AmeriServ Financial, Inc.

INDEX


	Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited) – ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018			1
Consolidated Statements of Operations (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018			2
Consolidated Statements of Comprehensive Income (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018			3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three and six months ended June 30, 2019 and 2018			4
Consolidated Statements of Cash Flows (Unaudited) – ~~Nine~~Six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018			5	4
Notes to Unaudited Consolidated Financial Statements			56
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosure About Market Risk			48
Item 4. Controls and Procedures			48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 4. ~~Controls and Procedures~~ 1A. Risk Factors			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

Item 1. Financial Statements

AmeriServ Financial, Inc.

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

	June 30, 2019			December 31, 2018
ASSETS
Cash and due from depository institutions		$	21,609		$	27,970
Interest bearing deposits			3,286			2,740
Short-term investments in money market funds			3,246			4,184
Total cash and cash equivalents			28,141			34,894
Investment securities:
Available for sale, at fair value			151,088			146,731
Held to maturity (fair value $40,775 on June 30, 2019 and $40,324 on December 31, 2018)			39,752			40,760
Loans held for sale			1,324			847
Loans			889,170			862,604
Less: Unearned income			413			322
Allowance for loan losses			8,102			8,671
Net loans			880,655			853,611
Premises and equipment:
Operating lease right-of-use asset			890			—
Financing lease right-of-use asset			3,207			—
Other premises and equipment, net			14,809			13,348
Accrued interest income receivable			3,916			3,489
Goodwill			11,944			11,944
Bank owned life insurance			38,652			38,395
Net deferred tax asset			3,710			3,637
Federal Home Loan Bank stock			4,763			4,520
Federal Reserve Bank stock			2,125			2,125
Other assets			5,607			6,379
TOTAL ASSETS		$	1,190,583		$	1,160,680
LIABILITIES
Non-interest bearing deposits		$	158,293		$	150,627
Interest bearing deposits			810,187			798,544
Total deposits			968,480			949,171
Short-term borrowings			35,190			41,029
Advances from Federal Home Loan Bank			53,124			46,721
Operating lease liabilities			907			—
Financing lease liabilities			3,253			—
Guaranteed junior subordinated deferrable interest debentures, net			12,947			12,939
Subordinated debt, net			7,499			7,488
Total borrowed funds			112,920			108,177
Other liabilities			7,707			5,355
TOTAL LIABILITIES			1,089,107			1,062,703
SHAREHOLDERS’ EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,648,728 shares issued and 17,384,355 shares outstanding on June 30, 2019; 26,609,811 shares issued and 17,619,303 shares outstanding on December 31, 2018			266			266
Treasury stock at cost, 9,264,373 shares on June 30, 2019 and 8,990,508 shares on December 31, 2018			(81,741)			(80,579)
Capital surplus			145,883			145,782
Retained earnings			49,618			46,733
Accumulated other comprehensive loss, net			(12,550)			(14,225)
TOTAL SHAREHOLDERS’ EQUITY			101,476			97,977
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,190,583		$	1,160,680

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.

TABLE OF CONTENTS

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
INTEREST INCOME
Interest and fees on loans		$	10,994		$	10,125		$	21,412		$	19,943
Interest bearing deposits			7			5			13			9
Short-term investments in money market funds			59			47			128			90
Investment securities:
Available for sale			1,314			1,101			2,633			2,130
Held to maturity			391			325			743			648
Total Interest Income			12,765			11,603			24,929			22,820
INTEREST EXPENSE
Deposits			2,867			1,973			5,597			3,754
Short-term borrowings			136			170			238			262
Advances from Federal Home Loan Bank			261			192			496			378
Financing lease liabilities			29			—			59			—
Guaranteed junior subordinated deferrable interest debentures			281			280			561			560
Subordinated debt			130			130			260			260
Total Interest Expense			3,704			2,745			7,211			5,214
NET INTEREST INCOME			9,061			8,858			17,718			17,606
Provision (credit) for loan losses			—			50			(400)			100
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES			9,061			8,808			18,118			17,506
NON-INTEREST INCOME
Wealth management fees			2,419			2,447			4,815			4,873
Service charges on deposit accounts			317			357			627			740
Net gains on sale of loans			107			119			169			217
Mortgage related fees			77			72			121			111
Net realized gains (losses) on investment securities			30			—			30			(148)
Bank owned life insurance			129			133			257			265
Other income			578			553			1,243			1,258
Total Non-Interest Income			3,657			3,681			7,262			7,316
NON-INTEREST EXPENSE
Salaries and employee benefits			6,348			6,218			12,649			12,311
Net occupancy expense			622			611			1,280			1,281
Equipment expense			387			378			748			769
Professional fees			1,249			1,252			2,369			2,436
Supplies, postage and freight			140			164			313			332
Miscellaneous taxes and insurance			294			258			571			539
Federal deposit insurance expense			80			155			160			317
Other expense			1,336			1,256			2,659			2,418
Total Non-Interest Expense			10,456			10,292			20,749			20,403
PRETAX INCOME			2,262			2,197			4,631			4,419
Provision for income tax expense			470			453			961			908
NET INCOME			1,792			1,744			3,670			3,511
PER COMMON SHARE DATA:
Basic:
Net income		$	0.10		$	0.10		$	0.21		$	0.19
Average number of shares outstanding			17,476			18,038			17,527			18,058
Diluted:
Net income		$	0.10		$	0.10		$	0.21		$	0.19
Average number of shares outstanding			17,560			18,140			17,611			18,158

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.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 1615 locations in ~~Pennsylvania.~~Pennsylvania and 1 location in Maryland. The Trust Company offers a complete range of trust and financial services and administers assets valued at ~~$2.1~~$2.3 billion that are not reported on the Company’s ~~consolidated balance sheet~~Consolidated Balance Sheets at ~~September~~June 30, ~~2017.~~2019. 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.

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.~~

2018.

Recent Accounting Pronouncements

In ~~January~~June 2016, the FASB issued ASU ~~2016-01,~~2016-13, Financial Instruments — ~~Overall (Subtopic 825-10): Recognition and~~Credit Losses: Measurement of Credit Losses on Financial ~~Assets and Financial Liabilities~~.Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update ~~applies to all entities that hold financial assets or owe financial liabilities and~~ is intended to ~~provide more useful information~~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 ~~recognition,~~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 affected for the measurement ~~presentation, and disclosure~~ of credit losses for newly recognized financial ~~instruments. For public business entities,~~assets, as well as the ~~amendments in this Update are~~expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for ~~fiscal years~~annual and interim periods beginning after December 15, ~~2017, including~~2019, and early adoption is permitted for annual and 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.~~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 ~~adoption of the standard~~Update will have on our consolidated financial statements. We are currently working with an industry leading third-party consultant and software provider to assist us in the ~~Company’s~~implementation of this standard. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial ~~position or results~~statements. The overall impact of ~~operations.~~

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.

On July 17, 2019, the FASB voted to create a proposal to delay the implementation of the current expected credit loss (CECL) model under ASU 2016-13 for smaller public companies. Once the proposal is finalized, smaller reporting companies (as defined by the Securities and Exchange Commission) would have until January 2023 to implement CECL. The Company, as a smaller reporting company, continues to monitor the status of the proposal.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Adoption of Accounting Standards

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~~Additionally, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) — Targeted Improvements, which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU 2016-02 and its related amendments as of January 1, 2019, which resulted in ~~this Update are effective~~the recognition of operating and financing right-of-use assets totaling $932,000 and $3.3 million, respectively, as well as operating and financing lease liabilities totaling $932,000 and $3.3 million, respectively. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. The related policy elections made by the Company and the additional lease disclosures can be found in Note 13. There was no cumulative effect adjustment to the opening balance of retained earnings required.

Revenue Recognition

ASU 2014-09, Revenue from Contracts with Customers — Topic 606, requires the Company to recognize the amount of revenue to which it expects to be entitled 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 appliedtransfer of promised goods or services to customers at the ~~beginning~~time the transfer of goods or services takes place. Management has determined that the primary sources of revenue associated with financial instruments, including interest and fee income on loans and interest on investments, along with certain noninterest revenue sources including net realized gains (losses) on investment securities, mortgage related fees, net gains on loans held for sale, and bank owned life insurance are not within the scope of Topic 606. These sources of revenue cumulatively comprise 80.4% of the ~~earliest period presented using a modified retrospective approach with earlier application permitted as~~total revenue of the ~~beginning~~Company.

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

•

Wealth management fees — Wealth management fee income is primarily comprised of fees earned from the management and administration of trusts and customer investment portfolios. The Company’s performance obligation is generally satisfied over a period of time and the resulting fees are billed monthly or ~~annual reporting period.~~quarterly, based upon the month end market value of the assets under management. Payment is generally received after month end through a direct charge to customers’ accounts. Other performance obligations (such as delivery of account statements to customers) are generally considered immaterial to the overall transactions price. Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Also included within wealth management fees are commissions from the sale of mutual funds, annuities, and life insurance products. Commissions on the sale of mutual funds, annuities, and life insurance products are recognized when sold, which is when the Company has satisfied its performance obligation.

•

Service charges on deposit accounts — The Company has contracts with its deposit account customers where fees are charged for certain items or services. Service charges include account analysis fees, monthly service fees, overdraft fees, and other deposit account related fees. Revenue related to account analysis fees and service fees is ~~currently assessing~~recognized on a monthly basis as the ~~practical measures it may elect at adoption, but does not anticipate the amendment will have a significant impact~~Company has an unconditional right to the ~~financial statements. Based on the Company’s preliminary analysis~~fee consideration. Fees attributable to specific performance obligations of ~~its current portfolio,~~ the Company ~~expects to recognize~~(i.e. overdraft fees, etc.) are recognized at a ~~right~~defined point in time based on completion of ~~use asset and a lease liability for its operating leases commitments. The Company also anticipates additional disclosures to be provided at adoption.~~

the requested service or transaction.

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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~~

•

Other noninterest income — ~~Credit Losses: Measurement~~Other noninterest income consists of ~~Credit Losses~~other recurring revenue streams such as safe deposit box rental fees, gain (loss) 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~~sale of ~~credit losses on loans~~other real estate owned 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 thatmiscellaneous revenue streams. Safe deposit box rental fees 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, transitioncharged to the ~~new requirements will be through a cumulative effect adjustment~~customer on an annual basis and recognized when billed. However, if the safe deposit box rental fee is prepaid (i.e. paid prior to ~~opening retained earnings as~~issuance of annual bill), the ~~beginning~~revenue is recognized upon receipt 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.~~payment. The Company has ~~enhanced its disclosures regarding~~determined that since rentals and renewals occur consistently over time, revenue is recognized on a basis consistent with the ~~impact that recently issued accounting standards adopted in a future period will have on its accounting~~duration of the performance obligation. Gains 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 impactlosses on the ~~Company’s financial statements.~~

~~In March 2017,~~sale of other real estate owned are recognized at the ~~FASB issued ASU 2017-08,~~~~Receivables — Nonrefundable Fees~~completion of the property sale when the buyer obtains control of the real estate and ~~Other Costs (Subtopic 310-20).~~all the performance obligations of the Company have been satisfied.

The ~~amendments in this Update shorten~~following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for 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,three and ~~interim~~six month 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,~~ending June 30, 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

2018 (in thousands).

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Noninterest income:
In-scope of Topic 606
Wealth management fees		$	2,419		$	2,447		$	4,815		$	4,873
Service charges on deposit accounts			317			357			627			740
Other			435			435			854			852
Noninterest income (in-scope of topic 606)			3,171			3,239			6,296			6,465
Noninterest income (out-of-scope of topic 606)			486			442			966			851
Total noninterest income		$	3,657		$	3,681		$	7,262		$	7,316

~~TABLE OF CONTENTS~~

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~~For the three and six month periods ending June 30, 2019, options to purchase 12,000 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~~$4.19 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,~~$4.22, 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~~There were no antidilutive securities during either period of ~~earnings per common share.~~

2018.

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
	(In thousands, except per share data)
Numerator:
Net income		$	1,792		$	1,744		$	3,670		$	3,511
Denominator:
Weighted average common shares outstanding (basic)			17,476			18,038			17,527			18,058
Effect of stock options			84			102			84			100
Weighted average common shares outstanding (diluted)			17,560			18,140			17,611			18,158
Earnings per common share:
Basic		$	0.10		$	0.10		$	0.21		$	0.19
Diluted			0.10			0.10			0.21			0.19

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.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 with original maturities of 90 days or less. The Company made ~~$975,000~~$300,000 in income tax payments in the first ~~nine~~six months of ~~2017~~2019 and ~~$390,000~~$800,000 in the same ~~2016~~2018 period. The Company made total interest payments of ~~$6,447,000~~$7,044,000 in the first ~~nine~~six months of ~~2017~~2019 compared to ~~$5,755,000~~$5,287,000 in the same ~~2016~~2018 period. The Company had ~~$59,000~~$75,000 non-cash transfers to other real estate owned (OREO) in the first ~~nine~~six months of ~~2017~~2019 compared to ~~$151,000~~$160,000 non-cash transfers in the same ~~2016~~2018 period.

As a result of the adoption of ASU 2016-02, Leases (Topic 842) as of January 1, 2019, the Company had non-cash transactions associated with the recognition of the right-of-use assets and lease liabilities. Specifically, the Company recognized a right-of-use asset and lease liability of $932,000 related to operating leases and a right-of-use asset and lease liability of $3.3 million related to financing leases.

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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):

	June 30, 2019
	Cost Basis			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
US Agency		$	7,489		$	54		$	—		$	7,543
US Agency mortgage-backed securities			90,523			1,602			(167)			91,958
Municipal			13,994			499			(22)			14,471
Corporate bonds			37,312			258			(454)			37,116
Total		$	149,318		$	2,413		$	(643)		$	151,088

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):

	June 30, 2019
	Cost Basis			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
US Agency mortgage-backed securities		$	9,501		$	197		$	(18)		$	9,680
Municipal			24,216			881			(44)			25,053
Corporate bonds and other securities			6,035			49			(42)			6,042
Total		$	39,752		$	1,127		$	(104)		$	40,775

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):

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Investment securities held to maturity (HTM):

	December 31, 2018
	Cost Basis			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
US Agency mortgage-backed securities		$	9,983		$	78		$	(132)		$	9,929
Municipal			24,740			131			(404)			24,467
Corporate bonds and other securities			6,037			13			(122)			5,928
Total		$	40,760		$	222		$	(658)		$	40,324

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~~June 30, ~~2017, 57.8%~~2019 and December 31, 2018, 57.5% of the portfolio was rated “AAA” ~~as compared to 63.5% at December 31, 2016.~~. Approximately ~~12.8%~~8.7% of the portfolio was either rated below “A” or unrated at ~~September~~June 30, ~~2017~~2019 as compared to ~~10.1%~~10.0% at December 31, ~~2016.~~

2018.

~~TABLE OF CONTENTS~~

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities – (continued)

The Company sold ~~$937,000~~$530,000 AFS securities in the ~~third~~second quarter and first six months of ~~2017~~2019 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~~$30,000 of gross investment security gains. The Company sold ~~$1.5 million~~no AFS securities induring the ~~third~~second quarter of ~~2016~~2018. Total proceeds from the sale of AFS securities for the first six months of 2018 were $4.5 million resulting in ~~$60,000~~$15,000 of gross investment security gains and ~~sold $9.0 million AFS securities in the first nine months of 2016 resulting in $183,000~~$163,000 of gross investment security ~~gains and $6,000 of gross investment security~~ losses.

The ~~book~~carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $121,682,000 at June 30, 2019 and ~~certain Federal Home Loan Bank borrowings was $114,589,000 at September 30, 2017 and $104,953,000~~$115,536,000 at December 31, ~~2016.~~

2018.

The following tables present information concerning investments with unrealized losses as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 (in thousands):

Total investment securities:

	June 30, 2019
	Less than 12 months						12 months or longer						Total
	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
US Agency		$	—		$	—		$	—		$	—		$	—		$	—
US Agency mortgage-backed securities			—			—			21,440			(185)			21,440			(185)
Municipal			—			—			2,468			(66)			2,468			(66)
Corporate bonds and other securities			4,922			(77)			18,182			(419)			23,104			(496)
Total		$	4,922		$	(77)		$	42,090		$	(670)		$	47,012		$	(747)

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:

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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~~65 positions that are considered temporarily impaired at ~~September~~June 30, ~~2017.~~2019. 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.~~

value or mature.

~~TABLE OF CONTENTS~~

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities – (continued)

Contractual maturities of securities at ~~September~~June 30, ~~2017~~2019 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 ~~September~~June 30, ~~2017~~2019 is ~~44.2~~37.2 months and is ~~higher~~lower than the duration at December 31, ~~2016~~2018 which was ~~41.2~~44.1 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:

	June 30, 2019
	Available for sale						Held to maturity
	Cost Basis			Fair Value			Cost Basis			Fair Value
Within 1 year		$	2,500		$	2,502		$	1,000		$	995
After 1 year but within 5 years			20,264			20,319			5,178			5,196
After 5 years but within 10 years			44,101			44,554			20,018			20,696
After 10 years but within 15 years			28,373			28,849			8,201			8,477
Over 15 years			54,080			54,864			5,355			5,411
Total		$	149,318		$	151,088		$	39,752		$	40,775

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
As of June 30, 2019, the Company reported $328,000 of equity securities within Other assets on the Consolidated Balance Sheets. These equity securities are held within a nonqualified deferred compensation plan in which a select group of executives of the Company can participate. An eligible executive can defer a certain percentage of their current salary to be placed into the plan and held within a rabbi trust. The assets of the rabbi trust are invested in various publicly listed mutual funds. The gain or loss on the equity securities (both realized and unrealized) will be reported within Other income on the Consolidated Statements of Operations. Additionally, the Company has recognized a deferred compensation liability, which is equal to the balance of the equity securities and is reported within Other liabilities on the Consolidated Balance Sheets.

7.
9.
Loans

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

	June 30, 2019			December 31, 2018
Commercial: Commercial and industrial		$	172,428		$	158,279
Commercial loans secured by owner occupied real estate			83,003			91,905
Commercial loans secured by non-owner occupied real estate			375,673			356,543
Real estate – residential mortgage			239,916			237,964
Consumer			17,737			17,591
Loans, net of unearned income		$	888,757		$	862,282

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Loan balances at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are net of unearned income of ~~$438,000~~$413,000 and ~~$476,000,~~$322,000, respectively. Real estate-construction loans comprised ~~3.6%~~4.0% and ~~4.7%~~3.5% of total loans, net of unearned income at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

8.

10.

Allowance for Loan Losses

The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three and ~~nine~~six month periods ending ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (in thousands).

	Three months ended June 30, 2019
	Balance at March 31, 2019			Charge- Offs			Recoveries			Provision (Credit)			Balance at June 30, 2019
Commercial		$	2,614		$	—		$	—		$	(76)		$	2,538
Commercial loans secured by non-owner occupied real estate			3,373			—			13			39			3,425
Real estate – residential mortgage			1,213			(10)			68			(53)			1,218
Consumer			125			(88)			12			75			124
Allocation for general risk			782			—			—			15			797
Total		$	8,107		$	(98)		$	93		$	—		$	8,102

	Three months ended June 30, 2018
	Balance at March 31, 2018			Charge- Offs			Recoveries			Provision (Credit)			Balance at June 30, 2018
Commercial		$	3,984		$	(412)		$	4		$	(10)		$	3,566
Commercial loans secured by non-owner occupied real estate			3,550			—			13			123			3,686
Real estate – residential mortgage			1,267			(103)			67			22			1,253
Consumer			142			(53)			23			13			125
Allocation for general risk			989			—			—			(98)			891
Total		$	9,932		$	(568)		$	107		$	50		$	9,521

	Six months ended June 30, 2019
	Balance at December 31, 2018			Charge- Offs			Recoveries			Provision (Credit)			Balance at June 30, 2019
Commercial		$	3,057		$	—		$	5		$	(524)		$	2,538
Commercial loans secured by non-owner occupied real estate			3,389			(63)			24			75			3,425
Real estate – residential mortgage			1,235			(71)			76			(22)			1,218
Consumer			127			(170)			30			137			124
Allocation for general risk			863			—			—			(66)			797
Total		$	8,671		$	(304)		$	135		$	(400)		$	8,102

	Six months ended June 30, 2018
	Balance at December 31, 2017			Charge- Offs			Recoveries			Provision (Credit)			Balance at June 30, 2018
Commercial		$	4,298		$	(574)		$	12		$	(170)		$	3,566
Commercial loans secured by non-owner occupied real estate			3,666			—			26			(6)			3,686
Real estate – residential mortgage			1,102			(217)			77			291			1,253
Consumer			128			(152)			35			114			125
Allocation for general risk			1,020			—			—			(129)			891
Total		$	10,214		$	(943)		$	150		$	100		$	9,521

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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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance

The Company did not record a provision 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~~loan losses 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~~2019 as ~~one large CRE credit was upgraded and another transferred into non-accrual status (see further discussion~~compared to a $50,000 provision recorded in the second quarter of 2018. For the first six months of 2019, the Company recorded a $400,000 loan loss provision recovery compared to a $100,000 provision expense recorded in the first six months of 2018. The 2019 provision recovery reflects our overall strong asset quality, ~~section~~reduced level of ~~the MD&A). The substantially higher than typical provision~~criticized loans and net loan charge-offs, and the lower six-month average loan portfolio balances. For the first six months of 2019, the Company experienced net loan charge-offs of $169,000, or 0.04% of total loans, compared to net loan charge-offs of $793,000, or 0.18% of total loans, in the first ~~three~~six 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,~~2018. Overall, the Company ~~concluded that~~continued to maintain outstanding asset quality as its ~~previously established reserves on these non-accrual~~non-performing assets totaled $1.7 million, or only 0.19% of total loans, ~~were not sufficient~~at June 30, 2019. The allowance for loan losses provided 482% coverage of non-performing assets, and 0.91% of total loans, at June 30, 2019, compared to ~~cover the discounted collateral values that resulted from the liquidation process.~~

629% coverage of non-performing assets, and 1.00% of total loans, at December 31, 2018.

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AmeriServ Financial, Inc.

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 June 30, 2019
	Commercial			Commercial Loans Secured by Non-Owner Occupied Real Estate			Real Estate- Residential Mortgage			Consumer			Allocation for General Risk			Total
Loans:
Individually evaluated for impairment		$	750		$	10		$	—		$	—					$	760
Collectively evaluated for impairment			254,681			375,663			239,916			17,737						887,997
Total loans		$	255,431		$	375,673		$	239,916		$	17,737					$	888,757
Allowance for loan losses:
Specific reserve allocation		$	78		$	10		$	—		$	—		$	—		$	88
General reserve allocation			2,460			3,415			1,218			124			797			8,014
Total allowance for loan losses		$	2,538		$	3,425		$	1,218		$	124		$	797		$	8,102

	At December 31, 2018
	Commercial			Commercial Loans Secured by Non-Owner Occupied Real Estate			Real Estate- Residential Mortgage			Consumer			Allocation for General Risk			Total
Loans:
Individually evaluated for impairment	��	$	—		$	11		$	—		$	—					$	11
Collectively evaluated for impairment			250,184			356,532			237,964			17,591						862,271
Total loans		$	250,184		$	356,543		$	237,964		$	17,591					$	862,282
Allowance for loan losses:
Specific reserve allocation		$	—		$	11		$	—		$	—		$	—		$	11
General reserve allocation			3,057			3,378			1,235			127			863			8,660
Total allowance for loan losses		$	3,057		$	3,389		$	1,235		$	127		$	863		$	8,671

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~~into classes that allows management to monitor risk and performance. The loan ~~segments~~classes 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.~~portfolio. The ~~overall risk profile for the~~ commercial loan segment ~~is effected by non-owner~~includes both the commercial and industrial

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

and the owner occupied commercial real estate ~~(CRE) loans, which include loans secured by non-owner occupied nonfarm nonresidential properties,~~loan classes while the remaining segments are not separated into classes as ~~a meaningful portion of the commercial portfolio is centered~~management monitors risk in these ~~types of accounts.~~loans at the segment level. 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.

~~TABLE OF CONTENTS~~

AmeriServ Financial, Inc.

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~~Assigned Risk Department to support the value of the property.

When reviewing an appraisal associated with an existing ~~collateral~~ real estate collateral 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:

•

the passage of time;

•

the volatility of the local market;

•

the availability of financing;

•

natural disasters;

•

the inventory of competing properties;

•

new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank;

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

•

changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or

•

environmental contamination.

~~TABLE OF CONTENTS~~

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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,~~portfolio segment, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).

	June 30, 2019
	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		$	750		$	78		$	—		$	750		$	750
Commercial loans secured by non-owner occupied real estate			10			10			—			10			32
Total impaired loans		$	760		$	88		$	—		$	760		$	782

	December 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 loans secured by non-owner occupied real estate		$	11		$	11		$	—		$	11		$	33
Total impaired loans		$	11		$	11		$	—		$	11		$	33

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 June 30,						Six months ended June 30,
	2019			2018			2019			2018
Average loan balance:
Commercial		$	375		$	457		$	250		$	709
Commercial loans secured by non-owner occupied real estate			11			13			11			191
Average investment in impaired loans		$	386		$	470		$	261		$	900
Interest income recognized:
Commercial		$	4		$	—		$	4		$	—
Commercial loans secured by non-owner occupied real estate			—			—			—			—
Interest income recognized on a cash basis on impaired loans		$	4		$	—		$	4		$	—

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses – (continued)

Management uses a ~~nine point~~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~~$1,000,000 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 and rating concurrence 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~~2019 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,~~$2,000,000, 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).

	June 30, 2019
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial and industrial		$	167,272		$	3,471		$	1,685		$	—		$	172,428
Commercial loans secured by owner occupied real estate			80,162			1,679			1,162			—			83,003
Commercial loans secured by non-owner occupied real estate			369,242			6,234			187			10			375,673
Total		$	616,676		$	11,384		$	3,034		$	10		$	631,104

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses – (continued)

	December 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 and industrial		$	158,279		$	—		$	—		$	—		$	—		$	158,279		$	—
Commercial loans secured by owner occupied real estate			91,905			—			—			—			—			91,905			—
Commercial loans secured by non-owner occupied real estate			355,963			580			—			—			580			356,543			—
Real estate – residential mortgage			232,465			3,651			472			1,376			5,499			237,964			—
Consumer			17,408			153			30			—			183			17,591			—
Total		$	856,020		$	4,384		$	502		$	1,376		$	6,262		$	862,282		$	—

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~~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.

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.

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

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

~~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~~Company had no loans modified as TDR’s ~~was $390,000~~during the three and ~~$507,000 as of September~~six month periods ending June 30, ~~2017 and 2016, respectively.~~ 2018.

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 %

TABLE OF CONTENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, commercial real estate, and ~~CRE~~commercial and industrial 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.

Lease Commitments

Due to the adoption of ASU 2016-02, Leases (Topic 842), the Company completed a comprehensive review and analysis of all its property and equipment contracts. As a result of this review, it was determined that the Company leases eight office locations under both operating and financing leases and one copy machine under a short-term lease. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Operations when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in the right-of-use assets and lease liabilities reported on the Consolidated Balance Sheets. The following table presents the lease cost associated with both operating and financing leases for the three and six month periods ending June 30, 2019 (in thousands). Total rent expense recorded during the three and six month periods ended June 30, 2018 was $98,000 and $215,000, respectively.

	Three months ended June 30, 2019			Six months ended June 30, 2019
Lease cost
Financing lease cost:
Amortization of right-of-use asset		$	65		$	129
Interest expense			29			59
Operating lease cost			29			58
Total lease cost		$	123		$	246

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at June 30, 2019.

	Operating		Financing
Weighted-average remaining term (years)		12.2		17.4
Weighted-average discount rate		3.44%		3.59%

TABLE OF CONTENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11. Preferred Stock

~~On August 11, 2011, pursuant~~

The following table presents the undiscounted cash flows due related to operating and financing leases as of June 30, 2019, along with a reconciliation to the ~~Small Business Lending Fund (SBLF),~~discounted amount recorded on the Consolidated Balance Sheets.

	Operating			Financing
Undiscounted cash flows due:
Within 1 year		$	117		$	299
After 1 year but within 2 years			119			282
After 2 years but within 3 years			117			276
After 3 years but within 4 years			75			278
After 4 years but within 5 years			69			251
After 5 years			624			3,126
Total undiscounted cash flows			1,121			4,512
Discount on cash flows			(214)			(1,259)
Total lease liabilities		$	907		$	3,253

Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of June 30, 2019, the Company ~~issued and sold~~had one short-term equipment lease which it has elected to not record on 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. Consolidated Balance Sheets.

14.

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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):

	Three months ended June 30, 2019									Three months ended June 30, 2018
	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		$	(16)		$	(14,266)		$	(14,282)		$	(1,526)		$	(11,798)		$	(13,324)
Other comprehensive income (loss) before reclassifications			1,438			29			1,467			(651)			3			(648)
Amounts reclassified from accumulated other comprehensive loss			(24)			289			265			—			305			305
Net current period other comprehensive income (loss)			1,414			318			1,732			(651)			308			(343)
Ending balance		$	1,398		$	(13,948)		$	(12,550)		$	(2,177)		$	(11,490)		$	(13,667)

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 )

~~(1)~~

~~Amounts in parentheses indicate debits on the Consolidated Balance Sheets.~~

(1)

Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

TABLE OF CONTENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Accumulated Other Comprehensive Loss – (continued)

	Six months ended June 30, 2019									Six months ended June 30, 2018
	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		$	(1,409)		$	(12,816)		$	(14,225)		$	(327)		$	(12,623)		$	(12,950)
Other comprehensive income (loss) before reclassifications			2,831			(1,710)			1,121			(1,967)			616			(1,351)
Amounts reclassified from accumulated other comprehensive loss			(24)			578			554			117			517			634
Net current period other comprehensive income (loss)			2,807			(1,132)			1,675			(1,850)			1,133			(717)
Ending balance		$	1,398		$	(13,948)		$	(12,550)		$	(2,177)		$	(11,490)		$	(13,667)

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 )

~~(1)~~

~~Amounts in parentheses indicate debits on the Consolidated Balance Sheets.~~

(1)

Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):

	Amount reclassified from accumulated other comprehensive loss(1)
Details about accumulated other comprehensive loss components	For the three months ended June 30, 2019			For the three months ended June 30, 2018			Affected line item in the consolidated statement of operations
Realized gains on sale of securities		$	(30)		$	—	Net realized (gains) losses on investment securities
			6			—	Provision for income tax expense
		$	(24)		$	—	Net of tax
Amortization of estimated defined benefit pension plan loss		$	366		$	386	Other expense
			(77)			(81)	Provision for income tax expense
		$	289		$	305	Net of tax
Total reclassifications for the period		$	265		$	305	Net income

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

~~(1)~~

~~Amounts in parentheses indicate credits.~~

(1)

Amounts in parentheses indicate credits.

TABLE OF CONTENTS

AmeriServ Financial, Inc.

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 six months ended June 30, 2019			For the six months ended June 30, 2018			Affected line item in the consolidated statement of operations
Realized (gains) losses on sale of securities		$	(30)		$	148	Net realized (gains) losses on investment securities
			6			(31)	Provision for income tax expense
		$	(24)		$	117	Net of tax
Amortization of estimated defined benefit pension plan loss		$	732		$	654	Other expense
			(154)			(137)	Provision for income tax expense
		$	578		$	517	Net of tax
Total reclassifications for the period		$	554		$	634	Net income

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

~~(1)~~

~~Amounts in parentheses indicate credits.~~

13.

(1)

Amounts in parentheses indicate credits.

15.

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.~~

M.D. & 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~~tier 1 capital to risk-weighted assets ~~Tier~~(as defined), tier 1 capital to average assets, and common equity ~~Tier I~~tier 1 capital (as defined in the regulations) to risk-weighted ~~assets (RWA) (as defined).~~assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of ~~September~~June 30, ~~2017,~~2019, 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.~~ table (in thousands, except ratios).

	At June 30, 2019
	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)		$	130,532		13.14%		$	117,702		11.91%		8.00%		10.00%
Common Equity Tier 1 (To Risk Weighted Assets)			102,082		10.28			108,631		10.99		4.50		6.50
Tier 1 Capital (To Risk Weighted Assets)			113,962		11.47			108,631		10.99		6.00		8.00
Tier 1 Capital (To Average Assets)			113,962		9.73			108,631		9.40		4.00		5.00

TABLE OF CONTENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	At December 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)		$	129,178		13.53%		$	115,451		12.14%		8.00%		10.00%
Common Equity Tier 1 (To Risk Weighted Assets)			100,258		10.50			105,891		11.14		4.50		6.50
Tier 1 Capital (To Risk Weighted Assets)			112,130		11.74			105,891		11.14		6.00		8.00
Tier 1 Capital (To Average Assets)			112,130		9.71			105,891		9.28		4.00		5.00

Applies to the Bank only.

Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was ~~7.35%~~7.60% at ~~September~~June 30, ~~2017 (in thousands, except ratios)~~2019. See the discussion of the tangible common equity ratio under the “Balance Sheet” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (M.D. & A.).

16.

Derivative Hedging Instruments

~~TABLE OF CONTENTS~~

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

AT DECEMBER 31, 2016
   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) $ 125,131 13.15 % $ 107,618 11.35 % 8.00 % 10.00 %
Tier 1 Common Equity (To Risk Weighted Assets) 95,028 9.99 96,796 10.21 4.50 6.50
Tier 1 Capital (To Risk Weighted Assets) 106,868 11.23 96,796 10.21 6.00 8.00
Tier 1 Capital (To Average Assets) 106,868 9.35 96,796 8.61 4.00 5.00

~~Applies to the Bank only.~~

14. 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 ~~entered~~may enter into interest rate swap agreements with customers and a large financial institution that specializes in these types of ~~transactions in the first nine months of 2017.~~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 an offsetting fixed rate swaps with ~~PNC.~~

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. DERIVATIVE HEDGING INSTRUMENTS – (continued)

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. ~~The Company received $139,000 in fees on the transactions.~~

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the interest rate swap transactions that impacted the Company’s first ~~nine~~six months ~~2017 performance.~~

of 2019 and 2018 performance (in thousands, except percentages).

	At June 30, 2019
	HEDGE TYPE	AGGREGATE NOTIONAL AMOUNT			WEIGHTED AVERAGE RATE RECEIVED/(PAID)		REPRICING FREQUENCY	INCREASE (DECREASE) IN INTEREST EXPENSE
SWAP ASSETS	FAIR VALUE		$	22,628		4.78%	MONTHLY		$	16
SWAP LIABILITIES	FAIR VALUE			(22,628)		(4.78)	MONTHLY			(16)
NET EXPOSURE				—		—				—

	At June 30, 2018
	HEDGE TYPE	AGGREGATE NOTIONAL AMOUNT			WEIGHTED AVERAGE RATE RECEIVED/(PAID)		REPRICING FREQUENCY	INCREASE (DECREASE) IN INTEREST EXPENSE
SWAP ASSETS	FAIR VALUE		$	16,681		4.04%	MONTHLY		$	(33)
SWAP LIABILITIES	FAIR VALUE			(16,681)		(4.04)	MONTHLY			33
NET EXPOSURE				—		—				—

HEDGE TYPE AGGREGATE
NOTIONAL
AMOUNT WEAIGHTED
AVERAGE
RATE
RECEIVED/
(PAID) REPRICING
FREQUENCY INCREASE
(DECREASE)
IN INTEREST
EXPENSE
SWAP ASSETS FAIR VALUE $ 17,057,388 3.42 % MONTHLY $ (72,920 )
SWAP LIABILITIES FAIR VALUE (17,057,388 ) (3.42 ) MONTHLY 72,920
NET EXPOSURE — — —

The Company monitors and controls all derivative products with a comprehensive Board of Director approved ~~hedging policy.~~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.~~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 ~~September~~June 30, ~~2017.~~

15. 2019 and 2018.

17.

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,~~wealth management, 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~~small 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~~segment includes the Trust Company, ~~and~~ West Chester Capital Advisors (WCCA), our registered investment advisory firm, and Financial Services. Wealth management ~~includes~~activities include 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~~include the union collective investment funds, primarily the ERECT ~~fund~~funds 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 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.

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17.

19.

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~~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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 were as follows (in thousands):

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Components of net periodic benefit cost
Service cost		$	374		$	409		$	748		$	818
Interest cost			402			303			804			606
Expected return on plan assets			(762)			(711)			(1,524)			(1,422)
Recognized net actuarial loss			366			386			732			772
Net periodic pension cost		$	380		$	387		$	760		$	774

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Components of net periodic benefit cost

Service cost $ 390 $ 368 $ 1,170 $ 1,104
Interest cost 326 344 978 1,032
Expected return on plan assets (631 ) (563 ) (1,893 ) (1,689 )
Recognized net actuarial loss 367 314 1,101 942
Net periodic pension cost $ 452 $ 463 $ 1,356 $ 1,389
The service cost component of net periodic benefit cost is included in “Salaries and employee benefits” and all other components of net periodic benefit cost are included in “Other expense” in the Consolidated Statements of Operations.

The Company implemented a soft freeze of its defined benefit pension plan to provide that non-union employees hired on or after January 1, 2013 and union employees hired on or after January 1, 2014 are not eligible to participate in the pension plan. Instead, such employees are eligible to participate in a qualified 401(k) plan. This change was made to help reduce pension costs in future periods.

18.

20.

Disclosures about Fair Value Measurements

and Financial Instruments

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three broad levels defined within this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liability Measured and Recorded on a Recurring Basis

Equity securities are reported at fair value utilizing Level 1 inputs. These securities are mutual funds held within a rabbi trust for the Company’s executive deferred compensation plan. The mutual funds held are open-end funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price.

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The fair values of the fair value swaps used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements. These fair values are based on an external derivative valuation model using data inputs as of the valuation date and classified Level 2.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

The following ~~tables present~~table presents the assets ~~reported~~and liability measured and recorded on the Consolidated Balance Sheets on a recurring basis at their fair value as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, by level within the fair value ~~hierarchy. Financial assets~~hierarchy (in thousands).

	Fair Value Measurements at June 30, 2019
	Total			(Level 1)			(Level 2)			(Level 3)
Equity securities		$	328		$	328		$	—		$	—
Available for sale securities:
US Agency			7,543			—			7,543			—
US Agency mortgage-backed securities			91,958			—			91,958			—
Municipal			14,471			—			14,471			—
Corporate bonds			37,116			—			37,116			—
Fair value swap asset			930			—			930			—
Fair value swap liability			(930)			—			(930)			—

	Fair Value Measurements at December 31, 2018
	Total			(Level 1)			(Level 2)			(Level 3)
Available for sale securities:
US Agency		$	7,529		$	—		$	7,529		$	—
US Agency mortgage-backed securities			89,527			—			89,527			—
Municipal			13,181			—			13,181			—
Corporate bonds			36,494			—			36,494			—
Fair value swap asset			257			—			257			—
Fair value swap liability			(257)			—			(257)			—

Assets Measured and ~~liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.~~

~~Assets and liability measured at fair value~~Recorded on a ~~recurring basis are summarized below (in thousands):~~

Non-Recurring Basis

Fair Value Measurements at September 30, 2017 Using
Total (Level 1) (Level 2) (Level 3)
US Agency securities $ 5,402 $ — $ 5,402 $ —
US Agency mortgage-backed securities 81,240 — 81,240 —
Taxable municipal 7,067 — 7,067 —
Corporate bonds 35,737 — 35,737 —
Fair value swap asset 84 — — 84
Fair value swap liability (84 ) — — (84 )

Fair Value Measurements at December 31, 2016 Using
Total (Level 1) (Level 2) (Level 3)
US Agency securities $ 398 $ — $ 398 $ —
US Agency mortgage-backed securities 89,184 — 89,184 —
Taxable municipal 3,622 — 3,622 —
Corporate bonds 33,873 — 33,873 —

~~Assets Measured on a Non-recurring Basis~~

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at the fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At ~~September~~June 30, ~~2017,~~2019, impaired loans with a carrying value of ~~$3.9 million~~$760,000 were reduced by a specific valuation allowance totaling ~~$888,000~~$88,000 resulting in a net fair value of ~~$3.0 million.~~$672,000. At December 31, ~~2016,~~2018, impaired loans with a carrying value of ~~$674,000~~$11,000 were reduced by a specific valuation allowance totaling ~~$527,000~~$11,000 resulting in a net fair value of ~~$147,000.~~

zero.

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other real estate owned is measured at fair value based on appraisals, less estimated ~~cost~~costs to ~~sell.~~sell at the date of foreclosure. Valuations are periodically performed by ~~management.~~management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

Assets measured and recorded at fair value on a non-recurring basis are summarized below (in thousands, except range data):

Fair Value Measurements at September 30, 2017 Using
Total (Level 1) (Level 2) (Level 3)
Impaired loans $ 3,035 $ — $ — $ 3,035
Other real estate owned 39 — — 39

Fair Value Measurements at December 31, 2016 Using
Total (Level 1) (Level 2) (Level 3)
Impaired loans $ 147 $ — $ — $ 147
Other real estate owned 21 — — 21

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

September 30, 2017 Quantitative Information About Level 3 Fair Value Measurements
Fair Value
Estimate Valuation
Techniques Unobservable Input Range (Wgtd Ave)
Impaired loans $ 3,035 Appraisal of
collateral⁽¹⁾^,⁽³⁾ Appraisal
adjustments⁽²⁾
40% to 77%(42%)
Other real estate owned 39 Appraisal of
collateral⁽¹⁾^,⁽³⁾ Appraisal
adjustments⁽²⁾
Liquidation
expenses 43% to 45%(43%)
2% to 206%(64%)

December 31, 2016 Quantitative Information About Level 3 Fair Value Measurements
Fair Value
Estimate Valuation
Techniques Unobservable Input Range (Wgtd Ave)
Impaired loans $ 147 Appraisal of
collateral⁽¹⁾^,⁽³⁾ Appraisal
adjustments⁽²⁾
40% to 99%(45%)
Other real estate owned 21 Appraisal of
collateral⁽¹⁾^,⁽³⁾ Appraisal
adjustments⁽²⁾
Liquidation
expenses 20% to 77%(42%)
3% to 199%(37%)

	Fair Value Measurements at June 30, 2019
	Total			(Level 1)			(Level 2)			(Level 3)
Impaired loans		$	672		$	—		$	—		$	672
Other real estate owned			57			—			—			57

	Fair Value Measurements at December 31, 2018
	Total			(Level 1)			(Level 2)			(Level 3)
Impaired loans		$	—		$	—		$	—		$	—
Other real estate owned			157			—			—			157

June 30, 2019

Quantitative Information About Level 3 Fair Value Measurements

Fair Value
Estimate

Valuation
Techniques

Unobservable
Input

Range
(Wgtd Avg)

Impaired loans

672

Appraisal of collateral(1),(3)

Appraisal adjustments(2)

0% to 100% (12%)

Other real estate owned

Appraisal of collateral(1),(3)

Appraisal
adjustments(2)
Liquidation expenses

0% to 44% (35%)
12% to 114% (28%)

December 31, 2018

~~(1)~~

Quantitative Information About Level 3 Fair Value Measurements

Fair Value ~~is generally determined through independent appraisals~~
Estimate

Valuation
Techniques

Unobservable
Input

Range
(Wgtd Avg)

Impaired loans

—

Appraisal of ~~the underlying~~ collateral ~~which generally include various level 3 inputs which are not identifiable.~~(1),(3)

Appraisal adjustments(2)

100% (100%)

Other real estate owned

157

Appraisal of collateral(1),(3)

Appraisal
adjustments(2)
Liquidation expenses

0% to 39% (8%)
21% to 195% (40%)

~~(2)~~

~~Appraisals may be adjusted by management for qualitative factors such as economic conditions.~~

~~(3)~~

~~Includes qualitative adjustments by management and estimated liquidation expenses.~~

DISCLOSURES ABOUT

(1)
Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions.

(3)
Includes qualitative adjustments by management and estimated liquidation expenses.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

~~TABLE OF CONTENTS~~

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash and cash equivalents, bank

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

owned life insurance, regulatory stock, accrued interest receivable and ~~loans~~payable, and ~~deposits with floating interest rates~~short term borrowings have ~~estimated~~ fair values which approximate the recorded ~~book balances.~~carrying values. The ~~estimation methodologies used, the~~fair value measurements for all of these financial instruments are Level 1 measurements.

The estimated fair values based on US GAAP measurements and recorded ~~book balances~~carrying values at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, for the remaining financial instruments not required to be measured or reported at fair value were as follows (in thousands):

	June 30, 2019
	Carrying Value			Fair Value			(Level 1)			(Level 2)			(Level 3)
FINANCIAL ASSETS:
Investment securities – HTM		$	39,752		$	40,775		$	—		$	37,817		$	2,958
Loans held for sale			1,324			1,362			1,362			—			—
Loans, net of allowance for loan loss and unearned income			880,655			879,993			—			—			879,993
FINANCIAL LIABILITIES:
Deposits with no stated maturities		$	674,243		$	651,367		$	—		$	—		$	651,367
Deposits with stated maturities			294,237			294,452			—			—			294,452
All other borrowings(1)			73,570			77,545			—			77,545

	December 31, 2018
	Carrying Value			Fair Value			(Level 1)			(Level 2)			(Level 3)
FINANCIAL ASSETS:
Investment securities – HTM		$	40,760		$	40,324		$	—		$	37,398		$	2,926
Loans held for sale			847			871			871			—			—
Loans, net of allowance for loan loss and unearned income			853,611			836,122			—			—			836,122
FINANCIAL LIABILITIES:
Deposits with no stated maturities		$	671,666		$	627,323		$	—		$	—		$	627,323
Deposits with stated maturities			277,505			277,010			—			—			277,010
All other borrowings(1)			67,148			69,692			—			—			69,692

September 30, 2017
   Carrying
Value Fair Value (Level 1) (Level 2) (Level 3)
FINANCIAL ASSETS:

Cash and cash equivalents $ 28,675 $ 28,675 $ 28,675 $ — $ —
Investment securities – AFS 129,446 129,446 — 129,446 —
Investment securities – HTM 38,997 39,059 — 36,105 2,954
Regulatory stock 6,554 6,554 6,554 — —
Loans held for sale 1,780 1,801 1,801 — —
Loans, net of allowance for loan loss and unearned income 885,864 884,359 — — 884,359
Accrued interest income receivable 3,503 3,503 3,503 — —
Bank owned life insurance 37,716 37,716 37,716 — —
Fair value swap asset 84 84 — — 84
FINANCIAL LIABILITIES:
      ��
Deposits with no stated maturities $ 707,566 $ 707,566 $ 707,566 $ — $ —
Deposits with stated maturities 259,355 260,498 — — 260,498
Short-term borrowings 33,593 33,593 33,593 — —
All other borrowings 64,420 67,962 — — 67,962
Accrued interest payable 1,622 1,622 1,622 — —
Fair value swap liability 84 84 — — 84

December 31, 2016
   Carrying
Value Fair Value (Level 1) (Level 2) (Level 3)
FINANCIAL ASSETS:

Cash and cash equivalents $ 34,073 $ 34,073 $ 34,073 $ — $ —
Investment securities – AFS 127,077 127,077 — 127,077 —
Investment securities – HTM 30,665 30,420 — 27,473 2,947
Regulatory stock 5,484 5,484 5,484 — —
Loans held for sale 3,094 3,158 3,158 — —
Loans, net of allowance for loan loss and unearned income 873,832 869,960 — — 869,960
Accrued interest income receivable 3,116 3,116 3,116 — —
Bank owned life insurance 37,903 37,903 37,903 — —
FINANCIAL LIABILITIES:

Deposits with no stated maturities $ 708,062 $ 708,062 $ 708,062 $ — $ —
Deposits with stated maturities 259,724 261,446 — — 261,446
Short-term borrowings 12,754 12,754 12,754 — —
All other borrowings 65,891 69,348 — — 69,348
Accrued interest payable 1,640 1,640 1,640 — —

(1)

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AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

~~The fair value of cash and cash equivalents, regulatory stock, accrued interest income receivable, short-term borrowings, and accrued interest payable are equal to the current carrying value.~~

The fair value of investment securities is equal to the available quoted market price for similar securities. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Level 3 securities are valued by discounted cash flows using the US Treasury rate for the remaining term of the securities.

~~Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment with an investor.~~ All loans in the held for sale account conform to Fannie Mae underwriting guidelines, with the specific intent of the loan being purchased by an investor at the predetermined rate structure. Loans in the held for sale account have specific delivery dates that must be executed to protect the pricing commitment (typically a 30, 45, or 60 day lock period).

The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.

~~The fair value of bank owned life insurance is based upon the cash surrender value of the underlying policies and matches the book value.~~

Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

~~The fair value of all~~ other borrowings ~~is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.~~

~~The fair values of the fair value swaps used for~~include advances from Federal Home Loan Bank, guaranteed junior subordinated deferrable interest ~~rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.~~

~~Commitments to extend credit~~debentures, and standby letters of credit are financial instruments generally not subject to sale, and fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 16.

subordinated debt.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“M.D. & A.”)

…~~2017 THIRD~~..2019 SECOND QUARTER SUMMARY OVERVIEW… It is common knowledge that in the Northeastern region that the cold winters hamper economic activity. Then a good bit of the spring is devoted to repairing and replacing. However, as the thermometer recovers, so does the economy. The third..AmeriServ reported second quarter ~~at AmeriServ demonstrated the impact of enterprises and consumers becoming actively engaged in their businesses. On October 17, 2017, AmeriServ announced~~2019 net income of ~~$1,551,000~~$1,792,000, or ~~$0.08~~$0.10 per share. ~~Those results are 12% higher than~~This respresents a 2.8%, or $48,000, improvement over the second quarter of ~~2017~~2018 where net income totaled $1,744,000, or $0.10 per share.

The return of solid loan growth and ~~46% higher than~~ the ~~third~~continuation of deposit growth contributed to an improved net interest margin which was one of the highlights of the quarter. Specifically, net loans have grown by $27 million or 3.1%, while deposits have increased by $19 million or 2.0%, in the first six months of 2019. Asset quality continued to be excellent as non-performing assets and net loan charge-offs remained at low levels, which allowed us to record a zero provision for loan losses in the second quarter of ~~2016. Numbers like these do not just happen because~~2019. We continue to believe that it is ~~summer. This kind~~important to return capital to our shareholders through common stock buybacks and cash dividends in order to increase shareholder value. Total capital returned to our shareholders exceeded 53% of ~~progress is the result of careful planning and execution by AmeriServ’s knowledgeable bankers.~~

The loan portfolio attained the second highest quarterly average level since the third quarter of 2016. Deposits on average in the third quarter of 2017 were at an all-time record and at $981 million are almost within reach of one billionnet income for the first time ever. However, these are static numbers measured at a point in time but revenues were not static. Revenues measure the payments by third party customers for products and services. In the third quarter of 2017, AmeriServ recorded a 5% increase in gross revenues when compared with the third quarter of 2016. At the very same time through the first ninesix months of ~~2017, AmeriServ non-interest expenses have declined by almost $600,000. This combination of increasing revenues and declining expenses enabled AmeriServ~~2019. Overall, our Company is well positioned to ~~report its best quarter since the third quarter of 2015.~~

~~The Federal Reserve has begun to increase interest rates from the virtually zero level of the last eight years. While it has been an~~build on again, off again proposition at the Fed, national interest rates have been on the increase since a year ago. Management took advantage of these higher rates to begin to reformat the securities portfolio. This process has produced a 31% increasethis positive momentum in the ~~securities portfolio revenue over the third quarter of 2016, while controlling the level of risk in the portfolio.~~

Banking is not a static industry, for it is a reflection of the dynamics at work in the national economy, the regional economy and the local economy. Each of these economies is a reflection of the millions of individual decisions by Americans pursuing their own separate initiatives. It then becomes the responsibility of the Board and this Management team to plot a course which accommodates these complexities. There is no formula which has ever been fool proof. Rather it is the daily balancing of risk against reward that decides the winners and losers.

Given these larger forces at work, AmeriServ is and should conduct itself as a financial franchise in transition. It has grown from a weak source of loans in its markets to an active lender. AmeriServ has now completed over four consecutive years when it has loaned over 90% of its deposits to smaller and mid-sized local and regional business and consumers. This is a full 10% more than similar sized community banks in the United States. We believe lending to small businesses is our role in keeping the economy recovering from its series of negative events.

~~Also during those same four years of active lending, AmeriServ’s loan losses have been less than a third of the losses of similar sized community banks in the United States.~~

~~Concurrently, AmeriServ’s stand-alone Trust and Wealth Management Company has been transitioning. It now has approximately $2 billion of assets under management and administration. More than~~second half of ~~that $2 billion is investments~~2019 in ~~retirement savings programs. AmeriServ provides investment guidance, safekeeping~~both our community banking and ~~administrative support so that~~wealth management businesses. We will continue to utilize our ~~friends and neighbors can devote their energies~~Banking for Life message to ~~their professions and careers. It is a very positive program and one which we are proud to watch grow.~~

During the first nine months of 2017, the AmeriServ Board of Directors conducted a complete review of its structure and activities. The Board confirmed its committee-oriented management structure. It defined its role as one of oversight and not of management. It is clear that the role of the Board is to represent not themselves but every AmeriServ shareholder. The full Board discussed this report of the Corporate Governance Committee and adopted it unanimously on July 15, 2017. This vote has set in motion a transition within the Board to be certain that the interest of the shareholders should be pre-eminent throughout the Company.

grow revenue.

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The economy has been continuing its slow recovery so this has been a good time to analyze the course and to structure the Company to be both relevant and rewarding in the days ahead. A new strategic plan, a reconstituted Board of Directors, and a rededication to continue the improvements in profitability have resulted. The positive impact has been demonstrated by the third quarter results. The eight cents level of earnings per share during the quarter provides a solid base for the hope of continued growth in earnings.

THREE MONTHS ENDED SEPTEMBERJUNE 30, 20172019 VS. THREE MONTHS ENDED SEPTEMBERJUNE 30, 2016

~~…PERFORMANCE OVERVIEW…~~2018

.....PERFORMANCE OVERVIEW.....The following table summarizes some of the Company’s key performance indicators (in thousands, except per share and ratios).

	Three months ended June 30, 2019			Three months ended June 30, 2018
Net income		$	1,792		$	1,744
Diluted earnings per share			0.10			0.10
Return on average assets (annualized)			0.61%			0.60%
Return on average equity (annualized)			7.24%			7.30%

Three months ended
September 30, 2017 Three months ended
September 30, 2016
Net income $ 1,551 $ 1,065
Net income available to common shareholders 1,551 1,065
Diluted earnings per share 0.08 0.06
Return on average assets (annualized) 0.53 % 0.37 %
Return on average equity (annualized) 6.37 % 4.27 %

The Company reported third quarter 2017 net income available to common shareholders of $1,551,000, or $0.08 per diluted common share. This earnings performance represented an increase of $486,000, or 45.6%, from the third quarter of 2016 where net income available to common shareholders totaled $1,065,000, or $0.06 per diluted common share. The improved earnings in the third quarter of 2017 resulted from a favorable combination of increased total revenue, reduced non-interest expense and a controlled loan loss provision. The balance sheet is well positioned for higher interest rates as demonstrated in the form of increased net interest income in the third quarter of 2017. Additionally, the Company benefited from several profitability improvement initiatives.

~~…NET~~.....NET INTEREST INCOME AND ~~MARGIN…~~MARGIN..... The Company’s net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities. Net interest income is a primary source of the Company’s earnings, and it is effected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities. The following table compares the Company’s net interest income performance for the ~~third~~second quarter of ~~2017~~2019 to the ~~third~~second quarter of ~~2016~~2018 (in thousands, except percentages):

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Total investment securities averaged ~~$175~~$200 million in the ~~third~~second quarter of ~~2017~~2019 which is ~~$26.2~~$16.9 million, or ~~17.6%~~9.3%, higher than the ~~$149~~$183 million average for the ~~third~~second quarter of ~~2016.~~2018. The growth in the investment securities portfolio is the result of the rising interest rate environment experienced during 2018 which provided an attractive market for additional security purchases. Purchases primarily focused on federal agency mortgage backed securities due to the ongoing cash flow that these securities provide. Also, management ~~electing to diversify the mix of the investment securities~~continued its portfolio diversification strategy through purchases of high quality corporate and taxable municipal securities. ~~This revised strategy for~~Investment security purchase activity slowed significantly during the second quarter of 2019 and was more selective as the market was less favorable with the U.S. Treasury yield curve flattening and becoming inverted at times in the short to mid-term portion of the curve. Overall, interest income on investment securities ~~purchases was facilitated by the increase in national interest rates that resulted in improved opportunities to purchase~~

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~~additional securities and grow the portfolio. As a result, interest on investments~~ increased between the ~~third~~second quarter of ~~2017~~2019 and the ~~third~~second quarter of ~~2016~~2018 by ~~$318,000~~$279,000, or ~~31.4%~~19.6%.

Total loans averaged ~~$892~~$883 million in the ~~third~~second quarter of ~~2017 which was comparable with~~2019 as loan growth returned and loan originations exceeded loan payoffs by $27 million, resulting in the ~~2016 third~~2019 second quarter average ~~of $893 million.~~total loan portfolio balance exceeding the 2018 second quarter average balance by $640,000, or 0.1%. The ~~slight decrease~~increase between years occurred primarily in the commercial real estate and commercial & industrial loan portfolio when comparing the third quarter average in 2017 to last year’s third quarter average was the result of accelerated prepayment activity along with new commercial loan production funding occurring late in the 2017 quarter.portfolios. Loan interest and fee income increased by ~~$393,000,~~$869,000, or ~~4.2%~~8.6%, between the ~~third~~second quarter of ~~2017~~2019 and last year’s second quarter. Included in this increase was a higher level of loan fee income by $141,000, due primarily to the ~~third quarter~~prepayment fee collected on the early payoff of ~~2016.~~one large commercial loan as well as the increased fees from the greater new loan origination activity. The higher loan interest income ~~results from~~also reflects new loans originating at higher yields ~~due to the higher interest rates and also reflects~~as well as the upward repricing of certain loans tied to LIBOR or the prime rate as both of these indices have moved up with the Federal Reserve’s decision to increase the target federal funds interest rate ~~by 25 basis points~~ in ~~December of 2016, March of 2017, and again in June of 2017. Also contributing to the higher level of total loan interest income was increased income from loan charges.~~2018. Overall, total interest income increased by ~~$711,000,~~$1.2 million, or ~~6.8%~~10.0%, ~~in the third quarter of 2017.~~

between years.

Total deposit interest expense in 2019 was higher by $894,000, or 45.3%, for the ~~third~~second quarter, ~~of 2017 increased by $280,000, or 14.2%, when compared to 2016, due to higher levels of both deposit and borrowing interest expense. The Company experienced growth in deposits~~ which ~~we believe~~ reflects the loyalty of our core deposit base that provides a strong foundation upon which this growth builds. Management’s ability to acquire new core deposit funding from outside of our traditional market areas as well as our ongoing efforts to offer new loan customers deposit products were the primary reasons for this growth. Specifically, total deposits averaged $981 million for the third quarter of 2017 which is $4.1 million, or 0.4%, higher than the $977 million average for the third quarter of 2016. Deposit interest expense for the third quarter of 2017 increased by $227,000, or 16.3%, due to the higher balance of deposits along with certain indexed money market accounts repricing upward ~~after~~due to the impact of the Federal Reserve increasing interest ~~rate increases. As~~rates during 2018. The Company also has experienced increasing market competitive pressure to retain existing deposit customers and attract new customer deposits. Customer product preference changed as well since last year as movement of funds occurred from lower yielding money market accounts into higher yielding certificates of deposit. Overall, total deposits continued to grow for a ~~result~~fourth consecutive quarter and averaged $980 million in the second quarter of 2019, which was $24.5 million, or 2.6%, higher than the ~~solid deposit growth, the~~2018 second quarter average. The Company’s loan to deposit ratio averaged ~~91.3% at September 30, 2017~~90.1% in the second quarter of 2019, which we believe indicates that the Company has ample ~~room~~capacity to ~~further~~ grow its loan portfolio.

The Company experienced a ~~$53,000~~$65,000, or 8.4%, increase in the interest cost for borrowings in the ~~third~~second quarter of ~~2017~~2019 due to ~~a higher level of total borrowed funds and~~ the ~~immediate~~ impact that the 2018 increases in the ~~Federal Funds Rate~~federal funds rate had on the cost of overnight borrowed ~~funds. In~~funds and the ~~third~~replacement of matured FHLB term advances. Also, due to a new accounting pronouncement that became effective January 1, 2019, the Company recognized additional interest expense of $29,000 on its financing property leases. The 2019 second quarter average of ~~2017, total average~~ FHLB borrowed funds was $70.9 million, which represented a decrease of ~~$59.2~~$7.8 million, or 9.9%, due to the increase in total average deposits. Overall, total interest expense for the second quarter of 2019 increased by ~~$8.0 million,~~$959,000, or ~~15.7% from the prior year quarter.~~

34.9%, when compared to 2018.

The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods ended ~~September~~June 30, ~~2017~~2019 and ~~September 30, 2016~~2018 setting forth (i) average assets, liabilities, and stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) the Company’s interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables, loan balances do include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of ~~34%~~21% is used to compute tax-equivalent ~~yields.~~

interest income and yields (non-gaap). The tax equivalent adjustments to interest income on loans and municipal securities for the

…~~PROVISION~~..PROVISION FOR LOAN ~~LOSSES…~~LOSSES..... The Company ~~recorded~~did not record a ~~$200,000~~ provision for loan losses in the ~~third~~second quarter of ~~2017~~2019 as compared to a ~~$300,000~~$50,000 provision ~~for loan losses in the third quarter of 2016. The provision~~expense recorded in the ~~third~~second quarter of ~~2017 supported commercial loan growth, a higher level~~2018. The zero provision for the second quarter of 2019 reflects our overall excellent asset quality and reduced levels of criticized loans and ~~a lower level of~~ net ~~charge-offs than what was~~charge-offs. The Company experienced ~~during the third quarter of 2016. Although~~ net loan charge-offs ~~were higher than the loan loss provision for the third quarter~~ of ~~2017, the provision through nine months has more than doubled the level of net charge-offs experienced during this same time period. This lower level of net charge-offs in relation~~$5,000, which equates to ~~the provision through nine-months as well as a reduction in classified assets and the level~~0.00% of total ~~delinquency since~~loans, in the ~~end~~2019 second quarter compared to net loan charge-offs of $461,000, or 0.21% of total loans, in the second quarter of ~~this year were the contributing factors for the lower provision during the third quarter of 2017. The net result was a higher loan loss allowance in 2017 compared to last year.~~2018. Overall, the Company continued to maintain ~~strong~~outstanding asset quality as its nonperforming assets totaled ~~$5.4~~$1.7 million, or ~~0.60%,~~only 0.19% of total loans, at ~~September~~June 30, 2017. Total non-performing assets did increase by $3.0 million since the end of the second quarter due primarily to the transfer of one commercial credit exposure into non-accrual status. It is believed that the Company’s loss exposure on this loan is limited because it is well secured and has a low loan to value ratio.2019. In summary, the allowance for loan losses provided ~~194%~~482% coverage of non-performing ~~loans,~~assets, and ~~1.15%~~was 0.91% of total loans, at ~~September~~June 30, ~~2017,~~2019, compared to ~~620%~~629% coverage of non-performing ~~loans,~~assets, and ~~1.12%~~1.00% of total loans, at December 31, ~~2016.~~

~~…NON-INTEREST INCOME…~~2018.

.....NON-INTEREST INCOME..... Non-interest income for the ~~third~~second quarter of ~~2017~~2019 totaled ~~$3.6~~$3.7 million and decreased ~~$32,000,~~$24,000, or ~~0.9%~~0.7%, from the ~~third~~second quarter ~~2016~~2018 performance. Factors contributing to this lower level of non-interest income for the quarter included:

a $118,000 increase in other income was primarily due to revenue from our financial services business unit increasing by $87,000 as wealth management continues to be an important strategic focus of the Company;•

a ~~$63,000~~$40,000 decrease ~~in mortgage related fees was due to a reduced level of residential mortgage refinancing activity which caused a corresponding $43,000 reduction~~ in revenue from ~~residential mortgage loan sales into the secondary market;~~

~~a $26,000 decrease in bank owned life insurance income; and~~

~~a $24,000 decrease in services~~deposit service charges ~~on deposit accounts was~~ due to a reduced level of overdraft fee ~~income;~~income as the bank is no longer charging a fee on overdrafts that result from signature based point of sale debit card transactions;

~~…NON-INTEREST EXPENSE…~~

•

The Company recognized a $30,000 investment security sale gain in the second quarter of 2019 after no security sale activity occurred in the second quarter of 2018. The 2019 gain resulted from the sale of one corporate security due to its significant price appreciation because of the falling long term national interest rates;

•

a $28,000 reduction in wealth management fees primarily due to a lower level of revenue from our Financial Services division because of fewer life insurance related sales in 2019, and;

•

a $25,000 increase in other income due to a higher level of letter of credit fee income because of the increased loan production.

.....NON-INTEREST EXPENSE..... Non-interest expense for the ~~third~~second quarter of ~~2017~~2019 totaled ~~$10.1~~$10.5 million and ~~decreased~~increased by ~~$242,000,~~$164,000, or ~~2.3%~~only 1.6%, from the prior year’s ~~third~~second quarter. Factors contributing to the ~~lower~~higher level of non-interest expense infor the quarter included:

a $117,000 or 8.8% decrease in professional fees and a $110,000 decrease in other expense as both of these expense categories were higher in 2016 due to costs associated with the resolution of a trust operations trading error;•

a ~~$104,000, or 1.8%,~~$130,000 increase in salaries & benefits expense due to annual merit increases, four additional employees hired at our new financial banking center in Hagerstown, Maryland and ~~employee benefits~~higher health care costs. These increased expenses more than offset reduced levels of pension expense and incentive compensation;

•

a $80,000 increase in other expenses due to higher ~~health care~~website costs and additional ~~investment in personnel talent, particularly within our wealth management subsidiary. These higher costs more than offset~~ telecommunications expense, and;

•

a $75,000 decrease in ~~pension expense; and~~

~~a combined $98,000 decrease in equipment & occupancy expenses was~~FDIC insurance cost due to a reduction to our deposit insurance assessment.

.....INCOME TAX EXPENSE..... The Company recorded an income tax expense of $470,000, or an effective tax rate of 20.8%, in the ~~Company’s ongoing profitability improvement initiatives.~~

second quarter of 2019. This compares to an income tax expense of $453,000, or an effective tax rate of 20.6%, for the second quarter of 2018.

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For the six-month time period ended June 30, 2019, the Company reported net income ~~available to common shareholders~~ of ~~$4,288,000,~~$3,670,000, or ~~$0.23~~$0.21 per diluted common share. This ~~represents~~earnings performance was a ~~significant~~$159,000, or 4.5%, improvement ~~of $3.1 million~~ from the ~~nine-month~~six-month period of ~~2016~~2018 where net income ~~available to common shareholders~~ totaled ~~$1,145,000,~~$3,511,000, or ~~$0.06~~$0.19 per diluted common share. ~~The improved earnings in~~Earnings per share grew at a faster rate of 10.5% over this six-month period due to a lower share count as a result of the ~~first nine months~~success of 2017 resulted from a favorable combination of total revenue growth, a reduction in non-interest expense and a controlled loan loss provision. The balance sheet is well positioned for higher interest rates as demonstrated in the ~~form of increased net interest income in the first nine months of 2017. Additionally, the Company benefitted from several profitability improvement initiatives.~~

~~…NET~~Company’s ongoing common stock buyback program.

.....NET INTEREST INCOME AND ~~MARGIN…~~MARGIN.....The following table compares the Company’s net interest income performance for the first ~~nine~~six months of ~~2017~~2019 to the first ~~nine~~six months of ~~2016~~2018 (in thousands, except percentages):

	Six months ended June 30, 2019			Six months ended June 30, 2018			$ Change			% Change
Interest income		$	24,929		$	22,820		$	2,109		9.2%
Interest expense			7,211			5,214			1,997		38.3
Net interest income		$	17,718		$	17,606		$	112		0.6
Net interest margin			3.27%			3.28%			(0.01)		N/M

Nine months ended
September 30, 2017 Nine months ended
September 30, 2016 $ Change % Change
Interest income $ 32,986 $ 31,287 $ 1,699 5.4 %
Interest expense 6,429 5,737 692 12.1
Net interest income $ 26,557 $ 25,550 $ 1,007 3.9
Net interest margin 3.27 % 3.23 % 0.04 N/M

N/M –— not meaningful

The Company’s net interest income ~~for~~in the first ~~nine~~six months of ~~2017~~2019 increased by ~~$1.0 million,~~$112,000, or ~~3.9%~~0.6%, when compared to the first ~~nine~~six months of ~~2016.~~2018. The Company’s net interest margin ~~was~~of 3.27% for the first ~~nine months~~half of ~~2017 representing an improvement of four~~2019 declined by 1 basis ~~points~~point from the prior year’s first ~~nine months of 2016.~~six-month time period. The ~~2017~~ increase in net interest income is athe result of an increase in total earning assets. Total average earning assets increased in the first half of 2019 by $8.6 million, or 0.8%. The increase in earning assets occurred in the investment securities portfolio, while total loans demonstrated a ~~higher level~~decline for the six-month average comparison. Also contributing to the net interest income increase was a favorable shift in the mix of total ~~earning assets~~average interest bearing liabilities as total interest bearing deposits increased and ~~a favorable balance sheet positioning which has contributed~~resulted in less reliance on higher cost borrowings to ~~the improved net interest margin performance. The Company continues to grow earning assets while also limiting increases in its cost of funds through disciplined deposit pricing. Specifically, the~~fund earning asset ~~growth occurred in, both, the total~~growth.

Total investment securities ~~and~~averaged $199 million in the ~~total loan portfolios. Total loans averaged $894 million~~first six months of 2019 which ~~is $6.4~~was $19.1 million, or ~~0.7%~~10.6%, higher than the ~~2016 nine month average. Investment securities have averaged $172~~$180 million average for the ~~nine-month time period which is $26.8 million, or 18.5%, higher than the nine month 2016 average.~~first six months of 2018. The growth in the investment securities portfolio is the result of management ~~electing to diversify the mix~~taking advantage of the ~~investment~~rising interest rate environment experienced during 2018, which provided an attractive market for additional security purchases. Purchases primarily focused on federal agency mortgage backed securities due to the ongoing cash flow that these securities provide. Also, management continued its portfolio diversification strategy through purchases of high quality corporate and taxable municipal securities. This revised strategy for securities purchases was facilitated by the increase in national interest rates that resulted in improved opportunities to purchase additional securities and grow the portfolio. As a result, interest income on investments increased between the first six months of 2019 and the first six months of 2018 by $598,000, or 21.5%.

Total loans averaged $872 million in the first ~~nine~~half of 2019 which was $10.3 million, or 1.2%, lower than the 2018 first six-month average. The impact from total loan payoffs exceeding loan originations that was experienced during most of 2018 was still evident in the total loan portfolio average balance during the first six months of ~~2017 from~~2019. However, as noted in the ~~same time period~~quarter vs. quarter comparison previously in ~~2016 by $846,000 or 28.7%. The~~this analysis, loan growth did return during the second quarter of 2019. This second quarter growth occurred primarily in commercial real estate loans and commercial & industrial loans. Even though the six month average of total loans ~~reflects the successful results of the Company’s business development efforts, with an emphasis on generating all types of commercial business loans particularly through its~~decreased since last year, loan ~~production offices. Loan~~ interest income increased by ~~$853,000,~~$1.5 million, or ~~3.0%~~7.4%, inbetween the first ~~nine months~~half of ~~2017 when compared~~2019 and the first half of 2018. Included in this increase was a higher level of loan fee income by $235,000, due primarily to ~~last year.~~prepayment fees collected on certain early loan pay-offs in addition to the increased fees from greater new loan origination activity. The higher loan interest income ~~results from~~also reflects new loans originating at higher yields ~~due to the higher interest rates and also reflects~~as well as the upward repricing of certain loans tied to LIBOR or the prime rate as both of these indices have moved up with the Federal Reserve’s decision to increase the target federal funds interest rate ~~by 25 basis points~~ in ~~December of 2016, March of 2017, and again in June of~~

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~~2017. The Company has also benefitted from a higher level of income from loan charges.~~2018. Overall, total interest income increased by ~~$1.7~~$2.1 million, or ~~5.4%~~9.2%, in the first ~~nine months~~half of ~~2017.~~

2019, as compared to the same period in 2018.

Total deposit interest expense increased by ~~$692,000,~~$1.8 million, or ~~12.1%~~49.1%, ~~in the first nine months of 2017 when compared to 2016, due to~~between time periods and reflects higher levels of ~~both deposit~~total average interest bearing deposits and ~~borrowing interest expense. The Company experienced growth in deposits which we believe reflects~~ the ~~loyalty~~upward repricing of our core deposit base that provides a strong foundation upon which this growth builds. Specifically, total deposits averaged $977 million for the first nine months of 2017 which is $29.9 million, or 3.2%, higher than the $947 million average for the first nine months of 2016. Deposit interest expense through nine months in 2017 increased by $583,000, or 14.7%, due to the higher balance of deposits along with certain indexed money market accounts ~~repricing upward~~ after the Federal Reserve interest rate ~~increases. As a result~~increases during 2018. Additionally, and similar to

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the quarterly comparision, the Company has experienced increasing market competitive pressure to retain existing deposit customers and attract new customer deposits. Customer product preference changed as well resulting in movement of ~~the solid deposit growth, the Company’s loan to deposit ratio~~some funds out of lower yielding money market accounts into higher yielding certificates of deposit. Overall, total deposits averaged ~~91.5%~~$975 million in the first ~~nine~~six months of ~~2017~~2019 which ~~indicates that~~was $16.6 million, or 1.7%, higher than the ~~Company has ample room to further grow its loan portfolio. The~~$958 million average for 2018.

Even though total average borrowings decreased between years, the Company experienced a ~~$109,000~~$154,000, or 10.5%, increase in the interest cost for borrowings in the first ~~nine~~six months of ~~2017 primarily~~2019 due to the ~~immediate~~ impact that the 2018 increases in the ~~Federal Funds Rate~~federal funds rate had on the cost of overnight borrowed ~~funds.~~funds and the replacement of matured FHLB term advances. Also, due to a new accounting pronouncement that became effective January 1, 2019, the Company recognized additional interest expense on its financing property leases of $59,000. In the first ~~nine months~~half of ~~2017,~~2019, total average FHLB borrowed funds was $66.7 million, a decrease of ~~$61.2~~$6.7 million, ~~remained relatively stable, increasing slightly~~or 9.2%, from the same period during 2018, which was due to the increase in total average deposits. Overall, total interest expense for the first six months of 2019 increased by ~~$339,000,~~$2.0 million, or ~~0.6%~~38.3%.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-gaap) for the ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2019 and ~~September 30, 2016 setting forth (i) average assets, liabilities,~~2018. For a detailed discussion of the components and ~~stockholders’ equity, (ii) interest income earned~~assumptions included in the table, see the paragraph before the quarterly table on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) the Company’s interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets)page 34. ~~For purposes of these tables, loan balances do include non-accrual loans, and~~The tax equivalent adjustments to interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Additionally, a tax rate of 34% is used to compute tax-equivalent yields.

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~~Nine~~and municipal securities for the six months ended ~~September~~June 30, 2019 and 2018 was $12,000 and $11,000, respectively, which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material.

Six months ended June 30 (In thousands, except percentages)

	2019								2018
	Average Balance			Interest Income/ Expense			Yield/ Rate		Average Balance			Interest Income/ Expense			Yield/ Rate
Interest earning assets:
Loans and loans held for sale, net of unearned income		$	871,742		$	21,424		4.90%		$	882,080		$	19,954		4.51%
Short-term investment in money market funds and bank deposits			7,813			141		3.58			7,914			99		2.48
Investment securities – AFS			157,844			2,633		3.34			140,693			2,130		3.03
Investment securities – HTM			41,118			743		3.61			39,184			648		3.31
Total investment securities			198,962			3,376		3.40			179,877			2,778		3.09
Total interest earning assets/interest income			1,078,517			24,941		4.62			1,069,871			22,831		4.27
Non-interest earning assets:
Cash and due from banks			20,633								21,858
Premises and equipment			17,053								12,484
Other assets			62,667								62,390
Allowance for loan losses			(8,425)								(10,143)
TOTAL ASSETS		$	1,170,445							$	1,156,460

2017 2016
   Average Balance Interest Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate
Interest earning assets:

Loans and loans held for sale, net of unearned income $ 894,088 $ 29,219 4.33 % $ 887,681 $ 28,358 4.22 %
Interest bearing deposits 1,029 8 1.03 1,871 11 0.71
Short-term investment in money market funds 8,049 93 1.52 12,987 54 0.55
Investment securities – AFS 135,131 2,819 2.78 120,710 2,324 2.57
Investment securities – HTM 36,854 877 3.17 24,482 562 3.06
Total investment securities 171,985 3,696 2.87 145,192 2,886 2.65
Total interest earning assets/interest income 1,075,151 33,016 4.08 1,047,731 31,309 3.96
Non-interest earning assets:

Cash and due from banks 22,214       19,883
Premises and equipment 12,095       11,982
Other assets 67,552       68,351
Allowance for loan losses (10,290 ) (9,777 )
TOTAL ASSETS $ 1,166,722 $ 1,138,170
Interest bearing liabilities:

Interest bearing deposits:

Interest bearing demand $ 129,923 $ 450 0.46 % $ 106,983 $ 231 0.29 %
Savings 97,852 122 0.17 96,149 119 0.16
Money markets 276,958 1,047 0.51 275,226 876 0.42
Time deposits 290,598 2,939 1.35 286,966 2,749 1.28
Total interest bearing deposits 795,331 4,558 0.77 765,324 3,975 0.69
Short-term borrowings 15,390 130 1.13 11,480 49 0.56
Advances from Federal Home Loan Bank 45,785 511 1.49 49,356 484 1.31
Guaranteed junior subordinated deferrable interest debentures 13,085 840 8.57 13,085 840 8.57
Subordinated debt 7,650 390 6.80 7,650 389 6.78
Total interest bearing liabilities/interest
expense 877,241 6,429 0.98 846,895 5,737 0.90
Non-interest bearing liabilities:

Demand deposits 181,924       182,003
Other liabilities 11,630       8,683
Shareholders’ equity 95,927 100,589
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,166,722 $ 1,138,170
Interest rate spread       3.10       3.06
Net interest income/Net interest margin    26,587 3.27 %    25,572 3.23 %
Tax-equivalent adjustment (30 ) (22 )
Net Interest Income $ 26,557 $ 25,550

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2019 2018
Average
Balance Interest
Income/
Expense Yield/
Rate Average
Balance Interest
Income/
Expense Yield/
Rate
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 166,461 $ 833 1.01% $ 131,202 $ 503 0.77%
Savings 97,867 81 0.17 98,286 81 0.17
Money markets 238,393 1,336 1.13 251,325 1,023 0.82
Time deposits 319,235 3,347 2.11 294,510 2,147 1.47
Total interest bearing deposits 821,956 5,597 1.37 775,323 3,754 0.98
Short-term borrowings 17,888 238 2.64 27,996 262 1.86
Advances from Federal Home Loan Bank 48,777 496 2.04 45,418 378 1.68
Guaranteed junior subordinated deferrable interest debentures 13,085 561 8.57 13,085 560 8.57
Subordinated debt 7,650 260 6.80 7,650 260 6.80
Lease liabilities 2,797 59 4.23 — — —
Total interest bearing liabilities/interest expense 912,153 7,211 1.59 869,472 5,214 1.21
Non-interest bearing liabilities:
Demand deposits 152,748 182,769
Other liabilities 7,276 8,821
Shareholders’ equity 98,268 95,398
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,170,445 $ 1,156,460
Interest rate spread 3.03 3.06
Net interest income/Net interest margin 17,730 3.27% 17,617 3.28%
Tax-equivalent adjustment (12) (11)
Net Interest Income $ 17,718 $ 17,606

…~~PROVISION~~..PROVISION FOR LOAN ~~LOSSES…~~LOSSES..... The Company recorded a ~~$750,000~~$400,000 provision ~~for loan losses compared to a $3,650,000 provision~~recovery for loan losses in ~~2016 or~~the first six months of 2019 compared to a ~~decrease~~$100,000 provision expense in the first six months of ~~$2.9 million between years. Both, the loan loss~~2018. The 2019 provision ~~and net charge-offs were at more typical~~recovery reflects our overall excellent asset quality, reduced levels this year than the substantially higher levels that were necessary early last year to resolve a troubled loan exposure to the energy industry. The provision recorded in 2017 supported commercial loan growth, a higher level of criticized loans and ~~more than covered the low level of~~ net loan charge-offs, ~~incurred in~~and the lower six-month average balance of total loans. For the first ~~nine~~six months of ~~2017. For the nine-month timeframe,~~2019, the Company experienced net loan charge-offs of ~~$336,000,~~$169,000, or ~~0.05%~~0.04% of total loans, ~~in 2017~~ compared to net loan charge-offs of ~~$3.8 million,~~$793,000, or ~~0.58%~~0.18%, ~~of total loans~~ in ~~2016.~~2018. Overall, the Company continued to maintain strong asset quality as its nonperforming assets totaled ~~$5.4~~$1.7 million, or ~~0.60%,~~only 0.19% of total loans, at ~~September~~June 30, ~~2017.~~

~~…NON-INTEREST INCOME…~~2019.

.....NON-INTEREST INCOME..... Non-interest income for the first ~~nine~~six months of ~~2017~~2019 totaled ~~$10.9~~$7.3 million, ~~and increased $106,000, or 1.0%, from the first nine months 2016 performance.~~decreasing by only $54,000. Factors contributing to this ~~higher~~slightly lower level of non-interest income ~~in 2017~~for the first six months included:

•

a ~~$206,000~~$178,000 favorable change in investment security sale gains after the Company sold a portion of low balance, low yielding securities at a loss in 2018 to reposition the investment portfolio for stronger future returns;

•

a $113,000 decrease in revenue from deposit service charges due to a reduced level of overdraft fee income as the bank is no longer charging a fee on overdrafts that result from signature based point of sale debit card transactions;

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•

a $58,000 decrease in Wealth Management fees after the equity market declined late in 2018 and unfavorably impacted market values for assets under management in the first quarter of 2019. Also, there has been a decrease in life insurance sales within our financial services division;

•

a $48,000 decrease in net gains on loan sales into the secondary market due to management’s decision to retain more of the residential mortgage loan production in our loan portfolio earlier in the year when market conditions were more favorable to adjust strategy;

.....NON-INTEREST EXPENSE..... Non-interest expense for the first half of 2019 totaled $20.7 million and increased by $346,000, or 1.7%, from the prior year. Factors contributing to the higher non-interest expense in the quarter included:

•

a $338,000 increase in salaries & benefits expense due to higher salaries which resulted from annual merit increases, four additional employees hired at our new financial banking center in Hagerstown, Maryland and higher health care costs. These increased expenses more than offset reduced levels of pension expense and incentive compensation;

•

a $241,000 increase in other expense due to higher website costs, additional telecommunications expense and a higher level of funding for the unfunded commitment reserve due to increased loan approvals in 2019;

•

a $157,000 reduction in FDIC deposit insurance expense due to a reduction to our deposit insurance assessment;

•

a $67,000 decrease in professional fees due to lower legal fees and costs for other professional services.

.....INCOME TAX EXPENSE.....The Company recorded an income tax expense of $961,000, or an effective tax rate of 20.8%, in the first six months of 2019. This compares to the income tax expense of $908,000, or an effective tax rate of 20.5% for the first six months of 2018.

…..SEGMENT RESULTS.…. Retail banking’s net income contribution was $1,176,000 in the second quarter of 2019 and $2,357,000 for the first six months of 2019 which was up by $422,000 from the second quarter of last year and by $897,000 from the net income contribution for the first six months of 2018. The increase reflects a higher level of net interest income as the funding benefit for deposits provided by this segment improved. This funding benefit more than offset the impact of the immediate upward repricing of money market deposit accounts because of the increases to the Federal Funds Rate during 2018. Retail banking was positively impacted by the lower level of FDIC insurance expense and the Company’s ongoing focus to reduce and control costs, which resulted in lower occupancy & equipment expenses. The Retail banking segment also benefitted from the recognition of a zero loan loss provision in the second quarter of 2019 and a loan loss provision recovery for the full six months of 2019. Slightly offsetting these favorable items was non-interest income decreasing due to the lower deposit service charge income and the decrease to net gains on loan sales into the secondary market due to management’s decision to retain more of the residential mortgage loan production in our loan portfolio earlier in the year when market conditions were more favorable to adjust strategy.

The commercial banking segment reported net income of $1,706,000 in the second quarter of 2019 and $3,473,000 for the first six months of 2019 which was up by $66,000 from the second quarter of last year and by $273,000 from the net income contribution for the first six months of 2018. The higher level of net income was ~~primarily~~ due to ~~revenue increasing~~the zero loan loss provision for the quarter and the loan loss provision recovery for the six-month time period. These favorable comparisons for the loan loss provision resulted from our ~~financial services business unit~~outstanding asset quality, reduced level of criticized assets and the lower level of net charge-offs during both time periods. Also, the lower level of average total commercial & industrial and commercial real estate loans over the six-month timeframe contributed to the provision recovery during the first six months of 2019. The commercial banking segment also benefitted from a higher level of loan fee income in both time periods, due primarily to prepayment fees collected on certain early loan pay-offs in addition to the increased fees from greater new loan origination activity. Loan interest income did not increase by ~~$240,000~~ as much that it otherwise could have for the first half of 2019 because of the lower volume of total average commercial loans between years. However, new loans did originate at higher yields and existing loans tied to

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LIBOR or the prime rate repriced upward as both of these indices moved up with the Federal Reserve’s fed funds interest rate increases during 2018. Also, unfavorably impacting net income was total employee costs increasing due to a higher level of full time equivalent employees in the commercial banking segment and a higher level of funding for the unfunded commitment reserve due to increased loan approvals in 2019.

The wealth management segment reported net income of $444,000 in the second quarter of 2019 and $888,000 for the first six months of 2019 which was $12,000 higher for the second quarter but $52,000 lower for the same time periods of 2018, respectively. The year over year decrease is due to wealth management fees declining during the first quarter of 2019 as this segment was unfavorably impacted by decreased market values for assets under management after the equity markets declined late in the fourth quarter of 2018, as well as a decrease in the volume of life insurance sales. Wealth management fees recovered during the second quarter of 2019 due to market values for assets under management improving after the equity markets rebounded and increased resulting in the favorable quarterly comparison. Finally, and also positively impacting the wealth management segment’s net income was lower professional fees due to lower legal fees and costs for other professional services. Wealth management continues to be an important strategic focus of the Company. Slightly offsetting the higher financial services business unit revenue was reduced miscellaneous income after the Company benefitted last year from funds received from our debit card vendor from a branding agreement;

~~an $89,000 increase in bank owned life insurance was due to the second quarter receipt of a death claim;~~

~~an $84,000 decrease in services charges on deposit accounts due to a reduced level of overdraft fee revenue;~~

a $66,000 decrease in mortgage related fees and a corresponding $35,000 decrease in revenue from residential mortgage loan sales into the secondary market as a result of reduced residential mortgage refinance activity;

a $62,000 decrease in gains realized on the sale of investment securities in the first nine months of 2017 as the Company sold certain lower coupon mortgage backed securities to reinvest in the portfolio. In addition to a slightly lower volume of total securities sold in 2017, the increases to national interest rates experienced since last year unfavorably impacted the market value of the existing securities portfolio and resulted in a lower level of gains recognized from security sales; and

~~a $58,000 increase in trust and investment advisory fees was due to a higher level of fee income that resulted from the effective management of client accounts as asset market values improved.~~

~~…NON-INTEREST EXPENSE…~~ Non-interest expense for the first nine months of 2017 totaled $30.5 million and decreased by $590,000, or 1.9%, from the prior year’s first nine months. Factors contributing to the lower non-interest expense in 2017 included:

a $242,000 decrease in other expense and a corresponding $159,000 decrease in professional fees were primarily due to costs associated with the resolution of a trust operations trading error in 2016. Also favorably impacting other expense during 2017 were lower costs for check card and ATM processing, software related expense, and a credit recognized to the Company’s unfunded commitment reserve and reduced costs for fraud loss. Slightly offsetting these favorable items within other expense was an increase in Pennsylvania shares tax expense;

a $136,000 decrease in occupancy expenses and a $68,000 decrease in equipment costs are reflective of the Company’s ongoing efforts to become more efficient by reducing and controlling non-interest expenses. Specifically, a branch consolidation and the closure on an unprofitable loan production office were the primary reasons for these decreases;

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~~an $88,000 decrease in FDIC insurance expense was due to a change in the calculation formula that benefitted smaller community banks; and~~

a $59,000 increase in salaries and employee benefits was due to higher health care costs and incentive compensation which more than offset a lower level of total salaries expense and reduced pension costs. There were six fewer full time equivalent employees on average during the first nine months of 2017 due to the previously disclosed branch consolidation in the State College Market and closure of an unprofitable loan production office in Harrisonburg, Virginia.

~~…INCOME TAX EXPENSE…~~ The Company recorded an income tax expense of $1.9 million, or an effective tax rate of 31.2%, in the first nine months of 2017. This compares to the income tax expense of $474,000, or an effective tax rate of 29.0% for the first nine months of 2016. The higher income tax expense and effective tax rate was due to the Company’s increased earnings.

~~…SEGMENT RESULTS…~~ Retail banking’s net income contribution was $794,000 in the third quarter of 2017 and $2.2 million for the first nine months of 2017 which was down by $63,000 and $176,000 from the net income contribution for the same 2016 periods. These decreases to both time periods reflects a higher volume of fixed rate residential mortgage loans being sold in the secondary market resulting in a lower volume held on our balance sheet. Interest expense is also higher between years due to higher deposit totals as certain indexed money market accounts repricing upward with the increases to the fed funds rate. Favorably impacting the retail segments income in both time periods was a lower level of non-interest expense due to the Company’s focus on reducing and controlling costs which resulted in lower employee and occupancy expenses due to the State College branch consolidation. Finally, FDIC insurance expense and miscellaneous expenses are also lower in 2017.

The commercial banking segment reported net income of $1.4 million in the third quarter of 2017 and $4.3 million for the first nine months of 2017 which was $60,000 and $2.4 million higher when compared to the same of 2016 results. The higher level of income for the first nine months of 2017 was due to the lower provision for loan losses. The higher loan loss provision in 2016 was necessary to resolve the troubled energy sector loan that had a significant negative impact to reported net income in 2016. Growth in commercial real estate loans over the past year also contributed to the higher level of net income for both the nine month and quarterly time periods. In addition to the growth experienced in the CRE portfolio, which contributed to the higher level of income quarter versus quarter, the commercial banking segments also benefitted from a lower level of non-interest expense due to the closure of the Harrisonburg, Virginia loan production office and additional operation efficiencies. Also, a decrease in classified assets and the level of delinquency since the second quarter of this year contributed to the lower provision expense.

The trust segment reported net income of $335,000 in the third quarter of 2017 and $991,000 for the first nine months of 2017 which was $140,000 higher than the 2016 quarter and $251,000 higher than the first nine months of 2016. The increases to total income occurred as expenses returned to a more normal level after additional costs were necessary in 2016 to address a trust operations trading error. Also, the higher level of net income results from continued effective management of existing customer accounts as asset market values have improved. Finally, income from the Financial Services business unit increased as wealth management continues to be an important strategic focus of the Company. Additionally, and slightly offsetting the favorable items mentioned above was additional investment in talent, which contributed to higher salaries and benefits expense.

The investment/parent segment reported a net loss of ~~$1.0 million~~$1,534,000 in the ~~third~~second quarter of ~~2017~~2019 and a net loss of ~~$3.2 million~~$3,048,000 for the first ~~nine~~six months of ~~2017,~~2019 which ~~resulted in~~is a ~~lower~~greater loss by ~~$349,000 and $642,000 from the 2016 results~~$452,000 for the ~~same periods.~~quarter and $959,000 for the first six months of 2018. The ~~decreased~~increased loss ~~between years is reflective~~was the result of overnight borrowed funds having a higher cost due to the ~~higher level of investment securities on~~increase to national interest rates during 2018 and the ~~Company’s balance sheet resulting from~~immediate impact that the Company’s strategic decision to purchase more high quality corporate and taxable municipal securities in 2017. Even with this improvement, this segment continues to feel the most earnings pressure from the continued lowrising interest rate ~~environment.~~

environment has on overnight borrowed funds. Additionally, maturing FHLB term advances repriced upward through 2018 and during the first half of 2019.

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~~…BALANCE SHEET…~~.....BALANCE SHEET.....The Company’s total consolidated assets were ~~$1.171~~$1.19 billion at ~~September~~June 30, ~~2017,~~2019, which increased by ~~$17.1~~$29.9 million, or ~~1.5%~~2.6%, from the December 31, ~~2016~~2018 asset level. ~~The increase~~This change was driven primarily by ~~the growth in~~an increased level of investment securities, loans, and ~~investment securities.~~fixed assets. Specifically, total ~~loans~~investment securities grew by ~~$12.4~~$3.3 million, or ~~1.4%~~1.8%, ~~during the period~~loans and ~~was complemented~~loans held for sale increased by ~~an additional $10.7~~$27.0 million, or ~~6.8%~~3.1%, ~~growth in investment securities.~~

and as a result of the adoption of ASU 2016-02, Leases (Topic 842), the Company reported $4.1 million of right of use assets within the fixed assets line of the Consolidated Balance Sheet at June 30, 2019. These increases were partially offset by a reduction of total cash and cash equilvalents of $6.8 million, or 19.4%.

Total deposits ~~decreased~~increased by ~~$865,000,~~$19.3 million, or ~~0.1%~~2.0% in the first ~~nine~~six months of ~~2017.~~2019. As of June 30, 2019, the 25 largest depositors represented 22.3% of total deposits, which is a slight decrease from December 31, 2018 when it was 22.7%. Total ~~FHLB~~ borrowings have increased by ~~$19.3~~$4.7 million, or 4.4%, since year-end ~~2016. The~~2018. Specifically, total FHLB term advances ~~declined~~increased by ~~$1.5~~$6.4 million, or 13.7%, and ~~now total $44 million as the~~totaled $53 million. The Company has utilized these term advances to help manage interest rate ~~risk and favorably position our balance sheet for~~risk. In addition, the Company reported $4.2 million of lease liabilities as a ~~rising rate environment.~~result of the adoption of ASU 2016-02, Leases (Topic 842). These increases were partially offset by a decrease in short term borrowings of $5.8 million, or 14.2%. The decrease in short term borrowings is attributable to the increase in total deposits. The Company’s total shareholders’ equity increased by ~~$1.7~~$3.5 million over the first ~~nine~~six months of ~~2017~~2019 due to the retention of earnings more than offsetting our common stock dividend payment to shareholders and the impact of our common stock buyback program.

Additionally, the improved value of the investment securities portfolio had a positive impact on accumulated other comprehensive loss.

The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of ~~13.08%~~13.14%, and a common equity tier 1 capital ratio of ~~9.92%~~10.28% at ~~September~~June 30, ~~2017.~~2019. (See the discussion of the Basel III capital requirements under the “Capital Resources” section.) ~~The~~As of June 30, 2019, the Company’s book value per common share was ~~$5.31,~~$5.84 and its tangible book value per common share was ~~$4.66,~~$5.15 (non-gaap). When compared to December 31, 2018, book value per common share and ~~its~~tangible book value per common share improved by $0.28 and $0.27, respectively, per common share. The tangible common equity to tangible assets ratio was ~~7.35%~~7.60% (non-gaap) at ~~September~~June 30, ~~2017.~~

~~…LOAN QUALITY…~~2019 and improved by 11 basis points when compared to December 31, 2018.

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The tangible common equity ratio and tangible book value per share are considered to be non-gaap measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The following table sets forth the calculation of the Company’s tangible common equity ratio and tangible book value per share at June 30, 2019 and December 31, 2018 (in thousands, except share and ratio data):

	June 30, 2019			December 31, 2018
Total shareholders’ equity		$	101,476		$	97,977
Less: Goodwill			11,944			11,944
Tangible equity			89,532			86,033
Total assets			1,190,583			1,160,680
Less: Goodwill			11,944			11,944
Tangible assets			1,178,639			1,148,736
Tangible common equity ratio			7.60%			7.49%
Total shares outstanding			17,384,355			17,619,303
Tangible book value per share		$	5.15		$	4.88

.....LOAN QUALITY.....The following table sets forth information concerning the Company’s loan delinquency, non-performing assets, and classified assets (in thousands, except percentages):

	June 30, 2019			December 31, 2018			June 30, 2018
Total accruing loan delinquency (past due 30 to 89 days)		$	3,253		$	4,752		$	3,137
Total non-accrual loans			874			1,221			1,000
Total non-performing assets including TDR*			1,681			1,378			1,160
Accruing loan delinquency, as a percentage of total loans, net of unearned income			0.37%			0.55%			0.35%
Non-accrual loans, as a percentage of total loans, net of unearned income			0.10			0.14			0.11
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned			0.19			0.16			0.13
Non-performing assets as a percentage of total assets			0.14			0.12			0.10
As a percent of average loans, net of unearned income:
Annualized net charge-offs			0.04			0.11			0.18
Annualized provision (credit) for loan losses			(0.09)			(0.07)			0.02
Total classified loans (loans rated substandard or doubtful)**		$	3,908		$	4,302		$	4,715

September 30, 2017 December 31, 2016 September 30, 2016
Total accruing loan delinquency (past due 30 to 89 days) $ 9,052 $ 3,278 $ 3,194
Total non-accrual loans 4,654 1,603 1,753
Total non-performing assets including TDR* 5,372 1,624 1,907
Accruing loan delinquency, as a percentage of total loans, net of unearned income 1.01 % 0.37 % 0.36 %
Non-accrual loans, as a percentage of total loans, net of unearned income 0.52 0.18 0.20
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned 0.60 0.18 0.21
Non-performing assets as a percentage of total assets 0.46 0.14 0.17
As a percent of average loans, net of unearned income:

Annualized net charge-offs 0.05 0.44 0.58
Annualized provision for loan losses 0.11 0.44 0.55
Total classified loans (loans rated substandard or doubtful) $ 8,140 $ 6,038 $ 5,203

Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as to interest and principal payments, (iii) performing loans classified as a troubled debt restructuring and (iv) other real estate owned.

Total classified loans include non-performing residential mortgage and consumer loans.

Overall, the Company continued to maintain strong asset quality in the first ~~nine~~six months of ~~2017~~2019 as evidenced by low levels of non-accrual loans, ~~and non-performing assets. However, total~~ non-performing assets, ~~did increase since the end of the second quarter of 2017 due to the transfer of one CRE loan association into non-accrual status which had previously been~~ classified ~~as delinquent. It is believed that the Company’s loss exposure on this credit is limited because it is well secured~~loans, and ~~has a low loan to value ratio. Overall, total~~ loan delinquency levels ~~and classified assets decreased during the third quarter of 2017 but remain higher than the December 31, 2016 level. The credits~~ that ~~caused delinquency to increase since year end 2016 do not relate to cash flow underperformance but rather appears~~continue to be related to cash flow difficulties that certain borrowers are experiencing on a broader basis. We continue to actively work with the borrowers and take the necessary steps to ensure that the cash flow generated from these properties is being appropriately applied to

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~~the debt service on these~~below 1% of total loans. ~~It is believed that the Company’s loss exposure to these delinquent credits is limited since the loans are secured and have low loan to value ratios.~~

We also continue to closely monitor the loan portfolio given ~~the continued slow recovery in the regional economy and~~ the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As of ~~September~~June 30, ~~2017,~~2019, the 25 largest credits represented ~~27.2%~~25.6% of total loans outstanding, which represents a slight ~~increase~~decrease from the ~~third~~second quarter ~~2016~~of 2018 when it was ~~27.1%~~26.4%.

~~…ALLOWANCE~~

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.....ALLOWANCE FOR LOAN ~~LOSSES…~~LOSSES.....The following table sets forth the allowance for loan losses and certain ratios for the periods ended (in thousands, except percentages):

	June 30, 2019			December 31, 2018			June 30, 2018
Allowance for loan losses		$	8,102		$	8,671		$	9,521
Allowance for loan losses as a percentage of each of the following:
total loans, net of unearned income			0.91%			1.00%			1.07%
total accruing delinquent loans (past due 30 to 89 days)			249.06			182.47			303.51
total non-accrual loans			927.00			710.16			951.15
total non-performing assets			481.98			629.25			820.78

September 30, 2017 December 31, 2016 September 30, 2016
Allowance for loan losses $ 10,346 $ 9,932 $ 9,726
Allowance for loan losses as a percentage of each of the following total loans, net of unearned income 1.15 % 1.12 % 1.10 %
total accruing delinquent loans (past due 30 to 89 days) 114.30 302.99 304.51
total non-accrual loans 222.30 619.59 554.82
total non-performing assets 192.59 611.58 510.02

The Company recorded a ~~$750,000~~$400,000 loan loss provision recovery in the first six months of 2019 compared to a $100,000 provision expense for loan losses in the first ~~nine~~six months of ~~2017 compared to~~2018 that resulted in a ~~$3.7 million provision for loan losses in the first nine months~~positive change of ~~2016 or a decrease of $2.9 million~~$500,000 between periods. The loan loss provision ~~was at a more typical level~~recovery in ~~2017 and supports the continuing loan growth and the previously discussed higher~~2019 reflects our overall strong asset quality, reduced level of criticized loans ~~when compared to 2016. The provision more than covered the low level of~~and net loan charge-offs, ~~incurred during~~and the ~~nine months.~~

~~…LIQUIDITY…~~lower six-month average loan portfolio balances.

.....LIQUIDITY..... The Company’s liquidity position has been strong during the last several ~~years. Our~~years, primarily due to our core retail deposit base, ~~has grown over the past five years and has been more than adequate to fund~~which provides a reliable source of funds for the Company’s operations. Payments and prepayments from the loan ~~portfolios,~~portfolio, as well as, cash flow from maturities, prepayments and amortization of securities ~~was~~were also used to help fund new loan ~~growth over the past few years.~~originations. We strive to operate our loan to deposit ratio in a range of 80% to 100%. For the ~~first nine months~~second quarter of ~~2017,~~2019, the Company’s loan to deposit ratio has averaged ~~91.5%~~90.10%. ~~We are optimistic that~~Given the loan growth experienced during the second quarter of 2019 and the strength of our current loan pipeline, we ~~can increase the~~expect our loan to deposit ratio ~~in 2018 given commercial loan pipelines, continued growth from our loan production offices and our focus on small business lending. However, we expect that total loans will remain relatively flat in~~to grow moderately through the ~~fourth quarter~~remainder of ~~2017 due to several large expected loan pay-offs.~~

2019.

Liquidity can be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash and cash equivalents decreased by ~~$5.4~~$6.8 million from December 31, ~~2016~~2018 to ~~September~~June 30, ~~2017,~~2019, due to ~~$25.8~~$28.8 million of net cash used in investing activities, which more than offset ~~by $5.5~~$17.9 million of net cash provided by financing activities and $4.1 million of net cash provided by operating ~~activities and $14.9 million provided by financing~~ activities. Within investing activities, cash ~~utilized for new investment security purchases totaled $37.0 which more than exceeded cash provided from investment security maturities and sales by $10.5 million. Cash~~ advanced for new loan fundings and loan participation purchases ~~(excluding residential mortgages sold in the secondary market) totaled $128.2~~was $126.6 million, ~~and~~which was ~~$12.7~~$26.7 million higher than the ~~$115.4~~$95.4 million of cash received from loan principal payments and $4.6 million from loan participations sold. Cash utilized for new investment security purchases totaled $10.7 million and was slightly less than cash provided from investment security maturities and sales of $10.8 million. Within financing activities, ~~deposits~~deposit balances increased by $19.3 million. Short term borrowed funds decreased by ~~$865,000. As a result~~$5.8 million, but were more than offset by an increase to advances from the Federal Home Loan Bank by $6.4 million. Within operating activities, originations of ~~this deposit decline, total borrowings increased as advances~~residential mortgage loans of ~~short-term borrowings and purchases~~$11.4 million offset sales of ~~FHLB term advances increased by $30.3~~residential mortgage loans of $11.1 million. At ~~September~~June 30, ~~2017,~~2019, the Company had immediately available ~~$389~~$352 million of overnight borrowing capacity at the FHLB and $35 million of unsecured federal funds lines with correspondent banks.

The holding company had ~~$10.7~~$7.1 million of cash, short-term investments, and investment securities at ~~September~~June 30, ~~2017.~~2019. Additionally, dividend payments from our subsidiaries also provide ongoing cash to the holding company. At ~~September~~June 30, ~~2017,~~2019, our subsidiary Bank had ~~$3.4~~$9.7 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that limits dividend payments from the Trust Company to 75% of annual net income. Overall, we

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believe that the holding company has strong liquidity to meet its trust preferred debt service requirements, its subordinated debt interest payments, its increased common stock ~~dividends,~~dividend, and support ~~its~~the common stock repurchase program.

~~…CAPITAL~~

.....CAPITAL RESOURCES…..The Bank meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The Company’s common equity tier 1 capital ratio was ~~9.92%~~10.28%, the tier 1 capital ratio was ~~11.15%~~11.47%, and the total capital ratio was ~~13.08%~~13.14% at ~~September~~June 30, ~~2017.~~2019. The Company’s tier 1 leverage ratio was ~~9.32%~~9.73% at ~~September~~June 30, ~~2017.~~2019. We anticipate that we will maintain our strong capital ratios throughout the remainder of ~~2017.~~2019. Capital generated from earnings will be utilized to pay the

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common stock cash dividend, ~~buyback shares under our~~fund the stock repurchase program, and will also support controlled balance sheet growth. There is a particular emphasis on ensuring that the subsidiary bank has appropriate levels of capital to support its non-owner occupied commercial real estate loan concentration, which stood at ~~354%~~344% of regulatory capital at ~~September~~June 30, ~~2017.~~

On January 24, 2017, the Company’s Board of Directors approved a new common stock repurchase program which calls for AmeriServ Financial, Inc. to buy back up to 5% or approximately 945,000 shares of its outstanding common stock during the next 18 months. 2019.

The shares may be purchased from time to time in open market, privately negotiated, or block transactions. This common stock repurchase program does not obligate the Company to acquire any specific number of shares and may be modified, suspended or discontinued at any time. During the first nine months of 2017, the Company was able to repurchase 686,360 shares of its common stock and return $2.8 million of capital to its shareholders through this program. As of September 30, 2017, the Company had approximately 18.3 million shares of its common stock outstanding. Overall, the Company was able to return 83.9% of its earnings through the first nine months of 2017 to its shareholders through accretive stock buybacks and cash dividends.

~~On January 1, 2015, U.S. federal banking agencies implemented the new~~ Basel III capital standards ~~which~~ establish the minimum capital levels in addition to ~~be considered well-capitalized and revise~~ the well capitalized requirements under the federal banking regulations prompt corrective ~~action requirements under banking regulations.~~ action. Under the Basel III capital standards, the minimum capital ratios are:

	Minimum capital ratio
Common equity tier 1 capital to risk-weighted assets		4.5%
Tier 1 capital to risk-weighted assets		6.0
Total capital to risk-weighted assets		8.0
Tier 1 capital to total average consolidated assets		4.0

The ~~revisions from the previous standards include~~capital rules also impose a ~~revised definition of~~ capital ~~the introduction of a minimum Common Equity Tier 1 capital ratio and changed risk weightings for certain assets. The implementation~~conservation buffer (“CCB”) on top of the ~~new rules will be phased in over a four year period ending~~three minimum risk-weighted asset ratios listed above. As of January 1, 2019, ~~with~~the CCB has been fully phased-in and is 2.5%. Banking institutions that fail to meet the effective minimum ~~capital requirements becoming increasingly more strict each year of~~ratios once the ~~transition. The new minimum capital requirements~~CCB is taken into account (that is, 7.0% for ~~each ratio, both, initially on January 1, 2015 and at the end of the transition on January 1, 2019, are as follows: A~~ common equity tier 1 capital ~~ratio of 4.50% initially and 7.00% at January 1, 2019; a~~to risk-weighted assets, 8.5% for tier 1 capital ~~ratio of 6.00%~~to risk-weighted assets and ~~8.50%; a~~10.5% for total capital ~~ratio of 8.00% and 10.50%; and a tier 1 leverage ratio of 5.00% and 5.00%. Under the new rules, in order~~ to ~~avoid limitations~~risk-weighted assets) will be subject to constraints on capital distributions, ~~(including dividend payments~~including dividends and share repurchases, and certain discretionary ~~bonus payments to~~ executive ~~officers), a banking organization must hold a capital conservation buffer above its minimum risk-based~~compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (four quarter trailing net income, net of distributions and tax effects not reflected in net income). The Company and the Bank meet all capital requirements, ~~which increases over~~including the ~~transition period, from 0.625% of total risk weighted assets in 2016 to 2.50% in 2019. The Company continues~~fully phased-in buffer, and continue to be committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a return to our shareholders.

~~…INTEREST~~

In the first quarter of 2019, the Company completed the previous common stock repurchase program where it bought back 540,000 shares, or 3% of its common stock, over a 9-month period at a total cost of $2.38 million. Specifically, during the first three months of 2019, the Company was able to repurchase 112,311 shares of its common stock and return $476,000 of capital to its shareholders through this program.

On April 16, 2019, the Company announced that its Board of Directors approved a new common stock repurchase program which calls for AmeriServ Financial, Inc. to buy back up to 3%, or approximately 526,000 shares, of its outstanding common stock during the next 12 months. The authorized repurchases will be made from time to time in either the open market or through privately negotiated transactions. The timing, volume and nature of share repurchases will be at the sole discretion of management, dependent on market conditions, applicable securities laws, and other factors, and may be suspended or discontinued at any time. No assurance can be given that any particular amount of common stock will be repurchased. This buyback program may be modified, extended or terminated by the Board of Directors at any time. During the second quarter of 2019, the Company was able to repurchase 161,554 shares of its common stock and return $686,000 of capital to its shareholders through this program. At June 30, 2019, the Company had approximately 17.4 million common shares outstanding.

.....INTEREST RATE ~~SENSITIVITY…~~SENSITIVITY.....The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points. Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low level of interest rates. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.

Interest Rate Scenario	Variability of Net Interest Income		Change in Market Value of Portfolio Equity
200bp increase		4.5%		24.1%
100bp increase		2.8		14.9
100bp decrease		(4.2)		(23.6)

Interest Rate Scenario Variability of Net Interest Income Change in Market Value of Portfolio Equity
200bp increase 2.3 % 21.7 %
100bp increase 1.6 12.9
100bp decrease (2.0 ) (18.0 )

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The Company believes that its overall interest rate risk position is well controlled. The variability of net interest income is positive in the upward rate shocks due to the Company’s short duration investment securities portfolio, the scheduled repricing of loans tied to ~~LIBOR~~Libor or prime, and the ~~extension of a portion of~~reduction to overnight borrowed funds. Also, the Company ~~expects that it~~ will ~~not have~~continue its disciplined approach to ~~reprice~~price its core deposit ~~accounts up as quickly as~~in a controlled but competitive manner when interest rates rise. The variability of net interest income is negative in the 100 basis point downward rate scenario as the Company has more exposure to assets repricing downward to a greater extent than liabilities due to the absolute low level of interest rates with the fed funds rate currently at ~~approximately 1.25%~~a targeted range of 2.25% to 2.50%. The market value of portfolio equity increases in the upward rate shocks due to the improved value of the Company’s core deposit base. Negative variability of market value of portfolio equity occurs in the downward rate shock due to a reduced value for core deposits.

~~…OFF~~

.....OFF BALANCE SHEET ARRANGEMENTS…..The Company incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company had various outstanding commitments to extend credit approximating ~~$169.6~~$227.6 million and standby letters of credit of ~~$10.3~~$16.3 million as of ~~September~~June 30, ~~2017.~~2019. 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 Company uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

…~~CRITICAL~~..REGULATORY UPDATE…..The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was enacted into law on May 24, 2018. Most of the changes made by the Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified as systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation. Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets not less than 8% or more than 10% and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings. In November 2018, as directed pursuant to the Act, the federal bank regulatory agencies issued proposed rules for a community bank leverage ratio (“CBLR”) for certain community banking organizations. Under the proposed rules, a bank or holding company would be eligible to elect the CBLR framework if the institution had less than $10.0 billion in total consolidated assets, met certain risk-based qualifying criteria and had a CBLR greater than 9%. A qualifying community banking organization that elected to opt in to the CBLR framework would not be subject to risk-based and leverage capital requirements under the Basel III rules. Additionally, the Act requires the enactment of a number of other implementing regulations, the details of which may have a material effect on the ultimate impact of the law. The Company continues to analyze the changes implemented by the Act and further rulemaking from federal banking regulators, but, at this time, does not believe that such changes will materially impact the Company’s business, operations, or financial results.

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.....CRITICAL ACCOUNTING POLICIES AND ~~ESTIMATES…~~ESTIMATES.....The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses, goodwill, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company’s financial position or results of operation.

ACCOUNT — Allowance for Loan Losses
BALANCE SHEET REFERENCE — Allowance for loan losses
INCOME STATEMENT REFERENCE — Provision (credit) for loan losses
DESCRIPTION

The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this quarterly evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management’s judgment concerning those trends.

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Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan ~~loss.~~losses. Approximately ~~$8.0~~$6.0 million, or ~~77%~~74%, of the total allowance for loan losses at ~~September~~June 30, ~~2017~~2019 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, levels of non-performing and ~~TDR~~troubled debt restructured (TDR) loans, 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. To the extent actual outcomes differ from management estimates, additional provision for loan losses may be required that would adversely impact earnings in future periods.

ACCOUNT — Goodwill
BALANCE SHEET REFERENCE — Goodwill
INCOME STATEMENT REFERENCE — Goodwill impairment
DESCRIPTION

The Company considers our accounting policies related to goodwill to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third party sources, when available. When third party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes. The Company routinely utilizes the services of an independent third party that is regarded within the banking industry as an expert in valuing core deposits to monitor the ongoing value and changes in the Company’s core deposit base. These core deposit valuation updates are based upon specific data provided from statistical analysis of the Company’s own deposit behavior to estimate the duration of these non-maturity deposits combined with market interest rates and other economic factors.

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. The Company’s goodwill relates to value inherent in the

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banking and wealth management businesses, and the value is dependent upon the Company’s ability to provide quality, cost-effective services in the face of free competition from other market participants on a regional basis. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of the Company’s services. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted and the loyalty of the Company’s deposit and customer base over a longer time frame. The quality and value of a Company’s assets is also an important factor to consider when performing goodwill impairment testing. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective value added services over sustained periods can lead to the impairment of goodwill.

Goodwill, which has an indefinite useful life, is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value.

ACCOUNT — Income Taxes
BALANCE SHEET REFERENCE — Net deferred tax asset
INCOME STATEMENT REFERENCE — Provision for income tax expense
DESCRIPTION

The provision for income taxes is the sum of income taxes both currently payable and deferred. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities as measured by the enacted tax rates that management estimates will be in effect when the differences reverse. This income tax review is completed on a quarterly basis.

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In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of ~~September~~June 30, ~~2017,~~2019, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

ACCOUNT — Investment Securities
BALANCE SHEET REFERENCE — Investment securities
INCOME STATEMENT REFERENCE — Net realized gains (losses) on investment securities
DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At ~~September~~June 30, ~~2017,~~2019, the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies or government sponsored agencies and certain high quality corporate and taxable municipal securities. The Company believes 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

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decrease; as market yields fall, the fair value of securities will increase. 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.

…FORWARD

.....FORWARD LOOKING ~~STATEMENT…~~

STATEMENT.....

THE STRATEGIC FOCUS:

~~The challenge~~

AmeriServ Financial is committed to increasing shareholder value by striving for consistently improving financial performance; providing our customers with products and exceptional service for every step in their lifetime financial journey; cultivating an employee atmosphere rooted in trust, empowerment and growth; and serving our communities through employee involvement and a philanthropic spirit. We will strive to provide our shareholders with consistently improved financial performance; the products, services and know-how needed to forge lasting banking for life customer relationships; a work environment that challenges and rewards staff; and the manpower and financial resources needed to make a difference in the communities we serve. Our strategic initiatives will focus on these four key constituencies:

•

Shareholders — We strive to increase earnings per share; identifying and managing revenue growth and expense reduction; and managing risk. Our goal is to increase value for AmeriServ shareholders by growing earnings per share by 10 percent year-over-year and narrowing the financial performance gap between AmeriServ and its peer banks. We try to return up to 75 percent of earnings to shareholders through a combination of dividends and share repurchases subject to maintaining sufficient capital to support balance sheet growth. We strive to educate our employee base as to the meaning/importance of earnings per share as a performance measure. We will develop a value added combination for increasing revenue and reducing expenses that is rooted in developing and offering high-quality financial products and services; an existing branch network; electronic banking capabilities with 24/7 convenience; and providing truly exceptional customer service. We will explore branch consolidation opportunities and further leverage union affiliated revenue streams, prudently manage the Company’s risk profile to improve asset yields and increase profitability and continue to identify and implement technological opportunities and advancements to drive efficiency for the ~~future is~~holding company and its affiliates.

•

Customers — The Company expects to provide exceptional customer service, identifying opportunities to enhance the Banking for Life philosophy by providing products and services to meet the financial needs in every step through a customer’s life cycle, and further defining the role technology plays in anticipating and satisfying customer needs. We anticipate providing leading banking systems and solutions to improve ~~earnings performance toward peer levels through~~and enhance customers’ Banking for Life experience. We will provide customers with a ~~disciplined focus on community~~comprehensive offering of financial solutions including retail and business banking, home mortgages and ~~improving~~wealth management at one location. We have upgraded and modernized select branches to be more inviting and technologically savvy to meet the ~~profitability~~needs of the next generation of AmeriServ customers without abandoning the needs of our ~~Trust Company. In accordance~~existing demographic.

•

Staff — We are committed to developing high-performing employees, establishing and maintaining a culture of trust and effectively and efficiently managing staff attrition. We will employ a work force succession plan to manage anticipated staff attrition while identifying and grooming high performing staff members to assume positions with greater responsibility within the organization. We will employ technological systems and solutions to provide staff with the tools they need to perform more efficiently and effectively.

•

Communities — We will continue to promote and encourage employee community involvement and leadership while fostering a positive corporate image. This will be accomplished by demonstrating our ~~strategic plan, the Company will maintain its focus as a community bank delivering banking and trust services~~commitment to the ~~best of our ability~~communities we serve through assistance in providing affordable housing programs for low-to-moderate-income families; donations to qualified charities; and ~~focus on further growing revenues by leveraging our strong capital base and infrastructure. It is our plan to continue to build~~ the ~~Company into a potent banking force in this region and in this industry. Our focus encompasses the following:~~

~~Customer Service — It is the existing and prospective customer that the Company must satisfy. This means good products and fair prices. But it also means quick response~~ time and ~~professional competence. It means speedy problem resolution and a minimizing~~talent contributions of ~~bureaucratic frustrations. The Company is training and motivating its~~AmeriServ staff to ~~meet these standards while providing customers with more banking options that involve leading technologies such as computers, smartphones,~~a wide-range of charitable and ~~tablets to conduct business.~~civic organizations.

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Revenue Growth — It is necessary for the Company to focus on growing revenues. This means loan growth, deposit growth and fee growth. It also means close coordination between all customer service areas so that revenue producing products can be presented to existing and prospective customers to meet their banking needs. The Company’s Strategic Plan contains action plans in each of these areas particularly on increasing loans through our loan production offices. There will be a particular focus on small business commercial lending. An examination of the peer bank database provides ample proof that a well-executed community banking business model can generate a reliable and rewarding revenue stream.

Expense Rationalization — The Company remains focused on trying to reduce and rationalize expenses. This has not been a program of broad based cuts, but has been targeted so the Company stays strong but spends less. It is critical to be certain that future expenditures are directed to areas that are playing a positive role in the drive to improve revenues. The Company’s also recently completed three additional initiatives that will further reduce non-interest expenses and improve the Company’s future profitability. Specifically, at the end of the first quarter of 2016, the Company closed its Southern Atherton branch office in the State College market and consolidated the retail customer accounts from this branch into its nearby and newer branch office located on North Atherton Street. The Company remains committed to the State College market and this change will allow for a more efficient operation that will allow us to better compete in this demographically attractive but highly competitive banking market. The Company also realigned its executive leadership team by eliminating one senior position in its executive office. Finally, the Company closed its Harrisonburg, Virginia loan production office. The combined annual cost savings from these profitability improvement initiatives approximates $1.2 million, which the Company is fully realizing in the 2017.

This Form 10-Q contains various forward-looking statements and includes assumptions concerning the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results, and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan” or similar expressions. These forward-looking statements are based upon current expectations, are subject to risk and uncertainties and are applicable only as of the dates of such statements. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Form 10-Q. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve; (iii) significant changes in interest rates and prepayment speeds; (iv) inflation, stock and bond market, and monetary fluctuations; (v) credit risks of commercial, real estate, consumer, and other lending activities; (vi) changes in federal and state banking and financial services laws and regulations; (vii) the presence in the Company’s market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors’ products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) unanticipated regulatory or judicial proceedings; and (xii) other external developments which could materially impact the Company’s operational and financial performance.

The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement.

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Item ~~3.…QUANTITATIVE~~3.....QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET ~~RISK…~~RISK.....The Company manages market risk, which for the Company is primarily interest rate risk, through its asset liability management process and committee, see further discussion in Interest Rate Sensitivity section of the M.D. & A.

Item ~~4.…CONTROLS~~4.....CONTROLS AND ~~PROCEDURES…~~PROCEDURES.....(a) Evaluation of Disclosure Controls and Procedures. The Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September~~June 30, ~~2017,~~2019, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2017,~~2019, are effective.

(b) Changes in Internal Controls. There have been no changes in AmeriServ Financial Inc.’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II Other Information

Item 1. Legal Proceedings

There are no material proceedings to which the Company or any of our subsidiaries are a party or by which, to the ~~Company’s’~~Company’s knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending or threatened against the Company or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.

Item 1A. Risk Factors

Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Following are the Company’s monthly common stock purchases during the ~~third~~second quarter of ~~2017.~~2019. All shares are repurchased under Board of Directors authorization.

Period	Total number of shares purchased		Average price paid per share			Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
April 1 – 30, 2019		6,000		$	4.18		6,000		520,000
May 1 – 31, 2019		101,008			4.25		101,008		418,992
June 1 – 30, 2019		54,546			4.25		54,546		364,446
Total		161,554					161,554

Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plan Maximum number of shares that may yet be purchased under the plan
July 1 – 31, 2017 33,400 $ 4.02 33,400 445,644
August 1 – 31, 2017 123,631 4.05 123,631 322,013
September 1 – 30, 2017 63,373 3.99 63,373 258,640
Total 220,404 $ 4.03 220,404

In first six months of 2017, the Company was able to repurchase 465,956 shares at an average price of $4.01. On a year to date basis the Board of Director approved repurchase plan had a total of 686,360 shares repurchased at an average price of $4.02. This represents approximately 73% of the authorized repurchase plan.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

~~None~~

Not applicable

Item 5. Other Information

~~None~~

None

	Pennsylvania			25-1424278
~~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)

Title Of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Stock	ASRV	The NASDAQ Stock Market LLC
8.45% Beneficial Unsecured Securities, Series A (AmeriServ Financial Capital Trust I)	ASRVP	The NASDAQ Stock Market LLC


Large accelerated filero ☐			Accelerated filero ☐	Non-accelerated filero ☒
		Smaller reporting companyx ☒
	Emerging growth companyo ☐


Class		Outstanding at ~~November~~August 1, ~~2017~~2019
	Common Stock, par value $0.01	~~18,273,824~~	17,384,355


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


o		~~Transition Report Pursuant to Section 13 or 15(d)~~ of☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


	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


	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


	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


	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


	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


	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


	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


	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

	June 30, 2019
	Performing			Non-Performing
Real estate – residential mortgage		$	239,052		$	864
Consumer			17,737			—
Total		$	256,789		$	864


	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	$	—

	June 30, 2019			December 31, 2018
Non-accrual loans
Commercial loans secured by non-owner occupied real estate		$	10		$	11
Real estate – residential mortgage			864			1,210
Total			874			1,221
Other real estate owned
Commercial loans secured by owner occupied real estate			—			157
Real estate – residential mortgage			57			—
Total			57			157
TDR’s not in non-accrual
Commercial and industrial			750			—
Total			750			—
Total non-performing assets including TDR		$	1,681		$	1,378
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned			0.19%			0.16%

	At June 30, 2019
Type	Maturing	Amount			Weighted Average Rate
Open Repo Plus	Overnight		$	35,190		2.46%
Advances	2019			10,500		1.53
	2020			16,729		1.74
	2021			9,496		2.28
	2022			9,831		2.68
	2023			5,568		2.48
	2024 and over			1,000		2.26
Total advances				53,124		2.06
Total FHLB borrowings			$	88,314		2.22%


	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


	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


	HEDGE TYPE		AGGREGATE NOTIONAL AMOUNT			WEAIGHTED AVERAGE RATE RECEIVED/ (PAID)			REPRICING FREQUENCY		INCREASE (DECREASE) IN INTEREST EXPENSE
SWAP ASSETS		FAIR VALUE	$	17,057,388			3.42	%		MONTHLY	$	(72,920	)
SWAP LIABILITIES		FAIR VALUE		(17,057,388	)		(3.42	)		MONTHLY		72,920
NET EXPOSURE				—			—					—

For the quarterly period endedSeptember June 30, 2017

For the transition period from to

2018.

3. Recent Accounting Pronouncements – (continued)

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Recent Accounting Pronouncements – (continued)

4. Earnings Per Common Share

5.

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities

Investment securities held to maturity (HTM):

Investment securities available for sale (AFS):

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities – (continued)

Total investment securities:

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investment Securities – (continued)

7. 9.Loans

8.

8. Allowance

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses – (continued)

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses – (continued)

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Allowance for Loan Losses – (continued)

8. Allowance for Loan Losses – (continued)

8. Allowance for Loan Losses – (continued)

8. Allowance for Loan Losses – (continued)

9.

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

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

10.

11. Preferred Stock

12. Consolidated Balance Sheets.

12. Accumulated Other Comprehensive Loss – (continued)

12. Accumulated Other Comprehensive Loss – (continued)

13.

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. Regulatory Capital – (continued)

14. DERIVATIVE HEDGING INSTRUMENTS

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. DERIVATIVE HEDGING INSTRUMENTS – (continued)

15. 2019 and 2018.

15. Segment Results – (continued)

16. Commitments and Contingent Liabilities

17.

18.

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

AmeriServ Financial, Inc.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18. Disclosures about Fair Value Measurements – (continued)

THREE MONTHS ENDED SEPTEMBERJUNE 30, 20172019 VS. THREE MONTHS ENDED SEPTEMBERJUNE 30, 2016

NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172019 VS. NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 2016

…FORWARD

STATEMENT.....

Item 3. Defaults Upon Senior Securities

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7.
9.
Loans

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AmeriServ Financial, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Three months ended June 30, 2019						Six months ended June 30, 2019
	Total revenue			Net income (loss)			Total revenue			Net income (loss)
Retail banking		$	6,859		$	1,176		$	13,533		$	2,357
Commercial banking			4,676			1,706			9,095			3,473
Wealth management			2,440			444			4,857			888
Investment/Parent			(1,257)			(1,534)			(2,505)			(3,048)
Total		$	12,718		$	1,792		$	24,980		$	3,670


	Three months ended September 30, 2017						Nine months ended September 30, 2017
	Total revenue			Net income (loss)			Total revenue			Net income (loss)
Retail banking	$	6,443		$	794		$	19,138		$	2,159
Commercial banking		4,722			1,412			14,269			4,295
Trust		2,223			335			6,804			991
Investment/Parent		(822	)		(990	)		(2,708	)		(3,157	)
Total	$	12,556		$	1,551		$	37,503		$	4,288


	Three months ended September 30, 2016						Nine months ended September 30, 2016
	Total revenue			Net income (loss)			Total revenue			Net income (loss)
Retail banking	$	6,653		$	857		$	19,543		$	2,335
Commercial banking		4,757			1,352			14,123			1,884
Trust		2,125			195			6,504			740
Investment/Parent		(1,368	)		(1,339	)		(3,780	)		(3,799	)
Total	$	12,167		$	1,065		$	36,390		$	1,160


	2017									2016
	Average Balance			Interest Income/ Expense			Yield/ Rate			Average Balance			Interest Income/ Expense			Yield/ Rate
Interest earning assets:
Loans and loans held for sale, net of unearned income	$	894,088		$	29,219			4.33	%	$	887,681		$	28,358			4.22	%
Interest bearing deposits		1,029			8			1.03			1,871			11			0.71
Short-term investment in money market funds		8,049			93			1.52			12,987			54			0.55
Investment securities – AFS		135,131			2,819			2.78			120,710			2,324			2.57
Investment securities – HTM		36,854			877			3.17			24,482			562			3.06
Total investment securities		171,985			3,696			2.87			145,192			2,886			2.65
Total interest earning assets/interest income		1,075,151			33,016			4.08			1,047,731			31,309			3.96
Non-interest earning assets:
Cash and due from banks		22,214									19,883
Premises and equipment		12,095									11,982
Other assets		67,552									68,351
Allowance for loan losses		(10,290	)								(9,777	)
TOTAL ASSETS	$	1,166,722								$	1,138,170
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand	$	129,923		$	450			0.46	%	$	106,983		$	231			0.29	%
Savings		97,852			122			0.17			96,149			119			0.16
Money markets		276,958			1,047			0.51			275,226			876			0.42
Time deposits		290,598			2,939			1.35			286,966			2,749			1.28
Total interest bearing deposits		795,331			4,558			0.77			765,324			3,975			0.69
Short-term borrowings		15,390			130			1.13			11,480			49			0.56
Advances from Federal Home Loan Bank		45,785			511			1.49			49,356			484			1.31
Guaranteed junior subordinated deferrable interest debentures		13,085			840			8.57			13,085			840			8.57
Subordinated debt		7,650			390			6.80			7,650			389			6.78
Total interest bearing liabilities/interest expense		877,241			6,429			0.98			846,895			5,737			0.90
Non-interest bearing liabilities:
Demand deposits		181,924									182,003
Other liabilities		11,630									8,683
Shareholders’ equity		95,927									100,589
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,166,722								$	1,138,170
Interest rate spread								3.10									3.06
Net interest income/Net interest margin					26,587			3.27	%					25,572			3.23	%
Tax-equivalent adjustment					(30	)								(22	)
Net Interest Income				$	26,557								$	25,550


	September 30, 2017			December 31, 2016			September 30, 2016
Total accruing loan delinquency (past due 30 to 89 days)	$	9,052		$	3,278		$	3,194
Total non-accrual loans		4,654			1,603			1,753
Total non-performing assets including TDR*		5,372			1,624			1,907
Accruing loan delinquency, as a percentage of total loans, net of unearned income		1.01	%		0.37	%		0.36	%
Non-accrual loans, as a percentage of total loans, net of unearned income		0.52			0.18			0.20
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned		0.60			0.18			0.21
Non-performing assets as a percentage of total assets		0.46			0.14			0.17
As a percent of average loans, net of unearned income:
Annualized net charge-offs		0.05			0.44			0.58
Annualized provision for loan losses		0.11			0.44			0.55
Total classified loans (loans rated substandard or doubtful)	$	8,140		$	6,038		$	5,203


Interest Rate Scenario	Variability of Net Interest Income			Change in Market Value of Portfolio Equity
200bp increase		2.3	%		21.7	%
100bp increase		1.6			12.9
100bp decrease		(2.0	)		(18.0	)


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
July 1 – 31, 2017		33,400	$	4.02		33,400		445,644
August 1 – 31, 2017		123,631		4.05		123,631		322,013
September 1 – 30, 2017		63,373		3.99		63,373		258,640
Total		220,404	$	4.03		220,404


~~3.1~~	3.1	Amended and Restated Articles of Incorporation as amended through August 11, 2011 (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8 (File No. 333-176869) filed on September 16, 2011).
~~3.2~~	3.2	Bylaws, as amended and restated on ~~May 18, 2017~~April 23, 2019 (Incorporated by reference to Exhibit 3.2 to the Current report on Form 8-K filed on ~~May 23, 2017)~~April 24, 2019).
~~15.1~~	15.1	Report of S.R. Snodgrass, P.C. regarding unaudited interim financial statement information.
~~15.2~~	15.2	Awareness Letter of S.R. Snodgrass, P.C.
~~31.1~~	31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
~~31.2~~	31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
~~32.1~~	32.1	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
~~32.2~~	32.2	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
	101	The following information from AMERISERV FINANCIAL, INC.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2019, formatted in XBRL ~~(eTensible~~(eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and ~~(iv)~~(vi) Notes to the Unaudited Consolidated Financial Statements.

				AmeriServ Financial, Inc. Registrant
	Date: ~~November 3, 2017~~ August 12, 2019			/s/ Jeffrey A. Stopko Jeffrey A. Stopko President and Chief Executive Officer
	Date: ~~November 3, 2017~~ August 12, 2019			/s/ Michael D. Lynch Michael D. Lynch Senior Vice President and Chief Financial Officer