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Section 1: 10-Q (FORM 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from           to          
Commission File Number 0-11204
AmeriServ Financial, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania
25-1424278
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA
15907-0430
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒ Yes   ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ☒ Yes   ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of  “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).   ☐ Yes   ☒ No
Securities registered pursuant to Section 12(b) of the Act:
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at May 1, 2019
Common Stock, par value $0.01
17,542,676

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AmeriServ Financial, Inc.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
1
1
2
4
5
6
8
32
44
44
PART II. OTHER INFORMATION
45
45
45
45
45
45
46
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Item 1. Financial Statements
AmeriServ Financial, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
(Unaudited)
March 31,
2019
December 31,
2018
ASSETS
Cash and due from depository institutions
$ 21,675 $ 27,970
Interest bearing deposits
3,940 2,740
Short-term investments in money market funds
4,056 4,184
Total cash and cash equivalents
29,671 34,894
Investment securities:
Available for sale, at fair value
154,025 146,731
Held to maturity (fair value $40,730 on March 31, 2019 and $40,324 on December 31, 2018)
40,528 40,760
Loans held for sale
619 847
Loans
862,882 862,604
Less: Unearned income
367 322
Allowance for loan losses
8,107 8,671
Net loans
854,408 853,611
Premises and equipment:
Operating lease right-of-use asset
911
Financing lease right-of-use asset
3,272
Other premises and equipment, net
14,378 13,348
Accrued interest income receivable
3,932 3,489
Goodwill
11,944 11,944
Bank owned life insurance
38,523 38,395
Net deferred tax asset
4,323 3,637
Federal Home Loan Bank stock
4,035 4,520
Federal Reserve Bank stock
2,125 2,125
Other assets
4,988 6,379
TOTAL ASSETS
$ 1,167,682 $ 1,160,680
LIABILITIES
Non-interest bearing deposits
$ 152,695 $ 150,627
Interest bearing deposits
805,084 798,544
Total deposits
957,779 949,171
Short-term borrowings
30,912 41,029
Advances from Federal Home Loan Bank
48,571 46,721
Operating lease liabilities
928
Financing lease liabilities
3,295
Guaranteed junior subordinated deferrable interest debentures, net
12,943 12,939
Subordinated debt, net
7,493 7,488
Total borrowed funds
104,142 108,177
Other liabilities
6,700 5,355
TOTAL LIABILITIES
1,068,621 1,062,703
SHAREHOLDERS’ EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,643,495 shares
issued and 17,540,676 shares outstanding on March 31, 2019; 26,609,811 shares issued
and 17,619,303 shares outstanding on December 31, 2018
266 266
Treasury stock at cost, 9,102,819 shares on March 31, 2019 and 8,990,508 shares on December 31, 2018
(81,055) (80,579)
Capital surplus
145,870 145,782
Retained earnings
48,262 46,733
Accumulated other comprehensive loss, net
(14,282) (14,225)
TOTAL SHAREHOLDERS’ EQUITY
99,061 97,977
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 1,167,682 $ 1,160,680
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended
March 31,
2019
2018
INTEREST INCOME
Interest and fees on loans
$ 10,418 $ 9,818
Interest bearing deposits
6 4
Short-term investments in money market funds
69 43
Investment securities:
Available for sale
1,319 1,029
Held to maturity
352 323
Total Interest Income
12,164 11,217
INTEREST EXPENSE
Deposits
2,730 1,781
Short-term borrowings
102 92
Advances from Federal Home Loan Bank
235 186
Financing lease liabilities
30
Guaranteed junior subordinated deferrable interest debentures
280 280
Subordinated debt
130 130
Total Interest Expense
3,507 2,469
NET INTEREST INCOME
8,657 8,748
Provision (credit) for loan losses
(400) 50
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES
9,057 8,698
NON-INTEREST INCOME
Wealth management fees
2,396 2,426
Service charges on deposit accounts
310 383
Net gains on sale of loans
62 98
Mortgage related fees
44 39
Net realized losses on investment securities
(148)
Bank owned life insurance
128 132
Other income
665 705
Total Non-Interest Income
3,605 3,635
NON-INTEREST EXPENSE
Salaries and employee benefits
6,301 6,093
Net occupancy expense
658 670
Equipment expense
361 391
Professional fees
1,120 1,184
Supplies, postage and freight
173 168
Miscellaneous taxes and insurance
277 290
Federal deposit insurance expense
80 162
Other expense
1,323 1,162
Total Non-Interest Expense
10,293 10,120
PRETAX INCOME
2,369 2,213
Provision for income tax expense
491 446
NET INCOME
1,878 1,767
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS – (continued)
(In thousands, except per share data)
(Unaudited)
Three months ended
March 31,
2019
2018
PER COMMON SHARE DATA:
Basic:
Net income
$ 0.11 $ 0.10
Average number of shares outstanding
17,578 18,079
Diluted:
Net income
$ 0.11 $ 0.10
Average number of shares outstanding
17,664 18,181
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2019
2018
COMPREHENSIVE INCOME
Net income
$ 1,878 $ 1,767
Other comprehensive income (loss), before tax:
Pension obligation change for defined benefit plan
(1,835) 1,044
Income tax effect
385 (219)
Unrealized holding gains (losses) on available for sale securities arising during
period
1,763 (1,666)
Income tax effect
(370) 350
Reclassification adjustment for (gains) losses on available for sale securities included
in net income
148
Income tax effect
(31)
Other comprehensive loss
(57) (374)
Comprehensive income
$ 1,821 $ 1,393
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Three months ended
March 31,
2019
2018
COMMON STOCK
Balance at beginning of period
266 266
New common shares issued for exercise of stock options
Balance at end of period
266 266
TREASURY STOCK
Balance at beginning of period
(80,579) (78,233)
Treasury stock, purchased at cost (112,311 and 105,663 shares in 2019 and 2018, respectively)
(476) (445)
Balance at end of period
(81,055) (78,678)
CAPITAL SURPLUS
Balance at beginning of period
145,782 145,707
New common shares issued for exercise of stock options (33,684 and 10,817 shares in 2019 and 2018, respectively)
85 28
Stock option expense
3 4
Balance at end of period
145,870 145,739
RETAINED EARNINGS
Balance at beginning of period
46,733 40,312
Net income
1,878 1,767
Cash dividend declared on common stock
(349) (272)
Balance at end of period
48,262 41,807
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
Balance at beginning of period
(14,225) (12,950)
Other comprehensive loss
(57) (374)
Balance at end of period
(14,282) (13,324)
TOTAL STOCKHOLDERS’ EQUITY
$ 99,061 $ 95,810
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
2019
2018
OPERATING ACTIVITIES
Net income
$ 1,878 $ 1,767
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses
(400) 50
Depreciation and amortization expense
450 405
Net amortization of investment securities
66 103
Net realized losses on investment securities – available for sale
148
Net gains on loans held for sale
(62) (98)
Amortization of deferred loan fees
(30) (35)
Origination of mortgage loans held for sale
(3,866) (4,061)
Sales of mortgage loans held for sale
4,156 6,441
(Increase) decrease in accrued interest receivable
(443) 48
Decrease in accrued interest payable
(17) (121)
Earnings on bank owned life insurance
(128) (132)
Deferred income taxes
532 447
Stock compensation expense
3 4
Net change in operating leases
(4)
Other, net
(434) (1,401)
Net cash provided by operating activities
1,701 3,565
INVESTING ACTIVITIES
Purchase of investment securities – available for sale
(9,063) (13,168)
Purchase of investment securities – held to maturity
(855)
Proceeds from sales of investment securities – available for sale
4,479
Proceeds from maturities of investment securities – available for sale
3,484 3,695
Proceeds from maturities of investment securities – held to maturity
214 917
Purchase of regulatory stock
(4,104) (3,924)
Proceeds from redemption of regulatory stock
4,589 4,334
Long-term loans originated
(40,640) (28,694)
Principal collected on long-term loans
48,654 44,999
Loan participations purchased
(8,399) (2,000)
Proceeds from sale of other real estate owned
176 12
Purchase of premises and equipment
(1,395) (77)
Net cash (used in) provided by investing activities
(6,484) 9,718
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)
(In thousands)
(Unaudited)
Three months ended
March 31,
2019
2018
FINANCING ACTIVITIES
Net increase (decrease) in deposit balances
8,608 (3,739)
Net decrease in other short-term borrowings
(10,117) (12,189)
Principal borrowings on advances from Federal Home Loan Bank
2,850 1,740
Principal repayments on advances from Federal Home Loan Bank
(1,000) (2,000)
Principal payments on financing lease liabilities
(41)
Stock options exercised
85 28
Purchase of treasury stock
(476) (445)
Common stock dividends
(349) (272)
Net cash used in financing activities
(440) (16,877)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(5,223) (3,594)
CASH AND CASH EQUIVALENTS AT JANUARY 1
34,894 34,188
CASH AND CASH EQUIVALENTS AT MARCH 31
$ 29,671 $ 30,594
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.   Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 15 locations in Pennsylvania and 1 location in Maryland. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.2 billion that are not reported on the Company’s Consolidated Balance Sheets at March 31, 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.
2.   Basis of Preparation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.
For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
3.   Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact that the Update will have on our consolidated financial statements. We are currently working with an industry leading third-party consultant and software provider to assist us in the 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 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.
4.   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
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. 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 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.
5.   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 the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. Management has determined that the primary sources of revenue associated with financial instruments, including interest income on loans and investments, along with certain noninterest revenue sources including 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 80.2% of the total revenue of the Company.
Noninterest income within the scope of 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 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 recognized on a monthly basis as the Company has an unconditional right to the fee consideration. Fees attributable to specific performance obligations of the Company (i.e. overdraft fees, etc.) are recognized at a defined point in time based on completion of the requested service or transaction.
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other noninterest income — Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, gain (loss) on sale of other real estate owned and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized when billed. However, if the safe deposit box rental fee is prepaid (i.e. paid prior to issuance of annual bill), the revenue is recognized upon receipt of payment. The Company has determined that since rentals and renewals occur consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Gains and losses on the sale of other real estate owned are recognized at the completion of the property sale when the buyer obtains control of the real estate and all the performance obligations of the Company have been satisfied.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three-month period ending March 31, 2019 and 2018 (in thousands).
Three months ended
March 31,
2019
2018
Noninterest income:
In-scope of Topic 606
Wealth management fees
$ 2,396 $ 2,426
Service charges on deposit accounts
310 383
Other
420 417
Noninterest income (in-scope of topic 606)
3,126 3,226
Noninterest income (out-of-scope of topic 606)
479 409
Total noninterest income
$ 3,605 $ 3,635
6.   Earnings Per Common Share
Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are excluded for earnings per share purposes. For the three-month period ending March 31, 2019, options to purchase 12,000 common shares, with an exercise price of  $4.19 to $4.22, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be antidilutive.
Three months ended
March 31,
2019
2018
(In thousands, except per
share data)
Numerator:
Net income
$ 1,878 $ 1,767
Denominator:
Weighted average common shares outstanding (basic)
17,578 18,079
Effect of stock options
86 102
Weighted average common shares outstanding (diluted)
17,664 18,181
Earnings per common share:
Basic
$ 0.11 $ 0.10
Diluted
0.11 0.10
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7.   Consolidated Statement of Cash Flows
On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits and short-term investments in money market funds with original maturities of 90 days or less. The Company made no income tax payments in the first three months of 2019 and 2018. The Company made total interest payments of  $3,524,000 in the first three months of 2019 compared to $2,590,000 in the same 2018 period. The Company had $18,000 non-cash transfers to other real estate owned (OREO) in the first three months of 2019 compared to $158,000 non-cash transfers in the same 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.
8.   Investment Securities
The cost basis and fair values of investment securities are summarized as follows (in thousands):
Investment securities available for sale (AFS):
March 31, 2019
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency
$ 7,606 $ 3 $ (65) $ 7,544
US Agency mortgage-backed securities
94,806 983 (537) 95,252
Municipal
13,298 228 (110) 13,416
Corporate bonds
38,334 127 (648) 37,813
Total
$ 154,044 $ 1,341 $ (1,360) $ 154,025
Investment securities held to maturity (HTM):
March 31, 2019
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency mortgage-backed securities
$ 9,764 $ 137 $ (53) $ 9,848
Municipal
24,729 341 (151) 24,919
Corporate bonds and other securities
6,035 6 (78) 5,963
Total
$ 40,528 $ 484 $ (282) $ 40,730
Investment securities available for sale (AFS):
December 31, 2018
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency
$ 7,685 $ 4 $ (160) $ 7,529
US Agency mortgage-backed securities
90,169 516 (1,158) 89,527
Municipal
13,301 114 (234) 13,181
Corporate bonds
37,359 131 (996) 36,494
Total
$ 148,514 $ 765 $ (2,548) $ 146,731
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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
Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of  “A.” At March 31, 2019, 58.5% of the portfolio was rated “AAA” as compared to 57.5% at December 31, 2018. Approximately 8.4% of the portfolio was either rated below “A” or unrated at March 31, 2019 as compared to 10.0% at December 31, 2018.
The Company sold no AFS securities during the first quarter of 2019. The Company sold $4.5 million AFS securities in the first quarter of 2018 resulting in $148,000 of gross investment security losses.
The book value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $118,370,000 at March 31, 2019 and $115,536,000 at December 31, 2018.
The following tables present information concerning investments with unrealized losses as of March 31, 2019 and December 31, 2018 (in thousands):
Total investment securities:
March 31, 2019
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US Agency
$ $ $ 5,891 $ (65) $ 5,891 $ (65)
US Agency mortgage-backed securities
40,841 (590) 40,841 (590)
Municipal
13,384 (261) 13,384 (261)
Corporate bonds and other securities
12,344 (213) 19,229 (513) 31,573 (726)
Total
$ 12,344 $ (213) $ 79,345 $ (1,429) $ 91,689 $ (1,642)
Total investment securities:
December 31, 2018
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US Agency
$ 244 $ (6) $ 5,631 $ (154) $ 5,875 $ (160)
US Agency mortgage-backed securities
17,718 (177) 39,983 (1,113) 57,701 (1,290)
Municipal
6,601 (71) 15,880 (567) 22,481 (638)
Corporate bonds and other securities
15,221 (440) 17,038 (678) 32,259 (1,118)
Total
$ 39,784 $ (694) $ 78,532 $ (2,512) $ 118,316 $ (3,206)
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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 129 positions that are considered temporarily impaired at March 31, 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 or mature.
Contractual maturities of securities at March 31, 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 March 31, 2019 is 41.7 months and is lower than the duration at December 31, 2018 which was 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:
March 31, 2019
Available for sale
Held to maturity
Cost Basis
Fair Value
Cost Basis
Fair Value
Within 1 year
$ 1,006 $ 1,005 $ 1,000 $ 953
After 1 year but within 5 years
22,552 22,456 5,192 5,168
After 5 years but within 10 years
44,406 44,189 19,023 19,149
After 10 years but within 15 years
29,382 29,521 9,816 9,971
Over 15 years
56,698 56,854 5,497 5,489
Total
$ 154,044 $ 154,025 $ 40,528 $ 40,730
9.   Loans
The loan portfolio of the Company consists of the following (in thousands):
March 31,
2019
December 31,
2018
Commercial:
Commercial and industrial
$ 157,555 $ 158,279
Commercial loans secured by owner occupied real estate
86,934 91,905
Commercial loans secured by non-owner occupied real estate
365,281 356,543
Real estate – residential mortgage
235,109 237,964
Consumer
17,636 17,591
Loans, net of unearned income
$ 862,515 $ 862,282
Loan balances at March 31, 2019 and December 31, 2018 are net of unearned income of  $367,000 and $322,000, respectively. Real estate-construction loans comprised 3.3% and 3.5% of total loans, net of unearned income at March 31, 2019 and December 31, 2018, respectively.
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10.   Allowance for Loan Losses
The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three-month period ending March 31, 2019 and 2018 (in thousands).
Three months ended March 31, 2019
Balance at
December 31, 2018
Charge-
Offs
Recoveries
Provision
(Credit)
Balance at
March 31, 2019
Commercial
$ 3,057 $ $ 5 $ (448) $ 2,614
Commercial loans secured by non-owner occupied real estate
3,389 (63) 11 36 3,373
Real estate-residential mortgage
1,235 (61) 8 31 1,213
Consumer
127 (82) 18 62 125
Allocation for general risk
863 (81) 782
Total
$ 8,671 $ (206) $ 42 $ (400) $ 8,107
Three months ended March 31, 2018
Balance at
December 31, 2017
Charge-
Offs
Recoveries
Provision
(Credit)
Balance at
March 31, 2018
Commercial
$ 4,298 $ (162) $ 8 $ (160) $ 3,984
Commercial loans secured by non-owner occupied real estate
3,666 13 (129) 3,550
Real estate-residential mortgage
1,102 (114) 10 269 1,267
Consumer
128 (99) 12 101 142
Allocation for general risk
1,020 (31) 989
Total
$ 10,214 $ (375) $ 43 $ 50 $ 9,932
The Company recorded a $400,000 loan loss provision recovery in the first quarter of 2019 compared to a $50,000 provision expense recorded in the first quarter of 2018. The 2019 provision recovery reflects our overall strong asset quality, reduced criticized loans, and lower loan portfolio balances. For the first three months of 2019, the Company experienced net loan charge-offs of  $164,000, or 0.08% of total loans, compared to net loan charge-offs of  $332,000, or 0.15% of total loans, in the first quarter of 2018. Overall, the Company continued to maintain outstanding asset quality as its non-performing assets totaled $1.2 million, or only 0.14% of total loans, at March 31, 2019. The allowance for loan losses provided 694% coverage of non-performing assets, and 0.94% of total loans, at March 31, 2019, compared to 629% coverage of non-performing assets, and 1.00% of total loans, at December 31, 2018.
The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).
At March 31, 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
$ $ 11 $ $ $ 11
Collectively evaluated for impairment
244,489 365,270 235,109 17,636 862,504
Total loans
$ 244,489 $ 365,281 $ 235,109 $ 17,636 $ 862,515
Allowance for loan losses:
Specific reserve allocation
$ $ 11 $ $ $ $ 11
General reserve allocation
2,614 3,362 1,213 125 782 8,096
Total allowance for loan losses
$ 2,614 $ 3,373 $ 1,213 $ 125 $ 782 $ 8,107
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
The segments of the Company’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan 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. The commercial loan segment includes both the commercial and industrial and the owner occupied commercial real estate loan classes while the remaining segments are not separated into classes as management monitors risk in these 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.
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.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 Assigned Risk Department to support the value of the property.
When reviewing an appraisal associated with an existing 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;

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.
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 portfolio segment, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).
March 31, 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 loans secured by non-owner occupied real estate
$ 11 $ 11 $ $ 11 $ 33
Total impaired loans
$ 11 $ 11 $ $ 11 $ 33
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).
Three months ended
March 31,
2019
2018
Average loan balance:
Commercial
$ $ 1,063
Commercial loans secured by non-owner occupied real estate
11 280
Average investment in impaired loans
$ 11 $ 1,343
Interest income recognized:
Commercial
$ $
Commercial loans secured by non-owner occupied real estate
Interest income recognized on a cash basis on impaired loans
$ $
Management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass-6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of  $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 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 $2,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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).
March 31, 2019
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial and industrial
$ 154,114 $ 1,702 $ 1,739 $ $ 157,555
Commercial loans secured by owner occupied real estate
84,301 1,496 1,137 86,934
Commercial loans secured by non-owner occupied real estate
358,806 6,271 193 11 365,281
Total
$ 597,221 $ 9,469 $ 3,069 $ 11 $ 609,770
December 31, 2018
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial and industrial
$ 154,510 $ 2,089 $ 1,680 $ $ 158,279
Commercial loans secured by owner occupied real
estate
86,997 3,769 1,139 91,905
Commercial loans secured by non-owner occupied
real estate
349,954 6,316 262 11 356,543
Total
$ 591,461 $ 12,174 $ 3,081 $ 11 $ 606,727
It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is generally the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolio classes (in thousands).
March 31, 2019
Performing
Non-Performing
Real estate – residential mortgage
$ 233,970 $ 1,139
Consumer
17,636
Total
$ 251,606 $ 1,139
December 31, 2018
Performing
Non-Performing
Real estate – residential mortgage
$ 236,754 $ 1,210
Consumer
17,591
Total
$ 254,345 $ 1,210
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).
March 31, 2019
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
$ 157,555 $ $ $ $ $ 157,555 $
Commercial loans secured by owner occupied real estate
86,934 86,934
Commercial loans secured by non-owner occupied real estate
365,281 365,281
Real estate – residential mortgage
231,558 2,213 753 585 3,551 235,109
Consumer
17,463 172 1 173 17,636
Total
$ 858,791 $ 2,385 $ 754 $ 585 $ 3,724 $ 862,515 $
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 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
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
11.   Non-performing Assets Including Troubled Debt Restructurings (TDR)
The following table presents information concerning non-performing assets including TDR (in thousands, except percentages):
March 31,
2019
December 31,
2018
Non-accrual loans
Commercial loans secured by non-owner occupied real estate
$ 11 $ 11
Real estate-residential mortgage
1,139 1,210
Total
1,150 1,221
Other real estate owned
Commercial loans secured by owner occupied real estate
157
Real estate-residential mortgage
18
Total
18 157
TDR’s not in non-accrual
Total non-performing assets including TDR
$ 1,168 $ 1,378
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned
0.14% 0.16%
The Company had no loans past due 90 days or more for the periods presented which were accruing interest.
The following table sets forth, for the periods indicated, (1) the gross interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period, (2) the amount of interest income actually recorded on such loans, and (3) the net reduction in interest income attributable to such loans (in thousands).
Three months ended
March 31,
2019
2018
Interest income due in accordance with original terms
$ 15 $ 27
Interest income recorded
Net reduction in interest income
$ 15 $ 27
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Bank’s objective in offering a TDR is to increase the probability of repayment of the borrower’s loan.
The Company had no loans modified as TDRs during the three-month period ending March 31, 2019 and 2018.
All TDR’s are individually evaluated for impairment and a related allowance is recorded, as needed. The specific ALL reserve for loans modified as TDR’s was $11,000 as of March 31, 2019 and December 31, 2018.
The Company had no loans that were classified as TDR’s or were subsequently modified during each 12-month period prior to the current reporting periods, which begin January 1, 2018 and 2017, respectively, and that subsequently defaulted during these reporting periods.
The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above.
12.   Federal Home Loan Bank Borrowings
Total Federal Home Loan Bank (FHLB) borrowings and advances consist of the following (in thousands, except percentages):
At March 31, 2019
Type
Maturing
Amount
Weighted
Average Rate
Open Repo Plus
Overnight
$ 30,912 2.70%
Advances
2019
11,500 1.53
2020
16,729 1.74
2021
9,496 2.28
2022
7,996 2.81
2023
2,850 2.65
Total advances
48,571 2.02
Total FHLB borrowings
$ 79,483 2.29%
At December 31, 2018
Type
Maturing
Amount
Weighted
Average Rate
Open Repo Plus
Overnight
$ 41,029 2.62%
Advances
2019
12,500 1.51
2020
16,729 1.74
2021
9,496 2.28
2022
6,996 2.86
2023
1,000 2.86
Total advances
46,721 1.98
Total FHLB borrowings
$ 87,750 2.28%
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 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.
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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 contracts. As a result of this review, it was determined that the Company leases eight office locations under both operating and financing leases. 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-month period ending March 31, 2019 (in thousands). Total rent expense recorded during the three-month period ended March 31, 2018 was $117,000
Three months ended
March 31, 2019
Lease cost
Financing lease cost:
Amortization of right-of-use asset
$ 64
Interest expense
30
Operating lease cost
29
Total lease cost
$ 123
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 positive 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 as of January 1, 2019. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at March 31, 2019.
Operating
Financing
Weighted-average remaining term (years)
12.4 17.5
Weighted-average discount rate
3.44% 3.59%
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the undiscounted cash flows due related to operating and financing leases as of March 31, 2019, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets.
Operating
Financing
Undiscounted cash flows due:
Within 1 year
$ 117 $ 295
After 1 year but within 2 years
118 289
After 2 years but within 3 years
120 276
After 3 years but within 4 years
85 278
After 4 years but within 5 years
69 262
After 5 years
641 3,184
Total undiscounted cash flows
1,150 4,584
Discount on cash flows
(222) (1,289)
Total lease liabilities
$ 928 $ 3,295
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 March 31, 2019, the Company had no leases that had a term of twelve months or less.
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 months ended March 31, 2019 and 2018 (in thousands):
Three months ended
March 31, 2019
Three months ended
March 31, 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
1,393 (1,739) (346) (1,316) 517 (799)
Amounts reclassified from
accumulated other comprehensive
loss
289 289 117 308 425
Net current period other comprehensive income (loss)
1,393 (1,450) (57) (1,199) 825 (374)
Ending balance
$ (16) $ (14,266) $ (14,282) $ (1,526) $ (11,798) $ (13,324)
(1)
Amounts in parentheses indicate debits on the Consolidated Balance Sheets.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three months ended March 31, 2019 and 2018 (in thousands):
Amount reclassified from accumulated
other comprehensive loss(1)
Details about accumulated other
comprehensive loss components
For the three
months ended
March 31, 2019
For the three
months ended
March 31, 2018
Affected line item in the
consolidated statement of operations
Realized loss on sale of securities
$ $ 148 Net realized loss on investment securities
(31) Provision for income tax expense
$ $ 117 Net of tax
Amortization of estimated defined benefit pension plan loss
$ 366 $ 390 Other expense
(77) (82) Provision for income tax expense
$ 289 $ 308 Net of tax
Total reclassifications for the period
$ 289 $ 425 Net income
(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 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 1 capital to risk-weighted assets (as defined), tier 1 capital to average assets, and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of March 31, 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 (in thousands, except ratios).
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 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)
$ 129,825 13.37% $ 116,107 12.01% 8.00% 10.00%
Common Equity Tier 1 (To Risk
Weighted Assets)
101,399 10.44 107,050 11.08 4.50 6.50
Tier 1 Capital (To Risk Weighted
Assets)
113,275 11.67 107,050 11.08 6.00 8.00
Tier 1 Capital (To Average Assets)
113,275 9.87 107,050 9.45 4.00 5.00
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 7.54% at March 31, 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
The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company can use derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates.
To accommodate the needs of our customers and support the Company’s asset/liability positioning, we may enter into interest rate swap agreements with customers and a large financial institution that specializes in these types of transactions. These arrangements involve the exchange of interest payments based on the notional amounts. The Company entered into floating rate loans and fixed rate swaps with our customers. Simultaneously, the Company entered into offsetting fixed rate swaps with Pittsburgh National Bank
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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 following table summarizes the interest rate swap transactions that impacted the Company’s first three months of 2019 and 2018 performance.
At March 31, 2019
HEDGE
TYPE
AGGREGATE
NOTIONAL
AMOUNT
WEIGHTED
AVERAGE
RATE
RECEIVED/(PAID)
REPRICING
FREQUENCY
INCREASE
(DECREASE) IN
INTEREST
EXPENSE
SWAP ASSETS
FAIR VALUE
$ 21,744,694 4.79% MONTHLY $ 9,008
SWAP LIABILITIES
FAIR VALUE
(21,744,694) (4.79) MONTHLY (9,008)
NET EXPOSURE
At March 31, 2018
HEDGE
TYPE
AGGREGATE
NOTIONAL
AMOUNT
WEIGHTED
AVERAGE
RATE
RECEIVED/(PAID)
REPRICING
FREQUENCY
INCREASE
(DECREASE) IN
INTEREST
EXPENSE
SWAP ASSETS
FAIR VALUE
$ 16,813,329 3.88% MONTHLY $ (23,543)
SWAP LIABILITIES
FAIR VALUE
(16,813,329) (3.88) MONTHLY 23,543
NET EXPOSURE
The Company monitors and controls all derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions. All hedge transactions must be approved in advance by the Investment Asset/Liability Committee (ALCO) of the Board of Directors, unless otherwise approved, as per the terms, within the Board of Directors approved Hedging Policy. The Company had no caps or floors outstanding at March 31, 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, 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 small business commercial loans. Commercial banking to businesses includes commercial loans, business services, and CRE loans. The wealth management segment includes the Trust Company, West Chester Capital Advisors (WCCA), our registered investment advisory firm, and Financial Services. Wealth management 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
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 include the union collective investment funds, primarily the ERECT 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.
The contribution of the major business segments to the Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 were as follows (in thousands):
Three months ended
March 31, 2019
Total
revenue
Net income
(loss)
Retail banking
$ 6,674 $ 1,181
Commercial banking
4,419 1,767
Wealth management
2,417 444
Investment/Parent
(1,248) (1,514)
Total
$ 12,262 $ 1,878
Three months ended
March 31, 2018
Total
revenue
Net income
(loss)
Retail banking
$ 6,139 $ 706
Commercial banking
4,455 1,560
Wealth management
2,443 508
Investment/Parent
(653) (1,007)
Total
$ 12,384 $ 1,767
18.   Commitments and Contingent Liabilities
The Company had various outstanding commitments to extend credit approximating $214.0 million and $177.8 million along with standby letters of credit of  $16.5 million and $16.7 million as of March 31, 2019 and December 31, 2018, respectively. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.
Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operation or cash flows.
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 period of employment. Plan assets are primarily debt securities (including US Treasury and Agency securities,
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AmeriServ Financial, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three months ended March 31, 2019 and 2018 were as follows (in thousands):
Three months ended
March 31,
2019
2018
Components of net periodic benefit cost
Service cost
$ 374 $ 409
Interest cost
402 303
Expected return on plan assets
(762) (711)
Recognized net actuarial loss
366 386
Net periodic pension cost
$ 380 $ 387
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.
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.
Assets and Liability Measured and Recorded on a Recurring Basis
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
The following table presents the assets and liability measured and recorded on the Consolidated Balance Sheets on a recurring basis at their fair value as of March 31, 2019 and December 31, 2018, by level within the fair value hierarchy (in thousands).
Fair Value Measurements at March 31, 2019
Total
(Level 1)
(Level 2)
(Level 3)
US Agency securities
$ 7,544 $ $ 7,544 $
US Agency mortgage-backed securities
95,252 95,252
Municipal securities
13,416 13,416
Corporate bonds
37,813 37,813
Fair value swap asset
210 210
Fair value swap liability
(210) (210)
Fair Value Measurements at December 31, 2018
Total
(Level 1)
(Level 2)
(Level 3)
US Agency securities
$ 7,529 $ $ 7,529 $
US Agency mortgage-backed securities
89,527 89,527
Municipal securities
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 Recorded 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 March 31, 2019 and December 31, 2018, impaired loans with a carrying value of  $11,000 were reduced by a specific valuation allowance totaling $11,000 resulting in a net fair value of zero.
Other real estate owned is measured at fair value based on appraisals, less estimated costs to sell at the date of foreclosure. Valuations are periodically performed by 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 March 31, 2019
Total
(Level 1)
(Level 2)
(Level 3)
Impaired loans
$ $ $ $
Other real estate owned
18 18
Fair Value Measurements at December 31, 2018
Total
(Level 1)