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

 

FORM 10-Q

 

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

For the period ended September 30, 2017

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, PA		15907-0430
(Address of principal executive offices)		(Zip Code)

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

 

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

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

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

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

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

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

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

Class		Outstanding at November 1, 2017
Common Stock, par value $0.01		18,273,824

TABLE OF CONTENTS

AmeriServ Financial, Inc.
 
INDEX

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited) – September 30, 2017 and December 31, 2016			1
Consolidated Statements of Operations (Unaudited) – Three and nine months ended September 30, 2017 and 2016			2
Consolidated Statements of Comprehensive Income (Unaudited) – Three and nine months ended September 30, 2017 and 2016			3
Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2017 and 2016			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosure About Market Risk			49
Item 4. Controls and Procedures			49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			49
Item 4. Mine Safety Disclosures			49
Item 5. Other Information			49
Item 6. Exhibits			50

TABLE OF CONTENTS

Item 1. Financial Statements

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

		September 30, 2017				December 31, 2016
ASSETS
Cash and due from depository institutions		$	20,267			$	25,107
Interest bearing deposits			2,718				3,066
Short-term investments in money market funds			5,690				5,900
Total cash and cash equivalents			28,675				34,073
Investment securities:
Available for sale			129,446				127,077
Held to maturity (fair value $39,059 on September 30, 2017 and $30,420 on December 31, 2016)			38,997				30,665
Loans held for sale			1,780				3,094
Loans			896,648				884,240
Less: Unearned income			438				476
Allowance for loan losses			10,346				9,932
Net loans			885,864				873,832
Premises and equipment, net			12,658				11,694
Accrued interest income receivable			3,503				3,116
Goodwill			11,944				11,944
Bank owned life insurance			37,716				37,903
Net deferred tax asset			9,255				10,655
Federal Home Loan Bank stock			4,429				3,359
Federal Reserve Bank stock			2,125				2,125
Other assets			4,524				4,243
TOTAL ASSETS		$	1,170,916			$	1,153,780
LIABILITIES
Non-interest bearing deposits		$	182,396			$	188,808
Interest bearing deposits			784,525				778,978
Total deposits			966,921				967,786
Short-term borrowings			33,593				12,754
Advances from Federal Home Loan Bank			44,042				45,542
Guaranteed junior subordinated deferrable interest debentures, net			12,919				12,908
Subordinated debt, net			7,459				7,441
Total borrowed funds			98,013				78,645
Other liabilities			8,872				11,954
TOTAL LIABILITIES			1,073,806				1,058,385
SHAREHOLDERS’ EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,585,403 shares issued and 18,281,224 outstanding on September 30, 2017; 26,521,291 shares issued and 18,903,472 outstanding on December 31, 2016			266				265
Treasury stock at cost, 8,304,179 shares on September 30, 2017 and 7,617,819 on December 31, 2016			(77,586	)			(74,829	)
Capital surplus			145,704				145,535
Retained earnings			39,450				36,001
Accumulated other comprehensive loss, net			(10,724	)			(11,577	)
TOTAL SHAREHOLDERS’ EQUITY			97,110				95,395
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,170,916			$	1,153,780

 
 
See accompanying notes to unaudited consolidated financial statements.

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

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
INTEREST INCOME
Interest and fees on loans		$	9,855			$	9,462			$	29,189			$	28,336
Interest bearing deposits			3				2				8				11
Short-term investments in money market funds			42				31				93				54
Investment securities:
Available for sale			973				779				2,819				2,324
Held to maturity			314				202				877				562
Total Interest Income			11,187				10,476				32,986				31,287
INTEREST EXPENSE
Deposits			1,618				1,391				4,558				3,975
Short-term borrowings			44				2				130				49
Advances from Federal Home Loan Bank			178				166				511				484
Guaranteed junior subordinated deferrable interest debentures			280				280				840				840
Subordinated debt			130				131				390				389
Total Interest Expense			2,250				1,970				6,429				5,737
NET INTEREST INCOME			8,937				8,506				26,557				25,550
Provision for loan losses			200				300				750				3,650
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,737				8,206				25,807				21,900
NON-INTEREST INCOME
Trust and investment advisory fees			2,045				2,035				6,292				6,234
Service charges on deposit accounts			409				433				1,168				1,252
Net gains on sale of loans			217				260				517				552
Mortgage related fees			69				132				227				293
Net realized gains on investment securities			56				60				115				177
Bank owned life insurance			143				169				594				505
Other income			690				572				2,033				1,827
Total Non-Interest Income			3,629				3,661				10,946				10,840
NON-INTEREST EXPENSE
Salaries and employee benefits			6,005				5,901				17,994				17,935
Net occupancy expense			634				656				1,947				2,083
Equipment expense			343				419				1,196				1,264
Professional fees			1,213				1,330				3,828				3,987
Supplies, postage and freight			161				181				516				530
Miscellaneous taxes and insurance			319				287				924				866
Federal deposit insurance expense			156				189				468				556
Other expense			1,283				1,393				3,643				3,885
Total Non-Interest Expense			10,114				10,356				30,516				31,106
PRETAX INCOME			2,252				1,511				6,237				1,634
Provision for income tax expense			701				446				1,949				474
NET INCOME			1,551				1,065				4,288				1,160
Preferred stock dividends			—				—				—				15
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	1,551			$	1,065			$	4,288			$	1,145
PER COMMON SHARE DATA:
Basic:
Net income		$	0.08			$	0.06			$	0.23			$	0.06
Average number of shares outstanding			18,380				18,899				18,590				18,893
Diluted:
Net income		$	0.08			$	0.06			$	0.23			$	0.06
Average number of shares outstanding			18,481				18,957				18,689				18,947
Cash dividends declared		$	0.015			$	0.015			$	0.045			$	0.035

 
 
See accompanying notes to unaudited consolidated financial statements.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
COMPREHENSIVE INCOME
Net income		$	1,551			$	1,065			$	4,288			$	1,160
Other comprehensive income, before tax:
Pension obligation change for defined benefit plan			396				263				870				1,030
Income tax effect			(135	)			(89	)			(297	)			(349	)
Unrealized holding gains (losses) on available for sale securities arising during period			176				(191	)			538				1,417
Income tax effect			(60	)			65				(182	)			(483	)
Reclassification adjustment for gains on available for sale securities included in net income			(56	)			(60	)			(115	)			(177	)
Income tax effect			19				20				39				60
Other comprehensive income			340				8				853				1,498
Comprehensive income		$	1,891			$	1,073			$	5,141			$	2,658

 
 
See accompanying notes to unaudited consolidated financial statements.

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

		Nine months ended September 30,
		2017				2016
OPERATING ACTIVITIES
Net income		$	4,288			$	1,160
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses			750				3,650
Depreciation expense			1,224				1,306
Net amortization of investment securities			346				342
Net realized gains on investment securities available for sale			(115	)			(177	)
Net gains on loans held for sale			(517	)			(552	)
Amortization of deferred loan fees			(117	)			(174	)
Origination of mortgage loans held for sale			(34,045	)			(42,549	)
Sales of mortgage loans held for sale			35,876				37,327
(Increase) decrease in accrued interest income receivable			(387	)			50
Decrease in accrued interest payable			(18	)			(18	)
Earnings on bank owned life insurance			(427	)			(505	)
Deferred income taxes			975				(280	)
Amortization of deferred issuance costs			29				29
Stock based compensation expense			170				89
Other, net			(2,492	)			(2,000	)
Net cash provided by (used in) operating activities			5,540				(2,302	)
INVESTING ACTIVITIES
Purchases of investment securities – available for sale			(27,581	)			(24,896	)
Purchases of investment securities – held to maturity			(9,465	)			(8,633	)
Proceeds from sales of investment securities – available for sale			8,143				8,966
Proceeds from maturities of investment securities – available for sale			17,341				18,750
Proceeds from maturities of investment securities – held to maturity			1,054				2,166
Purchases of regulatory stock			(12,894	)			(8,833	)
Proceeds from redemption of regulatory stock			11,824				10,106
Long-term loans originated			(122,029	)			(145,189	)
Principal collected on long-term loans			112,626				120,875
Loans purchased or participated			(6,121	)			(4,948	)
Loans sold or participated			2,800				18,900
Proceeds from sale of other real estate owned			60				99
Proceeds from life insurance policies			614				—
Purchases of premises and equipment			(2,188	)			(1,012	)
Net cash used in investing activities			(25,816	)			(13,649	)
FINANCING ACTIVITIES
Net (decrease) increase in deposit balances			(865	)			59,442
Net increase (decrease) in other short-term borrowings			20,839				(40,847	)
Principal borrowings on advances from Federal Home Loan Bank			9,500				7,042
Principal repayments on advances from Federal Home Loan Bank			(11,000	)			(6,000	)
Preferred stock redemption			—				(21,000	)
Purchase of treasury stock			(2,757	)			—
Common stock dividends			(839	)			(661	)
Preferred stock dividends			—				(15	)
Net cash provided by (used in) financing activities			14,878				(2,039	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(5,398	)			(17,990	)
CASH AND CASH EQUIVALENTS AT JANUARY 1			34,073				48,510
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30		$	28,675			$	30,520

 
 
See accompanying notes to unaudited consolidated financial statements.

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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 16 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.1 billion that are not reported on the Company’s consolidated balance sheet at September 30, 2017. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.

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

2. Basis of Preparation

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

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

3. Recent Accounting Pronouncements

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

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

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AmeriServ Financial, Inc.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Recent Accounting Pronouncements  – (continued)

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

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

In March 2017, the FASB issued ASU 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 as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and 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 interim 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 interim 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 amendments in an interim period, any adjustments

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AmeriServ Financial, Inc.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Recent Accounting Pronouncements  – (continued)

should be reflected as of the beginning 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. 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 10,000 options to purchase common shares with an exercise price of $4.00 per share, outstanding at September 30, 2017, but were excluded from the computation of diluted earnings per common share because to do so would be antidilutive. For the 2016 period, options to purchase 147,968 common shares, at exercise prices ranging from $3.18 to $4.60, were outstanding but were not included in 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 September 30,								Nine months ended September 30,
		2017				2016				2017				2016
		(In thousands, except per share data)
Numerator:
Net income		$	1,551			$	1,065			$	4,288			$	1,160
Preferred stock dividends			—				—				—				(15	)
Net income available to common shareholders		$	1,551			$	1,065			$	4,288			$	1,145
Denominator:
Weighted average common shares outstanding (basic)			18,380				18,899				18,590				18,893
Effect of stock options			101				58				99				54
Weighted average common shares outstanding (diluted)			18,481				18,957				18,689				18,947
Earnings per common share:
Basic		$	0.08			$	0.06			$	0.23			$	0.06
Diluted			0.08				0.06				0.23				0.06

5. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits and short-term investments in money market funds. The Company made $975,000 in income tax payments in the first nine months of 2017 and $390,000 in the same 2016 period. The Company made total interest payments of $6,447,000 in the first nine months of 2017 compared to $5,755,000 in the same 2016 period. The Company had $59,000 non-cash transfers to other real estate owned (OREO) in the first nine months of 2017 compared to $151,000 non-cash transfers in the same 2016 period.

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AmeriServ Financial, Inc.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities

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

Investment securities available for sale (AFS):

		September 30, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	5,435			$	1			$	(34	)		$	5,402
US Agency mortgage-backed securities			80,756				866				(382	)			81,240
Taxable municipal			7,203				30				(166	)			7,067
Corporate bonds			35,886				327				(476	)			35,737
Total		$	129,280			$	1,224			$	(1,058	)		$	129,446

Investment securities held to maturity (HTM):

		September 30, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	10,081			$	194			$	(23	)		$	10,252
Taxable municipal			22,873				222				(314	)			22,781
Corporate bonds and other securities			6,043				29				(46	)			6,026
Total		$	38,997			$	445			$	(383	)		$	39,059

Investment securities available for sale (AFS):

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

Investment securities held to maturity (HTM):

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

Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of “A.” At September 30, 2017, 57.8% of the portfolio was rated “AAA” as compared to 63.5% at December 31, 2016. Approximately 12.8% of the portfolio was either rated below “A” or unrated at September 30, 2017 as compared to 10.1% at December 31, 2016.

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AmeriServ Financial, Inc.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

The Company sold $937,000 AFS securities in the third quarter of 2017 resulting in $56,000 of gross investment security gains and sold $8.1 million AFS securities in the first nine months of 2017 resulting in $115,000 of gross investment security gains. The Company sold $1.5 million AFS securities in the third quarter of 2016 resulting in $60,000 of gross investment security gains and sold $9.0 million AFS securities in the first nine months of 2016 resulting in $183,000 of gross investment security gains and $6,000 of gross investment security losses.

The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits, and certain Federal Home Loan Bank borrowings was $114,589,000 at September 30, 2017 and $104,953,000 at December 31, 2016.

The following tables present information concerning investments with unrealized losses as of September 30, 2017 and December 31, 2016 (in thousands):

Total investment securities:

		September 30, 2017
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	3,990			$	(33	)		$	399			$	(1	)		$	4,389			$	(34	)
US Agency mortgage-backed securities			38,127				(321	)			3,239				(84	)			41,366				(405	)
Taxable municipal			11,724				(377	)			2,172				(103	)			13,896				(480	)
Corporate bonds and other securities			12,414				(205	)			10,265				(317	)			22,679				(522	)
Total		$	66,255			$	(936	)		$	16,075			$	(505	)		$	82,330			$	(1,441	)

Total investment securities:

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

The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 104 positions that are considered temporarily impaired at September 30, 2017. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities  – (continued)

Contractual maturities of securities at September 30, 2017 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The duration of the total investment securities portfolio at September 30, 2017 is 44.2 months and is higher than the duration at December 31, 2016 which was 41.2 months. The duration remains within our internal established guideline range of 24 to 60 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.

Total investment securities:

		September 30, 2017
		Available for sale								Held to maturity
		Cost Basis				Fair Value				Cost Basis				Fair Value
Within 1 year		$	1,400			$	1,399			$	2,000			$	1,975
After 1 year but within 5 years			11,706				11,718				1,551				1,533
After 5 years but within 10 years			45,805				45,999				14,562				14,639
After 10 years but within 15 years			27,738				27,609				14,924				14,824
Over 15 years			42,631				42,721				5,960				6,088
Total		$	129,280			$	129,446			$	38,997			$	39,059

7. Loans

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

		September 30, 2017				December 31, 2016
Commercial		$	160,918			$	171,529
Commercial loans secured by real estate			469,348				446,598
Real estate – mortgage			246,881				245,765
Consumer			19,063				19,872
Loans, net of unearned income		$	896,210			$	883,764

Loan balances at September 30, 2017 and December 31, 2016 are net of unearned income of $438,000 and $476,000, respectively. Real estate-construction loans comprised 3.6% and 4.7% of total loans, net of unearned income at September 30, 2017 and December 31, 2016, respectively.

8. Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three and nine month periods ending September 30, 2017 and 2016 (in thousands).

		Three months ended September 30, 2017
		Balance at June 30, 2017				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2017
Commercial		$	3,825			$	(228	)		$	9			$	561			$	4,167
Commercial loans secured by real estate			4,487				—				3				(644	)			3,846
Real estate-mortgage			1,151				(109	)			72				50				1,164
Consumer			138				(42	)			50				(7	)			139
Allocation for general risk			790				—				—				240				1,030
Total		$	10,391			$	(379	)		$	134			$	200			$	10,346

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8. Allowance for Loan Losses  – (continued)

		Three months ended September 30, 2016
		Balance at June 30, 2016				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2016
Commercial		$	4,322			$	(295	)		$	115			$	92			$	4,234
Commercial loans secured by real estate			3,274				(13	)			2				85				3,348
Real estate-mortgage			1,075				(104	)			24				77				1,072
Consumer			135				(57	)			8				53				139
Allocation for general risk			940				—				—				(7	)			933
Total		$	9,746			$	(469	)		$	149			$	300			$	9,726

		Nine months ended September 30, 2017
		Balance at December 31, 2016				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2017
Commercial		$	4,041			$	(228	)		$	22			$	332			$	4,167
Commercial loans secured by real estate			3,584				(14	)			8				268				3,846
Real estate-mortgage			1,169				(263	)			165				93				1,164
Consumer			151				(138	)			112				14				139
Allocation for general risk			987				—				—				43				1,030
Total		$	9,932			$	(643	)		$	307			$	750			$	10,346

		Nine months ended September 30, 2016
		Balance at December 31, 2015				Charge-Offs				Recoveries				Provision (Credit)				Balance at September 30, 2016
Commercial		$	4,244			$	(3,648	)		$	126			$	3,512			$	4,234
Commercial loans secured by real estate			3,449				(13	)			38				(126	)			3,348
Real estate-mortgage			1,173				(150	)			86				(37	)			1,072
Consumer			151				(302	)			18				272				139
Allocation for general risk			904				—				—				29				933
Total		$	9,921			$	(4,113	)		$	268			$	3,650			$	9,726

The provision expense, charge-offs and recoveries were at more typical levels in the first nine months of 2017. The allocation amount to commercial loans secured by real estate (CRE) in the third quarter of 2017 reflects an improvement in the level of delinquency and the level of classified assets since the end of the second quarter of 2017 as one large CRE credit was upgraded and another transferred into non-accrual status (see further discussion in the loan quality section of the MD&A). The substantially higher than typical provision and net loan charge-offs in the first three months 2016 for the commercial portfolio was necessary to resolve the Company’s only meaningful direct loan exposure to the energy industry. These loans were related to a single borrower in the fracking industry who had filed for bankruptcy protection in the fourth quarter of 2015. With the bankruptcy changing from Chapter 11 (reorganization) to Chapter 7 (liquidation) late in the first quarter of 2016, the Company concluded that its previously established reserves on these non-accrual loans were not sufficient to cover the discounted collateral values that resulted from the liquidation process.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

		At September 30, 2017
Loans:		Commercial				Commercial Loans Secured by Real Estate				Real Estate- Mortgage				Consumer				Allocation for General Risk				Total
Individually evaluated for impairment		$	1,458			$	2,465			$	—			$	—							$	3,923
Collectively evaluated for impairment			159,460				466,883				246,881				19,063								892,287
Total loans		$	160,918			$	469,348			$	246,881			$	19,063							$	896,210
Allowance for loan losses:
Specific reserve allocation		$	860			$	28			$	—			$	—			$	—			$	888
General reserve allocation			3,307				3,818				1,164				139				1,030				9,458
Total allowance for loan losses		$	4,167			$	3,846			$	1,164			$	139			$	1,030			$	10,346

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

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 effected by non-owner occupied commercial real estate (CRE) loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, as a meaningful portion of the commercial portfolio is centered in these types of accounts. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans secured by residential real estate. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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. 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).

		September 30, 2017
		Impaired Loans with Specific Allowance								Impaired Loans with no Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance
Commercial		$	1,448			$	860			$	10			$	1,458			$	1,458
Commercial loans secured by real estate			151				28				2,314				2,465				2,499
Total impaired loans		$	1,599			$	888			$	2,324			$	3,923			$	3,957

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

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

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Average loan balance:
Commercial		$	1,302			$	821			$	816			$	992
Commercial loans secured by real estate			1,316				283				825				449
Average investment in impaired loans		$	2,618			$	1,104			$	1,641			$	1,441
Interest income recognized:
Commercial		$	9			$	1			$	24			$	9
Commercial loans secured by real estate			—				—				2				8
Interest income recognized on a cash basis on impaired loans		$	9			$	1			$	26			$	17

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

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

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

		September 30, 2017
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	158,169			$	76			$	2,423			$	250			$	160,918
Commercial loans secured by real estate			448,766				16,524				4,044				14				469,348
Total		$	606,935			$	16,600			$	6,467			$	264			$	630,266

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

		September 30, 2017
		Performing				Non-Performing
Real estate-mortgage		$	245,479			$	1,402
Consumer			19,056				7
Total		$	264,535			$	1,409

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

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

		September 30, 2017
		Current				30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days Past Due				Total Past Due				Total Loans				90 Days Past Due and Still Accruing
Commercial		$	159,529			$	1,228			$	—			$	161			$	1,389			$	160,918			$	—
Commercial loans secured by real estate			461,506				5,358				—				2,484				7,842				469,348				—
Real estate-mortgage			242,793				2,488				861				739				4,088				246,881				—
Consumer			18,978				73				12				—				85				19,063				—
Total		$	882,806			$	9,147			$	873			$	3,384			$	13,404			$	896,210			$	—

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses  – (continued)

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

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

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

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

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

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

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

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

		September 30, 2017				December 31, 2016
Non-accrual loans
Commercial		$	461			$	496
Commercial loans secured by real estate			2,785				178
Real estate-mortgage			1,402				929
Consumer			7				—
Total			4,655				1,603
Other real estate owned
Real estate-mortgage			39				21
Total			39				21
TDR’s not in non-accrual			678				—
Total non-performing assets including TDR		$	5,372			$	1,624
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.60	%			0.18	%

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

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

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Interest income due in accordance with original terms		$	32			$	20			$	65			$	99
Interest income recorded			—				—				—				—
Net reduction in interest income		$	32			$	20			$	65			$	99

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

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

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

The following table details the loans modified as TDRs during the nine month period ended September 30, 2017 (dollars in thousands).

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan

2

$

678

Extension of maturity date with interest only period

The following table details the loans modified as TDRs during the nine month period ended September 30, 2016 (dollars in thousands).

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted

Commercial loan

2

$

507

Extension of maturity date with interest only period

In all instances where loans have been modified in troubled debt restructurings the pre- and post-modified balances are the same. The specific ALL reserve for loans modified as TDR’s was $390,000 and $507,000 as of September 30, 2017 and 2016, respectively. All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed.

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

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AmeriServ Financial, Inc.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company had no loans that were classified as TDR’s or were subsequently modified during each 12-month period prior to the current reporting periods, which begin January 1, 2017 and 2016 (nine month periods) and July 1, 2017 and 2016 (three month periods), respectively, and that subsequently defaulted during these reporting periods.

The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above.

Foreclosed assets acquired in settlement of loans carried at fair value less estimated costs to sell are included in the other assets on the Consolidated Balance Sheet. As of September 30, 2017 and December 31, 2016, a total of $39,000 and $21,000, respectively of residential real estate foreclosed assets were included in other assets. As of September 30, 2017, the Company had initiated formal foreclosure procedures on $297,000 of consumer residential mortgages.

10. Federal Home Loan Bank Borrowings

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

		At September 30, 2017
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	33,593				0.94	%
Advances			2017				1,000				0.88
			2018				12,000				1.48
			2019				12,500				1.51
			2020				13,542				1.67
			2021 and over				5,000				1.68
Total advances							44,042				1.57
Total FHLB borrowings						$	77,635				1.30	%

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

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11. Preferred Stock

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

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

12. Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three and nine months ended September 30, 2017 and 2016 (in thousands):

		Three months ended September 30, 2017												Three months ended September 30, 2016
		Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)				Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)
Beginning balance		$	30			$	(11,094	)		$	(11,064	)		$	1,791			$	(7,856	)		$	(6,065	)
Other comprehensive income (loss) before reclassifications			116				261				377				(126	)			174				48
Amounts reclassified from accumulated other comprehensive loss			(37	)			—				(37	)			(40	)			—				(40	)
Net current period other comprehensive income (loss)			79				261				340				(166	)			174				8
Ending balance		$	109			$	(10,833	)		$	(10,724	)		$	1,625			$	(7,682	)		$	(6,057	)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

		Nine months ended September 30, 2017												Nine months ended September 30, 2016
		Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)				Net Unrealized Gains and (Losses) on Investment Securities AFS(1)				Defined Benefit Pension Items(1)				Total(1)
Beginning balance		$	(171	)		$	(11,406	)		$	(11,577	)		$	808			$	(8,363	)		$	(7,555	)
Other comprehensive income before reclassifications			356				573				929				934				681				1,615
Amounts reclassified from accumulated other comprehensive loss			(76	)			—				(76	)			(117	)			—				(117	)
Net current period other comprehensive income			280				573				853				817				681				1,498
Ending balance		$	109			$	(10,833	)		$	(10,724	)		$	1,625			$	(7,682	)		$	(6,057	)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 (in thousands):

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the three months ended September 30, 2017				For the three months ended September 30, 2016				Affected line item in the consolidated statement of operations
Realized gains on sale of securities
		$	(56	)		$	(60	)			Net realized gains on   investment securities
			19				20				Provision for income tax expense
		$	(37	)		$	(40	)			Net of tax
Total reclassifications for the period		$	(37	)		$	(40	)			Net income

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss  – (continued)

		Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components		For the nine months ended September 30, 2017				For the nine months ended September 30, 2016				Affected line item in the consolidated statement of operations
Realized gains on sale of securities
		$	(115	)		$	(177	)			Net realized gains on   investment securities
			39				60				Provision for income tax expense
		$	(76	)		$	(117	)			Net of tax
Total reclassifications for the period		$	(76	)		$	(117	)			Net income

13. Regulatory Capital

The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. For a more detailed discussion see the Capital Resources section of the MD&A.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier I capital (as defined in the regulations) to risk-weighted assets (RWA) (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of September 30, 2017, the Bank was categorized as “Well Capitalized” under the regulatory framework for prompt corrective action promulgated by the Federal Reserve. The Company believes that no conditions or events have occurred that would change this conclusion as of such date. To be categorized as Well Capitalized, the Bank must maintain minimum Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital, and Tier 1 leverage ratios as set forth in the table. Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.35% at September 30, 2017 (in thousands, except ratios).

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AmeriServ Financial, Inc.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. Regulatory Capital  – (continued)

		AT SEPTEMBER 30, 2017
		COMPANY								BANK								MINIMUM REQUIRED FOR CAPITAL ADEQUACY PURPOSES				TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION REGULATIONS*
		AMOUNT				RATIO				AMOUNT				RATIO				RATIO				RATIO
		(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)		$	126,357				13.08	%		$	109,915				11.44	%			8.00	%			10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)			95,839				9.92				98,695				10.28				4.50				6.50
Tier 1 Capital (To Risk Weighted Assets)			107,678				11.15				98,695				10.28				6.00				8.00
Tier 1 Capital (To Average Assets)			107,678				9.32				98,695				8.68				4.00				5.00