Ameriserv Financial Inc /Pa/ ASRV US Equity☆

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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(MARK ONE)

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-11204

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AMERISERV FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

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MAIN & FRANKLIN STREETS, ​

P.O. BOX 430, JOHNSTOWN, ​

(Address of principal executive offices) (Zip Code)

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Registrant’s telephone number, including area code (814) 533-5300

Securities registered pursuant to Section 12(b) of the Act:

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Title Of Each Class Trading Symbol Name of Each Exchange On Which Registered

Common Stock, Par Value $0.01 Per Share ​ ASRV ​ The NASDAQ Stock Market LLC

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Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ◻ Yes ⌧No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ⌧No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ⌧Yes◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧Yes◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “ accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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​ ​ ​ Emerging growth company ☐

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant has filed a report on and attestation to its mangagement’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ⌧ No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was $60,759,199 as of June 30, 2021.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 17,104,309 shares outstanding as of February 28, 2022.

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the proxy statement for the annual shareholders’ meeting are incorporated by reference in Parts II and III.

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FORM 10-K INDEX

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​ ​ Page No.

PART I ​

Item 1. Business 3

Item 1A. Risk Factors 11

Item 1B. Unresolved Staff Comments 12

Item 2. Properties 12

Item 3. Legal Proceedings 12

Item 4. Mine Safety Disclosures 12

PART II ​

Item 6. Selected Consolidated Financial Data 14

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 38

Item 8. Consolidated Financial Statements and Supplementary Data 40

Item 9A. Controls and Procedures 101

Item 9B. Other Information 101

PART III ​ ​

Item 10. Directors, Executive Officers, and Corporate Governance 102

Item 11. Executive Compensation 102

Item 14. Principal Accountant Fees and Services 102

PART IV ​ ​

Item 15. Exhibits, Financial Statement Schedules 103

​ Signatures 105

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PART I

ITEM 1. BUSINESS

GENERAL

AmeriServ Financial, Inc. (the Company) is a bank holding company organized under the Pennsylvania Business Corporation Law. The Company became a holding company upon acquiring all of the outstanding shares of AmeriServ Financial Bank (the Bank) in January 1983. The Company’s other wholly owned subsidiary is AmeriServ Trust and Financial Services Company (the Trust Company) which was formed in October 1992. AmeriServ Life Insurance Company (AmeriServ Life), formed in October 1987, 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, the 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. When used in this report, the “Company” may refer to AmeriServ Financial, Inc. individually or AmeriServ Financial, Inc. and its direct and indirect subsidiaries.

The Company’s principal activities consist of owning and operating its two wholly owned subsidiary entities. At December 31, 2021, the Company had, on a consolidated basis, total assets, deposits, and shareholders’ equity of $1.3 billion, $1.1 billion, and $116.5 million, respectively. The Company and its subsidiaries derive substantially all of their income from banking, bank related services, and trust related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, accounting and taxes, loan review, auditing, investment accounting, marketing and risk management.

As a bank holding company, the Company is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking and Securities (PDB). The Company is also under the jurisdiction of the Securities and Exchange Commission (SEC) for matters relating to registered offerings and sales of its securities under the Securities Act of 1933, as amended, and the disclosure and regulatory requirements of the Securities Exchange Act of 1934, as amended. The Company’s common stock is listed on The NASDAQ Stock Market under the trading symbol “ASRV,” and the Company is subject to the NASDAQ rules applicable to listed companies.

AMERISERV FINANCIAL BANK

The Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended (Banking Code). Through 17 branch locations in Allegheny, Cambria, Centre, Somerset, and Westmoreland counties, Pennsylvania and Washington county, Maryland, the Bank conducts a general banking business. It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, checking accounts, money market accounts, secured and unsecured consumer loans, mortgage loans, safe deposit boxes, holiday club accounts, and money orders; and (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as commercial real estate mortgage loans (CRE), short and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, real estate construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services. The Bank also operates 18 automated bank teller machines (ATMs) through its 24-hour banking network that is linked with NYCE, a regional ATM network, and CIRRUS, a national ATM network. West Chester Capital Advisors (WCCA), a SEC-registered investment advisor, is a subsidiary of the Bank. The Company also operates loan production offices (LPOs) in Altoona and Wilkins Township in Pennsylvania.

On May 21, 2021, the Bank completed its acquisition from Citizen’s Neighborhood Bank (CNB), an operating division of Riverview Bank, the branch and related deposit customers in Meyersdale, Pennsylvania and the deposit customers in Somerset, Pennsylvania. The Meyersdale branch is operating under the AmeriServ name and the Somerset customers are being serviced from the full service AmeriServ office at 108 West Main Street. The related deposits totaled approximately $42 million at closing and were acquired for a 3.71% deposit premium, or $1.6 million.

We believe that the Bank’s deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. The Bank’s business is not seasonal, nor does it have any risks attendant to foreign sources. A significant majority of the Bank’s customer base is located within a 150-mile radius of Johnstown, Pennsylvania, the Bank’s headquarters.

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The Bank is subject to supervision and regular examination by the Federal Reserve Bank of Philadelphia and the PDB. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios of the Bank at December 31, 2021:

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Headquarters Johnstown, PA

Total Investment Securities ​ 209,190 ​

Total Loans and Loans Held for Sale (net of unearned income) ​ 986,037 ​

Total Net Income ​ 8,016 ​

Asset Leverage Ratio ​ 9.12 %

Return on Average Assets ​ 0.60 ​

Return on Average Equity ​ 6.79 ​

Total Full-time Equivalent Employees ​ 235 ​

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RISK MANAGEMENT OVERVIEW

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, which includes credit, interest rate and market, liquidity, operational, legal/compliance, strategic/reputational and security risk. Additionally, in 2021, the Company continued to focus on the risks surrounding the COVID-19 pandemic. The Company seeks to identify, manage and monitor these risks with policies, procedures, and various levels of oversight from the Company’s Board of Directors (the Board) and management. The Company has a Management Enterprise Risk Committee with Board of Director representation to help manage and monitor the Company’s risk position, which is reported formally to the Board, at a minimum, on a semi-annual basis.

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 and liabilities. The Company uses its asset liability management policy to monitor and manage interest rate risk.

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 the funding of operating costs. The Company uses its asset liability management policy and contingency funding plan to monitor and manage liquidity risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms resulting in an economic loss to the organization. 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 (the ALL) to monitor and manage credit risk. The Company’s investment policy and hedging policy seeks to limit the amount of credit risk that may be assumed in the investment portfolio and through hedging activities.

The following summarizes and describes the Company’s various loan categories and the underwriting standards applied to each:

Commercial Loans

This category includes credit extensions to commercial and industrial borrowers. Business assets, including accounts receivable, inventory and/or equipment, typically secure these credits. The commercial loan segment includes commercial loans secured by owner occupied real estate. In appropriate instances, extensions of credit in this category are subject to collateral advance formulas. Balance sheet strength and profitability are considered when analyzing these credits, with special attention given to historical, current and prospective sources of cash flow, and the ability of the customer to sustain cash flow at acceptable levels. The Bank’s policy permits flexibility in determining acceptable debt service coverage ratios. Personal guarantees are frequently required; however, as the financial strength of the borrower increases, the Bank’s ability to obtain personal guarantees decreases. In addition to economic risk, this category is impacted by the strength of the borrower’s management, industry risk and portfolio concentration risk each of which are also monitored and considered during the underwriting process.

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The commercial loan segment also includes Paycheck Protection Program (PPP) loans. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorized the Small Business Administration (SBA) to guarantee 100% of the PPP loans made to eligible borrowers pursuant to standards as defined by the SBA. The SBA guarantee on PPP loans minimizes the level of credit risk associated with the loans. As a result, such loans are assigned a 0% risk weight for purposes of calculating the Company’s risk-based capital ratios. Therefore, it was deemed appropriate to not allocate any portion of the loan loss reserve for the PPP loans.

Commercial Loans Secured by Non-Owner Occupied Real Estate

This category includes various types of loans, including acquisition and construction of investment property. Maximum term, minimum cash flow coverage, leasing requirements, maximum amortization and maximum loan to value ratios are controlled by the Bank’s credit policy and follow industry guidelines and norms, and regulatory limitations. Personal guarantees are normally required during the construction phase on construction credits and are frequently obtained on mid to smaller CRE loans. In addition to economic risk, this category is subject to geographic and portfolio concentration risk, each of which are monitored and considered in underwriting.

The Company utilizes a robust and diligent risk management framework to monitor the non-owner occupied commercial real estate segment of the portfolio. This analysis considers more forward looking credit metrics such as stress test results and underwriting trend data, coupled with risk tolerance and concentration guidelines. The process is intended to allow identification of emerging risk, in part, to determine any future change to lending policy, underwriting practices or broader lending strategy prior to any indication of performance deterioration.

Residential Real Estate — Mortgages

This category includes mortgages that are secured by residential property. Underwriting of loans within this category is pursuant to Freddie Mac/Fannie Mae underwriting guidelines, with the exception of Community Reinvestment Act (CRA) loans, which have more liberal standards. A meaningful portion of this portfolio consists of home equity loans. The major risk in this category is that a significant downward economic trend would increase unemployment and cause payment default. The Bank does not engage, and has never engaged, in subprime residential mortgage lending.

Consumer Loans

This category includes consumer installment loans and revolving credit plans. Underwriting is pursuant to industry norms and guidelines. The major risk in this category is a significant economic downturn.

INVESTMENTS

The strategic focus of the investment securities portfolio is managed for liquidity and earnings in a prudent manner that is consistent with proper bank asset/liability management and current banking practices. The objectives of portfolio management include consideration of proper liquidity levels, interest rate and market valuation sensitivity, and profitability. The investment portfolio of the Company and its subsidiaries are proactively managed in accordance with federal and state laws and regulations and in accordance with generally accepted accounting principles (GAAP).

The investment portfolio is primarily made up of AAA rated agency mortgage-backed securities, high quality corporate securities, taxable municipal securities, and agency securities. Management strives to maintain a portfolio duration that is less than 60 months. All holdings must meet standards documented in its investment policy, unless otherwise approved by the Company’s CEO or the Asset/Liability Management Committee.

Investment securities classified as held to maturity are carried at amortized cost while investment securities classified as available for sale are reported at fair market value.

The following table sets forth the weighted average yield for each type of investment security and range of maturity as of December 31, 2021. Yields are not presented on a tax-equivalent basis, but are based upon the cost basis and are weighted for the scheduled maturity.

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Investment securities available for sale:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TOTAL

​ ​ ​ ​ ​ ​ ​ U.S. AGENCY ​ INVESTMENT

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ MORTGAGE- ​ SECURITIES

​ ​ ​ ​ ​ ​ ​ ​ CORPORATE ​ BACKED ​ AVAILABLE

​ ​ U. S. AGENCY ​ MUNICIPAL ​ BONDS ​ SECURITIES ​ FOR SALE

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Investment securities held to maturity:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TOTAL

​ ​ ​ ​ ​ ​ ​ U.S. AGENCY ​ INVESTMENT

​ ​ ​ ​ ​ ​ ​ ​ CORPORATE ​ MORTGAGE- ​ SECURITIES

​ ​ ​ ​ ​ ​ ​ ​ BONDS AND ​ BACKED ​ HELD TO

​ ​ U. S. AGENCY ​ MUNICIPAL ​ OTHER ​ SECURITIES ​ MATURITY

Within 1 year ​ — % 3.83 % — % — % ​ 3.83 %

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DEPOSITS

The Bank has a stable core deposit base made up of traditional commercial bank products that exhibit modest fluctuation during the year, other than jumbo certificates of deposits (CDs) and certain municipal deposits, which demonstrate some seasonality. The Company also utilizes certain Trust Company specialty deposits related to the ERECT funds as a funding source, which serve as an alternative to wholesale borrowings and can exhibit some limited degree of volatility.

The following table sets forth the average balance of the Company’s deposits and average rates paid thereon for the past two calendar years:

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​ ​ AT DECEMBER 31, ​

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Demand: ​ ​ ​ ​ ​ ​ ​ ​ ​

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The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects bank depositors against loss. The Bank is an FDIC-insured institution, therefore, deposits are insured up to the standard insurance amount of $250,000 per depositor. As of December 31, 2021 and 2020, the estimated amount of uninsured deposits was $326.1 million and $307.1 million, respectively. The estimate of uninsured deposits was done at a single account level and does not take into account total customer balances in the Bank.

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The maturities on CDs with balances that exceed the FDIC insurance limit of $250,000 as of December 31, 2021, are as follows:

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​ (IN THOUSANDS)

MATURING IN: ​

Three months or less ​ $ 12,309

Over three through six months ​ 12,576

Over six through twelve months ​ 26,237

Over twelve months ​ 15,534

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LOANS

Secondary Market Activities

The residential lending department of the Bank continues to originate one-to-four family mortgage loans for customers, some of which are sold to outside investors in the secondary market and some of which are retained for the Bank’s portfolio. Mortgages sold in the secondary market are sold to investors on a “flow” basis; mortgages are priced and delivered on a “best efforts” pricing basis, with servicing released to the investor. Fannie Mae/Freddie Mac guidelines are used in underwriting all mortgages with the exception of a limited amount of CRA loans. Mortgages with longer terms, such as 30-year, FHA, and VA loans, are usually sold. The remaining production of the department includes construction, adjustable rate mortgages, and quality non-salable loans. These loans are usually kept in the Bank’s portfolio.

AMERISERV TRUST AND FINANCIAL SERVICES COMPANY

AmeriServ Trust and Financial Services Company is a trust company organized under Pennsylvania law in October 1992. Its staff of approximately 45 professionals administers assets valued at approximately $2.7 billion that are not recognized on the Company’s balance sheet at December 31, 2021. The Trust Company focuses on wealth management. Wealth management includes personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. This segment also includes financial services, which provide the sale of mutual funds, annuities, and insurance products. The wealth management business also includes the union collective investment funds, the ERECT funds, which are designed to use union pension dollars in construction projects that utilize union labor. At December 31, 2021, the Trust Company had total assets of $7.1 million and total stockholder’s equity of $6.7 million. In 2021, the Trust Company contributed earnings to the Company as its gross revenue amounted to $11.1 million and the net income contribution was $2.1 million. The Trust Company is subject to regulation and supervision by the Federal Reserve Bank of Philadelphia and the PDB.

MONETARY POLICIES

Commercial banks are affected by policies of various regulatory authorities including the Board of Governors of the Federal Reserve System (the Federal Reserve). An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve are: open market operations in U.S. Government securities, changes in the federal funds rate and discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

COMPETITION

Our subsidiaries face strong competition from other commercial banks, savings banks, credit unions, savings and loan associations, and other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions which are substantially larger and have greater financial resources than the Bank and the Trust Company. As the financial services industry continues to

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consolidate, the scope of potential competition affecting our subsidiaries will also increase. Brokerage houses, consumer finance companies, insurance companies, financial technology firms, and pension trusts are important competitors for various types of financial services. Personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals. In addition, some of these competitors, such as credit unions, are subject to a lesser degree of regulation or taxation than that imposed on us.

MARKET AREA & ECONOMY

The pandemic has resulted in negative impacts and a disruption to economic and commercial activity in both the local and global economies. The economy in which the Company operates began to strengthen and improve in 2021. Economic improvement had resulted in many positive economic trends, such as lower unemployment, increased consumer confidence, and an improved housing market. However, volatitly remains as the Company's business opportunities may be tempered by concerns such as, the effects of the remote workplace, the impact of inflation, the effect of current and proposed government stimulus and wage growth. Volatility in global economic markets, continued domestic political turmoil and various episodes of geopolitical unrest continue to provide a degree of uncertainty in the financial markets. Overall, management continues to be encouraged by the resiliency of the current economic environment and the prospects for continued growth of the Company.

Johnstown, Pennsylvania, where the Company is headquartered, continues to have a cost of living that is lower than the national average. Johnstown is home to The University of Pittsburgh at Johnstown, Pennsylvania Highlands Community College and Conemaugh Health System. The high-tech defense industry is the main non-health care staple of the Johnstown economy, with the region fulfilling many federal government contracts, punctuated by one of the premier defense trade shows in the U.S., the annual Showcase for Commerce. The city also hosts annual events such as the Flood City Music Festival and the Thunder in the Valley Motorcycle Rally, each of which draw several thousand visitors. The Johnstown, PA MSA unemployment rate decreased from a 9.6% average in 2020 to a 6.9% average in 2021. The Johnstown, PA MSA continues to have one of the highest jobless rates among the 18 metropolitan statistical areas across the state. This, coupled with a declining population trend, creates a challenge moving forward.

Economic conditions are stronger in the State College market and have demonstrated the same improvement experienced in the national economy. The community is a college town, dominated economically and demographically by the presence of the University Park campus of the Pennsylvania State University. “Happy Valley” is another often-used term to refer to the State College area, including the borough and the townships of College, Harris, Patton, and Ferguson. The unemployment rate for the State College MSA decreased from a 5.8% average in 2020 to a 4.5% average in 2021 and remains one of the lowest of all regions in the Commonwealth. A large percentage of the population in State College falls into the 18 to 34-year-old age group, while potential customers in the Cambria/Somerset markets tend to be over 50 years of age.

Hagerstown in Washington County, Maryland offers a rare combination of business advantages providing a major crossroads location that is convenient to the entire East Coast at the intersection of I-81 and I-70. It has a workforce of over 400,000 with strengths in manufacturing and technology. It also offers an affordable cost of doing business and living, all within an hour of the Washington, D.C./Baltimore regions. There are also plenty of facilities and land slated for industrial/commercial development. Hagerstown has become a choice location for manufacturers, financial services, and distribution companies. The Hagerstown, MD-Martinsburg, WV MSA unemployment rate decreased from a 6.5% average in 2020 to a 4.4% average in 2021.

The Company also has loan production offices in Wilkins Township in Allegheny County and Altoona in Blair County, Pennsylvania. Wilkins Township in Allegheny County, Pennsylvania is located 15 miles east of the city of Pittsburgh. While the city is historically known for its steel industry, today its economy is largely based on healthcare, education, technology and financial services. The city of Pittsburgh is home to many colleges, universities and research facilities, the most well-known of which are Carnegie Mellon University, Duquesne University and the University of Pittsburgh. Pittsburgh is rich in art and culture. Pittsburgh museums and cultural sites include the Andy Warhol Museum, the Carnegie Museum of Art, the Frick Art & Historical Center, and Pittsburgh Center for the Arts among numerous others. Pittsburgh is also the home of the Pirates, Steelers and Penguins. The unemployment rate for the Pittsburgh MSA decreased from a 9.3% average in 2020 to a 6.1% average in 2021.

Altoona is the business center of Blair County, Pennsylvania with a strong retail, government and manufacturing base. The top field of employment in Altoona and the metro area is healthcare. Its location along I-99 draws from a large trade area over a wide geographic area that extends to State College and Johnstown. It serves as the headquarters for

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Sheetz Corporation, which ranks on Forbes list of the top privately owned companies. In addition to being located adjacent to I-99 and a major highway system, Altoona also has easy access to rail and air transportation. The average unemployment rate in the Altoona MSA decreased from 8.7% in 2020 to 5.8% in 2021.

EMPLOYEES

The Company employed 319 people as of December 31, 2021 in full- and part-time positions. Approximately 150 non-supervisory employees of the Company are represented by the United Steelworkers AFL-CIO-CLC, Local Union 2635-06. The Company negotiated a new four-year labor contract this year, which will expire on October 15, 2025. The contract calls for annual wage increases of 2% over the next four years. The Company has not experienced a work stoppage since 1979. Unionization in financial institutions remains low with less than 1% of banks nationwide being covered by a Collective Bargaining Agreement.

INDUSTRY REGULATION

The banking and trust industry, and the operation of bank holding companies, is highly regulated by federal and state law, and by numerous regulations adopted by the federal and state banking agencies. Bank regulation affects all aspects of conducting business as a bank, including such major items as minimum capital requirements, limits on types and amounts of investments, loans and other assets, as well as borrowings and other liabilities, and numerous restrictions or requirements on the loan terms and other products made available to customers, particularly consumers. Federal deposit insurance from the Federal Deposit Insurance Corporation (FDIC) is required for all banks in the United States, and maintaining FDIC insurance requires observation of the various rules of the FDIC, as well as payment of deposit insurance premiums. New branches, or acquisitions or mergers, are required to be pre-approved by the responsible agency, which in the case of the Company and the Bank is the Federal Reserve and the PDB. The Bank provides detailed financial information to its regulators, including a quarterly call report that is filed pursuant to detailed prescribed instructions to ensure that all U.S. banks report the same way. The U.S. banking laws and regulations are frequently updated and amended, especially in response to crises in the financial industry, such as the global financial crisis of 2008, which resulted in the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 (the Dodd-Frank Act), a statute affecting many facets of the financial industry. The Economic Growth, Regulatory Relief, and Consumer Protection Act was enacted into law in 2018 and was designed to ease certain restrictions imposed by the Dodd-Frank Act. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted into law on March 27, 2020 in response to the COVID-19 pandemic.

While it is impractical to discuss all laws and regulations that regularly affect the business of the Company and its subsidiaries, set forth below is an overview of some of the major provisions and statutes that apply.

CAPITAL REQUIREMENTS

One of the most significant regulatory requirements for banking institutions is minimum capital, imposed as a ratio of capital to assets. The Federal Deposit Insurance Act, as amended (FDIA), identifies five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. It requires U.S. federal bank regulatory agencies to implement systems for prompt corrective action for insured depository institutions that do not meet minimum capital requirements based on these categories. Both federal and state banking regulation impose progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Unless a bank is well capitalized, it is subject to restrictions on its ability to utilize brokered deposits and on other aspects of its operations. Generally, a bank is prohibited from paying any dividend or making any capital distribution or paying any management fee to its holding company if the bank would thereafter be undercapitalized.

As of December 31, 2021, the Company believes that its bank subsidiary was well capitalized, based on the prompt corrective action guidelines described above. On January 1, 2015, U.S. federal banking agencies implemented the Basel III capital standards, which establish the minimum capital levels to be considered well-capitalized and revised the prompt corrective action requirements under banking regulations. The revisions from the previous standards include a revised definition of capital, the introduction of a minimum common equity tier 1 capital ratio and changed risk weightings for certain assets. Under the current rules, in order to avoid limitations on capital distributions (including

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dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer above its minimum risk-based capital requirements of 2.50% of total risk weighted assets.

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The capital to risk-adjusted assets requirements for minimum capital plus the applicable buffer, and the requirement to be well capitalized, are as follows:

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​ ​ Minimum Capital ​ Well

​ Plus Buffer Capitalized

Common equity tier 1 capital ratio 7.00 % 6.50 %

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In addition, see the discussion of the community bank leverage ratio under the Economic Growth, Regulatory Relief, and Consumer Protection Act below.

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DIVIDEND RESTRICTIONS

The primary source of cash to pay dividends, if any, to the Company’s shareholders and to meet the Company’s obligations is dividends paid to the Company by the Bank and the Trust Company. Dividend payments by the Bank to the Company are subject to the laws of the Commonwealth of Pennsylvania, the Banking Code, the FDIA and the regulation of the PDB and the Federal Reserve. Under the Banking Act and the FDIA, a bank may not pay any dividends if, after paying such dividends, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in unsafe or unsound banking practices. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available from the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividend that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. A bank holding company may not pay dividends when it is insolvent.

For more information regarding quarterly cash dividends, see Part II, Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities below.

PRIVACY PROVISIONS

Federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about customers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Company believes it is in compliance with the various provisions.

USA PATRIOT ACT

A major focus of governmental policy on financial institutions has been aimed at combating money laundering and terrorist financing. The USA Patriot Act substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the Company.

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CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted into law on March 27, 2020. Federal, state, and local governments have adopted various statutes, rules, regulations, orders, and guidelines in order to address the COVID-19 pandemic and the adverse economic effects of this pandemic on individuals, families, businesses, and governments. Financial institutions, including the Company, are affected by many of these measures, including measures that are broadly applicable to businesses operating in the communities where the Company does business. These measures include “stay-at-home orders” that allow only essential businesses to operate. Financial services firms are generally regarded as “essential businesses” under these orders, but financial services firms, like other essential businesses, are required to operate in a manner that seeks to protect the health and safety of their customers and employees.

In addition, the federal banking agencies along with state bank regulators issued an interagency statement on March 22, 2020, addressing loan modifications that are made by financial institutions for borrowers affected by the COVID-19 crisis. The agencies stated that short-term loan modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief do not need to be categorized as TDRs and that financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.

The CARES Act contains a number of provisions that affect banking organizations. The CARES Act provides funding for various programs under which the federal government will lend to, guarantee loans to, or make investments in, businesses. Banking organizations are expected to play a role in some of these programs, and when they do so, they will be subject to certain requirements. One of these programs is the Paycheck Protection Program (PPP), a program administered by the Small Business Administration (SBA) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 crisis. The loans can be made by SBA-certified lenders and are 100% guaranteed by the SBA. The loans are eligible to be forgiven if certain conditions are satisfied, in which event the SBA will make payment to the lender for the forgiven amounts. The Bank has participated in the PPP as a lender. In accordance with the CARES Act, a PPP loan will be assigned a risk weight of zero percent under the federal banking agencies’ risk-based capital rules.

The CARES Act also authorized temporary changes to certain provisions applicable to banking organizations. Among other changes, Section 4013 of the CARES Act gives financial institutions the right to elect to suspend GAAP principles and regulatory determinations for loan modifications relating to COVID-19 that would otherwise be categorized as TDRs from March 1, 2020, through the earlier of December 31, 2020, or 60 days after the COVID-19 national emergency ends. On April 7, 2020, the federal banking agencies, in consultation with state bank regulators, issued an interagency statement clarifying the interaction between (i) their earlier statement discussing whether loan modications relating to COVD-19 need to be treated as TDRs and (ii) the CARES Act provision on this subject. In this interagency statement, the agencies also said that when exercising supervisory and enforcement responsibility with respect to consumer protection requirements, they will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 emergency and that they do not expect to take a consumer compliance public enforcement action against an institution, provided that the circumstances were related to this emergency and the institution made good faith efforts to support borrowers and comply with the consumer protection requirements and addressed any needed corrective action. The suspension of TDR identification and accounting triggered by the effects of the COVID-19 pandemic was extended by the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. The period established by Section 4013 of the CARES Act was extended to the earlier of January 1, 2022 or 60 days after the date on which the national COVID-19 emergency terminates.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. These filings are available to the public on the internet at the SEC’s website at http://www.sec.gov.

Our internet address is http://www.ameriserv.com. We make available, free of charge on http://www.ameriserv.com, our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

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ITEM 1A. RISK FACTORS

Not applicable.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

The Company has no unresolved staff comments from the SEC for the reporting periods presented.

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ITEM 2. PROPERTIES

The principal offices of the Company and the Bank occupy the five-story AmeriServ Financial building at the corner of Main and Franklin Streets in Johnstown plus eleven floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 14 locations which are owned. Seven additional locations are leased with terms expiring from May 31, 2022 to June 30, 2033.

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ITEM 3. LEGAL PROCEEDINGS

The Company is subject to a number of asserted and unasserted potential legal claims encountered in the normal course of business. In the opinion of both management and legal counsel, there is no present basis to conclude that the resolution of these claims will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

As of February 28, 2022, the Company had 2,632 shareholders of record for its common stock. The Company’s common stock is traded on The NASDAQ Stock Market under the symbol “ASRV.” The following table sets forth the actual high and low closing prices and the cash dividends declared per share for the periods indicated:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ CASH

​ ​ PRICES ​ DIVIDENDS

​ HIGH LOW DECLARED

Year ended December 31, 2021: ​ ​ ​ ​ ​ ​

Year ended December 31, 2020: ​ ​ ​

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The declaration of cash dividends on the Company’s common stock is at the discretion of the Board, and any decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition, regulatory capital levels, applicable covenants under any credit agreements and other contractual restrictions, Pennsylvania law, federal and Pennsylvania bank regulatory law, and other factors deemed relevant. Additionally, the Company’s previously announced common stock repurchase programs have been completed.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ AT OR FOR THE YEAR ENDED DECEMBER 31, ​

​ ​ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) ​

SUMMARY OF INCOME STATEMENT DATA: ​ ​ ​ ​ ​ ​

PER COMMON SHARE DATA: ​ ​ ​ ​ ​ ​

BALANCE SHEET AND OTHER DATA: ​ ​ ​ ​ ​ ​

SELECTED FINANCIAL RATIOS: ​ ​ ​ ​ ​ ​

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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, 2021, 2020, AND 2019

2021 SUMMARY OVERVIEW:

On January 25, 2022, AmeriServ Financial, Inc. issued a press release announcing its financial performance for the fourth quarter and the full year of 2021. The results included fourth quarter net income of $1,852,000, or $0.11 per diluted common share. This was an increase of $1,160,000 from the fourth quarter of 2020 when net income totaled $692,000, or $0.04 per diluted share. The full year of 2021 resulted in net income of $7,072,000, or $0.41 per diluted common share. This performance represents a 51.9% increase in earnings per share from the full year of 2020 when net income totaled $4,598,000, or $0.27 per diluted common share.

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The continuing struggle of our nation and the world with the global pandemic has brought countless changes to the conduct of the banking business. However, we continue to provide premier banking and wealth management services to our customers in every market we serve. We also believe that we have substantially improved the performance of AmeriServ as a strong regional financial institution. We have zealously guarded our reputation for safety and soundness resulting in our friends and neighbors entrusting us with an additional $85 million of their funds in 2021, adding to the $94 million of absolute deposit growth in 2020. We have done much more than provide safety for these funds. As of December 31, 2021, we have lent 86% of our deposits to small and mid-size regional businesses and consumers. It is our special purpose to be a positive economic contributor to the entire region. As we have learned over the years, our valued borrowers are quality. They are largely responsible for the fact that well over 99% of our loans outstanding are performing exactly as planned. This is a metric we are especially proud to mention.

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Our predecessors on the Board of Directors were very wise thirty some years ago to establish a wealth management business within AmeriServ Financial, Inc. Wealth management had a record year in 2021. By pursuing excellent investment strategies, it closed 2021 with $2.7 billion of total assets, an increase of over 9% from just one year ago. This is good news for AmeriServ and for our clients.

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It is a fact that both the business of banking and the wealth management activity performed well despite the pandemic. There is a need for flexibility in almost everything we do. We also attended to the well being of this Corporation. Early in 2021, we negotiated the purchase of two branch banks in Somerset County where we already have three successful branches. This brought $42 million of low-cost retail deposit accounts to our balance sheet allowing us to replace more expensive wholesale deposits. Somerset County is in our core market and this branch acquisition was a natural fit. We continue to be on the alert for similar opportunities to strengthen our competitive position at a reasonable purchase price.

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As mentioned in previous communications with our shareholders and described in detail within this document, in 2021 we completed the issuance of $27 million of 10-year subordinated debentures. This action reduced the annual cost of capital debt service by a half million dollars annually and allowed us to strengthen our bank’s capital position. Economic conditions were excellent, and the Federal Reserve low interest rate scenario worked to both our short-term and our long-term advantage.

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In the midst of this pandemic, we must mention the relationship our staff fostered with our customers and clients. Even when they worked remotely because of local COVID issues, our loans and deposits grew in record levels. However, none of this would be possible without the solid citizens who are our customers and clients. Many of our staff have literally worked personally with small business customers so they could qualify for various government programs. This close communication with our customers will continue long after the pandemic is over.

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It is with considerable pride that we can say that our people have confronted the unique challenges of these times. AmeriServ has also satisfied every dollar of required debt service while maintaining its shareholder cash dividend and protecting the livelihood of our 324 staff members. The pandemic may be with us for some time yet, but we pledge the same careful attention to our responsibilities in the days ahead, whatever the challenges may be.

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

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS, EXCEPT

​ ​ PER SHARE DATA AND RATIOS) ​

Diluted earnings per share ​ 0.41 ​ 0.27 ​ 0.35 ​

Return on average assets ​ 0.52 % 0.37 % 0.51 %

Return on average equity ​ 6.48 ​ 4.52 ​ 6.02 ​

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The Company reported net income of $7,072,000, or $0.41 per diluted common share, in 2021. This represents a 51.9% increase in earnings per share from the full year of 2020 when net income totaled $4,598,000, or $0.27 per diluted common share. The Company’s return on average equity improved to 6.48% for the 2021 year from 4.52% in 2020. Our earnings demonstrated meaningful improvement as we realized the benefit of several important strategic actions that the Company executed during 2021. Overall, the increase in net interest income, a growing level of non-interest income, and a reduced loan loss provision more than offset a higher level of non-interest expense resulting in an improved earnings performance in 2021. In spite of the COVID-19 pandemic, the Company continued to generate record levels of both loans and deposits during the year. The good diversification of the Company’s revenue was evident as 31.2% of our total revenue in 2021 came from non-interest income sources which included record contributions from our strong wealth management business. Finally, the Company’s tangible book value(1) per share ended 2021 at $6.02, an increase of 11.1% from 2020. The increase in tangible book value is due to the combination of the Company’s improved earnings performance and effective management of both its investment portfolio and pension obligation. The Company continued to maintain strong capital ratios that exceed the regulatory defined well capitalized status.

The Company reported net income of $4.6 million, or $0.27 per diluted common share, for 2020. This represented a 22.9% decrease in earnings per share from 2019 when net income totaled $6.0 million, or $0.35 per diluted common share. During 2020, the Company dealt with the many unexpected challenges resulting from the COVID-19 pandemic. We continued our conservative risk management posture and 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 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.

(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:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31,

​ ​ (IN THOUSANDS, EXCEPT RATIOS)

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2021 NET INTEREST PERFORMANCE OVERVIEW. The Company’s net interest income for the full year of 2021 increased by $2.7 million, or 7.5%, when compared to the full year of 2020. The Company’s net interest margin was 3.15% for the full year of 2021 representing a four basis point decline from the full year of 2020. Financial results

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when comparing 2021 to 2020 are indicative of an improving economic environment as well as the Company’s execution of strategies to effectively meet the challenge presented by the low interest rate environment. This included the execution of several strategies to reduce our cost of funds. However, the emergence of the omicron variant, high inflation and supply chain issues remind us that many risks remain. AmeriServ has proven to be resilient given the complex challenges we have confronted. The Company will continue to adapt in this fluid environment and prioritize the well-being of our employees and the communities we serve.

The Company demonstrated significantly higher than historical levels of both total average loans and total average deposits during 2021. This growth is due to successful business development efforts, the impact from the government stimulus programs and the 2021 Somerset County branch acquisition. Net interest income improved due to (i) the positive impact of commercial real estate and residential mortgage loan growth, (ii) significant interest expense savings from the issuance of the subordinated debt during the third quarter of 2021, which was used to retire higher cost existing subordinated debt and trust preferred securities, and (iii) the utilization of acquired low-cost core deposits to replace higher cost institutional deposits that were on our balance sheet. The combination of these three factors more than offset the unfavorable impact of net interest margin pressure from lower earning asset yields. The significant decrease to total interest expense in 2021 was the primary driver for net interest income increasing compared to last year.

Total average earning assets increased by $102.9 million, or 9.0%, in 2021. Specifically, total loans averaged $989 million in 2021 which is $65.5 million, or 7.1%, higher than the 2020 full year average. Short-term investments and commercial paper averaged $47 million in 2021 which is $15.3 million, or 48.0%, higher than the 2020 full year average. Total investment securities averaged $210 million in 2021 which is $22.1 million, or 11.8%, higher than the 2020 full year average. These increases were largely offset by decreases in the yield on earning assets, which decreased from 4.11% to 3.76%.

Total deposits, including non-interest bearing demand deposits, averaged $1.154 billion for the full year of 2021, which was $119.6 million, or 11.6%, higher than the $1.035 billion average for the full year of 2020. The 2021 full year average of short-term and FHLB borrowed funds was $50 million, which represented a decrease of $19.3 million, or 27.9%. Overall, the Company’s loan to deposit ratio averaged 85.5% in the fourth quarter of 2021, which we believe indicates that the Company has ample capacity to continue to grow its loan portfolio through effective business development efforts and is also strongly positioned to provide the necessary assistance to our customers and our community as they recover from the COVID-19 pandemic and respond to an improving economy. Overall, the cost of total interest bearing liabilities decreased from 1.10% to 0.75%.

COMPONENT CHANGES IN NET INTEREST INCOME: 2021 VERSUS 2020. Regarding the separate components of net interest income, the Company’s total interest income in 2021 decreased by $213,000, or 0.5%, when compared to 2020. Total average earning assets increased by $102.9 million, or 9.0%, in 2021 as there was an increased level of average total loans, short-term investments, and 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 35 basis points from 4.11% to 3.76%. All categories within the earning asset base demonstrated an interest income decrease between years. The average total loan portfolio yield decreased by 29 basis points from 4.40% to 4.11% in 2021 while the average yield on total investment securities decreased by 33 basis points from 3.20% to 2.87%.

Total investment securities averaged $210 million for the full year of 2021, which is $22.1 million, or 11.8%, higher than the $188 million average in 2020. The Company continued to be selective in 2021 when purchasing securities due to the low interest rate environment. Specifically, a steeper U.S. Treasury yield curve generally results in improved yields for federal agency mortgage-backed securities and federal agency bonds. Once this occurs, management purchases more of these investments for our portfolio. This provides us with the opportunity to more profitably deploy a portion of the increased liquidity on our balance sheet into the securities portfolio as opposed to leaving these funds in low yielding federal funds sold. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipal and corporate securities to maintain a well-diversified portfolio.

The economic recovery has been evident in our lending activity as we continued to experience good loan production throughout 2021. Commercial loan pipelines returned to pre-COVID levels early this year. The overall total loan portfolio volume stabilized during the second half of the year as additional loan growth was offset by a high level of early payoff activity, particularly during the fourth quarter. Also, PPP loans continue to decline as they complete the forgiveness process. Overall, when compared to the most recently completed pre-pandemic year of 2019, total loan production was over $79 million, or 31.2%, higher in 2021. Although reduced from its peak in 2020, strong residential

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mortgage loan production continued throughout 2021. Residential mortgage loan production totaled $90.5 million in 2021 which declined by 36.5% from the production level of $142.5 million achieved in 2020. Despite the decline between years, this is the second highest level of residential mortgage loan production during the most recently completed eight-year period. The Company revised strategy in 2021 and retained a higher percentage of our residential mortgage loan production in the loan portfolio as opposed to selling into the secondary market. This strategic change allowed us to more profitably deploy a portion of the increased liquidity that we have on our balance sheet.

As stated previously, total loans continue to be significantly higher than historical levels and averaged $989 million for the full year of 2021, which is $65.5 million, or 7.1%, higher than the 2020 full year average. The growth experienced in our commercial real estate portfolio resulted in traditional loan fee income increasing by $465,000, or 41.9%, for the full year of 2021 when compared to last year. Total PPP loans averaged $23.4 million for the fourth quarter of 2021, decreasing by $41.4 million, or 63.9%, from last year’s fourth quarter average as we continue to work with our customers through the forgiveness process. The Company recorded a total of $2.3 million of processing fee income and interest income from PPP lending activity in 2021, which is $398,000, or 21.2%, higher than the 2020 level. Finally, on an end of period basis, excluding total PPP loans, the total loan portfolio grew by approximately $48.7 million, or 5.3%, since the end of the fourth quarter of 2020.

Similar to what is occurring across the banking industry, our liquidity position continues to be strong due to the significant influx of deposits. During the first quarter of 2021, the President signed into law another round of economic stimulus as part of the American Rescue Plan Act of 2021. The stimulus checks delivered to most Americans and the financial assistance provided to municipalities and school districts as part of this program contributed to total deposits increasing significantly. Our deposit balances were also positively impacted in the second quarter of 2021 by the Somerset County branch acquisition, which provided approximately $42 million of additional deposits. The challenges this increased liquidity presents are twofold. First, there is the uncertainty regarding the duration that these increased funds will remain on the balance sheet which will be determined by customer behavior as economic conditions change. The second challenge is to profitably deploy this increased liquidity given the current low yields on short-term investment products. As a result, short-term investment and commercial paper balances averaged $47.3 million for the full year of 2021, which remains high by historical standards. Late in the third quarter of 2021, the Company benefitted from utilizing a significant portion of our increased liquidity to allow a $33 million, high cost, institutional deposit to mature. This resulted in total short-term investments declining to a more manageable level. However, diligent monitoring and management of our short-term investment position remains a priority. Continued loan growth and prudent investment in securities are critical to achieve the best return on the remaining increased funds.

Total interest expense for the twelve months of 2021 decreased by $2.9 million, or 27.9%, when compared to 2020, due to lower levels of both deposit and Federal Home Loan Bank (FHLB) borrowings interest expense. Specifically, deposit interest expense in 2021 was lower by $2.8 million, or 37.0%, despite the previously mentioned increase in deposits that occurred between years. The deposit growth reflects new deposit inflows as well as the loyalty of the bank’s core deposit base. The previously mentioned late third quarter 2021 maturity of a $33 million institutional deposit that had an annual cost of 2.95% resulted in approximately $240,000 of interest expense savings during the fourth quarter. Additionally, management continues to effectively execute several deposit product pricing reductions to address the net interest margin challenges presented by the low interest rate environment. As a result, the Company experienced deposit cost relief. Specifically, our total deposit cost averaged 0.42% for the full year of 2021 compared to 0.74% in 2020, representing a meaningful decrease of 32 basis points. Note that total deposit cost in the fourth quarter of 2021 averaged 0.31%. Total FHLB borrowings interest expense for the full year of 2021 was lower by $252,000, or 22.3%, compared to 2020. The current strong liquidity position has allowed the Company to paydown short-term and FHLB advances, which typically cost more than similar term deposit products. At December 31, 2021, total short-term and FHLB advances were $42.7 million, which is $47 million, or 52.4%, lower than the December 31, 2020 level.

The Company completed a private placement of $27 million in fixed-to-floating rate subordinated notes on August 26, 2021. The notes have a fixed annual interest rate of 3.75%, payable until September 1, 2026. From and including September 1, 2026, the interest rate will reset quarterly to the then-current three-month Secured Overnight Financing Rate (SOFR) plus 3.11%. The Company used approximately $20 million of the net proceeds to retire its existing subordinated debt and trust preferred securities that had a weighted average cost of 7.73%. This strategy favorably reduced fourth quarter 2021 interest expense by $147,000 and it is expected that annual interest expense on long-term debt will decline by $588,000. This savings is being recognized even though the size of the new subordinated debt is $7 million higher than the debt instruments it replaced. The remainder of the proceeds are being utilized for general corporate purposes, including the downstream of $3.5 million of capital to the bank which will support additional loan growth. Long-term debt interest expense is higher for the full year of 2021 when compared to 2020 because the

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Company was required to immediately write off the remaining portion of the unamortized issuance costs from both original debt instruments which generated $202,000 of additional borrowings interest expense in the third quarter of 2021. Therefore, in aggregate, when considering the reduced short-term and FHLB borrowings interest cost, total borrowings interest expense decreased by $101,000, or 3.5%, for the full year.

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 which represented 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 was $48.1 million, or 5.5%, higher than the 2019 full year average. Short-term investments and commercial paper averaged $32 million in 2020 which was $20.4 million, or 176.3%, 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 was $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 indicated that the Company had ample capacity to continue to grow its loan portfolio and was well positioned to continue assisting our customers and the community given the impact that the COVID-19 pandemic was 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 was $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 had 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 2019. To somewhat offset the unfavorable market for the more traditional types of purchases, the Company had 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 was particularly attractive given the current low interest rate environment and modestly positive slope of the yield curve. Management believed 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 record levels and averaged $923 million for the full year of 2020 which was $48.1 million, or 5.5%, higher than the 2019 full year average. The growth between years was primarily related to AmeriServ’s 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 the 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 totaled approximately $755,000 and was amortized into income

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over the time period that the loans remained on our balance sheet or until the PPP loan was forgiven at which time the remaining fee was recognized immediately as income. Note that the level of PPP loans decreased by approximately $10 million during the fourth quarter of 2020 as we worked through the forgiveness process with our customers. In late December 2020, the Federal Government passed a new $900 billion pandemic relief bill which included $284.5 billion for the re-opening of the SBA Paycheck Protection Program. The Company participated in the 2021 program and continued to provide assistance to our business customers. Normal commercial lending production improved during the final four months of the year and commercial loan pipelines also improved 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 2019 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 reflected the challenges that the record low interest rate environment had created. New loans were being originated at lower yields and certain loans tied to LIBOR or the prime rate repriced downward as both of these indices had 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 continued to be strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continued to be cautious and were demonstrating reduced spending activity due to the economic uncertainty. As a result, short-term investments and commercial paper averaged $32 million for the full year of 2020 which was $20.4 million, or 176.3%, 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 level.

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 was $55.2 million, or 5.6%, higher than the 2019 full year average and reflected the benefit of government stimulus programs and reduced consumer spending in 2020. In addition, the Company’s loyal core deposit base continued 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 were 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 was a result of the Federal Reserve’s actions to decrease interest rates and the impact that these rate decreases had 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 was 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 represented an increase of $5.6 million, or 8.8%, from 2019.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) 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

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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, 2021, 2020, and 2019 was 18,000, 24,000, and 24,000, 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 ​ (11,919) ​ ​ ​ ​ (9,732) ​ ​ ​ ​ (8,404) ​ ​ ​ ​

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

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

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

Other liabilities ​ 6,446 ​ ​ ​ ​ ​ 10,340 ​ ​ ​ ​ ​ 7,271 ​ ​ ​ ​

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

Tax-equivalent adjustment ​ ​ ​ (18) ​ ​ ​ ​ ​ (24) ​ ​ ​ ​ (24) ​

​

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-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

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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: ​ ​ ​ ​ ​ ​

Investment securities: ​ ​ ​ ​ ​ ​ ​ ​

INTEREST PAID ON: ​ ​ ​ ​ ​ ​

Advances from Federal Home Loan Bank ​ (256) ​ 32 ​ (224) ​ 43 ​ (34) ​ 9

Subordinated debt ​ 434 ​ (100) ​ 334 ​ — ​ — ​ —

Lease liabilities ​ (7) ​ 1 ​ (6) ​ (6) ​ 1 ​ (5)

​

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, bankruptcy, or other negative economic concerns indicate impairment.

​

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. Overall, we believe that non-performing assets remain well controlled, and such assets have remained stable since the prior year totaling $3.3 million, or 0.34% of total loans, on December 31, 2021. The increase in accruing loan delinquency is the result of several residential mortgage loan borrowers demonstrating delinquency during the fourth quarter of 2021. Slightly offsetting this increase in residential mortgage loan delinquency during the fourth quarter was a decrease in commercial loan delinquency. In addition, the Company experienced an increase in non-accrual loans as a result of three commercial loan relationships, two of which were previously designated as a trouble debt restructure (TDR), being transferred into non-accrual status during the first half of 2021, which was partially offset by a decrease in non-accrual residential mortgage loans. Total classified loans increased $5.2 million since the prior year-end and now total $17.0 million. The increase in classified loans is the result of the risk rating downgrade of several commercial real estate loan relationships during 2021 in the hospitality and personal care industries.

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The Company remains committed to prudently working with our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. Borrower requested modifications primarily consist of the deferral of principal and/or interest payments. On December 31, 2021, loans totaling approximately $7.7 million, or 0.8% of total loans, were on a payment modification plan. These loans include five commercial borrowers primarily in the hospitality and personal care industries. This current level of borrowers requesting payment deferrals is down sharply from its peak level of approximately $200 million as of June 30, 2020. Management continues to carefully monitor asset quality with a particular focus on these customers that have requested payment deferrals. Deferral extension requests are considered based upon the customer’s needs and their impacted industry as well as borrower and guarantor capacity to service debt and 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, 2021, the 25 largest credits represented 22.3% of total loans outstanding, which represents a slight decrease from December 31, 2020 when it was 22.6%.

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 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) ​

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

Average for the year: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

As a percent of average loans: ​ ​ ​ ​

Net charge-offs (recoveries): ​ ​ ​ ​ ​ ​ ​ ​ ​

Real estate – residential mortgage ​ ​ (0.01) ​ ​ 0.07 ​ ​ (0.01) ​

Provision (credit) for loan losses ​ 0.11 ​ 0.26 ​ 0.09 ​

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

Total loans, net of unearned income ​ 1.26 ​ 1.16 ​ 1.05 ​

Allowance, as a multiple of net charge-offs ​ 263.79x ​ 36.72x ​ 48.33x ​

​

For 2021, the Company recorded a $1.1 million provision expense for loan losses compared to a $2.4 million provision expense in 2020. The lower 2021 provision reflects an improved credit quality outlook for the overall portfolio due to several loan upgrades as well as reduced criticized asset levels and delinquent loan balances demonstrating improvement this year. This reflects the Company’s loan officers working effectively with our customers as the economy improves and as businesses return to normal operations with limited restrictions. As demonstrated historically, the Company continues its strategic conviction that a strong allowance for loan losses is needed, which has proven to be essential as we support certain borrowers as they fully recover from the COVID-19 pandemic. The Company continued

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to grow the allowance for loan losses given the portfolio growth achieved during the year, specifically in the non-owner occupied commercial real estate and residential mortgage portfolios, which was dampened by a decline in the commercial portfolio. The need to fund the allowance for portfolio growth was somewhat eased by numerous upgrades, which occurred during 2021.

The Company experienced low net loan charge-offs of $47,000, which equates to 0.00% of total loans, in 2021 and compares favorably to net loan charge-offs of $309,000, or 0.03% of total loans, in 2020. Since the end of the fourth quarter of 2020, the balance of the allowance for loan losses increased by $1.1 million, or 9.3%, to $12.4 million at December 31, 2021. Non-performing assets totaled $3.3 million, or 0.34% of total loans, at December 31, 2021. Management continues to carefully monitor asset quality with a particular focus on loan customers that have requested an additional payment deferral. The Asset Quality Task Force is meeting at least monthly to review these particular relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. In summary, the allowance for loan losses provided 373% coverage of non-performing assets, and 1.26% of total loans, at December 31, 2021, compared to 341% coverage of non-performing assets, and 1.16% of total loans, at December 31, 2020. Note that the reserve coverage to total loans, excluding PPP loans (non-GAAP), was 1.28% and 1.23% at December 31, 2021 and 2020, respectively. The Small Business Administration guarantees 100% of the PPP loans made to eligible borrowers which minimizes the level of credit risk associated with these loans. As a result, such loans are assigned a 0% risk weight for purposes of calculating the Bank’s risk-based capital ratios. Therefore, it was deemed appropriate to not allocate any portion of the loan loss reserve for the PPP loans.

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 the 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, 2021 and 2020 (in thousands, except percentages).

​ ​ ​ ​ ​ ​ ​ ​

​ AT DECEMBER 31, ​

Reserve coverage 1.26 % ​ 1.16 %

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

Non-GAAP reserve coverage 1.28 % ​ 1.23 %

​ ​ ​ ​ ​ ​ ​ ​

For 2020, the Company recorded a $2,375,000 provision expense for loan losses compared to an $800,000 provision expense in 2019 which resulted in a net unfavorable shift of $1.6 million between years. The Company continued to build the allowance for loan losses given the overall economic climate and the uncertainty that existed because of the COVID-19 pandemic. The 2020 provision reflected management’s strengthening of certain qualitative factors within the allowance for loan losses calculation and downgrades of loan relationships that were reflective of the industries that were especially negatively impacted by the pandemic, primarily the hospitality industry, and were demonstrating a slow pace of recovery. Early in 2020, several loans within the hospitality industry were downgraded. Additionally, during the fourth quarter of 2020, the downgrade of a hospitality related credit and a large transportation related credit, as well as the loan growth experienced resulted in the provision increasing. Specifically, the effect of these downgrades was an increase in the allowance for the commercial loans secured by non-owner occupied real estate portfolio. The decrease in the allowance balance for the commercial loan portfolio was the result of two substantial commercial loans which were previously classified as substandard being upgraded. In addition, the growth in the allowance balance for residential mortgage loans was the result of the increased origination activity experienced within the portfolio during 2020 given the lower interest rate environment. 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. Overall, non-performing assets

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totaled $3.3 million, or 0.34% of total loans, at December 31, 2020. 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.

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) ​

​

Even though residential real estate mortgage loans comprise 29.2% of the Company’s total loan portfolio, only $1.6 million, or 12.8%, 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, 2021 to cover losses within the Company’s loan portfolio.

NON-INTEREST INCOME. Non-interest income for 2021 totaled $17.8 million, an increase of $1.5 million, or 9.1%, from 2020. Factors contributing to this higher level of non-interest income in 2021 included:

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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 EXPENSE. Non-interest expense for 2021 totaled $47.0 million, which represents a $2.5 million, or 5.7%, increase from 2020. Factors contributing to the higher non-interest expense in 2021 included:

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

INCOME TAX EXPENSE. The Company recorded an income tax expense of $1.7 million, or an effective tax rate of 19.4%, in 2021, compared to income tax expense of $1.2 million, or a 20.9% effective tax rate, in 2020, and compared to income tax expense of $1.6 million, or a 20.7% effective tax rate, in 2019. The increased income tax expense for the full year of 2021 is a result of the Company’s improved profitability this year. The higher effective tax rate in 2020 resulted from the write-off of a deferred tax asset related to the dissolution of the Company’s former small life insurance subsidiary. The Company’s deferred tax liability was $934,000 at December 31, 2021 compared to a deferred tax asset of $1.6 million at December 31, 2020, resulting primarily from change in the pension liability.

SEGMENT RESULTS. The community banking segment reported a net income contribution of $12.1 million in 2021 which improved from the $10.1 million contribution in 2020 and also increased from the $10.9 million contribution in 2019. The improvement between years is due to a higher level of total revenue and a reduced loan loss provision which more than offset an increased level of non-interest expense. Net interest income improved between years as a significant reduction to total interest expense more than offset a much lower reduction to total interest income. This segment is being favorably impacted by commercial real estate loan growth which correspondingly resulted in loan charge income increasing. Also, loan growth was positively impacted by the Company retaining more residential mortgage loans in the portfolio as opposed to selling in the secondary market. This growth more than offset payoff activity and maturities in the commercial & industrial loan portfolio. Additionally, PPP processing fee income increased between years by $398,000. Overall, total loan interest income decreased modestly by $49,000 in 2021. Favorably impacting net interest 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 low interest rate environment. The decrease to total deposit interest expense occurred even though total deposits increased significantly between years which is described previously in the MD&A. This segment was also favorably impacted by management’s strategic decision during the fourth quarter of 2021 to not replace a maturing high cost, large institutional deposit which resulted in approximately $240,000 of interest expense savings during the fourth quarter. The Company recorded a $1,100,000 provision expense for loan losses in 2021 compared to a $2,375,000 provision in 2020. This was discussed previously in the Allowance and Provision for Loan Losses section within this document. Non-interest income was favorably impacted by increased levels of interchange income, checking service charges and revenue from bank owned life insurance (BOLI). Note that the Company electing to retain the majority of residential mortgage loans

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production in the loan portfolio resulted in a decrease to loan sale gains. Non-interest expense compares unfavorably in 2021 due to the Company recognizing a settlement charge on its defined benefit pension plan, which was previously discussed in the MD&A. Other significant increases to non-interest expense between years were higher incentive compensation and health care costs and additional expense recognized for the Somerset County branch acquisition. Finally, non-interest expense was unfavorably impacted by higher professional fees, FDIC insurance expense and occupancy costs.

The wealth management segment’s net income contribution was $2.9 million in 2021 compared to $2.0 million in 2020 and $1.9 million in 2019. The increase is due to wealth management fees increasing as the entire wealth management group has performed exceptionally well through the pandemic, actively working with clients to increase the value of their holdings in the financial markets and adding new business. Slightly offsetting this favorable performance were higher levels of professional fees and total employee costs. Overall, the fair market value of trust assets under administration totaled $2.7 billion at December 31, 2021, an improvement from the early pandemic fair market value low point at March 31, 2020, exceeding by $728.7 million, or 36.7%.

The investment/parent segment reported a net loss of $7.8 million in 2021, which was greater than the net loss of $7.5 million in 2020 and $6.8 million in 2019. The increased loss in 2021 was due to the Company having to write off the remaining portion of unamortized issuance costs from existing subordinated debt and trust preferred securities that were replaced by the private placement of $27 million in subordinated notes on August 26, 2021, This write-off caused $202,000 of additional borrowings interest expense during the third quarter of 2021. Also, the original debt instruments did not leave the balance sheet until September 30, 2021 as per terms required to appropriately retire the existing debt. Therefore, there was one full month of the new and the old debt instruments being on our balance sheet in September causing additional interest expense. The Company did recognize approximately $147,000 of borrowings intereset expense savings since the new subordinated debt has a significantly lower cost than the old debt instruments. This interest expense savings will continue to positively impact this segment in the future. This segment also benefitted from a higher level of interest income from the securities portfolio due to a higher volume of securities. As a result of the increased level of liquidity on the Company’s balance sheet, management elected to more profitably deploy these funds into the securities portfolio as opposed to leaving them in low yielding federal funds sold. Finally, and also favorably impacting this segment was the recognition of an $84,000 security sale gain in 2021 after no gain was recognized last year.

BALANCE SHEET. The Company’s total consolidated assets of $1.336 billion at December 31, 2021 increased by $52.8 million, or 4.1%, from the $1.283 billion level at December 31, 2020. This change was related, primarily, to increased levels of cash and cash equivalents, investment securities, loans, and other assets. Specifically, cash and cash equivalents increased $9.6 million, or 30.5%, as the Company experienced a significant influx of deposits resulting from the government stimulus programs and financial assistance provided to municipalities and school districts. Our liquidity position was also positively impacted by the Somerset County branch and deposit acquisition completed in May 2021, which provided approximately $42 million of additional deposits. These deposit increases were partially offset by the maturity of a $33 million institutional deposit late in the third quarter of 2021. Total investment securities increased $28.5 million, or 15.1%, as the steepening of the U.S. Treasury yield curve improved the yield for federal agency mortgage-backed securities and federal agency bonds, making these types of securities more attractive for purchase. The Company also continued to purchase corporate and taxable municipal securities to maintain a well-diversified portfolio. In addition, loans, net of unearned fees, and loans held for sale increased by $7.7 million, or 0.8%, as a result of the higher levels of commercial real estate and residential mortgage loan production. The overall total loan portfolio volume stabilized during the second half of the year as additional loan growth was offset by a high level of early payoff activity, particularly during the fourth quarter. Also, PPP loans continue to decline as borrowers complete the forgiveness process. Finally, other assets increased $11.8 million, or 89.4%, as a result of an increase in the positive balance of the accrued pension liability, which totaled $19.5 million and $3.0 million as of December 31, 2021 and 2020, respectively. Due to the positive (debit) balance of the accrued pension liability, it was reclassified to other assets on the Consolidated Balance Sheets as of December 31, 2021 and 2020. The positive value of the accrued pension liability increased as a result of the $8.0 million contribution made in 2021 and the revaluation of the obligation due to the recognition of the settlement charge.

Total deposits increased by $84.5 million, or 8.0%, and remained significantly higher than historical levels in 2021. As previously mentioned, this robust growth is the result of the government stimulus programs and the Somerset County branch acquisition which were partially offset by the maturity of a large institutional deposit. As of December 31, 2021, the 25 largest depositors represented 18.9% of total deposits, which is a decrease from December 31, 2020 when it was 21.1%. Total borrowings have decreased by $41.2 million, or 36.2%, since year-end 2020. The decrease was driven,

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primarily, by a lower level of both short-term borrowings and FHLB term advances. Specifically, at December 31, 2021, the Company had no short-term borrowings outstanding as compared to $24.7 million at December 31, 2020. In addition, FHLB term advances decreased by $22.3 million, or 34.4%, and totaled $42.7 million at December 31, 2021. The current strong liquidity position has allowed the Company to paydown short-term borrowings and FHLB advances. However, the Company continues to utilize the FHLB term advances to help manage interest rate risk. Partially offsetting the decrease in short-term and FHLB borrowings was the previously mentioned subordinated debt transaction. The Company completed a private placement of $27 million in fixed-to-floating rate subordinated notes on August 26, 2021 and used approximately $20 million of the net proceeds to retire it existing subordinated debt and trust preferred securities.

The Company’s total shareholders’ equity increased by $12.2 million, or 11.6%, since year-end 2020. Capital was increased during 2021 by the Company’s $7.1 million of net income and the $8.8 million positive impact on accumulated other comprehensive loss from the recording of the settlement charge in connection with the defined benefit pension plan and the revaluation of the pension obligation. Slightly offsetting these increases was the $1.7 million common stock cash dividend and the $2.2 million negative impact experienced due to the reduced market value of the available for sale investment securities portfolio. The Company returned approximately 24% of our 2021 earnings to our shareholders through the quarterly common stock cash dividend. The Company continues to be considered well capitalized for regulatory purposes with a risk based capital ratio of 14.04% and an asset leverage ratio of 8.17% at December 31, 2021. The Company’s book value per common share was $6.82, its tangible book value per common share (non-GAAP) was $6.02 and its tangible common equity to tangible assets ratio (non-GAAP) was 7.78% at December 31, 2021.

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, 2021 and 2020 (in thousands, except share and ratio data):

​

​ ​ ​ ​ ​ ​ ​ ​

​ ​ AT DECEMBER 31, ​

Tangible common equity ratio (non-GAAP) ​ 7.78 % 7.28 %

Tangible book value per share (non-GAAP) ​ $ 6.02 ​ $ 5.42 ​

​

LIQUIDITY. Although leveling off somewhat in the fourth quarter of 2021, the Company’s liquidity position continues to be strong due to effective business development efforts as well as the significant influx of deposits that resulted from the government stimulus programs.. Also, deposit levels were positively impacted in the second quarter of 2021 by the Somerset County branch acquisition. 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. As a result, the Company continued to experience significantly higher than historical levels of total average deposits in 2021 averaging $1.154 billion for the year. Total deposits did decrease late in the third quarter of 2021 due to the maturity of a $33 million institutional deposit that had a cost of 2.95%, which is mentioned previously in this document. 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 increased during 2021 and continue to be higher than they have been historically which presents the challenge of profitably deploying this increased liquidity given the current low yields on short-term investment products. An additional challenge is the uncertainty regarding the duration that the increased liquidity will remain on the balance sheet which will be determined by customer behavior as the economic conditions

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change. Note that management’s decision to allow the previously mentioned high cost, institutional deposit to mature in the third quarter resulted in total short-term investments declining to a more manageable level. In addition to the commercial real estate loan growth experienced during the year and greater level of residential mortgage loans being retained in the portfolio, a portion of the increased liquidity was invested in additional securities to more profitably deploy the increased funds. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company’s loan to deposit ratio was 86.5% at December 31, 2021. The Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to provide the necessary assistance to our customers and our community as they continue their recovery from the COVID-19 pandemic and respond to an improving economy. We are also well positioned to service our existing loan pipeline and grow our loan to deposit ratio while remaining within our guideline parameters.

Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents increased by $9.6 million from December 31, 2020, to $41.1 million at December 31, 2021, due to $488,000 of cash used in investing activities being more than offset by $9.9 million of cash provided by operating activities and $146,000 of cash provided by financing activities. Within financing activities, deposits increased by $42.1 million while total FHLB borrowings declined as term advances decreased by $22.3 million and short-term borrowings decreased by $24.7 million. Also, within financing activities, the $26.6 million net new subordinated debt issuance more than offset the $19.7 million redemption of the old subordinated debt and trust preferred securities. Within investing activities, cash advanced for new loans originated totaled $313.1 million and was $11.6 million higher than the $301.5 million of cash received from loan principal payments. Also, within investing activities, $77.9 million of investment securities purchases more than offset $45.5 million of proceeds from maturities of investment securities. Within operating activities, $13.8 million of mortgage loans held for sale were originated while $19.7 million of mortgage loans were sold into the secondary market.

The holding company had $9.3 million of cash, short-term investments, and investment securities at December 31, 2021. Additionally, dividend payments from our subsidiaries also provide ongoing cash to the holding company. At December 31, 2021, our subsidiary Bank had $13.1 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 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, interest bearing deposits with banks, and federal funds sold. These assets totaled $41.1 million and $31.5 million at December 31, 2021 and 2020, 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, 2021, the Company had $365 million of overnight borrowing availability at the FHLB, $32 million of short-term borrowing availability at the Federal Reserve Bank and $35 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

CAPITAL RESOURCES. The Bank meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The Company’s common equity tier 1 capital ratio was 10.29%, the tier 1 capital ratio was 10.29%, and the total capital ratio was 14.04% at December 31, 2021. The Company’s tier 1 leverage ratio was 8.17% at December 31, 2021. Total regulatory capital was favorably impacted by the August 26, 2021 issuance of $27 million of subordinated debt as described in Note 24, Regulatory Capital. We anticipate that we will maintain our strong capital ratios throughout 2022.

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 2021 was 24.4%. Total Parent Company cash was $9.3 million at December 31, 2021. 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

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347% of regulatory capital at December 31, 2021. It should be noted that this ratio improved from 348% at December 31, 2020 even though total non-owner occupied commercial real estate loans grew between years. The improvement in this ratio is a direct result of the Parent Company downstreaming $3.5 million of capital to the Bank. The greater level of capital at the Bank creates additional capacity for future non-owner occupied commercial real estate loan growth. Additionally, while we work through the COVID-19 pandemic, our focus is on preserving capital to support customer lending and allow the Company to take advantage of opportunities that should result from the continued improvement in the economy. 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. At December 31, 2021, the Company had approximately 17.1 million common shares outstanding.

The Basel III capital standards establish the minimum capital levels in addition to the well capitalized requirements under the federal banking regulations prompt corrective action. The capital rules also impose a 2.5% capital conservation buffer (CCB) on top of the three minimum risk-weighted asset ratios. Banking institutions that fail to meet the effective minimum ratios once the CCB is taken into account will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (four quarter trailing net income, net of distributions and tax effects not reflected in net income). The Company and the Bank meet all capital requirements, including the CCB, and continue to be committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a return to our shareholders.

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

​

​ ​ ​ ​ ​ ​

​ ​ ​ ​ 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 ​

​

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: (i) 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; (ii) market value of portfolio equity sensitivity analysis; and (iii) 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.

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The following table presents a summary of the Company’s static GAP positions at December 31, 2021:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ 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 ​ — ​ — ​ 38,842 ​ — ​ 38,842

RATE SENSITIVE LIABILITIES: ​ ​ ​ ​ ​

Deposits: ​ ​ ​ ​ ​

Non-interest bearing demand deposits ​ $ — ​ $ — ​ $ — ​ $ 211,106 ​ $ 211,106

INTEREST SENSITIVITY GAP: ​ ​ ​ ​ ​

Ratio of cumulative GAP to total assets ​ 7.22 % 10.58 % 14.87 % 3.80 %

​

When December 31, 2021 is compared to December 31, 2020, 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. The Company demonstrated significantly higher than historical levels of both loans and deposits in 2021. This growth is due to successful business development efforts, the impact from the government stimulus programs and the 2021 Somerset County branch acquisition. The growth experienced in the loan portfolio, investment securities, and short-term assets was funded by the increase in total deposits. In addition, there was a significant decrease in overnight borrowings which are immediately impacted by changes to national interest rates. Even though the balance of FHLB term advances at December 31, 2021 decreased $22.3 million, or 34.4%, from the prior year, the Company continues to utilize such advances to help manage our interest rate risk position.

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

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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 an index, such as LIBOR or prime. Also, the Company has effectively utilized interest rate swaps for interest rate risk management purposes. The interest rate swaps allow our customers to lock in low interest rates while the Company retains the benefit of interest rates moving with the market. Regarding interest bearing liabilities, management continues 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, 2021, 75.0% of the portfolio is classified as available for sale and 25.0% 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 89 securities that are temporarily impaired at December 31, 2021. The Company reviews its securities quarterly and has asserted that at December 31, 2021, 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 2021, 21.1% of all residential mortgage loan production was sold into the secondary market. The Company revised strategy in 2021 and retained a higher percentage of our residential mortgage loan production in the loan portfolio as opposed to selling into the secondary market. This strategic change allowed us to more profitably deploy a portion of the increased liquidity that we have on our balance sheet.

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The amount of loans outstanding by category as of December 31, 2021, which are due in (i) one year or less, (ii) more than one year through five years, (iii) more than five years through 15 years, and (iv) over 15 years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ MORE ​ MORE ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ THAN ONE ​ THAN FIVE ​ ​ ​ ​ ​ ​

​ ​ ONE ​ YEAR ​ YEARS ​ ​ ​ ​ ​ ​

​ ​ YEAR OR ​ THROUGH ​ THROUGH ​ OVER 15 ​ TOTAL ​

​ LESS FIVE YEARS 15 YEARS ​ YEARS LOANS ​

​ (IN THOUSANDS, EXCEPT RATIOS) ​

Paycheck Protection Program (PPP) ​ ​ 185 ​ ​ 17,126 ​ ​ — ​ ​ — ​ ​ 17,311 ​

Fixed-rate loans as a percentage of total loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 56.2 %

​

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.

The following table presents the total loans due after one year that have predetermined (fixed) interest rates and floating interest rates as of December 31, 2021.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ FIXED-RATE ​ FLOATING-RATE ​ ​ ​

​ LOANS LOANS TOTAL

​ (IN THOUSANDS)

Paycheck Protection Program (PPP) ​ ​ 17,126 ​ ​ — ​ ​ 17,126

Commercial loans secured by owner occupied real estate ​ 6,225 ​ 87,355 ​ 93,580

​

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 $216.6 million and standby letters of credit of $13.1 million as of December 31, 2021. 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, 2021, the Company had $134.6 million in the notional amount of interest rate

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swaps outstanding, with a fair value of $1.2 million. In addition, the Company entered into a risk participation agreement (RPA) with the lead bank of a commercial real estate loan arrangement. As a participating bank, the Company guarantees the performance on a borrower-related interest rate swap contract. The notional amount of the RPA outstanding at December 31, 2021 was $2.5 million, with a fair value of zero.

As of December 31, 2021 and 2020, 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 $62.2 million and $61.3 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, intangible assets, 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 assets

INCOME STATEMENT REFERENCE — Salaries and employee benefits and Other expense

DESCRIPTION

Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Additionally, pension expense can also be impacted by settlement accounting charges if the amount of employee selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year. Our pension benefits are described further in Note 17 of the Notes to Consolidated Financial Statements.

ACCOUNT — Allowance for loan losses

BALANCE SHEET REFERENCE — Allowance for loan losses

INCOME STATEMENT REFERENCE — Provision for loan losses

DESCRIPTION

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

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 $9.5 million, or 76%, of the total allowance for loan losses at December 31, 2021 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.

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ACCOUNT — Intangible assets

BALANCE SHEET REFERENCE — Intangible assets

INCOME STATEMENT REFERENCE — Other expense

DESCRIPTION

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

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

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

Goodwill which has an indefinite useful life is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. The core deposit intangible, which is a wasting asset, is amortized and reported in other expense for a period of ten years using the sum of the years digits amortization method.

ACCOUNT — Income taxes

BALANCE SHEET REFERENCE — Net deferred tax asset and Net deferred tax liability

INCOME STATEMENT REFERENCE — Provision for income taxes

DESCRIPTION

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

In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of December 31, 2021, 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

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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 income 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 on investment securities

DESCRIPTION