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

 

FORM 10-Q

 

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

For the period endedMarch 31, 2017

2018

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 Number0-11204

AmeriServ Financial, Inc.

(Exact name of registrant as specified in its charter)

 

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

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

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo

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

Large accelerated filero		Accelerated filero		Non-accelerated filero
Smaller reporting companyx
	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 by Rule 12b-2 of the Exchange Act).Yes. Yeso Nox

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

Class		Outstanding at May 1, 20172018
Common Stock, par value $0.01		18,668,78418,033,401

 

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited) —– March 31, 20172018 and December 31, 20162017			1
Consolidated Statements of Operations (Unaudited) —– Three months ended March 31, 20172018 and 20162017			2
Consolidated Statements of Comprehensive Income (Unaudited) —– Three months ended March 31, 20172018 and 20162017			3
Consolidated Statements of Cash Flows (Unaudited) —– Three months ended March 31, 20172018 and 20162017			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations			2930
Item 3. Quantitative and Qualitative Disclosure About Market Risk			4142
Item 4. Controls and Procedures			4142
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			4243
Item 3. Defaults Upon Senior Securities			4243
Item 4. Mine Safety Disclosures			4243
Item 5. Other Information			4243
Item 6. Exhibits			4244

i

TABLE OF CONTENTS

Item 1. Financial Statements

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

		March 31, 2017				December 31, 2016				March 31, 2018				December 31, 2017
ASSETS
Cash and due from depository institutions		$	22,696			$	25,107			$	22,798			$	26,234
Interest bearing deposits			2,748				3,066				2,794				2,698
Short-term investments in money market funds			5,572				5,900				5,002				5,256
Total cash and cash equivalents			31,016				34,073				30,594				34,188
Investment securities:
Available for sale			129,044				127,077
Held to maturity (fair value $36,594 on March 31, 2017 and $30,420 on December 31, 2016)			36,737				30,665
Available for sale, at fair value											132,390				129,138
Held to maturity (fair value $38,041 on March 31, 2018 and $38,811 on December 31, 2017)											38,663				38,752
Loans held for sale			2,613				3,094				843				3,125
Loans			897,296				884,240				875,249				890,032
Less: Unearned income			453				476				376				399
Allowance for loan losses			10,080				9,932				9,932				10,214
Net loans			886,763				873,832				864,941				879,419
Premises and equipment, net			11,968				11,694				12,406				12,734
Accrued interest income receivable			3,200				3,116				3,555				3,603
Goodwill			11,944				11,944				11,944				11,944
Bank owned life insurance			38,044				37,903				37,992				37,860
Net deferred tax asset			9,998				10,655				5,585				5,963
Federal Home Loan Bank stock			4,284				3,359				4,265				4,675
Federal Reserve Bank stock			2,125				2,125				2,125				2,125
Other assets			4,391				4,243				5,857				4,129
TOTAL ASSETS		$	1,172,127			$	1,153,780			$	1,151,160			$	1,167,655
LIABILITIES
Non-interest bearing deposits		$	182,528			$	188,808			$	179,137			$	183,603
Interest bearing deposits			782,248				778,978				765,069				764,342
Total deposits			964,776				967,786				944,206				947,945
Short-term borrowings			33,676				12,754				36,895				49,084
Advances from Federal Home Loan Bank			46,042				45,542				45,969				46,229
Guaranteed junior subordinated deferrable interest debentures, net			12,912				12,908				12,927				12,923
Subordinated debt, net			7,447				7,441				7,470				7,465
Total borrowed funds			100,077				78,645				103,261				115,701
Other liabilities			11,670				11,954				7,883				8,907
TOTAL LIABILITIES			1,076,523				1,058,385				1,055,350				1,072,553
SHAREHOLDERS’ EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,536,139 shares issued and 18,666,520 outstanding on March 31, 2017; 26,521,291 shares issued and 18,903,472 outstanding on December 31, 2016			265				265
Treasury stock at cost, 7,869,619 shares on March 31, 2017 and 7,617,819 on December 31, 2016			(75,821	)			(74,829	)
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,596,220 shares issued and 18,033,401 outstanding on March 31, 2018; 26,585,403 shares issued and 18,128,247 outstanding on December 31, 2017											266				266
Treasury stock at cost, 8,562,819 shares on March 31, 2018 and 8,457,156 on December 31, 2017											(78,678	)			(78,233	)
Capital surplus			145,577				145,535				145,739				145,707
Retained earnings			37,066				36,001				41,807				40,312
Accumulated other comprehensive loss, net			(11,483	)			(11,577	)			(13,324	)			(12,950	)
TOTAL SHAREHOLDERS’ EQUITY			95,604				95,395				95,810				95,102
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,172,127			$	1,153,780			$	1,151,160			$	1,167,655

 
 
See accompanying notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

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

		Three months ended March 31,								Three months ended March 31,
		2017				2016				2018				2017
INTEREST INCOME
Interest and fees on loans		$	9,556			$	9,465			$	9,818			$	9,556
Interest bearing deposits			2				7				4				2
Short-term investments in money market funds			24				10				43				24
Investment securities:
Available for sale			901				767				1,029				901
Held to maturity			265				173				323				265
Total Interest Income			10,748				10,422				11,217				10,748
INTEREST EXPENSE
Deposits			1,436				1,254				1,781				1,436
Short-term borrowings			19				42				92				19
Advances from Federal Home Loan Bank			162				159				186				162
Guaranteed junior subordinated deferrable interest debentures			280				280				280				280
Subordinated debt			130				129				130				130
Total Interest Expense			2,027				1,864				2,469				2,027
NET INTEREST INCOME			8,721				8,558				8,748				8,721
Provision for loan losses			225				3,100				50				225
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,496				5,458				8,698				8,496
NON-INTEREST INCOME
Trust and investment advisory fees			2,166				2,075				2,278				2,166
Service charges on deposit accounts			374				415				383				374
Net gains on sale of loans			114				107				98				114
Mortgage related fees			75				63				39				75
Net realized gains on investment securities			27				57
Net realized gains (losses) on investment securities											(148	)			27
Bank owned life insurance			141				167				132				141
Other income			665				553				853				665
Total Non-Interest Income			3,562				3,437				3,635				3,562
NON-INTEREST EXPENSE
Salaries and employee benefits			6,010				6,166				6,093				5,948
Net occupancy expense			674				737				670				674
Equipment expense			419				436				391				419
Professional fees			1,200				1,465				1,184				1,200
Supplies, postage and freight			194				195				168				194
Miscellaneous taxes and insurance			294				291				290				294
Federal deposit insurance expense			160				179				162				160
Other expense			1,134				1,242				1,162				1,196
Total Non-Interest Expense			10,085				10,711				10,120				10,085
PRETAX INCOME (LOSS)			1,973				(1,816	)
Provision (benefit) for income tax expense			625				(549	)
NET INCOME (LOSS)			1,348				(1,267	)
Preferred stock dividends			—				15
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	1,348			$	(1,282	)
PRETAX INCOME											2,213				1,973
Provision for income tax expense											446				625
NET INCOME										$	1,767			$	1,348
PER COMMON SHARE DATA:
Basic:
Net income (loss)		$	0.07			$	(0.07	)
Net income										$	0.10			$	0.07
Average number of shares outstanding			18,814				18,884				18,079				18,814
Diluted:
Net income (loss)		$	0.07			$	(0.07	)
Net income										$	0.10			$	0.07
Average number of shares outstanding			18,922				18,884				18,181				18,922
Cash dividends declared		$	0.015			$	0.010			$	0.015			$	0.015

TABLE OF CONTENTS

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

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

		Three Months Ended March 31,
		2018				2017
COMPREHENSIVE INCOME
Net income		$	1,767			$	1,348
Other comprehensive income (loss), before tax:
Pension obligation change for defined benefit plan			1,044				77
Income tax effect			(219	)			(27	)
Unrealized holding gains (losses) on available for sale securities arising during period			(1,666	)			92
Income tax effect			350				(30	)
Reclassification adjustment for (gains) losses on available for sale securities included in net income			148				(27	)
Income tax effect			(31	)			9
Other comprehensive income (loss)			(374	)			94
Comprehensive income		$	1,393			$	1,442

 
 
See accompanying notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

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

		Three months ended March 31,								Three months ended March 31,
		2017				2016				2018				2017
OPERATING ACTIVITIES
Net income (loss)		$	1,348			$	(1,267	)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net income										$	1,767			$	1,348
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			225				3,100				50				225
Depreciation expense			428				445				405				428
Net amortization of investment securities			126				87				103				126
Net realized gains on investment securities available for sale			(27	)			(57	)
Net realized (gains) losses on investment securities available for sale											148				(27	)
Net gains on loans held for sale			(114	)			(107	)			(98	)			(114	)
Amortization of deferred loan fees			(51	)			(74	)			(35	)			(51	)
Origination of mortgage loans held for sale			(7,583	)			(7,226	)			(4,061	)			(7,583	)
Sales of mortgage loans held for sale			8,178				7,898				6,441				8,178
Increase in accrued interest income receivable			(84	)			(238	)
(Increase) decrease in accrued interest income receivable											48				(84	)
Decrease in accrued interest payable			(139	)			(167	)			(121	)			(139	)
Earnings on bank owned life insurance			(141	)			(167	)			(132	)			(141	)
Deferred income taxes			623				(976	)			447				623
Amortization of deferred issuance costs			10				10				9				10
Stock based compensation expense			42				55				32				42
Other, net			(233	)			(912	)			(1,410	)			(233	)
Net cash provided by operating activities			2,608				404				3,593				2,608
INVESTING ACTIVITIES
Purchases of investment securities – available for sale			(14,195	)			(6,128	)			(13,168	)			(14,195	)
Purchases of investment securities – held to maturity			(6,476	)			(2,107	)			(855	)			(6,476	)
Proceeds from sales of investment securities – available for sale			5,653				4,248				4,479				5,653
Proceeds from maturities of investment securities – available for sale			6,570				6,649				3,695				6,570
Proceeds from maturities of investment securities – held to maturity			375				253				917				375
Purchases of regulatory stock			(4,531	)			(4,929	)			(3,924	)			(4,531	)
Proceeds from redemption of regulatory stock			3,606				4,910				4,334				3,606
Long-term loans originated			(50,495	)			(52,432	)			(28,694	)			(50,495	)
Principal collected on long-term loans			37,520				48,974				44,999				37,520
Loans purchased or participated			(150	)			(3,995	)			(2,000	)			(150	)
Loans sold or participated			—				5,000
Proceeds from sale of other real estate owned			23				13				12				23
Purchases of premises and equipment			(702	)			(227	)			(77	)			(702	)
Net cash (used in) provided by investing activities			(22,802	)			229
Net cash provided by (used in) investing activities											9,718				(22,802	)
FINANCING ACTIVITIES
Net (decrease) increase in deposit balances			(3,010	)			3,479
Net decrease in deposit balances											(3,739	)			(3,010	)
Net increase (decrease) in other short-term borrowings			20,922				(8,796	)			(12,189	)			20,922
Principal borrowings on advances from Federal Home Loan Bank			3,500				2,000				1,740				3,500
Principal repayments on advances from Federal Home Loan Bank			(3,000	)			(1,000	)			(2,000	)			(3,000	)
Preferred stock redemption			—				(21,000	)
Purchase of treasury stock			(992	)			—				(445	)			(992	)
Common stock dividends			(283	)			(188	)			(272	)			(283	)
Preferred stock dividends			—				(15	)
Net cash provided by (used in) financing activities			17,137				(25,520	)			(16,905	)			17,137
NET DECREASE IN CASH AND CASH EQUIVALENTS			(3,057	)			(24,887	)			(3,594	)			(3,057	)
CASH AND CASH EQUIVALENTS AT JANUARY 1			34,073				48,510				34,188				34,073
CASH AND CASH EQUIVALENTS AT MARCH 31		$	31,016			$	23,623			$	30,594			$	31,016

TABLE OF CONTENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 1615 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.0$2.2 billion that are not reported on the Company’s consolidated balance sheet at March 31, 2017.2018. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

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

2. Basis of Preparation

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

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016.2017.

3. Recent Accounting Pronouncements

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

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

TABLE OF CONTENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Recent Accounting Pronouncements  – (continued)

effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact that the Update will have on our consolidated financial statements. The overall impact of the amendment will be affected by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.

In JanuaryMarch 2017, the FASB issued ASU No. 2017-03 “2017-08,Accounting ChangesReceivables — Nonrefundable Fees and Error Corrections (Topic 250)Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and Investments — Equity Methodinterim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements atinterim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the September 22, 2016 and November 17, 2016 EITF Meetings.” ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of “SEC Staff Announcement: Disclosurein an interim period, any adjustments should be reflected as of the Impact That Recently Issuedbeginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company’s financial statements.

4. Adoption of Accounting Standards Will Have on

Effective January 1, 2018, the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). This announcement applies toCompany adopted ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606)— Topic 606; and all subsequent ASUs that modified ASC 606. The standard required a company to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. The Company completed an assessment of revenue streams and review of the related contracts potentially affected by the new standard and concluded that ASU No. 2016-02,Leases (Topic 842); and2014-09 did not materially change the method in which it recognizes revenue. Therefore, implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods. However, additional disclosures were added in the current period, which can be found in Note 5.

In January 2016, the FASB finalized ASU 2016-03,2016-01,Financial Instruments — Credit Losses (Topic 326)Overall (Subtopic 825-10): Recognition and Measurement of Credit LossesFinancial Assets and Financial Liabilities. This accounting standard (a) requires separate presentation of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) on the balance sheet and measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

TABLE OF CONTENTS

AmeriServ Financial, Instruments, and subsequent amendments. Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Adoption of Accounting Standards  – (continued)

The Company has enhanced its disclosures regardingadopted this standard during the impactreporting period. On a prospective basis, the Company implemented changes to the measurement of the fair value of financial instruments using an exit price notion for disclosure purposes included in Note 19 to the financial statements. The December 31, 2017, fair value of each class of financial instruments disclosure did not utilize the exit price notion when measuring fair value and, therefore, would not be comparable to the March 31, 2018 disclosure. The Company estimated the fair value based on guidance from ASC 820-10, Fair Value Measurements, which defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is no active observable market for sale information on community bank loans and, thus, Level III fair value procedures were utilized, primarily in the use of present value techniques incorporating assumptions that recentlymarket participants would use in estimating fair values.

In March 2017, the FASB issued accounting standardsASU 2017-07,Compensation — Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. The Company adopted the standard on January 1, 2018, which resulted in a futurereclassification of $22,000 and $(62,000) from Salaries and employee benefits into Other expense on the Consolidated Statement of Operations for the periods ended March 31, 2018 and 2017, respectively. See Note 18 for additional information on the presentation of these pension cost components.

5. Revenue Recognition

Management determined that the primary sources of revenue associated with financial instruments, including interest income on loans and investments, along with certain noninterest revenue sources including investment security gains, loan servicing charges, gains on the sale of loans, and bank owned life insurance income are not within the scope of Topic 606. As a result, no changes were made during the period willrelated to these sources of revenue, which cumulatively comprise 78.3% of the total revenue of the Company.

Noninterest income within the scope of Topic 606 are as follows:

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5. Revenue Recognition  – (continued)

The following presents noninterest income, segregated by revenue streams in-scope and disclosures in this footnote.out-of-scope of Topic 606, for the three months ended March 31, 2018 and 2017 (in thousands).

		Three months ended March 31,
		2018				2017
Noninterest income:
In-scope of Topic 606
Trust and investment advisory fees		$	2,278			$	2,166
Service charges on deposit accounts			383				374
Other			566				540
Noninterest income (in-scope of topic 606)			3,227				3,080
Noninterest income (out-of-scope of topic 606)			408				482
Total noninterest income		$	3,635			$	3,562

4.6. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are excluded for earnings per share purposes. The Company had no options to purchase common shares excluded from the computation of diluted earnings per common share, since all option exercise prices were below the average closing price for both the first quarter of 2018 and 2017. Due to the net loss as of March 31, 2016, all options to purchase common shares were not included in

		Three months ended March 31,
		2018				2017
		(In thousands, except per share data)
Numerator:
Net income		$	1,767			$	1,348
Denominator:
Weighted average common shares outstanding (basic)			18,079				18,814
Effect of stock options			102				108
Weighted average common shares outstanding (diluted)			18,181				18,922
Earnings per common share:
Basic		$	0.10			$	0.07
Diluted			0.10				0.07

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4. Earnings Per Common Share  – (continued)

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

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

5.7. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits and short-term investments in money market funds. The Company made $3,000 inno income tax payments in the first three months of 20172018 and $438,500$3,000 in the same 20162017 period. The Company made total interest payments of $2,166,000$2,590,000 in the first three months of 20172018 compared to $2,031,000$2,166,000 in the same 20162017 period. The Company had $20,000$158,000 non-cash transfers to other real estate owned (OREO) in the first three months of 20172018 compared to $38,000$20,000 non-cash transfers in the same 20162017 period.

6.8. Investment Securities

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

Investment securities available for sale (AFS):

		March 31, 2017																March 31, 2018
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	1,397			$	—			$	(6	)		$	1,391			$	6,821			$	—			$	(166	)		$	6,655
US Agency mortgage-backed securities			88,508				1,023				(641	)			88,890				82,648				396				(1,498	)			81,546
Taxable municipal			5,450				13				(176	)			5,287				8,929				8				(347	)			8,590
Corporate bonds			33,881				196				(601	)			33,476				35,922				254				(577	)			35,599
Total		$	129,236			$	1,232			$	(1,424	)		$	129,044			$	134,320			$	658			$	(2,588	)		$	132,390

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6.8. Investment Securities  – (continued)

Investment securities held to maturity (HTM):

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

Investment securities available for sale (AFS):

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

Investment securities held to maturity (HTM):

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

Maintaining investment quality is a primary objective of the Company’sCompany's investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’sMoody's Investor's Service or Standard & Poor’sPoor's rating of “A.” At March 31, 2017, 61.3%2018, 57.4% of the portfolio was rated “AAA” as compared to 79.1%57.8% at December 31, 2016.2017. Approximately 10.7%9.4% of the portfolio was either rated below “A” or unrated at March 31, 20172018 as compared to 5.7%9.7% at December 31, 2016.2017.

The Company sold $4.5 million AFS securities in the first quarter of 2018 resulting in $148,000 of gross investment security losses and sold $5.7 million AFS securities in the first quarterthree months of 2017 resulting in $27,000 of gross investment security gains and sold $4.2 million AFS securities in the first three months of 2016 resulting in $63,000 of gross investment security gains and $6,000 of gross investment security losses.gains.

The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits and certain Federal Home Loan Bank borrowings was $111,529,000$115,980,000 at March 31, 20172018 and $104,953,000$117,181,000 at December 31, 2016.2017.

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8. Investment Securities  – (continued)

Contractual maturities of securities at March 31, 20172018 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The weighted average duration of the total investment securities portfolio at March 31, 20172018 is 45.246.9 months and is higher than the duration at December 31, 20162017 which was 41.244.3 months. The duration remains within our internal established guideline range of 24 to 60 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.

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8.10. Allowance for Loan Losses  – (continued)

		Three months ended March 31, 2016																				Three months ended March 31, 2017
		Balance at December 31, 2015				Charge-Offs				Recoveries				Provision (Credit)				Balance at March 31, 2016				Balance at December 31, 2016				Charge-Offs				Recoveries				Provision (Credit)				Balance at March 31, 2017
Commercial		$	4,244			$	(3,339	)		$	7			$	2,655			$	3,567			$	4,041			$	—			$	7			$	(24	)		$	4,024
Commercial loans secured by real estate			3,449				—				28				229				3,706				3,584				(14	)			2				175				3,747
Real estate – mortgage			1,173				(38	)			42				(20	)			1,157				1,169				(94	)			66				26				1,167
Consumer			151				(205	)			4				195				145				151				(63	)			19				42				149
Allocation for general risk			904				—				—				41				945				987				—				—				6				993
Total		$	9,921			$	(3,582	)		$	81			$	3,100			$	9,520			$	9,932			$	(171	)		$	94			$	225			$	10,080

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8.10. Allowance for Loan Losses  – (continued)

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

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

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

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

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

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8.10. Allowance for Loan Losses  – (continued)

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

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

		March 31, 2017																				March 31, 2018
		Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans								Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance				Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance
Commercial		$	484			$	484			$	—			$	484			$	511			$	902			$	835			$	11			$	913			$	922
Commercial loans secured by real estate			157				23				16				173				207				—				—				13				13				35
Total impaired loans		$	641			$	507			$	16			$	657			$	718			$	902			$	835			$	24			$	926			$	957