3.33												3.36												3.39												3.14												3.08												3.33
Net interest income/net interest margin							35,390				3.49	%							34,068				3.52	%							32,886				3.56	%							35,601				3.32	%							34,164				3.26	%							35,390				3.49	%
Tax-equivalent adjustment							(29	)											(24	)											(25	)											(40	)											(30	)											(29	)
Net interest income						$	35,361											$	34,044											$	32,861											$	35,561											$	34,134											$	35,361