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 March 31, 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 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 May 1, 2018
Common Stock, par value $0.01		18,033,401

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AmeriServ Financial, Inc.

INDEX

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited) – March 31, 2018 and December 31, 2017			1
Consolidated Statements of Operations (Unaudited) – Three months ended March 31, 2018 and 2017			2
Consolidated Statements of Comprehensive Income (Unaudited) – Three months ended March 31, 2018 and 2017			3
Consolidated Statements of Cash Flows (Unaudited) – Three months ended March 31, 2018 and 2017			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosure About Market Risk			42
Item 4. Controls and Procedures			42
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			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Mine Safety Disclosures			43
Item 5. Other Information			43
Item 6. Exhibits			44

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Item 1. Financial Statements

AmeriServ Financial, Inc.

CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
(Unaudited)

		March 31, 2018				December 31, 2017
ASSETS
Cash and due from depository institutions		$	22,798			$	26,234
Interest bearing deposits			2,794				2,698
Short-term investments in money market funds			5,002				5,256
Total cash and cash equivalents			30,594				34,188
Investment securities:
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			843				3,125
Loans			875,249				890,032
Less: Unearned income			376				399
Allowance for loan losses			9,932				10,214
Net loans			864,941				879,419
Premises and equipment, net			12,406				12,734
Accrued interest income receivable			3,555				3,603
Goodwill			11,944				11,944
Bank owned life insurance			37,992				37,860
Net deferred tax asset			5,585				5,963
Federal Home Loan Bank stock			4,265				4,675
Federal Reserve Bank stock			2,125				2,125
Other assets			5,857				4,129
TOTAL ASSETS		$	1,151,160			$	1,167,655
LIABILITIES
Non-interest bearing deposits		$	179,137			$	183,603
Interest bearing deposits			765,069				764,342
Total deposits			944,206				947,945
Short-term borrowings			36,895				49,084
Advances from Federal Home Loan Bank			45,969				46,229
Guaranteed junior subordinated deferrable interest debentures, net			12,927				12,923
Subordinated debt, net			7,470				7,465
Total borrowed funds			103,261				115,701
Other liabilities			7,883				8,907
TOTAL LIABILITIES			1,055,350				1,072,553
SHAREHOLDERS’ EQUITY
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			145,739				145,707
Retained earnings			41,807				40,312
Accumulated other comprehensive loss, net			(13,324	)			(12,950	)
TOTAL SHAREHOLDERS’ EQUITY			95,810				95,102
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,151,160			$	1,167,655

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 March 31,
		2018				2017
INTEREST INCOME
Interest and fees on loans		$	9,818			$	9,556
Interest bearing deposits			4				2
Short-term investments in money market funds			43				24
Investment securities:
Available for sale			1,029				901
Held to maturity			323				265
Total Interest Income			11,217				10,748
INTEREST EXPENSE
Deposits			1,781				1,436
Short-term borrowings			92				19
Advances from Federal Home Loan Bank			186				162
Guaranteed junior subordinated deferrable interest debentures			280				280
Subordinated debt			130				130
Total Interest Expense			2,469				2,027
NET INTEREST INCOME			8,748				8,721
Provision for loan losses			50				225
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,698				8,496
NON-INTEREST INCOME
Trust and investment advisory fees			2,278				2,166
Service charges on deposit accounts			383				374
Net gains on sale of loans			98				114
Mortgage related fees			39				75
Net realized gains (losses) on investment securities			(148	)			27
Bank owned life insurance			132				141
Other income			853				665
Total Non-Interest Income			3,635				3,562
NON-INTEREST EXPENSE
Salaries and employee benefits			6,093				5,948
Net occupancy expense			670				674
Equipment expense			391				419
Professional fees			1,184				1,200
Supplies, postage and freight			168				194
Miscellaneous taxes and insurance			290				294
Federal deposit insurance expense			162				160
Other expense			1,162				1,196
Total Non-Interest Expense			10,120				10,085
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		$	0.10			$	0.07
Average number of shares outstanding			18,079				18,814
Diluted:
Net income		$	0.10			$	0.07
Average number of shares outstanding			18,181				18,922
Cash dividends declared		$	0.015			$	0.015

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 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.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

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

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 15 locations in Pennsylvania. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.2 billion that are not reported on the Company’s consolidated balance sheet at March 31, 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's Annual Report on Form 10-K for the year ended December 31, 2017.

3. Recent Accounting Pronouncements

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.

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

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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 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 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. Adoption of Accounting Standards

Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers — 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 2014-09 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 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial 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.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Adoption of Accounting Standards  – (continued)

The Company has adopted this standard during the reporting 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 market participants would use in estimating fair values.

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 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 reclassification 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 related 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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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5. Revenue Recognition  – (continued)

The following presents noninterest income, segregated by revenue streams in-scope and 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

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.

		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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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 no income tax payments in the first three months of 2018 and $3,000 in the same 2017 period. The Company made total interest payments of $2,590,000 in the first three months of 2018 compared to $2,166,000 in the same 2017 period. The Company had $158,000 non-cash transfers to other real estate owned (OREO) in the first three months of 2018 compared to $20,000 non-cash transfers in the same 2017 period.

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, 2018
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	6,821			$	—			$	(166	)		$	6,655
US Agency mortgage-backed securities			82,648				396				(1,498	)			81,546
Taxable municipal			8,929				8				(347	)			8,590
Corporate bonds			35,922				254				(577	)			35,599
Total		$	134,320			$	658			$	(2,588	)		$	132,390

Investment securities held to maturity (HTM):

		March 31, 2018
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	8,809			$	99			$	(157	)		$	8,751
Taxable municipal			23,813				69				(590	)			23,292
Corporate bonds and other securities			6,041				33				(76	)			5,998
Total		$	38,663			$	201			$	(823	)		$	38,041

Investment securities available for sale (AFS):

		December 31, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency		$	6,612			$	—			$	(40	)		$	6,572
US Agency mortgage-backed securities			79,854				611				(719	)			79,746
Taxable municipal			7,198				27				(189	)			7,036
Corporate bonds			35,886				322				(424	)			35,784
Total		$	129,550			$	960			$	(1,372	)		$	129,138

Investment securities held to maturity (HTM):

		December 31, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
US Agency mortgage-backed securities		$	9,740			$	149			$	(45	)		$	9,844
Taxable municipal			22,970				203				(238	)			22,935
Corporate bonds and other securities			6,042				38				(48	)			6,032
Total		$	38,752			$	390			$	(331	)		$	38,811

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Investment Securities  – (continued)

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 March 31, 2018, 57.4% of the portfolio was rated “AAA” as compared to 57.8% at December 31, 2017. Approximately 9.4% of the portfolio was either rated below “A” or unrated at March 31, 2018 as compared to 9.7% at December 31, 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 three months of 2017 resulting in $27,000 of gross investment security gains.

The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $115,980,000 at March 31, 2018 and $117,181,000 at December 31, 2017.

The following tables present information concerning investments with unrealized losses as of March 31, 2018 and December 31, 2017 (in thousands):

Total investment securities:

		March 31, 2018
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	6,005			$	(165	)		$	400			$	(1	)		$	6,405			$	(166	)
US Agency mortgage-backed securities			51,033				(985	)			17,925				(670	)			68,958				(1,655	)
Taxable municipal			18,562				(412	)			8,431				(525	)			26,993				(937	)
Corporate bonds and other securities			15,181				(233	)			13,635				(420	)			28,816				(653	)
Total		$	90,781			$	(1,795	)		$	40,391			$	(1,616	)		$	131,172			$	(3,411	)

Total investment securities:

		December 31, 2017
		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
US Agency		$	5,923			$	(39	)		$	399			$	(1	)		$	6,322			$	(40	)
US Agency mortgage-backed securities			36,783				(253	)			22,625				(511	)			59,408				(764	)
Taxable municipal			8,657				(109	)			7,727				(318	)			16,384				(427	)
Corporate bonds and other securities			7,123				(71	)			13,655				(401	)			20,778				(472	)
Total		$	58,486			$	(472	)		$	44,406			$	(1,231	)		$	102,892			$	(1,703	)

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 190 positions that are considered temporarily impaired at March 31, 2018. 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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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Investment Securities  – (continued)

Contractual maturities of securities at March 31, 2018 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, 2018 is 46.9 months and is higher than the duration at December 31, 2017 which was 44.3 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.

Total investment securities:

		March 31, 2018
		Available for sale								Held to maturity
		Cost Basis				Fair Value				Cost Basis				Fair Value
Within 1 year		$	400			$	400			$	2,000			$	1,983
After 1 year but within 5 years			14,019				13,920				2,671				2,610
After 5 years but within 10 years			47,258				46,766				14,441				14,200
After 10 years but within 15 years			26,940				26,332				14,789				14,556
Over 15 years			45,703				44,972				4,762				4,692
Total		$	134,320			$	132,390			$	38,663			$	38,041

9. Loans

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

		March 31, 2018				December 31, 2017
Commercial		$	158,776			$	159,192
Commercial loans secured by real estate			451,787				463,780
Real estate – mortgage			244,322				247,278
Consumer			19,988				19,383
Loans, net of unearned income		$	874,873			$	889,633

Loan balances at March 31, 2018 and December 31, 2017 are net of unearned income of $376,000 and $399,000, respectively. Real estate-construction loans comprised 3.8% and 4.1% of total loans, net of unearned income at March 31, 2018 and December 31, 2017, respectively.

10. Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three month periods ending March 31, 2018 and 2017 (in thousands).

		Three months ended March 31, 2018
		Balance at December 31, 2017				Charge-Offs				Recoveries				Provision (Credit)				Balance at March 31, 2018
Commercial		$	4,299			$	—			$	1			$	(316	)		$	3,984
Commercial loans secured by real estate			3,666				(162	)			11				35				3,550
Real estate – mortgage			1,102				(114	)			19				260				1,267
Consumer			128				(99	)			12				101				142
Allocation for general risk			1,019				—				—				(30	)			989
Total		$	10,214			$	(375	)		$	43			$	50			$	9,932

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Allowance for Loan Losses  – (continued)

		Three months ended March 31, 2017
		Balance at December 31, 2016				Charge-Offs				Recoveries				Provision (Credit)				Balance at March 31, 2017
Commercial		$	4,041			$	—			$	7			$	(24	)		$	4,024
Commercial loans secured by real estate			3,584				(14	)			2				175				3,747
Real estate – mortgage			1,169				(94	)			66				26				1,167
Consumer			151				(63	)			19				42				149
Allocation for general risk			987				—				—				6				993
Total		$	9,932			$	(171	)		$	94			$	225			$	10,080

The Company recorded a $50,000 provision for loan losses in the first quarter of 2018 compared to a $225,000 provision for loan losses in the first quarter of 2017. The lower 2018 provision reflects our overall strong asset quality, the successful workout of several criticized loans, and reduced loan portfolio balances. The Company experienced net loan charge-offs of $332,000, or 0.15% of total loans, in 2018 compared to net loan charge-offs of $77,000, or 0.04% of total loans, in 2017. Overall, the Company continued to maintain strong asset quality as its nonperforming assets totaled $2.2 million, or only 0.25% of total loans, at March 31, 2018. In summary, the allowance for loan losses provided 460% coverage of non-performing assets, and 1.14% of total loans, at March 31, 2018, compared to 337% coverage of non-performing assets, and 1.15% of total loans, at December 31, 2017.

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

		At March 31, 2018
Loans:		Commercial				Commercial Loans Secured by Real Estate				Real Estate –  Mortgage				Consumer				Allocation for General Risk				Total
Individually evaluated for impairment		$	913			$	13			$	—			$	—							$	926
Collectively evaluated for impairment			157,863				451,774				244,322				19,988								873,947
Total loans		$	158,776			$	451,787			$	244,322			$	19,988							$	874,873
Allowance for loan losses:
Specific reserve allocation		$	835			$	—			$	—			$	—			$	—			$	835
General reserve allocation			3,149				3,550				1,267				142				989				9,097
Total allowance for loan losses		$	3,984			$	3,550			$	1,267			$	142			$	989			$	9,932

		At December 31, 2017
Loans:		Commercial				Commercial Loans Secured by Real Estate				Real Estate –  Mortgage				Consumer				Allocation for General Risk				Total
Individually evaluated for impairment		$	1,212			$	547			$	—			$	—							$	1,759
Collectively evaluated for impairment			157,980				463,233				247,278				19,383								887,874
Total loans		$	159,192			$	463,780			$	247,278			$	19,383							$	889,633
Allowance for loan losses:
Specific reserve allocation		$	909			$	—			$	—			$	—			$	—			$	909
General reserve allocation			3,390				3,666				1,102				128				1,019				9,305
Total allowance for loan losses		$	4,299			$	3,666			$	1,102			$	128			$	1,019			$	10,214

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 owner occupied commercial real estate (CRE) loans, which include loans secured by 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.

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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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2018
		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		$	902			$	835			$	11			$	913			$	922
Commercial loans secured by real estate			—				—				13				13				35
Total impaired loans		$	902			$	835			$	24			$	926			$	957

		December 31, 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		$	1,201			$	909			$	11			$	1,212			$	1,215
Commercial loans secured by real estate			—				—				547				547				600
Total impaired loans		$	1,201			$	909			$	558			$	1,759			$	1,815

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Allowance for Loan Losses  – (continued)

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 March 31,
		2018				2017
Average loan balance:
Commercial		$	1,063			$	490
Commercial loans secured by real estate			280				176
Average investment in impaired loans		$	1,343			$	666
Interest income recognized:
Commercial		$	8			$	6
Commercial loans secured by real estate			—				2
Interest income recognized on a cash basis on impaired loans		$	8			$	8

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 2018 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.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Allowance for Loan Losses  – (continued)

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).

		March 31, 2018
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	153,689			$	2,140			$	2,704			$	243			$	158,776
Commercial loans secured by real estate			441,330				10,112				332				13				451,787
Total		$	595,019			$	12,252			$	3,036			$	256			$	610,563

		December 31, 2017
		Pass				Special Mention				Substandard				Doubtful				Total
Commercial		$	153,728			$	2,175			$	2,759			$	530			$	159,192
Commercial loans secured by real estate			452,740				10,153				874				13				463,780
Total		$	606,468			$	12,328			$	3,633			$	543			$	622,972

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).

		March 31, 2018
		Performing				Non-Performing
Real estate – mortgage		$	243,259			$	1,063
Consumer			19,988				—
Total		$	263,247			$	1,063

		December 31, 2017
		Performing				Non-Performing
Real estate – mortgage		$	246,021			$	1,257
Consumer			19,383				—
Total		$	265,404			$	1,257

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Allowance for Loan Losses  – (continued)

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).

		March 31, 2018
		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		$	158,522			$	243			$	—			$	11			$	254			$	158,776			$	—
Commercial loans secured by real estate			446,505				5,282				—				—				5,282				451,787				—
Real estate – mortgage			240,783				1,823				686				1,030				3,539				244,322				—
Consumer			19,511				469				8				—				477				19,988				—
Total		$	865,321			$	7,817			$	694			$	1,041			$	9,552			$	874,873			$	—

		December 31, 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		$	159,181			$	—			$	—			$	11			$	11			$	159,192			$	—
Commercial loans secured by real estate			457,722				5,238				534				286				6,058				463,780				—
Real estate – mortgage			243,393				2,373				671				841				3,885				247,278				—
Consumer			19,262				76				45				—				121				19,383				—
Total		$	879,558			$	7,687			$	1,250			$	1,138			$	10,075			$	889,633			$	—

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,

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Allowance for Loan Losses  – (continued)

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.

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

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

		March 31, 2018				December 31, 2017
Non-accrual loans
Commercial		$	913			$	1,212
Commercial loans secured by real estate			13				547
Real estate – mortgage			1,063				1,257
Total			1,989				3,016
Other real estate owned
Commercial			157				—
Real estate-mortgage			11				18
Total			168				18
TDR’s not in non-accrual			—				—
Total non-performing assets including TDR		$	2,157			$	3,034
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.25	%			0.34	%

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 March 31,
		2018				2017
Interest income due in accordance with original terms		$	27			$	16
Interest income recorded			—				—
Net reduction in interest income		$	27			$	16

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

The Company had no loans modified as TDRs during the three month period ending March 31, 2018 and 2017.

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 $835,000 and $507,000 as of March 31, 2018 and 2017, respectively. All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed.

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, 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.

12. Federal Home Loan Bank Borrowings

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

		At March 31, 2018
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	36,895				1.87	%
Advances			2018				10,000				1.52
			2019				12,500				1.51
			2020				16,729				1.74
			2021				6,000				1.90
			2022				740				2.60
Total advances							45,969				1.66
Total FHLB borrowings						$	82,864				1.76	%

		At December 31, 2017
Type		Maturing				Amount				Weighted Average Rate
Open Repo Plus			Overnight			$	49,084				1.54	%
Advances			2018				12,000				1.48
			2019				12,500				1.51
			2020				16,729				1.74
			2021 and over				5,000				1.75
Total advances							46,229				1.61
Total FHLB borrowings						$	95,313				1.57	%

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Federal Home Loan Bank Borrowings  – (continued)

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.

13. Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2018 and 2017 (in thousands):

		Three months ended March 31, 2018												Three months ended March 31, 2017
		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		$	(327	)		$	(12,623	)		$	(12,950	)		$	(171	)		$	(11,406	)		$	(11,577	)
Other comprehensive income (loss) before reclassifications			(1,316	)			517				(799	)			62				(210	)			(148	)
Amounts reclassified from accumulated other comprehensive loss			117				308				425				(18	)			260				242
Net current period other comprehensive income (loss)			(1,199	)			825				(374	)			44				50				94
Ending balance		$	(1,526	)		$	(11,798	)		$	(13,324	)		$	(127	)		$	(11,356	)		$	(11,483	)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017 (in thousands):

		Amount reclassified from accumulated other comprehensive loss (1)
Details about accumulated other comprehensive loss components		For the three months ended March 31, 2018				For the three months ended March 31, 2017				Affected line item in the consolidated statement of operations
Realized (gains) losses on sale of securities		$	148			$	(27	)			Net realized (gains) losses on investment securities
			(31	)			9				Provision for income tax expense
		$	117			$	(18	)			Net of tax
Amortization of estimated defined benefit pension plan loss		$	390			$	395				Other expense
			(82	)			(135	)			Provision for income taxes
		$	308			$	260				Net of tax
Total reclassifications for the period		$	425			$	242				Net income

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. 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 March 31, 2018, 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 (in thousands, except ratios).

		AT MARCH 31, 2018
		COMPANY								BANK								MINIMUM REQUIRED FOR CAPITAL ADEQUACY PURPOSES				TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION REGULATIONS*
		AMOUNT				RATIO				AMOUNT				RATIO				RATIO				RATIO
Total Capital (To Risk Weighted Assets)		$	127,352				13.45	%		$	113,196				12.00	%			8.00	%			10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)			97,190				10.26				102,364				10.85				4.50				6.50
Tier 1 Capital (To Risk Weighted Assets)			109,050				11.52				102,364				10.85				6.00				8.00
Tier 1 Capital (To Average Assets)			109,050				9.54				102,364				9.09				4.00				5.00

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. Regulatory Capital  – (continued)

		AT DECEMBER 31, 2017
		COMPANY								BANK								MINIMUM REQUIRED FOR CAPITAL ADEQUACY PURPOSES				TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION REGULATIONS*
		AMOUNT				RATIO				AMOUNT				RATIO				RATIO				RATIO
Total Capital (To Risk Weighted Assets)		$	126,276				13.21	%		$	110,681				11.64	%			8.00	%			10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)			95,882				10.03				99,552				10.47				4.50				6.50
Tier 1 Capital (To Risk Weighted Assets)			107,682				11.26				99,552				10.47				6.00				8.00
Tier 1 Capital (To Average Assets)			107,682				9.32				99,552				8.75				4.00				5.00

Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.36% at March 31, 2018.

15. Derivative Hedging Instruments

The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company can use derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates.

To accommodate the needs of our customers and support the Company’s asset/liability positioning, we may enter into interest rate swap agreements with customers and a large financial institution that specializes in these types of transactions. These arrangements involve the exchange of interest payments based on the notional amounts. The Company entered into floating rate loans and fixed rate swaps with our customers. Simultaneously, the Company entered into offsetting fixed rate swaps with Pittsburgh National Bank (PNC). In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay PNC the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15. Derivative Hedging Instruments  – (continued)

The following table summarizes the interest rate swap transactions that impacted the Company’s first quarter 2018 and 2017 performance.

AT MARCH 31, 2018
		HEDGE TYPE				AGGREGATE NOTIONAL AMOUNT				WEIGHTED AVERAGE RATE RECEIVED/ (PAID)				REPRICING FREQUENCY				INCREASE (DECREASE) IN INTEREST EXPENSE
SWAP ASSETS			FAIR VALUE			$	16,813,329				3.88	%			MONTHLY			$	(23,543	)
SWAP LIABILITIES			FAIR VALUE				(16,813,329	)			(3.88	)			MONTHLY				23,543
NET EXPOSURE							—				—								—

AT MARCH 31, 2017
		HEDGE TYPE				AGGREGATE NOTIONAL AMOUNT				WEIGHTED AVERAGE RATE RECEIVED/ (PAID)				REPRICING FREQUENCY				INCREASE (DECREASE) IN INTEREST EXPENSE
SWAP ASSETS			FAIR VALUE			$	5,000,000				3.10	%			MONTHLY			$	(15,367	)
SWAP LIABILITIES			FAIR VALUE				(5,000,000	)			(3.10	)			MONTHLY				15,367
NET EXPOSURE							—				—								—

The Company monitors and controls all derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions. All hedge transactions must be approved in advance by the Investment Asset/Liability Committee (ALCO) of the Board of Directors, unless otherwise approved, as per the terms, within the Board of Directors approved Hedging Policy. The Company had no caps or floors outstanding at March 31, 2018.

16. Segment Results

The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. The Company’s major business units include retail banking, commercial banking, trust, and investment/parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.

Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and local business commercial loans. Commercial banking to businesses includes commercial loans, business services, and CRE loans. The trust segment contains our wealth management businesses which include the Trust Company and West Chester Capital Advisors (WCCA), our registered investment advisory firm and Financial Services. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial Services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also includes the union collective investment funds, primarily the ERECT fund which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

16. Segment Results  – (continued)

borrowing activities, general corporate expenses not allocated to the business segments, interest expense on corporate debt, and centralized interest rate risk management. Inter-segment revenues were not material.

The contribution of the major business segments to the Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 were as follows (in thousands):

		Three months ended March 31, 2018
		Total revenue				Net income (loss)
Retail banking		$	6,139			$	706
Commercial banking			4,455				1,560
Trust			2,443				508
Investment/Parent			(653	)			(1,007	)
Total		$	12,384			$	1,767

		Three months ended March 31, 2017
		Total revenue				Net income (loss)
Retail banking		$	6,243			$	617
Commercial banking			4,725				1,472
Trust			2,326				367
Investment/Parent			(1,011	)			(1,108	)
Total		$	12,283			$	1,348

17. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $180.0 million and $165.1 million as of March 31, 2018 and December 31, 2017, respectively. In addition, there were outstanding standby letters of credit of $10.0 million in each period. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operation or cash flows.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Pension Benefits

The Company has a noncontributory defined benefit pension plan covering certain employees who work at least 1,000 hours per year. The participants shall have a vested interest in their accrued benefit after five full years of service. The benefits of the plan are based upon the employee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. Plan assets are primarily debt securities (including US Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three months ended March 31, 2018 and 2017 were as follows (in thousands):

		Three months ended March 31,
		2018				2017
Components of net periodic benefit cost
Service cost		$	409			$	390
Interest cost			303				326
Expected return on plan assets			(711	)			(631	)
Recognized net actuarial loss			386				367
Net periodic pension cost		$	387			$	452