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, 20162017

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 $57,068,566$69,492,588 as of June 30, 2016.2017.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 18,903,47218,128,247 shares outstanding as of January 31, 2017.2018.

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			21
Item 1A. Risk Factors			1211
Item 1B. Unresolved Staff Comments			1211
Item 2. Properties			1211
Item 3. Legal Proceedings			1211
Item 4. Mine Safety Disclosures			1211
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			1312
Item 6. Selected Consolidated Financial Data			1413
Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations			1514
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			3634
Item 8. Financial Statements and Supplementary Data			3736
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure			9293
Item 9A. Controls and Procedures			9293
Item 9B. Other Information			9293
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			9394
Item 11. Executive Compensation			9394
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			9495
Item 13. Certain Relationships and Related Transactions, and Director Independence			9495
Item 14. Principal Accountant Fees and Services			9495
PART IV
Item 15. Exhibits, Financial Statement Schedules			9596
Signatures			9798

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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, 2016:2017:

Headquarters		Johnstown, PA				Johnstown, PA
Total Assets		$	1,134,827			$	1,151,205
Total Investment Securities			149,178				159,956
Total Loans and Loans Held for Sale (net of unearned income)			886,858				892,758
Total Deposits			967,986				948,145
Total Net Income			3,379				4,337
Asset Leverage Ratio			8.61	%			8.75	%
Return on Average Assets			0.30				0.38
Return on Average Equity			3.32				4.37
Total Full-time Equivalent Employees			235				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 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,
		2016				2015				2014				2017				2016				2015
		(IN THOUSANDS)												(IN THOUSANDS)
U.S. Agency		$	400			$	2,900			$	5,931			$	6,612			$	400			$	2,900
Taxable municipal			3,793				—				—				7,198				3,793				—
Corporate bonds			34,403				18,541				15,497				35,886				34,403				18,541
U.S. Agency mortgage-backed securities			88,738				96,801				102,888				79,854				88,738				96,801
Total cost basis of investment securities available for sale		$	127,334			$	118,242			$	124,316			$	129,550			$	127,334			$	118,242
Total fair value of investment securities available for sale		$	127,077			$	119,467			$	127,110			$	129,138			$	127,077			$	119,467

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Investment securities held to maturity at:

		AT DECEMBER 31,												AT DECEMBER 31,
		2016				2015				2014				2017				2016				2015
		(IN THOUSANDS)												(IN THOUSANDS)
Taxable municipal		$	13,441			$	5,592			$	3,364			$	22,970			$	13,441			$	5,592
U.S. Agency mortgage-backed securities			11,177				10,827				12,481				9,740				11,177				10,827
Corporate bonds and other securities			6,047				5,000				3,995				6,042				6,047				5,000
Total cost basis of investment securities held to maturity		$	30,665			$	21,419			$	19,840			$	38,752			$	30,665			$	21,419
Total fair value of investment securities held to maturity		$	30,420			$	21,533			$	20,213			$	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,
		2016				2015				2014				2013				2012				2017				2016				2015				2014				2013
		(IN THOUSANDS, EXCEPT PERCENTAGES)																				(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans:
Commercial		$	496			$	4,260			$	—			$	—			$	—			$	353			$	496			$	4,260			$	—			$	—
Commercial loans secured by real estate			178				18				778				1,632				4,623				1,406				178				18				778				1,632
Real estate-mortgage			929				1,788				1,417				1,239				1,191				1,257				929				1,788				1,417				1,239
Total			1,603				6,066				2,195				2,871				5,814				3,016				1,603				6,066				2,195				2,871
Other real estate owned:
Commercial loans secured by real estate			—				—				384				344				1,101				—				—				—				384				344
Real estate-mortgage			21				75				128				673				127				18				21				75				128				673
Total			21				75				512				1,017				1,228				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		$	1,624			$	6,297			$	2,917			$	4,109			$	7,224			$	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			0.18	%			0.71	%			0.35	%			0.52	%			1.00	%			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 4645 professionals administers assets valued at approximately $2.0$2.2 billion that are not recognized on the Company’s balance sheet at December 31, 2016.2017. 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, 2016,2017, the Trust Company had total assets of $4.8$5.1 million and total stockholder’s equity of $4.8$5.1 million. In 2016,2017, the Trust Company contributed earnings to the Company as its gross revenue amounted to $8.0$8.8 million and the net income contribution was $905,000.$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, 2016,2017, AmeriServ Life had total assets of $384,000.$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 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 increaseddecreased from a 6.5% average in 2015 to a 6.8% average in 2016.2016 to a 6.0% average in 2017. The Johnstown, PA MSA continues to have one of the highest jobless raterates 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 increaseddecreased from a 3.8% average in 2015 to 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 increaseddecreased from a 5.2% average in 2015 to a 5.7% average in 2016.2016 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 increaseddecreased from a 5.1% average in 2015 to a 5.3% average in 2016.2016 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 5.5% average in 2015 to a 4.6% average in 2016.2016 to a 3.7% average in 2017.

EMPLOYEES

The Company employed 326321 people as of December 31, 20162017 in full- and part-time positions. Approximately 159155 non-supervisory employees of the Company are represented by the United Steelworkers, AFL-CIO-CLC, Local Union 2635-06. The Company is under a four year labor contract with the United Steelworkers Local that will expire on October 15, 2017.2021. 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, 2016,2017, the Company believes that its bank subsidiary was well capitalized, based on the prompt corrective action guidelines described above. As discussed below, however,On January 1, 2015, U.S. federal banking agencies implemented the new Basel III capital requirements for all banks are being increased understandards, which establish the Dodd-Frank Act. Specifically, on July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act. The July 2013 final rules generally implement higher minimum capital levels to be considered well-capitalized and revise the prompt corrective action requirements addunder banking regulations. The revisions from the previous standards include a newrevised definition of capital, the introduction of a minimum common equity tier 1 capital requirement,ratio and establish criteria that instruments must meet tochanged risk weightings for certain assets. The implementation of the new rules will be considered common equity tierphased in over a four year period ending January 1, 2019 with minimum capital additional tier 1 capital or tier 2 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 effective January 1, 2016)applicable to each year) are as follows:

		Minimum Capital												Minimum Capital								Well Capitalized
		Effective January 1,								Well Capitalized				Effective January 1,
		2015				2016								2016				2017
Common equity tier 1 capital ratio			4.5	%			5.125	%			6.5	%			5.125	%			5.75	%			6.5	%
Tier 1 capital ratio			6.0	%			6.625	%			8.0	%			6.625	%			7.25	%			8.0	%
Total capital ratio			8.0	%			8.625	%			10.0	%			8.625	%			9.25	%			10.0	%

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requirements in an amount greater than 2.5%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.

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

SARBANES-OXLEY ACT OF 2002

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

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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 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’sSEC��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 ishttp://www.ameriserv.com. We make available free of charge onhttp://www. ameriserv.comwww.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. SevenSix additional locations are leased with terms expiring from January 1, 20172018 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, 2017,2018, the Company had 3,3272,983 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, 2016:
Year ended December 31, 2017:
First Quarter		$	3.36			$	2.96			$	0.01			$	4.00			$	3.60			$	0.015
Second Quarter			3.27				2.95				0.01				4.20				3.70				0.015
Third Quarter			3.34				3.02				0.015				4.05				3.80				0.015
Fourth Quarter			3.80				3.15				0.015				4.35				3.85				0.015
Year ended December 31, 2015
Year ended December 31, 2016
First Quarter		$	3.13			$	2.88			$	0.01			$	3.36			$	2.96			$	0.01
Second Quarter			3.44				3.00				0.01				3.27				2.95				0.01
Third Quarter			3.41				3.20				0.01				3.34				3.02				0.015
Fourth Quarter			3.39				3.16				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,
		2016				2015				2014				2013				2012				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		$	41,869			$	41,881			$	40,441			$	39,343			$	39,917			$	44,356			$	41,869			$	41,881			$	40,441			$	39,343
Total interest expense			7,735				6,520				6,397				6,482				7,714				8,795				7,735				6,520				6,397				6,482
Net interest income			34,134				35,361				34,044				32,861				32,203				35,561				34,134				35,361				34,044				32,861
Provision (credit) for loan losses			3,950				1,250				375				(1,100	)			(775	)			800				3,950				1,250				375				(1,100	)
Net interest income after provision (credit) for loan losses			30,184				34,111				33,669				33,961				32,978				34,761				30,184				34,111				33,669				33,961
Total non-interest income			14,638				15,267				14,323				15,744				14,943				14,645				14,638				15,267				14,323				15,744
Total non-interest expense			41,615				41,038				43,371				42,223				40,641				40,766				41,615				41,038				43,371				42,223
Income before income taxes			3,207				8,340				4,621				7,482				7,280				8,640				3,207				8,340				4,621				7,482
Provision for income taxes			897				2,343				1,598				2,289				2,241				5,347				897				2,343				1,598				2,289
Net income		$	2,310			$	5,997			$	3,023			$	5,193			$	5,039			$	3,293			$	2,310			$	5,997			$	3,023			$	5,193
Net income available to common shareholders		$	2,295			$	5,787			$	2,813			$	4,984			$	4,211			$	3,293			$	2,295			$	5,787			$	2,813			$	4,984
PER COMMON SHARE DATA:
Basic earnings per share		$	0.12			$	0.31			$	0.15			$	0.26			$	0.21			$	0.18			$	0.12			$	0.31			$	0.15			$	0.26
Diluted earnings per share			0.12				0.31				0.15				0.26				0.21				0.18				0.12				0.31				0.15				0.26
Cash dividends declared			0.05				0.04				0.04				0.03				0.00				0.06				0.05				0.04				0.04				0.03
Book value at period end			5.05				5.19				4.97				4.91				4.67				5.25				5.05				5.19				4.97				4.91
BALANCE SHEET AND OTHER DATA:
Total assets		$	1,153,780			$	1,148,497			$	1,089,263			$	1,056,036			$	1,000,991			$	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			886,858				883,987				832,131				786,748				731,741				892,758				886,858				883,987				832,131				786,748
Allowance for loan losses			9,932				9,921				9,623				10,104				12,571				10,214				9,932				9,921				9,623				10,104
Investment securities available for sale			127,077				119,467				127,110				141,978				151,538				129,138				127,077				119,467				127,110				141,978
Investment securities held to maturity			30,665				21,419				19,840				18,187				13,723				38,752				30,665				21,419				19,840				18,187
Deposits			967,786				903,294				869,881				854,522				835,734				947,945				967,786				903,294				869,881				854,522
Total borrowed funds			78,645				117,058				93,965				79,640				41,745				115,701				78,645				117,058				93,965				79,640
Stockholders’ equity			95,395				118,973				114,407				113,307				110,468				95,102				95,395				118,973				114,407				113,307
Full-time equivalent employees			305				318				314				352				350				302				305				318				314				352
SELECTED FINANCIAL RATIOS:
Return on average assets			0.20	%			0.54	%			0.29	%			0.51	%			0.51	%			0.28	%			0.20	%			0.54	%			0.29	%			0.51	%
Return on average total equity			2.30				5.10				2.61				4.69				4.51				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			91.64				97.86				95.66				92.07				87.56				94.18				91.64				97.86				95.66				92.07
Ratio of average total equity to average assets			8.79				10.65				10.92				10.86				11.36				8.24				8.79				10.65				10.92				10.86
Common stock cash dividends as a percent of net income available to common shareholders			41.18				13.03				26.73				11.36				—				33.80				41.18				13.03				26.73				11.36
Interest rate spread			3.08				3.33				3.36				3.39				3.43				3.14				3.08				3.33				3.36				3.39
Net interest margin			3.26				3.49				3.52				3.56				3.65				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			1.12				1.13				1.16				1.29				1.74				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			0.18				0.71				0.35				0.52				1.00				0.34				0.18				0.71				0.35				0.52
Net charge-offs as a percentage of average loans			0.44				0.11				0.11				0.18				0.19				0.06				0.44				0.11				0.11				0.18
Ratio of earnings to fixed charges and preferred dividends:(1)
Excluding interest on deposits			2.26X				4.68X				3.30X				5.13X				3.80X				4.22X				2.26X				4.68X				3.30X				5.13X
Including interest on deposits			1.40				2.19				1.67				2.07				1.80				1.97				1.40				2.19				1.67				2.07
Cumulative one year interest rate sensitivity gap ratio, at period end			1.44				1.23				1.13				1.09				1.30				1.22				1.44				1.23				1.13				1.09

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

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, 2015, AND 20142015

20162017 SUMMARY OVERVIEW:

The new Tax Cut and Jobs Act became law on December 21, 2017. Subsequently, AmeriServ closed 2016and 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 its third consecutive profitable quarter whilea 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 continuednot been necessary to recover fromrecalculate the net losstax accounting process and accept a one-time charge against earnings, that 2017 may have been the best year since the restructure of the first quarter. The Companyfranchise 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 for the fourth quarter of $1,150,000 or $0.06 earnings per share. When consolidated with the previous quarters of 2016, net income for the year was $2,310,000$2,295,000 or $0.12 per share. The fourth quarterParenthetically, 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 $85,000 above the third quarter of 2016,our year-long goal for 2017.

AmeriServ is growing stronger year over year, but $224,000 belowchallenges remain. AmeriServ has become a very active lender to small and mid-size businesses. AmeriServ finished 2017 for the fourth quarterconsecutive year with a record of 2015. These results reflectlending 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 continuing impactlocal 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 net loss recordedlargest provider of banking software in the first quarter. WeU.S. The goal is to continue to take full responsibility for putting the expenses relatedimprove productivity and to the Trust Company trading error, and our only loan to the energy industry, behind us immediately. AmeriServ’s quick return to profitability tells us that these were self-contained events and therefore do not indicate any continuing risk to the Company.consequently further reduce expenses.

We believe the marketplace agrees, net loans have begun to increase again and deposits closed the quarter at an all-time high and very near the $1 billion mark. However, even more encouraging was that the total revenue of the Trust Company was at an all-time high in the fourth quarter of 2016. It is also important to note that as 2016 ended,AmeriServ is now fully focused on executing the level2017 – 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 non-performing assets was at the lowest level ever reported. We believe that our presentearnings 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 well positionedour 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 higher levelbenefit of interest rates which have developed since the November election. It is a fact that it was necessary to take corrective actionsour customers and such actions take time and money. Therefore, the fourth quarter level of operating expenses were $339,000 higher than the same period in 2015. As those expenses disappear, our focus on increasing revenues should show a very positive trend line.

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

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

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

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

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

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,
		2016				2015				2014				2017				2016				2015
		(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)												(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Net income		$	2,310			$	5,997			$	3,023			$	3,293			$	2,310			$	5,997
Net income available to common shareholders			2,295				5,787				2,813				3,293				2,295				5,787
Diluted earnings per share			0.12				0.31				0.15				0.18				0.12				0.31
Return on average assets			0.20	%			0.54	%			0.29	%			0.28	%			0.20	%			0.54	%
Return on average equity			2.30				5.10				2.61				3.42				2.30				5.10

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

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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.

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

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

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