Ameriserv Financial Inc /Pa/ ASRV US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company including the related notes thereto, included elsewhere herein.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018

2020 SUMMARY OVERVIEW:

AmeriServ Financial, Inc.’s fourth quarter 2020 net income was $692,000, or $0.04 per diluted common share. This represents an increase of $23,000, or 3.4%, from the fourth quarter of 2019 when net income was $669,000, or also $0.04 per diluted common share. For the year ended December 31, 2020, net income was $4,598,000 or $0.27 per diluted share. This performance represented a decline of 22.9% from the full year of 2019, when net income was $6,028,000, or $0.35 per common share.

​

Admittedly, this has been, and in many ways continues to be, a difficult time for many of us, both in this nation and globally. But we believe the fundamental strength and resolve of the average citizen of these United States has emerged through the many challenges. The national lockdown was a shock to the fiber of our society. However, the limited re-openings that began in mid-summer were important. By the beginning of the fourth quarter, those commercial enterprises who re-opened began to revive commercial loan demand. AmeriServ experienced a growth in traditional loan products of nearly $39 million in net loans outstanding in the fourth quarter. This quickening pace we regard as a positive sign that recovery, while slow, has begun. We have also noticed the changed behavior of the American consumer as the pandemic event spread across all fifty states. All levels of government embarked on economic stimulus programs, introducing growth in the money supply for both businesses and consumers. But much of that stimulus funding went into debt reduction and even more to increase the level of deposits in banks across the U.S. Americans were unsure about the future and almost overnight, the nation of spenders became a nation of savers. AmeriServ alone found that from December 31, 2019 to December 31, 2020, its total deposits increased by $94 million, or approximately 10%, a record high for AmeriServ. The banking system was more liquid than it has been in sometime as businesses and consumers alike were concerned about an increased level of risk.

​

Other positive changes began occurring. The Federal Reserve reduced interest rates and ignited a boom in home buying and residential mortgages. In 2020, AmeriServ Financial Bank closed $142 million of residential mortgage loans as compared with $60 million in the 12 months of 2019. This flood of new stimulus funds also found its way into equity markets permitting AmeriServ’s Wealth Management complex to increase the market value of its clients’ funds under management or administration, by $243 million or 11%. This total closing at $2.48 billion, was an historic record for the Wealth Management complex at AmeriServ.

​

These positive developments were encouraging but we continued to be alert and active in the interests of those businesses or consumers who were struggling. Our commercial loan group actively supported certain borrowers in certain industries who remained closed or restricted. AmeriServ also participated in the Federal Payroll Protection Loan Program (PPP) in 2020 making 477 loans totaling $68.7 million to small businesses throughout the region. AmeriServ additionally has modified the payment terms for 19 commercial borrowers with loans totaling $47 million in order to assist these borrowers struggling with the pandemic event and conditions beyond their control. We monitor these borrowers continuously, along with guidance from the Federal Reserve, our primary regulator. Just as any knowledgeable team of money lenders would do, we have continued to build our allowance for loan losses to protect this Company. The PPP loans are relatively riskless because of a governmental guarantee. AmeriServ is monitoring the payment deferral loans and reporting in detail to the full Board of Directors monthly. Our goal is to provide reasonable assistance to all of our struggling customers, but also to protect the safety and soundness of this important regional franchise.

​

This Company continues to exceed all regulatory capital requirements. We continue to service the payment requirements of our Trust Preferred shares and our subordinated debt issue. Our quarterly common stock dividend remains in effect, but we have ceased common stock repurchases based upon guidance provided by regulatory authorities. Additionally, we are preserving capital to support the balance sheet growth that we have experienced. Daily, we are faced with the task of balancing risk with reward. However, the risk implicit today is not primarily economic risk but rather the total impact of the pandemic, which created unplanned and new economic risks. In such times, we

18

Table of Contents

naturally fall back into the time tested financial norms of the community bank business model. This is what we believe in and is exactly what good times and bad times have trained us to do. We are encouraged by the recent positive developments which we reviewed herein. We do not believe the difficulties are over. The pandemic is still with us every day. Therefore, this Board and this Management Team must continue to be vigilant and alert. There are still too many unknowns to be explored and mitigated.

​

PERFORMANCE OVERVIEW. The following table summarizes some of the Company’s key profitability performance indicators for each of the past three years.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS, EXCEPT

​ ​ PER SHARE DATA AND RATIOS) ​

Diluted earnings per share ​ 0.27 ​ 0.35 ​ 0.43 ​

Return on average assets ​ 0.37 % 0.51 % 0.67 %

Return on average equity ​ 4.52 ​ 6.02 ​ 8.08 ​

​

The Company reported net income of $4,598,000, or $0.27 per diluted common share, in 2020. This represents a 22.9% decrease in earnings per share from the full year of 2019 when net income totaled $6,028,000, or $0.35 per diluted common share. The Company’s return on average equity declined to 4.52% for the 2020 year from 6.02% in 2019. The resiliency of our community bank customer-focused business model was evident in 2020 as the Company dealt with the many unexpected challenges resulting from the COVID-19 pandemic. The Company experienced record levels of both loans and deposits as we served as an important financial resource to small businesses and consumers in our marketplace. Continuing our conservative risk management posture, we prudently built our allowance for loan losses to address increased credit risk in certain sectors of our loan portfolio which was a primary factor causing the decline in earnings between years. The good diversification of the Company’s revenue was evident as 31% of our total revenue in 2020 came from non-interest income sources which included record contributions from our strong wealth management business and active residential mortgage operation. Finally, the Company increased tangible book value(1) per share by 6.7% during 2020.

The Company reported net income of $6.0 million, or $0.35 per diluted common share, for 2019. This represented an 18.6% decrease in earnings per share from 2018 when net income totaled $7.8 million, or $0.43 per diluted common share. The decline in 2019 earnings was caused by an increased loan loss provision primarily related to one large commercial loan and an impairment charge recognized on a Community Reinvestment Act (CRA) related investment.

The Company reported net income of $7.8 million, or $0.43 per diluted common share, for 2018. This represented an 139% increase in earnings per share from 2017 where net income totaled $3.3 million, or $0.18 per diluted common share. The strong growth in earnings resulted from a favorable combination of lower income tax expense, outstanding asset quality, and well controlled non-interest expense.

(1) See reconciliation of non-GAAP tangible book value later in this MD&A.

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; 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 summarizes the Company’s net interest income performance for each of the past three years:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS, EXCEPT RATIOS)

​

19

Table of Contents

2020 NET INTEREST PERFORMANCE OVERVIEW. The Company’s net interest income for the full year of 2020 increased by $925,000, or 2.6%, when compared to the full year of 2019. The Company’s net interest margin was 3.19% for the full year of 2020 representing a ten basis point decline from the full year of 2019. Our net interest margin performance was challenged throughout 2020 as a result of the low interest rate environment and the economic uncertainty and volatility caused by the COVID-19 pandemic. As COVID-19 cases surged, government officials recommended the implementation of certain safety measures and restrictions on businesses and individuals. As a result, AmeriServ had to close its lobbies to customer traffic two separate times during the year for an extended period of time, but continued to service customers through drive up access. In spite of these pandemic related challenges, our balance sheet experienced robust growth in 2020 which caused the increase in net interest income despite the decline in the net interest margin due to pressures from the low interest rate environment. Total average earning assets increased by $62.2 million, or 5.8%, in 2020. Specifically, total loans averaged $923 million in 2020 which is $48.1 million, or 5.5%, higher than the 2019 full year average. Short-term investments averaged $29 million in 2020 which is $18.3 million, or 173.2%, higher than the 2019 full year average. Slightly offsetting the higher level of average loans and short-term investments was a decrease in average investment securities. Total investment securities averaged $188 million in 2020 which is $6.2 million, or 3.2%, lower than the 2019 full year average.

Total deposits, including non-interest bearing demand deposits, averaged $1.035 billion for the full year of 2020, which was $55.2 million, or 5.6%, higher than the $980 million average for the full year of 2019. The 2020 full year average of short-term and FHLB borrowed funds was $69 million, which represented an increase of $5.6 million, or 8.8%. Overall, the Company’s loan to deposit ratio averaged 90.9% in the fourth quarter of 2020 which we believe indicates that the Company has ample capacity to continue to grow its loan portfolio and is well positioned to continue assisting our customers and the community given the impact that the COVID-19 pandemic is having on the economy.

COMPONENT CHANGES IN NET INTEREST INCOME: 2020 VERSUS 2019. Regarding the separate components of net interest income, the Company’s total interest income in 2020 decreased by $2.9 million, or 5.8%, when compared to 2019. Total average earning assets increased by $62.2 million, or 5.8%, in 2020 as the increased level of average total loans and short term investments more than offset the lower level of average total investment securities. Despite the growth in average earning assets, interest income was unfavorably impacted by a decrease in the earning asset yield which declined by 50 basis points from 4.61% to 4.11%. All categories within the earning asset base demonstrated an interest income decrease between years. The average total loan portfolio yield decreased by 51 basis points from 4.91% to 4.40% in 2020 while the average yield on total investment securities decreased by 16 basis points from 3.36% to 3.20%.

Total investment securities averaged $188 million for the full year of 2020 which is $6.2 million, or 3.2%, lower than the $194 million average in 2019. The Company was selective in 2020 when purchasing the more typical types of securities that have been purchased historically as the market was less favorable for purchases, offering a lower return given the differences in the position and shape of the U.S. Treasury yield curve from last year. To somewhat offset the unfavorable market for the more traditional types of purchases, the Company has been active since March of 2020 purchasing corporate securities, particularly subordinated debt issued by other financial institutions along with taxable municipal securities. Subordinated debt offers higher yields than the typical types of securities in which we invest and is particularly attractive given the current low interest rate environment and modestly positive slope of the yield curve. Management believes it to be acceptable to increase our investments in bank subordinated debt in a gradual and diversified manner, given the heavily regulated nature of the industry combined with our intensive due diligence process and adherence to our internal guidelines for these types of investments.

Total loans reached a new record level and averaged $923 million for the full year of 2020 which is $48.1 million, or 5.5%, higher than the 2019 full year average. The growth between years was primarily related to AmeriServ’s early participation in the Small Business Administration’s (SBA) 100% guraranteed Paycheck Protection Program (PPP) which remained on the balance sheet from the time of their inception through year end. During 2020, the Company processed 477 PPP loans totaling $68.7 million to assist small businesses and our community in this difficult economy. Also, the Company recorded a total of $1.9 million of processing fee income and interest income from PPP lending activity. The remaining portion of PPP processing fees totals approximately $755,000 and is being amortized into income over the time period that the loans remain on our balance sheet or until the PPP loan is forgiven at which time the remaining fee will be recognized immediately as income. Note that the level of PPP loans did decrease by approximately $10 million during the fourth quarter as we work through the forgiveness process with our customers. In late December 2020, the Federal Government passed a new $900 billion pandemic relief bill which includes $284.5 billion for the re-opening of the SBA Paycheck Protection Program. The Company is participating in this new 2021 program to continue to provide assistance to our business customers. Normal commercial lending production improved

20

Table of Contents

during the final four months of the year with commercial loan pipelines also improving to pre-COVID levels. Overall, on an end of period basis and excluding total PPP loans, the total loan portfolio grew by approximately $39.1 million since September 30, 2020. Residential mortgage loan production continued to be exceptionally strong throughout the year and reached a record level given the lower interest rate environment. For the full year of 2020, residential mortgage loan production totaled $142 million and was 139% higher than the production level of $60 million achieved for the full year of 2019. Even though total average loans increased compared to last year and loan interest income was enhanced by the PPP revenue, loan interest and fee income declined by $2.3 million, or 5.4%, for the full year. The lower loan interest income reflects the challenges that this record low interest rate environment has created. New loans are being originated at lower yields and certain loans tied to LIBOR or the prime rate reprice downward as both of these indices have moved down with the Federal Reserve’s decision to decrease the target federal funds interest rate by a total of 225 basis points since June of 2019.

Our liquidity position continues to be strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending activity due to the economic uncertainty. As a result, short-term investments averaged $29 million for the full year of 2020 which is $18.3 million, or 173.2%, higher than the 2019 full year average. The challenge of profitably deploying this excess liquidity resulted in management initially investing in high quality commercial paper given their short maturities and higher rates of return. However, as 2020 progressed, the yields on commercial paper experienced a steady decline, once again creating pressure to find a suitable return for our excess liquidity. This pressure was eased during the fourth quarter given the loan growth that occurred which resulted in short term investment balances returning to a more normal.

Total interest expense for the twelve months of 2020 decreased by $3.8 million, or 26.6%, when compared to 2019, due to lower levels of both deposit and borrowing interest expense. Deposit interest expense in the full year of 2020 was lower by $3.6 million, or 31.8%. Total average deposits reached a record level, averaging $1.035 billion for the year, which is $55.2 million, or 5.6%, higher than the 2019 full year average reflecting the benefit of government stimulus programs and reduced consumer spending in 2020. In addition, the Company’s loyal core deposit base continues to be a source of strength for the Company during periods of market volatility. Management continued to effectively execute several deposit product pricing decreases given the low interest rate environment and the downward pressure that the low interest rates are having on the net interest margin. As a result, the Company experienced deposit cost relief. Overall, total deposit cost, including demand deposits, averaged 0.74% in 2020 compared to 1.14% in 2019, or a meaningful decrease of 40 basis points.

The Company experienced a $255,000, or 8.1%, decrease in the interest cost of borrowings in the full year of 2020 when compared to the full year of 2019. The decline is a result of the Federal Reserve’s actions to decrease interest rates and the impact that these rate decreases have on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. The total 2020 full year average term advance borrowings balance increased by approximately $11.7 million, or 22.4%, when compared to the full year of 2019 as the Company took advantage of the lower yield curve to prudently extend borrowings. The rate on certain FHLB term advances is lower than the rate on overnight borrowings. As a result, the combined growth of average FHLB term advances and total average deposits resulted in less reliance on overnight borrowed funds, which decreased between years by $6.1 million. Overall, the 2020 full year average of total short-term and FHLB borrowed funds was $69.0 million, which represents an increase of $5.6 million, or 8.8%, from 2019.

2019 NET INTEREST PERFORMANCE OVERVIEW. The Company’s net interest income for the full year of 2019 decreased by $52,000, or 0.1%, when compared to the full year of 2018. The Company’s net interest margin was 3.29% for the full year of 2019 which represented a two basis point decline from the full year of 2018. Our net interest margin performance was challenged throughout 2019 as the U.S. Treasury Yield Curve shifted downward, flattened and became inverted in certain segments, at various times during the year. The lower interest rate environment along with a lower full year average total loan portfolio balance resulted in the modest year over year unfavorable comparison for net interest income. Positively impacting net interest income during 2019 was a favorable shift experienced in the mix of total average interest bearing liabilities as the amount of total interest bearing deposits increased and resulted in less reliance on higher cost borrowings to fund interest earning assets. Total average earning assets increased by $6.7 million, or 0.6%, in 2019. Specifically, total investment securities averaged $194 million in 2019 which is $9.5 million, or 5.1%, higher than the 2018 full year average. Total loans averaged $875 million in 2019 which is $6.6 million, or 0.7%, lower than the 2018 full year average.

21

Table of Contents

Total average interest bearing liabilities increased by $31.5 million, or 3.6%, as a lower level of total average FHLB borrowings was more than offset by a higher level of interest bearing deposits. Total interest bearing deposits averaged $828 million in 2019 and increased when compared to the 2018 average by $42.7 million, or 5.4%. The 2019 full year average of FHLB borrowed funds was $63.4 million, which represented a decrease of $14.7 million, or 18.8%. Total deposits, including non-interest bearing demand deposits, averaged $980 million for the full year of 2019, which was $19.9 million, or 2.1%, higher than the $960 million average for the full year of 2018. Overall, the Company’s loan to deposit ratio averaged 89.1% in the fourth quarter of 2019 which we believe indicated that the Company had ample capacity to grow its loan portfolio.

COMPONENT CHANGES IN NET INTEREST INCOME: 2019 VERSUS 2018. Regarding the separate components of net interest income, the Company’s total interest income in 2019 increased by $2.7 million, or 5.7%, when compared to 2018. Total average earning assets increased by $6.7 million, or 0.6%, in 2019 as a lower level of total average loans were more than offset by an increased level of total investment securities. Also contributing to the higher level of interest income was the earning asset yield increasing by 22 basis points from 4.39% to 4.61%. All categories within the earning asset base demonstrated an interest income increase between years. The average total loan portfolio yield increased by 25 basis points from 4.66% to 4.91% in 2019 while the yield on total investment securities increased by 19 basis points from 3.17% to 3.36%.

Total investment securities averaged $194 million for the full year of 2019 which was $9.5 million, or 5.1%, higher than the $185 million average in 2018. The growth in the investment securities portfolio occurred primarily as the year progressed during 2018 and was the result of management taking advantage of the rising interest rate environment experienced during 2018 which provided an attractive market for additional security purchases. Purchases primarily focused on federal agency mortgage backed securities due to the ongoing cash flow that these securities provide. Also, management continued its portfolio diversification strategy through purchases of high quality corporate and taxable municipal securities. Investment security purchase activity slowed significantly during 2019 as the interest rate market was less favorable.

Total loans averaged $875 million for the full year of 2019 which was $6.6 million, or 0.7%, lower than the 2018 full year average. Overall, total loan originations in 2019 exceeded the prior year’s level by $50.4 million and also exceeded another strong level of loan payoffs during the year. However, because of the high level of loan payoffs received late in 2018, the full year average comparison between years was unfavorable. Loan pipelines remained strong throughout 2019. Loan interest income increased by $1.9 million, or 4.6%, between the full year of 2019 and the full year of 2018. The higher loan interest income primarily reflected the Federal Reserve increasing the federal funds interest rate in 2018. This resulted in new loans originating at higher yields throughout 2018 and during the first half of 2019 and also caused the upward repricing of certain loans tied to LIBOR or the prime rate as both of these indices moved up with the federal funds rate increases in 2018. Certain floating rate loans, however, did reprice down in the second half of 2019 as the Federal Reserve reduced the federal funds rate by a total of 75 basis points in the second half of 2019. Also, included in the favorable year over year loan interest income increase was a higher level of loan fee income by $325,000, due primarily to prepayment fees collected on certain early loan payoffs.

Total interest expense for the twelve months of 2019 increased by $2.7 million, or 23.5%, when compared to 2018, due to higher levels of deposit interest expense which more than offset a slight decrease in borrowings interest expense. Deposit interest expense in 2019 was higher by $2.7 million, or 32.5%, for the full the year which reflected the higher level of total average interest bearing deposits and certain indexed money market accounts repricing upward due to the impact of the Federal Reserve increasing interest rates during 2018. The full year average cost of total interest bearing deposits increased between years by 28 basis points from 1.07% in 2018 to 1.35% in 2019. Even though total average interest bearing deposit cost increased for the full year of 2019, the Company did experience deposit pricing relief during the third and fourth quarters of 2019 because of the Federal Reserve easing interest rates late in July, September and October of 2019. Specifically, the Company’s cost of interest bearing deposits declined by 10 basis points between the third and fourth quarters of 2019. However, the Company continued to experience competitive market pressure to retain existing deposit customers and attract new customer deposits. Customer product preference changed as well in 2019 resulting in movement of funds from non-interest bearing demand deposit accounts and lower yielding money market accounts into higher yielding certificates of deposits. Overall, total deposits grew during the year and averaged $980 million for the full year of 2019, which was $19.9 million, or 2.1%, higher than the 2018 full year average.

The Company experienced a $21,000, or 0.7%, decrease in the interest cost of borrowings for the full year of 2019. The decline was a result of the lower total average borrowings balance between years combined with the impact from the Federal Reserve’s action to decrease interest rates three times in 2019 and the immediate impact that those rate decreases

22

Table of Contents

had on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. The total full year average term advance borrowings balance increased by approximately $7.3 million, or 16.3%, when compared to the full year 2018. This increase was due to the inversion demonstrated by the U.S. Treasury Yield Curve in 2019 and resulted in certain term advances costing less than overnight borrowed funds. Overall, the 2019 full year average of FHLB borrowed funds was $63.4 million, which represented a decrease of $14.7 million, or 18.8%, due to the increase in total average deposits.

The table that follows provides an analysis of net interest income on a tax-equivalent basis 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) 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) 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, as well as interest recorded on certain non-accrual loans as cash is received. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 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 years ended December 31, 2020, 2019, and 2018 was 24,000, 24,000, and 21,000, 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.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ ​ ​ ​ INTEREST ​ ​ ​ ​ ​ ​ INTEREST ​ ​ ​ ​ ​ ​ INTEREST ​ ​

​ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE

​ ​ (IN THOUSANDS, EXCEPT PERCENTAGES)

Interest earning assets: ​ ​ ​ ​ ​ ​ ​

Investment securities: ​ ​ ​ ​ ​ ​ ​

Non-interest earning assets: ​ ​ ​ ​ ​ ​ ​

Allowance for loan losses ​ (9,732) ​ ​ ​ ​ (8,404) ​ ​ ​ ​ (9,866) ​ ​

Interest bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-interest bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest rate spread ​ ​ ​ ​ ​ 3.01 ​ ​ ​ ​ ​ 3.05 ​ ​ 3.08 ​

Tax-equivalent adjustment ​ ​ ​ (24) ​ ​ ​ ​ ​ (24) ​ ​ ​ ​ (21) ​

​

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-

23

Table of Contents

equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ INCREASE (DECREASE) ​ INCREASE (DECREASE)

​ ​ DUE TO CHANGE IN: ​ DUE TO CHANGE IN:

​ ​ AVERAGE ​ ​ ​ ​ ​ ​ ​ AVERAGE ​ ​ ​ ​ ​ ​

​ VOLUME RATE TOTAL VOLUME RATE TOTAL

​ ​ (IN THOUSANDS)

INTEREST EARNED ON: ​ ​ ​ ​ ​ ​

Deposits with banks ​ (15) ​ 6 ​ (9) ​ — ​ 4 ​ 4

Investment securities: ​ ​ ​ ​ ​ ​ ​

INTEREST PAID ON: ​ ​ ​ ​ ​ ​

Savings deposits ​ 11 ​ (25) ​ (14) ​ (1) ​ — ​ (1)

Lease liabilities ​ (6) ​ 1 ​ (5) ​ 117 ​ — ​ 117

​

LOAN QUALITY. The Company’s written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. The Company’s policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $1,000,000 within a 12-month period. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business relationships with aggregate balances of $250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more,

24

Table of Contents

bankruptcy, or other negative economic concerns indicate impairment. The following table sets forth information concerning the Company’s loan delinquency and other non-performing assets.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ AT DECEMBER 31,

​ ​ (IN THOUSANDS,

​ ​ EXCEPT PERCENTAGES)

Total non-performing assets including TDRs (1) ​ 3,331 ​ 2,339 ​ 1,378 ​

Non-performing assets as a percentage of total assets ​ 0.26 ​ 0.20 ​ 0.12 ​

​

​

Overall, the Company continues to maintain good asset quality. The continued successful ongoing problem credit resolution efforts of the Company is demonstrated in the table above as levels of non-accrual loans, non-performing assets, and loan delinquency are well below 1% of total loans. Accruing loan delinquency increased $2.5 million since the prior year-end and now totals $5.5 million. This increase is the result of several commercial and commercial real estate loan borrowers demonstrating delinquency during the fourth quarter of 2020. Slightly offsetting this increase in commercial loan delinquency during the fourth quarter was a decrease in residential mortgage loan delinquency. In addition, the Company experienced an increase in non-accrual loans due, primarily, to higher non-accrual residential mortgage loans which also led to an increase in non-performing assets in 2020. The Company did experience a decrease in classified loans during 2020 due to the upgrade of certain commercial loans from substandard.

In 2020, the Company, as suggested by the Federal Reserve, granted loan payment modifications to customers experiencing difficulty during this tough economic time. Requested modifications primarily consist of the deferral of principal and/or interest payments for a period of three to six months and maturity date extensions. Initially, the balance of loan modifications related to COVID-19 that were granted to our customers totaled $200 million. At December 31, 2020, loans totaling approximately $49.1 million, or 5.3% of total loans, were on a payment modification plan, most of which are borrowers who were granted a second loan payment deferral. Included within this total were 19 commercial borrowers with loans totaling $47 million. Management is carefully monitoring asset quality with a particular focus on customers that have requested these payment deferrals. As we reached the end of the initial deferral time periods, deferral extension requests were considered based upon the customer’s needs and their impacted industry, borrower and guarantor capacity to service debt as well as issued regulatory guidance. See the disclosures regarding COVID-19 related modifications within the Non-Performing Assets Including Troubled Debt Restructurings footnote.

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 December 31, 2020, the 25 largest credits represented 22.6% of total loans outstanding, which represents a decrease from December 31, 2019 when it was 24.3%.

ALLOWANCE AND PROVISION FOR LOAN LOSSES. As described in more detail in the Critical Accounting Policies and Estimates section of this MD&A, the Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a

25

Table of Contents

critical accounting policy since it involves significant estimates and judgments. The following table sets forth changes in the ALL and certain ratios for the periods ended.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)

Charge-offs: ​ ​ ​ ​ ​ ​

Real estate – residential mortgage ​ (233) ​ (98) ​ (380) ​ (313) ​ (208) ​

Recoveries: ​ ​ ​ ​ ​ ​

Loans and loans held for sale, net of unearned income: ​ ​ ​ ​ ​ ​

As a percent of average loans: ​ ​ ​ ​ ​ ​

Allowance as a percent of each of the following: ​ ​ ​ ​ ​ ​

​

For 2020, the Company recorded a $2,375,000 provision expense for loan losses compared to an $800,000 provision expense in 2019. The Company continues to build the allowance for loan losses given the overall economic climate and the uncertainty that exists because of the COVID-19 pandemic. The 2020 provision reflects management strengthening certain qualitative factors within the allowance for loan losses calculation and downgrades of loan relationships that are reflective of the industries that have been especially negatively impacted from the pandemic and are demonstrating a slow pace of recovery. Earlier in 2020, several loans from the hotel industry were downgraded. Additionally during the fourth quarter, the downgrade of a hospitality related credit and a large transportation related credit, as well as the loan growth experienced also resulted in the provision increasing. The recovery efforts of many of these borrowers experiencing a downgrade stalled during the fourth quarter due to the rise in COVID cases which caused additional safety measures and restrictions to be put in place on their businesses. While these borrowers will need additional time to recover, we remain encouraged by their efforts to work through the pandemic and signs of improvement in their operations. The Company experienced net loan charge-offs of $309,000, or 0.03% of total loans, in 2020 compared to net loan charge-offs of $192,000, or 0.02% of total loans, in 2019. As a result of the provision expense sharply exceeding net loan charge-offs, the balance in the allowance for loan losses increased by over $2 million in 2020. Nonperforming assets totaled $3.3 million, or 0.34% of total loans, at December 31, 2020. Management is carefully monitoring asset quality with a particular focus on loan customers that have requested a second payment deferral during this difficult economic time. The Asset Quality Task Force is meeting at least monthly to review these particular

26

Table of Contents

relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. In summary, the allowance for loan losses provided 341% coverage of non-performing assets, and 1.16% of total loans, at December 31, 2020, compared to 397% coverage of non-performing assets, and 1.05% of total loans, at December 31, 2019. Note that the reserve coverage to total loans, excluding PPP loans, is 1.23% (non-GAAP) at December 31, 2020.

Management believes that this non-GAAP measure provides a greater understanding of ongoing operations and enhances comparability of results of operations with prior periods. The Company believes that investors may use this non-GAAP measure to analyze the Company’s financial condition without impact of unusual items or events that may obscure trends in the Company’s underlying 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 that different companies might calculate these measures differently. The following table sets forth the calculation of the Company’s allowance for loan loss reserve coverage to total loans (GAAP) and the reserve coverage to total loans, excluding PPP loans (non-GAAP), at December 31, 2020 (in thousands, except percentages).

​ ​ ​ ​ ​

​ DECEMBER 31,

Allowance for loan losses ​ $ 11,345 ​

Total loans, net of unearned income(1) ​ 978,345 ​

Reserve coverage ​ 1.16 %

Reserve coverage to total loans, excluding PPP loans: ​ ​

Allowance for loan losses ​ $ 11,345 ​

Total loans, net of unearned income(1) ​ 978,345 ​

Non-GAAP reserve coverage ​ 1.23 %

(1) Includes loans and loans held for sale ​ ​ ​ ​

​ ​ ​ ​ ​

For 2019, the Company recorded an $800,000 provision expense for loan losses compared to a $600,000 provision recovery in 2018 which resulted in a net unfavorable shift of $1.4 million between years. The rating downgrade of a $6.5 million performing commercial loan to substandard as a result of the unexpected death of a borrower caused a $675,000 increase in fourth quarter 2019 provision expense. This rating action was prudent due to the inherent uncertainties associated with a large estate liquidation. The Company experienced net loan charge-offs of only $192,000, or 0.02% of total loans, in 2019 compared to net loan charge-offs of $943,000, or 0.11% of total loans, in 2018. Overall, nonperforming assets totaled $2.3 million, or only 0.26% of total loans, at December 31, 2019. In summary, the allowance for loan losses provided 397% coverage of non-performing assets, and 1.05% of total loans, at December 31, 2019, compared to 629% coverage of non-performing assets, and 1.00% of total loans, at December 31, 2018.

The following schedule sets forth the allocation of the ALL among various loan categories. This allocation is determined by using the consistent quarterly procedural discipline that was previously discussed. The entire ALL is available to absorb future loan losses in any loan category.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ AT DECEMBER 31,

​ ​ ​ ​ IN EACH ​ ​ ​ IN EACH ​ ​ ​ ​ IN EACH ​ ​ ​ IN EACH ​ ​ ​ IN EACH ​

​ AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ​

​ (IN THOUSANDS, EXCEPT PERCENTAGES) ​

​

27

Table of Contents

Even though residential real estate mortgage loans comprise 25.7% of the Company’s total loan portfolio, only $1.3 million, or 11.4%, of the total ALL is allocated against this loan category. The residential real estate mortgage loan allocation is based upon the Company’s three-year historical average of actual loan charge-offs experienced in that category and other qualitative factors. The disproportionately higher allocations for commercial loans and commercial loans secured by non-owner occupied real estate reflect the increased credit risk associated with those types of lending, the Company’s historical loss experience in these categories, and other qualitative factors.

Based on the Company’s current ALL methodology and the related assessment of the inherent risk factors contained within the Company’s loan portfolio, we believe that the ALL is adequate at December 31, 2020 to cover losses within the Company’s loan portfolio.

NON-INTEREST INCOME. Non-interest income for 2020 totaled $16.3 million, an increase of $1.5 million, or 10.2%, from 2019. Factors contributing to this higher level of non-interest income in 2020 included:

Non-interest income for 2019 totaled $14.8 million, an increase of $549,000, or 3.9%, from 2018. Factors contributing to this higher level of non-interest income in 2019 included:

28

Table of Contents

NON-INTEREST EXPENSE. Non-interest expense for 2020 totaled $44.5 million, which represents a $2.6 million, or 6.3%, increase from 2019. Factors contributing to the higher non-interest expense in 2020 included:

Non-interest expense for 2019 totaled $41.8 million, which represents a $942,000, or 2.3%, increase from 2018. Factors contributing to the higher non-interest expense in 2019 included:

INCOME TAX EXPENSE. The Company recorded an income tax expense of $1.2 million, or an effective tax rate of 20.9%, in 2020, compared to income tax expense of $1.6 million, or a 20.7% effective tax rate, in 2019, and compared to income tax expense of $1.7 million, or a 17.8% effective tax rate, in 2018. The higher effective tax rate in

29

Table of Contents

2020 reflects the recognition of additional income tax expense due to the write-off of a deferred tax asset that will not be realized due to the dissolution of the Company’s small life insurance subsidiary. Due to the enactment of the Tax Cuts and Jobs Act late in the fourth quarter of 2017, the Company was able to achieve a greater income tax benefit in the third quarter of 2018 by making a one-time additional contribution to the defined benefit pension plan resulting in a lower effective tax rate for that year. The Company’s deferred tax asset was $1.6 million at December 31, 2020.

SEGMENT RESULTS. The community banking segment reported a net income contribution of $10.1 million in 2020 which decreased from the $10.9 million contribution in 2019 and also decreased from the $11.1 million contribution in 2018. The primary driver for the lower level of net income in 2020 was the Company recording an $2,375,000 provision expense for loan losses compared to an $800,000 provision in 2019. This is discussed previously in the “Allowance and Provision for Loan Losses” section within this document. The downward shift in the U.S. Treasury yield curve between years along with the Federal Reserve’s actions to decrease the fed funds rate three times in the second half of 2019 and by 150 basis points in March of 2020 negatively impacted the Company’s earning asset margin performance. As a result, total loan interest income decreased between years. Partially offsetting the unfavorable impact that the lower interest rate environment had on loan interest income was the additional processing fee income and interest income that the Company recorded from PPP lending activity, which totaled $1,873,000 for 2020. The exceptionally stronger level of residential mortgage loan activity in 2020 resulted in this segment recognizing a higher gain on the sale of residential mortgage loans in the secondary market and a corresponding greater level of mortgage related fee income. Also favorably impacting net income was this segment experiencing deposit cost relief as total deposit interest expense decreased between years due to management’s action to lower pricing of several deposit products, given the declining interest rate environment. The decrease to total deposit interest expense occurred even though total deposits reached record levels which is described previously in the MD&A. Net income from this segment was also favorably impacted by a higher level of revenue from bank owned life insurance due to the receipt of a death claim received late in the year and a financial floor taking hold which caused increased earnings from a higher rate of return on certain policies. Finally, and unfavorably impacting net income were increases to total employee costs, a higher level of FDIC insurance expense and increased professional fees.

The wealth management segment’s net income contribution was $2.0 million in 2020 compared to $1.9 million in 2019 and $1.8 million in 2018. The increase is due to wealth management fees increasing in both time periods as this segment was positively impacted by management’s effective execution of managing client accounts. The entire wealth management segment has been resilient and performed well in spite of the volatility of the markets and a major market value decline that occurred in late March. The wealth management segment also benefitted from a lower level of meals & travel related expenses due to travel restrictions from the pandemic. Slightly offsetting these favorable items were higher levels of professional fees, incentive compensation and equipment costs. Overall, the fair market value of trust assets under administration totaled $2.481 billion at December 31, 2020, an increase of $243 million, or 10.9%, from the December 31, 2019 total of $2.238 billion.

The investment/parent segment reported a net loss of $7.5 million in 2020, which was greater than the net loss of $6.8 million in 2019 and $5.1 million in 2018. The increased loss was due to securities interest income decreasing by a higher amount than the decrease to total short term FHLB borrowings interest expense. Also, short-term investment interest income decreased in 2020 even though the Company experienced exceptionally strong growth in its liquidity position between years from the significant influx of deposits that resulted from the government stimulus programs. The yields on commercial paper decreased significantly during the second half of 2020 and resulted in reduced interest income. The greater net loss at the segment also results from higher employee costs and greater miscellaneous expenses. Finally, and favorably impacting this segment, there were no security sale gains or losses recognized during 2020 after this segment recognized a net loss of $382,000 in 2019 due to an impairment charge on a CRA investment which more than offset net security sale gain income.

For greater discussion on the future strategic direction of the Company’s key business segments, see “Management’s Discussion and Analysis — Forward Looking Statements.” For a more detailed analysis of the segment results, see Note 23.

BALANCE SHEET. The Company’s total consolidated assets of $1.280 billion at December 31, 2020 increased by $108.5 million, or 9.3%, from the $1.171 billion level at December 31, 2019. The increase to total consolidated assets was due primarily to a $90.8 million, or 10.2%, increase in total loans, a $6.7 million, or 3.7%, increase in investment securities, and a $9.3 million, or 42.1%, increase in cash balances. Overall, our loan portfolio benefitted from the increasing commercial loan production that began late in the third quarter and continued throughout the fourth quarter. We also continued to experience strong residential mortgage loan production. This commercial and residential mortgage

30

Table of Contents

loan growth combined with AmeriServ’s participation in the Small Business Administration’s (SBA) 100% guaranteed Paycheck Protection Program (PPP) resulted in a higher level of loans. The Company was selective in 2020 when purchasing the more typical types of securities that have been purchased historically as the market was less favorable for purchases. To somewhat offset the unfavorable market for the more traditional types of purchases, the Company has been active since March purchasing corporate securities, particularly subordinated debt issued by other financial institutions along with taxable municipal securities. Our liquidity position continues to be strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending activity due to the economic uncertainty.

The Company’s deposits at period end reached a record level and increased by $94.4 million, or 9.8%, reflecting the benefit of government stimulus programs and reduced consumer spending in 2020. Total short-term and FHLB borrowings increased $13.6 million, or 17.9%. Specifically, total FHLB term advances increased by $11.3 million, or 21.1%, and totaled $65.0 million. The Company has utilized these term advances to help manage interest rate risk and take advantage of the lower yield curve to prudently extend borrowings. During 2020, the rate on certain FHLB term advances was lower than the rate on overnight borrowed funds.

Total stockholders’ equity increased by $5.8 million, or 5.9%, since year-end 2019. Capital was increased during 2020 by the Company’s $4.6 million of net income, the $1.8 million positive impact experienced due to the improved market value of the available for sale investment securities portfolio, and the $1.1 million positive impact from the annual revaluation of the Company’s pension obligation. Slightly offsetting these increases, was the $1.7 million common stock cash dividend and $151,000 of common stock repurchases. The Company returned approximately 41% of our 2020 earnings to our shareholders through the accretive common stock repurchases and quarterly common stock cash dividend. The Company continues to be considered well capitalized for regulatory purposes with a risk based capital ratio of 12.93% and an asset leverage ratio of 9.29% at December 31, 2020. The Company’s book value per common share was $6.12, its tangible book value per common share (non-GAAP) was $5.42 and its tangible common equity to tangible assets ratio (non-GAAP) was 7.29% at December 31, 2020.

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 December 31, 2020, 2019, and 2018 (in thousands, except share and ratio data):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ AT DECEMBER 31,

Tangible common equity ratio (non-GAAP) ​ 7.29 % 7.48 % 7.49 %

Tangible book value per share (non-GAAP) ​ $ 5.42 ​ $ 5.08 ​ $ 4.88 ​

​

LIQUIDITY. The Company’s liquidity position continues to be exceptionally strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending activity due to the economic uncertainty. As a result total deposits on December 31, 2020 reached a record level at 1.055 billion. In addition, the Company’s loyal core deposit base continues to prove to be a source of strength for the Company during periods of market volatility. 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 were higher than they have been historically which presented the challenge of profitably deploying this excess liquidity given a steady decline in yields on short term investment products as 2020

31

Table of Contents

progressed. The pressure to find a suitable return on these excess liquid funds eased during the fourth quarter given the loan growth that occurred. Due to the loan growth, short term investment balances returned to a more normal, lower level in the fourth quarter of 2020. We strive to operate our loan to deposit ratio in a range of 80% to 100%. At December 31, 2020, the Company’s loan to deposit ratio was 92.7%. Given current commercial loan pipelines, which are now at pre-pandemic levels, we are optimistic that we can grow our loan to deposit ratio and remain within our guideline parameters. Also, we are positioned well to support our local economy and provide the necessary assistance to our community partners during this period of pandemic.

Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents increased by $9.3 million from December 31, 2019, to $31.5 million at December 31, 2020, due to $106.0 million of cash provided by financing activities which more than offset $95.3 million of cash used in investing activities and $1.4 million of cash used in operating activities. Within financing activities, deposits increased by $94.4 million while total FHLB borrowings also increased as term advances increased by $11.3 million and short-term borrowings increased by $2.3 million. Within investing activities, cash advanced for new loans originated totaled $301.2 million and was $89.0 million higher than the $212.2 million of cash received from loan principal payments. Within operating activities, $87.1 million of mortgage loans held for sale were originated while $87.3 million of mortgage loans were sold into the secondary market.

The holding company had $5.9 million of cash, short-term investments, and investment securities at December 31, 2020. Additionally, dividend payments from our subsidiaries also provide ongoing cash to the holding company. At December 31, 2020, our subsidiary Bank had $12.6 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that dividend payments from the Trust Company approximate 75% of annual net income. Overall, we believe that the holding company has good liquidity to meet its trust preferred debt service requirements, its subordinated debt interest payments, and its common stock dividend.

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, time deposits with banks, and federal funds sold. These assets totaled $31.5 million and $22.2 million at December 31, 2020 and December 31, 2019, 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- to longer-term advances based upon the Company’s investment in certain residential mortgage, commercial real estate, and commercial and industrial loans. At December 31, 2020, the Company had $329 million of overnight borrowing availability at the FHLB, $30 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 Company 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 10.06%, the tier 1 capital ratio was 11.20%, and the total capital ratio was 12.93% at December 31, 2020. The Company’s tier 1 leverage ratio was 9.29% at December 31, 2020. We anticipate that we will maintain our strong capital ratios throughout 2021.

Capital generated from earnings will be utilized to pay the common stock cash dividend and will support controlled balance sheet growth. Our common dividend payout ratio for the full year 2020 was 37.0%. Total Parent Company cash was $5.9 million at December 31, 2020. 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 348% of regulatory capital at December 31, 2020. While we work through the COVID-19 pandemic, our focus is on preserving capital to support customer lending and managing heightened credit risk due to the downturn in the economy. Additionally, 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 $0.025 per quarter.

32

Table of Contents

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:

​

​ ​ ​ ​ ​ ​

​ ​ ​ ​ MINIMUM CAPITAL RATIO

​ ​ MINIMUM ​ PLUS CAPITAL

​ CAPITAL RATIO CONSERVATION BUFFER

Common equity tier 1 capital to risk-weighted assets ​ 4.5 % 7.0 %

Tier 1 capital to risk-weighted assets 6.0 8.5 ​

Total capital to risk-weighted assets 8.0 10.5 ​

Tier 1 capital to total average consolidated assets 4.0 ​

​

In the first quarter of 2020, the Company completed the common stock repurchase program, which it had announced on April 16, 2019, where it bought back 526,000 shares, or 3%, of its common stock over a 12-month period at a total cost of $2.23 million. Specifically, during the first three months of 2020, the Company was able to repurchase 35,962 shares of its common stock and return $151,000 of capital to its shareholders through this program. Evaluation of a new common stock buyback program is on hold. At December 31, 2020, the Company had approximately 17.1 million common shares outstanding.

INTEREST RATE SENSITIVITY. Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company’s net interest income, net income and capital. The management and measurement of interest rate risk at the Company is performed by using the following tools: 1) simulation modeling, which analyzes the impact of interest rate changes on net interest income, net income and capital levels over specific future time periods. The simulation modeling forecasts earnings under a variety of scenarios that incorporate changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling incorporates assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities; 2) market value of portfolio equity sensitivity analysis; and 3) static GAP analysis, which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. The overall interest rate risk position and strategies are reviewed by senior management and the Company’s Board of Directors on an ongoing basis.

33

Table of Contents

The following table presents a summary of the Company’s static GAP positions at December 31, 2020:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ OVER ​ OVER ​ ​ ​ ​ ​ ​

​ ​ ​ ​ 3 MONTHS 6 MONTHS ​ ​ ​ ​ ​ ​

​ ​ 3 MONTHS OR THROUGH ​ THROUGH ​ OVER ​ ​ ​

INTEREST SENSITIVITY PERIOD LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL

​ (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)

RATE SENSITIVE ASSETS: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Bank owned life insurance ​ — ​ — ​ 39,208 ​ — ​ 39,208

RATE SENSITIVE LIABILITIES: ​ ​ ​ ​ ​

Deposits: ​ ​ ​ ​ ​

Non-interest bearing demand deposits ​ $ — ​ $ — ​ $ — ​ $ 177,533 ​ $ 177,533

INTEREST SENSITIVITY GAP: ​ ​ ​ ​ ​

​

When December 31, 2020 is compared to December 31, 2019, the Company’s cumulative GAP ratio through one year indicates that the Company’s balance sheet is still asset sensitive and the level of asset sensitivity increased between years. We continue to see loan customer preference for fixed rate loans given the low overall level of interest rates. As a result of the government stimulus programs and the impact that the pandemic had on consumer spending activity, both loans and deposits increased to record levels in 2020. The growth experienced in the loan portfolio and short term investments was funded by the increase in total deposits and also a modestly higher level of overnight short term borrowings. Overnight borrowings are immediately impacted by changes to national interest rates. We continue to have a relatively consistent level of term advances with the FHLB to help manage our interest rate risk position. The balance of FHLB term advance borrowings at December 31, 2020 is $11.3 million higher than the December 31, 2019 balance as the Company took advantage of the lower yield curve to prudently extend borrowings. The rate on certain FHLB term advances is lower than the rate on overnight borrowings.

Management places primary emphasis on simulation modeling to manage and measure interest rate risk. The Company’s asset/liability management policy seeks to limit net interest income variability over the first twelve months of the forecast period to -5.0% and -7.5%, which include interest rate movements of 100 and 200 basis points, respectively. Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet exposure to changes in interest rates. The Company monitors the trends in market value of portfolio equity sensitivity analysis on a quarterly basis.

The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points. Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low

34

Table of Contents

level of interest rates. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.

​

​ ​ ​ ​ ​ ​

​ ​ VARIABILITY OF CHANGE IN

​ ​ NET INTEREST ​ MARKET VALUE OF ​

INTEREST RATE SCENARIO INCOME PORTFOLIO EQUITY ​

​

The Company believes that its overall interest rate risk position is well controlled. The variability of net interest income is positive in the upward rate shocks due to the Company’s short duration investment securities portfolio and the scheduled repricing of loans tied to LIBOR or prime. Also, the Company will continue its disciplined approach to price its core deposit accounts in a controlled but competitive manner. The variability of net interest income is negative in the 100 basis point downward rate scenario as the Company has more exposure to assets repricing downward to a greater extent than liabilities due to the absolute low level of interest rates with the fed funds rate currently at a targeted range of 0% to 0.25%. The market value of portfolio equity increases in the upward rate shocks due to the improved value of the Company’s core deposit base. Negative variability of market value of portfolio equity occurs in the downward rate shock due to a reduced value for core deposits.

Within the investment portfolio at December 31, 2020, 76.0% of the portfolio is classified as available for sale and 24.0% as held to maturity. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity if needed. The mark to market of the available for sale securities does inject more volatility in the book value of equity, but has no impact on regulatory capital. There are 41 securities that are temporarily impaired at December 31, 2020. The Company reviews its securities quarterly and has asserted that at December 31, 2020, the impaired value of securities represents temporary declines due to movements in interest rates and the Company does have the ability and intent to hold those securities to maturity or to allow a market recovery. Furthermore, it is the Company’s intent to manage its long-term interest rate risk by continuing to sell a portion of newly originated fixed-rate 30-year mortgage loans into the secondary market (excluding construction and any jumbo loans). The Company also sells 15-year fixed-rate mortgage loans into the secondary market as well, depending on market conditions. For the year 2020, 60% of all residential mortgage loan production was sold into the secondary market.

The amount of loans outstanding by category as of December 31, 2020, which are due in (i) one year or less, (ii) more than one year through five years, and (iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ MORE ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ THAN ONE ​ ​ ​ ​ ​ ​

​ ​ ONE ​ YEAR ​ ​ ​ ​ ​ ​

​ ​ YEAR OR ​ THROUGH ​ OVER FIVE ​ TOTAL ​

​ LESS FIVE YEARS YEARS LOANS ​

​ (IN THOUSANDS, EXCEPT RATIOS) ​

Percent composition of maturity ​ 9.4 % 34.1 % 56.5 % 100.0 %

Fixed-rate loans as a percentage of total loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 59.1 %

Floating-rate loans as a percentage of total loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 40.9 %

​

35

Table of Contents

The loan maturity information is based upon original loan terms and is not adjusted for principal paydowns and rollovers. In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.

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’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. The Company had various outstanding commitments to extend credit approximating $213.9 million and standby letters of credit of $13.3 million as of December 31, 2020. The Company can also use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. As of December 31, 2020, the Company had $93.5 million in the notional amount of interest rate swaps outstanding, with a fair value of $3.3 million.

As of December 31, 2020 and 2019, municipal deposit letters of credit issued by the Federal Home Loan Bank of Pittsburgh on behalf of AmeriServ Financial Bank naming applicable municipalities as beneficiaries totaled $61.3 million and $41.5 million, respectively. The letters of credit serve as collateral, in place of pledged securities, for municipal deposits maintained at AmeriServ Financial Bank.

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 loan losses, goodwill, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company’s financial position or results of operation.

ACCOUNT — Pension liability

BALANCE SHEET REFERENCE — Other liabilities

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 employees 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 17 of the Notes to Consolidated Financial Statements.

ACCOUNT — Allowance for loan losses

BALANCE SHEET REFERENCE — Allowance for loan losses

INCOME STATEMENT REFERENCE — Provision (credit) for loan losses

DESCRIPTION

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

36

Table of Contents

allowance for credit losses to specific loan pools is based on historical loss trends and management’s judgment concerning those trends.

Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan losses. Approximately $8.8 million, or 78%, of the total allowance for loan losses at December 31, 2020 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, levels of non-performing and troubled debt restructured (TDR) loans, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for loan losses may be required that would adversely impact earnings in future periods.

ACCOUNT — Goodwill

BALANCE SHEET REFERENCE — Goodwill

INCOME STATEMENT REFERENCE — Goodwill impairment

DESCRIPTION

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

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

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

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

ACCOUNT — Income Taxes

BALANCE SHEET REFERENCE — Net deferred tax asset

INCOME STATEMENT REFERENCE — Provision for income 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.

37

Table of Contents

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 December 31, 2020, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed.

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

ACCOUNT — Investment Securities

BALANCE SHEET REFERENCE — Investment securities

INCOME STATEMENT REFERENCE — Net realized gains (losses) on investment securities

DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At December 31, 2020, the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies or government sponsored agencies and certain high quality corporate and taxable municipal securities. The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

FORWARD LOOKING STATEMENTS

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:

38

Table of Contents

This Form 10-K 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-K, 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-K. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve; (iii) significant changes in interest rates and prepayment speeds; (iv) inflation, stock and bond market, and monetary fluctuations; (v) credit risks of commercial, real estate, consumer, and other lending activities; (vi) changes in federal and state banking and financial services laws and regulations; (vii) the presence in the Company’s market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors’ products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) unanticipated regulatory or judicial proceedings; (xii) potential risks and uncertainties also include those relating to the duration of the COVID-19 outbreak, and actions that may be taken by governmental authorities to contain the outbreak or to treat its impact; and (xiii) 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.

​

39

Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, and liquidity risk. The Company seeks to identify, manage and monitor these risks with policies, procedures, and various levels of managerial and Board oversight. The Company’s objective is to optimize profitability while managing and monitoring risk within Board approved policy limits.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and hedges. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk. For information regarding the effect of changing interest rates on the Company’s net interest income and market value of its investment portfolio, see “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations — Interest Rate Sensitivity.”

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors, debtholders and to fund operating expenses. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk. See “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations — Liquidity.”

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. The Company’s primary credit risk occurs in the loan portfolio. The Company uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. The Company’s investment policy and hedging policy strictly limit the amount of credit risk that may be assumed in the investment portfolio and through hedging activities.

For information regarding the market risk of the Company’s financial instruments, see “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations — Interest Rate Sensitivity.” The Company’s principal market risk exposure is to interest rates.

​

​

40

Table of Contents

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMERISERV FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

​

​ ​ ​ ​ ​ ​ ​

​ ​ AT DECEMBER 31,

​ ​ (IN THOUSANDS,

​ ​ EXCEPT SHARE DATA)

ASSETS ​ ​

Cash and due from depository institutions ​ $ 20,427 ​ $ 15,642

Interest bearing deposits ​ 2,585 ​ 2,755

Investment securities: ​ ​

Less: Allowance for loan losses ​ 11,345 ​ 9,279

Premises and equipment: ​ ​ ​ ​

Operating lease right-of-use asset ​ ​ 758 ​ ​ 846

Financing lease right-of-use asset ​ ​ 2,956 ​ ​ 3,078

Other premises and equipment, net ​ ​ 14,336 ​ ​ 14,643

Accrued interest income receivable ​ 5,068 ​ 3,449

Federal Home Loan Bank stock ​ 4,821 ​ 3,985

Federal Reserve Bank stock ​ 2,125 ​ 2,125

LIABILITIES ​ ​ ​ ​ ​ ​

Advances from Federal Home Loan Bank ​ 64,989 ​ 53,668

Operating lease liabilities ​ ​ 776 ​ ​ 865

Financing lease liabilities ​ ​ 3,109 ​ ​ 3,163

Guaranteed junior subordinated deferrable interest debentures ​ 12,970 ​ 12,955

SHAREHOLDERS' EQUITY ​ ​

Accumulated other comprehensive loss, net ​ (13,198) ​ (16,171)

​

Seeaccompanyingnotestoconsolidatedfinancialstatements.

​

41

Table of Contents

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS,

​ ​ EXCEPT PER SHARE DATA)

INTEREST INCOME ​ ​ ​

Interest and fees on loans: ​ ​ ​

Interest bearing deposits ​ 15 ​ 24 ​ 20

Investment securities: ​ ​ ​

INTEREST EXPENSE ​ ​ ​

Advances from Federal Home Loan Bank ​ 1,099 ​ 1,090 ​ 797

Financing lease liabilities ​ ​ 112 ​ ​ 117 ​ ​ —

Provision (credit) for loan losses ​ 2,375 ​ 800 ​ (600)

NON-INTEREST INCOME ​ ​ ​

Service charges on deposit accounts ​ 903 ​ 1,271 ​ 1,420

Net gains on loans held for sale ​ 1,523 ​ 865 ​ 489

Net realized gains (losses) on investment securities ​ — ​ 118 ​ (439)

Impairment charge on other investments ​ ​ — ​ ​ (500) ​ ​ —

NON-INTEREST EXPENSE ​ ​ ​

Supplies, postage and freight ​ 714 ​ 605 ​ 674

Federal deposit insurance expense ​ 481 ​ 100 ​ 557

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

​

​

42

Table of Contents

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS,

​ ​ EXCEPT PER SHARE DATA)

PER COMMON SHARE DATA: ​ ​ ​

Basic: ​ ​ ​

Diluted: ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Seeaccompanyingnotestoconsolidatedfinancialstatements.

​

43

Table of Contents

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS)

COMPREHENSIVE INCOME ​ ​ ​

Other comprehensive income (loss), before tax: ​ ​ ​

Pension obligation change for defined benefit plan ​ 1,454 ​ (6,418) ​ (244)

Income tax effect ​ — ​ 25 ​ (92)

Other comprehensive income (loss) ​ 2,973 ​ (1,946) ​ (1,275)

​

See accompanying notes to consolidated financial statements.

​

44

Table of Contents

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS)

COMMON STOCK ​ ​ ​

Balance at beginning of period ​ $ 267 ​ $ 266 ​ $ 266

TREASURY STOCK ​ ​ ​

CAPITAL SURPLUS ​ ​ ​

Stock option expense ​ 3 ​ 7 ​ 14

RETAINED EARNINGS ​ ​ ​

Cumulative effect adjustment for change in accounting principal ​ — ​ 640 ​ —

ACCUMULATED OTHER COMPREHENSIVE LOSS, NET ​ ​ ​

Other comprehensive income (loss) ​ 2,973 ​ (1,946) ​ (1,275)

​

See accompanying notes to consolidated financial statements.

​

45

Table of Contents

AMERISERV FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31

​ (IN THOUSANDS)

OPERATING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ ​ ​

Provision (credit) for loan losses ​ 2,375 ​ 800 ​ (600)

Depreciation and amortization expense ​ 1,996 ​ 1,873 ​ 1,530

Net amortization of investment securities ​ 285 ​ 279 ​ 347

Impairment charge on other investments ​ ​ — ​ ​ 500 ​ ​ —

Net gains on loans held for sale ​ (1,523) ​ (865) ​ (489)

Amortization of deferred loan fees ​ (707) ​ (142) ​ (149)

Origination of mortgage loans held for sale ​ (87,140) ​ (49,460) ​ (28,916)

Decrease (increase) in accrued interest receivable ​ (1,619) ​ 40 ​ 114

Increase (decrease) in accrued interest payable ​ (525) ​ 546 ​ 302

Earnings on bank-owned life insurance ​ (782) ​ (521) ​ (536)

Stock compensation expense ​ 3 ​ 7 ​ 14

Net change in operating leases ​ ​ (89) ​ ​ (67) ​ ​ —

Net cash provided by (used in) operating activities ​ (1,373) ​ 4,890 ​ 7,984

INVESTING ACTIVITIES ​ ​ ​

Purchases of premises and equipment ​ (1,325) ​ (2,821) ​ (2,144)

Proceeds from sale of other real estate owned ​ 63 ​ 214 ​ 46

Proceeds from life insurance policies ​ 490 ​ — ​ —

FINANCING ACTIVITIES ​ ​ ​

Principal payments on financing lease liabilities ​ ​ (203) ​ ​ (173) ​ ​ —

Stock options exercised ​ 78 ​ 99 ​ 61

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ​ 9,336 ​ (12,726) ​ 706

​

See accompanying notes to consolidated financial statements.

​

​

46

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND NATURE OF OPERATIONS:

AmeriServ Financial, Inc. (the Company) is a bank holding company, headquartered in Johnstown, Pennsylvania. Through its banking subsidiary, the Company operates 16 banking locations in five southwestern Pennsylvania counties and Hagerstown, Maryland. These branches provide a full range of consumer, mortgage, and commercial financial products. In a press release dated January 15, 2021, the Company announced the execution of a definitive agreement whereby AmeriServ will acquire a branch and deposit customers from two locations in southwestern Pennsylvania of Citizen’s Neighborhood Bank (CNB), an operating division of Riverview Bank. The transaction is subject to regulatory approvals and satisfaction of customary closing conditions and is expected to close in the second quarter of 2021.

The AmeriServ Trust and Financial Services Company (the Trust Company) offers a complete range of trust and financial services and administers assets valued at approximately $2.5 billion that are not recognized on the Company’s Consolidated Balance Sheets at December 31, 2020.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of AmeriServ Financial, Inc. and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), the Trust Company, and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 15 locations in Pennsylvania and 1 location in Maryland. AmeriServ Life was a captive insurance company that engaged in underwriting as a reinsurer of credit life and disability insurance. New business ceased being generated by AmeriServ Life in 2005. Since that time, outstanding insurance policies have been running off, and the final policy has expired. On September 30, 2020, the Arizona Corporation Commission approved the Articles of Dissolution for AmeriServ Life. The remaining assets of AmeriServ Life were transferred to AmeriServ Financial, Inc. and the subsidiary was formally closed on December 31, 2020.

In addition, the Parent Company is an administrative group that provides support in such areas as audit, finance, investments, loan review, general services, and marketing. Intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles, or GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from these estimates and the differences may be material to the Consolidated Financial Statements. The Company’s most significant estimates relate to the allowance for loan losses, goodwill, income taxes, investment securities, pension, and the fair value of financial instruments.

INVESTMENT SECURITIES:

Securities are classified at the time of purchase as investment securities held to maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company’s books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management’s intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate appreciation/depreciation excluded from income and credited/charged to accumulated other comprehensive income/loss within stockholders’ equity on a net of tax basis. Any securities classified as trading assets are reported at fair value with unrealized aggregate appreciation/depreciation included in income on a net of tax basis. The Company does not engage in trading activity.

Realized gains or losses on securities sold are computed upon the adjusted cost of the specific securities sold. Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment.

47

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. The Company believes the unrealized losses on certain securities within the investments portfolio are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

Additionally, the Company holds equity securities which are comprised of mutual funds held within a rabbi trust for the executive deferred compensation plan. Such securities are reported at fair value within other assets on the Consolidated Balance Sheets. Unrealized holding gains and losses on equity securities are included in earnings.

FEDERAL HOME LOAN BANK STOCK:

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time any such situation has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (3) the impact of legislative and regulatory changes on the customer base of FHLB; and (4) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.

LOANS:

Interest income is recognized using the level yield method related to principal amounts outstanding. The Company discontinues the accrual of interest income when loans become 90 days past due in either principal or interest. In addition, if circumstances warrant, the accrual of interest may be discontinued prior to 90 days. Payments received on non-accrual loans are credited to principal until full recovery of principal has been recognized; or the loan has been returned to accrual status. The only exception to this policy is for residential mortgage loans wherein interest income is recognized on a cash basis as payments are received. A non-accrual commercial loan is placed on accrual status after becoming current and remaining current for twelve consecutive payments. Residential mortgage loans are placed on accrual status upon becoming current.

LOAN FEES:

Loan origination and commitment fees, net of associated direct costs, are deferred and amortized into interest and fees on loans over the loan or commitment period. Fee amortization is determined by the effective interest method.

LOANS HELD FOR SALE:

Certain newly originated residential mortgage loans are classified as held for sale, because it is management’s intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or fair value.

48

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TRANSFERS OF FINANCIAL ASSETS:

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

PREMISES AND EQUIPMENT:

Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation is charged to operations over the estimated useful lives of the premises and equipment using the straight-line method with a half-year convention. Useful lives of up to 30 years for buildings and up to 10 years for equipment are utilized. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives of the improvements, whichever is shorter. Maintenance, repairs, and minor alterations are charged to current operations as expenditures are incurred.

LEASES:

​

The Company has operating and financing leases for several office locations and equipment. Generally, the underlying lease agreements do not contain any material residual value guarantees or material restrictive covenants. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components, such as common area maintenance charges, utilities, real estate taxes, and insurance. The Company has elected to account for the variable non-lease components separately from the lease component. Such variable non-lease components are reported in net occupancy expense on the Consolidated Statements of Operations when incurred. These variable non-lease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in the right-of-use assets and lease liabilities reported on the Consolidated Balance Sheets.

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

Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of December 31, 2020, the Company had no short-term leases. As of December 31, 2019, the Company had one short-term equipment lease which it has elected to not record on the Consolidated Balance Sheets.

ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFF PROCEDURES:

As a financial institution, which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline to perform an analysis which is updated on a quarterly basis at the Bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes:

49

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve.

When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses.

The Company’s policy is to individually review, as circumstances warrant, its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $1,000,000 within a 12-month period. The Company defines classified loans as those loans rated substandard or doubtful. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business relationships with aggregate balances of $250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and evaluated for specific impairment if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment.

ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT:

The allowance for unfunded loan commitments and letters of credit is maintained at a level believed by management to be sufficient to absorb estimated losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers and the terms and expiration dates of the unfunded credit facilities. Net adjustments to the allowance for unfunded loan commitments and letters of credit are provided for in the unfunded commitment reserve expense line item within other expense in the Consolidated Statements of Operations and a separate reserve is recorded within the other liabilities line item of the Consolidated Balance Sheets.

50

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BANK-OWNED LIFE INSURANCE:

The Company has purchased life insurance policies on certain employees. These policies are recorded on the Consolidated Balance Sheets at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in bank owned life insurance within non-interest income. Additionally, income is accrued on certain policies that have reached the minimum floor rate of return. This guaranteed portion of income is not added to the cash surrender value of the policy until the policy anniversary date and is reported in other assets on the Consolidated Balance Sheets.

INTANGIBLE ASSETS:

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. The Company tests goodwill for impairment on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts.

EARNINGS PER COMMON SHARE:

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are excluded for earnings per share purposes. Options to purchase 139,759, 12,000, and 5,000 shares of common stock were outstanding during 2020, 2019 and 2018, respectively, but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive. Exercise prices of anti-dilutive options to purchase common stock outstanding were $3.18-$4.22, $4.19-$4.22, and $4.22 during 2020, 2019 and 2018, respectively.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS, EXCEPT PER SHARE DATA)

Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​

Denominator: ​ ​ ​

Weighted average common shares outstanding (basic) ​ 17,053 ​ 17,359 ​ 17,933

Effect of stock options ​ 10 ​ 81 ​ 104

Weighted average common shares outstanding (diluted) ​ 17,063 ​ 17,440 ​ 18,037

Earnings per common share: ​ ​ ​

​

STOCK-BASED COMPENSATION:

The Company uses the modified prospective method for accounting of stock-based compensation. The fair value of each option grant is estimated on the grant date using the Binomial or Black-Scholes option pricing model and the expense is recognized ratably over the service period. Forfeitures are recognized as they occur. See Note 19 for details on the assumptions used.

ACCUMULATED OTHER COMPREHENSIVE LOSS:

The Company presents the components of other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income (Loss). These components are comprised of the change in the defined benefit pension obligation and the unrealized holding gains (losses) on available for sale securities, net of any reclassification adjustments for realized gains and losses.

51

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CASH FLOWS:

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest bearing deposits, and short-term investments in both money market funds and commercial paper. The Company made $315,000 in income tax payments in 2020; $785,000 in 2019; and $875,000 in 2018. The Company had non-cash transfers to other real estate owned (OREO) in the amounts of $40,000 in 2020; $75,000 in 2019; and $166,000 in 2018. During 2020, the Company entered into two new financing leases, one related to office equipment and the other to a branch location, and recorded a right-of-use asset and lease liability of $149,000. As a result of the adoption of ASU 2016-02, Leases (Topic 842) as of January 1, 2019, the Company had non-cash transactions associated with the recognition of the right-of-use assets and lease liabilities. Specifically, the Company recognized a right-of-use asset and lease liability of $932,000 related to operating leases and a right-of-use asset and lease liability of $3.3 million related to financing leases. In addition, as a result of the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), the Company had a non-cash transaction in the amount of $640,000 associated with the recognition of a receivable for wealth management fees as of December 31, 2019. The Company also had a non-cash transfer of the AMT credit carryforward to other assets in the amount of $287,000 in 2018. The Company made total interest payments of $11,040,000 in 2020; $13,779,000 in 2019; and $11,298,000 in 2018.

INCOME TAXES:

Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the corresponding asset or liability from period to period. Deferred tax assets are reduced, if necessary, by the amounts of such benefits that are not expected to be realized based upon available evidence.

INTEREST RATE CONTRACTS:

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 as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” 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.

The Company periodically enters into derivative instruments to meet the financing, interest rate and equity risk management needs of its customers. Upon entering into these instruments to meet customer needs, 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. These instruments and their offsetting positions are recorded in other assets and other liabilities on the Consolidated Balance Sheets.

PENSION:

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 employees selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year.

The service cost component of net periodic benefit cost is determined by aggregating the product of the discounted cash flows of the plan’s service cost for each year and an individual spot rate (referred to as the “spot rate” approach). The interest cost component is determined by aggregating the product of the discounted cash flows of the plan’s

52

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

projected benefit obligations for each year and an individual spot rate. Management believes this methodology is an appropriate measure of the service cost and interest cost as each year’s cash flows are specifically linked to the interest rates of bond payments in the same respective year. Our pension benefits are described further in Note 17 of the Notes to Consolidated Financial Statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

We group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level I — Valuation is based upon quoted prices for identical instruments traded in active markets.

Level II — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level III — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in generally accepted accounting principles.

​

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company, as a smaller reporting company, has adopted this ASU and continues to evaluate the impact that ASU 2016-13 will have on our consolidated financial statements. We are currently working with an industry leading third-party consultant and software provider to assist us in the implementation of ASU 2016-13. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. The overall impact of the amendment will be affected by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.

​

In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications to ease the financial reporting burdens of the expected market

53

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

transition from LIBOR to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company has identified its LIBOR exposure across product categories and is analyzing the risks associated with the LIBOR transition. However, it is too early to predict whether a new rate index replacement and the adoption of this ASU will have a material impact on the Company’s financial statements.

​

3. REVENUE RECOGNITION

ASU 2014-09, Revenue from Contracts with Customers – Topic 606, requires the Company to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. Management determined that the primary sources of revenue associated with financial instruments, including interest and fee income on loans and interest on investments, along with certain noninterest revenue sources including net realized gains (losses) on investment securities, mortgage related fees, net gains on loans held for sale, and bank owned life insurance are not within the scope of Topic 606. These sources of revenue cumulatively comprise 79.7% of the total revenue of the Company.

Non-interest income within the scope of Topic 606 are as follows:

54

Table of Contents

AMERISERV FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2020, 2019, and 2018 (in thousands).

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ AT DECEMBER 31,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-interest income: ​ ​ ​ ​ ​ ​ ​ ​ ​

In-scope of Topic 606 ​ ​ ​

Service charges on deposit accounts ​ 903 ​ 1,271 ​ 1,420

​

​

​

4. CASH AND DUE FROM DEPOSITORY INSTITUTIONS

The Federal Reserve reduced reserve requirements to zero as of March 26, 2020. As of December 31, 2019, required federal reserves of $3.0 million were included in “Cash and due from depository institutions” for facilitating the implementation of monetary policy by the Federal Reserve System. Such required reserves were computed by applying prescribed ratios to the classes of average deposit balances. They were held in the form of vault cash and a depository amount held with the Federal Reserve Bank.

​

5. INVESTMENT SECURITIES

The cost basis and fair values of investment securities are summarized as follows:

Investment securities available for sale:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​