Ameriserv Financial Inc: Form 10-Q for the period ended Sep 30, 2023

THREE MONTHS ENDED SEPTEMBER 30, 2023 VS. THREE MONTHS ENDED SEPTEMBER 30, 2022

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

The Company reported net income of $647,000, or $0.04 per diluted common share. This earnings performance represented a $1,455,000, or 69.2%, decrease from the third quarter of 2022 when net income totaled $2,102,000, or $0.12 per diluted common share. Overall, a decrease to net interest income which reflects total interest expense increasing to a higher degree than the increase in total interest income, along with increased non-interest expense due to additional legal and professional services costs related to litigation and responses to the actions of an activist investor were the primary reasons for the lower level of earnings in the third quarter of 2023.

**…..NET INTEREST INCOME AND MARGIN…..**The Company’s net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company’s earnings, and it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. The following table compares the Company’s net interest income performance for the third quarter of 2023 to the third quarter of 2022 (in thousands, except percentages):

N/M — not meaningful

The Company's net interest income in the third quarter of 2023 decreased by $1.7 million, or 16.4%, from the prior year's third quarter while the net interest margin of 2.76% for the third quarter of 2023 represents a 59-basis point decrease from the third quarter of 2022. The Company’s quarterly net interest margin performance peaked in the third quarter of 2022. The decrease in net interest income reflects total interest expense increasing to a higher level than the increase in total interest income. The Company continues to benefit from increased yields on total loans and investment securities due to a higher U.S. Treasury yield curve and the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. However, similar to what is occurring across the banking industry, increased national interest rates have caused total deposit and borrowing costs to increase to a higher degree, resulting in net interest margin compression and lower net interest income.

Total average loans in the third quarter of 2023 compare favorably to the 2022 third quarter average by $18.6 million, or 1.9%. Excluding PPP loans, which still existed on the balance sheet in 2022, total average loans in the third quarter of 2023 exceeded last year’s third quarter by $20.0 million, or 2.0%. More significantly, on an end of period basis, total loans at September 30, 2023, increased by $22.9 million since the end of the third quarter of 2022 and surpassed the $1.0 billion threshold for the first time in Company history. Loan pipelines continue to be strong, but some customers have delayed fundings given the uncertainty that exists in the economy and expectations regarding interest rates. Growth in commercial & industrial (C&I), commercial real estate (CRE), and home equity loans more than offset decreased residential mortgage and consumer loans. Overall, the higher interest rate environment along with the higher average volumes of C&I, CRE, and home equity loans, resulted in total loan interest income improving by $2.5 million, or 23.0%, for the third quarter of 2023 when compared to the third quarter of last year.

Total investment securities averaged $260.2 million for the third quarter of 2023 which is $6.8 million, or 2.7%, higher than the $253.4 million average for the third quarter of last year. The increase reflects additional securities purchased, primarily during 2022, as the U.S. Treasury yield curve increased resulting in a more favorable market for securities purchasing activity. The higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio causing interest income from the securities portfolio to increase by $292,000, or 15.1%, for the third quarter of this year.

Due to a combination of increased investment in securities, loan growth and total deposits modestly declining, short-term investments and bank deposits demonstrated a lower average balance in the third quarter of 2023 compared to last year’s third quarter by $9.8 million, or 75.4%. Despite this decline, the Company’s liquidity position remains strong. We will continue to carefully monitor our liquidity position and short-term investments as we expect deposits related to government stimulus programs to continue to decline during the remainder of 2023. Overall, the 2023 third quarter average balance of total interest earning assets increased since last year’s third quarter average by $15.6 million, or 1.3%, while total interest income increased by $2.7 million, or 21.6%, compared to the third quarter of 2022.

On the liability side of the balance sheet, total average deposits for the third quarter of 2023 are $10.0 million, or 0.9%, lower than the 2022 third quarter average. The modest decrease since last year’s third quarter is reflective of a portion of the funds from the government stimulus programs leaving the balance sheet and reflects greater pricing competition in the market to retain deposits because of the increasing national interest rates. Since earlier in 2023 when three large bank failures occurred, customer fear of contagion within the industry caused deposit flight, especially uninsured deposits, from certain banks to other financial services providers. Despite this turmoil, the Company’s core deposit base continued to demonstrate the strength and stability that it has for many years. In addition to its strong, loyal core deposit base, the Company has several other sources of liquidity including a significant unused borrowing capacity at the Federal Home Loan Bank (FHLB), overnight lines of credit at correspondent banks and access to the Federal Reserve Discount Window. The Company does not utilize brokered deposits as a funding source. The loan to deposit ratio averaged 86.5% in the third quarter of 2023, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is well positioned to support our customers and our community during times of economic volatility.

Total interest expense in the third quarter of 2023 increased by $4.5 million, or 205.8%, when compared to the third quarter of 2022, due to higher deposit and short-term borrowings interest expense. Deposit interest expense was higher by $3.9 million, or 228.7%, while the third quarter 2023 average volume of total interest bearing deposits grew from the 2022 third quarter average by $21.9 million, or 2.3%. The impact that the higher national interest rates had on deposit costs combined with increased market competition to retain and attract deposits contributed to net interest margin compression. Another factor contributing to net interest margin compression was an unfavorable deposit mix shift as the 2023 third quarter average of non-interest bearing demand deposits declined by $31.8 million, or 14.5%, while total interest-bearing deposits increased by $21.9 million, or 2.3% when compared to the 2022 third quarter average. For interest rate risk management purposes and in an effort to offset a portion of the unfavorable impact that rising funding costs are having on net interest income, management proactively executed a $50 million interest rate hedge in February 2023 and another $10 million interest rate hedge in April 2023 to fix the cost of certain deposits that are indexed and move with short-term interest rates. These hedging transactions reduced the Company’s negative variability of net interest income in a rising interest rate environment and helped slow net interest margin compression. Overall, total deposit cost averaged 1.95% in the third quarter of 2023, which is 136 basis points higher than total deposit cost of 0.59% in the third quarter of 2022.

Total borrowings interest expense increased by $536,000, or 118.8%, between the third quarter of 2023 and the third quarter of 2022. The increase results from the impact that the higher national interest rates had on overnight borrowings cost as well as the Company utilizing more overnight borrowed funds in 2023. Total overnight borrowings averaged $36.0 million in the third quarter of 2023 after only $5.1 million of average overnight borrowings were utilized during the third quarter of 2022. Despite a decrease in the average balance of FHLB term borrowings in the third quarter of 2023 compared to the third quarter of 2022 of $10.7 million, or 34.2%, interest expense from FHLB term borrowings increased by $61,000, or 48.0%. The strength of the Company’s liquidity position allowed management to let FHLB term advances mature during 2022 and not be replaced. However, given the inversion in the yield curve, rates for FHLB term advances are lower than the cost of overnight borrowed funds. Therefore, management replaced matured FHLB term advances during the third quarter of 2023.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the three-month periods ended September 30, 2023 and 2022 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 this table, loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 21% was used to compute tax-equivalent interest income and yields (non-GAAP). The tax equivalent adjustments to interest income on loans and municipal securities for the three months ended September 30, 2023 and 2022 was $5,000 and $3,000, 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.

Three months ended September 30 (In thousands, except percentages)

**…..PROVISION FOR CREDIT LOSSES…..**The Company recorded a $189,000 expense for the provision for credit losses in the third quarter of 2023 after recognizing $500,000 provision expense in the third quarter of 2022. The reduced third quarter of 2023 provision for credit losses was comprised of the recognition of a $218,000 provision for credit losses for the loan portfolio and a $48,000 provision for credit losses related to unfunded commitments which more than offset a $77,000 provision recovery for credit losses for the HTM securities portfolio.

The third quarter 2023 provision for credit losses in the loan portfolio was necessary due to risk rating and non-accrual activity. Overall, we believe that non-performing assets remain well controlled, totaling $6.2 million, or 0.62% of total loans, at September 30, 2023. The Company experienced net loan charge-offs of $126,000, or 0.05% of total average loans, in the third quarter of 2023 which compares favorably to net charge-offs of $1.4 million, or 0.57% of total average loans, in the third quarter of 2022 due to the partial charge-down of one commercial real estate loan relationship.

**…..NON-INTEREST INCOME…..**Non-interest income for the third quarter of 2023 totaled $4.3 million and decreased by $70,000, or 1.6%, from the third quarter of 2022 performance. Factors contributing to the lower level of non-interest income for the quarter included:

• a $136,000, or 16.7%, decrease in other income due to the recognition of a credit valuation adjustment to the market value of the interest rate swap contracts that the Company executed to accommodate the needs of certain borrowers while managing our interest rate risk position; and
• a $32,000, or 1.1%, increase in wealth management fees as the market value of wealth management assets increased since the third quarter of 2022. Wealth management revenues have shown modest growth for the past three consecutive quarters.

**…..NON-INTEREST EXPENSE…..**Non-interest expense for the third quarter of 2023 totaled $12.1 million and increased by $368,000, or 3.1%, from the prior year’s third quarter. Factors contributing to the higher level of non-interest expense for the quarter included:

• a $287,000, or 4.1%, increase in salaries and employee benefits attributable to the annual employee merit increases, a greater level of full-time equivalent employees as the Company filled certain open positions that were vacant last year, and the impact that inflationary pressures are having on the cost of new hires. Partially offsetting the higher level of salaries was lower pension expense as there are fewer employees in the defined benefit pension plan due to numerous retirements over the past few years;
• a $237,000, or 25.4%, reduction in other expense as the Company did not have to recognize a pension settlement charge in the third quarter of 2023;
• a $198,000, or 20.9%, rise in professional fees due primarily to increased legal and professional fees related to the defense against an activist investor. These costs amounted to $308,000 in the third quarter of 2023; and
• a $103,000, or 9.9%, increase in data processing and IT expense due to increased software costs from our core data provider and additional expenses related to monitoring our computing and network environment.

**…..INCOME TAX EXPENSE…..**The Company recorded income tax expense of $124,000, or an effective tax rate of 16.1%, in the third quarter of 2023. This compares to income tax expense of $526,000, or an effective tax rate of 20.0%, for the third quarter of 2022.

NINE MONTHS ENDED SEPTEMBER 30, 2023 VS. NINE MONTHS ENDED SEPTEMBER 30, 2022

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

For the nine-month period ended September 30, 2023, the Company reported net income of $1,975,000, or $0.12 per diluted common share. This earnings performance was a $4,526,000, or 69.6%, decline from the nine-month period of 2022 when net income totaled $6,501,000, or $0.38 per diluted common share. Overall, the decrease to net interest income, along with increased non-interest expense were the primary reasons for the lower level of earnings in the first nine months of 2023.

While net income is down year-over-year, the Company continued to effectively operate its customer relationship focused community bank in a conservative manner amid a challenging period for the industry. Importantly, there have been several encouraging new business development results in key areas so far this year. For the first time in the Company’s history, total loans now exceed $1 billion. The loyalty of its deposit customers has shown excellent resilience, with an increase of $20.8 million, or 1.9%, in total deposits since the end of 2022. Additionally, wealth management revenues have now shown modest growth for the past three consecutive quarters.

**…..NET INTEREST INCOME AND MARGIN…..**The following table compares the Company’s net interest income performance for the first nine months of 2023 to the first nine months of 2022 (in thousands, except percentages):

N/M — not meaningful

The Company's net interest income in the first nine months of 2023 decreased by $3.0 million, or 9.8%, from the prior year's first nine months while the net interest margin of 2.89% for the first nine months of 2023 represents a 35-basis point decline from the first nine of months of 2022. As previously mentioned, the decrease in net interest income reflects total interest expense increasing to a higher level than the increase in total interest income. The Company continues to benefit from increased yields on total loans and investment securities due to a higher U.S. Treasury yield curve and the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. However, similar to what is occurring across the banking industry, increased national interest rates have caused total deposit and borrowing costs to increase to a higher degree, resulting in net interest margin compression and lower net interest income.

Total average loans in the first nine months of 2023 compare favorably to the 2022 first nine-month average by $11.6 million, or 1.2%. Excluding PPP loans, which still existed on the balance sheet in 2022, total average loans in the first nine months of 2023 exceeded last year’s first nine months by $17.6 million, or 1.8%. As previously mentioned, loan pipelines continue to be strong, and the loan portfolio has demonstrated consistent growth in 2023 despite some customers delaying fundings given the uncertainty that exists in the economy and expectations regarding interest rates. Growth in commercial & industrial (C&I), commercial real estate (CRE), and home equity loans more than offset decreased residential mortgage and consumer loans. Overall, the higher interest rate environment along with the higher average volumes of C&I, CRE and home equity loans, resulted in total loan interest income improving by $8.1 million, or 27.2%, for the first nine months of 2023 when compared to the first nine months of last year. This increase occurred despite a $433,000 reduction in PPP loan related income in 2023.

Total investment securities averaged $262.7 million for the first nine months of 2023 which is $24.2 million, or 10.1%, higher than the $238.5 million average for the first nine months of last year. The increase reflects additional securities purchased primarily during 2022 as the U.S. Treasury yield curve increased resulting in a more favorable market for securities purchasing activity causing the Company to redeploy some of its short-term excess liquidity. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio causing interest income from the securities portfolio to increase by $1.5 million, or 28.5%, through nine months of this year. So far in 2023, purchases of securities have slowed significantly as more funds have been allocated to the loan portfolio and the Company has been controlling the amount of overnight borrowed funds. While yields on new security purchases exceed the overall average yield of the existing securities portfolio, the spread between overnight borrowings and the yield on new securities ranged from negative to only marginally positive causing the slowdown in purchasing activity. Thus, the new investment security purchases have primarily been used to replace cash flow from maturing securities to maintain appropriate balances for pledging purposes related to deposits of public funds.

Due to a combination of increased investment in securities, loan growth and total deposits modestly declining, short-term investments and bank deposits demonstrated a lower average balance in the first nine months of 2023 compared to last year’s first nine months by $25.6 million, or 87.2%. Despite this decline, the Company’s liquidity position remains strong. We will continue to carefully monitor our liquidity position and short-term investments as we expect deposits related to government stimulus programs to continue to decline during the remainder of 2023. Overall, the 2023 first nine-month average balance of total interest earning assets increased since last year’s nine-month average by $10.1 million, or 0.8%, while total interest income increased by $9.6 million, or 27.3%, since the first nine months of 2022.

On the liability side of the balance sheet, through nine months, total average deposits are $8.3 million, or 0.7%, lower compared to the first nine months of 2022. The modest decrease since last year is reflective of a portion of the funds from the government stimulus programs leaving the balance sheet and greater pricing competition in the market to retain deposits because of the increasing national interest rates. As previously mentioned, the Company’s core deposit base continued to demonstrate the strength and stability that it has for many years, even during times of turmoil when three large bank failures occurred earlier in 2023 and customer fear of contagion within the industry caused deposit flight. Total deposits grew during the first nine months of 2023 by $20.8 million, or 1.9%, on an end of period basis since December 31, 2022, demonstrating what we believe is customer confidence in AmeriServ Financial Bank. In addition to its strong, loyal core deposit base, the Company has several other sources of liquidity, including a significant unused borrowing capacity at the Federal Home Loan Bank (FHLB), overnight lines of credit at correspondent banks and access to the Federal Reserve Discount Window. The Company does not utilize brokered deposits as a funding source.

Total interest expense in the first nine months of 2023 increased by $12.6 million, or 261.1%, when compared to the first nine months of 2022, due to higher deposit and short-term borrowings interest expense. Deposit interest expense was higher by $11.4 million, or 328.0%, while the nine-month 2023 average volume of total interest bearing deposits grew from the 2022 nine-month average by $13.2 million, or 1.4%. The rising national interest rates resulted in certain deposit products, particularly public funds, which are tied to a market index, repricing upward with the move in short-term national interest rates causing interest expense to increase. Additionally, increased market competition resulted in the Company increasing rates on certain shorter-term certificates of deposit to retain funds. Another factor contributing to net interest margin compression was an unfavorable deposit mix shift as the nine-month average of non-interest bearing demand deposits declined by $21.5 million, or 9.9%, while, as mentioned above, total interest bearing deposits increased by $13.2 million, or 1.4%. As previously mentioned, for interest rate risk management purposes and to offset a portion of the unfavorable impact that rising funding costs are having on net interest income, management proactively executed a $50 million interest rate hedge in February 2023 and another $10 million interest rate hedge in April 2023 to fix the cost of certain deposits that are indexed and move with short-term interest rates. These hedging transactions reduced the Company’s negative variability of net interest income in a rising interest rate environment and helped slow net interest margin compression. Overall, total deposit cost averaged 1.72% in the first nine months of 2023, which is 132 basis points higher than total deposit cost of 0.40% in the first nine months of 2022.

Total borrowings interest expense increased by $1.2 million, or 90.8%, in the first nine months of 2023 compared to the first nine months of 2022. The increase results from the impact that the higher national interest rates had on overnight borrowings cost as well as the Company utilizing more overnight borrowed funds so far in 2023. Total short-term borrowings averaged $33.9 million in the first nine months of 2023 after only averaging $2.2 million in the first nine months of 2022. As previously mentioned, given the high cost of overnight borrowed funds, management has been effectively controlling the usage of this funding source. Borrowings interest expense was favorably impacted by reduced interest expense from FHLB term borrowings greater than one year, which declined by $95,000, or 20.9%, during the nine months of 2023 compared to 2022. The average balance of advances from FHLB was lower in the first nine months of 2023 by $17.4 million, or 48.1%, as the Company’s strong liquidity position allowed management to let FHLB term advances mature during 2022 and not be replaced. However, given the inversion in the yield curve, rates for FHLB term advances are lower than the cost of overnight borrowed funds. Therefore, management began replacing matured FHLB term advances in 2023 as part of its overall balance sheet management strategy.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the nine-month periods ended September 30, 2023 and 2022. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 44. The tax equivalent adjustments to interest income on loans and municipal securities for the nine months ended September 30, 2023 and 2022 was $10,000 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.

Nine months ended September 30 (In thousands, except percentages)

**…..PROVISION FOR CREDIT LOSSES…..**The Company recorded a $1.4 million expense for the provision for credit losses in the first nine months of 2023 after recognizing a $225,000 benefit in the first nine months of 2022 resulting in a net unfavorable change of $1.6 million. Included in the nine-month 2023 provision expense was the recognition of a $926,000 loss from a subordinated debt investment with Signature Bank which was closed by banking regulators on March 12, 2023. In a press release issued by the Federal Deposit Insurance Corporation (FDIC), it was disclosed that unsecured debt holders of the institution will not be protected.

The 2023 provision for credit losses for the loan portfolio was necessary due to risk rating and non-accrual activity. Total classified loan levels exhibited a net increase during the first nine months of 2023 due to the downgrade of several commercial real estate loan relationships earlier this year. Specifically, non-performing assets increased from $5.2 million at December 31, 2022 to $6.2 million at September 30, 2023. Through nine months of 2023, the Company experienced net loan charge-offs of $187,000, or 0.03% of total average loans, which compares favorably to net charge-offs of $1.5 million, or 0.21% of total average loans, in the first nine months of 2022. In summary, the allowance for credit losses on the loan portfolio provided 199% coverage of non-performing assets, and 1.23% of total loans, at September 30, 2023, compared to 207% coverage of non-performing assets, and 1.08% of total loans, on December 31, 2022.

**…..NON-INTEREST INCOME…..**Non-interest income for the first nine months of 2023 totaled $13.6 million and increased by $826,000, or 6.5%, from the first nine months of 2022 performance. Factors contributing to the higher level of non-interest income for the nine-month period included:

• AmeriServ Financial Bank sold all 7,859 shares of the Class B common stock of Visa, Inc. that it owned for a sale price of $1.7 million. The shares had no carrying value on the balance sheet and, as the Bank had no historical cost basis in the shares, the entire sale price was recognized as a gain. The Company elected to capture this gain in 2023 due to the volatility and uncertainty in the financial markets;
• a $582,000, or 6.5%, decrease in wealth management fees due to the unfavorable market conditions for both equity securities and particularly bonds which have reduced the market value of wealth management assets. Also, new customer business growth has only partially offset the unfavorable impact of market conditions on fee income. Overall, the fair market value of wealth management assets declined since December 31, 2021, by $327.1 million, or 12.1%, and totaled $2.4 billion at September 30, 2023;
• a $362,000, or 18.3%, decrease in other income due to the recognition of a credit valuation adjustment to the market value of the interest rate swap contracts that the Company executed to accommodate the needs of certain borrowers while managing our interest rate risk position; and
• a $60,000, or 32.8%, decrease in net gains on loans held for sale as the limited housing supply along with sharply higher interest rates continues to unfavorably impact residential mortgage loan production.

**…..NON-INTEREST EXPENSE…..**Non-interest expense for the first nine months of 2023 totaled $37.2 million and increased by $1.9 million, or 5.4%, from the prior year’s first nine months. Factors contributing to the higher level of non-interest expense for the nine-month period included:

• a $1.9 million, or 80.5%, rise in professional fees due primarily to increased legal and professional fees related to the defense against an activist investor and a proxy contest at the 2023 annual meeting. These costs amounted to $2.0 million for the first nine months of 2023. As expected, costs related to the activist shareholder issue declined meaningfully between the second and third quarters of 2023 by $828,000. However, given a recent increase in activity by the activist investor, the Company cannot determine at this time whether these costs will remain at a lower level in the fourth quarter of 2023;
• a $1.4 million, or 41.2%, decrease in other expense as the Company did not have to recognize a pension settlement charge in the first nine months of 2023 compared to a $1,244,000 charge recognized in the first nine months of 2022;
• an $822,000, or 3.8%, increase in salaries and employee benefits expense. The increase is attributable to the annual employee merit increases, a greater level of full-time equivalent employees as the Company filled

certain open positions that were vacant last year, and the impact that inflationary pressures are having on the cost of new hires. Partially offsetting the higher level of salaries was lower incentive compensation and pension expense as there are fewer employees in the defined benefit pension plan due to numerous retirements over the past few years; and

• a $371,000, or 12.7%, increase in data processing and IT expense due to increased software costs from our core data provider and additional expenses related to monitoring our computing and network environment.

**…..INCOME TAX EXPENSE…..**The Company recorded an income tax expense of $435,000, or an effective tax rate of 18.0%, in the first nine months of 2023. This compares to an income tax expense of $1.6 million, or an effective tax rate of 20.0%, for the first nine months of 2022. The lower level of income tax expense this year is due to the reduced level of pre-tax income.

**…..SEGMENT RESULTS.…..**The community banking segment reported a net income contribution of $12,165,000 in the first nine months of 2023 which was $2,672,000 higher than the net income contribution in the first nine months of 2022. The increase between time periods results from the strength that this segment provides to the Company which was determined by a thorough funds transfer pricing analysis. In short, a funds transfer pricing analysis determines how funding (deposits) and use of this funding (loans) by each segment contributes to the overall profitability of the Company by providing an estimated positive or negative dollar value of the segment’s contribution to the Company. Overall, the funds transfer pricing analysis indicated that the community banking segment provided an additional $7.0 million benefit to the Company in the nine months of 2023 when compared to the nine months of 2022. Despite the benefit that community banking provides, this segment was unfavorably impacted from net interest margin compression as total deposit interest expense increased to a higher level than the increase to total loan interest income. Another factor contributing to net interest margin compression was an unfavorable deposit mix shift as the nine-month average of non-interest bearing demand deposits declined by $21.5 million, or 9.9%, while total interest-bearing deposits increased by $13.2 million, or 1.4%. This segment continues to benefit from increased yields on loans due to a higher U.S. Treasury yield curve and the Federal Reserve’s action to tighten monetary policy. However, the increased national interest rates have caused total deposit costs to increase to a higher degree. The Company benefitted from a higher level of total average loans in the first nine months of 2023. Growth in commercial & industrial (C&I), commercial real estate (CRE), and home equity loans more than offset decreased residential mortgage and consumer loans. This segment did benefit from an additional $98,000 of total loan charge income which partially offset a decline in PPP processing fees and interest. The Company recognized $433,000 of PPP related income in the first nine months of 2022 and did not recognize any PPP related income in 2023. Overall, total loan interest income improved by $8.1 million, or 27.2%, for the first nine months of 2023 when compared to the first nine months of last year. Deposit interest expense was higher by $11.4 million, or 328.0%, while, as mentioned above, the first nine months of 2023 average volume of total interest-bearing deposits increased by $13.2 million, or 1.4%. The impact that the higher national interest rates had on deposit costs combined with increased market competition to retain and attract deposits contributed to net interest margin compression. This segment was unfavorably impacted by the Company recording $567,000 of expense for the allowance for credit losses on our loan portfolio and unfunded commitments in the first nine months of 2023 compared to a $225,000 recovery for loan losses in last year’s first nine months. This was discussed previously in the Provision for Credit Losses section within this document. Non-interest income was unfavorably impacted by the recognition of a $178,000 credit valuation adjustment to the market value of the interest rate swap contracts that the Company executed to accommodate the needs of certain commercial borrowers while managing our interest rate risk position. Also, unfavorably impacting non-interest income was a reduced level of loan sale gain income by $60,000 due to the lower level of residential mortgage loan production in 2023. Non-interest expense, within the community banking segment, in the nine months of 2023 compares favorably to last year’s first nine months as reduced pension expense, explained in Note 16, and lower incentive compensation more than offset higher salaries cost. As mentioned previously in the MD&A, the Company did not have to recognize a pension settlement charge in the first nine months of 2023 after recognizing a $1.2 million pension settlement charge last year, which positively impacted all segments.

The wealth management segment’s net income contribution decreased by $751,000 in the first nine months of 2023 from the first nine months of 2022. The decrease reflects the unfavorable market conditions for both equity securities and bonds which have reduced the market value of wealth management assets. Also, new customer business growth has only partially offset the unfavorable impact of market conditions on fee income. The fair market value of wealth management assets declined since December 31, 2021 by $327.1 million, or 12.1%, and totaled $2.4 billion at September 30, 2023. Note that the market value of wealth management assets increased since the third quarter of 2022 and contributed to a favorable quarter versus quarter comparison for wealth management fee income. Wealth management revenues have shown modest growth for the past three consecutive quarters. However, nine-month results for wealth management fees continue to reflect the unfavorable market conditions. Partially offsetting the decline in wealth management revenue for the nine-month period were lower levels of incentive compensation, pension costs and professional fees.

The investment/parent segment reported a net loss of $11,097,000 in the nine months of 2023 which is greater than the net loss of $4,650,000 in the first nine months of 2022 by $6,447,000. The funds transfer pricing analysis within this segment caused the loss reported within this segment to be $4.7 million higher due to the inverted yield curve and the accelerated increase in funding costs on our balance sheet. Also, contributing to the greater loss within this segment was the first quarter of 2023 recognition of a $926,000 loss from a subordinated debt investment with Signature Bank and $2.0 million of additional legal and professional fees related to the Company’s recent annual meeting proxy contest and defense against an activist shareholder. This segment was also unfavorably impacted by $1.2 million of additional total borrowings interest expense due to the higher average balance of short-term borrowed funds. These unfavorable items more than offset the $1.7 million gain recognized during the first quarter of 2023 from the sale of the 7,859 shares of the Class B common stock of Visa Inc. that the Bank owned and an increased level of interest income from investment securities and short-term investments by $1.5 million as the higher interest rates resulted in an improved overall total portfolio yield.

**…..BALANCE SHEET…..**The Company’s total consolidated assets were $1.4 billion at September 30, 2023, which declined by $2.1 million, or 0.2%, from the December 31, 2022 asset level. This change was related, primarily, to decreased levels of cash and cash equivalents and investment securities which were partially offset by increased levels of loans and other assets. Specifically, cash and cash equivalents were reduced by $4.9 million, or 21.5%, while investment securities decreased $12.1 million, or 5.0%, during the first nine months of 2023. Purchasing activity of investment securities slowed significantly during 2023 as more funds have been allocated to the loan portfolio and the Company has been controlling the amount of its overnight borrowed funds due to the negative to the marginally positive spread between overnight borrowings and the yield on new securities. Loans, net of unearned fees, increased $11.5 million, or 1.2%, primarily as a result of growth in commercial real estate (CRE) loans. Other assets increased $2.8 million, or 8.2%, in the first nine months of 2023 due to an increase in the positive (debit) balance of the accrued pension liability as well as increased market values for the interest rate swaps and hedges.

Total deposits increased by $20.8 million, or 1.9%, in the first nine months of 2023. This demonstrates customer confidence and the strength and loyalty of our core deposit base. As of September 30, 2023, the 25 largest depositors represented 22.6% of total deposits, which is an increase from December 31, 2022, when it was 18.8%. As of September 30, 2023 and December 31, 2022, the estimated amount of uninsured deposits was $351.9 million and $316.5 million, respectively. The estimate of uninsured deposits was done at the single account level and does not take into account total customer balances in the Bank. It should be noted that approximately 50% of these uninsured deposits relate to public funds from municipalities, government entities, and school districts which by law are required to be collateralized by investment securities or FHLB letters of credit to protect these depositor funds. Total borrowings have decreased by $22.9 millon, or 16.5%, since year-end 2022. This change was driven by a decrease in short-term borrowings. Specifically, short-term borrowings decreased by $25.2 million, or 28.4%. Given the high cost of overnight borrowed funds, management has been effectively controlling the usage of this funding source. In addition, the inversion in the yield curve has caused FHLB term advances to have rates that are lower than the cost of overnight borrowed funds. Therefore, management began replacing matured FHLB term advances in 2023 leading to a slight increase in this line item of $2.4 million, or 11.9%.

The Company’s total shareholders’ equity decreased by $4.9 million, or 4.6%, during the first nine months of 2023. The decrease in capital is the result of the Company’s earnings performance during the first nine months of 2023 being more than offset by the cumulative effect adjustment for the adoption of ASU 2016-13 and our common stock dividend payments to shareholders. In addition, the reduced market value of the available for sale investment securities portfolio had a negative impact on accumulated other comprehensive loss which more than offset the improved market value adjustment on the interest rate hedges.

The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of 13.72%, and a common equity tier 1 capital ratio of 10.17% at September 30, 2023. See the discussion of the Basel III capital requirements under the Capital Resources section below. As of September 30, 2023, the Company’s book value per common share was $5.91 and its tangible book value per common share was $5.11(1). When compared to December 31, 2022, book value per common share and tangible book value per common share declined by $0.29 per common share. The decline in the Company’s book value and tangible book value per share in the first nine months of 2023 compared to last year-end reflects a decrease in the fair value of the Company’s available for sale investment securities by $6.1 million due to higher interest rates. Note that this caused a greater accumulated other comprehensive loss within total equity since December 31, 2022, as the decline in market value of the Company’s available for sale investment securities portfolio more than offset a positive market value adjustment for the interest rate hedges. There was no required revaluation of the net pension liability during the first nine months of 2023. The tangible common equity to tangible assets ratio was 6.50%(1) at September 30, 2023 and decreased by 35-basis points when compared to December 31, 2022.

(1) Non-GAAP financial information, see “Reconciliation of Non-GAAP Financial Measures” later in this MD&A.

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

* 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, and (iii) other real estate owned and repossessed assets.

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

Overall, the Company continued to maintain good asset quality in the first nine months of 2023 as evidenced by low levels of non-accrual loans, non-performing assets, and loan delinquency levels that continue to be below 1% of total loans. The decline in accruing loan delinquency is primarily attributable to a decrease in commercial and commercial real estate loan delinquency. The increase in non-accrual loans, as well as non-performing assets, reflects the transfer of two commercial real estate loan relationships together with three small business loans to non-accrual status which were partially offset by a decline in non-accrual residential mortgage loans. The increase in classified loans is the result of the risk rating downgrade of two commercial real estate loan relationships which was partially offset by the risk rating upgrade of a commercial & industrial loan.

We also continue to closely monitor the loan portfolio given the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As of September 30, 2023, the 25 largest credits represented 21.7% of total loans outstanding, which remained unchanged since December 31, 2022.

Urban Office Exposure

Urban office secured criticized commitments totaled $11.6 million at September 30, 2023 and was comprised of three other commercial real estate (non-owner occupied) loans, as follows:

• the aforementioned $7.0 million classified other commercial real estate (non-owner occupied) loan disclosed in Note 9, Allowance for Credit Losses - Loans;
• a $3.6 million classified other commercial real estate (non-owner occupied) loan secured by two interconnected office buildings located within the central business district of the City of Pittsburgh and evidencing a weakening trend in occupancy. The loan originated in 2018, matures in 2028, and has evidenced a clean repayment history; and
• a $965,000 criticized other commercial real estate (non-owner occupied) loan secured by a mixed-use (retail/office) property located within the City of Pittsburgh, but not in the downtown central business district, and evidencing sustained weak occupancy. The loan does evidence low loan to value and continued guarantor financial support. The loan originated in 2009, matures in 2029, and maintains a clean repayment history.

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

**…..LIQUIDITY…..**The Company’s liquidity position continues to be strong. Total average deposits are $8.3 million, or 0.7%, lower when compared to the 2022 first nine-month average. The modest decrease is reflective of a portion of the funds from the government stimulus programs leaving the balance sheet and also reflects greater pricing competition in the market to retain deposits because of the increasing national interest rates. The Company’s core deposit base continued to demonstrate the strength and stability that it has for many years, even during times of turmoil when three large bank failures occurred earlier in 2023 and customer fear of contagion within the industry caused deposit flight. Total deposits grew during the first nine months of 2023 by $20.8 million, or 1.9%, on an end of period basis since December 31, 2022, demonstrating customer confidence in AmeriServ Financial Bank. The Company does not utilize brokered deposits as a funding source. In addition to its strong, loyal core deposit base, the Company has several other sources of liquidity, including a significant unused borrowing capacity at the Federal Home Loan Bank (FHLB), overnight lines of credit at correspondent banks and access to the Federal Reserve Discount Window. Overall, deposit volumes continue to remain at a high level by historical standards in relation to the levels experienced prior to the pandemic. The core deposit base is adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities is used to help fund loan growth.

Average short-term investments demonstrated a lower average balance in the first nine months of 2023 compared to the first nine months of last year by $25.6 million, or 87.2%. Despite this decline, the Company’s liquidity position remains strong. The average balance of FHLB term borrowings was lower in the first nine months of 2023 by $17.4 million, or 48.1%, as the strength of the Company’s liquidity position allowed management to let FHLB term advances mature during 2022 and not be replaced. However, given the inversion in the yield curve, FHLB term advances have rates that are lower than the cost of overnight borrowed funds. Therefore, management is replacing matured FHLB term advances in 2023. The challenge remains as to the uncertainty regarding the duration that the higher than historical level of deposits will remain on the balance sheet which will be determined by customer behavior as the economic conditions change. Diligent monitoring and management of our short-term investment position and our level of overnight borrowed funds remains a priority. Given the high cost of overnight borrowed funds, management has been effectively controlling the usage of this funding source. Continued loan growth and prudent investment in securities are critical to achieve the best return on the normal level of earning asset cash flow that occurs each month. So far in 2023, purchases of securities have slowed as more funds have been allocated to the loan portfolio. Loan pipelines continue to be strong, and the loan portfolio has demonstrated consistent growth in 2023. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company’s loan to deposit ratio averaged 86.5% in the third quarter of 2023, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to support our customers and our community during times of economic volatility. We are also well positioned to service our existing loan pipeline and grow our loan to deposit ratio while remaining within our guideline parameters.

Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents decreased by $4.9 million from December 31, 2022, to $18.0 million at September 30, 2023, due to $6.4 million of net cash used in investing activities and $3.7 million of net cash used in financing activities more than offsetting $5.2 million of net cash provided by operating activities. Within investing activities, cash advanced for new loans originated totaled $140.1 million and was $11.6 million higher than the $128.4 million of cash received from loan principal payments. Within financing activities, total short-term borrowings decreased by $25.2 million, total FHLB borrowings increased by $2.4 million while total deposits increased by $20.8 million. Within operating activities, $6.4 million of mortgage loans held for sale were originated while $6.6 million of mortgage loans were sold into the secondary market.

The holding company had $7.4 million of cash, short-term investments, and investment securities at September 30, 2023, which represents a $2.2 million decrease from the holding company’s cash position since December 31, 2022. Dividend payments from our subsidiaries provided ongoing cash to the holding company. At September 30, 2023, our subsidiary Bank had $12.1 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 believe that the holding company has sufficient liquidity to meet its subordinated debt interest payments and its dividend payout level with respect to its common stock.

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investments, interest bearing deposits with banks, and federal funds sold. These assets totaled $18.0 million and $23.0 million at September 30, 2023 and December 31, 2022, respectively. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.

Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the FHLB systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary bank is a member of the FHLB, which provides the opportunity to obtain short-term to longer-term advances based upon the Company’s investment in certain residential mortgage, commercial real estate, and commercial and industrial loans. At September 30, 2023, the Company had $288 million of overnight borrowing availability at the FHLB, $42 million of short-term borrowing availability at the Federal Reserve Bank and $35 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

**…..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 10.17%, the tier 1 capital ratio was 10.17%, and the total capital ratio was 13.72% at September 30, 2023. The Company’s tier 1 leverage ratio was 8.41% at September 30, 2023. We anticipate that we will maintain our strong capital ratios throughout the remainder of 2023. 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 351% of regulatory capital at September 30, 2023.

Our focus is on preserving capital to support customer lending and allow the Company to take advantage of business opportunities as they arise. We currently believe that we have sufficient capital and earnings power to continue to pay our common stock cash dividend at its current rate of $0.03 per quarter. While the Company has frequently executed common stock buyback programs in the past, we presently do not have one in place due to the drop in our tangible common equity ratio to 6.50%(1) as a result of the decline in value of our AFS securities portfolio. At September 30, 2023, the Company had approximately 17.1 million common shares outstanding.

The Basel III capital standards establish the minimum capital levels in addition to the well capitalized requirements under the federal banking regulations prompt corrective action. The capital rules also impose a 2.5% capital conservation buffer (CCB) on top of the three minimum risk-weighted asset ratios. Banking institutions that fail to meet the effective minimum ratios once the CCB is taken into account will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive 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, including the CCB, 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.

Under the Basel III capital standards, the minimum capital ratios are:

(1) Non-GAAP financial information, see “Reconciliation of Non-GAAP Financial Measures” later in this MD&A.

**…..INTEREST RATE 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. 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.

The Company believes that its overall interest rate risk position is well controlled. The execution of a $50 million interest rate hedge, during the first quarter of 2023, and the execution of an additional $10 million interest rate hedge, during the second quarter of 2023, to fix the cost of certain deposits that are indexed and move with short-term interest rates, reduced the Company’s negative variability of net interest income in a rising interest rate environment and helped slow net interest margin compression. The fed funds rate is currently at a targeted range of 5.25% to 5.50% as the Federal Reserve took action during the first nine months of 2023 to increase the rate a total of 100 basis points.

Overall, the Company’s interest rate risk position is relatively neutral. The variability of net interest income is slightly negative in the upward rate scenarios as the Company is marginally more exposed to liabilities repricing upward to a greater extent than assets. Specifically, the cost of funds is immediately impacted when short-term national interest rates increase because certain deposit products and overnight borrowed funds move with the market. This was partially offset by the Company’s shorter duration investment securities portfolio and the scheduled repricing of loans tied to an index, such as SOFR or prime. In addition to the interest rate hedges discussed above, the Company has effectively utilized interest rate swaps for interest rate risk management purposes. The interest rate swaps allow our customers to lock in fixed interest rates while the Company retains the benefit of interest rates moving with the market. Regarding interest bearing liabilities, the Company will continue its disciplined approach to price its core deposit accounts in a controlled but competitive manner and control the amount of overnight borrowed funds. The variability of net interest income is slightly positive in the downward rate shocks as the Company has marginally more exposure to short-term liabilities repricing downward to a greater extent than assets. 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 shocks due to a reduced value for core deposits.

**…..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 $265.3 million and standby letters of credit of $7.7 million as of September 30, 2023. 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.

**…..OTHER INFORMATION…..**During the second quarter of 2023, a prominent third-party vendor (the “Vendor”) to AmeriServ Financial Bank (the "Bank") and to AmeriServ Trust and Financial Services Company (the “Trust Company”), each wholly-owned subsidiaries of AmeriServ Financial, Inc. (together with Bank and the Trust Company, the "Company"), confirmed to the Bank and the Trust Company that personally identifiable information associated with their respective clients had been compromised in a security incident that the Vendor experienced ("Vendor Incident"). The Vendor Incident resulted from a zero-day vulnerability in a popular file sharing software that the Vendor used called MOVEit Transfer ("MOVEit"). Progress Software Corporation developed and maintains MOVEit, which is used by thousands of organizations around the world. According to national media reports, the MOVEit zero-day vulnerability was exploited in a large-scale cyber campaign that is impacting government agencies, universities, and corporations around the world. Each of the Bank and the Trust Company uses the Vendor for certain operational support services.

As a result of the Vendor Incident, the Vendor confirmed to each of the Bank and the Trust Company that an unauthorized party was able to obtain access to certain of the Bank’s and Trust Company’s data files in the Vendor's possession that contained social security numbers, account numbers, and other personally identifiable information. The Bank and the Trust Company worked with the Vendor to provide appropriate notifications to potentially affected customers and have provided notice to regulatory agencies as required by federal and state law.

The Vendor confirmed that it has implemented the recommended patches released by Progress Software for the MOVEit platform to date and has taken other security measures with respect to file transfers. Upon learning of the Vendor Incident, the Company promptly commenced an investigation of the matter, including through the engagement of outside independent cybersecurity experts, to determine the scope and nature of any Bank and Trust Company client data that may have been affected. There is no indication the Vendor Incident involved the Company's internal network or IT systems, and there has been no material interruption to the Company's business operations.

Since the occurrence of the incident, the Company has incurred, and may continue to incur, certain expenses related to the Vendor Incident through September 30, 2023. Based upon the information that the Company has learned to date, the Company anticipates expenses related to the Vendor Incident should not be material due to, among other things, the fact that the Vendor has agreed to pay for notification as well as two years of credit monitoring services to all affected parties. However, the scope and timing of the issue remain uncertain. Accordingly, the Company’s estimate may change from time to time, and actual losses and expenses could vary. Further, the Company remains subject to risks and uncertainties as a result of the Vendor Incident, including litigation risk and additional regulatory scrutiny.

**…..RECONCILIATION OF NON-GAAP FINANCIAL MEASURES…..**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 Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.

The following table sets forth the calculation of the Company’s tangible common equity ratio and tangible book value per share at September 30, 2023 and December 31, 2022 (in thousands, except share and ratio data):

**…..CRITICAL ACCOUNTING POLICIES AND ESTIMATES…..**The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles (GAAP) and conform to general practices within the banking industry. Accounting and reporting policies for the pension liability, allowance for credit losses (related to investment securities, loans, and unfunded commitments), intangible assets, income taxes, and derivatives (interest rate swaps/hedges) 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 — Pension liability

BALANCE SHEET REFERENCE — Other assets

INCOME STATEMENT REFERENCE — Salaries and employee benefits and Other expense

DESCRIPTION

Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Additionally, pension expense can also be impacted by settlement accounting charges if the amount of employee selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year. Our pension benefits are described further in Note 16 of the Notes to Unaudited Consolidated Financial Statements.

ACCOUNT — Allowance for Credit Losses

BALANCE SHEET REFERENCE — Investment securities, net of allowance for credit losses, Allowance for credit losses – loans, Other liabilities

INCOME STATEMENT REFERENCE — Provision (credit) for credit losses

DESCRIPTION

Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and subsequent related updates. This standard replaces the incurred loss methodology for recognizing credit losses and requires the Company to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held to maturity (HTM) securities, and off-balance sheet credit exposures such as unfunded commitments. In addition, ASU 2016-13 requires credit losses on available for sale (AFS) debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell the security.

The Company measures expected credit losses on held to maturity debt securities, which are comprised of U.S. government agency and mortgage-backed securities as well as taxable municipal, corporate, and other bonds. The Company’s agency and mortgage-backed securities are issued by U.S. government entities and agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no allowance for credit losses has been established for these securities. The allowance for credit losses on the taxable municipal, corporate, and other bonds within the held to maturity securities portfolio is calculated using the PD/LGD method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. Based on management judgment, certain qualitative adjustments, such as the Company’s historical loss experience and/or the issuer’s credit quality, may be applied.

The Company measures expected credit losses on available for sale debt securities when the Company does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis.

The allowance for credit losses (ACL) is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the ACL when they are deemed uncollectible.

The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.

The allowance for credit losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb current expected 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. This process also considers economic conditions, for a reasonable and supportable forecast period of two years. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods.

The Company estimates expected credit losses over the contractual period in which it is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

ACCOUNT — Intangible assets

BALANCE SHEET REFERENCE — Intangible assets

INCOME STATEMENT REFERENCE — Other expense

DESCRIPTION

The Company considers our accounting policies related to goodwill and core deposit intangible 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 and core deposit intangible, 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 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. The core deposit intangible, which is a wasting asset, is amortized and reported in other expense for a period of ten years using the sum of the years digits amortization method.

ACCOUNT — Income Taxes

BALANCE SHEET REFERENCE — Net deferred tax asset

INCOME STATEMENT REFERENCE — Provision for income taxes

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.

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 30, 2023, 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 — Derivatives (interest rate swaps/hedges)

BALANCE SHEET REFERENCE — Other assets and Other liabilities

INCOME STATEMENT REFERENCE — Other income

DESCRIPTION

The Company periodically enters into derivative instruments to meet the financing, interest rate and equity risk management needs of its customers or the Bank.

The Company recognizes all derivatives as either assets or liabilities on the Consolidated Balance Sheets and measures those instruments at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and hedged item related to the hedged risk are recognized in earnings. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive loss, net of deferred taxes and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

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. The Company enters into offsetting positions to minimize interest rate and equity risk to the Company. These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings in amounts that offset. These instruments and their offsetting positions are recorded in other assets and other liabilities on the Consolidated Balance Sheets.

…..FORWARD LOOKING STATEMENT…..

THE STRATEGIC FOCUS:

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 control; and managing risk. Our goal is to increase value for AmeriServ shareholders by growing earnings per share and narrowing the financial performance gap between AmeriServ and its peer banks. We try to return earnings to shareholders through a combination of dividends and share repurchases (none currently authorized) subject to maintaining sufficient capital to support balance sheet growth and economic uncertainty. 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 controlling 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 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 and enhance customers’ Banking for Life experience. We will provide customers with a comprehensive offering of financial solutions including retail and business banking, home mortgages and wealth management at one location. We have upgraded and modernized select branches to be more inviting and technologically savvy to meet the needs of the next generation of AmeriServ customers without abandoning the needs of our 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 commitment to the communities we serve through assistance in providing affordable housing programs for low-to-moderate-income families; donations to qualified charities; and the time and talent contributions of AmeriServ staff to a wide-range of charitable and civic organizations.

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 and supervisory actions by such regulators, including bank failures; (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; (xii) the ability to attract new or retain existing deposits or to retain or grow loans, including growth from unfunded closed loans; (xiii) the ability to generate future revenue growth or to control future growth in non-interest expense, including, but not limited to, those related to technological changes, including changes regarding artificial intelligence and cybersecurity, changes affecting oversight of the financial services industry, and changes intended to manage or mitigate climate and related environmental risks; (xiv) the impact of failure in, or breach of, our operational or security systems or those of third parties with whom we do business, including as a result of cyberattacks or an increase in the incidence of fraud, illegal payments, security breaches or other illegal acts impacting us or our customers; (xv) expense and reputational impact on the Company as a result of litigation and other expenses related to the continuing activities of an activist shareholder; (xvi) legal, reputational, and financial risks resulting from the MOVEit cyber incident, our ongoing investigation of the incident, including the Company’s potential discovery of additional information related to the incident in connection with this investigation, any potential regulatory inquiries and/or litigation to which the Company may become subject in connection with this incident, the extent of remediation and other additional costs that may be incurred by the Company in connection with this incident, the extent of insurance coverage and contractual indemnification, the potential that other third-party vendors may have been affected by the MOVEit vulnerability in a manner that may compromise client data, including personally identifiable information; and (xvii) 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.

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 the Interest Rate Sensitivity section of the MD&A.

(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 30, 2023, 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 30, 2023, are effective.

(b) Changes in Internal Controls. Effective January 1, 2023, AmeriServ Financial Inc. adopted CECL. The Company designed new controls and modified existing controls as part of this adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f)) that occurred during the most recent fiscal quarter that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.