Ameriserv Financial Inc: Form 10-Q for the period ended Sep 30, 2024

THREE MONTHS ENDED SEPTEMBER 30, 2024 VS. THREE MONTHS ENDED SEPTEMBER 30, 2023

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

The Company reported third quarter 2024 net income of $1,183,000, or $0.07 per diluted common share. This earnings performance represented a $536,000, or 82.8%, increase from the third quarter of 2023 when net income totaled $647,000, or $0.04 per diluted common share. The Company’s community banking business continued to benefit from diversified revenue streams, with another quarter of strong revenue and profit contribution from our wealth management business. In addition, for the third quarter of 2024, earnings improvement was driven by the favorable comparison in the provision for credit losses and non-interest expense.

**…..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 2024 to the third quarter of 2023 (in thousands, except percentages):

N/M – not meaningful

The Company's net interest income in the third quarter of 2024 increased by $88,000, or 1.0%, from the prior year's third quarter while the net interest margin of 2.71% for the third quarter of 2024 represents a five-basis point decrease from the third quarter of 2023. The decrease reflects net interest margin compression which has been prevalent in the banking industry since the Federal Reserve began tightening monetary policy in an effort to control inflation. Additionally, contributing to net interest margin compression was the inverted U.S. Treasury yield curve. While the Company’s net interest margin percentage in the third quarter of 2024 compares unfavorably to last year’s third quarter, it did demonstrate relative stability so far in 2024 and was eight-basis points higher than the fourth quarter of 2023.

Total average loans in the third quarter of 2024 were higher than the 2023 third quarter average by $38.9 million, or 3.9%. During the third quarter of 2024, new loan originations slightly exceeded payoff activity and resulted in total loan volumes, on an end of period basis, increasing since June 30, 2024. Overall, total loans continue to be above the $1.0 billion threshold averaging $1.033 billion for the 2024 third quarter. The higher interest rate environment along with the higher average total loans outstanding resulted in total loan interest and fee income improving by $1.1 million, or 8.7%, for the third quarter of 2024 when compared to the third quarter of 2023.

Total investment securities averaged $254.6 million for the third quarter of 2024, which is $5.6 million, or 2.2%, lower than the $260.2 million average for the third quarter of last year. The decrease reflects management’s strategy to allocate more cash flow from the securities portfolio to higher yielding loans while the Company controlled the amount of high cost overnight borrowed funds. Thus, new investment security purchases were primarily used to replace cash flow from maturing securities to maintain appropriate balances for pledging purposes related to public funds deposits. The improved yields for new securities purchases along with management’s execution of an investment portfolio repositioning strategy in late December 2023 caused interest income from investments to increase by $123,000, or 5.5% in the third quarter of 2024 compared to the same period in 2023. Interest income from investments was unfavorably impacted by the transfer of one corporate security into non-accrual status during the third quarter of 2024, which resulted in a $73,000 reversal of previously recognized interest income. Overall, the 2024 third quarter balance of total average interest earning assets increased over last year’s third quarter by $34.0 million, or 2.7%, while total interest income increased by $1.3 million, or 8.2%, since the third quarter of 2023.

On the liability side of the balance sheet, total average deposits of $1.165 billion for the third quarter of 2024 were $15.9 million, or 1.4%, higher than the 2023 third quarter average. The increase reflects the Company’s successful business development efforts which more than offset 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 higher interest rates. The Company’s core deposit base continued to demonstrate the strength and stability that it has had for many years. In addition to its 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 88.7% in the third quarter of 2024, which indicates that the Company has ample capacity to continue to grow its loan portfolio, and we believe that it is well positioned to support our customers and our community during times of economic volatility.

Total interest expense in the third quarter of 2024 increased by $1.2 million, or 17.8%, when compared to the third quarter of 2023, due to higher deposit and borrowings interest expense. Deposit interest expense was higher by $862,000, or 15.2%, while the third quarter 2024 average volume of total interest-bearing deposits grew from the 2023 third quarter average by $27.1 million, or 2.8%. The rising national interest rates in 2023 resulted in certain deposit products, particularly public funds, which are tied to a market index, repricing upward with the move in short-term interest rates causing interest expense to increase. Additionally, increased market competition resulted in the Company raising 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 third quarter 2024 average of non-interest bearing demand deposits declined by $11.2 million, or 6.0%, while, as mentioned above, total interest-bearing deposits increased. 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 $70 million of interest rate hedge transactions during 2023 to fix the cost of certain deposits that are indexed and move with short-term interest rates. Overall, total deposit cost averaged 2.22% for the third quarter of 2024, which is 27-basis points higher than total deposit cost of 1.95% for the third quarter of 2023.

Total borrowings interest expense increased by $319,000, or 32.3%, when comparing the third quarter of 2024 and the third quarter of 2023. The increase primarily results from the impact that the higher interest rates had on total borrowings cost. While the Company’s utilization of overnight borrowed funds in the third quarter of 2024 was lower than the same period of last year, the level of advances from the FHLB increased. Total short-term borrowings averaged $28.7 million for the third quarter of 2024 after averaging $36.0 million for the third quarter of 2023. Advances from the FHLB averaged $53.4 million in the third quarter of 2024 which is $33.0 million, or 161.1%, higher than the $20.5 million average in the third quarter of 2023. Management’s strategy to increase term advances to lock in lower rates than overnight borrowings due to the inversion in the yield curve has favorably impacted net interest income.

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, 2024 and 2023 setting forth (i) average assets, liabilities, and shareholders’ 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 for the three months ended September 30, 2024 and 2023 was $7,000 and $5,000, 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 $51,000 provision for credit losses recovery in the third quarter of 2024 after recognizing provision expense of $189,000 in the third quarter of 2023, resulting in a net favorable change of $240,000. The provision recovery in the third quarter of 2024 primarily reflects improved historical loss rates used to calculate the allowance for loan credit losses in accordance with ASC 326, Financial Instruments – Credit Losses (CECL).

**…..NON-INTEREST INCOME…..**Non-interest income for the third quarter of 2024 totaled $4.2 million and decreased by $53,000, or 1.2%, from the third quarter of 2023 performance. Factors contributing to the lower level of non-interest income for the quarter included:

• wealth management fees improved by $205,000, or 7.2%, due in part to a strong performance from our Financial Services division that resulted from new business growth. Also, the increase in wealth management fees reflects the improving market conditions particularly for equity securities as major market indexes continue their ascent to record highs in 2024; and
• a $159,000, or 23.4%, decrease in other income due primarily to the necessary adjustments to the fair value of a risk participation agreement as well as the 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. Specifically, these adjustments reflect the changing national interest rates which unfavorably impacted other income by $234,000 during the third quarter of 2024.

**…..NON-INTEREST EXPENSE…..**Non-interest expense for the third quarter of 2024 totaled $11.7 million and decreased by $374,000, or 3.1%, from the prior year’s third quarter. Factors contributing to the lower level of non-interest expense for the quarter included:

• a $354,000, or 30.9%, decrease in professional fees. Professional fees in both 2024 and 2023 were impacted by litigation and responses to the actions of an activist shareholder. The Company’s activist related costs declined by approximately $400,000 when the third quarter of 2024 is compared to the third quarter of 2023. As a result of a Cooperation and Settlement Agreement reached with the activist shareholder, which was described in a Current Report on Form 8-K filed on June 14, 2024, the Company anticipates that it will not incur any further activist related costs through the remainder of 2024;
• a $236,000, or 3.2%, decrease in salaries and employee benefits due to the net impact of certain items within this broad category. Total salaries cost was down by $48,000, or 0.9%, while health care cost was down by $37,000, or 3.8%, due to a lower level of full-time equivalent employees. Additionally, the service cost associated with the Company’s defined benefit pension plan decreased $116,000, or 35.5%. The reduced pension expense in the third quarter of 2024 reflects the retirement of employees who chose to take the lump sum distribution. These individuals are no longer included in the pension plan which favorably impacts the Company’s basic pension expense;
• a $148,000, or 13.0%, increase in data processing and IT expense due to additional expenses related to monitoring our computing and network environment; and
• a $60,000, or 30.8%, increase in FDIC insurance due to an increase in both the asset assessment base as well as the assessment rate.

**…..INCOME TAX EXPENSE…..**The Company recorded income tax expense of $237,000, or an effective tax rate of 16.7%, in the third quarter of 2024. This compares to income tax expense of $124,000, or an effective tax rate of 16.1%, for the third quarter of 2023.

NINE MONTHS ENDED SEPTEMBER 30, 2024 VS. NINE MONTHS ENDED SEPTEMBER 30, 2023

**…..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, 2024, the Company reported net income of $2,712,000, or $0.16 per diluted common share. This represented a 37.3% increase in earnings from the nine-month period of 2023 when net income totaled $1,975,000, or $0.12 per diluted common share. Overall, the earnings improvement for the nine-month period in 2024 was driven by the favorable comparison in the provision for credit losses and non-interest expense which more than offset a lower level of total revenue.

The Company’s community banking business continued to benefit from diversified revenue streams, with total non-interest income representing 34% of total revenue for the first nine months of 2024. Both total average loans and deposits have grown this year, demonstrating the strength and loyalty of our customer base and helping to drive three consecutive quarters of net interest income improvement. The Company believes that its balance sheet is well positioned for further quarterly net interest income growth through the remainder of 2024 and into 2025.

**…..NET INTEREST INCOME AND MARGIN…..**The following table compares the Company’s net interest income performance for the first nine months of 2024 to the first nine months of 2023 (in thousands, except percentages):

N/M – not meaningful

The Company’s net interest income in the first nine months of 2024 decreased by $922,000, or 3.4%, from the prior year’s first nine months while the net interest margin of 2.72% for the first nine months of 2024 represents a 17-basis point decline from the first nine months of 2023. As previously mentioned, the decrease reflects net interest margin compression which has been prevalent in the banking industry since the Federal Reserve began tightening monetary policy to control inflation and as the U.S. Treasury yield curve continues to be inverted. While the Company’s net interest margin percentage compares unfavorably to last year, it did demonstrate relative stability so far in 2024 and has improved from its low point in the fourth quarter of 2023 which was 2.63%. With the Federal Reserve’s action to begin easing monetary policy in September 2024, the Company believes the net interest margin will continue to improve in the remaining months of 2024 and into 2025.

Total loans averaged $1.031 billion in the first nine months of 2024, which is higher than the 2023 average by $41.9 million, or 4.2%. So far in 2024, new loan originations have slightly exceeded payoff activity through nine months and resulted in total loan volumes, on an end of period basis, demonstrating modest growth since December 31, 2023. The higher interest rate environment along with the higher average total loans outstanding resulted in total loan interest and fee income improving by $4.0 million, or 10.6%, for the first nine months of 2024 when compared to the same period of 2023.

Total investment securities averaged $255.9 million for the first nine months of 2024, which is $6.7 million, or 2.6%, lower than the $262.7 million average for the first nine months of last year. As previously mentioned, the decrease reflects management’s strategy to allocate more cash flow from the securities portfolio to higher yielding loans while the

Company controlled the amount of high cost overnight borrowed funds. Thus, new investment security purchases were primarily used to replace cash flow from maturing securities to maintain appropriate balances for pledging purposes related to public funds deposits. The improved yields for new securities purchases along with management’s execution of an investment portfolio repositioning strategy in late December 2023 caused interest income from investments to increase by $512,000, or 7.7%. Interest income from investments was unfavorably impacted by the transfer of one corporate security into non-accrual status during the third quarter of 2024, which resulted in a $73,000 reversal of previously recognized interest income. Overall, the 2024 first nine-month average balance of total interest earning assets increased since last year’s nine-month average by $35.3 million, or 2.8%, while total interest income increased by $4.6 million, or 10.1%, since the first nine months of 2023.

On the liability side of the balance sheet, through nine months, total average deposits were $10.5 million, or 0.9%, higher compared to total average deposits in the first nine months of 2023. The increase since last year is reflective of the Company’s successful business development efforts despite greater pricing competition in the market to obtain/retain deposits because of higher interest rates which more than offset a portion of the funds from the government stimulus programs leaving the balance sheet. As previously mentioned, the Company’s core deposit base continued to demonstrate the strength and stability that it has had for many years. On September 30, 2024, total deposits grew by $31.0 million, or 2.7%, since December 31, 2023, demonstrating what we believe is customer loyalty and confidence in AmeriServ Financial Bank.

Total interest expense in the first nine months of 2024 increased by $5.5 million, or 31.3%, when compared to the first nine months of 2023, due to higher deposit and borrowings interest expense. Deposit interest expense was higher by $4.2 million, or 28.5%, while the first nine months of 2024 average volume of total interest-bearing deposits grew by $26.5 million, or 2.8%. The rising national interest rates in 2023 resulted in certain deposit products, particularly public funds, which are tied to a market index, repricing upward with the move in short-term interest rates causing interest expense to increase. Additionally, increased market competition resulted in the Company raising 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 first nine months of 2024 average of non-interest bearing demand deposits declined by $16.0 million, or 8.2%, while, as mentioned above, total interest-bearing deposits increased. Finally, the increasing trend in total deposit costs experienced since the Federal Reserve began to tighten monetary policy slowed in 2024 with the Federal Open Market Committee keeping the Fed Funds rate stable since July 2023 until their action to ease monetary policy in September 2024. This slowdown in deposit costs has contributed to the recent stabilization and improvement in the net interest margin. Management believes that deposit costs will improve as the Federal Reserve continues their expected tempered approach to reduce interest rates. Overall, total deposit cost averaged 2.19% in the first nine months of 2024, which is 47-basis points higher than total deposit cost of 1.72% for the first nine months of 2023.

Total borrowings interest expense increased by $1.2 million, or 47.3%, when comparing the first nine months of 2024 and the first nine months of 2023. The increase primarily results from the impact that the higher interest rates had on total borrowings cost. The Company’s utilization of overnight borrowed funds so far in 2024 has been lower than the 2023 level while the level of advances from the FHLB have increased. Total short-term borrowings averaged $30.2 million for the first nine months of 2024 after averaging $33.9 million for the first nine months of 2023. Advances from the FHLB averaged $50.7 million in the first nine months of 2024 which is $31.9 million, or 169.8%, higher than the $18.8 million average in the first nine months of 2023. Management’s strategy to increase term advances to lock in lower rates than overnight borrowings due to the inversion in the yield curve has favorably impacted net interest income.

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, 2024 and 2023. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 42. The tax equivalent adjustments to interest income on loans for the nine months ended September 30, 2024 and 2023 was $19,000 and $10,000, 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.

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

**…..PROVISION FOR CREDIT LOSSES…..**For the first nine months of 2024, the Company recognized a $174,000 provision for credit losses recovery after recognizing $1.4 million of provision expense in the first nine months of 2023, resulting in a net favorable change of $1.6 million. The provision for credit losses recovery for the nine-month timeframe of 2024 reflects recoveries recognized for both the loan and securities portfolios. Specifically, a $145,000 recovery from the loan portfolio occurred primarily due to a favorable adjustment to the loss and qualitative factors used to calculate the allowance for credit losses in accordance with ASC 326, Financial Instruments – Credit Losses (CECL). Within the investment portfolio, a $435,000 recovery was recognized on a $926,000 reserve that was established in the first quarter of 2023 for a Signature Bank subordinated debt investment after the bond was successfully sold in the first quarter of 2024. These recoveries more than offset a $360,000 reserve established for an available for sale corporate security and an additional $50,000 that was contributed to the reserve for HTM securities in accordance with CECL.

**…..NON-INTEREST INCOME…..**Non-interest income for the first nine months of 2024 totaled $13.5 million and declined by $103,000, or 0.8%, from the first nine months of 2023 performance. Factors contributing to the lower level of non-interest income for the nine-month period included:

• during the first quarter of 2023, the Company recognized a $1.7 million gain from AmeriServ Financial Bank selling all 7,859 shares of Class B common stock of Visa Inc. There was no such gain during the nine-month period ending September 30, 2024;
• wealth management fees improved by $1.0 million, or 12.0%, due in part to a strong performance from our Financial Services division that resulted from new business growth. Also, the increase in wealth management fees reflects the improving market conditions particularly for equity securities as major market indexes continue their ascent to record highs in 2024. Overall, the fair market value of wealth management assets totaled $2.6 billion at September 30, 2024 and increased by $218.3 million, or 9.1%, since September 30, 2023; and
• a $590,000, or 36.5%, increase in other income due to the necessary adjustments to the fair value of a risk participation agreement as well as the 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. These adjustments reflect the changing national interest rates which favorably impacted the nine-month period by $188,000. Also favorably impacting other income was the Company recognizing a $250,000 signing bonus in 2024 that resulted from successful negotiations related to the renewal of an expiring contract with Visa.

**…..NON-INTEREST EXPENSE…..**Non-interest expense for the first nine months of 2024 totaled $36.9 million and decreased by $353,000, or 0.9%, from the prior year’s first nine months. Factors contributing to the lower level of non-interest expense for the nine-month period included:

• a $914,000, or 4.1%, decrease in salaries and employee benefits due to the net impact of certain items within this broad category. Total salaries cost was down by $641,000, or 4.1%, after the Company incurred additional salary expense in 2023 related to a strategy to consolidate certain executive level positions in the wealth management business. Total health care cost was $459,000, or 15.9%, lower compared to last year and reflects management’s effective negotiations with our current health care provider that resulted in not having to recognize any premium costs in January 2024. These favorable items were partially offset by an increased level of incentive compensation by $343,000, or 41.2%, which corresponds to the strong performance of our wealth management division;
• a $517,000, or 26.7%, increase in other expense due primarily to the recognition of a pension settlement charge totaling $410,000 in 2024. A settlement charge must be recognized when the total dollar amount of lump sum distributions paid from the pension plan to retired employees exceeds a threshold of expected annual service and interest costs in the current year;
• a $473,000, or 10.8%, decrease in professional fees. Professional fees in both 2024 and 2023 were impacted by litigation and responses to the actions of an activist shareholder. These activist related costs amounted to $1.5 million for the first nine months of 2024 compared to $2.0 million for the first nine months of 2023 as a Cooperation and Settlement Agreement was reached with the activist shareholder in June 2024;
• a $291,000, or 8.8%, increase in data processing and IT expense due to additional expenses related to monitoring our computing and network environment; and
• a $265,000, or 53.5%, increase in FDIC insurance due to an increase in both the asset assessment base as well as the assessment rate.

**…..INCOME TAX EXPENSE…..**The Company recorded an income tax expense of $611,000, or an effective tax rate of 18.4%, in the first nine months of 2024. This compares to an income tax expense of $435,000, or an effective tax rate of 18.0%, for the first nine months of 2023. The higher level of income tax expense this year is due to the increased level of pre-tax income.

**…..SEGMENT RESULTS.…..**The community banking segment reported a net income contribution of $13,484,000 in the nine months of 2024 which was $1,319,000 higher than the net income contribution in the nine months of 2023. 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 $1.5 million benefit to the Company in the nine months of 2024 when compared to the nine months of 2023. Despite this 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 by $209,000. Contributing to the net interest margin compression experienced by the Company was an unfavorable deposit mix shift as exhibited by the nine-month average of non-interest-bearing demand deposits declining by $16.0 million, or 8.2%, while total interest-bearing deposits increased by $26.5 million, or 2.8%. This segment benefitted from a higher level of total average loans in the nine months of 2024 by $41.9 million, or 4.2%. Growth occurred primarily in the commercial real estate category with modest growth occurring in residential mortgage and home equity loans. Overall, total loan interest income improved by $4.0 million, or 10.6%, for the nine months of 2024 when compared to the nine months of last year. Deposit interest expense was higher by $4.2 million, or 28.5%, while, as mentioned above, the 2024 nine-month average volume of total interest-bearing deposits increased by $26.5 million, or 2.8%. The higher national interest rates along with increased market competition to retain and attract deposits contributed to deposit costs increasing. This segment was favorably impacted by the Company recording a $149,000 recovery for the allowance for credit losses on our loan portfolio and unfunded commitments in the nine months of 2024 compared to $567,000 of provision expense for credit losses on loans and unfunded commitments in last year’s nine months. Non-interest income increased due to the Company recognizing a $250,000 signing bonus that resulted from successful negotiations related to the renewal of an expiring contract with Visa. Also, this segment was favorably impacted by the necessary adjustment to the fair market value of an interest rate swap related risk participation agreement as well as the 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. Non-interest expense, within the community banking segment, in the nine months of 2024 compares unfavorably to last year’s nine months due to a higher level of FDIC deposit insurance expense and higher data processing and IT related costs.

The wealth management segment’s net income contribution increased by $1.2 million in the nine months of 2024 from the nine months of 2023. The increase reflects the strong performance from the Financial Services division that resulted from new business growth. In addition, wealth management fees increased due to the improving market conditions particularly for equity securities as the major market indexes continue their ascent to record highs in 2024. Overall, wealth management revenues reached a historically high level. Also contributing to the higher level of net income for this segment were lower levels of salaries expense and health care costs. Partially offsetting the improvement in wealth management revenue cost for the nine-month period were higher levels of professional fees and incentive compensation.

The investment/parent segment reported a net loss of $12,904,000 in the nine months of 2024 which is greater than the net loss of $11,097,000 in the nine months of 2023 by $1,807,000. The funds transfer pricing analysis caused the loss reported within this segment to be higher due to the inverted yield curve and the higher funding costs on our balance sheet. Also contributing to the higher net loss for this segment was the $1.7 million gain recognized during the first quarter of 2023 from the sale of the Class B common stock of Visa Inc. while there was no such gain in 2024. This segment did experience an $869,000 favorable shift from the Bank recognizing a $435,000 provision recovery in 2024 from the subordinated debt investment with Signature Bank after a $926,000 provision expense was recognized on this same investment in the first quarter of 2023. This segment was unfavorably impacted by the recognition of $360,000 of provision expense in 2024 to establish a reserve for an available for sale (AFS) corporate security. This segment was also unfavorably impacted by $1,230,000 of additional total borrowings interest expense due to the higher average balance of FHLB term borrowings. Professional fees in both 2024 and 2023 were impacted by litigation and responses to the actions of an activist shareholder. These activist related costs amounted to $1.5 million for the nine months of 2024 compared to activist costs of $2.0 million for the nine months of 2023. Favorably impacting net income for this segment was an increased level of interest income from investment securities by $512,000 as the higher interest rates and a portfolio restructuring in late 2023 resulted in an improved overall total securities yield.

**…..BALANCE SHEET…..**The Company’s total consolidated assets were $1.4 billion at September 30, 2024, which increased by $15.5 million, or 1.1%, from the December 31, 2023 asset level. This change was related, primarily, to increased levels of cash and cash equivalents, total loans, leases, other real estate owned (OREO) and repossessed assets and other assets. Specifically, total loans increased by $2.0 million, or 0.2%, as so far in 2024, new loan originations have only slightly exceeded payoff activity. The marginal growth in loans along with an increase in total deposits led to an $8.1 million, or 57.7%, increase in cash and cash equivalents. The $953,000, or 31.5%, increase in the right-of-use asset for operating and financing leases resulted from the execution of two new leases for office locations and one new lease for equipment during 2024. OREO and repossessed assets increased $1.8 million due primarily to the foreclosure of a non-owner occupied commercial real estate loan secured by an office property during the second quarter of 2024. Finally, other assets increased $2.7 million, or 7.3%, due to an increase in the positive balance of the accrued pension liability which was partially offset by a decrease in the market values for the interest rate swaps.

Total deposits increased by $31.0 million, or 2.7%, in the first nine months of 2024. We believe this demonstrates customer confidence and the strength and loyalty of our core deposit base. As of September 30, 2024, the 25 largest depositors represented 25.3% of total deposits, which is an increase from December 31, 2023, when it was 22.4%. As of September 30, 2024 and December 31, 2023, the estimated amount of uninsured deposits was $420.9 million and $384.5 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 short-term and FHLB borrowings were reduced by $19.2 million, or 22.5%, since year-end 2023 as a decrease in short-term borrowings more than offset an increase in FHLB term advances. Specifically, short-term borrowings decreased by $29.2 million, or 71.3%. 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 increased usage of FHLB term advances in the first nine months of 2024 leading to an increase of $10.0 million, or 22.4%.

The Company’s total shareholders’ equity increased by $5.9 million, or 5.8%, during the first nine months of 2024. The increase in capital is the result of the Company’s earnings performance during the first nine months of 2024 more than offsetting our common stock dividend payments to shareholders. In addition, the pension adjustment and improved market value of the available for sale investment securities portfolio had a positive impact on accumulated other comprehensive loss. Partially offsetting these positive items was the execution of a Stock Repurchase Agreement pursuant to which the Company repurchased, at current market price, 628,003 shares of common stock from Driver Opportunity Partners, in connection with a settlement agreement, reducing capital by $1.5 million.

The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of 12.87%, and a common equity tier 1 capital ratio of 9.33% at September 30, 2024. See the discussion of the Basel III capital requirements under the Capital Resources section below. As of September 30, 2024, the Company’s book value per common share was $6.55 and its tangible book value per common share was $5.72(1). When compared to December 31, 2023, book value per common share increased by $0.59, or 9.9%, and tangible book value per common share increased by $0.56 per common share, or 10.9%. The improvement in the Company’s book value and tangible book value per share during 2024 was largely due to the favorable adjustment for both the unrealized loss on available for sale securities and the Company’s defined benefit pension plan as well as the accretive repurchase of 628,003 shares of our common stock from the activist shareholder. The tangible common equity to tangible assets ratio was 6.79%(1) at September 30, 2024 and increased by 35-basis points when compared to December 31, 2023.

(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 loans, and classified loans (in thousands, except percentages):

* Non-performing loans are comprised of loans that are on a non-accrual basis and loans that are contractually past due 90 days or more as to interest and principal payments.

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

The increase in accruing loan delinquency since year-end 2023 is attributable to an increase in commercial real estate loan delinquency due to slow payments on a $3.6 million urban office loan for which the Company has already established a specific reserve for credit losses allocation of $1.6 million. Non-performing loans decreased from $12.4 million at December 31, 2023 to $9.8 million at September 30, 2024 due to a reduction in non-accrual loans as well as loans past due 90 days or more still accruing. Primarily, the foreclosure and transfer to other real estate owned (OREO), during the second quarter of 2024, of a commercial office building which secured a $1.5 million non-accrual commercial real estate loan contributed to this decrease. The aforementioned transfer to OREO along with the risk rating upgrade of a $3.6 million non-owner occupied commercial real estate loan and normal paydown activity contributed to a decrease in classified loans. Specifically, classified loans decreased $5.8 million, or 23.0%, from December 31, 2023 and totaled $19.2 million at September 30, 2024.

Non-performing assets from the loan portfolio, which include OREO and repossessed assets, were 1.12% of total loans as of September 30, 2024. The Company recognized net loan charge-offs of $488,000, or 0.06% of total average loans, in the first nine months of 2024 compared to net loan charge-offs of $187,000, or 0.03% of total average loans, in the first nine months of 2023.

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, 2024, the 25 largest credits represented 22.5% of total loans outstanding, which is relatively consistent with December 31, 2023 when it was 22.7%.

Commercial Real Estate Loan Exposure

A significant portion of the Company's loan portfolio consists of commercial real estate loans, including owner occupied properties, non-owner-occupied properties, and other commercial properties. These types of loans are generally viewed as having more risk of default than residential real estate loans and depend on cash flows from the owner’s business or the property’s tenants to service the debt. The borrower’s cash flows may be affected significantly by general economic conditions, a downturn in the local economy or in occupancy rates in the market where the property is located, any of which could increase the likelihood of default. Commercial real estate loans also typically have larger loan balances, and, therefore, the deterioration of one or a few of these loans could cause a significant increase in the percentage of the Company's non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for credit losses for loans, and an increase in charge-offs, all of which could have a material adverse effect on the Company's business, financial condition, and results of operations.

The banking regulatory agencies have recently expressed concerns about weaknesses in the current commercial real estate market. Banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement enhanced risk management practices, including stricter underwriting, internal controls, risk management policies, more granular reporting, and portfolio stress testing, as well as possibly higher levels of allowances for credit losses and capital levels as a result of commercial real estate lending growth and exposures. If the Company's banking regulators determine that our commercial real estate lending activities are particularly risky and are subject to such heightened scrutiny, the Company may incur significant additional costs or be required to restrict certain of our commercial real estate lending activities. Furthermore, failures in the Company's risk management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which could have a material adverse effect on the Company's business, financial condition, and results of operations.

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 388% as of September 30, 2024. It should be noted that this ratio increased from 375% at December 31, 2023 due to the growth in non-owner occupied commercial real estate loan balances out pacing the increase in total regulatory capital. Further, non-owner occupied commercial real estate loans represented 51.3% and 49.3% of total loans as of September 30, 2024 and December 31, 2023, respectively.

The commercial real estate loan segment includes the non-owner occupied commercial real estate loan classes of retail, multi-family, and other. The following table presents our non-owner occupied commercial real estate loan portfolio by property type.

(In thousands)

52

**…..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):

The allowance for loan credit losses declined since December 31, 2023 by $633,000, or 4.2%, to $14.4 million at September 30, 2024. Even with this modest decrease, the allowance for loan credit losses is $2.1 million, or 17.1%, higher than the allowance for loan credit losses at September 30, 2023. The increase since last year’s third quarter end was due to the Company strengthening its allowance for loan credit losses during the fourth quarter of 2023. Overall, the Company continues to maintain solid coverage of both total loans and non-performing loans as the allowance for loan credit losses provided 147% coverage of non-performing loans and 1.39% of total loans at September 30, 2024.

The allowance for credit losses on the investment securities portfolio was comprised of $360,000 on available for sale securities and $88,000 on held to maturity securities as of September 30, 2024. This compares to $926,000 on available for sale securities and $37,000 on held to maturity securities as of December 31, 2023. The allowance for credit losses on available for sale securities decreased $566,000, or 61.1%, since year-end 2023 due to the successful sale of the Signature Bank subordinated debt investment which was partially offset by the establishment of an allowance for credit losses on another corporate available for sale security that was deemed to be credit impaired in 2024.

**…..LIQUIDITY…..**The Company’s liquidity position continues to be strong. Total average deposits were $10.5 million, or 0.9%, higher when compared to the 2023 first nine-month average. The increase reflects the Company’s successful business development efforts which more than offset 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 higher interest rates. The Company’s core deposit base continued to demonstrate the strength and stability that it has had for many years. On September 30, 2024, total deposits grew by $31.0 million, or 2.7%, since December 31, 2023, demonstrating customer loyalty and confidence in AmeriServ Financial Bank. In addition to its 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. Overall, deposit volumes continue to remain at a high level. 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 remained relatively stable in the nine months of 2024 compared to the nine months of last year, increasing slightly by $69,000, or 1.8%. Advances from the FHLB averaged $50.7 million in the nine months of 2024 which is $31.9 million, or 169.8%, higher than the $18.8 million average in the nine months of 2023. Management’s strategy to increase term advances to lock in lower rates than overnight borrowings due to the inversion in the yield curve has favorably impacted net interest income. Management continues to monitor the changing economic conditions and adjust pricing strategies accordingly which largely determines customer behavior and the level of total deposits as well as shifts within the total deposit mix. Also, 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. The Company’s utilization of overnight borrowed funds so far in 2024 has been lower than the 2023 level. Total fed funds purchased and other short-term borrowings averaged $30.2 million for the nine months of 2024 after averaging $33.9 million for the nine months of 2023. 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 2024, purchases of securities have continued to follow the same trend exhibited during the full year of 2023. Securities purchases have been slow as more funds have been allocated to the loan portfolio. Loan pipelines are currently at a typical level. Total average loans in the nine months of 2024 were higher than the 2023 nine-month average by $41.9 million, or 4.2%. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company’s loan to deposit ratio averaged 88.7% in the third quarter of 2024, 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 increased by $8.1 million from December 31, 2023, to $22.1 million at September 30, 2024, due to $8.6 million of net cash provided by financing activities and $155,000 of net cash provided by investing activities which more than offset $685,000 of net cash used in operating activities. Within investing activities, cash advanced for new loans originated totaled $129.0 million and was $3.7 million higher than the $125.3 million of cash received from loan principal payments. Within financing activities, total short-term borrowings decreased by $29.2 million, total borrowings on advances from FHLB increased by $10.0 million while total deposits increased by $31.0 million.

The holding company had $6.3 million of cash, short-term investments, and investment securities at September 30, 2024, which represented a $1.9 million decrease from the holding company’s cash position since December 31, 2023. Dividend payments from our subsidiaries provided ongoing cash to the holding company. At September 30, 2024, our subsidiary Bank had $2.0 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 payments on 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 $22.1 million and $14.0 million at September 30, 2024 and December 31, 2023, 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, 2024, the Company had $299 million of overnight borrowing availability at the FHLB, $43 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 9.33%, the tier 1 capital ratio was 9.33%, and the total capital ratio was 12.87% at September 30, 2024. The Company’s tier 1 leverage ratio was 7.75% at September 30, 2024. We anticipate that we will maintain our strong capital ratios throughout the remainder of 2024.

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:

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. The Company had a book value of $6.55 per common share and a tangible book value of $5.72(1) per common share on September 30, 2024. In addition, our tangible common equity ratio was 6.79%(1). At September 30, 2024, the Company had approximately 16.5 million common shares outstanding.

During the second quarter of 2024, the Company executed a Stock Purchase Agreement with Driver Opportunity Partners (Driver), in connection with a settlement agreement. Under the stock purchase agreement, the Company repurchased 628,003 shares of common stock from Driver at a per share price of $2.38. Because these shares were acquired at a price below tangible book value, the stock repurchase was accretive to shareholders. The Company does not expect to execute any additional stock repurchases in 2024.

(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 $70 million of interest rate hedges during 2023, in order 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 4.75% to 5.00% as the Federal Reserve took action in September 2024 to ease monetary policy. The 50-basis point decrease to the target fed funds rate was the Federal Open Market Committee’s first change to interest rates since the third quarter of 2023.

The variability of net interest income was slightly negative in the upward rate scenarios as the Company was marginally more exposed to liabilities repricing upward to a greater extent than assets. Specifically, the cost of funds was 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 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. Overall, based on the slight change in the variability of net interest income in the various interest rate scenarios, the Company is well positioned to sustain either a rate increase or decrease.

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 $250.1 million and standby letters of credit of $8.9 million as of September 30, 2024. 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.

**…..RECONCILIATION OF NON-GAAP FINANCIAL MEASURES…..**This document contains certain financial information determined by methods other than in accordance with generally accepted accounting principles in the United States (GAAP). The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible common 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, 2024 and December 31, 2023 (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), 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 15 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 (recovery) for credit losses

DESCRIPTION

Effective January 1, 2023, the Company adopted ASC 326, Financial Instruments - Credit Losses and subsequent related updates. This standard 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, ASC 326 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 cancelable. 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 — 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 improving 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 (though none are 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. Our goal is to 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 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; and (xv) 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, 2024, 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, 2024 are effective.

(b) Changes in Internal Controls. There have been no changes in AmeriServ Financial, Inc.’s internal controls over financial reporting (as defined in Rule 13a-15(f)) that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.